Publications Archives

Fourth of Four Industry-Specific Programs

The False Claims Act (FCA) is one of the most powerful tools in the government’s arsenal to combat fraud, waste, and abuse involving government funds. After several years of statements and guidance indicating that the Department of Justice (DOJ) might alter its approach to FCA enforcement, the Biden Administration appears to be taking a different, more aggressive approach. Meanwhile, newly filed FCA cases remain at historical peak levels, and the government has recovered nearly $3 billion or more annually under the FCA for a decade. The government also continues to pursue new, large spending projects in COVID-related stimulus and infrastructure—which may bring yet more vigorous efforts by DOJ to pursue fraud, waste, and abuse in government spending. As much as ever, any company that receives government funds—especially in the health care sector—needs to understand how the government and private whistleblowers alike are wielding the FCA, and how they can defend themselves.

Please join us to discuss developments in the FCA, including:

The latest trends in FCA enforcement actions and associated litigation affecting health care providers;
Updates on the Biden Administration’s approach to FCA enforcement, including developments impacting DOJ’s use of its statutory dismissal authority;
New proposed amendments to the FCA introduced by Senator Grassley; and
The latest trends in FCA jurisprudence, including developments in particular FCA legal theories affecting your industry and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.

View Slides (PDF)

PANELISTS:

Jonathan M. Phillips is a partner in the Washington, D.C. office where he co-chair of the False Claims Act/Qui Tam Defense practice. Mr. Phillips focuses on compliance, enforcement, and litigation in the health care and government contracting fields, as well as other white collar enforcement matters and related litigation. A former Trial Attorney in DOJ’s Civil Fraud section, he has particular experience representing clients in enforcement actions by the DOJ, Department of Health and Human Services, and Department of Defense brought under the False Claims Act and related statutes.

Robert Hur is a partner in the Washington, D.C. office where he is co-chair of the Crisis Management group. A seasoned trial lawyer and advocate, he brings decades of experience in government and in private practice, including service in senior leadership positions with the U.S. Department of Justice, to guide companies and individuals facing white-collar criminal matters, regulatory proceedings and enforcement actions, internal investigations, and related civil litigation.

Brendan Stewart is of counsel in the New York office and a former federal prosecutor. He previously served as an Assistant Chief in the Fraud Section of the U.S. Department of Justice’s Criminal Division where he oversaw a unit of health care fraud prosecutors in the Eastern District of New York from 2017 to 2021. As a prosecutor since 2012, he has led numerous complex investigations—in coordination with the U.S. Attorney’s Office, the FBI, the Department of Health and Human Services’ Office of Inspector General, State Attorneys General —focusing on potential violations of federal statutes barring health care fraud and false medical statements and other crimes.

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.

RELATED WEBCASTS IN THIS SERIES:

The False Claims Act – 2021 Update for Financial Services (October 6, 2021)
The False Claims Act – 2021 Update for Government Contractors (October 14, 2021)
The False Claims Act – 2021 Update for Drug & Device Manufacturers (October 20, 2021)

New York partner David Feldman and Los Angeles partner Michael Neumeister are the authors of “Sale toggles in Chapter 11 plan processes” [PDF] published by Financier Worldwide in its November 2021 issue.

Please join Jessica Brown and Lauren Elliot, authors of An Employer Playbook for the COVID “Vaccine Wars”: Strategies and Considerations for Workplace Vaccination Policies (Dec. 2020, updated Feb. 2021), for the latest information and trends relating to workplace vaccination policies. This updated briefing is highly relevant in light of the Delta variant and President Biden’s announcement of vaccine and testing mandates. Jessica and Lauren will be joined by their former colleague Jodi Juskie, Vice President and Assistant General Counsel for Keysight Technologies, for an in-house perspective on workplace vaccination and testing policies.

Topics will include the legal and regulatory landscape for vaccine mandates; OSHA’s ETS regarding COVID-19 vaccines/testing and implications for employers; vaccine mandate considerations for employers; pros and cons of different approaches to mandating vaccinations; how to deal with employees who cannot be, or claim they cannot be, vaccinated; collection and handling of vaccine and testing information; liability considerations with and without vaccine mandates; and how to build buy-in and plan for conflict resolution.

View Slides (PDF)

PANELISTS:

Jessica Brown is a partner in the Denver office of Gibson, Dunn & Crutcher and a member of the firm’s Labor and Employment and White Collar Defense and Investigations Practice Groups. Ms. Brown advises corporate clients regarding COVID-19 liability risks, workplace vaccination policies, Colorado Equal Pay for Equal Work Act Transparency Rules, anti-harassment, whistleblower complaints, reductions in force, mandatory arbitration programs, return-to-work protocols, and matters that intersect with intellectual property law, such as noncompete agreements and trade secrecy programs. She has assisted clients to conduct audits of their pay practices for purposes of compliance with state and federal equal pay and wage and hour laws. In addition, Ms. Brown has defended nationwide and state-wide class action and individual lawsuits alleging, for example, gender discrimination under Title VII, failure to permit facility access under the Americans with Disabilities Act, and failure to compensate workers properly under the Fair Labor Standards Act. She has been ranked by Chambers USA as a leading Labor and Employment lawyer in Colorado for 16 consecutive years and is currently ranked in Band 1. She also is the current President of the Colorado Bar Association.

Lauren Elliot is a partner in the New York office of Gibson, Dunn & Crutcher and a member of the firm’s Life Sciences and Labor & Employment Practice Groups. Ms. Elliot has defended pharmaceutical and biotech companies in cases involving a broad spectrum of well-known life sciences products. She successfully defended Wyeth (now Pfizer) in close to 400 product liability actions in which plaintiffs alleged that childhood vaccines cause autism spectrum disorders. Ms. Elliot also has defended labor and employment claims in class actions and individual lawsuits alleging violations of state labor laws and the Fair Labor Standards Act, and has been advising on COVID-19 liability risks and workplace vaccination policies. Legal Media Group has named Ms. Elliot to its Expert Guides Guide to the World’s Leading Women in Business Law for Product Liability three times and she has served two terms as a member of the Product Liability Committee for the Association of the Bar of the City of New York.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 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.

On Friday October 15, 2021, the Commodity Futures Trading Commission (CFTC) issued an enforcement order (Tether Order) against the issuers of the U.S. dollar Tether token (USDT), a leading stablecoin, and fined those issuers $41 million for making untrue or misleading statements about maintaining sufficient fiat currency reserves to back each USDT “one-to-one.”[1] In so doing, the CFTC asserted that USDT is a “commodity” under the Commodity Exchange Act (CEA).

The Tether Order is significant for few reasons. First, it marks the first U.S. enforcement action against a major stablecoin. Second, the CFTC has now asserted that it has some enforcement authority over stablecoins, just at the time that the Biden Administration is gearing up its regulatory approach to digital currencies in general and stablecoins in particular. Securities and Exchange Commission (SEC) Chair Gary Gensler stated earlier this year that he believed that certain stablecoins, such as those backed by securities, are securities,[2] and the President’s Working Group on Financial Markets will soon be issuing a report on stablecoins.[3] Third, the CFTC’s assertion that USDT is a commodity signals that stablecoins that are backed one-to-one with fiat currency are not securities and therefore are not directly subject to the SEC’s jurisdiction.

CFTC Legal Authority

Although the CFTC is principally a regulator of the markets for commodity futures and derivatives such as swaps, it does have certain enforcement authority over commodities in the cash markets (i.e., spot commodities). Section 6(c)(1) of the Commodity Exchange Act, provides that it is “unlawful for any person, directly or indirectly, to use or employ, or attempt to use or employ, in connection with any swap, or a contract of sale of any commodity in interstate commerce, . . . any manipulative or deceptive device or contrivance, in contravention of such rules and regulations as the Commission shall promulgate.”[4] The CFTC has promulgated regulations pursuant to Section 6(c)(1), which render unlawful intentional or reckless statements or omissions “in connection with . . . any contract of sale of any commodity in interstate commerce.”[5] When those regulations were promulgated, the CFTC stated that “[it] expect[ed] to exercise its authority under 6(c)(1) to cover transactions related to the futures or swaps markets, or prices of commodities in interstate commerce, or where the fraud or manipulation has the potential to affect cash commodity, futures, or swaps markets or participants in these markets.”[6]

Tether Order

Prior to the Tether Order, the CFTC had asserted that some digital assets are commodities.[7] The Tether Order definitively states that USDT is a commodity (and, in dicta, asserts that bitcoin, ether, and litecoin are commodities as well). It then alleges that the issuers of USDT made material misstatements under Section 6(c)(1) of the CEA and its implementing regulations regarding whether USDT was backed on a one-to-one basis with fiat currency reserves and whether this reserving would undergo regular professional audits, and the issuers made material omissions regarding the timing of one of the reserve reviews that USDT issuers did take.[8] Without admitting or denying the CFTC’s findings and conclusions, the USDT issuers consented to the entry of a cease-and-desist order and civil money penalty of $41 million.[9]

Conclusion

The recent past has seen the explosive growth of the digital asset markets, with regulators globally seeking to catch up. In the United States, the challenge has been, in the absence of new legislation, to make digital asset transactions fit within existing regulatory schemes. Much initial regulation has been at the state level; most federal financial regulators have initially been attempting to regulate through enforcement. Now, however, there is the prospect of overlapping federal regulation, particularly with respect to stablecoins. The Tether Order comes at a time when media outlets have reported that the U.S. Department of Treasury will be working with U.S. financial regulators to issue a broad report on stablecoins, including how stablecoins should be regulated. And although the CFTC has taken its position on USDT, it is currently still unclear how other U.S. regulators will view stablecoins and other digital assets.

_____________________________

[1] In the Matter of Tether Holdings Limited, Tether Operations Limited, Tether Limited, and Tether International Limited, CFTC Docket No. 22-04 (Oct. 15, 2021), available at https://www.cftc.gov/media/6646/enftetherholdingsorder101521/download.

[2] Gary Gensler, SEC Chair, “Remarks Before the Aspen Security Forum” (August 3, 2021).

[3] See, e.g., Michelle Price, “Explainer: How the U.S. Regulators Are Cracking Down on Cryptocurrencies,” Reuters, September 24, 2021.

[4] 7 U.S.C. § 9(1).

[5] 17 C.F.R. § 180.1(a)(2).

[6] CFTC, Final Rules: Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices and Prohibition on Price Manipulation, 76 Fed. Reg. 41,398, 41,401 (July 14, 2011).

[7] See, e.g., In re Coinflip, Inc., CFTC No. 15-29, 2015 WL 5535736, at * 2 (Sept. 17, 2015) (stating that bitcoin is properly defined as a commodity within the meaning of the CEA).

[8] Tether Order at 8-9.

[9] Also on October 15, the CFTC entered into a consent order with Bitfinex, a leading digital currency exchange that has many management and operational interlocks with the USD Tether issuers, for allegedly permitting U.S. customers that were not eligible contract participants to engage in leveraged, margined or financed commodity transactions that were not carried out on a designated contract market (i.e., a CFTC registered futures exchange) in violation of the CEA’s requirements, and acting as a futures commission merchant (FCM) without being registered with the CFTC as such. The CFTC further asserted that Bitfinex had violated a 2016 CFTC order that had commanded it to cease-and-desist from such activity. Without admitting or denying the CFTC’s findings and conclusions, Bitfinex consented to the entry of the new cease-and-desist order and a $1 million fine. See In the Matter of iFinex Inc., BFXNA Inc., and BFXWW Inc., CFTC Docket No. 22-05 (Oct. 15, 2021), available at https://www.cftc.gov/media/6651/enfbfxnaincorder101521/download.

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)

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

Third of Four Industry-Specific Programs

The False Claims Act (FCA) is one of the most powerful tools in the government’s arsenal to combat fraud, waste, and abuse involving government funds. After several years of statements and guidance indicating that the Department of Justice (DOJ) might alter its approach to FCA enforcement, the Biden Administration appears to be taking a different, more aggressive approach. Meanwhile, newly filed FCA cases remain at historical peak levels, and the government has recovered nearly $3 billion or more annually under the FCA for a decade. The government also continues to pursue new, large spending projects in COVID-related stimulus and infrastructure—which may bring yet more vigorous efforts by DOJ to pursue fraud, waste, and abuse in government spending. As much as ever, any company that receives government funds—especially in the drug and medical device sector—needs to understand how the government and private whistleblowers alike are wielding the FCA, and how they can defend themselves.

Please join us to discuss developments in the FCA, including:

The latest trends in FCA enforcement actions and associated litigation affecting drug and medical device manufacturers;
Updates on the Biden Administration’s approach to FCA enforcement, including developments impacting DOJ’s use of its statutory dismissal authority;
New proposed amendments to the FCA introduced by Senator Grassley; and
The latest trends in FCA jurisprudence, including developments in particular FCA legal theories affecting your industry and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.

View Slides (PDF)

PANELISTS:

Winston Y. Chan is a former federal prosecutor and litigation partner in the San Francisco office, and Co-Chair of the Firm’s False Claims Act Practice Group. He has particular experience leading matters for health care and life sciences companies involving government enforcement defense, internal investigations and compliance counseling. From 2003 to 2011, Mr. Chan served as an Assistant United States Attorney in the Eastern District of New York, where he held a number of supervisory positions and investigated a wide range of matters, including False Claims Act violations and health care fraud.

Marian J. Lee is a partner in the Washington, D.C. office and Co-Chair of the Firm’s FDA& Health Care Practice Group. She has significant experience advising clients on FDA regulatory strategy, risk management, and enforcement actions. Her practice spans the product life cycle, including the conduct of preclinical and clinical studies, good manufacturing practices and quality systems, premarket approvals and clearances, scientific communications, product labeling and advertising, and postmarket compliance.

