Publications Archives

Click for PDF

According to recent statements of agency officials, the Federal Trade Commission (FTC) is looking to revise the Premerger Notification and Report Form (the “HSR Form”) “to conform to changing market realities and global standards.”[1] The FTC has not released details of the proposed changes, but recent statements from agency leadership provide some indication as to how the agency may expand the filing requirements. FTC Chair Lina Khan recently announced that the agency is exploring “ways to collect on the front end information that is more probative of whether parties are proposing an unlawful deal.”[2] And FTC Bureau of Competition Director Holly Vedova explained that the FTC wants, as part of the HSR filing, “overlap information, customers, things like that.”[3] The Bureau Director amplified that, under the proposed changes, the parties would “do that work ahead of time, and come in with that information, so that we don’t spend ten, twenty, thirty days trying to collect all that information.”[4]

Generally, M&A transactions are reportable under the HSR Act if, as a result of the transaction, (i) the buyer will hold stock, non-corporate interests, and/or assets of the seller valued at more than $101 million as a result of the deal (the “size-of-transaction” test) and, if the transaction is valued at $403.9 million or less, (ii) one party to the deal has assets or annual sales of $202 million or more, and the other party has assets or annual sales of $20.2 million or more (the “size-of-person” test). Certain exemptions and additional thresholds may apply.

While any changes to the HSR Form likely would not affect these filing thresholds or other rules relating to whether a transaction must be reported under the HSR Act, they would affect the information and documents that must be supplied to the FTC and DOJ in connection with those filings. To the extent that the changes require HSR forms to include the type of detailed information about the marketplace and industry participants that are often required in other jurisdictions, the changes would potentially impose substantial increased costs and potential delays in making HSR filings, including those that have no plausible competitive concerns.

The FTC has not yet expanded on Chair Khan and Bureau Director Vedova’s statements or floated, formally or informally, any specific proposed changes to the HSR Form. However, based on Bureau Director Vedova’s reference to “overlap information,” the new form might require additional information, including top customer lists and contact information for those customers, only where the filing parties report an “overlap” which, for purposes of the HSR Form, means that both parties produced revenues in the same 6-digit North American Industrial Classification System (NAICS) code in the most recent year. However, because the NAICS codes define broad industry sectors, parties that report an overlap are often not competitors. Beyond that, it is premature to speculate on the precise scope of the changes to the HSR Form or the magnitude of incremental cost, burden, and delays that such changes would impose on filing parties.

Such changes to the HSR Form are not likely to be adopted and implemented immediately. Although minor or administrative changes to the HSR Form have been made over the years without notice and comment, substantive changes would require the FTC to go through the notice and comment process under the Administrative Procedure Act (“APA”). The scope of changes previewed by the FTC would likely be considered “substantive,” as they were in 2011 when the concept of “associates” was added to the Rules and Items 4(d), 6(c)(ii) and 7(d) were added to the Form “in order to capture additional information that would significantly assist the Agencies in their initial review.”[5] The 2011 changes took just over a year from first publication to the final changes taking effect. While the changes contemplated by the FTC will likely not be as complex as the “associate” changes, the APA’s notice and comment period would still likely take many months. The HSR Act provides the FTC with discretion to determine the scope of the Form “as is necessary and appropriate” to enable the FTC and Department of Justice “to determine whether such acquisition may, if consummated, violate the antitrust laws.”[6] If the FTC makes changes that do not appear linked to the legality of the transaction under the antitrust laws, or otherwise appear to be “arbitrary and capricious”, then such changes might be subject to challenge. Although changes to the Form would not require new legislation, a three-Commissioner majority must vote in favor of the changes.

We will continue to keep you posted as developments on this front occur.

______________________

[1] David Hatch, FTC Wants More Upfront Merger Information, The Deal, April 12, 2022.

[2] 70th American Bar Association Antitrust Law Section Spring Meeting, Enforcers Roundtable, April 8, 2022.

[3] David Hatch, FTC Wants More Upfront Merger Information, The Deal, April 12, 2022.

[4] Id.

[5] 76 Fed. Reg. 42,471 (July 19, 2011). The “associate” changes were first published by the Commission on August 13, 2010, in a Notice of Proposed Rulemaking and Request for Public Comment available on its website. The final change to the Rules and Form and Instructions did not become effective until August 18, 2011.

[6] 15 U.S.C. § 18a(d)(1).

The following Gibson Dunn lawyers prepared this client alert: Andrew Cline, Rachel Brass, and Stephen Weissman.

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

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

Mergers and Acquisitions Group:
Eduardo Gallardo – Co-Chair, New York (+1 212-351-3847, egallardo@gibsondunn.com)
Robert B. Little – Co-Chair, Dallas (+1 214-698-3260, rlittle@gibsondunn.com)
Saee Muzumdar – Co-Chair, New York (+1 212-351-3966, smuzumdar@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Click for PDF

On April 28, 2022, the New York City Council amended the City’s pay transparency law, which was scheduled to go into effect on May 15. The amendments delay the effective date of the law until November 1, 2022. The amendments also make additional key changes that are noteworthy for employers.

Brief Summary of Law

The pay transparency law makes it an “unlawful discriminatory practice” under the New York City Human Rights Law for an employer to advertise a job, promotion, or transfer opportunity without stating the position’s minimum and maximum salary in the advertisement. The law applies to all employers with at least four employees in New York City, and independent contractors are counted towards that threshold. The law does not apply, however, to temporary positions advertised by temporary staffing agencies. The New York City Commission on Human Rights is authorized to take action to implement the law.

Recent Amendments

First, the new amendments clarify that only current employees may pursue a private right of action against their employers for an alleged violation of the law in relation to an advertisement for a job, promotion, or transfer opportunity. This important change eliminates the risk of applicants pursuing private claims against prospective employers.

Second, an employer will now have 30 days from receipt of an initial complaint of non-compliance to cure the employer’s “first time” violation of the law before facing a fine from the NYC Commission on Human Rights.

Third, the amendments clarify that either annual salary or hourly wage information must be disclosed in the required postings.

And finally, the new amendments expressly state that positions that cannot or will not be performed, at least in part, in New York City are exempt from the posting requirement.

Takeaways

The amendments were passed in response to concerns raised by the business community that the law was unclear, too burdensome, and could lead to an avalanche of litigation. All covered employers in New York City should ensure they are prepared to comply with the amended law effective November 1, 2022.

The following Gibson Dunn attorneys assisted in preparing this client update: Harris Mufson, Danielle Moss, Gabrielle Levin, and Hayley Fritchie.

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

Mylan Denerstein – New York (+1 212-351-3850, mdenerstein@gibsondunn.com)

Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com)

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

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

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

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

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Click for PDF

The Department of Justice’s Antitrust Division promised in a recent speech to increase enforcement of Section 8 of the Clayton Act, which prohibits competing corporations from sharing common directors or officers. The prevailing enforcement climate means that companies should have a compliance plan in place to discover potential director interlocks before they develop and monitor existing outside director positions to ensure they conform to existing Section 8 safe harbors.

Background

Jonathan Kanter, Assistant Attorney General for DOJ’s Antitrust Division, stated in a April 2022 speech that “[f]or too long, our Section 8 enforcement has essentially been limited to our merger review process.”[1] DOJ is “ramping up efforts to identify violations across the broader economy” and “will not hesitate to bring Section 8 cases to break up interlocking directorates.”[2]

The agencies have periodically issued warnings on Section 8 compliance. In 2019, the FTC published a blog post, Interlocking Mindfulness, reminding companies of the need to avoid director interlocks, particularly where mergers or spin-offs are involved.[3] This followed a 2017 post advising that companies “[h]ave a plan to comply with the bar on horizontal interlocks”.[4] Kanter’s statements are a marked evolution from the FTC’s 2017 guidance stating that the Commission “relie[s] on self-policing to prevent Section 8 violations,”[5] and indicate that DOJ may bring litigation to address potential interlocks.

Clayton Act, Section 8

Section 8 of the Clayton Act (15 U.S.C. § 19) prohibits one person from being an officer (defined as an “officer elected or chosen by the Board of Directors”) or director at two companies that are “by virtue of their business and location of operation, competitors.” “Person” has a broader meaning than a natural person, and includes a single firm.[6] Under this construction, a single firm could not appoint two different people as its agents to sit on the board or act as an officer of two competing corporations.

Section 8 broadly defines “competitors” to include any two corporations where “the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.” Section 8 is broad and potentially applies where two competing companies have an officer or director in common, subject to certain exceptions.

There are three potential safe harbors from Section 8 liability:

The competitive sales of either company are less than 2% of that company’s total sales;
The competitive sales of each company are less than 4% of that company’s total sales; or
The competitive sales of either company are less than $4,103,400 as of 2022.

While there are no penalties or fines imposed due to a Section 8 violation, the statute requires that the parties eliminate the interlock if a violation is found to have occurred. There is a one-year grace period to cure violations that develop after the interlock has occurred (e.g., competitive sales surpassing de minimis thresholds), provided the interlock did not violate Section 8 when it first occurred.

An antitrust investigation into a potential interlock may force the resignation of key officers or directors, delay the closing of a proposed transaction, or trigger consumer class actions alleging collusion.

Section 8 Compliance in the Current Regulatory Environment

As noted in a previous Client Alert, the DOJ has taken action against suspected interlocks even before Kanter’s April 2022 statements. Corporations should take proactive steps to detect interlocks before they occur and monitor existing ones to ensure they comply with current Section 8 safe harbors.

Corporations whose directors or officers are being considered for an outside position should first evaluate the position for potential Section 8 concerns. Where a corporation’s director or officer holds an outside position at another firm subject to a safe harbor due either to a lack of competition or a de minimis overlap, counsel should reevaluate the relationship periodically to ensure marketplace developments do not cause the position to run afoul of Section 8. This can occur because of growing sales in existing overlaps or entry into new lines of business. These checks can be incorporated as part of existing director/officer independence analyses.

Corporations engaged in financial transactions, such as spin-offs where the parent’s directors or officers may hold positions at the spin-off, should check whether the parent and the spin-off may compete in any line of business and evaluate potential Section 8 issues.

Private equity firms holding board seats or appointing leadership in multiple portfolio companies should evaluate carefully whether any could be considered “competitors” for Section 8 purposes.

Other antitrust statutes, particularly Section 1 of the Sherman Act (which prohibits agreements that unreasonably restrain trade), continue to apply even if the interlock is within Section 8 safe harbors. A sound compliance plan will therefore also establish procedures to prevent sharing of competitively sensitive information and avoid the appearance of potential competition concerns.

___________________________________

[1] Assistant Attorney General Jonathan Kanter Delivers Opening Remarks at 2022 Spring Enforcers Summit, April 4, 2022, available at: https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers.

[2] Id.

[3] Michael E. Blaisdell, Interlocking Mindfulness, June 26, 2019, available at: https://www.ftc.gov/enforcement/competition-matters/2019/06/interlocking-mindfulness.

[4] Debbie Feinstein, Have a plan to comply with the bar on horizontal interlocks, Jan. 23, 2017, available at: https://www.ftc.gov/enforcement/competition-matters/2017/01/have-plan-comply-bar-horizontal-interlocks.

[5] Id.

[6] Interlocking Mindfulness (Section 8 “prohibits not only a person from acting as officer or director of two competitors, but also any one firm from appointing two different people to sit as its agents as officers or directors of competing companies”).

The following Gibson Dunn lawyers prepared this client alert: Daniel Swanson, Rachel Brass, Cynthia Richman, and Chris Wilson.

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

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

Mergers and Acquisitions Group:
Eduardo Gallardo – New York (+1 212-351-3847, egallardo@gibsondunn.com)
Robert B. Little – Dallas (+1 214-698-3260, rlittle@gibsondunn.com)
Saee Muzumdar – New York (+1 212-351-3966, smuzumdar@gibsondunn.com)

Private Equity Group:
Richard J. Birns – New York (+1 212-351-4032, rbirns@gibsondunn.com)
Wim De Vlieger – London (+44 (0) 20 7071 4279, wdevlieger@gibsondunn.com)
Federico Fruhbeck – London (+44 (0) 20 7071 4230, ffruhbeck@gibsondunn.com)
Scott Jalowayski – Hong Kong (+852 2214 3727, sjalowayski@gibsondunn.com)
Ari Lanin – Los Angeles (+1 310-552-8581, alanin@gibsondunn.com)
Michael Piazza – Houston (+1 346-718-6670, mpiazza@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Click for PDF

In our previous client alerts “US and Allies Announce Sanctions on Russia and Separatist Regions of Ukraine”, “United States Responds to the Crisis in Ukraine with Additional Sanctions and Export Controls” and “Russia’s Suppression of the Media Violates Its International Law Obligations”, as well as our “The World Reacts to the Crisis in Ukraine” webcast series offered on March 4, 2022, March 10, 2022 and March 22, 2022, we noted that Russia has imposed significant “countersanctions” against “unfriendly countries” and companies that are trying to comply with the U.S., UK, EU and other sanctions regimes against Russia and Belarus. These countersanctions can place companies that operate globally and that are committed to complying with all applicable laws in a very difficult position and may end up hastening the withdrawal of more companies from Russia.

This client alert discusses the most significant measures Russia has taken in order to counter international sanctions imposed against it.[1]

Measures against so-called “Unfriendly States”

Accurately described as countersanctions in the narrow sense, a significant category of the Russian measures is directly related to the sanctions against Russia imposed by other countries. The Russian Government adopted a list of such “unfriendly states”, which currently includes the United States, all EU member states, Albania, Andorra, Australia, Canada, Iceland, Japan, Liechtenstein, Micronesia, Monaco, Montenegro, New Zealand, North Macedonia, Norway, San Marino, Singapore, South Korea, Switzerland, Taiwan, Ukraine and the UK.[2]

As of April 29, 2022, the following measures have been adopted by Russia against so-called “unfriendly states”:

Russian debtors are allowed to pay off their large debts (i.e., debts exceeding 10 million rubles = approx. 140,000 USD in value) to non-Russian creditors based in “unfriendly states” in Russian rubles (instead of otherwise applicable currency) according to the official exchange rate of the Bank of Russia as of the first day of the respective month.[3]

Buyers of Russian natural gas based in “unfriendly states” (or in cases when gas is supplied to an “unfriendly state”) are obliged to pay for gas in Russian rubles:[4]
- Non-compliance with this requirement could lead to a halt to further supplies.
- The requirement is somewhat mitigated by the special payment procedure, according to which buyers of gas must open accounts in both Russian rubles and non-ruble currency at Gazprombank and initially pay for gas in non-ruble currency, which is then sold by Gazprombank on the Moscow Exchange against Russian rubles credited to the buyer’s ruble account and subsequently paid to the seller of gas.
Russian residents are prohibited, without a prior clearance by the Government Commission for Control over Foreign Investments, from conducting the following transactions with foreigners based in “unfriendly states” and persons controlled by such foreigners:
- Providing loans in rubles;
- Transferring ownership of securities; or
- Transferring ownership of real estate.[5]
The compensation to be paid to rightholders from “unfriendly states” for the use of an invention, utility model or industrial design in cases where such protected subject-matter may be used without their consent shall amount to 0 % of the actual proceeds from the production and sale of goods, performance of works or rendering of services for which the respective invention, utility model or industrial design has been used.[6]

Any money transfers from Russian accounts of nonresidents (companies or individuals) from “unfriendly states” to their accounts outside of Russia are suspended for six months.[7]

Companies from “unfriendly states” are prohibited from buying any non-ruble currency in Russia.[8]

Russian state companies subject to sanctions by “unfriendly states” are allowed to refrain from publishing information on their public procurement activities and their suppliers.[9]

Until December 31, 2022, Russian banks and financial institutions are allowed to refrain from publishing certain information in order to avoid sanctions of “unfriendly states,” in particular as regards their ownership and control structure, members of management bodies and other officers, as well as corporate restructuring.[10]

Until December 31, 2022, Russian insurance companies are prohibited from entering into contracts with insurance and reinsurance companies and insurance brokers from “unfriendly states”.[11]

Several top officials of the United States, EU, UK and other countries with “unfriendly state” status are banned from entering Russia.

Further Countermeasures

In addition to the countersanctions in the narrow sense as described above, Russia has taken numerous further measures which do not specifically target countries that have imposed sanctions against Russia. Such countersanctions in the broad sense include measures generally taken to mitigate the effects of international sanctions on the Russian economy as well as to stifle free expression and limit media coverage that is critical of the government (on the latter set of measures and their international law implications, see also our previous client alert “Russia’s Suppression of the Media Violates Its International Law Obligations”).

In particular, Russia has adopted the following measures that are designed to mitigate the effects of international sanctions:

Professional brokers in Russia are prohibited from selling securities on behalf of any non-Russian companies or individuals.[12]

Issuance and trading outside of Russia of depositary receipts representing shares of Russian companies is prohibited, with such Russian companies being obliged to terminate their respective agreements so that the depositary receipts are converted into underlying shares that can be traded only in Russia.[13]

Russian residents are prohibited from:
- Depositing non-ruble currency into their accounts in banks abroad;
- Transferring money using non-Russian electronic payment services without opening an account; and
- Transferring non-ruble currency to any nonresidents under loan agreements.[14]
Russian residents participating in foreign trade are obliged to sell 80% of non-ruble currency received through foreign trade contracts beginning February 28, 2022. Non-ruble currency must be sold within three working days of receiving each transfer. This obligation also retroactively applies to all funds received since January 1, 2022.[15]

Cash exports of non-ruble currency from Russia in an amount exceeding $10,000 in value are prohibited.[16]

Until September 9, 2022, individuals may withdraw no more than $10,000 in cash from their non-ruble accounts in Russian banks; cash withdrawals exceeding this threshold can be made only in rubles.[17] For resident companies and individual entrepreneurs, this threshold is set to $5,000 to be used only for business trips outside of Russia.[18] For nonresident companies and individual entrepreneurs, cash withdrawals in USD, EUR, JPY and GBP are completely banned.[19]

Until October 2022, individuals (as long as they are not associated with “unfriendly states”) may transfer no more than $10,000 in value per month from their bank accounts in Russian banks to their accounts or accounts of other individuals in banks abroad, and no more than $5,000 in value using payment services without opening an account.[20]

Until December 31, 2022, Russian residents are prohibited from paying shares in any nonresident companies or making payments to any nonresidents under joint venture agreements, unless they obtain a permit of the Bank of Russia.[21]

For certain types of contracts with any nonresidents, Russian residents are prohibited from making advance payments exceeding 30% of the sum of their obligations under the contract.[22]

Parallel imports of certain goods protected by certain IP rights (patents, trademarks, utility models and design patents) are legalized. Lists of such goods are yet to be designated by the Ministry of Industry and Trade.[23]

Additionally, Russia has adopted the following measures that are designed to suppress free expression:

Amendments to the Russian Criminal Code have been enacted, criminalizing the following activities:
- Public dissemination of “fake news” about the operations of Russian military or other state bodies abroad (Art. 207.3 of Russian Criminal Code);
- Public actions aimed at “discrediting” the use of Russian military or other state bodies abroad (Art. 280.3 of Russian Criminal Code);
- Calls for the introduction of sanctions against Russia or Russian nationals/companies (Art. 284.2).[24]
Russian media watchdog Roskomnadzor banned numerous independent Russian media outlets due to their reports on Russia’s war in Ukraine.

Roskomnadzor further banned several Russian-language media outlets associated with countries that have imposed sanctions against Russia, in particular Voice of America and Radio Free Europe/Radio Liberty (U.S.), BBC (UK) and Deutsche Welle (Germany).

Roskomnadzor further banned the most popular social networks in Russia.

Outlook

While numerous international companies are exiting the Russian market, we expect that further Russian countermeasures will be imposed.

