On October 25, 2021, the Dubai Financial Services Authority (“DFSA”) updated its Rulebook for “crypto” based investments by launching a regulatory framework for “Investment Tokens”. This framework follows, on the whole, the approach proposed in the DFSA’s “Consultation Paper No. 138 – Regulation of Security Tokens”, published in March 2021 (the “Consultation Paper”).

Peter Smith, Managing Director, Head of Strategy, Policy and Risk at the DFSA has noted that: “Creating an ecosystem for innovative firms to thrive in the UAE is a key priority for both the UAE and Dubai Governments, and the DFSA. Our consultation on Investment Tokens enabled us to understand what firms were looking for in a regulatory framework and introduce a regime that is relevant to the market. We look forward to receiving applications from interested firms and contributing to the ongoing growth of future-focused financial services in the DIFC.”[1]

What is an “Investment Token”?

An “Investment Token” is defined as either a “Security Token” or a “Derivative Token”[2]. Broadly speaking, these are:

• a security (which includes, for example, a share, debenture or warrant) or derivative (an option or future) in the form of a cryptographically secured digital representation of rights and obligations that is issued, transferred and stored using Distributed Ledger Technology (“DLT”) or other similar technology; or
• a cryptographically secured digital representation of rights and obligations that is issued, transferred and stored using DLT or other similar technology and: (i) confers rights and obligations that are substantially similar in nature to those conferred by a security or derivative; or (ii) has a substantially similar purpose or effect to a security or derivative.

However, importantly, the definition of “Investment Token” will not capture virtual assets which do not either confer rights and obligations substantially similar in nature to those conferred by a security or derivative, or have a substantially similar purpose or effect to a security or derivative. This means that  key cryptocurrencies such as Bitcoin and Ethereum, as well as stablecoins such as Tether, will remain unregulated under the Investment Tokens regime.

Scope of framework

This regulatory framework applies to persons interested in marketing, issuing, trading or holding Investment Tokens in or from the Dubai International Financial Centre (“DIFC”). It also applies with respect to DFSA authorised firms wishing to undertake “financial services” relating to Investment Tokens. Such financial services would include (amongst other things) dealing in, advising on, or arranging transactions relating to, Investment Tokens, or managing discretionary portfolios or collective investment funds investing in Investment Tokens.

Approach taken by the DFSA

The approach taken by the DFSA has been to, rather than establish an entirely separate regime for Investment Tokens, bring these instruments within scope of the existing regime for “Investments”, subject to certain changes. The Consultation Paper noted that “in line with the approach adopted in the benchmarked jurisdictions, [the] aim is to ensure that the DFSA regime for regulating financial products and services will apply in an appropriate and robust manner to those tokens that [the DFSA considers] to be the same as, or sufficiently similar to, existing Investments to warrant regulation”.

The Consultation Paper proposed to do this through four means: (i) by making use of the existing regime for “Investments” as far as possible, whilst addressing specific risks associated with the tokens, especially technology risks; (ii) by not being too restrictive, so that the DFSA can accommodate the evolving nature of the underlying technologies that might drive tokenization of traditional financial products and services; (iii) by addressing risks to investor/customer communication and market integrity, and systemic risks,  should they arise, where new technologies are used in the provision of financial products or services in or from the DIFC; and (iv) remaining true to the underlying key characteristics and attributes of regulated financial products and services, as far as practicable.

As noted at (i) above, the changes brought about on October 25, 2021 necessarily involved the addition of new requirements to address specific issues related to Investment Tokens. For instance, added requirements are imposed on firms providing financial services relating to Investment Tokens in Chapter 14 of the Conduct of Business Module of the DFSA Rulebook.

This sets out (amongst other things):

• technology and governance requirements for firms operating facilities (trading venues) for Investment Tokens – for instance, they must: (i) ensure that any DLT application used by the facility operates on the basis of permissioned access, so that the operator is able to maintain adequate control of persons granted access; and (ii) have regard to industry best practices in developing their technology design and technology governance relating to DLT that is used by the facility;
• rules relating to operators of facilities for Investment Tokens which permit direct access – for example, the operator must ensure that its operating rules clearly articulate: (i) the duties owed by the operator to the direct access member; (ii) the duties owed by the direct access member to the operator; and (iii) appropriate investor redress mechanisms available. The operator must also make certain risk disclosures and have in place adequate systems and controls to address market integrity, anti-money laundering and other investor protection risks;
• requirements for firms providing custody of Investment Tokens (termed “digital wallet service providers”) – for example: (i) any DLT application used in providing custody of the Investment Tokens must be resilient, reliable and compatible with any relevant facility on which the Investment Tokens are traded or cleared; and (ii) the technology used and its associated procedures must have adequate security measures (including cyber security) to enable the safe storage and transmission of data relating to the Investment Tokens; and
• a requirement that firms carrying on one or more financial services with respect to Investment Tokens (such as dealing in investments as principal/agent, arranging deals in investments, advising on financial products and managing assets), provide the client with a “key features document” in good time before the service is provided. This must contain, amongst other things: (i) the risks associated with, and the essential characteristics of, the Investment Token; (ii) whether the Investment Token is, or will be, admitted to trading (and, if so, the details of its admission); (iii) how the client may exercise any rights conferred by the Investment Tokens (such as voting); and (iv) any other information relevant to the particular Investment Token that would reasonably assist the client to understand the product and technology better and to make informed decisions in respect of it.

Comment

In taking the approach to Investment Tokens outlined in this alert, the DFSA has aligned with the approach taken by certain key jurisdictions. It is similar to that taken by the U.K. Financial Conduct Authority, for example, which has issued guidance to the effect that tokens with specific characteristics that mean they provide rights and obligations akin to specified investments, like a share or a debt instrument (the U.K. version of Investment Tokens) be treated as specified investments and, therefore, be considered within the existing regulatory framework[3].

The DFSA’s regime has baked-in flexibility, particularly as a consequence of the fairly high level, principles-based approach. This will likely prove helpful, given the evolving nature of the virtual assets world. However, the exclusion of key cryptocurrencies from the scope of this regime may limit the attractiveness of the regime, particularly to cryptocurrency exchanges seeking to offer spot trading. However, this may be offset to some extent by the DFSA regime’s willingness to allow operators of facilities for Investment Tokens to provide direct access to retail clients, subject to those clients meeting certain requirements (such as having sufficient competence and experience). This is in contrast to the approach proposed by the Hong Kong Financial Services and the Treasury Bureau, which has proposed restricting access to cryptocurrency trading to professional investors only.[4]

Next steps

As noted above, the Investment Tokens regime does not cover many key virtual assets. However, we understand that the DFSA is drafting proposals for tokens not covered by the Investment Tokens regulatory framework. These proposals are expected to cover exchange tokens, utility tokens and certain asset-backed tokens (stablecoins). The DFSA intends to issue a second consultation paper later in Q4 of this year.[5]

____________________________

    [1]   https://www.dfsa.ae/news/dfsa-introduces-regulatory-framework-investment-tokens

    [2]   DFSA Rulebook: General Module, A.2.1.1

    [3]   FCA Policy Statement (PS 19/22), Guidance on Cryptoassets (July 2019)

    [4]   See our previous alert on the proposed Hong Kong regime: https://www.gibsondunn.com/licensing-regime-for-virtual-asset-services-providers-in-hong-kong/

    [5]   https://www.dfsa.ae/news/dfsa-introduces-regulatory-framework-investment-tokens

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Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  If you wish to discuss any of the matters set out above, please contact any member of Gibson Dunn’s Crypto Taskforce (cryptotaskforce@gibsondunn.com) on the Global Financial Regulatory team, or the following authors:

Hardeep Plahe – Dubai (+971 (0) 4 318 4611, hplahe@gibsondunn.com)
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)
William R. Hallatt – Hong Kong (+852 2214 3836, whallatt@gibsondunn.com)
Chris Hickey – London (+44 (0) 20 7071 4265, chickey@gibsondunn.com)
Martin Coombes – London (+44 (0) 20 7071 4258, mcoombes@gibsondunn.com)
Emily Rumble – Hong Kong (+852 2214 3839, erumble@gibsondunn.com)
Arnold Pun – Hong Kong (+852 2214 3838, apun@gibsondunn.com)
Becky Chung – Hong Kong (+852 2214 3837, bchung@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

On November 10, 2021, the UK Supreme Court issued a unanimous Judgment in Lloyd v Google LLC [2021] UKSC 50, overturning a ruling of the Court of Appeal and disallowing a data privacy class action. The Judgment denied Mr. Lloyd the ability to pursue a collective claim for compensation on behalf of around four million iPhone users in England and Wales whose internet activity data were allegedly collected by Google in late 2011 and early 2012 for commercial purposes without the users’ knowledge or consent, and in alleged breach of section 4(4) of the Data Protection Act 1998 (“the 1998 Act”). The 1998 Act has since been replaced by the UK GDPR and the Data Protection Act 2018 (“the 2018 Act”). The claim was backed by substantial litigation funding.

The Supreme Court’s Judgment provides, in brief, that the procedural mechanism used to bring the claims on a collective basis (known as a “representative action”) can be used for claims of this kind, but only for the purposes of establishing liability for a breach of relevant data protection laws. The question of damages cannot be addressed through a representative action, and would have to be dealt with through individual claims, which could be managed together through group litigation case management devices (see below).

The Court held that a representative action is unsuitable for damages assessment in a case of this kind because:

• first, damages for mere loss of control of data (as distinct from damages for actual loss or distress caused by the data breach) are not available for breaches of the 1998 Act (although the Supreme Court intimated that they may have been for another tort, misuse of private information); and
• second, even if such damages had been available, assessment of loss can only be determined on the basis of an individualised assessment of the alleged misuse of each individual’s data by Google.

The Supreme Court’s official summary of the Judgment can be found here.

In this alert we provide an overview of the Supreme Court’s decision and offer our observations on the implications of the Judgment.

Background to Collective Actions in the UK

There are a number of ways in which collective actions can be brought in the UK. Typically, such claims are brought on an “opt-in” basis. For example under the Data Protection Act 2018, individuals can authorise non-profit organisations to bring certain proceedings on their behalf, or under a group litigation order (“GLO”), courts can manage in a co-ordinated way claims which give rise to “common or related issues” of fact or law (Civil Procedure Rules (“CPR”) Parts 19.10 and 19.11).

However, there are two procedures that can be used in England and Wales to bring collective claims on an “opt-out” basis:

• A collective redress regime for competition claims, which was introduced on 1 October 2015 under the Consumer Rights Act 2015, and which provides for opt-out claims to be brought in appropriate circumstances for damages for certain breaches of competition laws (see our alert on the Supreme Court’s 2020 decision in Merricks v Mastercard for more information on these types of claims). Opt-in claims can also be brought under the Consumer Rights Act 2015 regime; and
• The “representative action” procedure, under which Lloyd v Google was brought, in which a party brings the claim as a “representative” of a group of litigants who have the “same interest” in the claim (under CPR 19.6). The “same interest” requirement has to date been interpreted strictly by the courts as requiring the claimants to have a common interest and grievance (which generally precludes claims relying on different fact patterns) and to all benefit from the remedy sought (which generally precludes claims for different remedies).

Summary of the Lloyd Action and Judgment

Background

The alleged conduct by Google had given rise to a number of individual claims in the U.S. and the UK which had settled, and had been the subject of a civil settlement between Google and the U.S. Federal Trade Commission. In May 2017, the claimant, Richard Lloyd, a consumer rights activist, commenced proceedings alleging that Google breached the 1998 Act, seeking damages on behalf of himself and other affected individuals under section 13(1) of the 1998 Act. That section provides: “An individual who suffers damage by reason of any contravention by a data controller of any of the requirements of this Act is entitled to compensation from the data controller for that damage.” He did not allege or prove any distinctive facts affecting any of the individuals, save that they did not consent to the abstraction of their data.

Mr. Lloyd applied for permission to serve the claim on Google outside England & Wales, namely, in the U.S. As with any such application, in order to succeed, Mr Lloyd had to establish that his claim has a reasonable prospect of success (CPR Part 6.37(1)(b)), that there is a good arguable case that the claim fell within one of the so-called jurisdictional “gateways” in paragraph 3.1 of CPR Practice Direction 6B (in this case, he sought to show that damage was sustained either within the jurisdiction or from an act committed within the jurisdiction), and that England and Wales was clearly or distinctly the most appropriate jurisdiction in which to try the claim (CPR Part 6.37(3)).

Google opposed the application on the grounds that: (i) the pleaded facts did not disclose any basis for claiming compensation under the 1998 Act; and (ii) the court should not permit the claim to continue as a representative action.

At first instance, Warby J refused to grant Mr. Lloyd permission to serve Google outside the jurisdiction on the basis that: (a) none of the represented class had suffered “damage” under section 13 of the 1998 Act; (b) the members of the class did not have the “same interest” within CPR 19.6(1) so as to justify allowing the claim to proceed as a representative action; and (c) the court’s discretion under CPR Part 19.6(2) should be exercised against allowing the claim to proceed.

The Court of Appeal reversed Warby J’s judgment on each of these issues, holding that: (a) the members of the class were entitled to recover damages pursuant to section 13 of the 1998 Act, based on the loss of control of their personal data alone, regardless of whether they had suffered actual pecuniary loss or distress as a result of Google’s alleged breaches; (b) the members of the class did, in fact, have the “same interest” for the purposes of CPR 19.6(1) and Warby J had defined the concept of “damage” too narrowly; and (c) the Court should exercise its discretion to permit Mr Lloyd to bring the claim on a representative basis.

Issues Before the Supreme Court

The claimant was granted leave to appeal to the Supreme Court. The three issues for determination by the Supreme Court were:

1. Are damages recoverable for loss of control of data under section 13 of 1998 Act, even if there is no pecuniary loss or distress?
2. Do the four million individuals allegedly affected by Google’s conduct share the “same interest”?
3. If the “same interest” test is satisfied, should the Court exercise its discretion and disallow the representative action in any event?

The Supreme Court’s Judgment

The Supreme Court’s unanimous Judgment, delivered by Lord Leggatt, reverses the Court of Appeal and re-instates the order of Warby J denying permission to serve out, essentially bringing the proceedings to an end. The key issues emerging from the Judgment are as follows:

• The representative action is a long-standing “flexible tool of convenience in the administration of justice”, which might be used today in appropriate cases to bring mass tort claims arising in connection with alleged misuse of digital technologies, particularly in matters involving mass, low-value consumer claims.
• There are limitations on the appropriateness of the use of representative actions to bring damages claims. Damages, as a remedy, by its very nature under English law, will typically require individualised assessment of loss, which requires participation of the affected parties.
• In the case at hand, the question of liability (i.e., whether Google had breached the 1998 Act) was suitable to be brought through a representative action. The purpose of such a claim may be to obtain declaratory relief, which could include a declaration that affected persons may be entitled to compensation for the breaches identified. However, damages would need to be assessed on an individualised basis. The Supreme Court noted that the claimant, Mr. Lloyd, had not proposed such a two-stage approach, presumably because that declaratory relief would not itself have generated an award of damages that would provide his litigation funders with a return on their investment.
• Section 13 of the 1998 Act does not, on its own wording, allow for damages claims on the “loss of control of data” basis pleaded by Mr. Lloyd. The Supreme Court appears to have acknowledged that “loss of control” damages may be available for the tort of misuse of private information, but held that section 13 could not be interpreted as giving an individual a right to compensation without proof of material damage or distress. Lord Leggatt indicated that, had a claim of this kind been brought, such damages would have been an appropriate way to assess loss, but no case had been brought under that tort. Even if loss of control damages were available, there would be a need to individualised assessment of the unlawful data processing in the case of each individual claimant; again, this would be inconsistent with proceeding by means of a representative action.

Analysis of the Lloyd Judgment

This Judgment appears to represent a significant victory for Google and other major data controllers, and a blow to funding-assisted collective actions in the data protection field in England and Wales.

While it is notable that the Supreme Court was at pains to assert the potential utility of the representative action in mass data rights violations in appropriate circumstances, it is not obvious what those circumstances are, and it seems unlikely that the representative action will represent a fruitful mechanism for bringing such claims going forward. At the very least, future claimants and their funders will need to give careful thought to the economics of bifurcated claims involving the bringing of a representative action for a declaration of liability and entitlement to compensation, followed by a large volume of coordinated damages claims for which a GLO is sought.

The historic nature of the claims offers little comfort to claimants here. The Judgment relates to the regime in place prior to entry to the GDPR.  Article 82(1) of the GDPR, which is retained in law in the UK post-Brexit, provides: “Any person who has suffered material or non-material damage as a result of an infringement of this Regulation shall have the right to receive compensation from the controller or processor for the damage suffered.” It is an open question whether the English courts will consider the Supreme Court’s analysis of section 13 to apply equally to Article 82(1), but the reasoning seems to apply.

Furthermore, even in observing, at paragraph 4 of the Judgment, that “Parliament has not legislated to establish a class action regime in the field of data protection”, the Supreme Court did not take the obvious opportunity to encourage Parliament to do so. Parliament will be in no doubt that, if a collective action regime is to be developed to address consumer data rights, it will need to legislate for it – it would now seem unlikely that such a culture can be developed from the procedural tools currently available to claimants.

Some claimants may find encouragement in the Judgment’s indication that the relatively new tort of misuse of private information may be used to recover “loss of control” damages, without proof of specific loss. The circumstances in which that tort will be relevant to breaches of the GDPR and the 2018 Act, however, may be limited in practice, due to the need to establish a reasonable expectation of privacy supported by evidence of facts particular to each individual claimant.

In sum, major data controllers will be content with this outcome, and the nascent plaintiff bar and funding industry in the UK will likely be turning its attention to other areas of potential multi-party actions – unless and until, of course, Parliament intervenes. With the current challenges facing the British government, that may be some time.

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This alert was prepared by Patrick Doris, Doug Watson, Harriet Codd, Gail Elman, Ahmed Baladi, Vera Lukic, Ryan Bergsieker, Ashlie Beringer, Alexander Southwell, and Cassandra Gaedt-Sheckter.

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

Privacy, Cybersecurity and Data Innovation Group:

Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0)1 56 43 13 00, abaladi@gibsondunn.com)
James A. Cox – London (+44 (0) 20 7071 4250, jacox@gibsondunn.com)
Patrick Doris – London (+44 (0) 20 7071 4276, pdoris@gibsondunn.com)
Kai Gesing – Munich (+49 89 189 33-180, kgesing@gibsondunn.com)
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, bgrinspan@gibsondunn.com)
Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Alejandro Guerrero – Brussels (+32 2 554 7218, aguerrero@gibsondunn.com)
Vera Lukic – Paris (+33 (0)1 56 43 13 00, vlukic@gibsondunn.com)
Sarah Wazen – London (+44 (0) 20 7071 4203, swazen@gibsondunn.com)

Asia
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
Connell O’Neill – Hong Kong (+852 2214 3812, coneill@gibsondunn.com)
Jai S. Pathak – Singapore (+65 6507 3683, jpathak@gibsondunn.com)

United States
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202-887-3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Robert K. Hur – Washington, D.C. (+1 202-887-3674, rhur@gibsondunn.com)
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Ashley Rogers – Dallas (+1 214-698-3316, arogers@gibsondunn.com)
Deborah L. Stein – Los Angeles (+1 213-229-7164, dstein@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

A main area of focus for public companies this past annual reporting season was the new human capital disclosure requirement for annual reports on Form 10-K. This client alerteviews disclosure trends among S&P 500 companies and provides practical considerations for companies as we head into 2022 and the second year of discussing human capital resources and management.

I.   Background on the New Requirements

On August 26, 2020, the U.S. Securities and Exchange Commission (the “Commission”) adopted amendments to Items 101, 103 and 105 of Regulation S-K, which became effective as of November 9, 2020.[1] Among other things, these amendments added human capital resources as a disclosure topic under Item 101, which addresses what companies must include in the “Business” section of their Form 10-K. As amended, Item 101(c) requires a registrant to describe its human capital resources “to the extent material to the understanding of that registrant’s business taken as a whole.”[2]  Specifically, the human capital disclosure must include “the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).”[3]  Prior to this amendment, Item 101(c) required the registrant to disclose only the number of persons employed by the registrant.

Consistent with the Commission’s stated desire to implement a more “principles-based” disclosure system,[4] the new rules did not define “human capital” or elaborate on specific requirements for human capital disclosures beyond the few examples provided in the rule text. This lack of specific line item requirements was criticized by Democratic Commissioner Caroline Crenshaw, who stated that “I would have supported today’s final rule if it had included even minimal expansion on the topic of human capital to include simple, commonly kept metrics such as part time vs. full time workers, workforce expenses, turnover, and diversity.  But we have declined to take even these modest steps.”[5] As discussed below, following the change in presidential administration, the Commission has indicated that it plans to revisit the human capital disclosure requirements and potentially adopt more prescriptive rules in the future.[6]

To understand how companies have responded to the current disclosure requirements, we conducted a survey of the substance and format of human capital disclosures made by the 451 S&P 500 companies that filed an annual report on Form 10-K between the date the new requirements became effective, November 9, 2020, and July 16, 2021.[7] As is to be expected from principles-based rules, companies provided a wide variety of human capital disclosures,[8] with no uniformity in their depth or breadth. The next three sections highlight our observations from this survey.[9]

II.   Disclosure Topics

Our survey breaks down companies’ human capital disclosures into 17 topics, each of which is listed in the following chart, along with the number of companies that discussed the topic.  Each topic is described more fully in the sections following the chart.

A.   Workforce Composition and Demographics

Of the 451 companies surveyed, 419, or 93%, included disclosures relating to workforce composition and demographics in one or more of the following categories:

• Diversity and inclusion. This was the most common type of disclosure, with 82% of companies including a qualitative discussion regarding the company’s commitment to diversity, equity, and inclusion. The depth of these disclosures varied, ranging from generic statements expressing the company’s support of diversity in the workforce to detailed examples of actions taken to support underrepresented groups and increase the diversity of the company’s workforce. Many companies also included a quantitative breakdown of the gender or racial representation of the company’s workforce: 41% included statistics on gender and 35% included statistics on race. Most companies provided these statistics in relation to their workforce as a whole, while a subset (21%) included separate statistics for different classes of employees (e.g., managerial, vice president and above, etc.) and/or for their boards of directors. Some companies also included numerical goals for gender or racial representation—either in terms of overall representation, promotions, or hiring—even if they did not provide current workforce diversity statistics.
• Full-time / part-time employee split. While most companies provided the total number of full-time employees, only 16% of the companies surveyed included a quantitative breakdown of the number of full-time versus part-time employees the company employed. Similarly, we saw a number of companies that provided statistics on the number of seasonal employees and/or independent contractors.
• Unionized employee relations. 37% of the companies surveyed stated that some portion of their employees was part of a union, works council, or similar collective bargaining agreement. These disclosures generally included a statement providing the company’s opinion on the quality of labor relations, and in many cases, disclosed the number of unionized employees. While never expressly required by Regulation S-K, as a result of disclosure review comments issued by the Division of Corporation Finance over the years and a decades-old and since-deleted requirement in Form 1-A, it has been a relatively common practice to discuss collective bargaining and employee relations in the Form 10-K or in an IPO Form S-1, particularly since the threat of a workforce strike could be material.
• Quantitative workforce turnover rates. Although a majority of companies discussed employee turnover and the related topics of talent attraction and retention in a qualitative way (as discussed in Section II.B. below), less than 13% of companies surveyed provided specific employee turnover rates (whether voluntary or involuntary).