John D. W. Partridge is a partner in the Denver office where he focuses on white collar defense, internal investigations, regulatory inquiries, corporate compliance programs, and complex commercial litigation. He has particular experience with the FCA and the Foreign Corrupt Practices Act (“FCPA”), including advising major corporations regarding their compliance programs.

MCLE CREDIT INFORMATION:

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.

RELATED WEBCASTS IN THIS SERIES:

The False Claims Act – 2021 Update for Financial Services (October 6, 2021)
The False Claims Act – 2021 Update for Government Contractors (October 14, 2021)
The False Claims Act – 2021 Update for Health Care Providers (October 26, 2021)

On October 13, 2021, the Securities and Exchange Commission (the “SEC”) adopted amendments to modernize filing fee disclosure for certain forms and schedules, as well as update payment methods for fees related to these filings. The final rule highlighted three primary goals of the amendments: (i) update disclosure requirements related to filing fees in order to provide more certainty to filers that the proper fee was calculated and facilitate the SEC staff’s review of such fee; (ii) modernize the payment method for filing fees and reduce the cost and burden on processing fee payments; and (iii) permit filers to reallocate previously paid filing fees in more situations than what was previously permitted. An overview of these changes is provided below. The amendments also contained certain technical, conforming and clarifying changes related to filing fee-related instructions and information.

The amendments will become effective January 21, 2022, with the changes to fee payment methods becoming effective May 31, 2022. The requirements for filing fee disclosures will be phased in over time as summarized below.

Read More

The following Gibson Dunn attorneys assisted in preparing this update: Ronald Mueller, Andrew Fabens, Peter Wardle, and James Moloney.

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

Deferred Prosecution Agreements (DPA) and Non-Prosecution Agreements (NPA) are the principal vehicles for bringing government investigations to closure short of a trial. In this annual presentation, a team of experienced practitioners discuss key considerations when evaluating these agreements and what to expect from the government. Topics will include:

Trends and statistics from 2000 to the present;
Factors that are likely to result in an NPA rather than a DPA;
Recent enforcement developments, including the impact of DOJ’s 2020 corporate compliance program guidelines;
Key terms in these agreements and what to watch out for, including updated compliance obligations;
Cross-border considerations and post-resolution consequences and obligations;
Brief survey of countries and agencies using DPA-or NPA-like resolution vehicles.

View Slides (PDF)

PANELISTS:

Stephanie L. Brooker is co-chair of Gibson Dunn’s global White Collar Defense and Investigations Practice Group and Financial Institutions Practice Group and anti-money laundering practice. She is the former Director of the Enforcement Division at FinCEN, and previously served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia and as a DOJ trial attorney for several years. Ms. Brooker represents multi-national companies and individuals in internal corporate investigations and DOJ, SEC, and other government agency enforcement actions involving, for example, matters involving BSA/AML; foreign influence; sanctions; anti-corruption; securities, tax, and wire fraud; whistleblower complaints; and “me-too” issues. Her practice also includes compliance counseling and deal due diligence and significant criminal and civil asset forfeiture matters. Ms. Brooker has been named a Global Investigations Review “Top 100 Women in Investigations” and National Law Journal White Collar Trailblazer.

Richard W. Grime is co-chair of Gibson Dunn’s Securities Enforcement Practice Group. Mr. Grime’s practice focuses on representing companies and individuals in corruption, accounting fraud, and securities enforcement matters before the SEC and the DOJ, along with advising companies on key aspects of their compliance programs. This year he represented two companies that resolved investigations through DOJ Deferred Prosecution Agreements. Prior to joining the firm, Mr. Grime was Assistant Director in the Division of Enforcement at the SEC, where he supervised a wide range of the Commission’s activities, including many FCPA and financial fraud cases, along with multiple insider trading and Ponzi-scheme cases. He is ranked annually in the top-tier by Chambers USA, and Chambers Global, for his FCPA practice.

Patrick F. Stokes is co-chair of Gibson Dunn’s Anti-Corruption and FCPA Practice Group. Mr. Stokes’ practice focuses on representing corporations and individuals in a wide variety of white collar investigations, including corruption, accounting fraud, securities fraud, money laundering, and financial institutions fraud. Prior to joining the firm, Mr. Stokes headed DOJ’s FCPA Unit, managing the FCPA enforcement program and all criminal FCPA matters throughout the United States covering every significant business sector. Previously, he served as Co-Chief of the DOJ Criminal Division’s Securities and Financial Fraud Unit, and was an Assistant U.S. Attorney in the Eastern District of Virginia. Mr. Stokes is highly ranked by Chambers USA and Chambers Global for his anti-corruption investigations and compliance practice.

F. Joseph Warin is co-chair of Gibson Dunn’s global White Collar Defense and Investigations Practice Group, and chair of the 200-person Litigation Department in Washington, D.C. Mr. Warin’s group is repeatedly recognized by Global Investigations Review as the leading global investigations law firm in the world. Mr. Warin’s practice includes representing corporations in complex civil litigation, white collar crime, and regulatory and securities enforcement – including FCPA investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation. He is a former Assistant United States Attorney in Washington, D.C. Mr. Warin is continually ranked annually in the top-tier in multiple practice categories by Chambers USA, Chambers Global, and Chambers Latin America. In 2021, Chambers named him a “Star” in FCPA, a “Leading Lawyer” in the nation in Securities Regulation: Enforcement, and a “Leading Lawyer” in the District of Columbia in Securities Litigation and White Collar Crime and Government Investigations.

Courtney Brown is a senior associate in the Washington, D.C. office of Gibson Dunn, where she practices primarily in the areas of white collar criminal defense and corporate compliance. Ms. Brown has experience representing and advising multinational corporate clients, boards of directors, and individuals in internal and government investigations on a wide range of topics, including anti-corruption, anti-money laundering, sanctions, securities, tax, and whistleblower and workplace matters. Ms. Brown has experience representing clients throughout the lifecycle of a government investigation, from the investigation stage to the completion of the post-resolution reporting period.

MCLE CREDIT INFORMATION:

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

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

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.

Washington, D.C. partner David Burns and associate Brian Williamson are the authors of “Should companies cooperate with law enforcement during ransomware attacks?” [PDF] published by Global Investigations Review on October 8, 2021.

New York partner Lindsey Schmidt and London associates Besma Grifat-Spackman and Rose Naing are the authors of “Protecting Your Foreign Investment,” [PDF] published by Corporate Disputes Magazine in its October-December 2021 issue.

Washington, D.C. partner David Fotouhi is the author of “9th Circ. Chromium Ruling May Expand Water System Liability,” [PDF] published by Law360 on October 14, 2021.

Second of four industry-specific programs

The False Claims Act (FCA) is one of the most powerful tools in the government’s arsenal to combat fraud, waste, and abuse involving government funds. After several years of statements and guidance indicating that the Department of Justice (DOJ) might alter its approach to FCA enforcement, the Biden Administration appears to be taking a different, more aggressive approach. Meanwhile, newly filed FCA cases remain at historical peak levels, and the government has recovered nearly $3 billion or more annually under the FCA for a decade. The government also continues to pursue new, large spending projects in COVID-related stimulus and infrastructure—which may bring yet more vigorous efforts by DOJ to pursue fraud, waste, and abuse in government spending. As much as ever, any company that receives government funds—especially in the government contracting sector—needs to understand how the government and private whistleblowers alike are wielding the FCA, and how they can defend themselves.

Please join us to discuss developments in the FCA, including:

The latest trends in FCA enforcement actions and associated litigation affecting government contractors;
Updates on the Biden Administration’s approach to FCA enforcement, including developments impacting DOJ’s use of its statutory dismissal authority;
New proposed amendments to the FCA introduced by Senator Grassley; and
The latest trends in FCA jurisprudence, including developments in particular FCA legal theories affecting your industry and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.

View Slides (PDF)

PANELISTS:

Jonathan M. Phillips is a partner in the Washington, D.C. office where he is co-chair of the False Claims Act/Qui Tam Defense practice. Mr. Phillips focuses on compliance, enforcement, and litigation in the government contracting and health care fields, as well as other white collar enforcement matters and related litigation. A former Trial Attorney in DOJ’s Civil Fraud section, he has particular experience representing clients in enforcement actions by the DOJ, Department of Health and Human Services, and Department of Defense brought under the False Claims Act and related statutes.

Nicola Hanna is a partner in the Los Angeles office and co-chair of the firm’s global White Collar Defense and Investigations practice. Mr. Hanna previously served as the presidentially appointed and Senate-confirmed United States Attorney for the Central District of California for three years. In this role, he was the chief federal law enforcement officer for the Los Angeles-based district, the largest Department of Justice office outside of Washington, D.C., and oversaw approximately 280 Assistant U.S. Attorneys. Under his leadership, the Central District brought and litigated some of the most impactful cases in the country and recovered nearly $4.5 billion in criminal penalties, civil recoveries, forfeited assets, and restitution. During his tenure as U.S. Attorney, Mr. Hanna served as the Chair of the Attorney General’s Advisory Committee’s White Collar Fraud Subcommittee. He also was a member of the Department of Justice Corporate Enforcement and Accountability Working Group, and one of two U.S. Attorneys on the Task Force on Market Integrity and Consumer Fraud chaired by the Deputy Attorney General.

James Zelenay is a partner in the Los Angeles office where he practices in the firm’s Litigation Department. He is experienced in defending clients involved in white collar investigations, assisting clients in responding to government subpoenas, and in government civil fraud litigation. He also has substantial experience with the federal and state False Claims Acts and whistleblower litigation, in which he has represented a breadth of industries and clients, and has written extensively on the False Claims Act.

Lindsay Paulin is an associate in the Washington, D.C. office. Her practice focuses on a wide range of government contracts issues, including internal investigations, claims preparation and litigation, bid protests, and government investigations under the False Claims Act. Ms. Paulin’s clients include contractors and their subcontractors, vendors, and suppliers across a range of industries including aerospace and defense, information technology, professional services, private equity, and insurance.

MCLE CREDIT INFORMATION:

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.

RELATED WEBCASTS IN THIS SERIES:

The False Claims Act – 2021 Update for Financial Services (October 6, 2021)
The False Claims Act – 2021 Update for Drug & Device Manufacturers (October 20, 2021)
The False Claims Act – 2021 Update for Health Care Providers (October 26, 2021)

On September 10, 2021, the Democratic majority of the United States House Committee on Ways and Means (“House Ways and Means Committee”) released draft legislation of its contributions to the Build Back Better Act (the “Legislative Recommendations”), designed to be enacted through the budget reconciliation process. On September 15, 2021, following close to 40 hours of debate over the course of four days, the House Ways and Means Committee advanced the Legislative Recommendations. Ten days later, on September 25, 2021, the House Budget Committee advanced the Legislative Recommendations. If enacted into law, the Legislative Recommendations would substantially extend and expand available clean energy tax incentives, helping to bring President Biden’s campaign promise to “reform and extend” these incentives to “unleash a clean energy revolution in America” closer to fruition.[1]

The Legislative Recommendations materially extend existing incentives, including the investment tax credit (“ITC”), the production tax credit (“PTC”), and the carbon capture and sequestration credit, including incentives that had begun (or were about to begin) to expire or phase down. These extensions will make the incentives available well into the next decade, while at the same time imposing new requirements designed to enhance the benefit to U.S. workers from spending on clean energy infrastructure (including prevailing wage and apprenticeship requirements). The Legislative Recommendations also expand the scope and availability of incentives, including making the ITC available for standalone energy storage and energy transmission assets and introducing new incentives for the production of clean hydrogen.

Perhaps most importantly, investors would have the option to elect to treat the applicable credit as a payment made against the tax imposed by subtitle A (the so-called “direct pay” option), and this option would be available for classes of investors (i.e., tax-exempt entities, taxpayers with substantial losses, and certain governmental entities) that have historically not been able to benefit directly from tax credits. If enacted, the “direct pay” option may make it easier for taxpayers without substantial taxable income (and an attendant need for tax credits) to make equity investments in clean energy projects.

In addition, the Legislative Recommendations propose to make income generated by various types of renewable energy assets (as well as facilities that install sufficient carbon capture equipment) “qualifying income” for “publicly traded partnerships,” opening up another source of capital for the development of clean energy projects.

Under budget reconciliation, Democrats only need 50 votes in the Senate to pass legislation through an equally divided Senate (the Vice President breaks the tie). But Democratic progressives and moderates disagree on the price tag and the scope of the Build Back Better Act. For the Legislative Recommendations to become law, they will need to pass muster with key Democratic moderates in both the House and Senate. If the Legislative Recommendations are enacted into law, we would expect that they will spur significant new investment in clean energy projects, providing increased certainty in an area of the law that has historically been subject to year-end stopgap extensions and a complicated patchwork of ever-changing and unpredictable qualification rules.

Direct Pay

The PTC, ITC, and section 45Q[2] carbon capture and sequestration credits (each of which is discussed in greater detail in a later subsection) have historically been non-refundable credits, meaning that substantial taxable income was generally a necessary prerequisite to benefit from the incentives.[3] The Legislative Recommendations would take steps to change that through a “direct pay” option, effective for projects whose placed in service date is after December 31, 2021. Under the “direct pay” option, an owner of a clean energy facility that would otherwise qualify for certain credits (including the ITC (including for transmission property), the PTC, the carbon capture and sequestration credit, and the advanced energy project credit) is authorized to make an irrevocable “direct pay” election. If the owner makes such an election, the owner will be treated as having paid tax in an amount equal to the credit amount (such that the investor is entitled to an overpayment or refund to the extent the deemed payment exceeds its tax liability).[4] In addition, partnerships and S corporations (i.e., entities not subject to entity-level income tax) are eligible to receive “direct pay” payments. The Legislative Recommendations provide that such payments will be made directly to the partnership or S corporation (rather than to their partners or shareholders).