In particular, the Russian Economic Ministry recently presented a draft bill on the “external administration” of companies closing their Russian businesses.[25]

Another draft bill stipulates that property of “unfriendly states” and of persons associated with such states located in Russia shall be subject to expropriation without compensation.[26]

A further draft bill proposes to introduce criminal liability for managers of companies and other entities for “abuse of office” committed in Russia for the purpose of compliance with international sanctions against Russia.[27]

According to another draft bill, which has already been passed by the Russian State Duma, Russian banks shall be prohibited from providing information on clients and their transactions upon request of any non-Russian authorities without prior consent of Russian authorities.[28]

The interaction between international sanctions and Russian countermeasures is creating and will continue to create difficult questions for companies with global operations, especially with touchpoints in Russia. We continue to closely track developments in this area.

________________________

[1] This alert cannot replace Russian local counsel advice on the continuously developing regulatory landscape.

[2] Russian Government’s Order No. 430-r of March 5, 2022.

[3] Russian President’s Decree No. 95 of March 5, 2022.

[4] Russian President’s Decree No. 172 of March 31, 2022.

[5] Russian President’s Decree No. 81 of March 1, 2022.

[6] Russian Government’s Regulation No. 299 of March 6, 2022.

[7] See Bank of Russia, Press Release of April 1, 2022 (Russian); see also Russian President’s Decree No. 126 of March 18, 2022.

[8] Decision of the Board of Directors of the Bank of Russia of April 1, 2022.

[9] See Meduza of March 8, 2022 (Russian).

[10] Federal Law No. 55-FZ of March 14, 2022.

[11] Federal Law No. 55-FZ of March 14, 2022.

[12] WSJ of February 28, 2022.

[13] Federal Law No. 114-FZ of April 16, 2022.

[14] Russian President’s Decree No. 79 of February 28, 2022.

[15] Russian President’s Decree No. 79 of February 28, 2022.

[16] Russian President’s Decree No. 81 of March 1, 2022.

[17] Bank of Russia, Press Release of March 9, 2022 (Russian); see also Bank of Russia, Press Release of April 8, 2022 (Russian).

[18] Bank of Russia, Press Release of March 10, 2022 (Russian); this restriction is applicable until September 10, 2022 and concerns only cash withdrawals in USD, EUR, JPY and GBP.

[19] Bank of Russia, Press Release of March 10, 2022 (Russian).

[20] Bank of Russia, Press Release of April 1, 2022 (Russian).

[21] Decision of the Board of Directors of the Bank of Russia of April 1, 2022; Russian President’s Decree No. 126 of March 18, 2022.

[22] Russian President’s Decree No. 126 of March 18, 2022.

[23] Russian Government’s Regulation of March 29, 2022 No. 506.

[24] The latter provision criminalizes only Russian citizens and only if the offence has been committed within a year after being subject to an administrative penalty for a similar offence.

[25] Draft bill No. 104796-8, registered at the Russian State Duma on April 12, 2022.

[26] Draft bill No. 103072-8, registered at the Russian State Duma on April 8, 2022.

[27] Draft bill No. 102053-8, registered at the Russian State Duma on April 8, 2022.

[28] Draft bill No. 1193544-7, passed by the Russian State Duma on April 20, 2022.

The following Gibson Dunn lawyers assisted in preparing this client update: Nikita Malevanny, Michael Walther, Richard Roeder, Claire Yi, Anna Helmer, Judith Alison Lee, and Adam M. Smith.

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

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202-887-3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com)
Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com)
Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com)
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com)
Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com)
Chris R. Mullen – Washington, D.C. (+1 202-955-8250, cmullen@gibsondunn.com)
Samantha Sewall – Washington, D.C. (+1 202-887-3509, ssewall@gibsondunn.com)
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, asyarief@gibsondunn.com)
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, stoussaint@gibsondunn.com)
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, szhang@gibsondunn.com)

Asia:
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
David A. Wolber – Hong Kong (+852 2214 3764, dwolber@gibsondunn.com)
Fang Xue – Beijing (+86 10 6502 8687, fxue@gibsondunn.com)
Qi Yue – Beijing – (+86 10 6502 8534, qyue@gibsondunn.com)

Europe:
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Nicolas Autet – Paris (+33 1 56 43 13 00, nautet@gibsondunn.com)
Susy Bullock – London (+44 (0) 20 7071 4283, sbullock@gibsondunn.com)
Patrick Doris – London (+44 (0) 207 071 4276, pdoris@gibsondunn.com)
Sacha Harber-Kelly – London (+44 (0) 20 7071 4205, sharber-kelly@gibsondunn.com)
Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Matt Aleksic – London (+44 (0) 20 7071 4042, maleksic@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33 180, mwalther@gibsondunn.com)
Richard W. Roeder – Munich (+49 89 189 33 115, rroeder@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Prospective joint venture partners frequently spend many hours discussing governance matters because they understand strong governance can be a key to venture success. In this recorded webcast, experts from Gibson Dunn and Ankura Consulting talk about designing an effective joint venture governance system. In particular, they discuss the following:

Why joint venture governance matters, and the relationship between governance and venture performance
How to make decisions regarding board structure and composition, including board size, quorum requirements, and the role of independent directors, observers, and committees
How to manage fiduciary duties and other conflicts of interest joint venture board directors face
What practical steps can be taken to ensure that governance processes continue to operate smoothly after the venture commences operation, and as the venture evolves over time

PANELISTS:

Stephen Glover is a partner in Gibson Dunn’s Washington, D.C. office and has served as Co-Chair of the firm’s Mergers and Acquisitions practice group. Mr. Glover has an extensive practice representing public and private companies in complex mergers and acquisitions, strategic alliances and joint ventures, as well as other corporate matters. Mr. Glover’s clients include large public corporations, emerging growth companies and middle market companies in a wide range of industries. He also advises private equity firms, individual investors and others.

Alisa Babitz is of counsel in Gibson Dunn’s Washington, D.C. office. She is a member of the firm’s Mergers and Acquisitions practice group. Ms. Babitz advises public and private companies on a wide range of general corporate, securities and M&A matters including acquisitions, dispositions and other business combinations; strategic alliances and joint ventures; public and private securities offerings; and venture capital investments.

James Bamford is a Senior Managing Director at Ankura and Head of the Joint Venture and Partnership Practice. He joined Ankura with the firm’s 2020 acquisition of Water Street Partners, which he co-founded in 2008. Mr. Bamford serves a global client base on joint venture transactions, governance, restructurings, and other partnership issues. He has advised clients on more than 200 venture transactions valued at more than $300 billion. He has served clients across multiple industries and in more than 50 countries. Mr. Bamford is author of two books and more than 100 articles on joint ventures and alliances.

Tracy Pyle is a Managing Director in Ankura’s Joint Venture and Partnership Practice. Ms. Pyle advises clients on joint ventures, partnerships, and alliances across the entire lifecycle of a partnership – from formation through launch, management, restructuring, and exit. She also advises companies on managing a portfolio of joint ventures. Ms. Pyle has written on the subject of joint ventures in numerous publications, including Sloan Management Review and the Harvard Law School Forum on Corporate Governance.

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 1.5 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

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

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

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

Click for PDF

Decided April 28, 2022

Cummings v. Premier Rehab Keller, P.L.L.C., No. 20-219

Today, the Supreme Court held 6-3 that emotional-distress damages are not available in discrimination actions against recipients of federal financial assistance.

Background: In a string of statutes, including Title VI of the Civil Rights Act of 1964, the Rehabilitation Act of 1973, the Patient Protection and Affordable Care Act of 2010 (“ACA”), and Title IX of the Education Amendments of 1972, Congress has invoked its authority under the Spending Clause to prohibit recipients of federal funds from discriminating based on race, sex, or disability. Under Title VI, individuals may recover “compensatory damages” for intentional discrimination, and each of the other statutes listed above incorporates this remedial scheme.

The Fifth Circuit held that emotional-distress damages aimed at compensating for humiliation or other noneconomic injuries resulting from intentional discrimination are categorically unavailable under Title VI, the Rehabilitation Act, and the ACA. The Supreme Court has employed a “contract-law analogy” to assess remedies available under Title VI because the conditioning of federal funds on statutory compliance is similar to the formation of a contract: recipients of federal funds agree to take on certain liabilities in exchange for funding. Drawing on that contract-based analogy, the Fifth Circuit reasoned that funding recipients lack notice of their potential liability for emotional-distress damages because that remedy generally is not available for breach of contract actions.

Issue: Whether damages for emotional distress are available in discrimination actions brought against recipients of federal funds under Title VI and the statutes that incorporate its remedial scheme, including the Rehabilitation Act and the ACA.

Court’s Holding: Damages for emotional distress may not be recovered in such actions.

“Cummings would have us treat statutory silence as a license to freely supply remedies we cannot be sure Congress would have chosen to make available.”

Chief Justice Roberts, writing for the Court

What It Means:

The Court’s ruling protects funding recipients, including states, local governments, and businesses, from potential liability for emotional-distress damages, which can be significant and unpredictable.
The Court’s ruling also suggests federal funding recipients will only “be subject to the usual contract remedies in private suits,” not “more fine-grained” exceptions to general rules.
The Court’s decision underscores that where a right of action is implied, as is the case here, congressional silence as to the available remedies should not be taken as an endorsement of all possible remedies.

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

Related Practice: Labor and Employment

Jason C. Schwartz
+1 202.955.8242
jschwartz@gibsondunn.com

Katherine V.A. Smith
+1 213.229.7107
ksmith@gibsondunn.com

Click for PDF

This update provides an overview of key class-action-related developments during the first quarter of 2022 (January through March).

Part I discusses cases from the Eleventh and Ninth Circuits regarding the diversity and amount-in-controversy requirements for federal court jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”).

Part II covers a recent decision from the Seventh Circuit analyzing when an intangible harm from a statutory violation is sufficient for Article III standing in putative class actions.

In addition, while not covered in this update, the Ninth Circuit recently issued a significant en banc opinion regarding class certification issues in Olean Wholesale Grocery v. Bumble Bee Foods, — F.4th —, 2022 WL 1053459 (9th Cir. Apr. 8, 2022) (en banc), including the evidentiary burden for a plaintiff seeking class certification, the assessment of expert testimony at the class certification stage, and the interplay between Rule 23 and injury and Article III standing. Olean is discussed in our separate client alert.

I. The Eleventh and Ninth Circuits Adopt Expansive Views of CAFA Jurisdiction

This past quarter, the Eleventh and Ninth Circuits issued noteworthy decisions relating to aspects of federal court jurisdiction under CAFA (minimal diversity and amount in controversy).

In Cavalieri v. Avior Airlines C.A., 25 F.4th 843 (11th Cir. 2022), the Eleventh Circuit addressed CAFA’s “minimal diversity” requirement, which provides for federal jurisdiction over a class action if there is more than $5 million in controversy and “any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state or a citizen or subject of a foreign state.” 28 U.S.C. § 1332(d)(2)(C). The court held that this requirement can be met in a foreign-defendant case by plausible allegations that a nationwide class includes at least one U.S. citizen.

In Cavalieri, two Venezuelan citizens, one of whom is a legal permanent resident of the United States, filed a putative class action against a Venezuelan airline for breach of contract. 25 F.4th at 848. On appeal, the Eleventh Circuit sua sponte considered whether plaintiffs had sufficiently alleged diversity jurisdiction. Id.

The court first held that a foreign citizen who is a permanent resident does not qualify as a “citizen[] of a State” under the 2011 amendments to CAFA—which meant that the case did not satisfy the general diversity requirements because both the plaintiffs and the defendant were noncitizens. 25 F.4th at 848–49 (citing 28 U.S.C. § 1332(a)). Nonetheless, the Eleventh Circuit concluded that the allegations supported minimal diversity jurisdiction under CAFA because the plaintiffs had plausibly alleged that “‘at least one unnamed class member is a U.S. citizen and resident and, thus, is diverse from’” the Venezuelan airline. Id. at 849. The court added that it was for “a later stage in the litigation for the district court to make the factual determination on whether there is indeed jurisdiction.” Id. at 850 (citation omitted).

The Ninth Circuit addressed CAFA’s amount-in-controversy requirement in Jauregui v. Roadrunner Transportation Services, Inc., 28 F.4th 989 (9th Cir. 2022). In that case, the plaintiff filed a putative wage-and-hour class action on behalf of all current and former hourly workers of the defendant. Id. at 991. Although the defendant removed the case to federal court under CAFA and presented substantial evidence to establish the amount-in-controversy requirement, the district court nevertheless remanded the case to state court. Id.

The Ninth Circuit reversed. It held that by improperly discounting the defendant’s substantial evidence showing the amount in controversy was satisfied, the district court had impermissibly imposed a “heavy burden” on the defendant that “contravenes the text and understanding of CAFA and ignores precedent.” 28 F.4th at 992. In particular, the district court improperly “put a thumb on the scale against removal” by assigning a $0 value to most of the plaintiff’s claims simply because it disagreed with the assumptions underlying the defendant’s estimates. Id. at 992. But “merely preferring an alternative assumption is not an appropriate basis to zero-out a claim,” and “at most, it only justifies reducing the claim to the amount resulting from the alternative assumption.” Id. at 994. Thus, the district court’s approach “turn[ed] the CAFA removal process into an unrealistic all-or-nothing exercise of guess-the-precise-assumption-the-court-will-pick—even where . . . the defendant provided substantial evidence and analysis supporting its amount in controversy estimate.” Id. The Ninth Circuit also reaffirmed the “expansive understanding of CAFA” under circuit precedent, and encouraged district courts to give defendants “latitude” when analyzing removal “as long as the [defendant’s] reasoning and underlying assumptions are reasonable.” Id. at 993.

II. The Seventh Circuit Addresses When a Violation of Consumer Financial Protection Statutes Gives Rise to Article III Standing

As reported in our prior updates, the federal courts have continued to apply a mix of approaches in determining whether plaintiffs asserting statutory violations have alleged a concrete injury to satisfy Article III under TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021). The Seventh Circuit weighed in this quarter in a case analyzing standing under the Fair Debt Collection Protection Act (“FDCPA”).

In Ewing v. MED-1 Solutions, LLC, 24 F.4th 1146 (7th Cir. 2022), the Seventh Circuit held that debt collectors’ failure to report a customer’s dispute of a debt to credit agencies is a concrete injury sufficient to support standing under the FDCPA. Although the defendants argued the plaintiffs lacked standing under TransUnion because “there is no evidence that [the credit agencies] sent the [plaintiffs’] credit reports to potential creditors,” the court disagreed. 24 F.4th at 1150, 1152. “In the wake of TransUnion,” the Seventh Circuit framed the standing analysis as asking “whether the [plaintiffs] suffered a concrete injury when the [debt collectors] communicated false information (i.e., the reports of debts not being disputed) about them to a credit-reporting agency.” Id. at 1152. Because the FDCPA protects against “reputational harm”—which “is analogous to the harm caused by defamation, which has long common law roots”—the claim satisfied TransUnion’s requirement that the injury bear a close relationship to a traditionally recognized harm. Id. at 1153. Additionally, the fact the credit reporting agencies did not publish the credit reports to third parties was “a red herring,” because the debt collectors published false information to the credit agency, and plaintiffs did not need to show that the credit agency then “also shared that false information” to further third parties. Id. at 1152–53.

The following Gibson Dunn lawyers contributed to this client update: The following Gibson Dunn lawyers contributed to this client update: Jessica Pearigen, Gillian Miller, Yan Zhao, Wesley Sze, Lauren Blas, Bradley Hamburger, Kahn Scolnick, and Christopher Chorba.

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

Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com)
Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com)
Theane Evangelis – Co-Chair, Litigation Practice Group, Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com)
Kahn A. Scolnick – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com)
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, bhamburger@gibsondunn.com)
Lauren M. Blas – Los Angeles (+1 213-229-7503, lblas@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Click for PDF

In this alert, we discuss the Federal Trade Commission’s recent reinstatement of a long dormant policy restricting certain future acquisitions by parties that hereafter enter into an FTC consent order.[1] Since announcing the return of the policy in October 2021, the Commission has included prior approval provisions in each of the seven consent orders issued in connection with conditional approval of mergers. Below, we provide details on these prior approval provisions and describe practical implications of the FTC’s prior approval policy change for companies considering transactions that may be subject to such requirements. Despite the policy reinstatement, FTC consent order terms—including prior approval provisions—remain subject to negotiation between the merging parties and the FTC.

Recent FTC Policy Changes Requiring Prior Approval in Merger Consent Orders

The FTC’s prior approval policy arises in the context of a Commission action to block or restructure a proposed merger. Prior to 1995, the FTC required all companies that entered into a consent decree to settle such an action with a divestiture to obtain prior approval from the FTC for any future transaction in at least the same product and geographic market for which a violation was alleged. The Commission’s 1995 Policy Statement on Prior Approval and Prior Notice Provisions (“1995 Policy Statement”) did away with that condition, requiring prior approval and prior notice only when there was a “credible risk” of an unlawful merger, without regard for market conditions or a company’s prior merger activity.[2]

In July 2021, the FTC voted 3-2 to rescind the 1995 Policy Statement, with Chair Khan, Commissioner Slaughter, and then-Commissioner Chopra voting in favor, and Commissioners Phillips and Wilson dissenting.[3] In support of her vote, Chair Khan cited the FTC’s “strapped resources.” She stated that since the FTC reduced its use of prior approval provisions following the 1995 Policy Statement, the agency had re-reviewed a number of the same or similar proposed transactions that the Commission had previously determined to be problematic. Similarly, she noted that companies in several cases had sought to buy back assets that the Commission had previously ordered those same companies to divest.[4] Commissioner Chopra made similar remarks in favor of the policy change, emphasizing that “Commission staff is stretched to the breaking point,” and arguing that this policy supports the Commission goal of “prevent[ing] egregious repeat offenses.”[5] In his dissenting opinion, Commissioner Phillips argued that this policy change will deter consent agreements, increase the number of merger challenges brought before a court, and result in less competition among companies by, for example, reducing competition in bidding processes as a potential bidder may be less attractive if it is subject to a prior approval provision.[6] And Commissioner Wilson argued in her dissent that the purported justification for the policy change is unsupported by empirical evidence and will result in wasted resources and less certainty.[7]

Subsequently, the FTC issued a Prior Approval Policy Statement in October 2021 (“2021 Policy Statement”), again by a 3-2 vote along party lines, that restored the Commission’s pre-1995 practice of restricting future acquisitions by parties subject to an FTC consent order.[8] Under the 2021 Policy Statement:

Parties settling a proposed transaction with a merger divestiture order will need to obtain prior approval from the Commission before closing any future transaction affecting each relevant market for which a violation was alleged, for a minimum of ten years.
The Commission may seek prior approval provisions that extend to broader markets than the product and geographic markets affected by the challenged merger, depending on the circumstances.
The Commission will weigh a number of factors in determining the scope of a prior approval provision, including: the nature of the transaction (i.e., whether the transaction includes some or all of the assets implicated in a prior transaction challenged by the Commission, or whether either party was subject to a merger enforcement action in the same relevant market); the level of market concentration and degree to which the transaction increases market concentration; the degree of pre-merger market power held by one of the parties; the parties’ history of acquisitions in the same relevant market, in upstream or downstream related markets, or in adjacent or complementary products or geographic areas; and evidence that market characteristics create an ability or incentive for anticompetitive market dynamics post-transaction.
The Commission will also require buyers of divested assets in FTC merger consent orders to agree to a prior approval for any future sale of the assets they acquire in divestiture orders, for a minimum of ten years.
The Commission is less likely to pursue a prior approval provision against merging parties that abandon their transaction prior to certifying substantial compliance with a Second Request (or in the case of a non-HSR reportable deal, with any applicable Civil Investigative Demand or Subpoena Duces Tecum). However, the Commission may seek an order incorporating a prior approval provision even in matters where the Commission issues a complaint to block a merger and the parties subsequently abandon the transaction.