B.   Recruiting, Training, Succession

395, or 88%, of the companies surveyed included disclosures relating to talent and succession planning in one or more of the following categories:

• Talent Attraction and Retention. These disclosures were generally qualitative and focused on efforts to recruit and retain qualified individuals. While providing general statements regarding recruiting and retaining talent were relatively common, with 58% of companies including this type of disclosure, quantitative measures of retention, like workforce turnover rate, were uncommon, with less than 13% of companies disclosing such statistics (as noted above).
• Talent Development. The most common type of disclosure in this area related to talent development, with 77% of companies including a qualitative discussion regarding employee training, learning, and development opportunities. This disclosure tended to focus on the broader workforce rather than specifically on senior management. Companies generally discussed training programs such as in-person and online courses, leadership development programs, mentoring opportunities, tuition assistance, and conferences, and a minority also disclosed the number of hours employees spent on learning and development.
• Succession Planning. Only 18% of companies surveyed addressed their succession planning efforts, which may be a function of succession being a focus area primarily for executives rather than the human capital resources of a company more broadly.

C.   Employee Compensation

Of the companies surveyed, 300, or 67%, included disclosures relating to employee compensation. Most of those companies, or 64% of companies surveyed, included a qualitative description of the compensation and benefits program offered to employees. However, only 16% of companies surveyed addressed pay equity practices or assessments, and even fewer companies (4% of companies surveyed) included quantitative measures of the pay gap between diverse and non-diverse employees or male and female employees.

D.   Health and Safety

Of the companies surveyed, 288, or 64%, included disclosures relating to health and safety in one or both of the following categories:

• Workplace health and safety. 53% of companies surveyed included qualitative disclosures relating to workplace health and safety, typically with statements around the company’s commitment to safety in the workplace generally and compliance with applicable regulatory and legal requirements. However, only 12% of companies surveyed provided quantitative disclosures in this category, generally focusing on historical and/or target incident or safety rates or investments in safety programs. These disclosures generally were more prevalent among industrial and manufacturing companies, as discussed in Section G below. Many companies also provided disclosures on safety initiatives undertaken in connection with COVID-19, which is discussed separately below.
• Employee mental health. In connection with disclosures about standard benefits provided to employees, or additional benefits provided as a result of the pandemic, 23% of companies disclosed initiatives taken to support employees’ mental or emotional health.

E.   Culture and Engagement

In addition to the many instances where companies mentioned a general commitment to culture and values, 229, or 51%, of the companies surveyed discussed specific initiatives they were taking related to culture and engagement in one or more of the following categories:

• 
  

  Culture and engagement initiatives. Only 20% of companies surveyed included specific disclosures relating to practices and initiatives undertaken to build and maintain their culture and values.  These disclosures most commonly discussed company efforts to communicate with employees (e.g., through town halls, CEO outreach, trainings, or conferences and presentations) and to recognize employee contributions (e.g., awards programs and individualized feedback).  Many companies also discussed culture in the context of the diversity-related initiatives to help foster an inclusive culture.

  
  
• Monitoring culture. Disclosures about the ways that companies monitor culture and employee engagement were much more common, with 45% of companies providing such disclosure. Companies generally disclosed the frequency of employee surveys used to track employee engagement and satisfaction, with some reporting on the results of these surveys, sometimes measured against prior year results or industry benchmarks.

F.   COVID-19

A majority of companies (67% of those surveyed) included information regarding COVID-19 and its impact on company policies and procedures or on employees generally. COVID-19-related topics addressed ranged from work-from-home arrangements and safety protocols taken for employees who worked in person to additional benefits and compensation paid to employees as a result of the pandemic and contributions made to organizations supporting those affected by the pandemic.

G.   Human Capital Management Governance and Organizational Practices

A minority of companies (34% of those surveyed) addressed their governance and organizational practices (such as oversight by the board of directors or a committee and the organization of the human resources function).

III.   Industry Trends

One of the main rationales underlying the adoption of principles-based—rather than prescriptive—requirements for human capital disclosures is that the relative significance of various human capital measures and objectives varies by industry.  This is reflected in the following industry trends that we observed:[10]

• Finance Industries (Asset Management & Custody Activities, Consumer Finance, Commercial Banks and Investment Banking & Brokerage). For the 34 companies in the Finance Industries, a majority included quantitative diversity statistics regarding race (61%) and gender (70%). Most companies also included qualitative disclosures regarding employee compensation (70%), and, compared to other industries discussed below, a relatively higher number discussed pay equity (35%) and quantified their pay gap (17%). Relatively uncommon disclosures among this group included part-time and full-time employee statistics, unionized employee relations, quantitative workforce turnover rates, and succession planning (in each case less than 20%).
• Technology Industries (E-Commerce, Internet Media & Services, Hardware, Software & IT Services and Semiconductors). For the 68 companies in the Technology Industries, 66% discussed talent development and training opportunities and 58% discussed talent attraction, recruitment, and retention. Relatively uncommon disclosures among this group included part-time and full-time employee statistics (7%), quantitative workforce turnover rates (16%), workplace health and safety measures (23%), culture initiatives (19%), and quantitative pay gap (2%).
• Manufacturing Industries (Industrial Machinery & Goods, Auto Parts, Automobiles, and Appliance Manufacturing). For the 21 companies in the Manufacturing Industries, 85% of the companies discussed their workplace health and safety measures. Other common disclosures included those related to COVID-19 (66%), unionized employee relations (52%), employee training and development (80%), and employee compensation (57%). Relatively uncommon disclosures among this group included those relating to corporate governance, part-time and full-time employee statistics, quantitative measures of diversity like race, ethnicity or gender workforce statistics, quantitative workforce turnover rates, employee mental health, culture initiatives, succession planning, pay equity or quantitative measures of the pay gap (in each case less than 25%).
• Travel Industries (Airlines and Cruise Lines). For the 8 companies in the Travel Industries, all but one discussed COVID-19, and all 8 companies discussed their unionized employee relations.  Other common disclosures related to diversity and inclusion (87%), talent development (62%), and employee compensation (62%). None of the companies in this group discussed pay equity or provided quantitative workforce turnover rates or pay gap analysis.
• Retail Industries (Food Retailers & Distributors and Multiline and Specialty Retailers & Distributors). Of the 22 companies in this Retail Industries category of our survey, 36% included disclosures related to part-time and full-time employee statistics. Relatively uncommon disclosures among this group included quantitative workforce turnover rates, employee mental health, culture initiatives, pay equity, and quantitative pay gap analysis (in each case less than 20%).
• Aerospace & Defense Industry. For the 10 companies in the Aerospace & Defense Industry, all but one included a disclosure regarding talent development and training, and 80% of the companies also discussed talent attraction and retention. Other common disclosures include those related to COVID-19 (60%), qualitative discussion of diversity and inclusion (70%), unionized employee relations (60%), workplace health and safety measures (70%), and qualitative discussion of employee compensation (60%). Uncommon disclosures for companies in this group related to part-time and full-time employee statistics, quantitative workforce turnover rates, employee mental health, culture initiatives, pay equity or quantitative measures of the pay gap (in each case 10% or less).
• Food & Beverage Industries (Agricultural Products, Alcoholic Beverages, Non-Alcoholic Beverages, Processed Foods, Meat, Poultry & Dairy). For the 17 companies in the Food & Beverage Industries, the most common disclosures included those related to qualitative discussions on diversity and inclusion (94%), workplace health and safety measures (70%), and talent development and training (82%). Less than 20% of the companies in this group included disclosures related to part-time and full-time employee statistics, quantitative workforce turnover rates, succession planning (none of the companies in this group included this type of disclosure), pay equity, or quantitative measures of the pay gap.
• Personal Goods Industries (Apparel, Accessories & Footwear, Household & Personal Products, Toys and Sporting Goods). For the 13 companies in the Personal Goods Industries, the most common disclosures were those related to a qualitative discussion on diversity and inclusion (92%), quantitative diversity statistics about gender (61%), COVID-19 (61%), talent attraction and retention (61%), talent development (76%), employee compensation (61%), and corporate governance and organization (61%).  Relatively uncommon disclosures for companies in this group include quantitative workforce turnover rates (7%), employee mental health (23%), culture initiative (23%), pay equity (15%), and the quantitative pay gap (0%).
• Biotechnology & Pharmaceutical Industry. For the 18 companies in the Biotechnology & Pharmaceutical Industry, 100% included a qualitative discussion of diversity and inclusion, with many including workforce diversity statistics for race (55%) or gender (50%). Other common disclosure topics for this industry were COVID-19 (72%), workplace health and safety measures (66%), monitoring culture (61%), talent development (77%), and employee compensation (72%). Less than 25% of the companies in this industry included disclosures regarding part-time and full-time employee statistics, quantitative workforce turnover rate, culture initiative, succession planning, or quantitative pay gap measures.
• Health Care Industries (Drug Retailers, Health Care Delivery, Health Care Distributors, and Medical Equipment & Supplies). For the 37 companies in the Health Care Industries, the most common disclosures were those related to COVID-19 (67%), qualitative discussion of diversity and inclusion (86%), diversity workforce statistics of gender (56%) (statistics about race were only disclosed by 43% of this group), workplace health and safety (59%), talent development and training (83%), and employee compensation (70%).  The least common disclosures, with less than 20% each, included quantitative workforce turnover rates, culture initiatives, succession planning, pay equity, and quantitative pay gap measures.
• Building Industries (Building Products & Furnishings, Engineering & Construction Services, and Home Builders). For the 11 companies in the Building Industries, the most common disclosures were those related to COVID-19 (63%), workplace health and safety (54%), talent attraction and retention (72%), talent development (72%), and employee compensation (54%). The least common disclosures, with 10% or less of the companies in this group including such disclosures, were part-time and full-time employee statistics, quantitative workforce turnover rate, employee mental health, culture initiatives, pay equity (0%) and quantitative pay gap measures (0%).
• Hotel Industries (Casinos & Gaming, Hotels & Lodging, and Leisure Facilities). Of the 9 companies in the Hotel Industries, 100% included COVID-19-related disclosure.  Disclosures of over 80% of companies in this group include in their annual report a qualitative discussion on diversity and inclusion, unionized employee relations, and employee compensation.  Relatively uncommon disclosures include those related to governance and corporate organization, quantitative diversity statistics regarding race and gender, quantitative workforce turnover rates, culture initiatives, monitoring culture, succession planning, pay equity, and quantitative pay gap (in each case less than 25%).
• Utilities Industries (Electric Utilities and Power Generators, Gas Utilities & Distributors, and Water Utilities). For the 26 companies in the Utilities Industries, the most common disclosures included those related to COVID-19 (69%), qualitative discussion regarding diversity and inclusion (88%), unionized employee relations (88%), workplace health and safety (88%) and workforce training (80%). Relatively uncommon disclosures among this group included part-time and full-time employee statistics, quantitative workforce turnover rate, employee mental health, culture initiatives, pay equity, and quantitative pay gap (in each case less than 20%).
• Electrical Equipment Industry (Electric & Electrical Equipment (excluding computer or similar technology equipment)). For the 18 companies in the Electrical Equipment Industry, the most common disclosures include qualitative discussion regarding diversity (83%), workplace health and safety (83%), and employee training (89%). The least common disclosures included part-time and full-time workforce statistics, employee mental health, culture initiatives, succession planning, pay equity, and quantitative pay gap measures (in each case less than 25%).
• Oil & Gas Industry. For the 21 companies in the Oil & Gas Industry, the most common disclosures included corporate governance and organization measures (57%), COVID-19 (71%), qualitative discussion of diversity (95%), workplace health and safety measures (80%), talent acquisition and retention (80%), talent development and training (80%), and employee compensation (76%). The least common disclosures for the Oil & Gas Industry, in each case less than 20%, were part-time and full-time workforce statistics, unionized workforce relations, quantitative workforce turnover rates, culture initiatives, pay equity, and quantitative pay gap measures (0% for this disclosure).
• Real Estate Industry. For the 24 companies in the Real Estate Industry, the most common disclosures included those related to COVID-19 (70%), qualitative discussion of diversity (79%), monitoring culture (67%), talent development (79%), and employee compensation (75%). Relatively uncommon disclosures among this group included unionized workforce relations, quantitative workforce turnover rates, succession planning, pay equity and quantitative pay gap (in each case less than 20%).
• Insurance and Professional Industries (Insurance and Professional & Commercial Services). For the 28 companies in the Insurance and Professional Industries, the disclosures with over 70% of occurrence each were those related to qualitative discussions of diversity, talent development and training and employee compensation. The disclosures with a less than 25% rate of inclusion were related to unionized employee relations, employee mental health, succession planning, and the pay gap.

IV.   Disclosure Format

The format of human capital disclosures in companies’ annual reports varied greatly.

Word Count. The length of the disclosures ranged from 10 to 2,180 words, with the average disclosure consisting of 797 words and the median disclosure consisting of 765 words.

Metrics. While the disclosure requirement specifically asks for a description of “any human capital measures or objectives that the registrant focuses on in managing the business” (emphasis added), our survey revealed that approximately 25% of companies determined not to include any quantitative metrics in their disclosure beyond headcount numbers. Given the materiality threshold included in the requirement and the fact that it is focused on what is actually used to manage the business, this is not a surprising result.  It was common to see companies identify important objectives they focus on, but omit quantitative metrics related to those objectives. For example, while 82% of companies discussed their commitment to diversity, equity, and inclusion, only 41% and 35% of companies disclosed quantitative metrics regarding gender and racial diversity, respectively.

Graphics. Although the minority practice, approximately 25% of companies surveyed also included charts or other graphics, which were generally used to present statistical data, such as diversity statistics or breakdowns of the number of employees by geographic location.

Categories. Most companies organized their disclosures by categories similar to those discussed above and included headings to define the types of disclosures presented.

V.   Comment Letter Correspondence

Often times comment letter correspondence from the staff of the Division of Corporation Finance (the “Staff”) helps put a finer point on disclosure requirements like this one that are relatively open-ended and give companies broad discretion to decide what to disclose. While there have been approximately two dozen comment letters published that address the new human capital requirements, the letters we have seen so far shed relatively little light on how the Staff believes the new requirements should be interpreted.  Rather, the comment letters, all of which involved reviews of registration statements, were generally issued to companies whose disclosures about employees were limited to the bare-bones items companies have discussed historically, such as the number of persons employed and the quality of employee relations. From these companies, the Staff simply sought a more detailed discussion of the company’s human capital resources, including any human capital measures or objectives upon which the company focuses in managing its business. In other words, similar to historical Staff comment practices generally in the context of the first year of new disclosure requirements, the Staff targeted “low-hanging fruit,” basically just asking companies that disclosed nothing in response to the new requirements to provide responsive disclosure. Based on our review of the responses to those comment letters, we have not seen a company take the position that a discussion of human capital resources was immaterial and therefore unnecessary.

VI.   Conclusion

The principles-based nature of the new human capital requirements predictably resulted in companies providing a wide variety of disclosures, with significant differences in depth and breadth. Companies’ responses to the new requirements underscore some of the potential advantages and disadvantages of principles-based rulemaking. On one hand, the largely principles-based requirements gave each company wide latitude to tailor its discussion to its own circumstances and to highlight the measures and objectives focused on by its management team. The resulting disclosures seemed to provide insight into how each company views its human capital resources and manages that aspect of its business.  On the other hand, the general lack of prescriptive requirements limited the comparability of disclosures from one company to another and failed to facilitate quantitative analyses of companies’ human capital resources. While some would argue that precluding surface-level quantitative comparisons across companies is a virtue of the new rule, others, including SEC Chair Gensler, favor more specificity. On August 18, 2020 Chair Gensler tweeted: “Investors want to better understand one of the most critical assets of a company: its people. I’ve asked staff to propose recommendations for the Commission’s consideration on human capital disclosure….  This could include a number of metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety.”[11]

Until the Commission proposes and adopts new rules governing the disclosure of human capital management, however, we expect the wide variance in Form 10-K human capital disclosures to continue. As companies prepare for the upcoming Form 10-K reporting season, they should consider the following:

• Confirming (or reconfirming) that the company’s disclosure controls and procedures support the statements made in human capital disclosures so that they are reliable, consistent, and appropriately updated, and that there is a robust verification process in place. While many companies have historically provided information like this in other contexts (e.g., hiring brochures and company websites), given the potential liability attached to disclosures in SEC filings, more rigorous controls will likely need to be put in place to ensure the accuracy and completeness of the information.
• Confirming (or reconfirming) that the human capital disclosures included in the Form 10-K remain appropriate and relevant. In this regard, companies may want to compare their own disclosures against what their industry peers did this past year as well as against any internal reporting frameworks (such as the human capital information that is regularly reported to senior management and the board or a committee).
• Setting expectations internally that these disclosures likely will evolve. Companies should expect to develop their disclosure over the course of the next couple of annual reports in response to peer practices, regulatory changes and investor expectations, as appropriate. The types of disclosures that are material to each company may also change in response to current events.
• Addressing in the upcoming disclosure the progress that management has made with respect to any significant objectives it has set regarding its human capital resources as investors are likely to focus on year-over-year changes and the company’s performance versus stated goals.
• Ensuring consistency across disclosures by being mindful of other human capital disclosures the company has already made and what the company has already said about its human capital in other filings or voluntary statements in sustainability reports, investor outreach, college campus recruiting materials or elsewhere (e.g., how is the composition of the company’s workforce described in the CEO pay ratio disclosure?).
• Addressing significant areas of focus highlighted in engagement meetings with investors and other stakeholders. In a 2020 survey, 64% of institutional investors surveyed said they planned to focus on human capital management when engaging with boards (second only to climate change, at 91%).[12]
• Addressing, to the extent material, the effect that return-to-work policies, vaccine mandates, or other COVID-related policies may have on the workforce.
• Revalidating the methodology for calculating quantitative metrics and assessing consistency with the prior year. Former Chairman Clayton commented that he would expect companies to “maintain metric definitions constant from period to period or to disclose prominently any changes to the metrics.”

_____________________________

   [1]   See, A Double-Edged Sword? Examining the Principles-Based Framework of the SEC’s Recent Amendments to Regulation S-K Disclosure Requirements, available here.

   [2]   See, 17 C.F.R. § 229.101(c)(2)(ii).

   [3]   Id.

   [4]   See, Modernizing the Framework for Business, Legal Proceedings and Risk Factor Disclosures, available at https://www.sec.gov/news/public-statement/clayton-regulation-s-k-2020-08-26.

   [5]   See, Regulation S-K and ESG Disclosures: An Unsustainable Silence, available at https://www.sec.gov/news/public-statement/lee-regulation-s-k-2020-08-26.

   [6]   Commission Chair Gary Gensler’s Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions (the “Spring 2021 Reg Flex Agenda”) shows “Human Capital Management Disclosure” as being in the proposed rule stage.  Available here.

   [7]   Our survey captured the following information: company industry, word count of relevant disclosure, category of information covered (e.g., diversity, workplace safety, etc.), and types of metrics included.

   [8]   See Considerations for Preparing your 2020 Form 10-K, available at https://www.gibsondunn.com/wp-content/uploads/2021/02/considerations-for-preparing-your-2020-form-10-k.pdf; Amit Batish et al., Human Capital Disclosure: What Do Companies Say About Their “Most Important Asset”?, The Harvard Law School Forum on Corporate Governance, May 18, 2021; Marc Siegel et al., How do you value your social and human capital?; Andrew R. Lash et al., Variety of Approaches to New Human Capital Resources Disclosure in 10-K Filings, The Harvard Law School Forum on Corporate Governance, Dec. 13, 2020.

   [9]   Note that companies often include additional human capital management-related disclosures in their ESG/sustainability/social responsibility reports and websites and sometimes in the proxy statement, but these disclosures are outside the scope of the survey.

  [10]   For purposes of our survey, we grouped companies in similar industries based on both their four-digit Standard Industrial Classification code and their designated industry within the Sustainable Industry Classification System.  The industry groups discussed cover approximately 85% of the companies included in our survey.

  [11]   Available at https://twitter.com/garygensler/status/1428022885889761292

  [12]   See Morrow Sodali 2020 Institutional Investor Survey, available at https://morrowsodali.com/insights/institutional-investor-survey-2020.

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New Guidance Unwinds Four Years of Staff Precedent and Raises the Burden for Companies Seeking to Exclude Environmental and Social Proposals from Proxy Statements

On November 3, 2021, the Division of Corporation Finance (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”) published Staff Legal Bulletin 14L (“SLB 14L”), which sets forth new Staff guidance on shareholder proposals submitted to publicly traded companies under SEC Rule 14a-8.  As discussed in greater detail below, SLB 14L:

• rescinds each of the Staff Legal Bulletins issued under the Clayton Commission; specifically, Staff Legal Bulletin 14I (Nov. 1, 2017) (“SLB 14I”), Staff Legal Bulletin 14J (Oct. 23, 2018) (“SLB 14J”), and Staff Legal Bulletin 14K (Oct. 16, 2019) (“SLB 14K”) (collectively, the “Prior SLBs”);
• reverses the Prior SLBs’ company-specific approach to evaluating the significance of a policy issue that is the subject of a shareholder proposal for purposes of the ordinary business exclusion in Rule 14a-8(i)(7) (thereby negating the need for a board analysis or “delta” analysis to support future no-action requests);
• reverses the Prior SLBs’ approach on micromanagement arguments for purposes of the ordinary business exclusion in Rule 14a-8(i)(7);
• outlines the Staff’s view regarding application of the economic relevance exclusion in Rule 14a-8(i)(5), which reverses the Prior SLBs’ approach that proposals raising social concerns could be excludable where not economically or otherwise significant to the company;
• republishes prior guidance regarding the use of graphics and images;
• furthers the Staff’s retreat in applying the procedural requirements of Rule 14a-8 by reflecting more leniency in interpreting proof of ownership letters and suggesting the use of a second deficiency notice in certain circumstances; and
• provides new guidance on the use of email for submission of proposals, delivery of deficiency notices and responses (encouraging a bilateral use of email confirmation receipts by companies and shareholder proponents alike).

The new guidance was issued with the 2022 shareholder proposal season already underway and – unlike with many past Staff Legal Bulletins – was not previewed or discussed in advance at the traditional “stakeholders” meeting with proponents and companies (as the Staff did not host such a meeting this year).  As a result, SLB 14L injects more uncertainty for companies evaluating shareholder proposals under Rule 14a-8 and further clouds an already opaque no-action review process.  The Staff states that SLB 14L is intended to streamline and simplify the Staff’s process for reviewing no-action requests, and to clarify the standards the Staff will apply.  Notably, however, the Staff has not addressed changes to its process for responding to no-action letters, including its 2019 decision to no longer issue individual responses explaining its views on each no-action request, which has been decried by both proponents and companies.

Summary of the New Staff Guidance

In SLB 14I, the Staff addressed standards for evaluating both the ordinary business exclusion and the economic relevance exclusion, including challenges in determining whether a particular proposal focused on a policy issue that was sufficiently significant to the company’s business.  SLB 14I also introduced the concept of a board analysis by a company to buttress its no-action analysis on whether a proposal raised a significant policy issue or was relevant to a company’s business.  Subsequently, SLB 14J and SLB 14K provided further interpretive gloss on these bases for exclusion, including the use of a “delta” analysis to distinguish whether a proposal’s request represented a significant variance from actions already taken by a company.  SLB 14J and SLB 14K also provided the Staff’s expanded view of when proposals could be excluded on the basis of micromanagement (leading to a notable increase in climate proposals subsequently being excluded based on micromanagement).  New SLB 14L tosses all of that guidance and analysis and announces, among other things, the Staff’s intent to apply a “realigned” approach to analyzing significance and social policy issues.