The irrevocable (it appears, solely for a particular taxpayer with respect to a particular year) “direct pay” election would be required to be made no later than the due date (including extensions) for the return of tax for the taxable year for which the applicable credit is determined. Under the Legislative Recommendations, it appears (but is not entirely clear) that direct pay elections will not be able to be made on a facility-by-facility basis. The Legislative Recommendations provide even less clarity as to whether taxpayers will be able to make elections on a credit-by-credit basis. Further legislative clarity on these points would be useful, although the Secretary of the Treasury is legislatively authorized to address the time and manner for making the direct pay election and so may have some flexibility to provide clarification through regulatory guidance.

In addition to making renewable energy incentives available to entities lacking sufficient taxable income, the “direct pay” option would make such incentives available to various classes of investors that have historically not benefited directly from them, including state and local governments, Native American tribal governments, and tax-exempt organizations.

The “direct pay” option would, however, be subject to various restrictions and limitations. Perhaps most notable is the “domestic content” requirement, which focuses on whether the facility is composed of iron, steel or manufactured products that were produced in the United States, where a “manufactured product” is deemed manufactured in the United States if not less than 55 percent of the total cost of the components are attributable to components mined, produced or manufactured in the United States (the “Domestic Content Requirement”). This requirement would phase in over time, first applying to facilities whose construction begins in 2024 (which would be subject to a ten percent haircut if the Domestic Content Requirement was not met), gradually ramping up in 2025 (projects starting construction in 2025 would be subject to a 15 percent haircut), and then becoming subject to a cliff in 2026 (when projects must meet the Domestic Content Requirement or face the complete loss of any “direct pay” benefit). While there is a long onramp to applicability of the Domestic Content Requirement and the Secretary of the Treasury is permitted to waive the “domestic manufacture” requirement for projects the construction of which starts later in the decade, these new requirements could become a material impediment to the utility of the “direct pay” option.

In addition, the combination of the irrevocability of the “direct pay” election and the Domestic Content Requirement may deter taxpayers from the “direct pay” option. If a taxpayer elects into the “direct pay” option but fails to satisfy the Domestic Content Requirements, such taxpayer would not only be ineligible to receive the full amount of the “direct payment,” but would also apparently lose its ability to claim any alternative tax credit (e.g., the PTC, ITC, and section 45Q credits), at least for the taxable year for which the election was made.[5] Had the taxpayer not made the “direct pay” election, such credits would, at the very least, have been available to the taxpayer.

Moreover, the Legislative Recommendations clarify that direct payments elected with respect to ITCs will be subject to recapture and basis adjustment rules similar to the existing ITC rules.

In general, the “direct pay” option would be expected to reduce the need for tax-equity investors (i.e., investors with significant taxable income that have the ability to utilize tax credits) to partner with developers to monetize clean energy tax credits. But tax-equity financing would still yield benefits because a tax-equity investor may be willing to monetize not just the federal clean energy tax incentives produced by a renewable energy project, but also the future cash flows, depreciation deductions, and other state-level incentives resulting from that project. Tax-equity financing could also provide timing benefits, as tax-equity investors generally fund before (in the case of the ITC) or shortly after (in the case of the PTC) a project is placed in service, whereas the “direct pay” payment would be a refund of a tax deemed paid, with the tax not being deemed paid until the later of the due date of the tax return for the taxable year to which the “direct pay” payment relates or the date on which the return is actually filed, resulting in a delay of cash payment to sponsors until such time. Moreover, tax-equity investors can also effectively offset tax credits received under the ITC and PTC regimes against estimated tax payments, so the “direct pay” option may result in the loss of an additional timing benefit available to some taxpayers.

In addition, the Legislative Recommendations provide that the Secretary of the Treasury may require such information or registration as the Secretary determines is necessary or appropriate for purposes of preventing duplication, fraud, improper payments, or excessive payments under these provisions. Drawing on regulatory authority to prevent any “direct payment” from exceeding the credit to which a taxpayer would otherwise be entitled, we would anticipate that the Secretary would clarify that other limitations imposed under the U.S. Internal Revenue Code, as amended (the “Code”), and any applicable Treasury Regulations (including, for example, the limitation in section 38(c) on the portion of a taxpayer’s tax liability that can be reduced through the general business credit (which includes the energy credit)) to apply to direct payments. And, if the Secretary determines that there has been an excessive payment, a penalty is imposed (in an amount equal to the sum of the excessive payment plus 20 percent).

Furthermore, given the expected size of some of the refund claims contemplated by the “direct pay” arrangement, it is uncertain whether or not such claims may in the future be subjected to mandatory review by the Congressional Joint Committee on Taxation (the “JCT”). Treasury Regulations exclude refunds of overpayments (such as estimated tax payments and withholdings reported on original returns) from JCT review. The Internal Revenue Service has interpreted the applicable Treasury Regulations to exclude all refundable credits reported on original returns as well, but historically there have been few, if any, refundable business credits. The U.S. Treasury Inspector General for Tax Administration has prepared a report that criticizes the existing Treasury Regulations on this matter, which notes that the JCT should review more original returns. Making PTCs and ITCs refundable and adding the “direct pay” option could significantly increase the pressure to move that issue forward and require JCT review of original returns claiming PTC and ITC refund claims and claims under the “direct pay” option.

Expansion and Extension of Renewable Electricity Production Credit (PTC) under Section 45

The PTC available to taxpayers under section 45 of the Code applies to “qualified facilities” (as currently defined in section 45 of the Code) at a specified percentage of certain credit amounts (as adjusted by the “inflation adjustment factor” in section 45(e)(2), the “PTC Credit Amounts”).

Under the current PTC regime, the full PTC is only available for projects the construction of which began by the end of 2016 (with the PTC phasing down for projects on which construction began in 2017 or later).

The Legislative Recommendations would extend the duration of the PTC for more than a decade, and expand the scope and amount of the credit in various respects, but would also impose new requirements that need to be satisfied in order to qualify for the credit.

In terms of the duration of the credit, for projects beginning construction between January 1, 2022 and December 31, 2031 (and for projects the construction of which began in 2020 or 2021, but only if those facilities are placed in service in 2022 or later), the credit would be available at 100 percent of the PTC Credit Amounts. This 100 percent credit would be a boon for taxpayers relative to the current regime, given that the PTC was going to be completely unavailable to projects beginning construction in 2022 or later, and (as noted) projects the construction of which began in 2017 or later were subject to phaseouts (e.g., a 40 percent reduction for a 2021 start of construction project). Importantly, however, the Legislative Recommendations do not extend the full PTC to projects the construction of which began prior to 2020. While this may be a drafting glitch, if the Legislative Recommendations are enacted in their current form, we would expect that taxpayers who already began construction on a project (under the flexible regulatory “begun construction” guidance) would have incentives to try to take available steps to abandon or otherwise recommence the work that was done previously on such project, and in light of the placed in service rule for 2020 or 2021 start of construction projects, we would expect taxpayers to delay placing in service such projects until 2022 where feasible to benefit from being able to claim the credit at a 100 percent rate.

Under the Legislative Recommendations, the PTC would be subject to a gradual phaseout beginning more than a decade in the future, with a 20 percent phaseout for projects beginning construction during the year 2032, 40 percent for projects beginning construction during 2033, and a complete phaseout for projects beginning construction after December 31, 2033.

Beyond its temporal expansion, the Legislative Recommendations would also expand the scope of projects to which the PTC is available. The Legislative Recommendations permit credits for electricity generated by solar power for the first time in nearly two decades, at a PTC Credit Amount of 2.5 cents per kilowatt hour for facilities placed in service after December 31, 2021 and the construction of which begins before January 1, 2034. In addition, the Legislative Recommendations contain proposed section 45W, which creates a PTC for zero-emission nuclear power equal to the amount by which (1) the product of (a) 1.5 cents multiplied by (b) the kilowatt hours produced by the taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year, exceeds (2) the “reduction amount” for such taxable year. The “reduction amount” is equal to the lesser of subparagraph (1) above, or 80 percent of the excess of (A) the gross receipts from any electricity produced by such qualified nuclear power facility and sold to an unrelated person during the taxable year, over (B) the product of (i) 2.5 cents and (ii) the figure calculated in subparagraph (b) above.

As part of an effort to incentivize domestic manufacturing, the Legislative Recommendations would create a bonus for certain projects, increasing the applicable PTC Credit Amount by ten percent for any qualified facility that satisfies the Domestic Content Requirement. This incentive approach deviates from the “direct pay” rules (which, as described previously, penalize taxpayers who place in service a facility that would otherwise be eligible for PTCs, make a “direct pay” election, but fail to satisfy the Domestic Content Requirement).

As noted, however, in addition to expanding the PTC in various respects, the Legislative Recommendations would impose new requirements to qualify for the full PTC, subjecting projects that do not satisfy certain prevailing wage and apprenticeship requirements to a substantial 80 percent reduction to the otherwise available PTC Credit Amounts. Such requirements would apply broadly, to any project with a maximum net output of at least one megawatt, the construction of which begins on or after the date the Legislative Recommendations are signed into law.

The proposed wage requirements (the “Prevailing Wage Requirements”) in the Legislative Recommendations would require the taxpayer to provide written certification to the government that all laborers and mechanics employed in the construction (and, for the ten-year period beginning on the date of service, alteration or repair) of a qualified facility are paid wages at rates not less than the prevailing rates on projects of similar character in the locality, as determined by the Secretary of Labor. If a taxpayer underpays its employees and its available PTC is slashed (to 20 percent of the otherwise available credit amount) as a result, it could cure such violation by both (1) compensating each of its employees that worked on the project in an amount equal to the sum of (a) the difference between the actual wages paid during the applicable period and the amount of wages required to be paid under the Legislative Recommendations, and (b) applicable interest, and (2) paying a penalty to the U.S. government of $5,000 for each underpaid employee. The Legislative Recommendations leave unanswered practical questions about how or when the determination as to whether the Prevailing Wage Requirements has been satisfied would be made. Assuming such determination is to be made on audit, that audit would likely occur several years after the relevant credit had been claimed, requiring taxpayers (and contractors who work for them) to provide service providers with additional compensation at that time, even though certain service providers might no longer be affiliated in any way with the project (or the owner of the project that is claiming the credit).

The proposed apprenticeship requirement in the Legislative Recommendations (the “Apprenticeship Requirement,” and, together with the Prevailing Wage Requirements, the “Prevailing Wage and Apprenticeship Requirements”) would require the taxpayer to ensure that an “applicable percentage” of the total labor hours (which excludes hours worked by foremen, superintendents, owners, or executives) connected with the construction (and, for the ten-year period beginning on the date of service, alteration or repairs) on a project be performed by “qualified apprentices.” The term “qualified apprentice” means an individual who is (1) an employee of the project’s contractor or subcontractor, and (2) participating in an apprenticeship program registered under the National Apprenticeship Act. For projects beginning construction before January 1, 2023, five percent of the total labor hours must be performed by qualified apprentices. For projects beginning construction during calendar year 2023, ten percent of the total labor hours must be performed by qualified apprentices, and for projects beginning construction after December 31, 2023, 15 percent of the total labor hours must be performed by qualified apprentices. Each contractor or subcontractor who employs four or more individuals to perform construction, alteration, or repair work on a project must employ at least one qualified apprentice to assist in the work. The taxpayer may be excused for failing to satisfy these requirements if (1) the taxpayer can demonstrate that there is a dearth of qualified apprentices available for employment in the geographic area of the project, and (2) the taxpayer makes a good faith effort to comply with the Apprenticeship Requirement, including by requesting qualified apprentices from a registered apprenticeship program (even if such request is denied, the taxpayer will be excused as long as the denial is not the result of the refusal by contractors or subcontractors involved in the project to comply with the standards of a registered apprenticeship program).

Because projects whose construction begins prior to the enactment of the Legislative Recommendations would be exempted from the proposed Prevailing Wage and Apprenticeship Requirements, we can expect to see taxpayers seek to “grandfather” in projects by beginning construction before these requirements are enacted. For projects seeking to qualify for the full PTC, taxpayers will need timely and clear guidance from the government about how to meet the requirements (e.g., clear guidance from the Secretary of Labor about how to determine the prevailing wages in a particular location). While the Prevailing Wage Requirement can generally be satisfied through the mere payment of additional wages (and so should be relatively easy to satisfy), the Apprenticeship Requirement will force taxpayers to closely monitor (and force their contractors and subcontractors to closely monitor) who performs construction, alterations, and repairs on projects, likely necessitating new certification processes, particularly because the Legislative Recommendations do not have a mechanism to “cure” failures to comply with the requirement through the payment of a penalty. In terms of tax-equity financings, we would expect that tax-equity investors will seek to push noncompliance risk onto project sponsors, particularly the risk that activities that occur following funding (such as repairs) might jeopardize PTC qualification.

Expansion and Extension of Energy Credit (ITC) under Section 48

The ITC available under section 48 of the Code would be significantly extended under the Legislative Recommendations. In particular, a solar facility on which construction began prior to 2032 (and which is placed in service after 2022 but before 2036) would be eligible for the ITC without phase-down if such solar facility meets the continuity of construction requirements issued by the IRS. Without the extension under the Legislative Recommendations, the ITC would continue to phase down through the end of 2023, and for projects beginning construction in 2024 would only be available at a modest ten percent rate.