In a dissenting statement, Commissioners Wilson and Phillips characterized the 2021 Policy Statement as a “broadside at the market for corporate control in the United States” and expressed concerns that “[d]espite its unassuming label, a prior approval requirement imposes significant obligations on merging parties and innocent divestiture buyers not with respect to currently pending mergers, but instead with respect to future deals.”[9] During panel discussions at the American Bar Association’s Antitrust Spring Meeting in April 2022, both dissenting Commissioners reiterated their concerns regarding the policy change. Commissioner Wilson suggested that prior approval requirements raise significant due process concerns and argued that this policy change disincentivizes potential divestiture buyers from assisting the FTC in resolving its competitive concerns.[10] Commissioner Phillips similarly stated that the requirements opposed on divestiture buyers are “like a penalty for helping.”[11]

Recent Consent Orders Containing Prior Approval Provisions

Since issuing the 2021 Policy Statement, the FTC has entered into consent agreements containing prior approval provisions to resolve competitive concerns in seven proposed transactions.

Dialysis Services Transaction. The FTC challenged a dialysis company’s proposed acquisition of a number of dialysis clinics from another provider in Utah in October 2021, alleging that the proposed acquisition would reduce competition and increase concentration in the provision of outpatient dialysis services in the greater Provo, Utah area. In the first consent agreement to contain a prior approval provision following the FTC’s announcement of its revised prior approval policy, the buyer agreed to divest four outpatient dialysis clinics to a third party. The consent agreement also required the buyer to seek prior approval from the FTC for a ten-year period before: (1) acquiring an ownership or leasehold interest in any facility that has operated as an outpatient dialysis clinic within six months prior to the date of the proposed acquisition, within the State of Utah; (2) acquiring an ownership interest in any individual or entity that owns any interest in or operates an outpatient dialysis clinic within the State of Utah (but only with respect to that individual or entity’s interest in clinics operated Utah); or (3) entering into any contract for the buyer to participate in the management or business of an outpatient dialysis clinic located within the State of Utah. Notably, the consent agreement did not contain a prior approval provision binding the divestiture buyer.

Generic Pharmaceuticals. In November 2021, the FTC’s challenged ANI Pharmaceuticals, Inc.’s (“ANI”) proposed acquisition of Novitium Pharma LLC (“Novitium”), alleging that the transaction likely would have harmed competition in the U.S. markets for generic sulfamethoxazole-trimethoprim (“SMX-TMP”) oral suspension, an antibiotic used to treat infections, and generic dexamethasone tablets, an oral steroid product used to treat inflammation. The FTC approved a final consent order settling those charges in January 2022, pursuant to which ANI and Novitium agreed to divest ANI’s rights and assets to generic SMX-TMP oral suspension and generic dexamethasone tablets to Prasco LLC (“Prasco”). The consent order imposed prior approval provisions on the merging parties as well as on the divestiture buyer. The order required ANI and Novitium to seek prior approval from the FTC before acquiring any rights or interests in the two relevant markets (generic SMX-TMP and generic dexamethasone), or the therapeutic equivalent or biosimilar of those products, as well as before acquiring any rights or interests in a third pipeline product, erythromycin/ethylsuccinate products, or the therapeutic equivalent or biosimilar of those products. Additionally, for three years, Prasco must seek prior approval before selling or licensing any FDA authorizations for the divested assets, and for an additional seven years thereafter Prasco must seek prior approval before selling or licensing any FDA authorizations for the divested assets to anyone who owns or is seeking approval for an FDA authorization to manufacture or sell a therapeutic equivalent of a divested product.[12]

More recently, in April 2022, the FTC challenged Hikma Pharmaceuticals’ (“Hikma”) proposed acquisition of Custopharm, Inc. (“Custopharm”), alleging that the transaction would likely substantially lessen competition in the U.S. market for generic injectable triamcinolone acetonide (“TCA”), a corticosteroid used for severe skin conditions, allergies, and inflammation. As part of the transaction, Custopharm’s parent company, Water Street Healthcare Partners, LLC (“Water Street”), agreed to retain and transfer Custopharm’s pipeline TCA product, assets, and business to another company Water Street owns, Long Grove Pharmaceuticals, LLC. Under the terms of the consent order entered to resolve the FTC’s allegations, for ten years, Hikma will not acquire any rights or interests in the divested TCA product, assets, and business, or the therapeutic equivalent or biosimilar thereof, without the prior approval of the Commission. The consent order further provides that Water Street shall not sell, transfer, or otherwise convey any interest in the divested TCA assets or business for four years without the prior approval of the Commission. The consent order also includes a novel requirement that the divestiture buyer and its parent company not terminate the operations of the divested TCA business and take all actions necessary to maintain the full economic viability, marketability, and competitiveness of the divested TCA assets and business.[13]

Grocery Stores. Two New York-based supermarket operators—The Golub Corp. (“Golub”), which owns the Price Chopper chain, and Tops Market Corp. (“Tops”)—sought to merge in a transaction that would have created a combined company with nearly 300 supermarkets across six states. In its November 2021 complaint challenging the transaction, the FTC alleged that the proposed merger would substantially lessen competition in the retail sale of food and other grocery products in supermarkets in nine counties in New York and one county in Vermont. To settle those charges, Golub and Tops entered into a final consent agreement with the FTC in January 2022 pursuant to which the merging parties agreed to divest 12 Tops stores and related assets to C&S Wholesale Grocers, Inc. (“C&S”). The consent agreement requires Golub and Tops to obtain prior approval from the FTC for a ten-year period before acquiring any facility that has operated as a supermarket, as well as before acquiring an interest in any entity that has owned or operated a supermarket, in the ten counties comprising the relevant geographic markets alleged in the complaint within six months prior to the date of such proposed acquisition. The consent agreement also requires C&S to seek prior approval for a three-year period before selling a divested supermarket, and for an additional seven-year period before selling a divested supermarket to any person that owned an interest in supermarket located in the same county as the divested supermarket within six months prior to the date of such proposed sale.[14]

Retail Fuel Assets. In December 2021, the FTC challenged Global Partners LP’s (“Global”) proposed acquisition of 27 retail gasoline and diesel outlets from Richard Wiehl (“Wiehl”). The FTC alleged that the transaction would harm competition for the retail sale of gasoline in five local Connecticut markets, as well as for the retail sale of diesel fuel in four of those markets. Pursuant the FTC’s consent order, Global and Wiehl were required to divest to Petroleum Marketing Investment Group (“PMG”) six Global retail fuel outlets and one Wheels retail fuel outlet. Under the order, Global must obtain FTC prior approval for a ten-year period before acquiring an interest in any retail fuel business within a two-mile driving distance from any of the seven divested fuel outlets. Additionally, PMG must not, without FTC prior approval, sell or otherwise convey any of the divested fuel outlets for a period of three years, or sell any of the divested fuel outlets for an additional seven-year period, to any person who owned an interest in any retail fuel business within a two-mile driving distance from any of the seven divested fuel outlets.[15]

Oil and Gas Production Assets. In March 2022, the FTC challenged a proposed transaction that would have combined two of four significant oil and gas development and production companies in northeast Utah’s Uinta Basin, alleging that it would harm competition in the relevant product market for the development, production, and sale of Uinta Basin waxy crude to Salt Lake City area refiners, as well as in a narrower relevant product market for the development, production, and sale of Uinta Basin yellow waxy crude to Salt Lake City area refiners. The complaint alleged harm in a relevant geographic market no broader than the Uinta Basin, as well as in an alternative relevant geographic market consisting of the Salt Lake City area. To resolve the FTC’s allegations, the merging parties entered into a consent agreement with the FTC pursuant to which they agreed to divest certain assets in Utah to a third party. The prior approval provision in the consent agreement required the buyer to receive FTC prior approval for a ten-year period before acquiring any ownership, leasehold, or other interest in any person that has produced or sold, on average over the six months prior to the acquisition, more than 2,000 barrels per day of waxy crude in seven Utah counties, as well as before acquiring any ownership or leasehold interest in lands located in those seven Utah counties where the transaction—or sum of transactions with the same counterparty during any 180-day period—results in an increase in the buyer’s land interests in those seven counties of more than 1,280 acres. The consent agreement also requires the divestiture buyer to obtain prior approval for a three-year period before selling the divested assets, as well as for an additional seven-year period before selling the divested assets to any person engaged in the development, production, or sale of Uinta Basin waxy crude in seven Utah counties.

Glass Enamel and Colorants. The FTC challenged Prince International Corp.’s (“Prince”) proposed acquisition of Ferro Corp. (“Ferro”) in April 2022, alleging that the proposed acquisition would substantially lessen competition in the North American market for porcelain enamel frit and in the worldwide markets for glass enamel and forehearth colorants. To resolve the FTC’s competitive concerns, the parties entered into a consent agreement requiring Prince and Ferro to divest three facilities to a third party: a porcelain enamel frit and forehearth colorants plant in Leesburg, Alabama; a porcelain enamel frit and forehearth colorants plant and research center in Bruges, Belgium; and a glass enamel plant in Cambiago, Italy. Under the terms of the consent order, the merged company must obtain prior approval from the Commission for ten years before buying assets to manufacture and sell porcelain enamel frit in North America, or before buying assets to manufacture and sell glass enamel or forehearth colorants anywhere in the world. The consent order also requires the divestiture buyer to obtain prior approval for three years before transferring any of the divested assets to any buyer, and for seven additional years before transferring any of the divested assets to a buyer that manufactures and sells porcelain enamel frit, glass enamel, or forehearth colorants.[16]

Key Takeaways for Parties Considering Transactions that May be Subject to FTC Consent Orders

Negotiation of Merger Agreements Should Anticipate Prior Approval Provisions in FTC Investigations that Result in Consent Orders. Merging parties should expect that the FTC will require a prior approval provision in any transaction in which potential competitive concerns can be resolved with a divestiture. There may be some flexibility, however, to negotiate the precise contours of a prior approval requirement with the FTC to fit the unique circumstances of a particular transaction. Buyers should therefore consider seeking flexible merger agreement language to avoid being obligated to accept a prior approval provision that would unreasonably impede their ability to pursue potential future transactions, particularly in an area broader than the specific competitive concerns the FTC is likely to have in the earlier transaction. Sellers, on the other hand, would benefit from seeking assurances obligating the buyer to agree to a reasonable prior approval provision to the extent the FTC requires a divestiture to resolve competitive concerns while, at the same time, appreciating a buyer’s reluctance to agree to take on risks associated with a broadly worded obligation.

Negotiation of Prior Approval Provisions with FTC Should Ensure They Do Not Result in Broader Consequences than Intended. A prior approval provision in certain circumstances could apply to any subsequent transaction involving assets that are covered by the prior approval, even if that transaction also includes assets that fall outside the prior approval’s scope. For this reason, parties should carefully negotiate the scope of prior approval provisions with potential future transactions in mind to avoid agreeing to overly broad terms that may impact the timing and risks in future transactions involving assets that include both in-scope and out-of-scope assets.

Product and Geographic Scope Generally Limited to Divestiture Markets. The 2021 Policy Statement suggests that prior approval provisions in FTC consent orders, under certain circumstances, may extend beyond the relevant product and geographic markets affected by the merger. So far, however, the prior approval provisions included in FTC consent orders since the 2021 Policy Statement have generally been narrowly drawn around the divestiture product and geographic areas, and any extensions beyond the relevant markets defined in the FTC’s complaints have been relatively limited. Merging parties should be in a position to comply with a Second Request and be prepared to litigate if needed to gain leverage to secure a settlement on reasonable terms if the FTC seeks to impose prior approval provisions broader than the markets in which the parties have agreed to divest assets.

Duration. Despite the 2021 Policy Statement’s proclamation that prior approval provisions will cover “a minimum of ten years,” none of the prior approval provisions included in the consent orders entered since the 2021 Policy Statement have extended beyond a ten-year period. Additionally, all but one of the consent orders issued include prior approval provisions applicable to buyers of divested assets. With the exception of the four-year period applied to the divestiture buyer in Hikma/Custopharm, the prior approval provisions for divestiture buyers generally cover a three-year period during which the divestiture buyer must obtain prior approval before conveying the divested assets to another buyer, followed by a seven-year period during which the divestiture buyer must seek prior approval before conveying the divested assets to a buyer that operates in a similar product and geographic market as the divested assets.

Transactions Abandoned Post-Complaint. The 2021 Policy Statement put merging parties on notice that even if they abandon a proposed merger after litigation commences, the Commission may subsequently pursue an order incorporating a prior approval provision. To obtain such an order the FTC would have to pursue an enforcement action in its administrative court seeking injunctive relief to prevent a potential recurrence of the alleged violation, which would likely require significant resources. Since the 2021 Policy Statement was issued, the FTC has yet to pursue such an order against merging parties who have abandoned post-complaint but before fully litigating the challenged transaction.[17] There have been indications, however, that the FTC is exploring the possibility of seeking an order against Hackensack Meridian Health and Englewood Healthcare—who abandoned their proposed merger after the Third Circuit upheld a preliminary injunction entered by the U.S. District Court for the District of New Jersey enjoining the merger—that would require the two hospital systems to provide prior notice should they attempt the same merger in the future.[18]

Lack of Convergence with DOJ Policy. The Antitrust Division currently does not have a similar policy requiring prior approval provisions in divestiture orders. Assistant Attorney General Jonathan Kanter’s recent statements about the inadequacy of divestiture remedies and proclamations that the Antitrust Division’s “duty is to litigate, not settle,”[19] suggest that the agency will enter into fewer consent decrees conditionally approving deals with divestitures than in prior administrations. It remains to be seen whether, for such decrees, the Antitrust Division will follow in the FTC’s footsteps with regard to prior approval provisions although, in the first consent decree issued since the new Assistant Attorney General took office, the decree did not include such a provision.

___________________________

[1] Statement of the Commission on Use of Prior Approval Provisions in Merger Orders (Oct. 25, 2021), here.

[2] Press Release, FTC Rescinds 1995 Policy Statement that Limited the Agency’s Ability to Deter Problematic Mergers (July 21, 2021), https://www.ftc.gov/news-events/news/press-releases/2021/07/ftc-rescinds-1995-policy-statement-limited-agencys-ability-deter-problematic-mergers.

[3] Id.

[4] Remarks of Chair Lina M. Khan Regarding the Proposed Rescission of the 1995 Policy Statement Concerning Prior Approval and Prior Notice Provisions (July 21, 2021), here.

[5] Prepared Remarks of Commissioner Rohit Chopra Regarding the Motion to Rescind the Commission’s 1995 Policy Statement on Prior Approval and Prior Notice (July 21, 2021), here.

[6] Dissenting Statement of Commissioner Noah Joshua Phillips Regarding the Commission’s Withdrawal of the 1995 Policy Statement Concerning Prior Approval and Prior Notice Provisions in Merger Cases (July 21, 2021), here.

[7] Oral Remarks of Commissioner Christine S. Wilson (July 21, 2021), here.

[8] Statement of the Commission on Use of Prior Approval Provisions in Merger Orders (Oct. 25, 2021), here.

[9] Dissenting Statement of Commissioners Christine S. Wilson and Noah Joshua Phillips Regarding the Statement of the Commission on Use of Prior Approval Provisions in Merger Orders (Oct. 29, 2021), here.

[10] Matthew Perlman, FTC’s Republicans Say Leaders Think Mergers are ‘Evil’, Law360, Apr. 6, 2022, here.

[11] Id.

[12] See Complaint, In the Matter of ANI Pharmaceuticals, Inc., Novitium Pharma LLC, and Esjay LLC (Nov. 10, 2021), here; Decision and Order, In the Matter of ANI Pharmaceuticals, Inc., Novitium Pharma LLC, and Esjay LLC (Jan. 12, 2022), here.

[13] See Complaint, In the Matter of Hikma Pharmaceuticals PLC, et al. (Apr. 18, 2022), here;
Decision and Order, In the Matter of Hikma Pharmaceuticals PLC, et al. (Apr. 18, 2022), here.

[14] See Complaint, In the Matter of The Golub Corporation, Tops Markets Corporation, and Project P Newco Holdings, Inc. (Nov. 8, 2021), here; Decision and Order, In the Matter of The Golub Corporation, Tops Markets Corporation, and Project P Newco Holdings, Inc. (Jan. 24, 2022), here.

[15] See Complaint, In the Matter of Global Partners LP and Richard Wiehl (Dec. 20, 2021),
https://www.ftc.gov/system/files/ftc_gov/pdf/final_global_wiehl_complaint_0.pdf;
Decision and Order, In the Matter of Global Partners LP and Richard Wiehl (Dec. 20, 2021),
https://www.ftc.gov/system/files/ftc_gov/pdf/final_global_wiehl_order_0.pdf.

[16] See Complaint, In the Matter of American Securities Partners VII, Prince International Corporation, and Ferro Corporation (Apr. 21, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/2110131ASPFerroComplaint.pdf; Decision and Order, In the Matter of American Securities Partners VII, Prince International Corporation, and Ferro Corporation (Apr. 21, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/2110131ASPFerroDecisionOrder.pdf.

[17] See, e.g., Statement Regarding Termination of Nvidia Corp.’s Attempted Acquisition of Arm Ltd. (Feb. 14, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/02/statement-regarding-termination-nvidia-corps-attempted-acquisition-arm-ltd; Statement Regarding Termination of Lockheed Martin Corporation’s Attempted Acquisition of Aerojet Rocketdyne Holdings Inc. (Feb. 15, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/02/statement-regarding-termination-lockheed-martin-corporations-attempted-acquisition-aerojet; Statement Regarding Termination of Attempted Merger of Rhode Island’s Two Largest Healthcare Providers (Mar. 2, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/03/statement-regarding-termination-attempted-merger-rhode-islands-two-largest-healthcare-providers.

[18] See, e.g., Respondents’ Reply in Support of Motion to Dismiss Complaint, In the Matter of Hackensack Meridian Health, Inc. and Englewood Healthcare Foundation, Dkt No. 9399 (Apr. 20, 2022), here.

[19] Prepared Remarks of Assistant Attorney General Jonathan Kanter, Antitrust Enforcement: The Road to Recovery (Apr. 21, 2022), ttps://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-keynote-university-chicago-stigler.

The following Gibson Dunn lawyers prepared this client alert: Jamie E. France and JeanAnn Tabbaa.

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Click for PDF

On November 8, 2021 New York Governor Kathy Hochul signed an amendment to the New York Civil Rights Law which requires employers provide notice to employees of electronic monitoring of telephone, email, and internet access and usage. The law, as described briefly below, is scheduled to go into effect on May 7, 2022.

Once effective, the law requires all New York employers (regardless of size) to provide written notice, upon hire, to new employees if the employer does and/or plans to monitor or intercept their telephone or email communications or internet usage. The notice must be in writing (either hard copy or electronic), and it must be acknowledged by new employees. Although employers need not obtain acknowledgements from existing employees, they will be required to post a notice in a “conspicuous place which is readily available for viewing” by existing employees subject to electronic monitoring.

The notice should inform employees that “any and all telephone conversations or transmissions, electronic mail or transmissions, or internet access or usage by an employee by any electronic device or system,” including, but not limited to, “computer, telephone, wire, radio or electromagnetic, photoelectronic or photo-optical systems,” may be subject to monitoring “at any and all times by any lawful means.”

“Conspicuous place” is not defined in the statute. Therefore, employers who have safe harbor policies in their handbooks allowing electronic monitoring may consider posting a stand-alone notice of their electronic monitoring policy in a place in which employees can easily and readily access and review the policy.

Notably, the law does not apply to processes that:

are designed to manage the type or volume of incoming or outgoing electronic mail or telephone voice mail or internet usage;
are not targeted to monitor or intercept the activities of a particular individual; and
are performed solely for the purpose of computer system maintenance and/or protection.

Violations

There is no private right of action available for violations. The Office of the New York State Attorney General is tasked with enforcing the law. Employers who are determined to have violated the law will be subject to fines of up to $500 for the first offense, $1,000 for the second offense, and $3,000 for the third and each subsequent offense.