1. Changes to the Application of the Ordinary Business Exclusion in Rule 14a-8(i)(7).

Company-Specific Approach to Significance is Out; Significant Social Policy Issues are Back; and Board and Delta Analyses are No Longer Necessary.

SLB 14L begins with a rebuke of the Staff’s more recent company-specific approach to significance, as articulated and developed in the Prior SLBs.  The Staff expressed its current view that this approach has placed undue emphasis on evaluating the significance of a policy issue to a particular company at the expense of whether or not the proposal focuses on a significant social policy, noting too that such approach did not always yield “consistent, predictable results.”  SLB 14L states that, going forward, the Staff plans to “realign” its approach with the standard outlined in Release No. 34-12000 (Nov. 22, 1976), and which the Commission subsequently reaffirmed in Release No. 34-40018 (May 21, 1998) (the “1998 Release”), which SLB 14L interprets as having the Staff focus on the social policy significance of the issue that is the subject of the proposal, including considering whether the proposal raises issues with a broad societal impact such that they transcend the company’s ordinary business.

It is unclear how much this reflects a return to past interpretations under Rule 14a-8(i)(7), or represents a wholesale abandonment of any assessment of relevance of a proposal to a company’s business (as compared to relevance to society at large).  Notably, SLB 14L states that the Staff “will no longer focus on determining the nexus between a policy issue and the company.”  However, the “nexus” concept was embedded in the 1998 Release, as stated in Staff Legal Bulletin 14E (Oct. 27, 2009), at footnote 4 (citing the 1998 Release), and reaffirmed in Staff Legal Bulletin 14H (Oct. 22, 2015).  Ominously, SLB 14L states that it also supersedes any earlier Staff Legal Bulletin to the extent the views expressed therein are contrary to the views expressed in SLB 14L.  Indeed, SLB 14L concedes that its “realigned” approach will result in nullifying certain recent precedent, citing specifically to a shareholder proposal that raised human capital management issues but which was determined excludable under Rule 14a-8(i)(7) because the proponent failed to demonstrate that the issue was significant to the company.[1]

In connection with the Staff’s rejection of the company-specific approach to evaluating significance, SLB 14L also rejects the use of board analyses and “delta” analyses by companies in their no-action requests.  Specifically, the Staff no longer expects a board analysis as part of demonstrating that a proposal is excludable under the ordinary business exclusion, referring to the board analysis as both a distraction from the proper application of Rule 14a-8(i)(7) and as muddying the application of the substantial implementation standard under Rule 14a-8(i)(10) (in situations where the board analysis involved a “delta” component).

Hitting the Brakes on Micromanagement.

The Staff determined that recent application of the micromanagement exclusion, as outlined in SLB 14J and SLB 14K, expanded the concept of micromanagement beyond the Commission’s intent, and SLB 14L specifically rescinds guidance suggesting that any limit on a company’s or board’s discretion constitutes micromanagement.  The new guidance indicates that the Staff “will take a measured approach” to evaluating micromanagement arguments, stating that proposals seeking detail, suggesting targets, or seeking to promote time frames for methods do not per se constitute impermissible micromanagement, provided that the proposals afford discretion to management as to how to achieve the desired goals.  The Staff will instead focus on the level of granularity sought by the proposal and whether and to what extent it inappropriately limits discretion of the board or management.  Moreover, the Staff states that it expects proposals to include the level of detail required to enable investors to assess a company’s impact, progress towards goals, risk or other strategic matters.

While much of the language surrounding the Staff’s new application of the micromanagement exclusion relates to climate change shareholder proposals, including a reference to the Staff’s decision in ConocoPhillips Co. (Mar. 19, 2021)[2] as an example of the Staff’s current approach to micromanagement, SLB 14L also addresses the Staff’s views on the micromanagement exclusion generally.  For example, the Staff states that in order to assess whether a proposal probes too deeply into matters of a complex nature, the Staff “may consider the sophistication of investors generally on the matter, the availability of data, and the robustness of public discussion and analysis on the topic” as well as “references to well-established national or international frameworks when assessing proposals related to disclosure, target setting, and timeframes as indicative of topics that shareholders are well-equipped to evaluate.”[3]

The Staff explained that these changes are designed to help proponents navigate Rule 14a-8: enabling them to craft proposals with sufficient specificity and direction to avoid exclusion under substantial implementation (Rule 14a-8(i)(10)), while being general enough to avoid exclusion under micromanagement.  The foregoing should come as no surprise given the Commission’s numerous public statements indicating that climate change and social issues are a priority.[4]

2. Changes to the Application of the Economic Relevance Exclusion in Rule 14a-8(i)(5).

SLB 14L announces the Staff’s return to a pre-SLB 14I approach to interpreting the economic relevance exclusion under Rule 14a-8(i)(5), in what the Staff described as consistent with Lovenheim v. Iriquois Brands, Ltd.[5]  As a result, shareholder proposals that raise issues of broad social or ethical concern related to the company’s business may not be excluded, even if the relevant business falls below the economic thresholds in Rule 14a-8(i)(5).  Relatedly, a board analysis (which had been largely used to demonstrate the qualitative insignificance of the subject matter of the proposal vis-à-vis the company) will no longer be necessary.

3. The Staff Reaffirms its Views on the Use of Images in Shareholder Proposals, Including When Exclusion is Appropriate.

SLB 14L republishes the Staff’s guidance on the use of images in shareholder proposals, previously set forth in SLB 14I.  The guidance appears to have been republished simply to preserve the Staff’s views on this topic since SLB 14I is rescinded.

In short, the Staff continues to believe that Rule 14a-8(d) does not preclude shareholders from using graphics and/or images to convey information about their proposal.  That said, recognizing the potential for abuse in this area, the Staff also reaffirmed its views on when exclusion of such graphics/images would be appropriate under Rule 14a-8(i)(3), and that it is appropriate to include any words used in the graphics towards the total proposal word count for purposes of determining whether or not the proposal exceeds 500 words.  Helpfully, SLB 14L indicates that companies do not need to give greater prominence to proponent graphics than to their own, and may reprint graphics in the same colors used by the company for its own graphics.

4. The Staff Reaffirms its Plain Meaning Approach to Interpreting Broker Letters; Adds New Burden for Companies.

In SLB 14K, the Staff explained its approach to interpreting proof of ownership letters; namely, that it takes a “plain meaning” approach to interpreting the text of proof of ownership letters and generally finds arguments to exclude based on “overly technical reading[s]” unpersuasive.[6]   SLB 14L largely republishes and reaffirms the Staff’s prior guidance in this regard, with two notable exceptions.

First, the guidance provides an updated, suggested (but not required) format for shareholders and their brokers or banks to follow when supplying proof of ownership.  In this regard, the updated language references the new ownership thresholds reflected in the Commission’s 2020 rulemaking.  The format is as follows:

As of [date the proposal is submitted], [name of shareholder] held, and has held continuously for at least [one year] [two years] [three years], [number of securities] shares of [company name] [class of securities].[7]

Consistent with prior guidance, SLB 14L provides that use of the aforementioned format “is neither mandatory nor the exclusive means of demonstrating ownership” under Rule 14a-8(b), and that “companies should not seek to exclude a shareholder proposal based on drafting variances in the proof of ownership letter if the language used in such letter is clear and sufficiently evidences the requisite minimum ownership requirements.”[8]  The Staff also confirms that the recent amendments to the ownership standards under Rule 14a-8 are not intended to change the nature of proof of ownership provided by proponents’ brokers and banks.

Second, and more notably, the guidance suggests that if, after receiving an initial deficiency letter from a company, a shareholder returns a deficient proof of ownership, the Staff believes that the company should identify such defects explicitly in a follow-up deficiency notice.  SLB 14L provides no citation in support of this position, and it does not attempt to reconcile the position with decades of precedent that are based on the language of Rule 14a-8, which ties the deadlines for addressing a deficiency notice to when a proposal is first submitted.  Since in many cases a company may not receive a proponent’s response to a deficiency notice within 14 days of the date that the proposal was received by the company, it is unclear whether the Staff intends this process to impose obligations on companies that are outside the scope of Rule 14a-8 and presents a quandary on whether companies need to follow new procedures beyond those expressly provided for in Rule 14a-8.

5. Guidance on the Use of Email Communications.

The new guidance recognizes the growing reliance by proponents and companies alike on the use of emails to submit proposals and make other communications.  Consistent with prior no-action letter precedent in this area, SLB 14L provides that, unlike third-party mail delivery (which provides the sender with a proof of delivery), methods for email confirmation of delivery may vary.  In particular, the Staff states its view that email delivery confirmations and company server logs may not be sufficient to prove receipt of emails as they only serve to prove that emails were sent.  In light of this, the Staff suggests that both parties increasingly rely on email confirmation from the recipient expressly acknowledging receipt.  The Staff encourages both companies and shareholder proponents to acknowledge receipt of emails when requested, and it suggests the use of email read receipts (if received by the sender).

The Staff goes on to specifically address the use of email for submission of proposals, delivery of deficiency notices, and submitting responses to such notices.  In regards to submissions, the Staff encourages shareholders to submit a proposal by means that permit them to prove the date of delivery, including electronic means (though the Staff acknowledges the inherent risk of using email exclusively as a means of submission in the event timely receipt is disputed and if the proponent does not receive confirmation of receipt from the company).  If a company does not provide an email address for receiving proposals in its proxy statement, shareholders are encouraged to contact the company to obtain the proper email address.  Similarly, if companies use email to deliver deficiency notices, they are encouraged to seek a confirmation of receipt from the proponent, since the company has the burden of proving timely delivery of the notice.  Likewise, if a shareholder uses email to respond to a company’s deficiency notice, the burden to show receipt is on the shareholder, and therefore shareholders are encouraged both to use an appropriate company email address and to seek confirmation of receipt.

Commissioners’ Dissent Underscores Deep Divisions within the Commission.

Chair Gensler publicly endorsed the Staff’s new guidance,[9] asserting that SLB 14L will provide greater clarity to companies and shareholders on when certain exclusions may or may not apply.  At the same time, Republican Commissioners Hester M. Pierce and Elad L. Roisman (the “Commissioners”) released a joint statement that articulated their concerns regarding the Staff’s new guidance.[10]  First, the Commissioners expressed disappointment at SLB 14L’s explicit singling out of proposals “squarely raising human capital management issues with a broad societal impact,” and proposals that “request[] companies adopt timeframes or targets to address climate change” as likely non-excludable.[11]  Second, the Commissioners said that the actions of the Staff in publishing the guidance were the result of the current Commission’s “flavor-of-the-day regulatory approach.”[12]  Next, the Commissioners espoused the belief that SLB 14L ultimately creates significantly less clarity for companies, dramatically slows down the Rule 14a-8 no-action request process and wastes taxpayer dollars on shareholder proposals that “involve issues that are, at best, only tangential to our securities laws.”[13]  Finally, the Commissioners noted that they would be open to either shifting responsibility for the no-action process from the Staff to the Commission directly, or even amending Rule 14a-8 to excise the Commission and Staff from the process altogether.  These views, taken together, demonstrate a clear division among the Commission, right down political party lines, on matters relating to shareholder proposals.

Takeaways

While the practical consequences of the Staff’s new interpretive guidance will likely become clearer over time, this much is evident: the Staff’s latest guidance cements the end of the Trump-era Commission and is a bellwether for the challenging shareholder proposal season that awaits companies, particularly with respect to climate and social proposals, as well as the nature of changes that we might expect to see later in 2022 when the Commission revisits Rule 14a-8 rulemaking.[14]  In many respects, SLB 14L serves up what the proponent community has been asking for.  For example, shareholder proponents have long argued that the Staff should not be involved in assessing the relevancy of a social policy issue for a company – that shareholders can do so through their voting – and SLB 14L appears to lean in that direction.  Similarly, after stating in the Prior SLBs that the extent to which a proposal dealt with a “complex” topic was not a determinative factor under a micromanagement analysis, SLB 14L now suggests that complexity was relevant and that it will be assessing that matter differently.  Further, it is notable that SLB 14L follows a shareholder proposal season in which the Staff failed to host its annual “stakeholders” meeting, which historically has been an annual opportunity for various parties that are part of the shareholder proposal process to dialogue with the Staff and each other about Rule 14a-8 issues.

In light of the guidance set forth in SLB 14L, we urge public companies to keep the following in mind.

• Companies May Need to Send a Second Deficiency Letter in Certain Circumstances. Excluding proposals based on a shareholder proponent’s failure to satisfy the Rule 14a-8 procedural requirements just got harder.  The new Staff guidance increases the burden on companies by now suggesting that they may need to send a second deficiency notice in certain situations.[15]  Now, even when a proponent only sends ownership proof in response to a company’s deficiency notice requesting such documentation, companies will need to evaluate whether to send a second notice to the proponent identifying any defects in such proof of ownership.  At a minimum, this will prolong the uncertainty for companies on whether a proponent has demonstrated eligibility to submit a proposal, and places significant pressure on subsequently challenging eligibility within the time periods set forth in Rule 14a-8.  Similarly, while the Staff has objected in years past to arguments to exclude proposals based on minor issues, new SLB 14L reiterates that fact and suggests that the Staff intends for companies to actively assist proponents in complying with well-established procedural requirements.
• Companies Should Continue to Send Deficiency Notices Via Mail (and Email). In spite of the Staff’s well-intended guidance encouraging the use of email, because there can be no guarantee that a proponent will promptly confirm receipt via email, companies seeking certainty should continue to send deficiency letters via a means that enables them to indisputably prove receipt by the proponent (g., overnight mail).  That said, some companies may be comfortable with email communications alone depending on the specific shareholder proponent and the nature of their relationship with the company.
• The Staff Appears Poised to Enforce the New Ownership Thresholds. Although the 2020 amendments to Rule 14a-8 are now in effect for meetings held after January 1, 2022, the Staff has not yet affirmed or denied any no-action requests seeking relief based on any of the amended Rule 14a-8 requirements.  That said, despite litigation[16] suggesting that the Staff should not enforce the amended rules, SLB 14L expressly acknowledges the new tiered ownership thresholds (as part of the revised format provided for proof of ownership letters), suggesting that the Staff may concur with exclusion of proposals based on failure to comply with the new one-, two- and three-year ownership requirements.[17]
• The Staff Will Once Again be Positioned as Arbiter of Social Issues. Gone is the company-specific approach to analyzing significance under the ordinary business exclusion, and back in vogue are topically significant policy issues, as determined by the Staff.  Determining what constitutes a significant policy issue will be all the more difficult to predict and discern given the Staff’s increased reliance on the shareholder proposal no-action response chart[18] and reluctance to issue response letters explaining their reasoning.[19]
• Let’s Call it What it is: Open Season for Environmental and Social Proposals. The Staff’s new guidance is likely to lead to an increase in the submission of social, political and environmental shareholder proposals and to an increase in the number of such proposals being included in proxy statements.

___________________________

   [1]   See Dollar General Corp. (Mar. 6, 2020).

   [2]   In ConocoPhillips Co., a decision that was inconsistent with the Staff’s position in recent proxy seasons, the Staff denied a request to exclude a shareholder proposal that requested that the company set emission reduction targets.  In its only written response letter of the season on this topic, the Staff indicated that the proposal did not impose a specific method and thus did not micromanage to such a degree that exclusion was warranted under Rule 14a-8(i)(7).

   [3]   See SLB 14L.

   [4]   In this regard, and as already described in Gibson Dunn’s client alert of June 21, 2021, the SEC’s recently announced rulemaking agenda highlights the SEC’s near-term focus on prescribing climate change disclosure.

   [5]   618 F. Supp. 554 (D.D.C. 1985).

   [6]   See SLB 14L.

   [7]   Id.

   [8]   Id.

   [9]   See Chair Gary Gensler, Statement regarding Shareholder Proposals: Staff Legal Bulletin  No. 14L, SEC (Nov. 3, 2021), available here.

  [10]   See Commissioner Hester M. Peirce & Commissioner Elad L. Roisman, Statement on Shareholder Proposals: Staff Legal Bulletin No. 14L, SEC (Nov. 3, 2021), available here.

  [11]   Id. (quoting SLB 14L)

  [12]   Id.

  [13]   Id.

  [14]   See Agency Rule List – Spring 2021 Securities and Exchange Commission, Office of Information and Regulatory Affairs (2021), available here, as discussed in Gibson Dunn’s client alert of August 19, 2021.

  [15]   In this regard, 37% of all successful no-action requests were granted based on procedural grounds in 2021 and the overall success rate for procedural arguments was 84% and 80% in 2021 and 2020, respectively, as discussed in Gibson Dunn’s client alert of August 19, 2021.

  [16]   Compl., Interfaith Ctr. on Corp. Responsibility v. SEC, No. 1:21-cv-01620-RBW (D.D.C. June 15, 2021), ECF No. 1.

  [17]   The Commission’s deadline to submit its response in the aforementioned litigation involving Interfaith Ctr. on Corp. Responsibility, As You Sow and James McRitchie is November 19, 2021.

  [18]   Available here.

  [19]   As discussed in Gibson Dunn’s client alert of August 19, 2021, the number of Staff response letters declined significantly in 2021, with the Staff providing response letters only 5% of the time during the 2021 proposal season, compared to 18% in 2020.

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The following Gibson Dunn attorneys assisted in preparing this update: Courtney Haseley, Elizabeth Ising, Thomas Kim, Ronald Mueller and Lori Zyskowski.

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

Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com)
Ron Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)
Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com)
Lori Zyskowski – New York, NY (+1 212-351-2309, lzyskowski@gibsondunn.com)
Aaron Briggs – San Francisco, CA (+1 415-393-8297, abriggs@gibsondunn.com)
Courtney Haseley – Washington, D.C. (+1 202-955-8213, chaseley@gibsondunn.com)
Julia Lapitskaya – New York, NY (+1 212-351-2354, jlapitskaya@gibsondunn.com)
Cassandra Tillinghast – Washington, D.C. (+1 202-887-3524, ctillinghast@gibsondunn.com)
David Korvin – Washington, D.C. (+1 202-887-3679, dkorvin@gibsondunn.com)
Geoffrey Walter – Washington, D.C. (+1 202-887-3749, gwalter@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

Yesterday, the proxy advisory firm Institutional Shareholder Services (“ISS”) proposed and published for comment voting policy changes for the 2022 proxy season. There are five proposed updates that would apply to U.S. companies, including two related to “Say on Climate” proposals and a third related to climate issues.

In addition, ISS is proposing (starting in 2023) to begin issuing negative voting recommendations for directors at all companies with multi-class stock structures. Companies that went public before 2015 would no longer be grandfathered under ISS policy. ISS is requesting comment on whether to take a similar approach for companies that have other “poor” governance practices—specifically, a classified board, or the requirement of a supermajority vote to amend the governing documents.

The proposed U.S. policy changes are available here and are summarized below. Comments on the proposals can be submitted by e-mail to policy@issgovernance.com until 5 p.m. ET on November 16, 2021. ISS will take the comments into account as part of its policy review and expects to release final changes to its voting policies by or around the end of November. It is important to note that ISS’s final 2022 proxy voting policies may reflect additional changes, beyond those on which ISS is soliciting comment. The final voting policies will apply to shareholder meetings held on or after February 1, 2022, except for policies subject to transition periods.

Comments submitted to ISS may be published on its website, unless requested otherwise in the body of email submissions.

Read More

The following Gibson Dunn attorneys assisted in preparing this update: Ronald Mueller, Elizabeth Ising, and Lori Zyskowski.

© 2021 Gibson, Dunn & Crutcher LLP

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

Yesterday, November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) released its long-awaited emergency temporary standard (“ETS”) requiring most American workers to be vaccinated or undergo weekly COVID-19 testing. Importantly, the ETS states that it preempts state and local requirements that might stand in the way of employee vaccination (or that regulate testing protocols), even if it is possible for employers to comply with both those state requirements and the ETS.

The ETS applies to employers with more than 100 employees except in workplaces covered by the Safer Federal Workforce Task Force COVID-19 Workplace Safety: Guidance for Federal Contractors and Subcontractors (the “Task Force Guidance”), which implements Executive Order 14042 for federal contractors. Workplaces covered by that Guidance are not covered by the ETS.

As expected, under the ETS employers with 100 or more employees must require employees to either be vaccinated or present a negative COVID-19 test weekly and wear a face covering when indoors. The ETS also requires employers to pay employees for time spent getting vaccinated and recovering from side effects.

By December 6, employers must comply with all requirements other than testing. This includes establishing a vaccination policy, determining employee vaccination status, providing the requisite paid time off, and ensuring that unvaccinated employees are masked.

Beginning on January 4, 2022, unvaccinated employees must undergo weekly testing. Any employee who has received all doses of the vaccine by January 4 does not have to be tested. The Task Force Guidance for Executive Order 14042 will be revised to postpone the current December 8 vaccination deadline and to require, like the ETS, that employees receive all vaccine doses by January 4.

In issuing the ETS, OSHA has also sought notice and comment, so the ETS may be converted to a “permanent” OSHA standard. Under the OSH Act, ETSs are to be in place for only six months. Comments are due December 6, 2021.

Some states and private employers have already announced that they have or will file litigation regarding the ETS, which could potentially result in a stay or in the ETS being invalidated. Litigation that is already pending could have the same impact on Executive Order 14042. Events in court likely will move quickly in the coming weeks.

OSHA has also published FAQs,[1] a summary,[2] and fact sheet.[3] This alert provides an overview of the ETS contents and timing and previews some of its implications for employers.

Who Does (and Doesn’t) the OSHA ETS Cover?

The ETS applies to “all employers with a total of 100 or more employees at any time” the ETS is in effect.

The ETS does not apply to:

• Federal contractor workplaces covered under the Task Force Guidance, which we previously discussed here;
• Settings where any employee provides healthcare services or healthcare support services subject to the requirements of the Healthcare ETS, issued in June; and
• Employees of covered employers:
  • Who do not report to a workplace where other individuals such as coworkers or customers are present;
  • While working from home; or
  • Who work exclusively outdoors.

Can an Employer Require Testing in Lieu of Vaccination?

Yes. Under the OSHA ETS, an employer must either: (1) require that all employees are vaccinated; or (2) require unvaccinated employees to be regularly tested and wear masks in the workplace.

• An employee might be exempted from a vaccination requirement if the employee is entitled to reasonable religious or disability accommodations under federal civil rights laws, vaccination is medically contraindicated, or a medical necessity requires delay.
• An employer must ensure that each unvaccinated employee regularly submits a negative COVID-19 test result. Testing frequency for unvaccinated employees depends on whether the employee regularly reports to a workplace or was recently diagnosed with COVID-19:
  • If an employee regularly reports to a workplace, he must present a COVID-19 test result at least once every 7 days.
  • If an employee usually does not report to a workplace, e.g., he regularly works from home, he must test at least 7 days before returning to the workplace.
  • If an employee is diagnosed with COVID-19, by a health care professional or by a positive COVID-19 test result, then the employer must not require that employee to undergo testing for 90 days following the date of the positive test or diagnosis.