It is worth noting that the Legislative Recommendations would not increase the ITC for solar projects for which construction began after 2019 if such projects are placed in service before the end of 2021. Beginning with projects placed in service in 2022, however, certain solar projects on which construction begins prior to 2032 would be eligible for the ITC at the rate of 30 percent—which is the highest amount of the ITC for which solar projects have been eligible in recent years. Thereafter, the credit would begin to step down, with the ITC being equal to 26 percent for projects beginning construction in 2032, and 22 percent for solar projects beginning construction in 2033. In addition, the Legislative Recommendations push out the statutory deadline (December 31, 2036) by which solar projects must be placed in service to qualify for an ITC greater than ten percent. The structure of the Legislative Recommendations, as it pertains to solar projects, would seem to incentivize sponsors that are developing solar projects that are nearly complete and operational to delay placing these projects into service until after the end of this year. All else being equal (and assuming enactment), an owner of a project eligible for the ITC could receive (at least) an additional four percentage points in ITCs if the owner (or sponsor) waited to place the solar project in service until after the end of this year.

The Legislative Recommendations also expand the list of renewable energy projects eligible for the ITC in various respects (including to “qualified biogas property” and “microgrid controllers”). Most notable, perhaps, is the expansion of the ITC to “energy storage technology” which is equipment, other than equipment primarily used in the transportation of goods or individuals and not for the production of electricity, that uses batteries or certain other technologies to store energy for conversion to electricity and that has capacity of at least five kilowatt hours. Equipment that would meet these requirements, but has a capacity of less than five kilowatt hours, can qualify for this credit if such equipment is modified or refitted such that it has at least five kilowatt hours of capacity. However, no portion of the tax basis that was part of such equipment before its modification can be taken into account in calculating the ITC after modification. The expansion of the ITC to standalone batteries could be of key importance to the renewable energy industry. Under current law, only certain storage technologies that are directly tied to facilities that generate electricity and that are otherwise eligible to claim the ITC (separate from such storage technologies) are ITC eligible. Not only would the expansion of the ITC to these standalone facilities spur development of such technologies and infrastructure, but it would also support the build-out of what many industry observers have described as a missing piece of the puzzle for the renewable energy space—sufficient battery storage to build reserves of renewably generated electricity for use during the periods of time when renewable facilities are not generating sufficient energy for public consumption (e.g., storage of solar energy generated during the day for use during nights and evenings).

As with other portions of the Legislative Recommendations, for projects with a maximum net output of at least one megawatt, any credit claimed under section 48 would only be eligible for the full rate if the Prevailing Wage and Apprenticeship Requirements are satisfied. If such requirements are not satisfied, or otherwise cured, then any credit claimed under section 48 could be claimed at a rate equal to only 20 percent of the otherwise available credit amount. These requirements are similar to the requirements that apply to facilities seeking to claim PTCs, although the Prevailing Wage and Apprenticeship Requirements only apply for five years after a facility is placed in service (rather than for ten years). See the discussion of these requirements above under “Expansion and Extension of Renewable Electricity Production Credit (PTC) under Section 45.” The exception from the Prevailing Wage and Apprenticeship Requirements for projects with a maximum net output of less than one megawatt would be particularly helpful to the residential rooftop solar industry.

With respect to an energy property that satisfies the Domestic Content Requirement, such energy property is eligible for a step-up—or bonus—in the amount of ITC that can be claimed in respect of that project. For a project that meets the Domestic Content Requirement but that (1) has a maximum net output of one megawatt or more, and (2) does not meet the Prevailing Wage and Apprenticeship Requirements, that project is eligible for a two percentage point increase in the amount of ITC that can be claimed. For projects that meet the Domestic Content Requirement and that either (1) have a maximum net output of less than one megawatt or (2) satisfy the Prevailing Wage and Apprenticeship Requirements, then such a project is eligible for a ten percentage point increase in the amount of ITC that can be claimed.

Certain solar facilities with a nameplate capacity of less than five megawatts are eligible for a ten percentage point step-up in the ITC if the facility is located in a “low-income community” (defined by cross-reference to the new markets tax credit rules in section 45D of the Code). If a solar facility with a nameplate capacity of less than five megawatts is part of a “qualified low-income residential building project or a qualified low-income economic benefit project,” then it is eligible for a step-up in the ITC equal to 20 percentage points.[6] The property with respect to which this step-up in ITC can be claimed includes certain energy storage property installed in connection with such solar facility and the amount of expenditures incurred for “qualified interconnection property” (as defined in the Legislative Recommendations). In sum, under the Legislative Recommendations, certain small scale solar facilities that are installed as part of a “qualified low-income residential building project” and that meet the Domestic Content Requirements could be eligible for the ITC at an amount equal to 60 percent of the basis of the energy property placed in service in connection with that project.

Qualifying Electric Transmission Property (Section 48D)

In addition to expanding the ITC (as described above), the Legislative Recommendations provide for a new tax credit (similar to the ITC) claimable in respect of “qualifying electric transmission property” for an amount equal to 30 percent of the basis of the applicable property. “Qualifying electric transmission property” is generally defined to include an electric transmission line that is capable of transmitting electricity at a voltage of not less than 275 kilovolts that has a transmission capacity of not less than 500 megawatts and any property that, with respect to a credit-eligible electric transmission line, is necessary for the operation of such electric transmission line (or is otherwise listed as “transmission plant” in the Uniform System of Accounts for the Federal Energy Regulatory Commission).

A qualifying electric transmission line can be a replacement to, or upgrade to, an existing electric transmission line, but only if the transmission capacity of such electric transmission line, as upgraded, increases to an amount equal to the existing capacity of such transmission line plus 500 megawatts. The basis allocable to such existing transmission line also would not be eligible for any credit under section 48D. This new section 48D credit is not claimable with respect to property on which construction begins prior to January 1, 2022 or if a state or political subdivision thereof, any agency or instrumentality of the United States, a public service or public utility commission, or an electric cooperative has previously (before the date when the Legislative Recommendations are enacted) “selected for cost allocation such property for cost recovery.”

As with other portions of the Legislative Recommendations, any credit claimed under section 48D would only be eligible for the full rate if the Prevailing Wage and Apprenticeship Requirements are satisfied, although these requirements will not apply to projects the construction of which begins before the Legislative Recommendations are enacted. Depending on when the Legislative Recommendations might be enacted, however, there may be little opportunity to plan around the Prevailing Wage and Apprenticeship Requirements, given that the credit does not apply to property the construction of which begins before January 1, 2022. If such requirements are not satisfied, or otherwise cured, then any credit claimed under section 48D could be claimed at a rate equal to only 20 percent of the full credit amount.

With respect to an energy project that is composed of “steel, iron, or manufactured products which were produced in the United States” (i.e., that satisfies the Domestic Content Requirement), such energy property is eligible for a step-up—or bonus—in the amount of ITC that can be claimed in respect of that project. If a transmission project satisfies the Domestic Content Requirement but does not satisfy the Prevailing Wage and Apprenticeship Requirements, then that project is eligible for a two percentage point increase in the amount of ITC that can be claimed. Those projects that satisfy the Domestic Content Requirement and meet the Prevailing Wage and Apprenticeship Requirements are eligible for a ten percentage point increase in the amount of ITC that can be claimed.[7]

In general, any credit claimed under section 48D would have to be claimed in respect of property that is placed in service prior to January 1, 2032.

Expansion and Extension of Credit for Carbon Oxide Sequestration under Section 45Q

The Legislative Recommendations extend the date by which construction must have begun on a “qualified facility” for purposes of section 45Q from January 1, 2026 to January 1, 2032. The Legislative Recommendations leave many aspects of the tax credit rules for facilities that capture carbon oxide intact, but also makes some significant expansions and revisions to the rules.

The Legislative Recommendations would accelerate certain scheduled section 45Q rate increases (to be effective in 2022, rather than 2026 under current law): to $35 per metric ton, for qualified carbon oxide captured and used in an enhanced oil or natural gas recovery (or other allowable uses), and to $50 per metric ton for qualified carbon oxide captured and disposed of in secured geological storage.[8] For direct air capture facilities, each metric ton of qualified carbon oxide that is captured and disposed of in a geological storage would be eligible for a $180 credit, and each metric ton of carbon oxide that is captured and used in an enhanced oil or natural gas recovery (or another allowable use) would be eligible for a $130 credit.[9]

Under the Legislative Recommendations, the “qualified facilities” eligible for these expanded credits include:

“direct air capture facilities” that capture 1,000 metric tons or more of qualified carbon oxide during a taxable year (under current law, the applicable threshold is not less than 100,000 metric tons),[10]
electricity generating facilities that capture 18,750 metric tons or more of qualified carbon oxide during the taxable year and at least 75 percent of the carbon dioxide from such facilities would otherwise be released into the atmosphere by such facility during such taxable year (under current law, the applicable threshold is not less than 500,000 metric tons, but there is no minimum percentage capture requirement under current law), and
any other facilities that capture 12,500 metric tons or more of qualified carbon oxide during the taxable year and at least 50 percent of the carbon oxide from such facilities would otherwise be released into the atmosphere during such taxable year (the facilities described in this paragraph, “Industrial Facilities”) (under current law, the applicable threshold is not less than 25,000 metric tons, but there is no minimum percentage capture requirement under applicable law).

As with other portions of the Legislative Recommendations, any credit claimed under section 45Q would only be creditable in full if the Prevailing Wage and Apprenticeship Requirements are satisfied.[11] If such requirements are not satisfied, or otherwise cured, then any credit claimed under section 45Q could be claimed at a rate equal to 20 percent of the full credit amount.

Modification of Special Rules for Offshore Wind Projects

The Legislative Recommendations modify special rules that excepted certain offshore wind projects from ITC phase-outs under current law in light of such projects’ significantly longer development timelines. Under the Legislative Recommendations, offshore wind projects are generally subjected to the same extended construction deadlines as onshore wind projects. The Legislative Recommendations make clear, however, that the 100 percent ITC remains available in respect of certain offshore wind projects placed in service before 2022.[12]

Going forward, the Legislative Recommendations would revert to prior law regarding the geographic boundaries for offshore wind projects eligible for the ITC. Under current law (which applies to projects that begin construction before 2022), for a project to be PTC eligible, it must be located within the United States or in a possession, which is defined for PTC purposes to include an exclusive economic zone (which generally extends as much as 200 nautical miles from a territorial sea baseline). For the ITC, on the other hand (which, under current law, is available for offshore wind projects that begin construction through 2025) the facility must be “located in the inland navigable waters of the United States or in the coastal waters of the United States.” The narrower geographic ITC boundary for offshore wind projects would only apply to projects that were placed in service before 2022.

Publicly Traded Partnerships

In general, under existing law, a “publicity traded partnership” (which is any partnership if the interests in such partnership are traded on an established securities market or readily tradable on a secondary market (or the substantial equivalent thereof)) is taxed as a corporation (and therefore subject to entity-level U.S. federal income tax) unless an exception applies. The primary exception to these rules is for partnerships that earn 90 percent or more “qualifying income” (which includes a variety of types of passive income as well as income and gains from exploration, development, mining, production, processing, refining, transportation, and marketing of any mineral or natural resource). Historically, the income generated by a renewable energy facility would not have been “qualifying income.” Under the Legislative Recommendations, however, the definition of “qualifying income” would be revised to include various types of income derived from clean energy projects (including PTC and ITC eligible property and income or gain from a “qualified facility” under section 45Q(d)).

This aspect of the Legislative Recommendations, if enacted, would open up a potential source of new capital for clean energy projects, making it possible for investors in the public markets to more easily participate (through a flow-through vehicle) in such projects. The impact of this proposal on traditional tax-equity investors is not entirely clear. On the one hand, “publicly traded partnerships” could compete against tax-equity investors, reducing returns as additional capital competes for the right to invest in projects. On the other hand, publicly traded partnerships would not be well situated to directly capture the key benefits generated by renewable energy projects—tax credits and depreciation deductions—because deductions and credits attributable to an investment in a renewable energy project would generally pass through to the holders of interests in the partnership, who may or may not be able to effectively monetize those items, although (with respect to the tax credits, but not depreciation deductions) publicly traded partnerships could seek to avail themselves of the “direct pay” election, subject to the limitations and restrictions on “direct pay” described previously in this alert, and subject to the limitations described in the next sentence. In addition, certain rules that can reduce or eliminate the availability of the ITC or accelerated depreciation (including the tax-exempt use property rules) based on tax characteristics of the owners of a partnership could make it challenging for publicly traded partnerships to partner with tax-equity investors in a way that would allow those investors to effectively monetize tax benefits from a clean energy project.

Clean Hydrogen Incentives

The Legislative Recommendations also propose to add section 45X, which would provide a tax credit for the production of clean hydrogen. This new credit would be available (subject to the Prevailing Wage and Apprenticeship Requirements[13]) for clean hydrogen projects the construction of which begins before January 1, 2029 that are placed in service after December 31, 2021, and, with respect to those projects, the credit would be claimable for the ten-year period beginning on the placed in service date of the clean hydrogen project. This credit is not available for clean hydrogen produced at a facility that includes property for which a section 45Q carbon oxide sequestration credit is allowed (i.e., “blue” hydrogen facilities taking advantage of the section 45Q credit would not also be entitled to the section 45X credit).