Takeaway

On or before the effective date (May 7), New York employers who currently and/or plan to conduct electronic monitoring of employees should prepare to provide: (1) an acknowledgement form to new employees upon hire; as well as (2) notice of the electronic monitoring policy to existing employees.

The following Gibson Dunn attorneys assisted in preparing this client update: Harris Mufson, Danielle Moss, and Lizzy Brilliant.

Mylan Denerstein – New York (+1 212-351-3850, mdenerstein@gibsondunn.com)

Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com)

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

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

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

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

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Washington, D.C. partner Howard S. Hogan and New York associate Connor S. Sullivan are the authors of “Courts Continue to Debate the Legal Status of Reposted Social Media Content,” [PDF] published by The National Law Journal on April 22, 2022.

In March 2022, the Securities and Exchange Commission approved a rule proposal for new climate change disclosure requirements for both U.S. public companies and foreign private issuers. In this webcast, a panel of Gibson Dunn lawyers provides an overview of the proposed requirements and discuss the key takeaways and the impact the proposal, if adopted, would have on public companies.

PANELISTS:

Aaron Briggs is a partner in Gibson Dunn’s San Francisco office and a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Briggs’ practice focuses on advising technology, life sciences and other companies and their boards of directors on a wide range of securities and governance matters, including ESG, corporate governance, SEC disclosure and compliance, shareholder activism, executive compensation, investor communications, disclosure effectiveness and stakeholder engagement matters. Prior to re-joining the firm in 2018, Mr. Briggs served as Executive Counsel – Corporate, Securities & Finance at General Electric. In addition, Mr. Briggs was named Corporate Governance Professional of the Year by Corporate Secretary Magazine.

Anne Champion is a partner in Gibson Dunn’s New York office and a member of the firm’s Transnational Litigation, Environmental Litigation, Media Law, and Intellectual Property Practice Groups. Ms. Champion has played a lead role in a wide range of high-stakes litigation matters, including trials. Her practice focuses on complex international disputes, including RICO, fraud, and tort claims, and includes federal and state court litigation and international arbitration. She also has significant experience in First Amendment and intellectual property disputes.

Tom Kim is a partner in Gibson Dunn’s Washington, D.C. office and a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Kim focuses his practice on a broad range of SEC disclosure and regulatory matters, including capital raising and tender offer transactions and shareholder activist situations, as well as corporate governance, environmental social governance and compliance issues. He also advises clients on SEC enforcement investigations involving disclosure, registration and auditor independence issues. Mr. Kim served at the SEC for six years as the Chief Counsel and Associate Director of the Division of Corporation Finance, and for one year as Counsel to the Chairman.

Lori Zyskowski is a partner in Gibson Dunn’s New York office and Co-Chair of the firm’s Securities Regulation and Corporate Governance Practice Group. Ms. Zyskowski advises clients, including public companies and their boards of directors, on corporate governance and securities disclosure matters, with a focus on Securities and Exchange Commission reporting requirements, proxy statements, annual shareholders meetings, director independence issues, proxy advisory services, and executive compensation disclosure best practices. She also focuses on advising companies on environmental, social and governance, or ESG, disclosures. Ms. Zyskowski also advises on board succession planning and board evaluations and has considerable experience advising nonprofit organizations on governance matters.

Brian A. Richman is an associate in Gibson Dunn’s Washington, D.C. office and a member of the firm’s Appellate and Constitutional Law, and Administrative Law and Regulatory practice groups. Mr. Richman focuses his practice on high-stakes appellate, administrative law, and complex litigation matters. He regularly litigates constitutional and statutory issues in courts around the country and represents clients in challenging and defending regulatory action by administrative agencies, with an emphasis on securities and financial services matters.

MCLE CREDIT INFORMATION:

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

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

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

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

Click for PDF

Compared to 2021’s record level deal activity, the first quarter of 2022 has registered a dip in global M&A. Analysts report that for January through March of 2022, global M&A is down by approximately one-fifth relative to the same period last year when measured by both deal value and volume metrics. The total value of pending and completed deals announced in Q1 2022 is the lowest since the second quarter of 2020. Big deals are still being signed, including a range of high profile deals in the largest mega-deal bracket (i.e., deals valued at $10B or more), a category that includes, among others, Microsoft/Activision Blizzard ($68B) and TD Bank/First Horizon ($13.4B). Yet, during the early months of 2022, large and mid-market deals—those valued between $1B and $5B—declined 40% relative to last year.

A host of complex factors influence M&A activity at any given time, from inflation to global conflicts to liquidity factors to prevailing regulatory dynamics. To be sure, the current regulatory climate around antitrust issues presents a challenge for deal makers. Progressive leadership at the Federal Trade Commission (FTC) and the Department of Justice Antitrust Division (DOJ) (together, the Agencies) have articulated and begun to execute a broad anti-consolidation agenda, increasing uncertainty and heightening risk associated with the U.S. merger clearance process. Similar trends are playing out across the global antitrust enforcement community. This shift has implications for the costs, timeline, and business disruption associated with the merger clearance process, particularly in light of the Agencies’ movement towards disfavoring settlements. But unlike many of the factors that contribute to M&A trends, which are exogenous and uncontrollable by deal parties, concerns about antitrust risk can be assessed and managed.

Gibson Dunn is working actively with clients to ensure that unpredictability around the merger control process under the Biden administration does not create unnecessary barriers to lawful M&A transactions. In this climate, the clear and certain allocation of risk and articulation of regulatory obligations in transaction agreements is paramount. Where appropriate, merging parties should prepare to defend their transactions through federal court litigation in the event that the Agencies adopt theories of harm that depart from standing law or are inconsistent with business realities. Finally, parties should give broad consideration to the implications of Agency non-merger enforcement activity (i.e., investigative studies, conduct enforcement actions, and rulemakings) on potential transactions, and vice versa.

Heightened Uncertainty and Risk Associated With Merger Clearance in the U.S. and Beyond

Since coming to leadership, FTC Chair Lina Khan and Assistant Attorney General Jonathan Kanter of the DOJ have pursued a top to bottom reconsideration of the antitrust agenda. Through rulemaking, promises of tougher enforcement activity, and rescission and (eventual) replacement of key policy documents, the Agencies are seeking to broaden antitrust enforcement and, in so doing, discourage M&A activity. These policies stem, in part, from the Agencies’ belief that corporate consolidation has “harmed open markets and fair competition” under overly permissive enforcement regimes in the past decades.

Among the Agencies’ most significant departures from past merger review practice is their reconsideration of the Horizontal Merger Guidelines and withdrawal of the Vertical Merger Guidelines, which they deemed “narrow and outdated.” Historically, agency staff, as well as deal makers and advisors interpreting the merger laws, have relied heavily on the Horizontal Merger Guidelines and, to a lesser extent (due to their recent revision and the less developed state of vertical merger enforcement), the Vertical Merger Guidelines. Now, the relevancy of the past guidelines is in doubt, but the content and scope of new guidelines is also unknown. What is clear from Agency commentary is that new guidelines are likely to substantially expand the scope of merger enforcement and very well may embrace novel and untested theories of harm, including greater scrutiny of “non-horizontal” transactions (e.g., conglomerate mergers and cross market mergers), examination of the incentives created by the involvement of investment firms, and a newfound emphasis on harm to workers and small businesses.

The Agencies’ shifting policy around merger remedies is another source of unpredictability and increased deal risk. In recent remarks, AAG Kanter expressed concern that the Agencies’ historical approach to merger remedies has been ineffective. He went on to say that under his leadership the DOJ may be less willing to resolve competitive concerns through divestitures, particularly when a deal involves “innovative markets” or “evolving business models.” Instead, when enforcers “conclude[] that a merger is likely to lessen competition, in most situations” the Agency “should seek a simple injunction to block the transaction,” rather than trying to cure the harm through divestitures. Accordingly, relative to past practice, merging parties may find the Agencies unreceptive to settlement negotiations. At the least, parties will face more resistance and likely need to offer broader divestiture packages. And even where merger settlements are available, the Agencies have revived the practice of including in consent decrees prior notice and approval requirements in respect of future transactions, with the effect of complicating settlement negotiations and burdening future deals.

Outside of the merger context, the Agencies are taking action that is likely to have second-order effects for M&A. For example, the FTC is actively deploying its Section 6(b) authority, which enables the agency to conduct wide-ranging studies without a specific law enforcement objective. Section 6(b) scrutiny of particularly industries or issues (such as non-reportable technology transactions or particular healthcare sectors) is likely to create obstacles for mergers that coincide with the area of FTC scrutiny. For example, enforcers may be inclined to look more closely at a transaction that relates to an area of active study in order to further their study objectives. In addition, political or PR concerns may enter into the Agencies’ calculus about clearing mergers in an industry that is under active 6(b) scrutiny. The same is true for mergers in industries that are being investigated or prosecuted for anticompetitive practices; such mergers may face more intense and searching scrutiny.

Once the new merger guidelines are issued and AAG Kanter and Chair Khan’s new policies develop a track record of implementation, we will have a more precise understanding of the operative analytical framework and its implications for M&A transactions. But the practical consequences of Chair Khan and AAG’s Kanter’s antitrust rewrite are already playing out and the trajectory is unlikely to change: merging parties are bearing more second request risk, broader and longer investigations, less opportunity to resolve competitive concerns with settlements, and greater risk of enforcement action.

Practical Considerations for Dealmakers and Advisors

In light of antitrust’s gating function, it is fair to question whether the current antitrust climate has to some extent played a role in the Q1 M&A dip. Yet dealmakers have a range of tools to accommodate and manage the risk engendered by the current regulatory environment. Antitrust considerations should be raised in the earliest phases of deal negotiations. As transaction agreements are negotiated, clear articulation of regulatory obligations and risk allocation remains critical in the effort to keep merging parties aligned and ultimately hold deals together when Agency scrutiny comes to bear. Before agreeing to particular efforts standards in purchase agreements in respect of obtaining antitrust approvals, parties should appreciate the possibility that those efforts standards may ultimately require time-consuming and costly litigation.

In some transactions, merging parties are unwilling to carry on if a second request is issued and their agreement reflects that fact. The signal that such a contractual provision sends to the Agencies and the incentives that it creates should be weighed carefully.

Appreciating that merger reviews are likely to be more time consuming, onerous, and costly (whether because the Agencies require more engagement and advocacy during the first 30 days, require a pull-and-refile, or issue a broad second request), parties should consider building flexibility or extra time into transaction timetables. For cross-border deals that may be subject to scrutiny in jurisdictions that move slowly or, like the U.S., are broadening their approach to merger enforcement, a sophisticated multi-jurisdiction analysis should be conducted early on so that deal timing can be formulated accordingly. The likelihood of protracted reviews should also be contemplated during deal financing.

Transaction rationale and economics should take account of the Agencies’ heightened skepticism of merger remedies and the possibility of the FTC imposing a prior approval clause in those consents that are achievable. Transactions in which divestiture of a full business is feasible will have a better chance of resolving Agency concerns with a remedy, whereas transactions involving dynamic markets are expected to face more settlement resistance.

In light of the FTC’s new practice of warning merging parties that they may keep investigations open beyond the expiration of the HSR Act waiting period, contractual language formulating closing conditions based on the status of antitrust review should be worded precisely. Likewise, in the context of cross-border transactions that must be notified in ex-U.S. jurisdictions that do not have a statutory bar on closing before the review is complete, merging parties should agree as to whether they will close the deal during an ongoing review, with the buyer bearing the risk of future action by competition authorities.

Even deals that do not present any facial competitive issue may face an uncertain regulatory path if the parties do business in a sector that is the subject of Agency interest, as evinced by 6(b) studies, the Executive Order on Promoting Competition in the American Economy, conduct investigations or enforcement activity, or the Agencies’ political agenda. Parties doing deals in these industries should actively consider this layer of risk in consultation with antitrust counsel, so as to ensure that all possible risks are understood and mitigated.

Finally, where possible, merging parties should consider including commitments to litigate in their transaction agreement to signal to the Agencies that they are committed to closing and will not be backed off by onerous second requests or a protracted review. Ultimately, merger guidelines and other enforcement policy statements do not bind federal courts. In the event that the Agencies depart significantly from established law and economics, merging parties may have good prospects of vindicating their deals in federal court.

Antitrust and Competition Group:
Sophia A. Vandergrift – Washington, D.C. (+1 202-887-3625, svandergrift@gibsondunn.com)
Adam Di Vincenzo – Washington, D.C. (+1 202-887-3704, adivincenzo@gibsondunn.com)
Kristen C. Limarzi – Washington, D.C. (+1 202-887-3518, klimarzi@gibsondunn.com)
Joshua Lipton – Washington, D.C. (+1 202-955-8226, jlipton@gibsondunn.com)
Michael J. Perry – Washington, D.C. (+1 202-887-3558, mjperry@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)
Ali Nikpay – Co-Chair, London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)
Christian Riis-Madsen – Co-Chair, Brussels (+32 2 554 72 05, criis@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Click for PDF

Decided April 21, 2022

City of Austin, Texas v. Reagan National Advertising of Austin, Inc., No. 20-1029

Today, the Supreme Court held that a regulation treating on-premises signs—those that contain advertisements for the place where the signs are located—differently from off-premises signs is content neutral and therefore not subject to strict scrutiny under the First Amendment.

Background: The Sign Code of Austin, Texas permits the new construction only of signs and billboards that advertise for the place where they are located, which are known as on-premises signs. The Code similarly permits only on-premises signs to be equipped with electronic controls that, for example, allow billboards to cycle through digital advertisements. Advertisers wishing to convert off-premises billboards to digitally changeable displays sued, claiming that the Code discriminates based on the content of their speech in violation of the First Amendment. The Fifth Circuit agreed, holding that because the on-premises/off-premises distinction could be applied only by a person who reads and interprets the sign’s message, the regulation was content-based and subject to strict scrutiny. Finding no compelling government justification, the Fifth Circuit found the Code’s distinction unconstitutional.

Issue: Whether the Sign Code’s distinction between on- and off-premises signs is a content-neutral regulation of speech.

Court’s Holding: The Sign Code’s distinction between on- and off-premises advertisements is facially content-neutral and subject to intermediate scrutiny under the First Amendment. The Court remanded the case to the Fifth Circuit to apply that test, rather than strict scrutiny.

“[H]old[ing] that a regulation cannot be content neutral if it requires reading the sign at issue[ ] is too extreme an interpretation of this Court’s precedent.”

Justice Sotomayor, writing for the Court

What It Means:

The Court’s decision clarifies that its 2015 case, Reed v. Town of Gilbert, does not hold that restrictions are content-based every time they require an official to read a sign to determine whether it complies with a regulation. According to the Court, Reed involved “a very different regulatory scheme” that placed stricter limitations on some types of signs compared to others—for instance, by placing more restrictions on advertisements for religious services than on political messages. In this case, by contrast, the “sign’s substantive message is irrelevant to the application of” the on-premises/off-premises distinction.
The Court noted that regulations like Austin’s Sign Code are common, including in provisions of the federal Highway Beautification Act. It expressed reluctance to question these rules where authorities claim they are necessary to combat distracted driving and reduce blight, and where an “unbroken tradition of on-/off-premises distinctions counsels against” invalidating the rule.
The decision subjects regulations like Austin’s to intermediate scrutiny, which requires the government to show that the rule does not excessively restrict speech and serves an important government interest. The Court reserved judgment on whether the Code would satisfy that test.
In a dissenting opinion joined by Justices Gorsuch and Barrett, Justice Thomas wrote that the Court had departed from Reed’s “clear and neutral rule” that regulation of signs is content-based whenever enforcing the rule requires determining whether a sign conveys a particular message. He predicted that the departure from Reed’s “bright-line rule” will lead to future confusion.

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

Click for PDF

Decided April 21, 2022

Boechler, P.C. v. Commissioner of Internal Revenue, No. 20-1472

Today, the Supreme Court unanimously held that the Internal Revenue Code’s 30-day deadline for taxpayers to seek Tax Court review of “collection due process” determinations is a nonjurisdictional claims-processing rule that is subject to equitable tolling.

Background: When the IRS assesses a tax and the taxpayer doesn’t pay, the IRS can seize the taxpayer’s property to satisfy the outstanding amount. Since 1998, Congress has required the IRS to give advance notice to taxpayers before it levies their property to cover unpaid taxes. Taxpayers can challenge a proposed levy in an administrative hearing before the IRS’s Independent Office of Appeals, which issues the taxpayer a notice of determination stating its findings and decision. And the Internal Revenue Code provides that a taxpayer “may, within 30 days of a determination [from the Independent Office of Appeals], appeal such determination to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).” 26 U.S.C. § 6330(d)(1).

Boechler, P.C. received an unfavorable determination from the IRS’s Independent Office of Appeals on a proposed levy but petitioned the Tax Court for review one day after the thirty-day deadline. The Eighth Circuit held that § 6330(d)(1)’s 30-day deadline is jurisdictional, meaning it could not be subject to equitable tolling.

Issue: Is § 6330(d)(1)’s 30-day deadline a jurisdictional requirement or a nonjurisdictional claims-processing rule? If it is a claims-processing rule, is it mandatory or subject to equitable tolling?

Court’s Holding: Section 6330(d)(1) is a nonjurisdictional claims-processing rule and is subject to equitable tolling.

“[The] 30-day time limit to file a petition for review of a collection due process determination is an ordinary, nonjurisdictional deadline subject to equitable tolling.”

Justice Barrett, writing for the Court

What It Means:

The Court’s decision reinforces the principle that filing deadlines are generally not jurisdictional unless the statute’s text or structure provides a clear statement to the contrary. In rejecting the Commissioner’s arguments, the Court reasoned that ambiguity in the text left “multiple plausible interpretations” and thus no clear statement of jurisdictional intent.
The decision likewise confirms that nonjurisdictional filing deadlines are “presumptively subject to equitable tolling,” particularly where the statutory framework in question is likely to produce circumstances warranting exceptions to a statutory deadline—for instance, where the provision appears as part of a scheme in which unrepresented parties often initiate the process.
The Court’s holding provides taxpayers with a limited opportunity to seek judicial review of unfavorable collection due process determinations even when they fail to petition the Tax Court for review within 30 days of the determination. That holding is consistent with the statute’s underlying purpose, which was to give taxpayers a way to seek administrative and judicial review before the IRS took the serious step of levying their property to satisfy unpaid taxes.
The Court did not elaborate on the circumstances in which it would be appropriate for courts to toll § 6330(d)(1)’s 30-day deadline, leaving those arguments for further proceedings on remand. Lower courts are likely to encounter arguments for tolling featuring a wide variety of factual scenarios, including with respect to lower-income taxpayers, many of whom do not have counsel in collection due process proceedings.
While the Court’s holding is limited to the deadline under § 6330(d)(1) for filing a collection due process case, the decision specifically calls into question a long line of cases holding that the 90-day deadline for invoking the Tax Court’s general deficiency jurisdiction under 26 U.S.C. § 6213(a) is jurisdictional. Section 6213(a) applies broadly when a taxpayer seeks to challenge an IRS audit determination or other income tax adjustment in Tax Court. Of the more than 150 million income tax returns filed each year, the IRS has historically issued far more than one million such adjustments, typically resulting in around 25,000 cases filed in Tax Court. If, following the Court’s holding, § 6213(a) is also found to be nonjurisdictional, it could open the door for a large number of taxpayers to argue for equitable tolling when they miss the 90-day general filing deadline.

The Court’s opinion is available here.

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
Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com

Related Practice: Global Tax Controversy and Litigation

Michael J. Desmond +1 213.229.7531 mdesmond@gibsondunn.com	Saul Mezei +1 202.955.8693 smezei@gibsondunn.com	Sanford W. Stark +1 202.887.3650 sstark@gibsondunn.com
C. Terrell Ussing +1 202.887.3612 tussing@gibsondunn.com

Click for PDF

In March 2022, amidst an array of new proposals for sustainable products (including a proposed draft Regulation on Ecodesign for Sustainable Products) the European Commission announced an EU Strategy for Circular and Sustainable Textiles.