Must an Employer Pay for Employees’ Time to Get Vaccinated?

The ETS requires that employers compensate employees for the time it takes to get vaccinated and to recover from vaccination side effects. This includes:

• Up to four hours paid time, including travel time, at the employee’s regular rate of pay for each vaccination dose; and
• Paid sick leave for a “reasonable” amount of time to recover from side effects.
  • Employers may require employees to use accrued paid sick leave benefits for recovery from vaccination, but may not require employees to use existing leave entitlements for the time to get vaccinated.
  • But if an employee does not have accrued paid sick leave needed to recover from vaccine side effects, an employer may not require the employee to accrue negative paid sick leave or borrow against future paid sick leave.

Must an Employer Pay for Testing Costs?

The ETS does not require employers to pay for any costs associated with testing; however, other laws, regulations, or collective bargaining agreements may require an employer to pay for testing:

• California’s Department of Industrial Relations has stated that employers are responsible for the costs of employer-mandated COVID-19 testing under the state’s reimbursable business expense law.
• Some other states have business expense reimbursement laws or prohibitions on requiring employees to pay for medical testing in certain circumstances. These types of laws might be interpreted to place the burden on employers to pay for mandated COVID-19 tests.

To What Extent Does the ETS Preempt State Laws?

The ETS states that it preempts all state “workplace requirements relating to the occupational safety and health issues of vaccination, wearing face coverings, and testing for COVID-19, except under the authority of a Federally-approved State Plan.” This includes all “inconsistent state and local requirements relating to these issues . . . regardless of the number of employees.” In the preamble to the ETS, OSHA was clear that it intends for the ETS to preempt state or local requirements that stand in the way of vaccination, testing, or masking, even if it is possible to comply with both the ETS and those state or local requirements. The sweeping language also may be interpreted to preempt state and local anti-discrimination laws that are more accommodating than the federal standard.

The ETS does not purport to preempt more protective generally applicable state and local requirements that apply to the public at large. Such measures might include generally applicable state laws such as vaccine passports and mask mandates or more stringent requirements imposed by OSHA-approved state plans.

Are Masks Required for Unvaccinated Employees?

Under the ETS, employers must ensure that any employee who is not fully vaccinated wear a face covering when indoors or when occupying a vehicle with another person for work purposes.

• The ETS includes an exception to the face covering requirement when an employee is alone in a closed room; for a limited time while eating or drinking; for a limited time for identification purposes; when an employee is wearing a respirator or facemask (such as a mask for medical procedures); or where the employer can show that the use of face coverings is not feasible or creates a greater hazard.

The ETS itself “does not require the employer to pay for any costs associated with face coverings.” But, as with other COVID-related costs, other laws or employment agreements may require that employers pay for or provide face coverings.

Notably, the ETS does not require fully vaccinated employees to wear face coverings indoors, even in areas of substantial or high transmission. But other laws or regulations may.

What Recordkeeping Requirements Does the ETS Impose?

The ETS requires employers to maintain a record and roster of each employee’s vaccination status and preserve these records and rosters while the ETS remains in effect. Critically, the ETS provides an exemption from this requirement for employers that previously ascertained (before the ETS was published) and retained records of employee vaccination status through another form of proof (including self-attestation). The ETS also requires employers to make available, for examination and copying by an employee or anyone with written authorization from the employee, the employee’s COVID-19 vaccine documentation and any COVID-19 test results for the employee. Additionally, employers must make available to an employee (or their representative) the aggregate number of fully vaccinated employees and total number of employees at the workplace.

What Else Does the ETS Require?

Employers must require employees to “promptly notify the employer” of a positive test result, remove any employee who receives a positive test from the workplace until the ETS return-to-work criteria are met, and report work-related COVID-19 fatalities and in-patient hospitalizations. The CDC document, “Key Things to Know About COVID-19 Vaccines,” must be provided to all employees, along with the employer’s policies established to comply with the ETS, OSHA’s anti‑discrimination and anti‑retaliation requirements, and information about OSHA’s penalties for supplying false statements or documentation.

What Are the Implications for Federal Contractor Employers?

As noted above, the ETS does not apply to workplaces covered by the Task Force Guidance for federal contractors. But to the extent that a federal contractor has workplaces that are not covered by the Task Force Guidance, it will need to ensure compliance with the ETS for those sites.

The Administration announced that the Task Force Guidance will be revised to mirror the ETS by requiring that covered employees have received all shots by January 4, 2022. That will mean that federal contractor employees, like employees covered by the ETS, would not need to meet the Task Force definition of “fully vaccinated” until January 18, 2022.

How Does the ETS Interact with Accommodation Requirements?

The ETS acknowledges that federal law requires reasonable accommodations for employees who cannot be vaccinated because of a religious belief or medical condition. Employers that elect to comply with the ETS by allowing employees to decide whether to get vaccinated or be tested weekly may not receive many accommodation requests because employees who cannot be vaccinated for medical or religious reasons can choose the weekly testing option.

By contrast, employers that elect to comply with the ETS by adopting a vaccination mandate (rather than opting for testing in lieu) should anticipate and prepare for accommodation requests from their workforces. OSHA predicts that 5% of employees will request accommodations from vaccine requirements, but the actual number may be significantly higher for certain segments of the workforce.

Employers that mandate vaccination should have robust protocols for reviewing and resolving accommodation requests, and should anticipate that such requests will begin immediately upon announcement of their vaccine mandates. For some employers, being prepared to handle accommodation requests will necessitate additional HR personnel training on compliance with federal law in the context of vaccines.

Employers should be aware that the ETS masking and testing requirements for unvaccinated employees will apply to employees who qualify for accommodations. Also of note, the ETS “encourages employers to consider the most protective accommodations such as telework, which would prevent the employee from being exposed at work or from transmitting the virus at work.” Particularly where remote work is not a viable accommodation, compliance with the masking and testing requirements may inform whether an employer can provide accommodations without incurring “undue hardship.”

Additional information about compliance with federal law in the context of employer-mandated vaccines can be found in our client alerts on these topics.

What Impact Could Legal Challenges Have?

Some court challenges to the ETS already have been filed, and more are likely. The challenges are being filed directly in federal courts of appeals, and the challengers are likely to soon seek a stay of the ETS’s requirements pending a decision on the merits.  Cases filed in different courts will be consolidated and assigned to a single court by lottery.

The litigation bears watching, since ETSs historically do not have a good track record on judicial review: Of the six challenged in court, only two have been upheld even in part. In the cases now being filed, challengers are likely to argue that OSHA has not met the standard to issue the ETS as an emergency rulemaking without notice and comment. They also are likely to challenge OSHA’s authority to promulgate a vaccine-or-test mandate at all.

In addition, at least twenty-five states have brought challenges to the federal contractor vaccine mandate, which may result in a preliminary injunction prohibiting enforcement of those requirements. If the federal contractor mandate is enjoined, but the ETS is not stayed (or a stay is promptly lifted), federal contractor employers may have to comply with the ETS instead.

Employers should watch these lawsuits and other ETS-related developments carefully. Employers should also continue to monitor for new Task Force Guidance if they are federal contractors.

_____________________________

[1] https://www.osha.gov/coronavirus/ets2/faqs.

[2] https://www.osha.gov/sites/default/files/publications/OSHA4162.pdf.

[3] https://www.osha.gov/sites/default/files/publications/OSHA4161.pdf.

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The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Jason C. Schwartz, Katherine V.A. Smith, Jessica Brown, Lauren Elliot, Amanda C. Machin, Zoë Klein, Andrew Kilberg, Emily Lamm, Hannah Regan-Smith, Marie Zoglo, Josh Zuckerman, Nicholas Zahorodny, and Kate Googins.

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, the authors, or any of the following in the firm’s Administrative Law and Regulatory or Labor and Employment practice groups.

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

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

© 2021 Gibson, Dunn & Crutcher LLP

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

On November 1, 2021, the President’s Working Group on Financial Markets,[1] joined by the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC), issued its expected report (Report) on stablecoins, a type of digital asset that has recently grown significantly in market capitalization and importance to the broader digital asset markets.[2]

Noting gaps in the regulation of stablecoins, the Report makes the following principal recommendations:

• Congress should promptly enact legislation to provide a “consistent and comprehensive” federal prudential framework for stablecoins –
  • Stablecoin issuers should be required to be insured depository institutions
  • Custodial wallet providers that hold stablecoins on behalf of customers should be subject to federal oversight and risk-management standards
  • Stablecoin issuers and wallet providers should be subject to restrictions on affiliations with commercial entities.
• In the absence of Congressional action, the Financial Stability Oversight Council (FSOC) should consider steps to limit stablecoin risk, including designation of certain stablecoin activities as systemically important payment, clearing, and settlement activities.

The Report thus calls for the imposition of bank-like regulation on the world of stablecoins, and it does so with a sense of urgency.  Below we summarize the Report’s key conclusions and recommendations, and then preview the path forward if the FSOC is to take up the Report’s call to action.

Stablecoins

A stablecoin is a digital asset that is created in exchange for fiat currency that a stablecoin issuer receives from a third-party; most stablecoins offer a promise or expectation that the stablecoin can be redeemed at par on request.  Although certain stablecoins are advertised as being backed by “reserve assets,” there are currently no regulatory standards governing such assets, which can range on the risk spectrum from insured bank deposits and Treasury bills to commercial paper, corporate and municipal bonds, and other digital assets.  Indeed, in October, the CFTC took enforcement action against the issuers of US Dollar Tether (USD Tether) for allegedly making untrue or misleading statements about USD Tether’s reserves.[3]

The market capitalization of stablecoins has grown extremely rapidly in the last year; according to the Report, the largest stablecoin issuers had, as of October, a market capitalization exceeding $127 billion.[4]  The Report states that stablecoins are predominantly used in the United States to facilitate the trading, lending, and borrowing of other digital assets – they replace fiat currency for participants in the trading markets for Bitcoin and other digital assets and allow users to store and transfer value associated with digital asset trading, lending, and borrowing within distributed ledger environments.[5]  The Report further notes that certain stablecoin issuers believe that stablecoins should be used in the payment system, both for domestic goods and services, and for international remittances.[6]  Stablecoins, the Report asserts, are also used as a source of collateral against which participants in the digital assets markets can borrow to fund additional activity, “sometimes using extremely high leverage,” as well as to “earn yield,” by using stablecoins as collateral for extending loans and engaging in margined transactions.[7]

Perceived Risks of Stablecoins

The Report views the stablecoin market as currently having substantial risks not subject to regulation.

First, the Report asserts that stablecoins have “unique risks” associated with secondary market activity and market participants beyond the stablecoin issuers themselves, because most market participants rely on digital asset trading platforms to exchange stablecoins with national currencies and other stablecoins.[8]  In addition, the Report states that the active trading of stablecoins is part of an essential stabilization mechanism to keep the price of the stablecoin close to or at its pegged value.[9]  It further asserts that digital asset trading platforms typically hold stablecoins for customers in non-segregated omnibus custodial wallets and reflect trades on internal records only, and that such platforms and their affiliates may also engage in active trading of stablecoins and as market makers.[10]

Second, the Report argues that stablecoins play a central role in Decentralized Finance (DeFi).  It gives two examples – first, stablecoins often are one asset in a pair of digital assets used in “automated market maker” arrangements, and second, they are frequently “locked” in DeFi arrangements to garner yield from interest payments made by persons borrowing stablecoins for leveraged transactions.[11]

As a result, the Report describes a range of risks arising from stablecoins, including risks of fraud, misappropriation, and conflicts of interest and market manipulation; the risk that failure of disruption of a digital asset trading platform could threaten stablecoins; the risk that failure or disruption of a stablecoin could threaten digital asset trading platforms; money laundering and terrorist financing risks; risks of excessive leverage on unregulated trading platforms; risks of non-compliance with applicable regulations; risks of co-mingling trading platform funds with funds of customers; risks flowing from information asymmetries and market abuse; risks from unsupervised trading; risks from distributed-ledger based arrangements, including governance, cybersecurity, and other operational risks; and risks from novel custody and settlement processes.[12]

The Report also notes the risk of stablecoin “runs” that could occur upon loss of confidence in a stablecoin and the reserves backing it, as well as risks to the payment system generally if stablecoins became an important part of the payment system.  The Report notes that “unlike traditional payment systems where risk is managed centrally by the payment system operator,” some stablecoin arrangements feature “complex operations where no single organization is responsible or accountable for risk management and resilient operation of the entire arrangement.”[13]

Finally, the Report asserts that the rapid scaling of stablecoins raises three other sets of policy concerns.  First is the potential systemic risk of the failure of a significant stablecoin issuer or key participant in a stablecoin arrangement, such as a custodial wallet provider.[14]  Second, the Report points to the business combination of a stablecoin issuer or wallet provider with a commercial firm as raising economic concentration concerns traditionally associated with the mixing of banking and commerce.[15]  Third, the Report states that if a stablecoin became widely accepted as a means of payment, it could raise antitrust concerns.[16]

Recommendations

The Report’s key takeaway is that the President’s Working Group, the OCC and the FDIC believe that there are currently too many regulatory gaps relating to stablecoins and DeFi.  The Report does note that, in addition to existing anti-money laundering and anti-terrorist financing regulations, stablecoin activities may implicate the jurisdiction of the SEC and CFTC, because certain stablecoins may be securities or commodities.  Indeed, the CFTC just recently asserted that Bitcoin, Ether, Litecoin and USD Tether are commodities.[17]  Nonetheless, the Report states that as stablecoin markets continue to grow, “it is essential to address the significant investor and market risks that could threaten end users and other participants in stablecoin arrangements and secondary market activity.”[18]

The Report therefore calls for legislation to close what it sees as the critical gaps.  First, it argues that stablecoin issuance, and the related activities of redemption and maintenance of reserve assets, should be limited to entities that are insured depository institutions:  state and federally chartered banks and savings associations that are FDIC insured and have access to Federal Reserve services, including emergency liquidity.[19]  Legislation should also ensure that supervisors have authority to implement standards to promote interoperability among stablecoins.[20]  Given the global nature of stablecoins, the Report contends that legislation should apply to stablecoin issuers, custodial wallet providers, and other key entities “that are domiciled in the United States, offer products that are accessible to U.S. persons, or that otherwise have a significant U.S. nexus.”[21]

Second, given the Report’s perceived risks of custodial wallet providers, the Report argues that Congress should require those providers to be subject to “appropriate federal oversight,” including restricting them from lending customer stablecoins and requiring them to comply with appropriate risk-management, liquidity, and capital requirements.[22]

Third, because other entities may perform activities that are critical to the stablecoin arrangement, the Report argues that legislation should provide the supervisor of a stablecoin issuer with the authority to require any entity that performs activities “critical to the functioning of the stablecoin arrangement” to meet appropriate risk-management standards, and give the appropriate regulatory agencies examination and enforcement authority with respect to such activities.[23]

Finally, the Report advocates that both stablecoin issuers and wallet providers should, like banks, be limited in their ability to affiliate with commercial firms.[24]

Interim Measures

The Report characterizes the need for legislation as “urgent.”  While legislation is being considered, the Report recommends that the Financial Stability Oversight Council (FSOC) consider taking actions within its jurisdiction, such as designating certain activities conducted within stablecoin arrangements as systemically significant payment, clearing, and settlement activities.[25]  The Report states that such designation would permit the appropriate federal regulatory agency to establish risk-management requirements for financial institutions[26] that engage in the designated activities.

Such designations would occur pursuant to Title VIII of the Dodd-Frank Act, and it would be the first time that the FSOC would make them.[27]  The procedure that the FSOC must follow is set forth in Title VIII, and, absent an emergency, it appears that it would not be a quick one.  First, the FSOC must consult with the relevant federal supervisory agencies and the Federal Reserve.[28]  Next, it must provide notice to the financial institutions whose activities are to be designated, and offer those institutions the opportunity for a hearing.[29]  The institutions may then choose to appear, personally or through counsel, to submit written materials, or, at the sole discretion of FSOC, to present oral testimony or argument.[30]  The FSOC must approve the activity designation by a vote of at least two-thirds of its members, including an affirmative vote by the Chair.[31]  The FSOC must consider the designation in light of the following factors:  (i) the aggregate monetary value of transactions carried out through the activity, (ii) the aggregate exposure of the institutions engaged in the activity to their counterparties, (iii) the relationship, interdependencies, or other interactions of the activity with other payment, clearing, or settlement activities, (iv) the effect that the failure of or a disruption to the activity would have on critical markets, financial institutions, or the broader financial system, and (v) any other factors that the FSOC deems appropriate.[32]

Conclusion

With the Report, Treasury and the relevant federal agencies – the Federal Reserve, the SEC, CFTC, OCC, and FDIC – have made it clear that they believe that the risks of stablecoin activities are not fully mitigated by existing regulation.  Their recommendations for legislation look principally to bringing stablecoins within the banking system and to bank regulation as a means of addressing those risks.  It is an open question, however, whether Congress will act, much less with the urgency that the Report desires.  Action by the FSOC, moreover, will almost certainly take some time, given the statutory designation procedures.  In the near term, therefore, it is likely to fall to the existing agencies with some jurisdiction over stablecoins – the CFTC and SEC – to address the gaps with the tools at their disposal.[33]

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   [1]   The Working Group comprises representatives of the Treasury Department (Treasury), Board of Governors of the Federal Reserve System (Federal Reserve), the Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC).

   [2]   See https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf.

   [3]   See https://www.gibsondunn.com/digital-asset-developments-us-commodity-futures-trading-commission-asserts-that-tether-is-a-commodity/.

   [4]   Report, at 7.  In addition to USD Tether, the most circulated stablecoins are USD Coin, Binance USD, Dai Stablecoin, and TrueUSD.  All are pegged to the U.S. dollar.

   [5]   Id. at 8.

   [6]   Id.

   [7]   Id.

   [8]   Id.

   [9]   Id.

  [10]   Id.

  [11]   Id. at 9.

  [12]   Id. at 10-11.

  [13]   Id. at 12-13.

  [14]   Id. at 14.

  [15]   Id.

  [16]   Id.

  [17]   See https://www.gibsondunn.com/digital-asset-developments-us-commodity-futures-trading-commission-asserts-that-tether-is-a-commodity/.

  [18]   Report, at 11.

  [19]   Id. at 16.  Unless the insured depository institution in question is an industrial bank, requiring the stablecoin issuer to be an insured depository institution would also be a requirement for the issuer’s parent company, if any, to be a bank or thrift holding company supervised and regulated by the Federal Reserve.

  [20]   Id.

  [21]   Id. n. 29.

  [22]   Id. at 17.

  [23]   Id.

  [24]   Id.

  [25]   Id. at 18.

  [26]   Title VIII defines “financial institution” broadly to reach “any company engaged in activities that are financial in nature or incidental to a financial activity, as described in section 4 of the Bank Holding Company Act,” in addition to banks, credit unions, broker-dealers, insurance companies, investment advisers, investment companies, futures commission merchants, commodity pool operators and commodity trading advisers.

  [27]   The FSOC has previously undertaken designations of systemically significant nonbank financial companies under Title I of the Dodd-Frank Act and systemically significant financial market utilities under Title VIII of the Dodd-Frank Act.

  [28]   12 U.S.C. § 5463(c)(1).

  [29]   Id. § 5463(c)(2).

  [30]   Id. § 5463(b)(1).

  [31]   Id. § 5463(c)(3).

  [32]   Id. § 5463(a)(2).

  [33]   In a press release issued just after the Report, the Director of the Consumer Financial Protection Bureau, Rohit Chopra, stated that “stablecoins may . . . be used for and in connection with consumer deposits, stored value instruments, retail and other consumer payments mechanisms, and in consumer credit arrangements. These use cases and others trigger obligations under federal consumer financial protection laws, including the prohibition on unfair, deceptive, or abusive acts or practices.”  See https://www.consumerfinance.gov/about-us/newsroom/statement-cfpb-director-chopra-stablecoin-report/.

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The following Gibson Dunn lawyers assisted in preparing this client update: Arthur Long and Jeffrey Steiner.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the author, or any of the following members of the firm’s Financial Institutions practice group:

Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com)
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com)
Mylan L. Denerstein – New York (+1 212-351- 3850, mdenerstein@gibsondunn.com)
William R. Hallatt – Hong Kong (+852 2214 3836, whallatt@gibsondunn.com)
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)
Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Matthew Nunan – London (+44 (0) 20 7071 4201, mnunan@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

Independent compliance monitors are typically appointed to assess the sufficiency and effectiveness of a company’s compliance program and adherence to the terms of a settlement with an enforcement authority, like the SEC or DOJ. Compliance monitors have been a part of the SEC’s and DOJ’s enforcement arsenal for over two decades, and corporate monitorships are now a mainstay of corporate resolutions. Although monitors have been an oversight vehicle for the SEC and DOJ for years, there has been an explosion of their employment by other governmental agencies.

Monitors are now a feature of enforcement by the Environmental Protection Agency (EPA), the Federal Highway Safety Administration (FHSA), the Federal Trade Commission (FTC), and the Food and Drug Administration (FDA), as well as for non-U.S. authorities, like the World Bank and the United Kingdom’s Financial Conduct Authority. Understanding the requirements and expectations of a monitorship, and how to manage the associated costs and burdens on operations, are crucial to achieving a successful monitorship and compliance enhancement process.

Our panelists have served as DOJ-appointed monitors and DOJ-appointed counsel to the monitor, and have counseled numerous companies under external compliance monitors.  As former DOJ officials, they also bring unique perspectives regarding prosecutors’ and regulators’ expectations for various facets of a corporate compliance program.

Please join the panel discussion, which will include:

• Use of monitorships in DOJ and SEC resolutions – statistics and terms (including hybrid monitorships)
  • Benczkowski Memo and monitorship selection
  • DOJ goals in monitorship use and selection
• Being the monitor – goals and strategies
• Strategies for companies that have a monitorship
• Strategies to avoid the imposition of a monitor

View Slides (PDF)

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PANELISTS:

F. Joseph Warin is Co-Chair of Gibson Dunn’s global White Collar Defense and Investigations Practice Group, and Chair of the Washington, D.C. office’s 200-person Litigation Department.  He holds the distinguished position as the only person ever to serve as a compliance monitor or counsel to the compliance monitor in three separate FCPA monitorships, pursuant to settlements with the SEC and DOJ:  Statoil ASA; Siemens AG; and Alliance One International.  Mr. Warin also served as post-resolution counsel to Innospec, Weatherford, and Diebold, during their FCPA monitorships.

Michael S. Diamant is a partner in the Washington, D.C. office. He helped to execute two major, multi-year DOJ/SEC-appointed compliance monitorships, each of which ended successfully, on-time, and with praise from DOJ and SEC attorneys for the monitorship team’s effectiveness. He also served as post-resolution counsel to several companies during their monitorships, helping them to successfully navigate the process and ensure successful and timely completion of the monitorship.  Mr. Diamant’s practice focuses on white collar criminal defense, internal investigations, and corporate compliance, and he regularly advises major corporations on the structure and effectiveness of their compliance programs.

Kristen Limarzi is a partner Gibson Dunn’s Antitrust Practice Group, based in Washington, D.C. She previously served as the Chief of the Appellate Section of the DOJ’s Antitrust Division, where she litigated challenges to the first antitrust compliance monitor imposed following an Antitrust Division civil enforcement action. Leveraging her experience as a top government enforcer, Kristen’s practice focuses on representing clients in merger and non-merger investigations before the DOJ, the Federal Trade Commission, and foreign antitrust enforcers, as well in as appellate and civil litigation.