The amount of the credit is equal to the product of (1) the number of kilograms of “qualified clean hydrogen” (hydrogen that is produced through a process that achieves a percentage reduction in lifecycle greenhouse gas emissions of at least 40 percent as compared to hydrogen produced by steam-methane reforming of non-renewable natural gas) produced during the applicable taxable year, and (2) the “applicable amount” of $3.00 (adjusted for inflation) multiplied by the “applicable percentage.” The “applicable percentage” is a percentage available to taxpayers based on the percentage reduction in “lifecycle greenhouse gas emissions” (as defined in the Clean Air Act) as compared to hydrogen produced by steam-methane reforming. The “applicable percentage” can be: (a) 20 percent (for a less than 75 percent reduction), (b) 25 percent (for a reduction greater than or equal to 75 percent and less than 85 percent), (c) 34 percent (for a reduction greater than or equal to 85 percent and less than 95 percent), and (d) 100 percent (for a 95 percent or greater reduction). In other words, the higher the reduction, the higher the applicable percentage, and therefore, the larger the available tax credit eligible to be claimed under section 45X would be.

Tax Credits and BEAT

Tax credits are only useful to the extent they are able to actually reduce cash taxes payable. Under the Legislative Recommendations, the general business credit (which includes the PTC, the ITC, and section 45Q credits and would include the proposed section 48D and section 45X credits) would be fully creditable against BEAT liability. Under current law, only up to 80 percent of the otherwise-available section 48 ITC and the section 45 PTC (and none of the section 45Q credit) are able to reduce BEAT liability (and then only through 2025, after which the ITC and PTC would also effectively cease to reduce BEAT liability).

This modification to the rules would be expected to make the credit more desirable to tax-equity investors with meaningful potential BEAT liability, particularly if BEAT liability is expanded as has been proposed.

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[1] Democratic National Committee, The Biden Plan To Build A Modern, Sustainable Infrastructure And An Equitable Clean Energy Future, JoeBiden.com (last visited Oct. 13, 2021), https://joebiden.com/clean-energy/.

[2] Unless otherwise noted, section references refer to sections of the Internal Revenue Code of 1986, as amended.

[3] Substantial taxable income was not, however, needed for developers/owners of certain renewable energy projects to benefit from the “cash grant” program under section 1603 of the American Recovery and Reinvestment Tax Act of 2009. Under this program, eligible developers/owners of certain renewable energy projects were able to forgo tax credits in lieu of a direct cash payment from the Treasury Department that would defray part of the cost of the project.

[4] Curiously, the payment is to be treated as a payment against “the tax imposed by subtitle A,” which includes sections 1 through 1563. Thus, if enacted in its current form, the deemed payment would offset not only income tax liability (imposed under chapter 1 of subtitle A), but also liability for self-employment taxes, the net investment income tax, and various withholding taxes (including liability to remit taxes withheld on various payments to non-U.S. taxpayers). It is possible that the offset was intended be limited to income taxes.

[5] As noted, it appears that election is only irrevocable with respect to a particular taxable year. Thus, for credits that accrue over a period of time (e.g., the PTC, which is available over ten years), it appears that taxpayers may be able to toggle between “direct pay” and PTCs from year to year. For facilities that would otherwise seek to claim the ITC, however, a “direct pay” election could completely foreclose the ability to claim that credit (which is a one-time credit, available in the year when a facility is placed in service).

[6] A solar facility is part of “qualified low-income residential building project” if (1) the facility is installed on a residential rental building that is part of one of various enumerated legislative programs (e.g., a “covered housing program” defined in section 41411(a) of the Violence Against Women Act of 1994), and (2) the financial benefits of the electricity produced by the facility are equitably allocated among the building occupants. A facility is treated as part of a “qualified low-income economic benefit project” if at least 50 percent of the financial benefits of the electricity produced by the facility are provided to households that meet certain income requirements. For purposes of determining whether there has been a “financial benefit,” the Legislative Recommendations specify that electricity acquired at below-market rates “shall not fail to be taken into account as a financial benefit.”

[7] The Prevailing Wage and Apprenticeship Requirements also include an exception (similar to the ITC and PTC) for projects with a maximum net output of less than one megawatt, which in this instance appears to be a drafting glitch. First, it does not comport with the 500 megawatt requirement for “qualifying electric transmission property” described in the Legislative Recommendations. Second, this requirement is not noted in the JCT’s report discussing the Legislative Recommendations, entitled “Description Of The Chairman’s Modification To The Provisions Of The ‘Clean Energy For America Act’.” Similar issues arise with respect to the Prevailing Wage and Apprenticeship Requirements that would be made applicable to sections 45Q and 45X (discussed below). We would expect that these exceptions may be subsequently revised as the Legislative Recommendations make their way through the legislative process.

[8] Credit amounts are subject to inflation adjustments.

[9] The Legislative Recommendations expanding section 45Q appear to contain several drafting oversights. The caption for new subparagraph (B) of section 45Q(b)(1), as provided for by section 136107(c) of the Legislative Recommendations, describes a “Special Rule for Direct Air Capture Facilities” but then, by its terms, would only apply to those facilities described in section 45Q(d)(2)(C), which (as amended by the Legislative Recommendations) only pertains to Industrial Facilities and not the “direct air capture facilities” that would be described in section 45Q(d)(2)(A). We note that section 136107(e)(1)(C) of the Legislative Recommendations would also revise section 45Q(b)(1)(B) without coordination with the changes proposed by section 136107(c). Also, the “direct pay” rules for a partnership or S corporation seeking direct payments for section 45Q credits would require the qualified facility be “held” by the partnership or S corporation.

[10] Note that a “direct air capture facility” is any facility that captures carbon dioxide, and the eligibility for such a “direct air capture facility” for the enhanced credit under section 45Q is calculated on the basis of the number of metric tons of “qualified carbon oxide” captured. However, with respect to a “direct air capture facility,” “qualified carbon oxide” only includes, for purposes of section 45Q, carbon dioxide (1) that is captured directly from the ambient air, and (2) that is measured at the source of capture and verified at the point of disposal, injection, or utilization. As a result, and assuming that legislators clarify that a “direct air capture facility” is eligible for the expanded credit under section 45Q, any “direct air capture facility” can earn the expanded tax credits under the Legislative Recommendations only if such facility captures 1,000 metric tons or more of carbon dioxide during the taxable year, and meets certain other requirements.

[11] In the Legislative Recommendations, the Prevailing Wage and Apprenticeship Requirements for section 45Q contain an exception for a qualified facility with a maximum net output of less than one megawatt, which (similar to the issue in proposed sections 48D and 45X) may be a drafting glitch.

[12] To date, there are only two operating offshore wind projects in the United States, although a third project is reportedly slated for construction.

[13] In the Legislative Recommendations, the Prevailing Wage and Apprenticeship Requirements for section 45X contain an exception for a project with a maximum net output of less than one megawatt, which (similar to the issue in proposed sections 45Q and 48D) may be a drafting glitch.

This alert was prepared by Matt Donnelly, Michael Desmond, Roscoe Jones, Jr., Eric Sloan, Mike Cannon, Josiah Bethards, and Laura Pond.

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, any member of the firm’s Tax, Public Policy, or Power and Renewables practice groups, or any of the following:

Tax Group:
Matt Donnelly – Washington, D.C. (+1 202-887-3567, mjdonnelly@gibsondunn.com)
David Sinak – Dallas (+1 214-698-3107, dsinak@gibsondunn.com)
Michael Q. Cannon – Dallas (+1 214-698-3232, mcannon@gibsondunn.com)
Josiah Bethards – Dallas (+1 214-698-3354, jbethards@gibsondunn.com)

Public Policy Group:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Roscoe Jones, Jr. – Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com)

Power and Renewables Group:
Nicholas H. Politan, Jr. – New York (+1 212-351-2616, npolitan@gibsondunn.com)
Gerald P. Farano – Denver (+1 303-298-5732, jfarano@gibsondunn.com)

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

Over the past few years we have observed a trend in companies seeking to outsource (and monetize) certain core, best-in-class processes. These transactions, dubbed “lift-outs”, include examples such as insurance companies lifting-out their insurance claims processing capabilities, medical device companies lifting-out their medical device manufacturing capabilities, and pharmaceutical companies lifting-out their research and development capabilities.

While the benefits of these transactions are potentially significant, lift-outs are complex and require a broad array of legal disciplines, such as technology, corporate, tax, privacy, real estate, intellectual property, and employment law specialists, often in multiple jurisdictions. They also demand a significant amount of effort and advance planning in order to address issues such as pricing, governance, change management, limits on liability, indemnification obligations, intellectual property rights, termination rights, and exit rights, among others. As a result, successful lift-out transactions require robust legal expertise in order to document and support the long term goals, opportunities and arrangements of the parties.

From a legal perspective, many of the challenges that arise from lift-out transactions stem from the fact that lift-outs are a hybrid of several better known transactions, namely IT outsourcing transactions, business process outsourcing transactions and carve-out divestiture transactions. While lift-outs have elements that on their face look familiar to either an outsourcing attorney or M&A attorney, these elements and issues are often not addressed in a traditional manner. As such, understanding how to address these elements is critical to a successful lift-out transaction. This alert will discuss several of these key elements.

The Business

An important aspect of most lift-out transactions is the description of “the business”; in other words, what internal capabilities is the service provider acquiring from the company that will be used to provide services back to the company (and eventually the service provider’s other customers). This is often the most difficult aspect of a lift-out transaction because the internal capabilities being acquired are unlikely to have been operated as a separate business. Moreover, these internal capabilities are rarely even housed within a single legal entity. More often, the personnel, infrastructure and processes that make up these internal capabilities are spread across disparate pieces of a company, multiple entities and

potentially even different business units. Furthermore, the internal capabilities have typically never been commercially exploited and are rarely subject to the types of procedures and performance standards of a commercial offering. As a result, referring to these internal capabilities as “a business” is in name only. For these reasons, typical requirements of an M&A carve-out transaction, such as requiring a financial statement or a sufficiency of assets representation, are often impractical, if not impossible in lift-out transactions; and a significant degree of analysis, both legal and financial, and ultimately negotiation, is required to properly define the internal capabilities being transferred.

Purchase Agreement vs. Services Agreement

Another critical aspect of most lift-out transactions is the interplay between the purchase agreement and the outsourcing agreement. Obligations and requirements in one agreement often have a direct impact on the obligations and requirements in the other agreement, and in some instances such obligations and requirements may unwind the parties arrangement in the other agreement. For example, an obligation of the service provider in the outsourcing agreement to indemnify the company for third party infringement claims in connection with the services may be unwound if the company is representing to the service provider in the purchase agreement that the assets being purchased by the service provider do not infringe on a third party’s rights. Moreover, the parties are often focused on the liabilities the service provider is assuming under the purchase agreement, and its ability to recover those liabilities under either the purchase agreement or

the outsourcing agreement. Consider for instance a typical employee-related obligation in a carve-out transaction such as accrued paid time off. Is accrued time off valued as debt, for which the service provider should obtain a purchase price adjustment under the purchase agreement, or is it an ongoing expense that the service provider can seek to recover through its pricing under the outsourcing agreement? Either of these options may make sense depending on the specific lift-out transaction, but the failure to coordinate between the documents as to how this obligation is addressed can lead to an inadvertent benefit to either the service provider or the company. As such, it is critical that attorneys negotiating lift-outs carefully coordinate the negotiations of the obligations and liabilities among the various agreements.

Indemnification/Representation Coverage

One of the more complicated areas in a lift-out transaction is the tension between the indemnification provisions in the outsourcing agreement, and how much indemnification and representation coverage the service provider should be provided under the purchase agreement. Often service providers will demand more coverage than usual under a typical carve-out transaction because of the inherent limitations on the service provider under the outsourcing agreement. Moreover, in many lift-out transactions, the outsourcing agreement imposes certain limitations or even prohibitions on who the service provider may provide services to using the purchased capabilities, further limiting the service provider’s upside on the arrangement. Companies on the other hand will demand less coverage than usual

under a typical carve-out transaction due to the fact that they are often selling the internal capabilities at book-value, with little to no premium, or even at a loss. As the company is not making money on the sale of the internal capabilities, and the service provider is not paying for the goodwill or going-concern value of the internal capabilities, the company will often seek to limit its indemnification exposure under the purchase agreement. Achieving the correct balance between the two competing positions is critical to the success of these arrangements. Too one-sided in either direction can achieve the short term goal of a party under the purchase agreement, but can undermine both parties’ long term goals under the outsourcing agreement.

Transitional Services

As with most carve-out transactions, the service provider in a lift-out transaction will often need the company to continue to provide the services for a period of time following the closing until the service provider can successfully transition the people, infrastructure and processes to its own systems. However, in a lift-out transaction this standard arrangement for a carve-out transaction can become circular, as under the outsourcing agreement the service provider is providing these same services back to the company. To avoid the situation where the company provides transitional services to the service provider who provides services back to the company, the parties need to tailor the transitional services with the implementation services under the outsourcing agreement. This starts with a careful inventory of all of the various people, infrastructure and processes (including third party services and contracts) that the customer uses to

perform the services. Once the inventory is documented, the parties then need to agree-on a detailed implementation plan for each, person, piece of infrastructure and process that is being transferred to the service provider, as well as identifying any gaps in people, infrastructure and processes that the service provider will need to solution, and the plan for addressing those gaps. The implementation plan should ideally be documented and agreed to in sufficient detail prior to contract signing, or at the latest, prior to closing. Otherwise, even minor discrepancies in the parties’ understanding as to how particular people, infrastructure or processes are transferring (or not) can have significant impacts on the pricing of the outsourcing aspect of the transaction.