The Strategy envisages that “By 2030, textile products placed on the EU market are long-lived and recyclable, to a great extent made of recycled fibres, free of hazardous substances and produced in respect of social rights and the environment. Consumers benefit longer from high quality affordable textiles, fast fashion is out of fashion, and economically profitable re-use and repair services are widely available…..producers take responsibility for their products along the value chain, including when they become waste,…. incineration and landfilling of textiles is reduced to the minimum”.

The EC envisages numerous steps to achieve this strategy, including:

Binding product-specific ecodesign requirements to increase durability, reusability, repairability and recyclability, and to address the unintentional release of microplastics in the environment.
Development of criteria for safe and sustainable chemicals and materials- to reduce the presence of hazardous substances used in textile products.
Introduction of a transparency obligation requiring large companies to publicly disclose the number of products they discard and destroy, including textiles.
Introduction of a Digital Product Passport for textiles-based on mandatory information requirements on circularity and other key environmental aspects.
Increased information and transparency for consumers at the point of sale, regarding the sustainability credentials of products.
Extended producer responsibility requirements for textiles.

According to the EC’s Strategy Communication, the textiles and clothing sector comprises more than 160,000 companies and employs 1.5 million people, generating a turnover of EUR 162 billion in 2019. Global textile production has almost doubled between 2000 and 2015, with the consumption of clothing and footwear expected to increase by 63% by 2030, from 62 million tonnes now, to 102 million tonnes in 2030. The EC flags that in the EU, the consumption of textiles, most of which are imported, now accounts on average for the fourth highest negative impact on the environment and on climate change and third highest for water and land use from a global life cycle perspective. In circumstances where approximately 5.8 million tonnes of textiles are discarded every year in the EU, the impact of this Strategy could be significant.

This alert was prepared by Susy Bullock, Sophy Helgesen, and Freddie Batho*.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more, please contact Susy Bullock, the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Environmental, Social and Governance (ESG) or Fashion, Retail and Consumer Products practice groups:

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

Fashion, Retail and Consumer Products Group:
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)

* Freddie Batho is a trainee solicitor working in the firm’s London office and not yet admitted to practice law.

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Click for PDF

In the past year, the U.S. Federal Trade Commission (“FTC”) and Department of Justice’s Antitrust Division (“DOJ”) have put antitrust enforcement in the employment context at center stage. Last week, those efforts were put to their first true test in trials in Texas and Colorado—where juries failed to convict any defendant of wage-fixing, unlawful no-poach agreements, or any other antitrust violation. But employers should not rest easy; the DOJ has already confirmed that it is undaunted. And both the DOJ and FTC appear ready to bring novel enforcement actions against agreements and consolidations that allegedly restrain competition in labor markets.[1] These developments, should put employers on high-alert to ensure that their hiring, recruitment, non-compete, and employee classification and compensation policies and practices conform with antitrust laws.

Wage-Fixing, No-Hire, No-Poach, and Non-Solicit Agreements

For more than five years, following the DOJ and FTC’s 2016 “Antitrust Guidance for Human Resource Professionals,” the DOJ has been vocal about its intent to criminally prosecute “naked” wage-fixing and no-hire, no-poach and non-solicit agreements between horizontal competitors.[2] This intention has become reality over the past 18 months, with a number of criminal indictments against both companies and individual executives for alleged wage-fixing, no-poach, and non-solicit agreements. Those efforts have now been tested at trial.

Late last week, a jury in Texas returned its verdict after a eight-day trial of two health care staffing executives accused of fixing the rates paid to physical therapists and therapist assistants in the Dallas-Fort Worth area. The jury acquitted the defendants of violating the Sherman Act, but did convict one defendant for obstructing a related FTC investigation.[3] In response to the verdict, a DOJ official said, “In no way should the verdict today be taken as a referendum on the Antitrust Division’s commitment to prosecuting labor market collusion, or on our ability to prove these crimes at trial.”[4] And late Friday, a Colorado jury acquitted defendants DaVita Inc. and its former CEO Kent Thiry of all charges after a nearly two-week trial regarding an alleged no-poach agreement.[5]

Still, the DOJ’s docket remains full of labor-related actions demonstrating that “commitment to prosecuting labor market collusion.” In December 2021, for example, the DOJ announced indictments of six executives at companies in the aerospace industry for alleged no-poach and non-solicitation agreements.[6] The DOJ currently has five pending criminal cases against both companies and individual executives for their alleged participation in wage-fixing, no-poach and non-solicit agreements. These cases are expected to proceed toward trial throughout 2022.

Outside the criminal context, DOJ has also recently taken a harder line on whether certain no-poach and non-solicit agreements should be treated as per se violations—meaning that they would be deemed illegal irrespective of any inquiry into procompetitive justifications or anticompetitive effects—as opposed to being reviewed under the rule of reason standard, which requires such inquiry. In particular:

In November 2020, the DOJ filed an amicus brief in the Ninth Circuit arguing that no-poach provisions can be deemed “ancillary” to a procompetitive venture only upon a fairly demanding showing by the defendant that they are “reasonably necessary” to the overall agreement.[7] The Ninth Circuit rejected the DOJ’s arguments,[8] but if the DOJ’s position were adopted by other courts it would mean that companies would have to show that a no-poach or non-solicit agreement entered into in the context of a transaction, joint-venture, or other legitimate arrangement between competitors was “reasonably necessary” to the execution or implementation of that overall agreement, otherwise it could be considered per se
In December 2021, the DOJ filed a statement of interest in a putative class action involving outpatient medical center employees in which it directly equated no-poach agreements with horizontal market allocation schemes, urging the court that “[t]he anticompetitive potential” of such market allocation schemes “justifies their facial invalidation even if procompetitive justifications are offered for some.”[9] The DOJ also argued that employers need not enter “quid pro quo” or “bilateral commitments” to allege an agreement in violation of the antitrust laws.
In February 2022, the DOJ filed a motion for leave to file a statement of interest in a case involving alleged no-poach and non-solicit agreements in the franchise context.[10] The DOJ indicated that statements of interest it filed in franchise cases in 2019—in which the DOJ argued that the per se rule was unlikely to apply in the franchise context—”do not fully and accurately reflect the government’s current views.” The court denied the DOJ’s motion, and thus how exactly the DOJ’s views in the franchise context have evolved remains unseen, although the other activity discussed above may provide some indication.

Mergers that Allegedly Reduce Competition for Labor

On January 18, 2022, in a joint press conference, the FTC and DOJ announced that they were launching a joint public inquiry aimed at strengthening enforcement against anticompetitive mergers. FTC Chair Lina Khan took a “spotlight” to the effects of mergers in labor markets in particular, asking whether the agencies’ merger guidelines adequately assess whether mergers may lessen competition in labor markets, thereby harming workers. That includes whether the guidelines should consider factors beyond wages, salaries, and financial compensation, and whether the cost savings derived from elimination of jobs are a cognizable efficiency.[11]

Likewise, labor market considerations in merger review was addressed as part of the December 2021 FTC and DOJ workshop on “Promoting Competition in Labor Markets.” Chair Kahn and Jonathan Kanter, head of the DOJ’s Antitrust Division, reiterated that the current horizontal merger guidelines apply equally to labor markets and Tim Wu, Special Assistant to the President for Technology and Competition Policy, voiced the view that merger review has not focused sufficiently on the effects on workers.

The DOJ’s November 2021 lawsuit to block Penguin Random House’s acquisition of Simon & Schuster was perhaps a harbinger of things to come, focusing on the alleged harm the merger would have on workers—in that case, authors—who, according to the complaint, rely on competition between the major publishers to ensure they are fairly compensated for their work.[12] The DOJ argued that the merger would reduce such competition, leading to less compensation for authors, and thus a declining quality and quantity of published books.

Employment Contracts, Including Non-Compete and Non-Disclosure Provisions

Antitrust enforcers have also signaled that they will more aggressively challenge employment contracts and agreements between employers that increase labor market frictions.

In February 2022, the DOJ submitted a statement of interest in a Nevada state court lawsuit filed by a group of anesthesiologists alleging that non-compete provisions in their employment agreements (with a contractor to sell their services to a hospital system) violate state law.[13] The DOJ used the case as an opportunity to advance its position that such non-compete restrictions could be considered per se violations of Section 1 of the Sherman Act. Notably, the DOJ argued that the non-compete restriction was not merely a vertical one (between employer and employee), but horizontal in so far as, at the time the agreement was made, the plaintiff anesthesiologists could sell their services directly to the hospital system at issue, in competition with the contractor who contracted with the hospital system on their behalf. That is, in the DOJ’s view, the non-compete was akin to a horizontal no-hire agreement between competitors. And even if the non-compete is considered a vertical agreement, the DOJ argued that it raises “significant concerns” because it can “effectively freeze” much of the local market for anesthesiology services.

Of course, no court has yet endorsed the unprecedented theory advanced by DOJ—that a unilateral decision to use a non-compete provision could be deemed per se unlawful—but the case illustrates the degree to which DOJ is continuing to aggressively push the boundaries of antitrust law in this area.

In addition, at the DOJ/FTC December 2021 workshop, speakers attacked mandatory arbitration agreements and class action waivers as anticompetitive, but they did not address how to reconcile a competition law focus on arbitration with the Federal Arbitration Act. Panelists and enforcers also criticized agreements between employers which facilitate coordination (e.g., information sharing and benchmarking agreements) or reduce competition (e.g., no-poach agreements). Enforcers recognized that these agreements can enhance competition in some cases, but also signaled that they may treat non-compete and information sharing agreements as presumptively illegal unless they are narrowly tailored to a facially obvious procompetitive business justification. Enforcers also stated their intention to reconsider enforcement safe harbors.

Employee Misclassification

At the DOJ/FTC December 2021 workshop, FTC speakers discussed the possibility of challenging employee misclassification as an unfair method of competition under Section 5 of the FTC Act. This would reflect a significant shift in the law and an unprecedented expansion of the scope of the FTC Act. Specifically, the FTC signaled that it considers an employer’s intentional misclassification of its employees as independent contractors to be an unfair method of competition because misclassification gives non-compliant employers a cost advantage over employers which follow labor guidelines.

The DOJ also voiced concerns that misclassification can lead to competitive harm in an amicus brief filed last month in an NLRB case in which the NLRB is considering whether to overturn its current independent-contractor standard.[14] The DOJ brief argued that misclassification can lead to competitive harm in part because workers cannot “resist” unfavorable terms and conditions “without the organizing rights and protections provided by the NLRA.” The DOJ further suggested that the existing independent contractor standard is “ambiguous” and that the ambiguity “encourage[s] employers to misclassify their workers.” The DOJ then connected these concerns to the labor exemption from the antitrust laws, noting that, “[e]ven if the Antitrust Division were to exercise its prosecutorial discretion not to pursue action against workers whose status as employees is unclear, the threat of private antitrust lawsuits and treble damages might nonetheless substantially chill worker organizing, since employers and other interested parties would remain free to pursue antitrust litigation.” In other words, the DOJ seems to be suggesting that the risk of private sector enforcement of the Sherman Act is chilling union organization, and that the NLRB should clarify the law to deprive employers of that potential claim in the context of independent contractor workers.

Executive Action and Administrative Rulemaking

President Biden’s July 2021 Executive Order on Promoting Competition in the American Economy specifically encouraged the FTC to engage in rulemaking “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”[15] And the FTC has signaled it will act on the Executive Order’s instruction to prohibit or otherwise curtail non-compete agreements.[16] While the FTC recently streamlined its rulemaking procedures and gave the Chair more control over the process,[17] rulemaking is a protracted process that often takes years. To implement a rule, the FTC must develop a factual record; draft and issue a proposed rule; invite and consider the public’s comments on the proposal; and then revise and finalize the rule in light of those comments and the evidence in the record. A rule that gives insufficient attention to important problems identified by commenters, such as the absence of statutory authority or constitutional problems, is legally vulnerable. Thus, companies concerned about prohibitions against non-compete agreements and other potential rules should begin making plans to ensure those concerns are amply documented before the FTC when rulemaking proceedings begin.

President Biden’s Executive Order also tasked the Treasury Department, in consultation with the DOJ, the FTC, and the Department of Labor, to investigate the effects of an alleged lack of labor market competition on the U.S. labor market. The Treasury Department’s report, issued last month, concluded that “a careful review of credible academic studies places the decrease in wages” relative to what they would have been in a “fully competitive market” at “roughly 20 percent.”[18] The report further noted that employers’ “[w]age-setting power is also evident in the large number of workers who are subject to rules and agreements that limit their ability to switch jobs and occupations and, hence, their bargaining power.” There is little doubt that enforcers (along with plaintiffs’ attorneys) will seize upon such language to support antitrust claims against employers.

Takeaways

After five years of looking for ways to use antitrust laws to improve mobility and competition in the labor markets, the FTC and DOJ appear ready to bring novel enforcement actions against agreements and consolidations that restrain competition in labor markets. The potential antitrust risks associated with the labor practices discussed above run the gamut from civil DOJ, FTC or state AG investigations and lawsuits to, in some (potentially growing number of) instances, criminal prosecution, alongside the ever-present threat of private civil litigation. In the merger context, companies have to consider potential second requests stemming from labor market concerns where there are otherwise no antitrust issues.

It is therefore now more important than ever that companies ensure that their hiring, employment, and compensation policies and practices conform with antitrust laws. That includes:

Consider labor market issues early in the M&A context. Expect heightened scrutiny not only where a transaction results in concentration or among parties with a history of collusion, but also where there is a history of attempted unionization, prior discrimination or wage and hour litigation, and or disputes about employee classification. Scrutiny may also extend to non-competes, no-hire, and no-poach provisions within purchase agreements. Consider the rationale for any such provision, and in particular whether it addresses a risk arising out the transaction.
Check in on your employment agreements, and consider whether provisions that could be viewed as limiting employee mobility (such as non-competes) are state of the art. This includes considering the duration, scope, and purpose of those provisions, and whether the provision is tailored to achieve the company’s objectives.
Be particularly mindful of enforcer interest in private equity acquisitions, agriculture, healthcare, technology, transportation, and shipping.
Understand that the antitrust enforcers are equally interested in all categories of workers, from low-wage to highly trained workers.

_________________________

[1] Outside the U.S., European enforcers have also indicated that they intend to take a tougher enforcement stance with respect to no-poach and other labor market agreements. See Client Alert: EU Competition Commissioner Signals Tougher Enforcement of No-Poach and Other Labor Market Agreements, Gibson, Dunn & Crutcher (Oct. 26, 2021).

[2] A “no-hire” agreement is one in which a company or individual agrees not to hire any employee from another company, while a “no-poach” or “non-solicit” agreement is one in which a company or individual agrees not to recruit or solicit employees from another company. The DOJ generally treats all of these types of agreements similarly.

[3] United States v. Jindal, United States v. Rodgers, Case No. 20-CR-358 (E.D. Tex. Apr. 14, 2022).

[4] Ben Penn, “DOJ’s First Criminal Wage-Fixing Case Ends Mostly in Defeat,” Bloomberg Law (Apr. 14, 2022).

[5] United States v. Da Vita Inc, Case No. 1:21-CR-00229 (D. Colo. Apr. 15, 2022).

[6] Department of Justice, Antitrust Division, Six Aerospace Executives and Managers Indicted for Leading Roles in Labor Market Conspiracy that Limited Workers’ Mobility and Career Prospects, Press Release (Dec. 16, 2021).

[7] Brief of Amicus United States of America in Support of Neither Party, Aya Healthcare Servs., Inc. v. AMN Healthcare, Inc. (9th Cir. Nov. 19, 2020).

[8] Aya Healthcare Servs., Inc. v. AMN Healthcare, Inc., 9 F.4th 1102 (9th Cir. 2021).

[9] Statement of Interest of the United States of America, In re Outpatient Medical Center Employee Antitrust Litig., Case No. 1:21-cv-00305 (N.D. Ill. Nov. 9, 2021).

[10] Motion for Leave to File Statement of Interest by United States of America, Deslandes v. McDonald’s USA, LLC, et al., Case No. 19-cv-05524 (N.D. Ill. Feb. 17, 2022).

[11] Federal Trade Commission, Remarks of Chair Lina M. Khan Regarding the Request for Information on Merger Enforcement (Jan. 18, 2022).

[12] Department of Justice, DOJ Sues to Block Penguin Random House’s Acquisition of Rival Publisher Simon & Schuster, Press Release (Nov. 2, 2021).

[13] Statement of Interest of the United States, Beck et al. v. Pickert Medical Group, P.C., et al., Case No. CV21-02092 (2d Jud. Dist. Nev. Feb. 25, 2022).

[14] See The Atlanta Opera, Inc. and Make-Up Artists & Hair Stylists Union, Case No. 10-RC-27692.

[15] See Client Alert: President Signs Executive Order Directing Agencies to Address Wide Range of Businesses’ Competitive Practices, Including Non-Compete Agreements, Gibson, Dunn & Crutcher (July 9, 2021).

[16] Chair Khan had also proposed banning non-compete agreements prior to her appointment. Rohit Chopra & Lina Khan, The Case for “Unfair Methods of Competition” Rulemaking, 87 U. Chi. L. Rev. 357, 373 (2020).

[17] Statement of FTC Commissioner Rebecca Kelly Slaughter (July 1, 2021).

[18] U.S. Department of the Treasury, The State of Labor Market Competition (Mar. 7, 2022).

The following Gibson Dunn lawyers prepared this client alert: Rachel Brass, Caeli Higney, Kirsten Limarzi, Michael Holecek, Jeremy Robison, Nick Marquiss, Connie Lee, Chris Wilson, JeanAnn Tabbaa, and Logan Billman.

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 Antitrust and Competition, Labor and Employment or Administrative Law and Regulatory practice groups:

Antitrust and Competition Group:
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Scott D. Hammond – Washington, D.C. (+1 202-887-3684, shammond@gibsondunn.com)
Caeli A. Higney – San Francisco (+1 415-393-8248, chigney@gibsondunn.com)
Kristen C. Limarzi – Washington, D.C. (+1 202-887-3518, klimarzi@gibsondunn.com)
Jeremy Robison – Washington, D.C. (+1 202-955-8518, wrobison@gibsondunn.com)
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)
Ali Nikpay – Co-Chair, London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)
Christian Riis-Madsen – Co-Chair, Brussels (+32 2 554 72 05, criis@gibsondunn.com)

Labor and Employment Group:
Michael Holecek – Los Angeles (+1 213-229-7018, mholecek@gibsondunn.com)
Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Co-Chair, Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)

Administrative Law and Regulatory Group:
Eugene Scalia – Co-Chair, Washington, D.C. (+1 202-955-8543, escalia@gibsondunn.com)
Lucas C. Townsend – Washington, D.C. (+1 202-887-3731, ltownsend@gibsondunn.com)
Helgi C. Walker – Co-Chair, Washington, D.C. (+1 202-887-3599, hwalker@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Click for PDF

This client alert provides an overview of, and our current perspectives on, the SEC’s recently proposed rules that would establish a new climate change reporting framework for U.S. public companies and foreign private issuers as well as practical recommendations on what companies should be doing now.

I. Overview

On March 21, 2022, the Securities and Exchange Commission (the “SEC” or “Commission”) proposed rules for climate change disclosure requirements for both U.S. public companies and foreign private issuers. The SEC posted a 500+ page Proposing Release (the “Proposing Release”) and issued a Press Release and a Fact Sheet summarizing notable provisions.

These disclosure requirements are mostly prescriptive rather than principles-based, and in many respects are derived from the Taskforce on Climate-related Financial Disclosures (“TCFD”) reporting framework and the Greenhouse Gas Protocol. The requirements would apply to annual reports on Forms 10-K and 20-F, with material changes to be reported quarterly on Form 10-Q. These requirements would also apply to IPO, spin-off and merger registration statements. Rather than creating a new stand-alone reporting form, as some corporate commenters had urged, the Commission has proposed amending Regulation S-K and Regulation S-X to create a climate change reporting framework within existing Securities Act and Exchange Act forms.