Patrick F. Stokes is Co-Chair of the Anti-Corruption and FCPA Practice Group. Previously, he headed the DOJ’s FCPA Unit, managing the DOJ’s FCPA enforcement program and all criminal FCPA matters throughout the United States, covering every significant business sector, and including investigations, trials, and the assessment of corporate anti-corruption compliance programs and monitorships.  His practice focuses on internal corporate investigations and enforcement actions regarding corruption, securities fraud, and financial institutions fraud.

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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 1.5 credit hours, of which 1.5 credit hours 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 1.5 hours.

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.

Los Angeles partners James Zelenay Jr. and Eric Vandevelde and associate Tim Biché are the authors of “DOJ turns to familiar tool to address cybersecurity threats” [PDF] published by the Daily Journal on November 1, 2021.

New York Governor Kathy Hochul recently signed a new law dramatically expanding protections for whistleblowers in New York.  New York’s whistleblower law (New York Labor Law Section 740) previously limited anti-retaliation protections to employees who raised concerns about “substantial and specific danger to the public health and safety” or “health care fraud”.  As outlined below, the amended law, which will go into effect on January 26, 2022, expands the scope of who is protected and what is deemed “protected activity” under Section 740.  It also contains additional key changes and requirements for employers.

In sum, the amendments to Section 740:

• Broaden the categories of workers protected against retaliation;
• Expand the scope of protected activity entitling employees to anti-retaliation protection;
• Expand the definition of prohibited retaliatory action;
• Require employers to notify their employees of the whistleblower protections;
• Lengthen the statute of limitations for bringing a cause of action against an employer;
• Allow courts to order additional remedies; and
• Entitle plaintiffs to a jury trial.

Key Changes to NYLL Section 740

Below, we outline the key changes to New York’s whistleblower law, effective January 26.

Expanding The Definition of “Employee” – The amendments expand the range of individuals protected from retaliation to include current and former employees as well as independent contractors.

Expanding Protected Activity – The amendments prohibit employers from retaliating against any employee because the employee:

1. discloses, or threatens to disclose to a supervisor or to a public body an activity, policy or practice of the employer that the employee reasonably believes is in violation of law, rule or regulation or that the employee reasonably believes poses a substantial and specific danger to the public health or safety:
2. provides information to, or testifies before, any public body conducting an investigation, hearing or inquiry into such activity, policy or practice by such employer; or
3. objects to, or refuses to participate in any such activity, policy or practice.

Prior to the new amendments, the law required that, before disclosing violations to a public body, employees first report violations to their employer to afford employers a reasonable opportunity to correct the alleged violation. The new law merely requires employees make a “good faith” effort to notify their employer before disclosing the violation to a public body. Additionally, employer notification is not required for protection under the amended statute if the employee reasonably believes that reporting alleged wrongdoing to their employer will result in the destruction of evidence, other concealment, or harm to the employee, or if the employee reasonably believes that their supervisor is already aware of the practice and will not correct it.

Expanding Prohibited Retaliatory Action – Prior to the amendments, conduct constituting retaliatory action was limited to “discharge, suspension or demotion of an employee, or other adverse employment action taken against an employee in the terms and conditions of employment.”  Adverse action now also includes actions that would “adversely impact a former employee’s current or future employment,” including contacting immigration authorities or reporting the immigration status of employees or their family members.

Statute of Limitations – The new law expands the statute of limitations for filing a retaliation claim from one to two years.

Additional Remedies – Aggrieved plaintiffs are entitled to jury trials, and the amendments allow the recovery of front pay, civil penalties not to exceed $10,000, and punitive damages. Prevailing plaintiffs are also entitled injunctive relief, reinstatement, compensation for lost wages, benefits, and other remuneration, and reasonable costs, disbursements, and attorneys’ fees.  Notably though, if a court finds that a retaliation claim was brought “without basis in law or in fact,” a court may award reasonable attorneys’ fees and court costs and disbursements to the employer.

Employee Notification – Employers must post notice of the protections, rights, and obligations of employees under the law. Such notice should be posted conspicuously and in “accessible and well-lighted places.” The New York Department of Labor will likely publish a model posting in advance of January 26.

Recommendations for Employers

In addition to complying with the new posting requirement, New York employers should consider steps to prepare for an uptick in internal complaints and potential claims.  For example, employers may, as appropriate, consider revisiting their whistleblower and compliance policies, including opening up additional channels for internal reporting of employee concerns.  Employers may also consider additional training for managers on receiving and escalating whistleblower complaints, as appropriate.

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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 authors:

Harris M. Mufson – Co-Head, Whistleblower Team, and Partner, Labor & Employment Group, New York (+1 212-351-3805, hmufson@gibsondunn.com)

Gabrielle Levin – Partner, Labor & Employment Group, New York (+1 212-351-3901, glevin@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)

© 2021 Gibson, Dunn & Crutcher LLP

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

This update provides an overview of key class action developments during the third quarter of 2021.

Part I covers two important decisions from the Third and Ninth Circuits regarding the scope of the Section 1 exemption under the Federal Arbitration Act.

Part II addresses a Ninth Circuit decision endorsing the use of a motion to deny class certification at the pleadings stage.

Part III reports on a Fourth Circuit decision vacating a class certification order because of the numerosity requirement.

Part IV discusses a Third Circuit decision rejecting the certification of an “issue” class under Rule 23(c)(4) where the district court did not find that one of the Rule 23(b) factors was satisfied.

And finally, Part V analyzes a Ninth Circuit decision clarifying that a defendant need not raise a personal jurisdiction defense as to a putative absent class member at the outset of a case, and instead can assert that defense for the first time at the class certification stage.

I.    The Third and Ninth Circuits Address the Federal Arbitration Act’s Section 1 Exemption

The Third and Ninth Circuits both weighed in this past quarter on the so-called Section 1 exemption in the Federal Arbitration Act (“FAA”), which exempts “workers engaged in foreign or interstate commerce” from having to arbitrate their claims under federal law.  9 U.S.C. § 1. The Section 1 exemption has been the subject of substantial litigation in recent years, particularly in the context of class actions involving “gig” economy workers, and the decisions from the Third and Ninth Circuits provide additional clarity to litigants regarding the scope of this exemption. Gibson Dunn served as counsel to the defendants in both appeals.

In Harper v. Amazon.com Services, Inc., 12 F.4th 287 (3d Cir. 2021), a delivery driver claiming he was misclassified as an independent contractor asserted that he could not be compelled to arbitrate his claim because he and other New Jersey drivers made some deliveries across state lines and therefore qualified for the Section 1 exemption.  Id. at 292. The district court deemed that contention to raise a question of fact and it ordered discovery, without examining Amazon’s contention that state law would also require arbitration even if the Plaintiff was exempt from arbitration under the FAA. Id. The Third Circuit vacated the district court’s order and “clarif[ied] the steps courts should follow––before discovery about the scope of § 1—when the parties’ agreement reveals a clear intent to arbitrate.” Id. at 296. Under this three-part framework, a district court must first determine, based on the allegations in the complaint, whether the agreement applies to a class of workers that fall within the exemption. If it is not clear from the face of the complaint, the court must assume § 1 applies and “consider[] whether the contract still requires arbitration under any applicable state law.” Id. If the arbitration clause is unenforceable under state law, only then does the court “return to federal law and decide whether § 1 applies, a determination that may benefit from limited and restricted discovery on whether the class of workers primarily engage in interstate or foreign commerce.” Id.

In Capriole v. Uber Technologies, Inc., 7 F.4th 854 (9th Cir. 2021), the Ninth Circuit addressed whether rideshare drivers are transportation workers engaged in foreign or interstate commerce; it joined the growing number of courts holding that such drivers do not fall within this Section 1 exemption. Although the plaintiffs claimed they fell under the Section 1 exemption because they sometimes cross state lines, and also pick up and drop off passengers from airports who are engaging in interstate travel, the Ninth Circuit held this was not enough to qualify for the exemption. Id. at 863. In particular, the Ninth Circuit cited the district court’s finding that only 2.5% of trips fulfilled by Uber started and ended in different states, and that only 10.1% of trips began or ended at an airport (and not all of the customers’ flights involved interstate travel). Id. at 864. This sporadic interstate movement “cannot be said to be a central part of the class member’s job description,” and thus a driver “does not qualify for the exemption just because she occasionally performs” work in interstate commerce. Id. at 865. The Ninth Circuit’s holding “join[s] the growing majority of courts holding that Uber drivers as a class of workers do not fall within the ‘interstate commerce’ exemption from the FAA.” Id. at 861.

II.    The Ninth Circuit Affirms the Granting of a Motion to Deny Class Certification at the Pleadings Stage

The propriety of class certification is typically decided after discovery occurs and the plaintiff moves to certify a class. But in some cases, a defendant can properly move to deny class certification at the outset of a case. That is exactly what the Ninth Circuit endorsed this quarter in Lawson v. Grubhub, Inc., 13 F.4th 908 (9th Cir. 2021), a case in which Gibson Dunn served as counsel for the defendant.

In Lawson, the district court granted the defendant’s motion to deny class certification on the ground that the vast majority of putative class members were bound by arbitration agreements with class action waivers. Lawson, 13 F.4th at 913. The Ninth Circuit affirmed, explaining that because only the plaintiff and one other person had opted out of the arbitration clause and class action waiver in their contracts, the plaintiff was “neither typical of the class nor an adequate representative,” and the proceedings were “unlikely to generate common answers.” Id. The Ninth Circuit also rejected the plaintiff’s argument that the denial of class certification was premature because the plaintiff had not yet moved for certification, and specifically held that Rule 23 “allows a preemptive motion by a defendant to deny class certification.” Id.

III.    The Fourth Circuit Addresses the Numerosity Requirement

Plaintiffs seeking class certification often have little trouble satisfying Rule 23(a)(1)’s requirement that “the class is so numerous that joinder of all members is impracticable.” With proposed classes commonly covering thousands or millions of members, appellate courts rarely have an opportunity to address this numerosity requirement. But in certain areas, including in pharmaceutical antitrust class actions, it has become increasingly common for plaintiffs to seek certification of small classes of sophisticated and well-resourced businesses claiming substantial damages. This past quarter, however, the Fourth Circuit vacated an order certifying such a class after finding that the district court had applied an erroneous standard for assessing numerosity.  Gibson Dunn represented one of the defendants in this action.

In re Zetia (Ezetimibe) Antitrust Litigation, 7 F.4th 227 (4th Cir. 2021), rejected a district court’s conclusion that a putative class of 35 purchasers of certain prescription drugs had satisfied Rule 23’s numerosity requirement. The court explained that the district court’s numerosity analysis rested on “faulty logic” and neglected to consider that “the text of Rule 23(a)(1) refers to whether ‘the class is so numerous that joinder of all members is impracticable,’ not whether the class is so numerous that failing to certify presents the risk of many separate lawsuits.”  7 F.4th at 234–35 (quoting In re Modafinil Antitrust Litig., 837 F.3d 238 (3d Cir. 2016)).  Accordingly, when evaluating numerosity, the question is whether a class action is preferable as compared to joinder—not as compared to the prospect of individual lawsuits. Id. at 235.  And with respect to class members’ ability and motivation to litigate, the court emphasized that the proper comparison is not individual suits, but rather whether it is practicable to join class members into a single action. Significantly, the Fourth Circuit emphasized that Rule 23(a)(1) requires plaintiffs to produce evidence that, absent certification of a class, the putative class members would not join the suit and that it would be uneconomical for smaller claimants to be individually joined.  Id. at 235–36 & nn. 5 & 6.

IV.    The Third Circuit Heightens the Standard for the Certification of “Issue” Classes

Rule 23(c)(4) provides that, “[w]hen appropriate, an action may be brought or maintained as a class action with respect to particular issues.” Some courts have read this language as permitting the certification of classes without a separate showing that the requirements of Rule 23(b)(1), (b)(2), or (b)(3) are satisfied. In practice, this view of Rule 23(c)(4) can permit plaintiffs to bypass the need to establish that common questions predominate. The Third Circuit this quarter refused to adopt such a reading of Rule 23, and instead held that a certification of an “issue” class under Rule 23(c)(4) is not permissible unless one of the Rule 23(b) requirements is also satisfied.

In Russell v. Educational Commission for Foreign Medical Graduates, the Third Circuit reversed a district court’s certification of an “issue” class under Rule 23(c)(4) because the district court had not found that any subsection of Rule 23(b) was satisfied. 15 F.4th 259, 271 (3d Cir. 2021). The court explained that “[t]o be a ‘class action,’ a party must satisfy Rule 23 and all of its requirements,” and concluded that class certification was improperly granted because there had been no determination if Rule 23(b) could be met.  Id. at 262, 271–73. Thus, plaintiffs in the Third Circuit seeking to certify an issue-only class under Rule 23(c)(4) must still satisfy the other requirements of Rule 23, including showing that “action is maintainable under Rule 23(b)(1), (2), or (3).”  Id. at 267.

V.    The Ninth Circuit Holds That a Defendant Does Not Waive a Personal Jurisdiction Defense to Absent Class Members by Not Raising It at the Pleadings Stage

In our First Quarter 2020 Update on Class Actions, we covered decisions from the Fifth and D.C. Circuits holding that the proper time to adjudicate whether a court has personal jurisdiction over absent class members is at the class certification stage, not at the pleading stage. This past quarter, the Ninth Circuit aligned itself with these other Circuits.

In Moser v. Benefytt, Inc., 8 F.4th 872 (9th Cir. 2021), the Ninth Circuit ruled that a defendant can raise a personal jurisdiction objection as to absent class members at the class certification stage, even if the defendant did not raise it in its first responsive pleading. In Moser, a California resident filed a putative nationwide class action alleging that the defendant, a Delaware corporation with its principal place of business in Florida, violated the Telephone Consumer Protection Act by making calls to persons across the country. Id. at 874. When the plaintiff moved to certify a nationwide class, the defendant argued that the district court could not certify a nationwide class because the court lacked personal jurisdiction over any of the non-California plaintiffs’ claims under the Supreme Court’s decision in Bristol-Myers Squibb v. Superior Court, 137 S. Ct. 1773 (2017). But the district court declined to consider the argument, holding that the defendant waived it by failing to raise the objection to personal jurisdiction in its first Rule 12 motion to dismiss. Moser, 8 F.4th at 875.

The Ninth Circuit reversed. It held that the defendant had not waived its personal jurisdiction objection to nationwide certification by not raising it in the first responsive pleading. Id. at 877.  The court reasoned that because defendants do not yet have “available” a “personal jurisdiction defense to the claims of unnamed putative class members who were not yet parties to the case” at the pleadings stage, defendants could not waive such an objection before the certification stage. Id. This ruling clarifies that defendants in the Ninth Circuit do not need to raise personal jurisdiction challenges to putative absent class members at the outset of the case, and instead should raise such challenges at the class certification stage.

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The following Gibson Dunn lawyers contributed to this client update: Christopher Chorba, Kahn Scolnick, Bradley Hamburger, Lauren Blas, Wesley Sze, Emily Riff, Jeremy Weese, and Dylan Noceda.

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 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)

© 2021 Gibson, Dunn & Crutcher LLP

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

On October 28, 2021, Deputy Attorney General Lisa Monaco spoke to the ABA’s 36th National Institute on White Collar Crime and announced, among other things, three actions the U.S. Department of Justice (“DOJ”) is taking with respect to its policies on corporate criminal enforcement. These relate to:

• Restoring prior DOJ guidance about the need for corporations to provide all non-privileged information about all individuals involved in the misconduct to be eligible for cooperation credit;
• Taking account of a corporation’s full criminal, civil, and regulatory record in making charging decisions, even if dissimilar from the conduct at issue; and
• Making it clear that prosecutors are free to require the imposition of a corporate monitor when they determine it is appropriate to do so.

In summary, as a result of these actions:

• In government investigations, companies will need to identify all individuals involved in the misconduct and provide all non-privileged information about their involvement;
• In charging decisions, DOJ will review companies’ entire criminal, civil, and regulatory record; and
• In corporate resolutions, there is no presumption against the imposition of a corporate compliance monitor, which may be imposed whenever DOJ prosecutors deem it appropriate to do so.

This announcement is notable both for what it does and what it does not purport to do. This Client Alert provides some initial thoughts on the issues outlined by Deputy Attorney General Monaco.

Notably, thus far, the Biden DOJ has not indicated that it plans to rescind or otherwise revisit what possibly was the most significant corporate criminal enforcement announcement of the Trump DOJ: the so-called anti-“piling on” policy announced by then-Deputy Attorney General Rod Rosenstein in 2018, which directs DOJ to coordinate internally and with other authorities to avoid duplicative fines or penalties for the same underlying conduct. Additionally, although Deputy Attorney General Monaco signaled a reversion to Obama-era requirements for corporate cooperation, she did not suggest revisiting DOJ’s firm guidance to its prosecutors that waiver of the attorney-client privilege shall not be required for an organization to receive full cooperation credit. Nevertheless, this announcement, which reflects the first major announcement of the Biden DOJ about corporate criminal enforcement, will undoubtedly have a meaningful impact on investigations and prosecutions.

Corporate Cooperation Credit

Deputy Attorney General Monaco signaled that the DOJ is reverting to the cooperation requirements as outlined in the Yates Memo—a change to corporate cooperation requirements announced by then-Deputy Attorney General Sally Yates in 2015. As discussed in this Client Alert, the Yates Memo augmented the Justice Manual, which provides a comprehensive collection of standards that guide prosecutors from the start of an investigation through prosecution, to require, among other things, that prosecutors premise cooperation credit on organizations providing “all relevant facts relating to the individuals responsible for the misconduct.” This guidance amended Section 9-28 of the Justice Manual, entitled “Principles of Federal Prosecution of Business Organizations,” which sets forth the factors that prosecutors must consider when determining whether to bring criminal charges against a company.  The Trump DOJ subsequently modified the Yates Memo in 2018, in response to concerns that this requirement was inefficiently slowing down corporate investigations. This revision premised cooperation on providing information about individuals who were “substantially” involved in or responsible for the misconduct, rather than requiring information about all individuals involved in the misconduct.

Deputy Attorney General Monaco explained that this is no longer DOJ policy and that the prior guidance on the Yates Memo will control going forward. Specifically, she stated that to receive cooperation credit, organizations must provide to DOJ “all non-privileged information about individuals involved in or responsible for the misconduct at issue.” She underscored that this requirement is irrespective of an individual’s position in the company and observed that the prior standard of “substantially” involved individuals proved unworkable, because the standard was not clear and left too much to the judgment of cooperating companies. Importantly, however, Deputy Attorney General Monaco repeatedly used the phrase “non-privileged information,” strongly signaling no intent to revisit the prohibition on premising cooperation credit on an organization waiving any valid assertion of the attorney-client privilege.

Prior Misconduct

The Justice Manual also advises federal prosecutors to consider a “corporation’s history of similar misconduct” when making a charging decision with regard to an organization. Here too, Deputy Attorney General Monaco announced a shift in DOJ policy. Specifically, no longer will DOJ focus merely on prior misconduct similar to the conduct under investigation. Rather, DOJ will consider other historical misconduct by the corporation. Going forward, “all prior misconduct needs to be evaluated . . . , whether or not that misconduct is similar to the conduct at issue in a particular investigation.”

Deputy Attorney General Monaco explained that, by focusing narrowly only on similar misconduct, the prior guidance failed to consider fully a “company’s overall commitment to compliance programs and the appropriate culture to disincentivize criminal activity.” This approach will sweep broadly to include past regulatory violations and prosecutions by state and local authorities. The speech suggested that prosecutors should exhibit flexibility in recognizing that not all past misconduct is indeed relevant, but provided a baseline at which “prosecutors need to start by assuming all prior misconduct is potentially relevant.” Although Deputy Attorney General Monaco did not indicate how recent past misconduct must be to retain relevance, she gave an example that suggested a focus on more recent violations: “For example, a company might have an antitrust investigation one year, a tax investigation the next, and a sanctions investigation two years after that.”

Monitorships

The final portion of Deputy Attorney General Monaco’s speech focused on corporate compliance monitors, which has been a recurring topic of great interest in corporate enforcement.  Corporations that enter into a negotiated resolution with DOJ generally will be required to pay a fine and penalties, admit to wrongdoing, and fulfill a number of obligations, such as regular reports to the government. On occasion, DOJ also imposes an independent, third-party corporate monitor as part of a negotiated resolution. These monitors observe and assess a company’s compliance with the terms of the resolution and make regular reports to DOJ. They are intended to help companies reduce the risk of recurrence of misconduct.

As the imposition of a monitorship can be quite costly and time-consuming for companies, DOJ has established guidelines to create greater transparency concerning the imposition, selection, and use of monitors. In March 2008, then-Acting Deputy Attorney General Craig Morford issued the first policy memorandum (the “Morford Memo”) establishing basic standards surrounding corporate monitorships.  In determining the appropriateness of imposing a monitor, the Morford Memo advised prosecutors to consider both the potential benefits of a monitor and “the cost of a monitor and its impact on the operations of a corporation.” The Morford Memo further cautioned that monitors should never be used “to further punitive goals.”

More recently, in October 2018, then-Assistant Attorney General Brian Benczkowski issued a memorandum (the “Benczkowski Memo”), which significantly expanded on the Morford Memo. The Benczkowski Memo further stressed the Morford Memo’s pronouncement that prosecutors should assess both the benefits and the cost of imposing a monitor, stating that monitors should only be favored “where there is a demonstrated need for, and clear benefit to be derived from, a monitorship relative to the projected costs and burden.” Moreover, the Benczkowski Memo explained that if a company has demonstrated that it has a demonstrably effective compliance program and controls, “a monitor will likely not be necessary.”

Deputy Attorney General Monaco’s remarks suggest that DOJ is poised to loosen prior guardrails around the impositions of monitors. Deputy Attorney General Monaco explained that, where trust in a corporation’s commitment to improvement and self-policing is called into question, monitors are a longstanding tool in DOJ’s arsenal to motivate and verify compliance.  To that end, Deputy Attorney General Monaco emphasized that DOJ “is free to require the imposition of independent monitors whenever it is appropriate to do so” and made clear that she is “rescinding” any prior DOJ guidance suggesting that monitorships are an exception or disfavored.

Deputy Attorney General Monaco made clear that the decision to impose a monitor must still consider the monitorship’s administration and the standards by which monitors will accomplish their work. With respect to the selection of monitors, Deputy Attorney General Monaco announced that DOJ will study how corporate monitors are chosen and whether that process should be standardized across all DOJ components and offices.

*          *          *          *          *

Deputy Attorney General Monaco framed all three of these changes to DOJ policy as part of a broader Biden DOJ initiative to revisit the standards and practices that DOJ has applied to corporate criminal enforcement. Notably, she announced the formation of a Corporate Crime Advisory Group within DOJ, featuring representatives from each portion of DOJ that brings enforcement actions against corporations, to make recommendations on enhancing departmental policy in this area. Among the areas the Advisory Group will consider are the efficacy of the current approach to pretrial diversion (non-prosecution and deferred prosecution agreements), especially in cases of arguably recidivist organizations, and DOJ’s standards and practices for the selection of corporate monitors.