The foregoing is a sample of the complex issues that arise in connection with the negotiation and documentation of the purchase aspects of a lift-out transaction. There are similar complex issues that arise in connection with the negotiation and documentations of the outsourcing aspects of the lift out arrangement as follows.

Pricing

While lift-outs are driven by a variety of business drivers – such as introducing a change agent, getting access to best-of-breed services, and refocusing on competitive advantages – the pricing of the services back to the customer under the outsourcing agreement is often the most critical consideration. A basic goal of these transactions is for a company to obtain variable pricing for what is otherwise a fixed cost. Moreover, built-in flexibility in the pricing structure is typically a sought after feature of the pricing model under the outsourcing aspect of a lift-out transaction as companies are looking for their service provider to accommodate the inevitable changes that arise in the company’s own product and

service offerings. Given the complexity of these transactions, rarely does the pricing model fit neatly into a typical outsourcing pricing model (e.g., fixed fee, variable unitized fee, or time and materials). Instead, the pricing model under lift-out transactions is often a mix of these various pricing models. Often the pricing model in these transactions must take into account increases in the cost of raw materials, labor and other service inputs, and efficiencies that arise from new technologies and innovations in the processes comprising the internal capabilities transferred to the service provider.

Limits on Liability

The liability provisions in typical outsourcing arrangements often involve the most negotiation, and lift-out transactions are no different. However, most companies and service providers will acknowledge that the standard construct whereby the service provider will seek to limit its liability for direct damages to a function of the fees paid by the company under the outsourcing arrangement, and have the company completely waive its right to seek consequential damages, does not work well for lift-out transactions. Especially given the fact that the people, infrastructure and processes used to provide the services came, in large part, from the company. Moreover, given the critical nature of the services provided

by the service provider, rarely are the parties able to agree to a straight-forward liability structure. More often, the liability structure for lift-out transactions is a complex combination of acknowledging that the people, infrastructure and processes were originally the customers, but also recognizing that the service provider will modify, evolve and potentially even replace or sunset these assets over time once in the possession of the service provider, and include numerous separate caps and baskets for certain types of liabilities, and carve-outs to the consequential damages waiver for certain liabilities.

Governance

A comprehensive governance process is critical in most outsourcing transactions; and this is equally, if not more, important in a lift-out transaction. The decision making processes under the outsourcing agreement must be efficient and enable the company to respond quickly to market changes, similar to the manner in which the company was able to respond prior to the lift-out. A number of elements often contribute to an efficient and effective governance process. First, the governance model should identify the roles both parties will maintain and describe with as much precision as possible the responsibilities of those roles.

Second, contractually requiring a regular meeting cadence is important. Third, the parties should include an efficient dispute resolution process to address operational issues, before they become impediments to the transaction’s success. By providing a strong governance process upfront and addressing these and other key issues in advance, the parties to a lift-out transaction can provide a mechanism that will allow the parties to resolve future disputes when they do inevitably arise.

Exit Rights

Whether due to the arrangement’s natural expiration, poor performance by the service provider, or a change in strategy by the company, exit rights vary dramatically transaction to transaction depending on the type of internal capabilities transferred, and when in the life-cycle of the arrangement the arrangement is terminated. In anticipation of the potential for a termination of the arrangement, the parties should establish in the outsourcing agreement the appropriate distribution of assets, including people, facilities, IP rights and

processes and determine whether the company will have the right to take back any of the capabilities transferred to the service provider under the purchase agreement. In almost all cases, given the complexity of these arrangements and the interdependencies between the services provided by the service provider, and the success of the company’s own business, the parties should provide for a significant transition period in the event the arrangement is terminated for any reason.

Please note that we have only highlighted some of the issues that arise in connection with these complex transactions. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these transactions. We have a team of experienced partners across the U.S., EU and Asia dedicated to assisting customers on these and related outsourcing matters. Please contact the Gibson Dunn attorney with whom you usually work, any member of the firm’s Strategic Sourcing and Commercial Transactions Practice, or the authors.

Daniel Angel
Co-Chair,
Technology Transactions Practice
New York
+1 212.351.2329
dangel@gibsondunn.com

Dennis J. Friedman
New York
+1 212.351.3900
dfriedman@gibsondunn.com

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

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From October 11 to 15, 2021, the most significant global biodiversity summit in over a decade convenes in Kunming, China. The Kunming conference marks the 15th meeting of the Conference of the Parties (COP15) to the United Nations Convention on Biological Diversity (CBD), and aspires to do for biodiversity what the Paris Agreement did for climate change—namely, producing a landmark multinational accord to address one of the most pressing ecological and economic issues of our time.

COP15 is anticipated to finalize a Post-2020 Global Biodiversity Framework, outlining what countries need to do going forward, individually and collectively, to align humanity’s trajectory with CBD’s overall vision of “living in harmony with nature” by 2050. The world has continued veering off-course to date, failing to meet any of the 20 Aichi biodiversity targets[i] which CBD set in 2010.

However, optimists will observe that the goals proposed in the draft Post-2020 Framework[ii] are more outcome-oriented than CBD’s previous goals, buttressed by targeted, time-bound measures to address the drivers of biodiversity loss. The draft goals are as ambitious as they are potentially far-reaching, including proposals to conserve 30% of the world’s oceans and land by 2030, reduce pollution from pesticides, plastic waste, and nutrient excess by 50% by 2030, support integration of biodiversity-related information into business reporting, and promote the sustainable harvest of wild species.

Addressing biodiversity loss is by no means viewed solely as a responsibility of nation-states and governments. Corporations are increasingly under pressure from investors, the communities in which they operate, and other stakeholders to address biodiversity loss and account for their biodiversity impacts. In this alert, we discuss the significance of global action on biodiversity, and also provide a landscape overview of the modern regulatory developments (with our initial focus on Europe and the United States) and voluntary disclosure frameworks, reporting standards, initiatives, and performance assessment tools that are reshaping how the business community views, discloses, and addresses biodiversity risk.

The Import of COP15 and Biodiversity

Biodiversity – Why it is so important – A quick recap: Encompassing the variety of life, ecosystems, and species on Earth and the natural patterns they form,[iii] biodiversity is critical to the quality and function of the ecosystem services that society derives from nature. The World Economic Forum estimated that more than half the world’s GDP (around US$44 trillion) is moderately or highly dependent on these services, and accordingly found that biodiversity loss is among the existential threats facing society today, in terms of both impact and likelihood.[iv]

Scientists have warned that human activity is currently driving a sixth mass extinction of life on Earth.[v] Such biodiversity loss and consequent damage to ecosystems could drain nearly US$10 trillion from the global economy by 2050[vi], with the deterioration of crop yields, buffers against the physical effects of climate change, soil and water quality, and other biodiversity-related forms of natural capital depreciation translating into lower productivity, supply chain disruptions, higher raw material costs, social instability, and other negative ramifications for many businesses.

The IPCCC Report: The recently published[vii] Sixth Assessment Report by the Intergovernmental Panel on Climate Change (IPCCC) stresses that climate change, disaster risk, economic development, biodiversity conservation, and human well-being are tightly interconnected. Biodiversity loss has nevertheless been overshadowed, somewhat understandably, by the threat of climate change. But as data collection methods, metrics, and technologies used to identify and evaluate both biodiversity degradation and the value of natural capital have advanced, so too has the business community—investors, businesses, lenders, credit agencies, and ESG raters alike—awakened to the reality that biodiversity loss is a serious systemic economic risk in its own right.[viii]

Perhaps more significantly, biodiversity risk is also climbing up the agenda of global regulators and supervisors.

Modern Regulatory Action on Biodiversity

Should COP15 produce a Paris Agreement analogue for biodiversity, we expect an increase in momentum behind the introduction of next generation regulations requiring businesses to disclose, diligence, and/or mitigate their risks relating to and impacts on biodiversity, paralleled by an increase in shareholder/stakeholder pressure of equal measure.

Global Finance: The Network for Greening the Financial System (NGFS), a group of central banks and financial supervisors, published an interim report[ix] jointly with INSPIRE (the International Network for Sustainable Financial Policy Insights, Research and Exchange) on Biodiversity and Financial Stability on October 8, 2021. The report highlights growing evidence that biodiversity loss could have significant economic and financial implications and recommends that central banks and financial supervisors undertake a series of measures to upskill in the area, develop methodologies to capture the risks of impacts, and importantly, start to take actions in relation to the financial institutions they supervise, including encouraging institutions to seek information from borrowers on biodiversity plans, exposures, and performance. Whilst it may take time for some of the specific recommended actions of the NGFS to filter through to financial institutions, other more immediately applicable regulations impacting the investment management industry and larger corporations have already surfaced.

European Union: The biodiversity ball has been rolling at some pace in Europe. This past summer, the European Union (EU) approved a report concluding that a new EU biodiversity governance framework is needed to set enforceable biodiversity protection targets and support the formation of Europe-specific biodiversity reporting rules (EU Biodiversity Strategy for 2030).[x] In addition, the EU is set to propose and adopt further technical screening criteria[xi] for environmental objectives, including biodiversity, under its Taxonomy Regulation (EU Taxonomy) by December 2021 and the first half of 2022, respectively.

This “Green Taxonomy” is, in part, designed to enable the designation of company activities as either sustainable or unsustainable based on whether a company’s activities meet to-be-determined “substantial contribution” and “do no significant harm” criteria with respect to biodiversity. Consequently, companies required to report sustainability information under the EU’s existing Non-Financial Reporting Directive (NFRD) or the proposed Corporate Sustainability Reporting Directive—which would expand upon the NFRD’s biodiversity disclosure mandates and scope of applicability—will also have to disclose the share of their activities that are aligned with the EU Taxonomy’s biodiversity protection criteria. Similarly, in connection with the EU’s recently enacted Sustainable Finance Disclosure Regulation (SFDR), “financial market participants” will need to determine and disclose whether their economic activities, if linked to financial products offered as sustainable, qualify as taxonomy-aligned with respect to biodiversity.

European countries (including the UK): Further, on an individual basis, France[xii] and the Netherlands[xiii] have promulgated non-financial reporting laws for businesses and/or investors which require the consideration and/or disclosure of biodiversity impacts, with the United Kingdom (UK) appearing poised to follow suit. Biodiversity-related funds and initiatives[xiv], as well as legislation for the adoption of biodiversity net-gain principles for new significant infrastructure[xv], have gained considerable traction since the publication of the findings of the watershed “Dasgupta Review” of the economics of biodiversity.[xvi] In particular, the Dasgupta Review argues that institutional change is required (particularly in finance) such that (i) financial institutions and businesses are required to report on their dependencies and impacts on nature, and (ii) investors are provided with credible, decision-grade data based on measurement and disclosure of both climate- and nature-related financial risks.

Separately, the UK has announced plans to mandate the adoption of the Taskforce on Climate-related Financial Disclosures (TCFD) across the major segments of the UK economy by 2025. Changes have already been implemented to the UK Listing Rules introducing a requirement for all UK premium listed companies to comply with the TCFD recommendations and disclose how they are considering the impacts of climate change, and on a comply or explain basis report against the TCFD framework. Consultations also recently closed on extending these requirements to issuers of standard listed equity shares, certain regulated firms, and certain large UK registered companies and LLPs, with rules expected to come into force in 2022.[xvii] Whilst the efforts to mandate the TCFD across the UK are to be lauded, the TCFD in and of itself touches but does not adequately cover biodiversity loss. Certain aspects of the TCFD, including categories of physical and transition risk, are relevant to biodiversity loss, but there is a clear need for a distinct framework designed to focus on nature-related financial risks and incorporate the concept of natural capital (see ‎3 below for recent developments involving the Taskforce on Nature-related Financial Disclosures).

United States: The United States Securities Exchange Commission (SEC) is expected to propose similar climate disclosure rules, or updated disclosure guidance, this month, and its request for public comment on its potential rulemaking has elicited calls for separate mandatory biodiversity risk disclosures.[xviii] The advent of such disclosures cannot be ruled out during the Biden Administration, which signaled its interest in preserving biodiversity when setting a target to conserve 30% of the nation’s land and water by 2030.

In the meantime, voluntary disclosure frameworks, reporting standards, initiatives, and performance assessment tools addressing biodiversity risk are proliferating, providing inspiration and bases for nascent biodiversity regulations, supporting compliance with existing rules, and gradually equipping investors with much needed data to facilitate effective engagement and stewardship on biodiversity loss issues.

Voluntary Biodiversity Disclosure Frameworks, Reporting Standards, Initiatives, and Performance Assessment Tools

Disclosure Frameworks and Reporting Standards

Existing Standards & Frameworks – How Biodiversity Loss is Incorporated: A number of voluntary disclosure frameworks and reporting standards addressing businesses’ biodiversity risks and impacts have been developed to date. Sustainability reporting standard No. 304 of the Global Reporting Initiative, for example, directs companies to report on their significant biodiversity impacts, how they manage such impacts, and the habitats they have protected and restored.[xix] CDP (formerly the Carbon Disclosure Project) has also begun incorporating biodiversity-focused questions into its business questionnaires, to date adding questions on biodiversity impacts, risks and/or opportunities to its forests questionnaires for the metals and mining and coal sectors. More recently, the Climate Disclosure Standards Board (CDSB) closed public consultation on its nascent biodiversity application guidance,[xx] which will support companies in reporting material land use and biodiversity-related information through the CDSB disclosure framework. The new guidance will focus on the first six reporting elements of the CDSB framework, including the topics of governance, management’s environmental policies, strategies and targets, risks and opportunities, and sources of impact.