The proposed climate change reporting framework is extensive and detailed. For example, the text of the proposed Regulation S-K climate change reporting requirements comprise approximately 50% more words than the part of Regulation S-K requiring large public companies to describe their Business. In most cases where the proposed rules call for disclosure, the level of specificity and detail called for is virtually unprecedented in the SEC’s public company reporting rules.

Given the breadth and specificity of the proposed climate change reporting framework, compliance costs are expected to be significant. It is difficult to reasonably estimate the incremental costs of compliance given the absence of precedent for such disclosures. The Commission estimates that annual direct costs to comply with the proposed rules (including both internal and external resources) would range from $490,000 (smaller reporting companies) to $640,000 (non-smaller reporting companies) in the first year and $420,000 to $530,000 in subsequent years.^[1] In terms of the additional workload that would be necessary to prepare an annual report on Form 10-K, the Commission estimates this would be approximately 3,400 to 4,400 hours in the first year and 2,900 to 3,700 hours in years 2-6.^[2] While these estimates appear to include the incremental costs associated with the third-party attestation requirements, these estimates assume that companies already have the necessary internal personnel to support compliance and do not include transaction costs associated with hiring additional personnel or of implementing new processes, controls and procedures to satisfy the extensive reporting obligations.

The proposed rules would phase in over time, based on a company’s filer status.

II. Background

The SEC’s rule proposal comes amidst a backdrop of increasing focus on climate change by the investment community in recent years and follows on the heels of several initiatives and announcements throughout 2021 that signaled the Commission’s growing resolve to take action on the topic of climate change disclosure. The Commission had been mostly silent on these disclosure issues since its issuance of principles-based climate change disclosure guidance in 2010.[3]

Request for public comment. In March 2021, in an effort to determine how and whether the Commission should further regulate the disclosure of this information, the Commission’s then-Acting Chair, Allison Herren Lee, requested public input regarding the need for climate change disclosure requirements.^[4] This solicitation generated 600 unique responses from a wide range of individuals, organizations, and institutions.^[5] Proponents of additional climate-related disclosure supported their position with arguments that “climate change poses significant financial risks to registrants and investors,” and that “current disclosure practice[s have] not produced consistent, comparable, reliable information for investors and their advisors.”^[6] Advocates opposed to additional climate-related disclosure argued that the existing principles-based disclosure framework under the securities laws, including the 2010 Climate Change Guidance, adequately provided for disclosure of climate-related risk when material.
ESG Task Force. Also in March 2021, the SEC established a Climate and Environmental, Social, and Governance Task Force (the “ESG Task Force”) within the Commission’s Division of Enforcement. The initial focus of this task force was to “identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing [Commission] rules.”[7] We are not yet aware of any publicly announced climate-related enforcement actions initiated by the ESG Task Force.
Announced rulemaking priorities. In May 2021, shortly after his confirmation, SEC Chair Gary Gensler announced that information about climate risk “is one of my top priorities and will be an early focus during my tenure at the SEC.”[8] In June of that year, climate change disclosure rulemaking appeared on the SEC’s Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions (“Reg-Flex Agenda”).[9]
Wave of climate change comment letters. In the Summer and Fall of 2021, the Commission’s Division of Corporation Finance issued comment letters to dozens of companies on their fiscal 2020 Form 10-Ks relating exclusively to climate change disclosure issues. The comments, which were issued by a variety of the Division’s industry review groups, appeared to be based on the 2010 Climate Change Guidance.[10] In contrast, between 2010 and 2020, the SEC issued relatively few climate change-related comments.[11]

Chair Gensler had intended to propose climate change rules by the end of 2021, but the timing was reportedly delayed due to ongoing internal debate at the Commission on the scope of the proposed rules and continued refinement of the rule proposal.[12]

III. Summary of Proposed Reg. S-K Amendments

A. Overview

The proposed climate change disclosure requirements would amend Regulation S-K to require a new, separately captioned “Climate-Related Disclosure” section in applicable SEC filings, which would cover a range of climate-related information. In order to avoid duplicative disclosure, companies would have the flexibility to incorporate by reference into the new section relevant information included elsewhere in the document (e.g., Risk Factors, MD&A), subject to compliance with the SEC’s general rules on incorporation by reference.[13] The proposed disclosure requirements, which would be housed in new subpart 1500 of Regulation S-K and are discussed in more detail in the following sections, include:

Risks. How any climate-related risks have had or are reasonably likely to have material impacts on a company’s business or consolidated financial statements.
Impact on the company. How any climate-related risks have affected or are reasonably likely to affect a company’s strategy, business model and outlook.
Risk management/oversight process. Processes for identifying, assessing and managing climate-related risks, as well as board governance of climate-related risks and relevant risk management processes.
GHG emissions. Greenhouse gas (“GHG”) emissions metrics, which would include:
- Scope 1 and Scope 2, which, for accelerated and large accelerated filers only, would be subject to assurance by an independent GHG emissions attestation provider.
- For certain filers, Scope 3, but only if material or if the company has set a GHG emissions reduction target or goal that includes its Scope 3 emissions.
Targets/goals. Information regarding climate-related targets, goals, and transition plans, if any.

B. Climate-Related Risks

Proposed Item 1502 of Reg. S-K would require companies to describe “climate-related risks reasonably likely to have a material impact on the registrant, including on its business or consolidated financial statements, which may manifest over the short, medium, and long term.” The detailed disclosures would include:

Categorization of each risk as either a “physical risk” (e.g., related to the physical impacts of climate change, such as hurricanes, wildfires, floods) or “transition risk” (i.e., related to the transition to a lower-carbon economy).
For physical risks, the nature of the risk, including whether it is acute (e.g., short-term or event-driven) or chronic (i.e., related to longer-term weather patterns); the location (by ZIP code or, for regions without ZIP codes, a similar subnational postal zone or geographic location) and nature of the properties/operations subject to the risk; and, to the extent the risk concerns flooding or drought conditions, additional information about the size/amount and location of assets.
For transition risks, the nature of the risk, including whether it relates to regulatory, technological, market (including changing consumer, business counterparty, and investor preferences), liability, reputational or other transition-related factors, and how those factors impact the company.

A couple of aspects of the proposed rules would impact how companies assess the potential materiality of climate-related risks. First, companies would be required to consider various time horizons (short-, medium- and long-term). The proposed rules would provide flexibility for companies to determine how they define these time horizons, but companies would be required to disclose this determination as well as information about how such determination ties to the expected useful life of assets and climate-related planning processes and goals. Second, based on the proposed rules’ definition of “climate-related risks,” companies would need to consider not only the direct impacts of climate change on their financial statements and business, but also the indirect impacts on their “value chains” (i.e., upstream and downstream activities related to the company’s operations). This would encompass supply chain activities as well as product distribution and end use.

While the prescriptive requirements are largely focused on climate-related risks, the proposed rules make clear that companies also are permitted, but not required, to provide corresponding information about climate-related opportunities.

C. Climate-Related Impacts on Strategy, Business Model & Outlook

Proposed Item 1502 of Reg. S-K would also require companies to describe “the actual and potential impacts of any [identified] climate-related risks … on the registrant’s strategy, business model, and outlook.” The detailed disclosures would include:

Nature of the impact, including on business operations (by type and location), products or services, value chain, activities to mitigate or adapt to climate-related risks, R&D expenditures and any other “significant changes or impacts.”
Time horizon for each impact, e.g., short-, medium- or long-term.
How each impact is integrated into the company’s business model and outlook, including with respect to strategy planning, financial planning, capital allocation and resources used for risk mitigation.
How identified climate change metrics and targets are integrated into the business model and strategy, including the role of any carbon offsets or renewable energy credits or certificates (“RECs”) that the company utilizes.
Financial statement impact, including whether and how identified climate-related risks have affected or are reasonably likely to affect the financial statements and considering any climate-related metrics required to be disclosed in the financials under the proposed rules (as discussed below).
Business strategy resilience in light of potential changes in climate-related risks, on both a qualitative and quantitative basis and including any analytical tools used by the company to assess the impact of climate-related risks and support resiliency. Companies that use scenario analysis (e.g., a process for identifying and assessing a potential range of outcomes under various possible future climate scenarios, such as global surface temperature rise of 2 degrees Celsius above pre-industrial levels) would be required to disclose the specific scenarios considered along with parameters, assumptions, analytical choices and projected financial impacts under each scenario.

In addition to the above, for companies that have set an internal price on carbon (i.e., an estimate of the cost of carbon emissions for planning purposes), the proposed rules would require detailed disclosure about the price per unit and total price used, how the total price is estimated to change over time, calculation methodology, rationale for selecting the price used, and how the company uses that information to evaluate and manage climate-related risks. If the company uses more than one internal carbon price (i.e., for planning under various scenarios), then it would be required to provide disclosures for each price.

D. Climate-Related Risk Oversight & Management

Proposed Item 1501 of Reg. S-K would require companies to describe “the [board’s] oversight of climate-related risks” and “management’s role in assessing and managing climate-related risks.” The detailed disclosures would include:

With respect to the board’s role, who, if any, on the board is responsible for climate risk oversight (e.g., full board, board committee, certain directors), whether any directors have “expertise in climate-related risks” (including supporting information to fully describe the nature of the expertise), the process by which the board is informed about climate risks and frequency of discussion, integration of climate risks into the strategy/risk/financial oversight processes, and the board’s establishment of and monitoring of climate-related targets or goals.
With respect to management’s role, to the extent applicable, who in management is responsible for climate risk assessment and management (e.g., certain management positions or committees), relevant expertise of the position holders or committee members (including supporting information to fully describe the nature of the expertise), the process by which they are informed and monitor climate risks, and the frequency of reporting to the board/committee.

In addition, proposed Item 1503 of Reg. S-K would require companies to describe, if applicable, “any processes the registrant has for identifying, assessing, and managing climate-related risks.” The detailed disclosures would include:

Risk identification and assessment process, including determination of relative significance of climate risks versus other risks, consideration of existing or likely regulatory requirements or policies, consideration of shifts in customer or counterparty preferences, technological changes or changes in market prices, and determination of materiality of climate risks.
Risk management process, specifically the decision-making process for mitigating, accepting or adapting to particular risks, including risk prioritization and mitigation of high-priority risks.
How these processes are integrated into overall risk management, including whether and how climate-related risks are integrated into the registrant’s overall risk management system or processes, and whether climate-focused board and management committees interact with the committees focused on overall risk management (if different).

Also, to the extent a company has adopted a transition plan as part of its climate risk management strategy, additional disclosures would be required. These disclosures would include, for example, a description of the plan, relevant metrics and targets used, annual updates about the transition plan (e.g., actions taken to meet goals) and how the company plans to mitigate or adapt to identified physical and transition risks.

Notably, the Commission did not include specific requirements addressing compensation practices tying executive pay to climate-related targets and goals, taking the position that the Compensation Discussion & Analysis rules already provide a framework for this disclosure.[14]

E. GHG Emissions Reporting

Proposed Item 1504 of Reg. S-K would require companies to disclose Scope 1, Scope 2 and, in some cases, Scope 3 “GHG emissions … for [their] most recently completed fiscal year, and for the historical fiscal years included in [their] consolidated financial statements in the filing, to the extent such historical GHG emissions data is reasonably available,” and Item 1505 of Reg. S-K would require certain companies to obtain external assurance of some of these disclosures.

The proposed rules define GHGs to include carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), nitrogen trifluoride (NF₃), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur hexafluoride (SF₆), consistent with the Kyoto Protocol, the UN Framework Convention on Climate Change, the U.S. Energy Information Administration, and the U.S. Environmental Protection Agency. The proposed rules share basic concepts and vocabulary from the Greenhouse Gas Protocol, which is a widely accepted accounting and reporting standard for GHG emissions, in order to attempt to reduce the compliance burden on companies and promote comparability of reported data.[15] However, the SEC rules would require reporting to exclude the effects of offsets and RECs, and companies would not be required to follow the standards and guidance provided by the Greenhouse Gas Protocol in reporting their GHG emissions.

The proposed rules generally would require companies to provide GHG emissions data with respect to each year for which financial statements are included in the filing. For example, for a non-smaller reporting company, this would mean three years of GHG emissions data in an annual report on Form 10-K. Although data for the most recent fiscal year would always be required to be reported, the proposed rules contain an exception for prior years to the extent the data is not “reasonably available.” The proposing release explains that a company would be able to omit data for such years to the extent it “has not previously presented such metric for such fiscal year and the historical information necessary to calculate or estimate such metric is not reasonably available … without unreasonable effort or expense.” [16] As a result, we expect that companies that did not previously collect such data would be able to avail themselves of this exception on a scope-by-scope basis to “phase in” to full compliance (i.e., for a large accelerated filer, providing one year of data for the first year of compliance, two years of data for the next year, and three years of data beginning in the third year of compliance).

The proposed rules also include a limited safe harbor from liability for Scope 3 disclosures, providing that such disclosures will not be deemed fraudulent, “unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith.” However, the proposed safe harbor does little beyond defining the standard necessary to establish scienter for fraud-based claims, and provides only limited protection in the context of Securities Act liability standards provided it is shown that the company was not negligent.

The following table provides an overview of the detailed GHG emissions reporting requirements contained in the proposed rules, comparing applicable requirements for Scopes 1, 2 and 3:

	Scope 1	Scope 2	Scope 3
How this is defined	Direct emissions from operations owned or controlled by company (i.e., consolidated or accounted for as an equity method investment)	Indirect emissions from generation of purchased or acquired energy consumed by operations owned or controlled by company	All other indirect emissions not otherwise included in Scope 2 that occur in upstream and downstream activities of a company’s value chain
Who must report	All companies	Same as Scope 1	All companies (other than smaller reporting companies), but only if (a) material to the company, or (b) the company has set[17] a GHG emissions target that includes Scope 3
What must be reported: absolute GHG emissions	Aggregate amount in terms of metric tons of CO₂e* Breakdown by constituent GHGs* *Excluding impact of purchased or generated offsets	Same as Scope 1	Same as Scope 1* plus breakdown by any significant categories of Scope 3 emissions *May choose to present as a range if company discloses reasons for doing so and underlying assumptions
What must be reported: GHG intensity	Sum of Scopes 1+2 emissions in terms of metric tons of: CO₂e[18] per unit of total revenue (using company’s reporting currency), and CO₂e per unit of production relevant to company’s industry (disclosing basis for unit used)* *Special rules apply for companies with no revenue or unit of production for a fiscal year or when voluntarily disclosing additional GHG intensity measures		Same as Scopes 1+2, but must be calculated and presented separately
What must be reported: description of methodology	Approach to categorizing emissions, including organizational & operational boundaries[19] (which must be consistent with financial reporting & as between Scopes 1/2/3) Reasonable estimates & material data gaps Calculation approach, including third-party data Material year-over-year changes in methodology	Same as Scope 1	Same as Scope 1 plus: Categories of included upstream and downstream activities Data sources used to calculate, including whether verified by company or third party Any significant overlap in categories producing Scope 3 emissions and how accounted for
Time period covered	Most recent fiscal year plus, if reasonably available, other years covered by financial statements in filing* *If full-year data not reasonably available for most recent year, can use actual data for Q1-Q3 plus reasonable estimate for Q4, but must promptly disclose any material difference between Q4 estimates and actuals	Same as Scope 1	Same as Scope 1
Subject to attestation requirements	Yes, for large accelerated filers and accelerated filers, subject to a stepped phase-in from limited assurance to reasonable assurance	Same as Scope 1	No
Subject to liability safe harbor	No	No	Yes, not deemed to be fraudulent unless it is shown that the disclosure was made without a reasonable basis or not in good faith

A key question for large accelerated filers and accelerated filers that have not yet set GHG emissions targets that encompass Scope 3 emissions will be whether such emissions are material to the company and, therefore, required to be disclosed. According to the Commission, Scope 3 emissions disclosure would be subject to a materiality qualifier in order to balance the “relative difficulty” for companies to collect this data and in acknowledgment of the fact that the impact of Scope 3 emissions can vary significantly across industries and companies.^[20] The Commission stated that this determination is based on traditional notions of materiality and that disclosure would be required “if there is a substantial likelihood that a reasonable investor would consider [Scope 3 emissions] important when making an investment or voting decision.”[21] The Commission added that this inherently is a company-specific determination that depends, in part, on a company’s industry and whether Scope 3 emissions represent a significant portion of a company’s total GHG emissions footprint.[22] Although the proposed rules would not explicitly require a company to disclose its basis for determining that Scope 3 emissions are not material, the proposing release notes that “it may be useful to investors to understand the basis for that determination.”[23] Moreover, the recent wave of SEC comment letters on climate change disclosures shows the Staff’s willingness to probe companies’ materiality determinations in this area.

F. Attestation of GHG Emissions

As noted above, proposed Item 1505 of Reg. S-K would require large accelerated filers and accelerated filers to obtain an attestation report from a GHG emissions attestation provider covering disclosure of Scope 1 and Scope 2 emissions. The detailed disclosures would include:

Requirements for selecting a GHG emissions attestation provider, including that the person or firm is an expert in GHG emissions by virtue of having “significant experience,” and is “independent” from the company and its affiliates during the “attestation and professional engagement period” (as such terms are defined in the proposed rules), and the company would be required to disclose whether the attestation provider has a license to provide assurance (identifying any such licensing or accreditation body), is subject to any oversight inspection program (identifying any such program), and is subject to record-keeping requirements with respect to the engagement (identifying any such requirements and their duration).
Form and content requirements for the report, including that the report contain information about its subject matter, evaluation time period, measurement criteria and attestation standard used (which must be publicly available at no cost and established by a group that has followed due process procedures), level of assurance provided, nature of engagement, description of the work performed if it is a limited assurance engagement, relative responsibilities of the company versus the attestation provider, independence of the attestation provider, any inherent limitations in the evaluation and conclusion of the attestation provider, among other technical form requirements.
Phase-in of attestation requirements, under which filings with respect to the (1) first fiscal year after the compliance date would not require attestation, (2) second and third fiscal years after the compliance date would require, at a minimum, attestation at a “limited assurance” level, and (3) all years beginning with the fourth fiscal year after the compliance date would require attestation at a “reasonable assurance” level.[24]
Voluntary attestation or verification would be permitted during the first fiscal year after the compliance date, but various disclosure requirements would apply, such as providing the identity of the attestation/verification provider and information about its independence, description of the standards used, level and scope of the attestation/verification provided, and a brief description of the results. Companies who voluntarily comply after the first fiscal year after the compliance date would be required to follow the full attestation requirements in the proposed rules.

The proposed rules would not require that the GHG emissions attestation provider be an independent, registered public accounting firm.[25] However, given the extensive qualification and disclosure requirements that would apply to the provider, as well as the expert liability that the provider would be subject to under the Securities Act of 1933 (the “Securities Act”),[26] we believe that many large public companies would engage their existing outside audit firm to provide these attestation services.[27] In this regard, registration statements that include an attestation report would be required to include as an exhibit a consent from the GHG emissions attestation provider, and, as a result, such provider would have a role in the diligence and comfort letter process for securities offerings.

G. Targets, Goals & Transition Plans

Proposed Item 1506 of Reg. S-K would require detailed disclosures if a company has “set any targets or goals related to the reduction of GHG emissions, or any other climate-related target or goal (e.g., regarding energy usage, water usage, conservation or ecosystem restoration, or revenues from low-carbon products) such as actual or anticipated regulatory requirements, market constraints, or other goals established by a climate-related treaty, law, regulation, policy, or organization.” The detailed disclosures would include:

Scope and calculation of the target, including scope of activities and emissions included in the target, unit of measurement and whether absolute or intensity-based, time horizon for achievement (including whether it is consistent with an external standard), and baseline against which progress is measured (including a requirement to use a consistent base year for multiple targets).
Progress achievement, including how the company intends to meet the target, any interim targets set by the company, and annual updates on progress achieved towards the target (including quantitative data and actions taken).
Any use of carbon offsets or RECs, including the amount of carbon reduction represented by the offsets or amount of generated renewable energy from the RECs, description and location of the underlying projects, and information about the source, cost and authentication of the offsets or RECs.