Over the coming weeks and months, we will carefully monitor DOJ implementation of these new measures.

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The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, M. Kendall Day, Robert K. Hur, Michael S. Diamant, David P. Burns, Stephanie Brooker, Christopher W.H. Sullivan, and Jason H. Smith.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, the authors, or any of the following leaders and members of the firm’s Anti-Corruption and FCPA or White Collar Defense and Investigations practice groups:

Washington, D.C.
F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com)
M. Kendall Day (+1 202-955-8220, kday@gibsondunn.com)
Stephanie L. Brooker (+1 202-887-3502, sbrooker@gibsondunn.com)
David P. Burns (+1 202-887-3786, dburns@gibsondunn.com)
John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com)
Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com)
David Debold (+1 202-955-8551, ddebold@gibsondunn.com)
Michael Diamant (+1 202-887-3604, mdiamant@gibsondunn.com)
Richard W. Grime (202-955-8219, rgrime@gibsondunn.com)
Scott D. Hammond (+1 202-887-3684, shammond@gibsondunn.com)
Robert K. Hur (+1 202-887-3674, rhur@gibsondunn.com)
Judith A. Lee (+1 202-887-3591, jalee@gibsondunn.com)
Adam M. Smith (+1 202-887-3547, asmith@gibsondunn.com)
Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com)
Oleh Vretsona (+1 202-887-3779, ovretsona@gibsondunn.com)
Courtney M. Brown (+1 202-955-8685, cmbrown@gibsondunn.com)
Christopher W.H. Sullivan (+1 202-887-3625, csullivan@gibsondunn.com)
Jason H. Smith (+1 202-887-3576, jsmith@gibsondunn.com)
Ella Alves Capone (+1 202-887-3511, ecapone@gibsondunn.com)
Pedro G. Soto (+1 202-955-8661, psoto@gibsondunn.com)
Melissa Farrar (+1 202-887-3579, mfarrar@gibsondunn.com)

New York
Zainab N. Ahmad (+1 212-351-2609, zahmad@gibsondunn.com)
Matthew L. Biben (+1 212-351-6300, mbiben@gibsondunn.com)
Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com)
Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com)
Mylan L. Denerstein (+1 212-351-3850, mdenerstein@gibsondunn.com)
Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com)
Barry R. Goldsmith (+1 212-351-2440, bgoldsmith@gibsondunn.com)
Christopher M. Joralemon (+1 212-351-2668, cjoralemon@gibsondunn.com)
Mark A. Kirsch (+1 212-351-2662, mkirsch@gibsondunn.com)
Randy M. Mastro (+1 212-351-3825, rmastro@gibsondunn.com)
Karin Portlock (+1 212-351-2666, kportlock@gibsondunn.com)
Marc K. Schonfeld (+1 212-351-2433, mschonfeld@gibsondunn.com)
Orin Snyder (+1 212-351-2400, osnyder@gibsondunn.com)
Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com)
Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com)

Denver
Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com)
John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com)
Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com)
Laura M. Sturges (+1 303-298-5929, lsturges@gibsondunn.com)

Los Angeles
Nicola T. Hanna (+1 213-229-7269, nhanna@gibsondunn.com)
Debra Wong Yang (+1 213-229-7472, dwongyang@gibsondunn.com)
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Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com)
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Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com)
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Graham Lovett (+971 (0) 4 318 4620, glovett@gibsondunn.com)

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Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com)
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Joerg Bartz (+65 6507 3635, jbartz@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

The New York State Department of Financial Services is the state’s primary regulator of financial institutions and activity, with jurisdiction over approximately 1,400 financial institutions and 1,800 insurance companies. This year, the agency will undergo a change in leadership with the appointment of Adrienne Harris as Superintendent.  At the same time, the agency stands ready to emerge from the COVID-19 pandemic with a continued focus on consumer protection and assertion of authority over emerging areas of significance to New York’s banking and insurance industries. In this exclusive one-hour presentation, three experienced practitioners—Mylan Denerstein, Akiva Shapiro, and Seth Rokosky—explain key developments at this important financial services regulator. They will discuss not only changes to the agency’s leadership and organizational structure, but also recent developments with respect to the agency’s guidance, regulations, and enforcement matters in a broad array of areas, including insurance, consumer protection, cybersecurity, fintech and cryptocurrency, financial empowerment and inclusion, climate change, and special-purpose national bank charters.

View Slides (PDF)

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PANELISTS:

Mylan Denerstein is a litigation partner in the New York office of Gibson, Dunn & Crutcher. Ms. Denerstein is Co-Chair of Gibson Dunn’s Public Policy Practice Group and a member of the Crisis Management, White Collar Defense and Investigations, Labor and Employment, Securities Litigation, and Appellate Practice Groups. Ms. Denerstein leads complex litigation and internal investigations, representing companies in their most critical times, typically involving state, municipal, and federal government agencies. Prior to joining Gibson Dunn, Ms. Denerstein served as Counsel to New York State; in a diverse array of legal positions in New York State and City agencies; and as a federal prosecutor and Deputy Chief of the Criminal Division in the U.S. Attorney’s Office for the Southern District of New York. Ms. Denerstein is ranked as a leading lawyer in White-Collar Crime & Government Investigations by Chambers USA: America’s Leading Lawyers for Business 2021.  She was named by Benchmark Litigation to its 2021 “Top 250 Women in Litigation” list,  and was also recognized by the publication as a 2021 “Litigation Star” nationally in Appellate, Securities and White-Collar Crime, as well as in New York. Ms. Denerstein was named to the 2020 “Albany Power 100”, 2020 “Law Power 100” and 2019 “Law Power 50” list by City & State and the 2019 list of “Notable Women in Law” by Crain’s New York Business.

Akiva Shapiro is a litigation partner in the New York office of Gibson, Dunn & Crutcher, where he is a member of the firm’s Appellate and Constitutional Law, Media & Entertainment, Securities Litigation, and Betting & Gaming Practice Groups. Mr. Shapiro’s practice focuses on a broad range of high-stakes constitutional, commercial, and appellate litigation matters, successfully representing plaintiffs and defendants in suits involving civil RICO, securities fraud, breach of contract, misappropriation, and many other tort claims, as well as CPLR Article 78, First Amendment, Due Process, and statutory challenges to government actions and regulations. He is regularly engaged in front of New York’s trial courts, federal and state courts of appeal, and the U.S. Supreme Court, and has been named a Super Lawyers New York Metro “Rising Star” in Constitutional Law. Mr. Shapiro was named Litigator of the Week by The American Lawyer in August 2021 for what it called an “extraordinary SCOTUS win for New York landlords,” obtaining an emergency injunction from the Court on due process grounds.  He was named a runner-up Litigator of the Week by The American Lawyer in November 2020 for “two big wins . . . scored late on the Wednesday before Thanksgiving,” including obtaining an emergency injunction from the U.S. Supreme Court in The Roman Catholic Diocese of Brooklyn, New York v. Cuomo, a landmark religious liberties decision. He was also named a runner-up Litigator of the Week in August 2019 for a First Amendment and due process victory on behalf of the New York State title insurance industry.

Seth Rokosky is an associate in the New York office of Gibson, Dunn & Crutcher. He is a member of the firm’s Litigation Department and focuses his practice in the Appellate and Constitutional Law group. Mr. Rokosky has extensive experience challenging and defending government policies at the state, local, and federal level. He rejoined Gibson Dunn after serving in the New York Attorney General’s Office. As an Assistant Solicitor General in the Bureau of Appeals and Opinions, his public service included representing the State and its agencies as principal attorney on 43 appellate matters. Mr. Rokosky has conducted more than 20 oral arguments and filed more than 70 appellate briefs in both state and federal court, and he maintains a robust litigation practice in trial courts with a particular focus on complex briefing and providing strategic advice to trial counsel. The Best Lawyers in America® has recognized Mr. Rokosky as “One to Watch” in the Appellate Practice.

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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.

China’s Anti-Monopoly Law (“AML”) was adopted in 2007 and talks about possible amendments have regularly surfaced in the last few years. The State Administration for Market Regulation (“SAMR”)  released a draft amendment for public comments in early 2020. The process is now accelerating with a formal text (“AML Amendment”) submitted to the thirty-first session of the Standing Committee of the National People’s Congress for first reading on 19 October 2021. This client alert summarizes the main proposed changes to the AML, which have been published for comments.[1]

1.   Targeting the digital economy

Emphasis on the digital economy. Technology firms and digital markets have been the subject of a broad regulatory assault in China, including one that is based on the AML.  SAMR has published specific guidelines on the application of the AML to platforms in early 2021 and has imposed significant fines on these market players in the last months. For example, SAMR fined Meituan, an online food delivery platform provider, RMB 3.44 billion (~$534 million) for abusing its dominant position.[2]  The AML Amendment specifically refers to enforcement in the digital economy by making it clear that undertakings shall not exclude or restrict competition by abusing the advantages in data and algorithms, technology and capital and platform rules. At the same time, the objectives to the AML have also been updated to include “encouraging innovation.” Going forward, SAMR will need to tread the delicate line between encouraging digital innovation and curbing such advancement where it constitutes abusive market behaviour. In the most recent year, at least, in practice there has been an emphasis on enforcement rather than fostering innovation, a trend we anticipate will continue.

2.   Substantive changes

Cartel facilitators. The AML arguably does not cover the behaviour of undertakings facilitating anticompetitive conduct, in particular cartels. The AML Amendment fills the gap by extending the scope of the AML to the organisation or provision of material assistance in reaching anticompetitive- agreements. This effectively means that the AML will be extended to cover behaviour leading up to the conclusion of such agreements, and third parties may be found in breach by virtue of their role in aiding the conclusion of cartels.

Abandoning per se treatment of resale price maintenance. The application of the AML to resale price maintenance (“RPM”) is confusing. While SAMR seems to apply a strict “per se” approach, the courts have generally adopted a rule of reason analysis, only prohibiting RPM when it led to anticompetitive effects.[3]  The AML Amendment seems to favour the courts’ approach by providing that RPM is not prohibited if the supplier can demonstrate the absence of anticompetitive effects.

Safe harbour for anticompetitive agreements. The AML Amendment introduces a safe harbour for anticompetitive agreements. Agreements between undertakings that have a market share lower than a specific threshold to be set by SAMR will not be prohibited unless there is evidence that the agreement has anticompetitive effects. Given that this is not a complete exemption from the prohibition, it is very much the question whether this safe harbour will be at all useful to undertakings.

Merger review of sub-threshold transactions. The State Council Regulation on the Notification Thresholds for Concentrations of Undertakings already provides SAMR with the right to review transactions that do not meet the thresholds for mandatory review. This right would now directly be enshrined in the AML.

Stop-the-clock in merger investigations. SAMR will have the power to suspend the review period in merger investigations under any of the following scenarios: where the undertaking fails to submit documents and materials leading to a failure of the investigation; where new circumstances and facts that have a major impact on the review of the merger need to be verified; or where additional restrictive conditions on the merger need to be further evaluated and the undertakings concerned agree. The clock resumes once the circumstances leading to the suspension are resolved. It seems that this mechanism may be used to replace the “pull-and-refile” in contentious merger investigations.

3.   Increased penalties

Penalties on individuals. The AML Amendment would introduce personal liability for individuals. In particular, if the legal representative, principal person-in-charge or directly responsible person of an undertaking is personally responsible for reaching an anticompetitive agreement, a fine of not more than RMB 1 million (~$157,000) can be imposed on that individual. At this stage, however, cartel leniency is not available to individuals.

Penalties on cartel facilitators. As explained above, cartel facilitators will be liable for their conduct. They risk penalties of not more than RMB 1 million (~$157,000).

Increased penalties for merger-related conduct. One of the weaknesses of the AML is the very low fines for gun jumping (limited to RMB 500,000). The AML Amendment now states that where an undertaking implements a concentration in violation of the AML, a fine of less than 10% of the sales from the preceding year shall be imposed. Where such concentration does not have the effect of eliminating or restricting competition, the fine will be less than RMB 5 million (~$780,000).

Superfine. SAMR can multiply the amount of the fine by a factor between 2 and 5 in case it is of the opinion that the violation is “extremely severe”, its impact is “extremely bad” and the consequence is “especially serious.” There is no definition of what these terms mean and this opens the door to very significant and potentially arbitrary fines.

Penalties for failure to cooperate with investigation. Where an undertaking refuses to cooperate in anti-monopoly investigations, e.g. providing false materials and information, or conceals, destroy or transfer evidence, SAMR has the authority to impose a fine of less than 1% of the sales from the preceding year, and where there are no sales or the data is difficult to be assessed, the maximum fine on enterprises or individuals involved is RMB 5 million (~$780,000) and RMB 500,000 (~$70,000) respectively.

Public interest lawsuit. Finally, public prosecutors (i.e. the people’s procuratorate) can bring a civil public interest lawsuit against undertakings they have acted against social and public interests by engaging in anticompetitive conduct.

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   [1]   National People’s Congress of the People’s Republic of China, “Draft Amendment to the Anti-Monopoly Law” (中华人民共和国反垄断法(修正草案)) (released on October 25, 2021), available at http://www.npc.gov.cn/flcaw/flca/ff8081817ca258e9017ca5fa67290806/attachment.pdf.

   [2]   SAMR, “Announcement of SAMR’s Penalty To Penalise Meituan’s Monopolistic Behaviour In Promoting “Pick One Out Of Two” In The Online Food Delivery Platform Service Market” (市场监管总局依法对美团在中国境内网络餐饮外卖平台服务市场实施“二选一”垄断行为作出行政处罚) (released on October 8, 2021), available at http://www.samr.gov.cn/xw/zj/202110/t20211008_335364.html.

   [3]   Gibson Dunn, “Antitrust in China – 2018 Year in Review” (released on February 11, 2019), available at https://www.gibsondunn.com/antitrust-in-china-2018-year-in-review/.

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The following Gibson Dunn lawyers assisted in the preparation of this client update: Sébastien Evrard, Bonnie Tong, and Jane Lu.

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

Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com)
Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com)

Please also feel free to contact the following practice leaders:

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

© 2021 Gibson, Dunn & Crutcher LLP

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

Diversity and inclusion (“D&I”) in the workplace including at leadership levels of organisations is an ever prominent issue brought into sharp focus during the pandemic, intensified in the wake of the recent racially motivated crimes in the US and elsewhere,  which had brought this critical issue on the agenda of many regulators, globally including the UK’s financial services regulators, the Financial Conduct Authority (“FCA”)[1] and the Prudential Regulatory Authority (“PRA”)[2]

Earlier this year, in July, the UK’s financial services regulators published a discussion paper and a consultation paper setting out proposals to enhance diversity and inclusion in the financial services and the UK listed company sectors respectively. The feedback period on both papers recently came to an end. This alert looks at some of the detail behind the proposals and considers whether in some aspects the FCA has missed an opportunity to push forward the broader D&I agenda and whether in other ways it has gone too far with certain proposals which may have a real and direct impact on the privacy of individuals and the qualitative impact of the proposals.

INTRODUCTION & OVERVIEW OF THE PROPOSALS

Joint Discussion Paper Impacting the UK Financial Services Sector

What?: On 7 July, the FCA, the PRA and the Bank of England[3] (together, the “Regulators”) issued a joint discussion paper – “Diversity and inclusion in the financial sector – working together to drive change” (“DP 21/2“)[4]  expounding how meaningful change in respect of diversity and inclusion in the financial services sector can be accelerated and the paper should be viewed as the starting point for the implementation and formalisation of the related requirements. The Regulators’ make it clear that their primary focus is enhancing “diversity of thought” or “cognitive diversity” whilst recognising that diversity of thought can be influenced by many factors including demographic characteristics which are visible and measurable (e.g. gender, age, ethnicity) and invisible (e.g. disability, sexual orientation and education).

Which firms does it impact?: DP 21/2 affects the whole UK financial services sector including firms authorised and regulated jointly by the FCA and PRA (e.g. banks, building societies, designated investment firms, credit unions and insurance firms) or solely by the FCA. Payment services and e-money firms, credit rating agencies and recognised investment exchanges regulated by the FCA and FMIs regulated by the Bank of England fall within the broad reach of the paper.

Next steps: The proposals are only at a “discussion paper” stage but will be the foundations upon which further steps towards change in this area are built upon. Whilst the official deadline for feedback on the discussion paper passed on 30 September, the regulators propose to continue to engage with firms and other regulators on the topics presented in the paper and intend to gather further data to support their analysis and eventual recommendations with a view to issuing a formal consultation paper in Q1 2022 followed by a Policy Statement in Q3 2022.

Consultation Paper Impacting Listed Companies in the UK

What?: On 28 July 2021, the FCA has published a consultation paper – “Diversity and inclusion on company boards and executive committees” (CP 21/24)[5] which sets  a number of proposals to enhance diversity-related reporting by certain listed companies in  relation to gender and ethnic diversity at both board and executive management level.

Which types of companies does it impact?: The companies in the scope of the breath of the proposals are both UK and  overseas issuers with equity shares, or certificates representing equity shares, admitted to either the premium or standard section of the FCA’s Official List (“In-scope Companies”). In addition, the corporate governance related proposals will also capture UK issuers admitted to UK regulated markets and certain overseas listed companies (subject to exemptions for small and medium companies). The FCA is proposing to exclude open-ended investment companies and shell companies. The FCA is also proposing at this stage, to exclude issuers of debt securities, securities derivatives or miscellaneous securities. The FCA estimates that there are about 1,106 issuers who would be In-scope Companies (766 large issuers and 340 small and medium-sized issuers).

Next steps: The consultation closed on 20 October 2021 and, subject to consultation feedback and approval by the FCA Board, the FCA aims to  publish a policy statement along with the new Listing  Rules and the Disclosure and Transparency Rules (“DTR”) before the end of 2021. This would mean that any new rules would apply to accounting periods beginning on or after 1 January 2022.

A MORE DETAILED LOOK AT THE PROPOSALS

Policy Options Under Consideration for the Financial Services Sector – DP 21/2

Which firms should be in scope? – The Regulators are seeking views on which of the entities identified as falling in the UK financial services sector above should be in scope and the extent that different categories of firms should fall in scope. For example, it is expected that firms which currently fall within the Senior Managers and Certification Regime (“SMCR”)[6] should fall in scope but potentially to different degrees depending on their classification for SMCR purposes (i.e. whether and ‘enhanced’, ‘core’ or ‘limited scope’ firm). The Regulators are keen also to include FMIs (even though they are not caught by the SMCR in the same way as other firms) given the important albeit unseen role they place in society and the UK financial markets. An alternative to utilising the SMCR regime as a foundation to introducing potentially new D&I rules would be to utilise existing size classifications under the UK Companies Act 2006 regime for accounting and reporting purposes (i.e. micro-entity, small, medium sized and large). The Regulators are also keen to gather views on the extent to which overseas firms operating in the UK (including through branches) should be caught – we consider that to the extent that these firms are providing financial services and products into the UK market, it would be appropriate that they fall in scope, albeit this should be in a proportionate manner.

Data Collection: One of the trickiest elements for the Regulators to navigate in putting together their proposals is in relation to data collation. The Regulators rightly see data collation (and related setting of targets or metrics) as key to driving impact and change D&I however recognise first that many firms are already collecting some data[7] (albeit not in a consistent manner) and that collection of meaningful D&I data (particularly in smaller firms) can run directly counter to data privacy rules and these will vary across different jurisdictions. In addition, the effectiveness of D&I data collation including data which requires individuals to self-identify for certain categories of diversity, is likely to be impacted by the culture of the individual firms and indeed the culture (and potentially laws and regulations e.g. rules which may prohibit certain sexual or romantic orientation) across different jurisdictions. Further, on the key diversity element of ethnicity, the appropriate ethnic categories for a firm may well be impacted by the jurisdictions in which those firms principally operate (albeit with UK operations or nexus), where they are incorporated or have their headquarters or key leadership teams. How should the regulations be structured to accommodate for this? This is also proving to be a key factor in the specific proposals for listed companies (see  below). Finally, on data collation, whilst for purposes of the discussion paper, the Regulators are gathering feedback on collection of data across the nine “protected characteristics” recognised under the UK’s Equality Act 2010[8]  plus socio-economic background, we do not expect this to result in proposals in the first instance which would cover all of these areas.

Key focus areas of the Discussion Paper: The following areas are the focus of the discussion paper and where the Regulators are actively considering developing policy options (including potentially mandatory proposals):

• Governance – The Regulators recognise that in order to drive effective change in D&I, the leadership and culture of a firm is critical and boards are ultimately responsible for setting strategy and culture and holding management to account for promoting D&I. The paper queries if targets for representation at board level should be set and clarification should be delivered around succession planning for boards and the specific role of nomination committees in driving D&I.
• Accountability – The Regulators are in favour of making senior leaders directly accountable for D&I alongside collective responsibility of the board – this could be done for example through aligning this with the prescribed responsibilities under the senior management function (SMF) in firms for leading the development of firm culture and/or overseeing adoption of the firm’s culture[9].
• Remuneration – As with other areas of environmental, social governance (ESG), the Regulators also see linking remuneration (in particular variable remuneration) with progress on D&I as a key tool for driving both accountability and to incentivise progress. The Regulators are also looking to introduce explicit rules about remuneration policies set by firms and the requirement to ensure that both fixed and variable remuneration do not give rise to discriminatory practices.
• D&I Policies – The Regulators consider having clearly set out D&I policies are essential and wish to explore a requirement for all firms to publish their D&I policies on their website – and whilst not intending to be prescriptive about the content of such policies the expectation is that at a minimum the policies include clear objectives and goals and the Regulators note that for smaller firms a proportionate and simpler approach would be appropriate.
• Progression, Development & Targets – The Regulators are keen to facilitate early consideration by firms about the progression of their talent from the time of entry to the top of the organisation. This should include consideration being given to recruitment practices and beyond. Linked to this, the Regulators are keen to get views on the merits of setting targets for under-represented groups for entry into management (whether senior-management or customer-facing roles)
• Training – The Regulators believe that all employees in firms should understand D&I and its importance and that accordingly firms should institute training for employees which is focussed on real business outcomes. The Regulators are cognisant of the mixed views on D&I training and the pros and cons of mandatory (potentially tick the box training) and voluntary training (which may run the risk of poor take up) and is seeking further insights in this area.
• Products and Services – Importantly, the Regulators want firms to focus on consumer outcomes and to take care to ensure that a firm’s target market is not defined in a way that can result in unlawful discrimination. Rules already require firms to ensure fair treatment of vulnerable customers – the Regulators however are seeking views on whether their rules should go further such that product governance requirements should specifically take into account consumers’ protected characteristics or other diversity characteristics.
• Disclosure – Research cited by the Regulators shows that greater disclosure is linked to increased diversity and accordingly they wish to consult on requirements for firms to publicly disclose a selection of aggregated diversity data about the firm’s senior management and employee population as a whole. Disclosure could potentially include pay gap information and the Regulators are also seeking views on whether a template form of disclosure would be beneficial for firms. Again the Regulators are cognisant of not imposing excessively burdensome disclosure requirements and ensuring a proportionate approach.
• D&I Audits – The Regulators consider that diversity audits should be considered to assist firms to measure and monitor D&I and in particular help boards judge whether measures put in place to change culture and thus behaviour are actually working.
• Regulatory Measures – The Regulators consider that non-financial misconduct (which could for example include evidence of sexual harassment, bullying and discrimination) should be embedded into fitness and propriety assessments of senior managers. The Regulators are also keen to understand further how a firm’s appointments at board and senior management level have considered and taken into account how such appointments will contribute to diversity (e.g. in a way that addresses risks arising as a result of lack of diversity and group think).
• Authorisation – Threshold Conditions – Finally, the Regulators are seeking views on whether and to what extent D&I should be embedded into the minimum conditions that a firm must meet to carry on regulated activities (both initially at authorisation stage and on an ongoing basis)

 

New Specific Proposals for Listed Companies – CP 21/24

Key new annual reporting requirements:

Unlike DP 21/2 which is looking at a broad range of D&I characteristics potentially across the whole population of a firm, the initial focus of the FCA in  CP 21/24 is on gender and ethnicity at board and executive management level. Specifically, if the proposals are to be adopted, they will  require In-scope Companies to make the following public annual disclosures:

• Targets – A “comply or explain statement” on whether they have achieved certain proposed targets for gender and ethnicity representation on their boards:
  • At least 40% of the board are women (including individuals self-identifying as women);
  • At least one of the senior board positions[10] is held by a woman (including individuals self-identifying as women); and
  • At least one member of the board is from a non-White ethnic minority background.