New Initiative – Taskforce on Nature-related Financial Disclosures: The disclosure framework that has received the most attention from observers, however, is not expected to be finalized until 2023. The recently-formed Taskforce on Nature-related Financial Disclosures (TNFD) is developing a framework specifically for nature-related disclosures, modelled on its climate-focused cousin, the TCFD. On October 6, 2021, in the run-up to COP15, the TNFD officially kicked-off their work on developing the TNFD framework.[xxi] Accordingly, the TNFD’s recommendations are expected to focus on company disclosures around certain biodiversity impact metrics and targets as well as governance around the strategic impact of, and the assessment and management of, biodiversity risks and opportunities. More broadly, the TNFD aims to align with CBD’s target of no net biodiversity loss by 2030 and net gain by 2050. Given the broad endorsement the TCFD has received from the business community, and the extent to which governments crafting climate risk disclosure regulations have referred to the TCFD as a model, it is widely expected that the TNFD (which already has the backing of the G7) will become an equally influential model for biodiversity disclosures.

Initiatives – Coalitions & Networks

Corporations seeking to elevate biodiversity loss on their ESG agendas and to meaningfully commit to actions in this area should actively consider participation in and support of one or more of the initiatives, charters, and coalitions noted below.

Among the growing chorus of initiatives calling for science-based biodiversity protection targets, the Science Based Targets Network[xxii] and U.N. Principles for Responsible Banking[xxiii] have each recently developed guidance for companies setting such objectives. Financial institutions in particular are coming under pressure to set targets, and the Finance for Biodiversity Pledge, for its part, has sought to commit its signatories to commit to science-based targets by 2024 (in addition to suggesting that financial institutions become legally liable for their impacts on ecosystems).

Members of the broader business and investor community are also uniting behind the biodiversity agenda through initiatives such as Act4Nature, One Planet Business for Biodiversity, and Business for Nature. Representing more than 900 companies with a cumulative revenue exceeding US$4 trillion, the Business for Nature Coalition, for example, has called on governments to adopt policies to reverse nature loss in this decade. Hundreds of coalition members have already made commitments to support three biodiversity-related U.N. Sustainable Development Goals (SDGs)[xxiv], and investor-oriented initiatives such as the U.N. Principles of Responsible Investment (which has been adopted by leading global asset owners and investment managers) have similarly recognized the business case for preserving biodiversity and the importance of biodiversity to achieving the SDGs generally.[xxv]

Other common initiatives focus more narrowly on the biodiversity effects of the cultivation of high-impact soft commodities such as palm oil, beef, and soy. Companies with ties to these industries have increasingly adopted “No Deforestation, No Peat, No Exploitation” (NDPE) procurement or lending policies, creating stranded asset risk for certain industry members. We expect NPDE policies to continue gaining traction going forward and other sector-specific biodiversity initiatives to rise to similar prominence.

Performance Assessment Tools for Organizations & Asset Managers – Nascent Stages of Development

As with all ESG factors—as asset owners and managers are acutely aware—you cannot manage what you do not measure. Hence, the growing importance of performance assessment tools and measures in the biodiversity loss and impact space.

Historically, biodiversity value and/or business impacts on diversity have been measured on a location-by-location basis or on a nation-by-nation basis (based on national biodiversity indicators, for example). Important improvements in satellite imagery and other technologies used to measure localized impacts, and advancements toward a common lexicon to discuss impacts (e.g., coalescence around metrics such as Mean Species Abundance), are currently being made with greater urgency. But perhaps more significantly, tools designed to measure organization-level biodiversity impact have recently multiplied.

In 2020, the Mission Économie de la Biodiversité presented its Global Biodiversity Score, a tool designed to assess the biodiversity footprint of business and financial assets. The U.N. Environment Programme Finance Initiative and Center for Sustainable Organizations then made their own contributions to the assessment cause in 2021 in launching the “ENCORE”[xxvi] module and Biodiversity Performance Index (BPI) prototype, respectively. Focused on the mining and agricultural sectors, the ENCORE module aims to allow banks and investors to explore the extent to which their financial portfolios indirectly drive species extinction risk and impact on ecological integrity. Over 30 financial institutions are currently testing the module. The BPI prototype, meanwhile, holds itself out as the world’s first context-based biodiversity metric designed for companies and investors, using a composite of 10 biodiversity-related indicators to weigh organization-level performance in relation to ecological thresholds.

Continuing on the Road to Biodiversity

Understandably governments around the world are focused on achieving net zero deadlines, pushing ahead with decarbonization projects, and low-carbon strategies, and the intense “buzz” around COP26 will continue for weeks to come. These steps are not only critical to the reduction of greenhouse gas emissions, but also create local jobs, assist in retraining (and retaining) the existing workforce and help grow economies.

However, much like climate change, the loss of biodiversity is irreversible and immediate action is necessary. Let’s see if natural capital receives the attention it requires this week and Kunming brings about global alignment for urgent action on biodiversity loss.

__________________________

[i] 20 Aichi biodiversity targets available at: https://www.cbd.int/sp/targets/.

[ii] The first detailed draft of the new Post-2020 Global Biodiversity Framework is available at: https://www.cbd.int/conferences/post2020.

[iii] The United Nations Environment Programme defines biological diversity or biodiversity as the variety of life on Earth and the natural patterns it forms. See: https://www.unep.org/unep-and-biodiversity.

[iv] The World Economic Forum’s 2021 Global Risks Report is available at: https://www.weforum.org/reports/the-global-risks-report-2021.

[v] The World Wide Fund for Nature’s (WWF) 2020 Living Planet Report, for example, shows a 68% decline in animal population size and 84% decline in freshwater wildlife in the past few decades. The report is available at: https://livingplanet.panda.org/en-us/.

[vi] As detailed in WWF’s 2020 Global Futures report, available at https://wwf.panda.org/?359334.

[vii] The IPCC Sixth Assessment Report was published on August 7, 2021 and is available at https://www.ipcc.ch/assessment-report/ar6/.

[viii] See, for example, the opening statement of the U.N. Principles for Responsible Investment Association’s (UNPRI) “Investor Action on Biodiversity” discussion paper, available here.

[ix] https://www.ngfs.net/sites/default/files/medias/documents/ngfs-press-release_2021-10-08_interim-report.pdf

[x] The report is available here.

[xi] Technical screening criteria have already been adopted for climate change.

[xii] France passed its Law on Climate and Energy in 2019, which includes an update to the 2015 Energy Transition Law’s requirements on non-financial reporting by investors. Only climate issues are covered under the 2015 law, but the 2019 law takes into account the preservation of the biodiversity of the ecosystems.

[xiii] The Netherlands passed legislation on the mandatory disclosure of non-financial information in 1997 and, in 2003, produced a reporting guide stating that sustainability reporting should disclose information on the effects of business operations on biodiversity and the measures taken to mitigate these effects.

[xiv] Initiatives and funds include the England Trees Action Plan, Peat Action Plan, Benyon Review on Highly Protected Marine Areas (and the response to it), development of a Nature for Climate Impact Fund (£640 million announced at Budget 2020), Blue Planet Fund (£500 million), International Biodiversity Fund (£220 million), Green Recovery Challenge Fund (proposed to increase to £80 million) to deliver up to 100 nature projects in two years, and 25 Year Environment Plan.

[xv] Amendments to the Environment Bill to legislate (among other matters) for the introduction of: (i) biodiversity net gain for new nationally significant infrastructure are currently pending (requiring all new developments to demonstrate a 10% net gain in biodiversity at or near their sites); (ii) biodiversity credits allowing developers to purchase credits from the UK Government to be used to fund the creation of conservation sites; and (iii) prohibition on the use by large businesses of illegally produced commodities, due diligence requirements in relation to forest-risk commodities, and reporting on compliance. The Environment Bill still remains in the House of Lords and has not yet progressed to the final stages of receiving Royal Assent.

[xvi] The final report of the independent review (commissioned in 2019 by Her Majesty’s Treasury (HMT)) on the Economics of Biodiversity led by Professor Sir Partha Dasgupta (Dasgupta Review) was published in February 2021. The report restarted the conversation on biodiversity in the UK, with HMT publishing the UK Government’s response to the Dasgupta Review in July 2021 and emphasizing its commitment to (among other matters) delivering a nature positive future and to reverse biodiversity loss by 2030.

[xvii] From January 1, 2021, the UK Financial Conduct Authority (FCA) implemented changes to the Listing Rules (Listing Rule 9.8.6) introducing a requirement for all UK premium listed companies to comply with the TCFD recommendations and disclose how they are considering the impacts of climate change, and on a comply or explain basis report against the TCFD framework. The FCA also recently consulted on extending these requirements to issuers of standard listed equity shares and certain regulated firms. The UK Government’s Department for Business, Energy & Industrial Strategy also recently concluded a consultation relating to mandatory climate-related financial disclosures by publicly quoted and large private companies and LLPs and the TCFD. The Government response is still pending. The proposals apply to UK companies currently required to produce a non-financial information statement, those being UK companies with more than 500 employees and transferable securities admitted to trading on a UK regulated market, and relevant public interest entities; UK registered companies with securities admitted to AIM with more than 500 employees; UK registered companies which are not included in the categories above with more than 500 employees and a turnover of more than £500 million; and LLPs with more than 500 employees and a turnover of more than £500 million. These rules are expected to come into force for accounting periods on or after April 6, 2022.

[xviii] From the Commonwealth Climate and Law Imitative, for example. Comments submitted to the SEC are available at: https://www.sec.gov/comments/climate-disclosure/cll12.htm.

[xix] The Global Reporting Initiative (GRI) provides the most widely used sustainability reporting standards in the world. The GRI standards are available at: https://www.globalreporting.org/how-to-use-the-gri-standards/gri-standards-english-language/.

[xx] The CDSB’s draft Biodiversity Guidance and further information on the consultation is available at: https://www.cdsb.net/biodiversity.

[xxi] The Agence Française de Développement (AFD) launched the TNFD Development Finance Hub at the first plenary meeting, which will sit under the umbrella of the TNFD’s broader Knowledge Hub. Further information is available at: https://tnfd.global/news/first-plenary-launch-of-development-finance-hub/.

[xxii] The Science Based Targets Network’s initial guidance on science-based targets for nature is available at: https://sciencebasedtargetsnetwork.org/wp-content/uploads/2020/09/SBTN-initial-guidance-for-business.pdf.

[xxiii] The Principles for Responsible Banking’s Guidance on Biodiversity Target-setting is available at: https://www.unepfi.org/publications/guidance-on-biodiversity-target-setting/.

[xxiv] The three SDGs are: SDG6 (Clean water and sanitation), SDG 14 (Life below Water) and SDG 15 (Life on Land). The commitments of Business for Nature Coalition members involve acting and advocating for more ambitious nature policies and work on protecting and restoring nature. Before making commitments, companies are encouraged to understand their dependencies and impacts on biodiversity as they relate to their direct operations or supply chain.

[xxv] As reflected in UNPRI’s “Investor Action on Biodiversity” discussion paper.

[xxvi] ENCORE stands for Exploring Natural Capital Opportunities, Risks and Exposure.

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 of the following leaders and members of the firm’s Environmental, Social and Governance (ESG) practice group, or the following authors:

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)
Mitasha Chandok – London (+44 (0)20 7071 4167, mchandok@gibsondunn.com)
Kyle Neema Guest – Washington, D.C. (+1 202-887-3673, kguest@gibsondunn.com)

Please also feel free to contact the following practice leaders:

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

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September 2021 was certainly the month of sustainability initiatives for the UK’s competition watchdog.

On 20 September, the Competition & Markets Authority (CMA) published a Green Claims Code aimed at protecting consumers from misleading environmental claims amidst concerns over ‘greenwashing’. Greenwashing refers to overstated, unsubstantiated green credentials of a product or service. The Code is also intended to protect businesses from unfair competition and ensure a level playing field.

And then on 29 September, the CMA launched a public consultation, to help inform its advice to government on how competition and consumer regimes can better support the UK’s Net Zero and sustainability goals. The consultation runs until 10 November 2021.

Impact: who needs to take the Green Claims Code into account

The new Code potentially impacts any company which puts forward claims of positive environmental impact in relation to its products or services. It is particularly important for businesses involved in textiles and fashion, travel and transport, and fast-moving consumer goods because the CMA has flagged these industries as priorities. These are the sectors where consumers appear to be most concerned about misleading claims. Any other sector where the CMA finds significant concerns could also become a priority in due course. Financial services, for example, is not currently one of the CMA’s priority areas, but the Code would nonetheless apply in this sector. For example, to companies selling “ethical” or “green” investment services, which would also be a focus area of the UK’s financial services regulator, the Financial Conduct Authority (FCA).

The purpose of the Code is to help businesses understand and comply with their existing obligations under consumer protection law when making environmental claims. The Green Claims Code is broad and applies to all commercial practices, including advertisements, product labelling, packaging, and even product names.

The Code will operate in parallel with and not to the exclusion of other applicable rules and regimes. Accordingly businesses should consider whether they are subject to any sector- or product-specific requirements and ensure they comply with them, as well as their obligations under general consumer protection law.

Consequences: what happens if the Code is breached?

The Code is not new legislation, it draws on enforcement powers derived from existing consumer protection rules under the Consumer Protection from Unfair Trading Regulations (CPUT) 2008 and Business Protection from Misleading Marketing Regulations 2008.

The CMA and other bodies (for example, Trading Standards Services) can bring court proceedings in relation to the Code.