IV. Summary of Proposed Reg. S-X Amendments

A. Overview

The proposed rules would amend Regulation S-X to require certain climate-related financial statement metrics and related disclosures in a separate footnote to companies’ annual audited financial statements. Specifically, the proposed disclosure requirements, which would be housed in new Article 14 of Regulation S-X, would require disclosure of three types of information: (1) financial impact metrics, (2) expenditure/cost metrics, and (3) financial estimates and assumptions.

As this information would be included in the financial statements, it would come within the scope of an independent, registered public accounting firm’s audit of the financials as well as a company’s internal control over financial reporting and related CEO and CFO certifications.

These disclosures, which are discussed in more detail below, would not be required to be included in filings that do not include audited financial statements (e.g., quarterly reports on Form 10-Q).

B. Generally Applicable Requirements

Proposed Rules 14-01 and 14-02 of Reg. S-X contain several requirements that would apply with respect to all of the climate-related financial metrics discussed below. The detailed disclosures would include:

Disclosure thresholds. A particular metric would need to be disclosed if the absolute value of all climate-related impacts or expenditures/costs, as applicable, with respect to a corresponding financial statement line item represents at least 1% of that line item.
Calculation methodology. The calculation of reported metrics must use financial information that is consistent with the scope of the rest of the financial statements and apply the same accounting principles utilized for the rest of the financial statements.
Contextual information. For each reported metric, contextual information must be provided as to how it was derived, including significant inputs and assumptions, policy decisions (if applicable) and the impact of any climate-related risks identified pursuant to the new Regulation S-K requirements.

C. Financial Impact Metrics

Proposed Rule 14-02(c) and (d) of Reg. S-X would require companies to disclose, subject to the 1% line-item threshold, the financial impacts of severe weather events, other natural conditions and transition activities on any relevant line items in the company’s financial statements. The detailed disclosures would include:

Presentation requirements, including that disclosure be presented, at a minimum, on an aggregated, line-by-line basis for all negative impacts and, separately, positive impacts.
Scope of severe weather events and other natural conditions, including flooding, drought, wildfires, extreme temperatures and sea level rise, with potential impacts, including, for example, revenue and cost changes from business disruptions, asset impairment charges, changes in loss contingencies or reserves, and changes in total expected insured losses.
Scope of covered transition activities, including efforts to reduce GHG emissions or mitigate exposure to transition risks, with potential impacts, including, for example, revenue and cost changes from new emissions pricing or regulations, cash flow changes from changes in upstream costs, changes in asset carrying amounts due to reduction in useful life, and changes to interest expense due to climate-linked bonds with variable interest rates based on achievement of climate targets.

D. Expenditure/Cost Metrics

Proposed Rule 14-02(e) and (f) of Reg. S-X would require companies to disclose, subject to the 1% threshold, expenditures and capitalized costs to mitigate the risks of severe weather events or other natural conditions and expenditures related to transition activities. The detailed disclosures would include:

Presentation requirements, including that disclosure be presented on an aggregated basis for expenditures expensed and, separately, capitalized costs incurred.
Scope of covered severe weather events and other natural conditions, including flooding, drought, wildfires, extreme temperatures and sea level rise (same as for financial impact metrics), with potential expenses/costs related to, for example, increasing business resilience, retiring or shortening the useful life of assets, relocating at-risk assets or operations, and otherwise reducing the future impact of severe weather events and other natural conditions on the business.
Scope of covered transition activities, including efforts to reduce GHG emissions or mitigate exposure to transition risks (same as for financial impact metrics), with potential expenses/costs related to, for example, R&D for new technologies, purchase of assets, infrastructure or products to reduce GHG emissions, increase energy efficiency, offset emissions (e.g., energy credit purchases) or improve resource efficiency, and progress towards meeting disclosed climate-related targets or commitments.

E. Financial Estimates & Assumptions

Proposed Rule 14-02(g) and (h) of Reg. S-X would require companies to disclose whether estimates and assumptions underlying the amounts reported in the financial statements were impacted by risks and uncertainties associated with, or known impacts from, severe weather events and other natural conditions, the transition to a lower-carbon economy and any disclosed climate-related targets. To the extent there was an impact, qualitative disclosure would be required as to how the development of any such estimate or assumption was impacted.

F. Time Period Covered

Proposed Rule 14-01 of Reg. S-X would require the financial statement disclosures discussed above to be provided for a company’s most recently completed fiscal year and for each historical fiscal year included in the financial statements in the filing. As an example, a company that includes balance sheets as of the end of its two most recent fiscal years and three years of income and cash flow statements would be required to disclose two years of climate-related metrics that correspond to balance sheet line items and three years of climate-related metrics that correspond to income or cash flow statement line items.

Unlike the Reg. S-K disclosure requirements for GHG emissions, the Reg. S-X disclosure proposals do not contain an exemption for information that is not reasonably available with respect to historical periods.

V. Other Significant Aspects of the Proposed Rules

A. Applicability

The proposed rules would apply to companies with reporting obligations under the Securities Exchange Act of 1934 (the “Exchange Act”) pursuant to Section 13(a) or Section 15(d) and companies filing a registration statement under the Securities Act or Exchange Act. As a result, the proposed rules would apply to both U.S. public companies and foreign private issuers.

Once the rules are completely phased in (as discussed below), there generally would not be any filer-status-based exemptions from complying with the proposed rules. There would be limited exceptions for Scope 3 emissions disclosure (smaller reporting companies would be exempt) and GHG emissions attestation requirements (non-accelerated filers would be exempt). However, in contrast to some of the other SEC rules adopted in recent years, there would be no exemption for emerging growth companies.

The new disclosures would apply broadly to periodic filings as well as registration statements, including U.S. companies’ Forms S-1, S-3, S-4, S-11, 10, 10-Q and 10-K and foreign companies’ Forms F-1, F-3, F-4, 6-K and 20-F.[28] Although these forms generally would require the full panoply of disclosures in the proposed rules, quarterly reports on Form 10-Q would be required to disclose only material changes to the Regulation S-K-based climate change disclosures included in a company’s Form 10-K.

B. Liability Implications

The proposed rules would treat all climate-related disclosures as “filed” rather than “furnished” (other than those included in a foreign private issuer’s Form 6-K, which generally are “furnished”). This means that, in addition to general anti-fraud liability under Rule 10b-5 under the Exchange Act, such disclosures would be subject to incremental liability under Section 18 of the Exchange Act and, to the extent such disclosures are included or incorporated by reference into Securities Act Registration Statements, subject to liability under Sections 11 and 12 of the Securities Act. Importantly, claims under Section 11 of the Securities Act and Section 18 of the Exchange Act do not require a plaintiff to prove scienter or negligence, in contrast to claims under Rule 10b-5. As discussed above, there would be a limited safe-harbor from liability for Scope 3 emissions disclosures.

C. Safe Harbor for Forward-Looking Information

The proposed rules make clear that, to the extent that any of the climate-related disclosures are forward-looking (e.g., climate-related goals, emission reduction targets, transition plans, scenario analysis), they would be subject to the general safe-harbor protections under the Private Securities Litigation Reform Act (“PSLRA”), assuming that all of the required conditions under the PSLRA are met.[29] However, the PSLRA safe harbor would not be available for climate-related disclosures contained in the financial statement notes or in the context of initial public offerings. Also, compliance with the PSLRA safe harbor does not limit the Commission’s ability to bring enforcement actions.

D. Inline XBRL Data Tagging Requirements

The proposed rules would require all of the required disclosures to be tagged in Inline XBRL, including block text tagging and detail tagging of both qualitative and quantitative disclosures. According to the proposing release, this Inline XBRL tagging requirement is intended to “enable automated extraction and analysis of climate-related disclosures, allowing investors and other market participants to more efficiently perform large-scale analysis and comparison of climate-related disclosures across companies and time periods.”^[30]

VI. Commissioner Remarks and Potential Challenges

The Commission voted on party lines, three-to-one, in support of the proposed rule amendments. Chair Gensler supported the proposed rules, indicating that the rules would provide investors with “consistent, comparable, and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations to issuers.” He highlighted that the SEC has historically “stepped in when there’s a significant need for disclosure of information relevant to investors’ decisions.” Subsequent to the open meeting at which the rule proposal was approved, in response to a letter sent to the Commission by 40 Congressional Republicans asking the SEC to “immediately table” the rule on grounds that it would be “extremely burdensome,” Chair Gensler reiterated his view that the information sought by the proposed rules was “consistent with … concepts of decision-making and related materiality.”[31]

Commissioner Lee also supported the proposed rules, hailing their introduction as a “watershed moment for investors and financial markets.” In addition, Commissioner Lee noted that the majority of public comments received in last year’s request for public comment favored enhanced climate disclosure and that the proposed rules are responsive to those requests. Similarly, Commissioner Crenshaw supported the proposed rules, noting that they would “empower investors to make more informed decisions.”

Commissioner Peirce dissented and outlined several concerns she had regarding the proposed rules. In a dissent that may preview legal arguments that challengers would raise in litigation challenging the rule once finalized, Commissioner Peirce indicated that: (i) existing rules already cover material climate risks, (ii) the proposed rules would not apply a materiality threshold in some places (e.g., Scope 1 and Scope 2 required disclosures) and would distort materiality in other places (e.g., the Scope 3 disclosure requirements), (iii) the proposal would not lead to comparable, consistent, and reliable disclosures, (iv) the proposal exceeds the Commission’s statutory limits of authority, (v) the proposed rules would be expensive for companies to implement, and (vi) the proposal would hurt investors, the economy and the reputation of the SEC. Notably, Commissioner Peirce’s remarks also seemingly laid the framework for First Amendment challenges to the proposed rules based on limitations on compelled speech.

For the full text of the published statements of the Commissioners, please see the following links: Chair Gensler, Commissioner Peirce, Commissioner Lee and Commissioner Crenshaw.

VII. Effective Dates and Comment Period

The table below shows the phase-in schedule for the proposed rule requirements, assuming that final rules are adopted and effective by the end of 2022 (consistent with the proposing release’s assumption). This illustrative schedule would apply to companies with a December 31 or later fiscal year-end.^[32]

Disclosure Requirement	Large Accelerated Filers	Accelerated Filers	Non-Accelerated Filers	Smaller Reporting Companies
All disclosures other than Scope 3	Fiscal year 2023 (filed in 2024)	Fiscal year 2024 (filed in 2025)	Same as for Accelerated Filers	Fiscal year 2025 (filed in 2026)
Scope 3 emissions disclosures	Fiscal year 2024 (filed in 2025)	Fiscal year 2025 (filed in 2026)	Same as for Accelerated Filers	Exempt
Attestation for Scope 1 & Scope 2 emissions disclosures	Limited Assurance Fiscal year 2024 (filed in 2025) Reasonable Assurance Fiscal year 2026 (filed in 2027)	Limited Assurance Fiscal year 2025 (filed in 2026) Reasonable Assurance Fiscal year 2027 (filed in 2028)	Exempt	Same as for Accelerated Filers or Non-Accelerated Filers (as applicable)

The comment period ends on May 20, 2022, which is 60 days from when the SEC approved the rule proposal.

VIII. Key Takeaways and Action Items for Public Companies

In addition to their detailed and prescriptive approach to setting forth disclosure standards, several other aspects of the proposed rules are notable:

Absence of materiality. The proposed disclosure standards largely eschew the use of a materiality standard; other than in the context of Form 10-Q updating, only the climate change risk disclosures, one of the two standards for requiring Scope 3 emissions disclosure, and certain details regarding emissions disclosures are predicated on materiality (and in the case of risk disclosures, the standard is “reasonably likely” to have a material impact). Notably, Chair Gensler stated that the definition of “materiality” applicable to the proposed rules is the one used under the U.S. securities laws, notwithstanding other “materiality” definitions used by various environmental, social and governance reporting frameworks,^[33] suggesting that company disclosures in sustainability reports may encompass topics not required to be addressed under the proposed rules.
Inner workings disclosure. The proposed rules would require companies to disclose detailed underlying methodologies regarding climate-change issues to a degree that has few precedents in the SEC’s rules. For example, a company would not only have to disclose its GHG emissions, but would also have to provide a detailed description of its methodology, including significant inputs, calculation approach, and calculation tools. Thus, the rules would provide insights into key internal aspects of this one facet of a company’s business and operations to a greater degree than most other aspects of the company’s operations, potentially resulting in disclosure of proprietary business strategies and competitively sensitive information.
Vague disclosure triggers based on company actions. In many cases, company actions can trigger disclosure under the proposed rules. For example, a company would have to provide Scope 3 emissions disclosure if the company “has set” a Scope 3 target or goal. Similarly, detailed disclosures would be required if a company “uses” a scenario analysis, “maintains” an internal carbon price, “has set” any climate-related target or goal, “has adopted” a transition plan. Moreover, once these disclosures are triggered, the proposed rules would prescribe detailed information that would have to be disclosed and would impose conditions on the disclosure that may differ from the company action that triggered the disclosure. For example, Scope 3 emissions disclosure would be required to be provided by constituent GHG, even if the target or goal that triggered the disclosure was not developed in that manner. Given the detailed reporting requirements that would be triggered by various company actions, the rules could disincentivize companies from taking such actions or from modifying or updating their planning around these types of actions and could lead to widely disparate disclosures among companies, largely without regard to the materiality of such actions or disclosures.

Although the rules have only been proposed and are subject to comment (which we believe will be significant) and any final rules could be challenged in court, it is not too early to start thinking about the potential implications of the proposed rules, if they are adopted as proposed, and assess what additional steps may be necessary to take in order to be well positioned to comply. The following planning suggestions should be tailored, as appropriate, to your company’s particular industry and size.

Participate in the rulemaking. Under the Administrative Procedure Act, the SEC is required to consider and reasonably respond to public comments. Accordingly, companies concerned about aspects of the proposed rules should consider participating in the rulemaking proceedings, either by submitting their own comments or by working in conjunction with a trade association. Among other things, comments may address the expected costs of compliance with the proposed rules (including quantitative data, where available); requirements in the proposed rules that are unclear, impractical or unduly burdensome; and possible alternatives to provisions of potential concern.
Conduct a gap analysis against any existing disclosures. Companies should start by taking stock of their existing climate-related disclosures—including in their SEC filings and on their websites (e.g., on an ESG webpage or stand-alone ESG report), as applicable—and assessing what additional disclosures would be needed to comply with the proposed climate-related risk disclosure framework. That will help focus and inform compliance and readiness efforts once final rules are issued.
Assess sufficiency of internal and external climate change resources. Given their breadth and complexity, compliance with the proposed rules, if adopted, likely would require substantial internal and external resources. As a result, companies should begin to assess their internal resources’ expertise and external service providers. In assessing resource sufficiency, consideration should also be given to the timing for preparing these disclosures, since most will need to be finalized early the following year in time for the annual report on Form 10-K. This is an already busy time for internal legal and financial reporting teams and, for those companies that voluntarily publish an ESG report, this timing likely represents an acceleration of when similar disclosures otherwise would have been prepared as ESG reports are often published later in the year. Companies should start gathering information necessary for budgeting and organizational planning purposes.
Evaluate disclosure controls and internal controls. Given that the proposed new disclosures would be included in SEC filings, companies should assess their existing disclosure controls and procedures, as well as internal control over financial reporting as it relates to the proposed Regulation S-X rules, to identify any necessary enhancements to cover the new climate-related disclosures. As a general matter, in light of the potential disclosure liability that attaches to these disclosures generally (even those included on company websites),^[34] it is important to have robust processes in place to collect and verify the underlying data and assumptions.
Revisit climate-related risk oversight and management practices. As the proposed rules would require significant disclosure about climate-related risk oversight and management practices, companies should begin assessing their existing practices and considering whether any enhancements are warranted to how the board oversees climate-related risks (e.g., whether at the full board level or a committee, frequency for monitoring, etc.) and how these risks are managed internally before such practices are subject to disclosure.
Reassess board composition, focusing on climate change expertise. As the proposed rules would require disclosure about any climate change expertise on the board of directors, companies should start assessing relevant qualifications of existing board members to consider what the potential disclosure would look like and evaluate whether it is appropriate (or not) to make climate change expertise a recruitment focus area for future board refreshment opportunities.
Conduct a detailed materiality assessment of climate-related risks on the business. As a significant portion of the new Regulation S-K qualitative disclosure requirements would include a materiality qualifier, companies, would be well served by conducting a more detailed materiality assessment of climate change risks and opportunities on their business than they have done in the past.
Begin considering potential significance of Scope 3 emissions for your company. As a threshold question for whether Scope 3 emissions disclosure would be required is whether they are material, companies should start to consider the potential significance of their Scope 3 emissions, including taking into account a company’s value chain. As this likely will require reliance on third-party data to some extent, companies should begin identifying potential data sources, including both industry resources and partners in their value chains.
Discuss implications with your outside auditor. Companies should start discussing with their outside auditors the implications of both (1) the proposed financial statement disclosure requirements on the firm’s audit, and (2) the proposed disclosure requirements outside of the financial statements on the comfort letter process. Companies also should consider whether their outside auditors could be engaged to conduct the required GHG emissions attestation.

[1] See the Proposing Release, p. 386.

[2] See the Proposing Release, p. 450.

[3] See Commission Guidance Regarding Disclosure Related to Climate Change, Release No. 33-9106 (Feb. 2, 2010) (the “2010 Climate Change Guidance”), https://www.sec.gov/rules/interp/2010/33-9106.pdf.

[4] See Acting Chair Allison Herren Lee, “Public Input Welcomed on Climate Change Disclosures” (Mar. 15, 2021), https://www.sec.gov/news/public-statement/lee-climate-change-disclosures.

[5] See the Proposing Release, p. 19.

[6] Id., pp. 19-20

[7] See SEC Announces Enforcement Task Force Focused on Climate and ESG Issues, Press Release 2021-42 (Mar. 4, 2021), https://www.sec.gov/news/press-release/2021-42.

[8] See Gensler Says Climate Disclosure Rules Among “Top Priorities,” Law360 (May 13, 2021), https://www.law360.com/articles/1384626.

[9] See SEC Announces Annual Regulatory Agenda, Press Release 2021-99 (June 11, 2021), https://www.sec.gov/news/press-release/2021-99.

[10] See SEC Staff Scrutiny of Climate Change Disclosures Has Arrived: What to Expect and How to Respond, Gibson, Dunn & Crutcher (Sep. 19, 2021), https://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=446. See also Sample Letter to Companies Regarding Climate Change Disclosures, (Last Modified Sept. 22, 2021), https://www.sec.gov/corpfin/sample-letter-climate-change-disclosures.

[11] Based on Gibson Dunn’s review of the Intelligize database for the relevant time period.

[12] See SEC Bogs Down on Climate Rule, Handing White House Fresh Setback, Robert Schmidt and Benjamin Bain, Bloomberg Green (Feb. 8, 2022), https://www.bloomberg.com/news/articles/2022-02-08/sec-bogs-down-on-climate-rule-saddling-biden-team-with-new-woe.

[13] See the Proposing Release, p. 54.

[14] See the Proposing Release, p. 102.

[15] See the Proposing Release, p. 154.

[16] See the Proposing Release, p. 192.

[17] The proposed rules are not as clear on what it means to “set” a target, but we believe it makes sense to interpret this as meaning the company has publicly disclosed a target that includes Scope 3 emissions.