Ethnic categories – The non-White ethnicity categories are to be based on the UK’s Official National Statistics (ONS) categories – which as readers will immediately appreciate would not appropriately reflect ethnic categories which may be more appropriate for companies either incorporated or based in overseas jurisdictions and where board or senior management teams are composed of persons and/or might more fairly reflect the demographics in such jurisdictions.

Where – The annual disclosure must be set out in the annual report and accounts of the issuer.

Failure to meet the targets – Where In-scope Companies have not met all of the targets, they will need to indicate which targets have not been met and explain the reasons for not meeting the targets.

• Numerical Disclosure – A standardised[11] numerical disclosure across five categories covering the gender and ethnic diversity of a company’s board, key board positions and “executive management team”[12].
• Optional Additional Disclosures – The FCA is also proposing to include guidance that In-scope Companies may in addition to the mandatory disclosures above, wish to include the following in their annual financial reports to provide potentially relevant context:
  • Summary of existing key policies, procedures and processes;
  • Mitigating factors or circumstances which make achieving diversity on its board more challenging (e.g. size of board or country where main operations are located); and
  • Any risks foreseen in continuing to meet the board diversity targets in the next accounting period and/or plans to improve the diversity of its board.

We would recommend that issuers consider taking up the opportunity to provide further disclosure and context (whether or not they have failed to meet targets and/or perceive a risk in so doing) as this additional narrative can also serve to provide a helpful platform for setting out narratives which can support and distinguish an issuer’s efforts to enhance diversity in its board and leadership teams.

Enhancing existing corporate governance disclosure requirements:

In addition to amending the Listing Rules to reflect the above new annual reporting requirements, the FCA is proposing additional specificity and more information to be disclosed  by certain issuers[13] who currently are required to publish a corporate governance statement which includes a description of diversity policies which apply to the their administrative, management and supervisory bodies (or, if they do not have one, explain not). The FCA is proposing to expand the disclosure of the diversity policy to cover the following elements:

• Scope – The diversity policy should also apply to a company’s remuneration, audit and nominations committees; and
• D&I Categories – The policy should also cover the following additional diversity elements ethnicity, sexual orientation, disability and socio-economic background.

 

POINTS OF NOTE ON THE PROPOSALS & SOME PRACTICAL CONSIDERATIONS FOR ORGANISATIONS

1. Too much data and the increasing regulatory burden – Following the publication of the Discussion Paper, concern has been expressed and feedback provided to the Regulators on the scope of the D&I factors covered by the paper – the prospect of having to comply with new disclosure requirements across the nine protected characteristics and socio-economic factors would be overwhelming for the financial services sector industry. In addition, there is concern amongst both the financial services and listed company sectors regarding the already significant and growing data sets required and to the extent there is an opportunity to merge data collation requirements and/or to use existing frameworks (e.g. the senior managers or SCMR) as a foundation to develop for example new specific rules on individual accountability for D&I matters, the Regulators should try to do so.
2. Overlap between the Proposals – There are overlaps between the proposals in DP 21/2 and CP 21/24 of course to the extent that any of the financial services firms are also In-scope (listed) Companies – the FCA recognises this and the Regulators will need to be cognisant of this when developing proposals for the financial services sector.
3. Existing Reporting by In-Scope Companies – On the subject of overlap, there are some In-scope Companies which are already voluntarily reporting D&I data against other voluntary frameworks and will need to start to give consideration now as to whether these should continue and/or how reporting can be most efficiently aligned or integrated with the proposed new reporting requirements.
4. Preparatory considerations & data collection challenges – On timing, the FCA’s proposals would as noted above, apply to accounting periods starting on or after 1 January 2022 so that reporting will start to emerge in annual reports published for 2022 on and from Spring 2023. The FCA is even encouraging companies to consider voluntary early disclosures in annual financial reports published before that time! This would potentially be a challenge for companies unless and to the extent that they are already collating the relevant data in the way prescribed by the FCA (including having given appropriate consideration as to who would fall within their “executive management” for these reporting purposes). To meet the official reporting timing, companies should already start actively considering how to collate the relevant information envisaged by the FCA. There are a number of “tricky” (potentially newer) elements in the proposals including gender data which covers persons self-identifying as women.
5. Data Privacy – We understood the Regulators’ general stance on the importance of data collation in driving efforts on D&I. including allowing for comparisons to be made across companies and sectors (and monitoring progress against targets). However, the key crucial issue which has been flagged by market participants and advisers providing feedback on both sets of proposals is the issue of data privacy. Whilst the Proposals make touching reference to compliance with data privacy requirements, there does not appear to have been an adequate assessment or analysis of how the Proposals (in particular in CP 21/24) potentially cut across data privacy requirements (including but not limited to General Data Protection Regulations (“GDPR”). As we have seen, the Proposals place or consider placing obligations on companies to collect data and personal data revealing race, ethnicity, sexuality or disabilities background or concerning ”special categories of personal data” under the GDPR (which are subject to additional restrictions). We note there are provisions within the GDPR that allow processing of special category personal data for equality of opportunity monitoring purposes, however, this is something that will need to be carefully managed to ensure no data remains personally identifiable. Further, for the proposals to work in practice companies will need the support of employees themselves who will need to be willing to provide their personal information, which to some may be deemed sensitive.
6. Modest targets … not quotas – We note that the proposed board diversity targets referred to in CP 21/24 reflect what is currently expected of FTSE 350 companies, on a voluntary basis, by virtue of the Hampton- Alexander and Parker[14] review reports, save that the FCA has increased the women on boards target from 33% to 40% and some consider that a more stretching target could have been imposed. Additionally, it is worth noting,  that it is not envisaged by the consultation paper that the proposed Listing Rule targets become mandatory quotas, but instead the FCA makes it clear (assuaging any concerns that some issuers may have) that is seeking to provide a positive benchmark for firms to aim towards.

 

MIS-STEPS? – WHAT DO WE THINK ABOUT THE PROPOSALS?

We note that DP 21/2 is broad and sweeping in nature and makes reference to all protected characteristics under the Equality Act as an attempt to consider diversity & inclusion as a whole rather than focusing on any specific area of underrepresentation. Whilst the ambition is noteworthy, If the intention is to address a broad range of D&I, some market participants would be in favour of a qualitative, in-depth approach over a more modest range of criteria, mindful of overlaps and multiple data requests that firms are facing.

Conversely, CP 21/24, whilst making positive steps in its focus on gender and ethnicity does not cover all aspects of diversity & inclusion including some other key areas including disability and socio-economic background which some market participants view as a missed opportunity.   A more ambitious set of proposals giving companies a longer lead time to start to consider, embed and eventually report on a slightly broader data set merited consideration by the FCA.

Finally, we note that neither of the papers have  tackled the question of intersectionality[15] nor how the Proposals or development of new rules pursuant to the discussion paper would adequately address this.  For example, the new and/or enhanced corporate governance disclosures could have specifically required companies to include disclosures on the extent to which they have identified and are addressing issues of intersectionality.

A QUICK LOOK ACROSS THE SEAS – GLOBAL COMPARISONS

The publication of papers with a focus on D&I is not unique to the UK or the UK Regulators, this is a current hot topic with regulators around the globe keen to ensure representation across companies to reflect all elements of diversity & inclusion. For example:

• In Hong Kong, the Stock Exchange of Hong Kong Limited published a consultation paper on its Corporate Governance Code and Listing Rules in April 2021 which considered gender diversity on boards;
• In April 2021, the Financial Services Agency in Japan published a consultation on proposals to revise its Corporate Governance Code to require companies to disclose a policy and voluntary measurable targets in respect of promoting diversity in senior management by appointing females, non-Japanese and mid-career professionals;
• In Australia, diversity and inclusion on boards’ obligations are set through the Corporate Governance Principles applicable to companies listed on the Australian Securities Exchange. Principle One, which applies to listed entities from financial years commencing on or after 1 January 2020, requires the entity to “lay solid foundations for management and oversight”. It includes the recommendation that the board sets “measurable objectives for achieving gender diversity in the composition of the board, senior executives and workforce generally”; and
• In Singapore, the Ministry of Social and Family Development has established the Council for Board Diversity to promote a sustained increase in the number of women on boards of listed companies, statutory boards and non-profit organisations. The Council has set a target for the 100 largest listed companies of 20% women on boards.

 

CONCLUSIONS

Whilst no formal changes have yet to be put into effect in the UK, it is clear to see through the publication of both CP 21/24 and DP 21/2, that the Regulators and the FCA are determined to follow and, potentially in a number of respects, lead the global momentum to drive enhancement of  diversity & inclusion in business and this is welcome. As the detailed proposals are crystallised and finalised, we will continue to review whether some of the possible unintended consequences (particularly around possible compromises on data privacy) are identified and addressed and if a proportionate set of measures are rolled out across the financial services and listed company sectors.

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   [1]   The FCA regulates part of the financial services industry in the UK. Its role includes protecting consumers, keeping the industry stable, and promoting healthy competition between financial service providers. The FCA the conduct regulator for around 51,000 financial services firms and financial markets and the prudential supervisor for 49,000 firms, setting specific regulatory standards for around 18,000 firms.

   [2]   The PRA is the prudential regulator of around 1,500 financial institutions in the UK comprising banks, building societies, credit unions, insurance companies and major investment firms.

   [3]   The Bank of England’s input to the discussion paper is in its capacity of supervising financial market infrastructure firms (FMI).

   [4]   DP 21/2

   [5]   CP 21/24

   [6]   A new set of compliance regulations introduced in the UK to reduce harm to consumers and strengthen financial market integrity by making firms and individuals at those firms more accountable for their conduct and competence. The rules were rolled out across different parts of the UK financial services sector from 2016 and apply to a range of firms in a proportionate manner depending on size and business type, including banks, insurers, FCA-solo regulated firms, PRA-designated investment firms and deposit takers.

   [7]   Research quoted DP 21/2 notes that gender is the most commonly collected data with some firms now also collecting and mapping data across the lifecycle of employees. More sophisticated firms are also now starting to collect data on ethnicity.

   [8]   These are age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex and sexual orientation.

   [9]   Prescribed Responsibilities (PR) (I) and (H).

  [10]   i.e. Chair, Chief Executive Officer (CEO), Senior Independent Director (SID) or Chief Financial Officer (CFO).

  [11]   A reporting template (in tabular form) has been proposed and is laid out in the discussion paper.

  [12]   The Listing Rules would be amended to include a new definition of executive management – “executive committee or most senior executive or managerial body below the board (or where there is no such formal committee or body, the most senior level of managers reporting to the chief executive) including the company secretary but excluding administrative and support staff”. We note that whilst there is merit in including the company secretary, this role would not normally carry executive responsibilities, hence different terminology e.g. “management” may be a more accurate and representative definition.

  [13]   This obligation is set out in the Disclosure and Transparency Rules (DTR) of the FCA’s Handbook and the relevant DTR applies to certain UK and overseas issuers admitted to UK regulated markets but exempts small and medium issuers.

  [14] Hampton-Alexander Review: FTSE women leaders – initial report and Hampton-Alexander Review: FTSE women leaders –  Improving gender balance – 5 year summary report – February 2021.

  [15]   The concept of intersectionalism is credited to Kimberlé Crenshaw, a legal scholar at Columbia University. The term is used today more broadly to refer to any individuals with multiple self-identities. Specifically, intersectionalism in the workplace does not refer only to the factors of a person’s identity. It is a concept that recognizes the multiple identity factors and how they influence privilege and marginalization, power and influence, emotional impact, and individual and intersecting behaviour (Source: DiversityCan).

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This alert has been prepared by Selina Sagayam and Shannon Pepper.

Ms. Sagayam, a corporate partner in the London office of Gibson Dunn, co-chairs Gibson Dunn’s global ESG Practice, is a member of its Global Diversity Committee and chairs its London Diversity Talent & Inclusion Committee.

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

Selina S. Sagayam – International Corporate Group (+44 (0) 20 7071 4263, ssagayam@gibsondunn.com)
James A. Cox – Labour & Employment Group (+44 (0) 20 7071 4250, jacox@gibsondunn.com)
Michelle M. Kirschner – Global Financial Regulatory Group (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)

Please also feel free to contact the following practice leaders:

Environmental, Social and Governance (ESG) Practice:
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)

© 2021 Gibson, Dunn & Crutcher LLP

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

Summary

• On 22 October, 2021, Executive Vice President Margrethe Vestager delivered a speech in which she stated for the first time that the European Commission (Commission) is going to expand its cartel enforcement to labor markets, including no-poach and wage-setting agreements.
• The U.S. authorities have already been active in pursuing naked no-poach and other labor market agreements, but to date the Commission has not taken any enforcement action in this area.
• The Commissioner’s statement signals a new enforcement priority and companies should prepare. We recommend that companies review their recruitment policies and HR practices in the EU to identify and remediate potential competition law risks.
• Companies should also expand compliance programs to include anticompetitive conduct in labor markets and ensure human resources personnel are receiving competition law training on a regular basis.

Background

The EU turns its attention to labor market agreements

On 22 October, Margrethe Vestager, the Commission’s Competition Commissioner and Executive Vice President, delivered a speech in which she signaled a new area of cartel enforcement for the Commission: anticompetitive labor market agreements.[1] Vestager highlighted wage-fixing and no-poach agreements as two examples of labor market agreements that could create a cartel. Under a no-poach agreement, companies mutually commit not to recruit and/or hire one another’s workers, or at least certain types of workers. Vestager argued that such arrangements can depress salaries, but she cautioned that labor market agreements could be seen as a broader threat to innovation and market entry. She explicitly shared her belief that labor market agreements can “restrict talent from moving where it serves the economy best” and can “effectively be a promise not to innovate.”

While the Commission has historically not focused its enforcement efforts on labor market arrangements such as naked no-poach agreements, Vestager’s speech is an indication that change is coming in the near future. This is part of a broader action plan with respect to EU cartel enforcement, which has historically given rise to high fines. Companies should be taking steps now to ensure they are prepared.

EU labor market interest follows growing international momentum

Vestager’s interest in labor market cartel enforcement is consistent with the growing enforcement efforts in several other jurisdictions. In 2016, the U.S. became the first jurisdiction to announce that it would treat labor market agreements as a criminal cartel matter.[2] In the subsequent five years, the U.S. Department of Justice (“DOJ”) has pursued numerous criminal investigations into potential wage-fixing, no-poach, and non-solicitation agreements. However, these investigations have only recently led to the first criminal charges, and the DOJ is now preparing for a series of criminal trials in 2022 that will test whether courts agree that such labor market agreements can amount to a cartel.

• Healthcare Providers: In 2021, the DOJ indicted two healthcare providers and a former CEO for their alleged participation in non-solicitation agreements. The DOJ charged both companies and the executive with agreeing not to solicit certain “senior-level employees” from one another. Additionally, the DOJ charged one of the companies and its former CEO with entering a separate agreement in which an unidentified healthcare company agreed not to solicit its employees—without any reciprocal commitment from the other company. Both companies and the executive have filed motions to dismiss the charges, arguing that such labor market agreements should not be treated as a criminal matter under U.S. law and that imposing criminal liability in the absence of judicial precedent would violate due process. The trial courts will first rule on these threshold legal issues and, if the DOJ prevails, the cases are scheduled for trial in March and May 2022, respectively.
• Physical Therapists: Neeraj Jindal and John Rodgers were charged in December 2020 and April 2021, respectively, as part of the DOJ’s first criminal wage-fixing case. Both individuals are alleged to have participated in a conspiracy among companies in northern Texas to lower rates paid to in-home physical therapists. Jindal and Rodgers are also charged with obstruction of justice for their actions during an earlier investigation into the same conduct by the U.S. Federal Trade Commission. The case is currently scheduled for trial in April 2022.
• School Nurses: The DOJ secured criminal charges against VDA OC and its regional manager, Ryan Hee, for participating in a conspiracy to fix wages and restrain their recruitment efforts for school nurses in Las Vegas, Nevada. During a ten-month period that began in October 2016, VDA OC and Hee allegedly agreed with a competitor not to solicit or hire each other’s nurses and to resist nurses’ efforts to increase wages. The case is currently scheduled for trial in late February 2022.

In Europe, the Portuguese Competition Authority moved to the forefront on labor market enforcement earlier this year. On April 13, the Portuguese Competition Authority announced a statement of objections against the Portuguese Professional Football League and 31 of its teams for an alleged agreement not to hire any player who terminated his agreement with another team for reasons related to the pandemic.[3] More importantly, the Portuguese authority used the case as an opportunity to outline its enforcement policies for labor market conduct. The authority released a policy paper on labor market enforcement[4] and published a Good Practice Guide entitled “Prevention of Anticompetitive Agreements in the Labor Market,” which sets out the various ways labor market agreements might be viewed as anticompetitive.[5]

Companies should prepare for a new era of labor market enforcement

Vestager’s comments suggest that the Commission is turning its enforcement efforts to labor markets. Companies should therefore be taking steps now to ensure they are identifying potential risks and working to remediate them before an investigation occurs.

As a starting point, companies should review their recruitment practices in the EU to determine whether their HR teams avoid recruiting or hiring from specific companies. In many instances, these restraints can be identified quickly in communications with external recruiters in which they receive instructions about the company’s specific hiring needs. Any such hiring restraint should be assessed to ensure it is permissible in its specific context. Any hiring restrictions agreed upon between companies or among members of a trade association that are unrelated to a legitimate commercial relationship are particularly high risk.

Companies would also benefit from reviewing their processes for setting employees’ compensation and benefits. Each company should be competing independently in setting its package of cash compensation (e.g., salaries, hourly wages, bonuses) and non-cash benefits (e.g., insurance, vacation and family policies). Any agreements or informal understandings with another company about the amount of compensation or the types of benefits that will be offered should be immediately discussed with legal counsel. Additionally, companies should be cautious about directly exchanging HR-related information with other companies in an effort to benchmark their compensation practices.

Companies should also expand the scope of their antitrust compliance programs, which have historically been focused on sales and marketing personnel and senior executives. As antitrust enforcers move into labor markets, compliance programs should be extended to human resources personnel and any other employees involved in recruiting. The programs themselves must also be updated to ensure the company’s competition law policy addresses labor market risks, competition training materials reflect labor market conduct, and employees have pathways to internally report suspected competition violations.

In the event that companies do encounter a potential antitrust breach, they should immediately seek legal counsel. The European Commission operates a leniency program that encourages companies to self-report a suspected cartel in exchange for full immunity (for the first company to report the breach). If other companies involved in the cartel can provide evidence of “significant added value,” they will be eligible for a fine reduction (between 30% to 50% for the first company, 20% to 30% for the second, and up to 20% thereafter).

Conclusion

Executive Vice-President Vestager’s statement is a clear signal that the Commission is shifting its attention to anticompetitive labor market conduct, such as wage-fixing and no-poach agreements. To prepare, companies must promptly review their HR-related practices to ensure they address any existing conduct that creates competition law risks and educate their HR employees to minimize the risk of a future infringement.

Gibson Dunn will be hosting a Webcast in November to discuss labor market enforcement in the U.S. and other jurisdictions, including the EU, as well as practical steps that companies should be taking to minimize HR-related competition law risks. Invitations to join the Webcast will follow shortly.

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[1]   Margrethe Vestager, A new era of cartel enforcement, Speech at the Italian Antitrust Association Annual Conference (Oct. 22, 2021), available at https://ec.europa.eu/commission/commissioners/2019-2024/vestager/announcements/speech-evp-m-vestager-italian-antitrust-association-annual-conference-new-era-cartel-enforcement_en.

[2]   U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Guidance for Human Resources Professionals (October 2016), https://www.justice.gov/atr/file/903511/download.

[3]   Autoridade da Concorréncia, AdC issues Statements of Objections for anticompetitive agreement in the labour market for the first time (Apr. 18, 2021), https://www.concorrencia.pt/en/articles/adc-issues-statements-objections-anticompetitive-agreement-labour-market-first-time.

[4]   Autoridade da Concorréncia, Acordos no Mercado de trabalho e política de concorréncia (Apr. 2021), here.

[5]   Autoridade da Concorréncia, Guia De Boas Práticas: Prevenção De Acordos Anticoncorrenciais Nos Mercados De Trabalho (Apr. 2021), here.

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The following Gibson Dunn lawyers prepared this client alert: Scott Hammond, Jeremy Robison, Christian Riis-Madsen, Stéphane Frank, Katie Nobbs, and Sarah Akhtar.

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 or Labor and Employment practice groups:

Antitrust and Competition Group:

Brussels
Attila Borsos (+32 2 554 72 11, aborsos@gibsondunn.com)
Christian Riis-Madsen (+32 2 554 72 05, criis@gibsondunn.com)
Lena Sandberg (+32 2 554 72 60, lsandberg@gibsondunn.com)
David Wood (+32 2 554 72 10, dwood@gibsondunn.com)
Stéphane Frank (+32 2 554 72 07, sfrank@gibsondunn.com)
Alejandro Guerrero (+32 2 554 72 18, aguerrero@gibsondunn.com)

Frankfurt
Georg Weidenbach (+49 69 247 411 550, gweidenbach@gibsondunn.com)

Munich
Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com)
Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com)

London
Ali Nikpay (+44 20 7071 4273, anikpay@gibsondunn.com)
Deirdre Taylor (+44 20 7071 4274, dtaylor2@gibsondunn.com)
Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com)
Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com)
Charles Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com)

United States
Scott D. Hammond – Washington, D.C. (+1 202-887-3684, shammond@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 – Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)
Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Caeli A. Higney – San Francisco (+1 415-393-8248, chigney@gibsondunn.com)
Veronica S. Lewis – Dallas (+1 214-698-3320, vlewis@gibsondunn.com)

Labor and Employment Group:

Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

On October 25, 2021, the Equal Employment Opportunity Commission (“EEOC”) expanded its guidance on religious exemptions to employer vaccine mandates under Title VII of the Civil Rights Act of 1964 (“Guidance”). This Guidance describes in greater detail the framework under which the EEOC advises employers to resolve religious accommodation requests.

The EEOC emphasizes that whether an employee is entitled to a religious accommodation is an individualized determination to be made in light of the “particular facts of each situation.”  Guidance at L.3. The agency also was careful to note that the Guidance is specific to employers’ obligations under Title VII and does not address rights and responsibilities under the Religious Freedom Restoration Act or state laws that impose a higher standard for “undue hardship” than Title VII.