[18] CO₂e refers to carbon dioxide equivalents and is a common unit of measurement that indicates global warming potential of each greenhouse gas. See the Proposing Release, p. 474.

[19] Organizational boundaries refer to entities owned or controlled by the company, whereas operational boundaries define the direct and indirect emissions associated with the business. See the Proposing Release, p. 193.

[20] See the Proposing Release, p. 169.

[21] Id.

[22] See the Proposing Release, pp. 169-173 (highlighting several industry dynamics that might lead a company to conclude that Scope 3 emissions are material).

[23] See the Proposing Release, p. 174.

[24] “Reasonable assurance” is the same level of assurance as a company’s financial statements in Form 10-K. It is an affirmative assurance that the GHG emissions disclosure is measured in accordance with the attestation provider’s standards. “Limited assurance” is a form of negative assurance and commonly referred to as “review,” and it is the same level of assurance provided to a company’s financial statements in a Form 10-Q.

[25] See the Proposing Release, p. 47.

[26] See the Proposing Release, pp. 252-253.

[27] The Commission affirmed that fees paid to the outside auditor for GHG emissions attestation services would be considered “audit-related fees” for proxy disclosure purposes. See the Proposing Release, p. 252.

[28] See the Proposing Release, p. 285-286.

[29] See the Proposing Release, pp. 70-71.

[30] Id. at 295.

[31] See SEC Chief Doubles Down on Climate Plan Amid GOP Uproar, Law360 (Apr. 12, 2022), https://www.law360.com/securities/articles/1483445/sec-chief-doubles-down-on-climate-plan-amid-gop-uproar?nl_pk=a362658d-96a1-4200-b75b-8cd032e05259&utm_source=newsletter&utm_medium=email&utm_campaign=securities&utm_content=2022-04-13.

[32] For companies with a fiscal year 2023 that commences before the adoption and effectiveness of the final rules, the proposing release makes clear that the time period for compliance would be one year later than illustrated above. See the Proposing Release, p. 225.

[33] See Chair Gary Gensler, “Statement on Proposed Mandatory Climate Risk Disclosures,” Mar. 21, 2022, https://www.sec.gov/news/statement/gensler-climate-disclosure-20220321. Compare, for example, the Global Reporting Initiative, which uses an “impact materiality” standard based on whether information is important for reflecting an organization’s economic, environmental and social impacts, or the European Union’s Corporate Sustainability Reporting Directive, which uses a “double materiality” standard, based on both financial materiality and impact materiality concepts.

[34] For a discussion about potential disclosure and other liability associated with ESG disclosures, see ESG Legal Update: What Corporate Governance and ESG Professionals Need to Know, Gibson, Dunn & Crutcher (June 2020), https://www.gibsondunn.com/wp-content/uploads/2020/10/Ising-Meltzer-McPhee-Percopo-Assaf-Holmes-ESG-Legal-Update-What-Corporate-Governance-and-ESG-Professionals-Need-to-Know-Society-for-Corporate-Governance-06-2020.pdf.

The following Gibson Dunn attorneys assisted in preparing this client update: Aaron Briggs, Zane Clark, Charli Gibbs-Tabler, Hillary Holmes, Tom Kim, Ron Mueller, Brian Richman, and Lori Zyskowski.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance, Environmental, Social and Governance (ESG), Capital Markets, and Administrative Law and Regulatory 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 (+1 949-451-4343, jmoloney@gibsondunn.com)
Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)
Brian J. Lane – Washington, D.C. (+1 202-887-3646, blane@gibsondunn.com)
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)
Mike Titera – Orange County (+1 949-451-4365, mtitera@gibsondunn.com)
Aaron Briggs – San Francisco (+1 415-393-8297, abriggs@gibsondunn.com)
Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com)

Environmental, Social and Governance (ESG) Group:
Susy Bullock – London (+44 (0) 20 7071 4283, sbullock@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)

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)

Administrative Law and Regulatory Group:
Eugene Scalia – Washington, D.C. (+1 202-955-8543, escalia@gibsondunn.com)
Lucas C. Townsend – Washington, D.C. (+1 202-887-3731, ltownsend@gibsondunn.com)
Helgi C. Walker – Washington, D.C. (+1 202-887-3599, hwalker@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Los Angeles partner Michael Holecek and Washington, D.C. associates Andrew Kilberg and Logan Billman are the authors of “The FTC’s Foray Into Worker Classification Is Misguided and Unlawful” [PDF] published by The National Law Journal on April 12, 2022.

Click for PDF

On April 4, 2022, the U.S. Federal Trade Commission and U.S. Department of Justice (together, the “Agencies”) hosted international and state antitrust enforcers for panel discussions on current and emerging enforcement trends. U.S. agency leaders Assistant Attorney General (“AAG”) Jonathan Kanter and FTC Chair Lina M. Khan used the Summit to help showcase their policy objectives and enforcement priorities as part of President Biden’s efforts to harness antitrust as a tool to pursue his administration’s broader agenda.

A few key themes emerged from the Summit:

The Agencies plan to substantively reform their approach to evaluating and challenging mergers in digital platform markets, markets where non-price competition is the predominant form of competition, and non-horizontal markets.
The Agencies will continue their efforts to expand the reach of antitrust enforcement—including through the adoption of novel theories of harm and seldom used enforcement tools, such as challenging allegedly unfair methods of competition on a standalone basis under Section 5 of the FTC Act and criminally prosecuting alleged monopolization under Section 2 of the Sherman Act.

The Agencies are expected to substantively revise the Merger Guidelines

Throughout the Summit, state and international enforcers (together, the “enforcers”) celebrated merger control as the most important tool for preserving competition. Yet some enforcers bemoaned that the Agencies’ current Horizontal and Vertical Merger Guidelines inadequately prevent competitive harms in myriad industries. Noting the Agencies’ efforts to revise the current Merger Guidelines, enforcers discussed the current state of merger enforcement and identified areas where revisions may be appropriate. Among those concerns are:

Structural Presumptions: Enforcers recognized that structural presumptions based on market shares are an essential starting place for merger analyses, but expressed concern that market share analysis alone does not necessarily paint an accurate picture of harm in dynamic markets, digital markets, and non-price markets.
Digital and No-Marginal Cost Products: Enforcers expressed concern that traditional approaches to defining relevant markets and analyzing competitive effects do not apply to markets defined by non-price or negative price competition. For example, enforcers are particularly concerned with digital platforms that provide consumer facing services for “free” but monetize the service by selling advertisements. Enforcers suggested that the revised Guidelines could address this blind spot by adopting new economic tools, such as defining non-price markets through the “Small But Significant and non-Transitory Increase in Attention Costs” test. Enforces also suggested that the Agencies should place increased emphasis on ordinary course business documents.
Non-Horizontal Mergers: Enforcers emphasized that antitrust should take a broad view of potential merger harms, including harms that may come from mergers that are neither strictly horizontal nor vertical, but are instead “non-horizontal” (i.e., conglomerate mergers, cross-market mergers, private equity acquisitions, and partial mergers). While the Agencies currently recognize that a broad range of non-horizontal transactions may be anticompetitive if they would enable a party to expand its monopoly power, or exclude rivals, through bundling, tying, and price discrimination, the enforcers suggested the Merger Guidelines could discuss these theories of harm in greater detail. Enforcers also suggested that the revised Merger Guidelines should provide a framework for analyzing transactions that might diminish or eliminate nascent competition, which often evade neat categorization into existing paradigms of vertical and horizontal harm.
Remedies and Divestitures: International and local enforcers expressed agreement with the Agencies – and in particular AAG Kanter – that behavioral merger remedies inadequately address anticompetitive harms, and called on the Guidelines to expressly disfavor behavioral remedies.

While the precise scope, content, and timing of the revised Merger Guidelines remain unknown, signals from the Agencies suggest that they may substantially expand on and depart from the prior Guidelines, particularly with respect to issues surrounding digital platforms, non-price markets, non-horizontal mergers, and remedies. Ultimately, we expect that the regulatory environment for M&A transactions will continue to be unpredictable at best and at times more challenging than in the past; we expect the Agencies to probe novel or searching theories of harm during merger investigations.

The Agencies recommit to invigorating non-merger enforcement

In the non-merger context, the Agencies’ leadership signaled their intent to bring aggressive enforcement actions under novel legal and economic theories. For instance, the DOJ reiterated its commitment to criminally prosecute antitrust violations involving agreements in labor markets. DOJ staff celebrated recent court decisions that declined to dismiss indictments for employment-related violations under Section 1 of the Sherman Act and emphasized that labor market prosecutions will remain a priority. As the Agencies expand antitrust enforcement in labor markets, they also have been increasing their efforts to investigate whether a proposed transaction effects competition for workers.

AAG Kanter also reiterated that the DOJ will begin efforts to bring criminal charges for violations of Section 2 of the Sherman Act based on unilateral conduct of dominant firms. Not only is criminal prosecution for Section 2 violations unprecedented in the modern era, the DOJ historically has analyzed Section 2 cases under the rule of reason, which is an in-depth factual analysis unlike the “per se” rule, and prosecuted them only on a civil basis, reserving criminal enforcement for the most hardcore per se violations, such as agreements between competitors to fix prices or allocate markets. The DOJ has not prosecuted a Section 2 case criminally since 1981, and has brought only a handful of civil Section 2 cases in the past twenty years. Given the Supreme Court’s guidance that per se treatment should be used only for restraints with “manifestly anticompetitive effects” that “lack any redeeming virtue,” and per se treatment of single-firm conduct is rare, efforts to revive criminal Section 2 enforcement will likely face significant headwinds in the courts.

The DOJ and FTC further signaled increased civil enforcement actions, especially against interlocking directors involving competitors under Section 8 of the Clayton Act. And the FTC committed to challenging anticompetitive conduct that falls short of a Sherman Act violation under Section 5 of the FTC Act. Likewise, the FTC suggested it may regulate markets through its substantive rule-making authority. Previous workshops suggest that the FTC intends to target worker misclassification and other labor-related practices.

Concurrent with the Summit, the DOJ announced updates to its leniency program that foreshadow an era of criminal enforcement in which leniency applicants will face additional eligibility hurdles and heightened scrutiny. Under the revised policy, the DOJ will no longer grant leniency to companies that fail to promptly report cartel violations and will condition leniency on swift remediation of historic violations. These revisions to the DOJ’s leniency program create divergences from major international leniency programs that do not include these eligibility requirements.

In addition to a number of other changes, including with respect to civil litigation and Type B leniency, the leniency program’s frequently asked questions (“FAQs”) added compliance officers, alongside board members and legal counsel, as “authoritative representative[s] of the applicant for legal matters.” As a result, when any of these individuals discover collusive conduct, it will be attributed to the company and used to determine whether leniency was promptly sought.

Additionally, the FAQs do not define the meaning of “prompt.” Rather, the DOJ will base its determination of promptness on “the facts and circumstances of the illegal activity and the size and complexity of operations of the corporate applicant.” Importantly, it imposes on the applicant the “burden to prove that its self-reporting was prompt.”

The changes to the leniency program may create uncertainty as to leniency eligibility when companies make the determination whether to self-report. The drafting of the FAQs would have benefited from a consultation process with the private bar and the business community as is common in other jurisdictions.

While the Agencies’ expanded use of the federal antitrust laws, both through potential criminal enforcement (the mechanics of which remain unclear) and broader civil enforcement through Section 5 of the FTC Act, indicates novel challenges are likely, Article III courts ultimately determine whether conduct violates the antitrust laws. Where an Agency challenge departs from precedent and modern antitrust principles, parties should be prepared to vindicate their conduct through litigation before district and circuit courts, which tend to favor adherence to precedent instead of embracing novel and untested theories of liability.

The following Gibson Dunn lawyers prepared this client alert: Rachel Brass, Stephen Weissman, Scott Hammond, Sophia Vandergrift, Jamie France, Chris Wilson, Caroline Ziser Smith, Logan Billman, and Harry Phillips.

Scott D. Hammond – Washington, D.C. (+1 202-887-3684, shammond@gibsondunn.com)

Sophia A. Vandergrift – Washington, D.C. (+1 202-887-3625, svandergrift@gibsondunn.com)

Jamie E. France – Washington, D.C. (+1 202-955-8218, jfrance@gibsondunn.com)

Chris Wilson – Washington, D.C. (+1 202-955-8520, cwilson@gibsondunn.com)

Rachel S. Brass – Co-Chair, Antitrust & Competition Group, San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)

Stephen Weissman – Co-Chair, Antitrust & Competition Group, Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)

Ali Nikpay – Co-Chair, Antitrust & Competition Group, London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)

Christian Riis-Madsen – Co-Chair, Antitrust & Competition Group, Brussels (+32 2 554 72 05, criis@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Click for PDF

Since President Biden took office in January 2021, employers’ compensation and nondiscrimination practices have been under increasing scrutiny by the federal government. For example, the recently issued Directive 2022-01—the Office of Federal Contract Compliance Programs (OFCCP) of the United States Department of Labor’s first directive since President Biden took office—directly underscores that pay equity is a priority of the new administration.[1] This Directive, among other mandates, makes clear that OFCCP intends to challenge whether employers can rely on the attorney-client privilege and work product doctrine to protect internal pay equity audits from being produced when requested by OFCCP as part of its investigations into regulatory compliance. As a result, companies should be particularly mindful of how they conduct internal pay equity analyses going forward. This is especially important considering OFCCP Director Jenny Yang has recently declared that going forward, it is “redoubling its efforts to remove barriers to pay equity.”[2]

Recent Legal Developments

The Directive, which was issued on March 15, 2022, attempts to clarify federal contractor affirmative action obligations under 41 C.F.R. § 60-2.17(b)(3), which requires that federal contractors analyze their compensation systems for gender, race, or ethnicity-based disparities to ensure fair compensation policies and practices. While the Directive does not create new legal rights or requirements, it is an example of the federal government’s increased attention to pay equity. The Directive provides insight on how OFCCP will evaluate the “in-depth” pay equity audits required by federal affirmative action regulations. According to the Directive, OFCCP can evaluate federal contractors’ compliance during a “desk audit,” during which OFCCP will “look broadly at a contractor’s workforce (across job titles, levels, roles, positions, and functions) to identify patterns of segregation by race, ethnicity, and gender . . . that drive pay disparities.”[3] While the Directive does not make clear exactly what methods OFCCP will use in making this assessment, “where possible,” OFCCP will use “regression and other systemic analyses” to identify potential pay disparities in either patterns of assignment or in salary paid across similar functions and positions.[4] If this audit reveals disparities in pay, OFCCP may seek additional information, such as additional compensation data, and conduct follow-up interviews. OFCCP may also request additional information if the audit reveals employee complaints of pay discrimination, other anecdotal evidence of discrimination, or inconsistencies in how the contractor is applying its pay policies.

Importantly, the Directive makes clear that OFCCP can request production of the employer’s pay equity audit required under 41 C.F.R. § 60-2.17(b)(3), as well as any materials and communications related to that audit. Employers often conduct privileged, internal audits on pay equity to proactively assess potential legal issues and to receive legal guidance. Employers typically have resisted production of these privileged studies on attorney-client privilege and work product grounds.

The Directive emphasizes federal contractors “must maintain and make available to OFCCP documentation of their compliance with OFCCP regulations,” and that it “has the authority under its regulations to request the analyses the contractor has conducted to comply with OFCCP regulations.”[5] OFCCP may also request information relating to the frequency of pay equity audits, the communication to management, and how the results were used to rectify disparities based on gender, race and/or ethnicity. The Directive takes the position that since federal contractors have an independent, regulatory duty to provide such information to OFCCP, they cannot withhold it on the basis of attorney-client privilege or pursuant to the attorney work product doctrine.[6] OFCCP has made clear that its position is that this obligation “defeats any expectation” that the company’s pay equity audit findings and compliance records prepared by or with the assistance of counsel would remain confidential. Id.

Notwithstanding this broad position, the Directive suggests that so long as federal contractors produce a pay equity audit and compliance records sufficient to comply with 41 C.F.R. § 60-2.17(b)(3), OFCCP “generally will not seek [production of] additional privileged analyses” conducted for any other purpose.[7]

While OFCCP’s application of this new position remains to be seen, it suggests that a prudent course for government contractor employers may be to conduct separate pay audits—one for the sole purpose of obtaining privileged legal advice, and a second, potentially non-privileged audit for demonstrating regulatory compliance. Employers that conduct a single audit run a risk that OFCCP could challenge the audit as conducted, at least in part, for regulatory compliance purposes, making communications and other records regarding the exercise subject to disclosure. Additionally, while it is unclear at this time how far OFCCP will go in contesting any privilege assertions over pay equity audit records, if OFCCP’s recent aggressive actions (such as its proposed changes to the pre-enforcement notice and conciliation procedures, see supra note 1) serve as an indication, OFCPP could become more insistent on challenging an employer’s assertions of privilege. If in fact OFCCP takes an aggressive approach towards challenging these privilege assertions, the boundaries of OFCCP’s position and the contours of privilege in this context will likely have to be resolved through litigation. Employers should thus be prepared to vigorously defend any assertions of privilege in this context and to minimize risk of waiver.

Conclusion and Next Steps

In light of OFCCP’s increasing focus on pay equity, employers subject to OFCCP requirements should take care to ensure compliance with the pay equity obligations established by 41 C.F.R. § 60-2.17. This means conducting regular audits of compensation systems, as well as implementing action-oriented programs designed to correct identified problem areas. To the extent employers wish to conduct audits for the purposes of legal advice and to maintain privilege over such materials, it is important to establish clear separation between privileged audits conducted solely for the purpose of legal advice, and audits conducted for the purpose of complying with federal regulations. Blurring the lines between those purposes could risk waiver of the privileged materials. Furthermore, if employers choose to conduct separate pay equity audits, they should be mindful of potential differences in the data utilized for the privileged and non-privileged audits as there could be inconsistent outcomes between audits. Employers subject to OFCCP requirements should seek the advice of counsel to ensure appropriate processes and guardrails are in place to meet these federal obligations.

_______________________

[1] This is not the only evidence of the government’s recently increased scrutiny on nondiscrimination in general, however. On March 21, 2022, OFCCP announced newly proposed amendments to its current rules governing its pursuit of potential discrimination violations. OFCCP issued rules entitled “Nondiscrimination Obligations of Federal Contractors and Subcontractors: Procedures to Resolve Potential Employment Discrimination” on December 10, 2020. The rules were purportedly designed to provide transparency into OFCCP’s process for evaluating nondiscrimination compliance and clarity for contractors in understanding the substantive requirements for OFCCP to issue discrimination findings. However, OFCCP’s proposed amendments, if implemented, would have the effect of eliminating certain evidentiary and procedural safeguards that are currently in place (and which tend to protect contractors under a more flexible framework). See Pre-Enforcement Notice and Conciliation Procedures, 87 Fed. Reg. 16138 (proposed March 22, 2022) (to be codified at 41 C.F.R. § 60).

[2] Press Release, U.S. Department of Labor, U.S. Department of Labor Announces Pay Equity Audit Directive for Federal Contractors to Identify Barriers to Equal Pay (Mar. 15, 2022), https://www.dol.gov/newsroom/releases/ofccp/ofccp20220315.

[3] Directive 2022-01.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason C. Schwartz, Karl G. Nelson, Dhananjay S. Manthripragada, Lindsay M. Paulin, Tiffany Phan, Lauren Fischer, and Virginia Baldwin.

Government Contracts Group:
Dhananjay S. Manthripragada – Co-Chair, Los Angeles (+1 213-229-366, dmanthripragada@gibsondunn.com)
Lindsay M. Paulin – Washington, D.C. (+1 202-887-3701, lpaulin@gibsondunn.com)

Labor and Employment Group:
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Tiffany Phan – Los Angeles (+1 213-229-7522, tphan@gibsondunn.com)
Eugene Scalia – Washington, D.C. (+1 202-955-8543, escalia@gibsondunn.com)
Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Co-Chair, Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.