The EEOC provided its views on the following questions.

Who makes a religious accommodation request, and what form must it take?

• Only sincerely held religious beliefs, practices, or observances qualify for accommodation. Id. at L.1.
• A religious accommodation request need not use “magic words,” but it must communicate to the employer that there is a conflict between the employee’s religious beliefs and a workplace COVID-19 vaccination requirement. Id.
• The EEOC encourages employers to create processes and/or designate particular employees to handle such religious accommodations requests. Id. Employers also should provide employees and applicants with information about whom to contact, and the procedures to follow, to request a religious accommodation, the EEOC advises.

May an employer ask an employee for more information regarding a religious accommodation request?

Yes.  An employer may ask for an explanation of how an employee’s religious beliefs conflict with a COVID-19 vaccination requirement.  Id. at L.2. Furthermore, an employer may make a “limited factual inquiry” if there is an objective basis for questioning either: (1) the religious nature of the employee’s belief; or (2) the sincerity of an employee’s stated beliefs. Id.

• The religious nature of the employee’s belief. Employers are not prohibited from inquiring whether a belief is religious in nature, or based on unprotected “social, political, or economic views, or personal preferences.” Id. However, the EEOC cautions employers that even unfamiliar or nontraditional beliefs are protected under Title VII.  Id.
• The sincerity of an employee’s stated beliefs. The EEOC explains that “[t]he sincerity of an employee’s stated religious beliefs … is not usually in dispute,” but provides factors that may “undermine an employee’s credibility.” Id. These factors are:
  1. actions the employee has taken that are inconsistent with the employee’s professed belief;
  2. whether the accommodation may have a non-religious benefit that is “particularly desirable”;
  3. the timing of the request; and
  4. any other reasons to believe the accommodation is not sought for religious reasons. Id.  

No single factor is determinative. Id. The EEOC cautions that religious beliefs “may change over time,” “employees need not be scrupulous in their [religious] observance,” and “newly adopted or inconsistently observed practices may nevertheless be sincerely held.” Id.

What is an undue hardship under Title VII? 

The Supreme Court has held that an employer is not required to provide an accommodation if the accommodation would impose more than a de minimis cost. Id. at L.3. The Guidance takes an expansive view of what types of costs might justify denying an accommodation. The EEOC suggests that such costs may include:

• “[D]irect monetary costs”;
• “[T]he burden on the conduct of the employer’s business—including, in this instance, the risk of spread of COVID-19 to the public”;
• Diminished efficiency in other jobs;
• Impairments to workplace safety; and
• Causing coworkers to take on the accommodated employee’s “share of potentially hazardous or burdensome work.”  Id.

Furthermore, an employer “may take into account the cumulative cost or burden of granting accommodations to other employees,” but may not rely on the “mere assumption” that “more employees might seek religious accommodation” with respect to a vaccine requirement. Id. at L.4. Likewise, an employer cannot rely on “speculative hardships” to deny an accommodation, according to the EEOC, but must rely “on objective information,” considering factors such as whether the employee making the request works indoors or outdoors, in a solitary or group setting, or has close contact with others, especially “medically vulnerable individuals.”

If an employer grants one religious accommodation request from a COVID-19 vaccination requirement, must it grant all religious accommodation requests?

No. Religious accommodation determinations are individualized in nature and must focus on a specific employee’s request and whether accommodating the specific employee would impose an undue hardship. Id. When assessing whether granting an exemption would impair workplace safety, the EEOC advises considering, among other factors, the number of employees who are fully vaccinated, physically enter the workplace, and will need a particular accommodation.

Must an employer provide a requesting employee’s preferred religious accommodation?

No. An employer may choose any reasonable accommodation that would “resolve the conflict” between the a vaccination requirement and an employee’s sincerely held religious belief, though it “should consider the employee’s preference.” Id. at L.5. If an employer does not choose an employee’s preferred accommodation, it should explain to the employee why that accommodation is not granted. Id.

Can an employer discontinue a previously granted religious accommodation?

Yes. An employer may be able to discontinue an accommodation if the accommodation is no longer used for religious purposes or the accommodation subsequently imposes more than a de minimis cost. Id. at L.6. Employers also should be aware that an employee’s “religious beliefs and practices may evolve or change over time and may result in requests for additional or different religious accommodations.”

Questions the EEOC did not address include what steps large employers faced with tens of thousands of reasonable accommodation requests must take to satisfy the individualized-determination requirement; what may constitute reasonable accommodations for employees entitled to exemptions, particularly when community transmission is high; and how employers can comply with recordkeeping and privacy concerns under state and federal statutes, including how to receive and store employee vaccine and testing records.

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The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Katherine V.A. Smith, Jason C. Schwartz, Jessica Brown, Andrew G. I. Kilberg, Zoë Klein, Chad C. Squitieri, Hannah Regan-Smith, and Kate Googins.

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, or any of the following in the firm’s Administrative Law and Regulatory or Labor and Employment practice groups.

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

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

© 2021 Gibson, Dunn & Crutcher LLP

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

On September 16, 2021, Governor Gavin Newsom signed bipartisan legislation intended to expand housing production in California, streamline the process for cities to zone for multi-family housing, and increase residential density, all in an effort to help ease California’s housing shortage. The suite of housing bills includes California Senate Bill (“SB”) 8 (Skinner), SB 9 (Atkins), and SB 10 (Weiner). Each of the bills will take effect on January 1, 2022. Some have characterized the bills as “the end of single family zoning.”  In practice the results may be more nuanced, but the net effect will be to allow significantly more development of housing units “by right.”

SB 8

SB 8 is an omnibus clean-up bill impacting several previous housing initiatives. Notably, it extends key provisions of SB 330, also known as the Housing Crisis Act of 2019 (previously set to expire in 2025),  until January 1, 2030. That act set limits on the local approval process for housing projects, curtailed local governments’ ability to downzone residential parcels after project initiation, and limited fee increases on housing applications, among other key provisions. If a qualifying preliminary application for a housing development is submitted prior to January 1, 2030, then rights to complete that project can vest until January 1, 2034. The amendment specifies that it does not prohibit a housing development project from being subject to ordinances, policies, and standards adopted after a preliminary application was submitted if the project has not commenced construction within two and a half (2.5) years, or three and a half (3.5) years if the project is an affordable housing project.

Existing law provides that if a proposed housing development project complies with the applicable objective general plan and zoning standards in effect at the time an application is deemed complete, then after the application is deemed complete, a city, county, or city and county shall not conduct more than five hearings pursuant to Section 65905, or any other law requiring a public hearing in connection with the approval of that housing development project. SB 8 expands the definition of “hearing” from any public hearing, workshop, or similar meeting to explicitly include “any appeal” conducted by the city or county with respect to the housing development project.  A “housing development project” is also defined to include projects that involve no discretionary approvals, projects that involve both discretionary and nondiscretionary approvals, and projects to construct a single dwelling unit. The receipt of a density bonus does not constitute a valid basis on which to find that a proposed housing project is inconsistent, not in compliance, or not in conformity, with an applicable plan, program, policy, ordinance, standard, requirement, or other similar provision. This section applies to housing development projects that submit a preliminary application after January 1, 2022 and before January 1, 2030.

SB 8 further amends the Government Code to state that with respect to land where housing is an allowable use, an affected city of county, defined as a city, including charter city, that the Department of Housing and Community Development determines is in an urbanized area or urban cluster, as designated by the Census Bureau, shall not enact a development policy, standard or condition that would have the effect of changing the general plan land use designation, specific plan land use designation, or zoning of a parcel or parcels of property to a less intensive use or reducing the intensity of land use within an existing general plan land use designation, specific plan land use designation, or zoning district in effect at the time of the proposed change. “Reducing the intensity of land use” includes, but is not limited to, reductions to height, density, or floor area ratio, new or increased open space or lot size requirements, new or increased setback requirements, minimum frontage requirements, or maximum lot coverage limitations, or any other action that would individually or cumulatively reduce the site’s residential development capacity.

SB 8 further provides that a city or county may not approve a housing development project that will require the demolition of occupied or vacant protected rental units unless all requirements are met. These requirements include that the project will replace all existing or demolished protected units and that the housing development project will include at least as many residential dwelling units as the greatest number of residential dwelling units that existed on the project site within the last five years. “Protected units” means any of the following: (i) residential dwelling units that are or were subject to a recorded covenant, ordinance, or law that restricts rents to levels affordable to persons and families of lower or very low income within the past five years, (ii) residential dwelling units that are or were subject to any form of rent control within the past five years, (iii) residential dwelling units that are or were occupied rented  by lower or very low income households within the past five years, and (iv) residential dwelling units that were withdrawn from rent or lease in accordance with the Ellis Act within the past 10 years.

SB 8 adds the general requirement that any existing occupants that are required to leave their units shall be allowed to return at their prior rental rate if the demolition does not proceed and the property is returned to the rental market (with no time limit  specified in the bill text).  The developer must agree to provide existing occupants of any protected units that are of lower income households: relocation benefits and a right of first refusal for a comparable unit (defined as either a unit containing the same number of bedrooms if the single-family home contains three or fewer bedrooms or a unit containing three bedrooms if the single-family home contains four or more bedrooms) available in the new housing development affordable to the household at an affordable rent (as defined in Section 50053 of the Health and Safety Code).

SB 9

SB 9, the California Housing Opportunity and More Efficiency (“HOME”) Act, facilitates the process for homeowners to subdivide their current residential lot or build a duplex. State law currently provides for the creation of accessory dwelling units by local ordinance, or, if a local agency has not adopted an ordinance, by ministerial approval, in accordance with specified standards and conditions. SB 9 allows for ministerial approval, without discretionary review or hearings, of duplex residential development on single-family zoned parcels.

SB 9 allows housing development projects of no more than two dwelling units on a single-family zoned parcel to be permitted on a ministerial basis if the project satisfies the SB 9 requirements. In order for a housing project to qualify under SB 9 the project must be located within a city, the boundaries of which must include some portion of either urbanized area or urban cluster, as designated by the United States Census Bureau, or, for unincorporated areas, the parcel must be wholly within the boundaries of an urbanized area or urban cluster. The project may not require demolition or alteration of the following types of housing: (i) housing that is subject to a recorded covenant, ordinance, or law that restricts rents to affordable levels, (ii) housing subject to rent control, or (iii) housing that has been tenant-occupied in the last three (3) years (with no distinction drawn between market rate and affordable housing). Further, the project may not have been withdrawn from the rental market under the Ellis Act within the past fifteen (15) years. The proposed development also may not demolish more than twenty-five percent (25%) of existing exterior structural walls, unless expressly permitted by a local ordinance or the project has not been tenant occupied within the past three years.

The project may not be located within a historic district or property included on the State Historic Resources Inventory or within a site that is designated as a city or county landmark or historic property pursuant to local ordinance. A local agency may impose objective zoning standards, subdivision standards, and design standards unless they would preclude either of the two units from being at least 800 square feet in floor area.

No setback may be required for an existing structure or a structure constructed in the same location and dimensions as an existing structure. In other circumstances, a local agency may require a setback of up to four feet (4’) from the side and rear lot lines. Off-street parking of up to one (1) space per unit may be required by the local agency, except if the project is located within a half-mile walking distance of a high-quality transit corridor or a major transit stop, or if there is a car share vehicle within one block of the parcel. If a local agency makes a written finding that a project would create a specific, adverse impact upon public health and safety or the environment without a feasible way to mitigate such impact, the agency still may deny the housing project.

A local agency must require that rental of a unit created pursuant to SB 9 be for a term longer than 30 days, thus preventing application of SB 9 to promote speculation in the short-term rental market.

SB 9 does not supersede the California Coastal Act, except that the local agency is not required to hold public hearings for coastal development permit applications for a housing development pursuant to SB 9. A local agency may not reject an application solely because it proposes adjacent or connected structures, provided that they meet building code safety standards and are sufficient to allow separate conveyance .

Projects that meet the SB 9 requirements must be approved by a local agency ministerially and are not subject to the California Environmental Quality Act (“CEQA”).

SB 9 also allows for qualifying lot splits to be approved ministerially upon meeting the bill requirements. Each parcel may not be smaller than forty (40%) percent of the original parcel size and each parcel must be at least one thousand two hundred (1,200) square feet in size unless permitted by local ordinance. The parcel must also be limited to residential use. Neither the owner of the parcel being subdivided nor any person acting in concert with the owner may have previously subdivided an adjacent parcel using a lot split as provided for in SB 9. The applicant must also provide an affidavit that the applicant intends to use one of the housing units as a principal residence for at least three (3) years from the date of approval.

A local agency may not condition its approval of a project under SB 9 upon a right-of-way dedication, any off-site improvements, or correction of nonconforming zoning conditions. The local agency is not required to approve more than two (2) units on a parcel. The local agency may require easements for public services and facilities and access to the public right-of-way.

SB 9 changes the rules regarding the life of subdivision maps by extending the additional expiration limit for a tentative map that may be provided by local ordinance, from 12 months to 24 months.

SB 10

SB 10 creates a voluntary process for local governments to pass ordinances prior to January 1, 2029 to zone any parcel for up to ten (10) residential units if located in transit rich areas and urban infill sites. Adopting a local ordinance or a resolution to amend a general plan consistent with such an ordinance would be exempt from review under the California Environmental Quality Act (“CEQA”). This provides cities, including charter cities, an increased ability to upzone property for housing without the processing delays and litigation risks associated with CEQA. However, if the new housing authorized by the general plan would require a discretionary approval to actually build the housing (for example, a subdivision map or design review), CEQA review would be required for those subsequent approvals, and the benefits of the law may prove limited.  Moreover, in contrast to SB 9, each individual city or county must affirmatively pass an ordinance authorizing the upzoning.

A “transit rich area” means a parcel within one-half mile of a major transit stop, as defined in Section 21064.3 of the Public Resources Code, or a parcel on a high quality bus corridor. A “high quality bus corridor” means a corridor with fixed route bus service that meets all of the following criteria: (i) it has average service intervals of no more than 15 minutes during the three peak hours between 6 a.m. to 10 a.m., inclusive, and the three peak hours between 3 p.m. and 7 p.m., inclusive, on Monday through Friday; (ii) it has average service intervals of no more than 20 minutes during the hours of 6 a.m. to 10 p.m., inclusive, on Monday through Friday; and (iii) it has average intervals of no more than 30 minutes during the hours of 8 a.m. to 10 p.m., inclusive, on Saturday and Sunday. An “urban infill site” is a site that satisfies all of the following: (i) it is a legal parcel or parcels located in a city if, and only if, the city boundaries include some portion of either an urbanized area or urban cluster, or, for unincorporated areas, a legal parcel or parcels wholly within the boundaries of an urbanized area or urban cluster, as designated by the United States Census Bureau; (ii) a site in which at least seventy-five percent (75%) of the perimeter of the site adjoins parcels that are developed with urban uses (parcels that are only separated by a street or highway shall be considered to be adjoined); and (iii) a site that is zoned for residential use or residential mixed-use development, or has a general plan designation that allows residential use or a mix of residential and nonresidential uses, with at least two-thirds of the square footage of the development designated for residential use.

Zoning ordinances adopted pursuant to the authority granted under SB 10 must explicitly declare that the ordinance is adopted pursuant to SB 10 and clearly demarcate the areas that are zoned pursuant to SB 10, and the local legislative body must make a finding that the increased density authorized by such ordinance is consistent with the city or county’s obligations to further fair housing pursuant to Government Code Section 8899.50. A legislative body that approves a zoning ordinance pursuant to SB 10 may not subsequently reduce the density of any parcel subject to the ordinance. The bill text does not explicitly state a sunset on this restriction.

A zoning ordinance adopted pursuant to SB 10 may override a local ballot initiative which restricts zoning only if adopted by a two-thirds vote of the members of the legislative body. The creation of up to two accessory dwelling units (“ADUs”) or junior ADUs (“JADUs”) per parcel is allowed, and these units would not count towards the ten unit count.

SB 10 does not apply to parcels located within a high or very high fire hazard severity zone, as determined by the Department of Forestry and Fire Protection, but this restriction does not apply to sites that have adopted fire hazard mitigation measures pursuant to existing building standards or state fire mitigation measures applicable to the development. SB 10 also does not apply to any local restriction enacted or approved by a local ballot initiative that designates publicly owned land as open-space land, as defined in Section 65560(h), or for park or recreational purposes. Furthermore, a project may not be divided into smaller projects in order to exclude the project from the limitations of SB 10.

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The following Gibson Dunn attorneys prepared this client update: Amy Forbes, Doug Champion, and Maribel Garcia Ochoa.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Land Use and Development or Real Estate practice groups in California:

Doug Champion – Los Angeles (+1 213-229-7128, dchampion@gibsondunn.com)
Amy Forbes – Los Angeles (+1 213-229-7151, aforbes@gibsondunn.com)
Mary G. Murphy – San Francisco (+1 415-393-8257, mgmurphy@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

In a judgment dated 14 October 2021 related to the so-called “Case of the Century”, the Paris Administrative Court (the Court) ordered the State to make good the consequences of its failure to reduce greenhouse gas (GHG) emissions. In this respect, the Court ordered that the excess of the GHG emissions cap set by the first carbon budget be offset by 31 December 2022 at the latest. The French Government remains free to choose the appropriate measures to achieve this result.

I.   Background to the Judgment

In March 2019, four non-profit organizations had filed petitions before the Court to have the French State’s failure to combat climate change recognized, to obtain its condemnation to compensate not only their moral prejudice but also the ecological prejudice and to put an end to the State’s failures to meet its obligations.

In a judgment dated February 3, 2021, the Court ruled that the State should compensate for the ecological damage caused by the failure to comply with the objectives set by France in terms of reducing GHG emissions and, more specifically, the objectives contained in the carbon budget for the period 2015-2019. As a reminder, France has defined a National Low-Carbon Strategy, which describes both a trajectory for reducing GHG emissions until 2050 and short- and medium-term objectives. These latter, called carbon budgets, are emission ceilings expressed as an annual average per five-year period, that must not be exceeded. The Court also ordered a further investigation before ruling on the evaluation and concrete methods of compensation for this damage (please see Gibson Dunn’s previous client alert).

In the separate Grande Synthe case, the Council of State – France’s highest administrative court – on 1 July 2021 enjoined the Prime Minister to take all appropriate measures to curb the curve of GHG emissions produced on national territory to ensure its compatibility with the 2030 GHG emission reduction targets set out in Article L. 100-4 of the Energy Code and Annex I of Regulation (EU) 2018/842 of 30 May 2018 before 31 March 2022.

II.   The steps in the reasoning followed by the Tribunal

First, the Court considers that it is dealing solely with a dispute seeking compensation for the environmental damage caused by the exceeding of the first carbon budget and the prevention or cessation of the damage found and that it is for the Court to ascertain, at the date of its judgment, whether that damage is still continuing and whether it has already been the subject of remedial measures.

On the other hand, the Court considers that it is not for it to rule on the sufficiency of the measures likely to make it possible to achieve the objective of reducing GHGs by 40% by 2030 compared to their 1990 level, which is a matter for the litigation brought before the Council of State.

Second, the Court considers that it can take into account, as compensation for damage and prevention of its aggravation, the very significant reduction in GHG emissions linked to the Covid 19 crisis and not to the action of the State.

However, the Court finds that the data relating to the reduction of GHG emissions for the first quarter of 2021 do not make it possible to consider as certain, in the state of the investigation, that this reduction would make it possible to repair the damage and prevent it from worsening. It concludes that the injury continues to be 15 Mt CO2eq.

Third, the Court considers that it can apply articles 1246, 1249 and 1252 of the Civil Code, which give it the power to order an injunction in order to put an end to an ongoing injury and prevent its aggravation.

The State argued in its defense that the injunction issued by the Council of State in its decision of 1 July, 2021 already made it possible to repair the ecological damage observed. The Court nevertheless considers that the injunction issued by the Conseil d’Etat aims to ensure compliance with the overall objective of a 40% reduction in GHG emissions in 2030 compared to their 1990 level and that it does not specifically address the compensation of the quantum of the damage associated with exceeding the first carbon budget. Since the injunction sought from the Court is specifically intended to put an end to the damage and prevent it from worsening, the Court considers that it is still useful and that the non-profit organizations are entitled to request that it be granted.

Fourth, the Court indicated that “the ecological damage arising from a surplus of GHG emissions is continuous and cumulative in nature since the failure to comply with the first carbon budget has resulted in additional GHG emissions, which will be added to the previous ones and will produce effects throughout the lifetime of these gases in the atmosphere, i.e. approximately 100 years. Consequently, the measures ordered by the judge in the context of his powers of injunction must be taken within a sufficiently short period of time to allow, where possible, the damage to be made good and to prevent or put an end to the damage observed.

As the State failed to demonstrate that the measures to be taken pursuant to the Climate Act of 20 August 2021 will fully compensate for the damage observed, the Court then ordered “the Prime Minister and the competent ministers to take all appropriate sectoral measures to compensate for the damage up to the amount of the uncompensated share of GHG emissions under the first carbon budget, i.e. 15 Mt CO2eq, and subject to an adjustment in the light of the estimated data of the [Technical Reference Centre for Atmospheric Pollution and Climate Change] known as of 31 January 2022, which make it possible to ensure a mechanism for monitoring GHG emissions“.

In view of (i) the cumulative effect of the harm linked to the persistence of GHGs in the atmosphere and the damage likely to result therefrom, and (ii) the absence of information making it possible to quantify such harm, the Court orders that the abovementioned measures be adopted within a period sufficiently short to prevent their aggravation.

Finally, he adds that:

(i)      “the concrete measures to make reparation for the injury may take various forms and therefore express choices which are within the free discretion of the Government“;

(ii)     repair must be effective by 31 December 2022, which means that measures must be taken quickly to achieve this objective;

(iii)    that no penalty be imposed in addition to the injunction.

III.   The aftermath of the Judgment

The Government has two months in which to appeal against the Judgment. If the Judgment is appealed, the application for enforcement will have to be submitted to the Administrative Court of Appeal in Paris.

If the Government decides not to contest the Judgment, it will have to take the necessary measures for each of the sectors identified in the SNBC (transport, agriculture, construction, industry, energy, waste), which will probably mean imposing new standards on economic actors and individuals.

If, on December 31, 2022, the non-profit organizations consider that the Judgment has not been properly executed, i.e., if the measures taken by the Government have not made it possible to repair the damage up to the amount of 15 Mt CO2eq, they will be able to refer the matter to the Tribunal so that it may order, after investigation, a measure to execute the Judgment, which will most likely be a penalty payment.

As a reminder, in a decision of August 4, 2021, the Council of State condemned the State to pay the sum of 10 million euros to various organizations involved in the fight against air pollution for not having fully implemented its previous decisions regarding its failure to improve air quality in several areas in France.

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The following Gibson Dunn attorneys assisted in preparing this client update: Nicolas Autet and Grégory Marson.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following lawyers in Paris by phone (+33 1 56 43 13 00) or by email:

Nicolas Autet (nautet@gibsondunn.com)
Grégory Marson (gmarson@gibsondunn.com)
Nicolas Baverez (nbaverez@gibsondunn.com)
Maïwenn Béas (mbeas@gibsondunn.com)

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