Any business found to be in breach of consumer law can face civil action or criminal prosecution. Breach of CPUT can attract criminal liability, including for directors and other officers of corporate bodies.

There is also a direct civil right of redress by consumers against traders who conduct misleading or aggressive practices. If found to be in breach, companies may be required to pay redress to any consumers harmed as a result of the breach.

More generally, a company’s reputation, and sales, could also suffer damage.

Timing: when will enforcement ramp up?

The CMA has announced that it will begin a review of misleading green claims in January 2022. It is not required to wait until January 2022 to take action, and has noted that where there is evidence of breaches of consumer law, it may take action before the start of the formal review.

The CMA shares consumer protection law enforcement powers with other bodies, such as Trading Standards Services and sectoral regulators. And, where appropriate, the CMA has flagged that it may work with other enforcement or regulatory bodies in relation to environmental claims.

Significance: why is greenwashing of importance to the CMA?

Consumers are increasingly environmentally-minded. A recent YouGov survey showed that 57% of UK consumers are willing to pay more for environmentally friendly products, increasing up to 69% of consumers for the younger generations. Mintel found in 2019 that nearly half of new UK beauty and personal care launches had an ethical or environmental claim, an increase of almost 100% compared to four years earlier. The CMA notes the increase in claims by businesses to meet this consumer demand, and considers that many of these claims may be misleading. A beauty product promoted as ‘microbead free’, for example, may be misleading in its suggestion of a benefit over other products because microbeads in rinse-off cosmetics and personal care products are, in any event, banned in the UK.

Earlier this year, the International Consumer Protection Enforcement Network (ICPEN) hosted its annual sweep of websites, led by the CMA and the Dutch Competition Authority. The global review found that 40% of green claims made online could be misleading consumers, through tactics such as:

Making vague claims and unclear language including terms such as ‘eco’ or ‘sustainable’ or reference to ‘natural products’ without adequate explanation or evidence of the claims.
Using own brand eco logos and labels that are not associated with an accredited organisation.
Hiding or omitting certain information, such as a product’s pollution levels, to appear more eco-friendly.

More detail on the Code

In November 2020, the CMA announced an investigation into misleading environmental claims. The CMA’s final guidance has now been published, with the Green Claims Code announced on Monday 20 September. This work ties in to the CMA’s Annual Plan commitment to support the move towards a low carbon economy.

The aim of the new Code is to protect consumers from misleading environmental claims, and to protect businesses from unfair competition. The CMA intends to create a level playing field for businesses whose products or services genuinely represent a better choice for the environment, thus incentivising them to invest in the environmental performance of their products.

There are six principles set out in the Code:

claims must be truthful and accurate
claims must be clear and unambiguous
claims must not omit or hide important relevant information
comparisons must be fair and meaningful
claims must consider the full life cycle of the product or service
claims must be substantiated

The focus of the Code is on environmental claims made by businesses, but the guidance is also relevant to the wider category of sustainability claims.

The CMA is not alone: a trending initiative across Europe

The CMA’s new Green Claims Code forms part of a broader trend where competition regulators are taking an interest in the link between competition regulation and the green economy. This includes clamping down on suspected greenwashing practices.

There is also ongoing work in the advertising space in the UK by the Advertising Standards Authority, with new guidelines covering environmental claims in advertising. There are separate and specific regulations in place and being developed in relation to financial services products, for example the EU’s Sustainable Finance Disclosure Regulation and EU Taxonomy. Earlier this year, HM Treasury announced that a new advisory group had been set up to advise the UK Government on standards for green investment, and will oversee the creation of a Green Taxonomy.

The Dutch Competition Authority published new guidelines for sustainability claims in January 2021, which set out five rules for companies to follow, for example to substantiate sustainability claims with evidence.

The European Commission launched an initiative last year which aims to harmonise green claims across Europe, including the prevention of overstated environmental information (‘greenwashing’) and the sale of products with a covertly shortened lifespan. The EC held a public consultation on the initiative which closed in October 2020, and intends to propose a new directive as a result.

These recent developments are part of a trend in which failings traditionally thought to have fallen into soft-edged Environmental, Social and Governance territory are being hardened into actionable standards. Companies are increasingly being held to account for the claims they make about their own ethical and sustainability performance, particularly where these claims can negatively impact outcomes or choices for customers.

Dos and Don’ts: some practical tips for Green Claims

Companies potentially affected are well advised to review current business practices, in order to ensure compliance with the CMA’s new Code and avoid potentially incurring civil and criminal penalties and reputational damage for misleading consumers.

In particular, they should:

Avoid using broad, general terms, such as ‘green’, ‘eco’ and ‘sustainable’. These claims will be considered to apply to the whole life cycle of the product and must be substantiated with evidence.
Avoid conflating the environmental goals of the business with specific product claims.
Clearly state any caveats that apply to product claims.
Consider implicit claims being made by a product, for example through the use of images and colours on packaging.
Avoid claiming as environmental benefits any features or benefits that are necessary standard features or legal requirements of that product or service type.

Following the CMA’s guidance is a good starting point. But multinational companies will also need to consider guidance available in other jurisdictions besides the UK.

The future: environmental sustainability and competition rules

There has been a lot of global interest in the interaction between climate change and competition law in recent years, with thought-provoking debate around how to tackle a global crisis through collaboration, without encouraging harmful collusion between competitors.

On 29 September 2021, the CMA opened a consultation on advice to the UK government. The consultation, which runs until 10 November 2021, calls for views to help inform its advice to government on how competition and consumer regimes can better support the UK’s Net Zero and sustainability goals, including preparing for climate change. The key areas in which the CMA is seeking information are:

competition law enforcement;
merger control;
consumer protection law; and
market investigations.

The CMA’s consultation is similar to the EU consultation on competition policy and the Green Deal, which ran in late 2020. Both consultations consider how antitrust policy and environmental and climate policies work together, and how the merger control regimes could better contribute to protecting the environment and supporting sustainability goals. The EC’s consultation is somewhat wider, as it also considered State aid rules, which is not within the scope of the CMA consultation.

On 10 September the EC published a Brief titled Competition Policy in Support of Europe’s Green Ambition which gives an overview of its consultation. Executive Vice-President Vestager recently stated in a speech at the IBA Competition Conference that “one of the main messages from our consultation and the conference was the need to support the green transition by enforcing our rules more vigorously than ever.” DG COMP’s ongoing reviews of its vertical and horizontal block exemption regulations (and accompanying guidelines) provide a perfect opportunity for the EC to take a more proactive approach to promote sustainability through the application of EU competition law. The new vertical guidelines are expected to be in place by May 2022, with the new horizontal guidelines following by the end of December 2022 and so we will need to wait until then to see how Vestager’s message will translate in practice.

We expect the results of the UK consultation process to yield similar results to the EU consultation. But how the CMA will respond in its application of UK competition laws going forward is a development to be watched carefully.

Gibson Dunn’s lawyers are available to assist in addressing any questions that you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition practice group, or the following authors:

Deirdre Taylor – London (+44 (0) 20 7071 4274, dtaylor2@gibsondunn.com)
Mairi McMartin – Brussels (+32 2 554 72 29, mmcMartin@gibsondunn.com)
Kirsty Everley – London (+44 (0) 20 7071 4043, keverley@gibsondunn.com)

Please also feel free to contact the following practice leaders and members:

Ali Nikpay – London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)
Deirdre Taylor – London (+44 (0) 20 7071 4274, dtaylor2@gibsondunn.com)
Selina S. Sagayam – London (+44 (0) 20 7071 4263, ssagayam@gibsondunn.com)
Susy Bullock – London (+44 (0) 20 7071 4283, sbullock@gibsondunn.com)
Patrick Doris – London (+44 (0) 20 7071 4276, pdoris@gibsondunn.com)
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Mairi McMartin – Brussels (+32 2 554 72 29, mmcMartin@gibsondunn.com)

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First of four industry-specific programs

The False Claims Act (FCA) is one of the most powerful tools in the government’s arsenal to combat fraud, waste, and abuse involving government funds. After several years of statements and guidance indicating that the Department of Justice (DOJ) might alter its approach to FCA enforcement, the Biden Administration appears to be taking a different, more aggressive approach. Meanwhile, newly filed FCA cases remain at historical peak levels, and the government has recovered nearly $3 billion or more annually under the FCA for a decade. The government also continues to pursue new, large spending projects in COVID-related stimulus and infrastructure—which may bring yet more vigorous efforts by DOJ to pursue fraud, waste, and abuse in government spending. As much as ever, any company that receives government funds—especially in the financial services sector—needs to understand how the government and private whistleblowers alike are wielding the FCA, and how they can defend themselves.

Please join us to discuss developments in the FCA, including:

The latest trends in FCA enforcement actions and associated litigation affecting financial services;
Updates on the Biden Administration’s approach to FCA enforcement, including developments impacting DOJ’s use of its statutory dismissal authority;
New proposed amendments to the FCA introduced by Senator Grassley; and
The latest trends in FCA jurisprudence, including developments in particular FCA legal theories affecting your industry and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.

View Slides (PDF)

PANELISTS:

F. Joseph Warin is a partner in the Washington, D.C. office, chair of the office’s Litigation Department, and co-chair of the firm’s White Collar Defense and Investigations practice group. His practice focuses on complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation.

Casey Kyung-Se Lee is a senior associate in the New York office and a member of the firm’s White Collar Defense and Investigations, and Litigation Practice Groups. Mr. Lee’s practice focuses on representing clients in litigation and investigations involving the federal government. Mr. Lee rejoined Gibson Dunn in 2020 after serving as an Assistant United States Attorney in the Civil Division of the U.S. Attorney’s Office for the Southern District of New York, where he investigated allegations of fraud against the United States under the False Claims Act, Anti-Kickback Statute, and other statutes.

MCLE CREDIT INFORMATION:

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.

RELATED WEBCASTS IN THIS SERIES:

The False Claims Act – 2021 Update for Government Contractors (October 14, 2021)
The False Claims Act – 2021 Update for Drug & Device Manufacturers (October 20, 2021)
The False Claims Act – 2021 Update for Health Care Providers (October 26, 2021)

In Horror Inc. v. Miller, the Second Circuit affirmed that Victor Miller had successfully reclaimed his rights in the screenplay for Friday the 13th by invoking the Copyright Act’s termination provisions, notwithstanding his assignment of those rights to a film production company in 1980. The Court reached that conclusion after finding that Miller’s assignment was made as an independent contractor, rather than as an employee.[1]

In certain situations, an author of a copyrighted work that has been transferred to another can terminate the transfer and reclaim the copyright. A transfer of a copyrighted work created as a work-for-hire, however, cannot be terminated. For purposes of determining if a work is a work-for-hire under the Copyright Act, Horror Inc. held that copyright law—not labor law—determines whether the creator and a hiring party are in an employer-employee relationship. The court further held that, because Miller wrote the screenplay as an independent contractor under copyright law, the screenplay was not a work-for-hire and Miller was entitled to terminate his decades-earlier transfer of the screenplay’s copyright.

Statutory Background

The Copyright Act of 1976[2] provides that copyright ownership “vests initially in the author or authors of the work.”[3] Under well-established case law, the person who “actually creates the work, that is, the person who translates an idea into a fixed, tangible expression entitled to copyright protection,” is generally considered to be the work’s “author.”[4] But the Copyright Act creates an exception for “a work made for hire,” which is defined as one “prepared by an employee within the scope of his or employment,” or, in certain instances, “a work specially ordered or commissioned for use as contribution to a collective work.”[5] In the case of a work-for-hire, “the employer or other person for whom the work was prepared is considered the author.”[6]

Authors can transfer ownership of any or all of the exclusive rights comprised in a copyright,[7] but Section 203 of the Copyright Act permits an author (or his or her successors) in certain circumstances to terminate prior transfers of copyrights during a specified window of time.[8] Congress added this termination right to the Copyright Act to address “the unequal bargaining position of authors” in negotiations over conveyance of their ownership rights “resulting . . . from the impossibility of determining the work’s value until the value has been exploited.”[9] A creator of a work-for-hire cannot take advantage of this provision, however, because the termination right expressly does not apply to works-for-hire.[10]

Factual Background

Victor Miller, a professional screenplay writer, has long been a member of the Writers Guild of America (“WGA”), a labor union representing writers in the film and television industries. In 1979, Miller agreed to write the screenplay for a horror film, which would eventually be titled Friday the 13th and introduce the iconic character of Jason Voorhees.[11] Friday the 13th opened on May 9, 1980 and enjoyed “unprecedented box office success for a horror film,” leading to eleven sequels to-date and a host of other derivative products.[12] But before that took place, in exchange for only $9,000, Miller assigned his rights in the screenplay to a film production and distribution company.

In 2016, Miller sought to reclaim copyright ownership of the screenplay by serving notices of termination pursuant to Section 203(a) of the Copyright Act. The companies to whom the copyrights had been transferred then sued Miller in the United States District Court for the District of Connecticut, seeking a declaration that Miller wrote the screenplay as an employee and that the screenplay therefore was a work-for-hire, which would prevent Miller from terminating the companies’ rights. On cross-motions for summary judgment asserting largely undisputed facts, the District Court concluded that Miller did not create the screenplay as a work-for-hire. Because he was the “author” of the screenplay, his termination notices were valid and served to restore his ownership of the copyright for the Friday the 13th screenplay. After the companies appealed, the Second Circuit affirmed the District Court’s ruling in Miller’s favor.

The Second Circuit’s Decision

Because the Copyright Act’s termination provision is not applicable to works-for-hire, the courts had to resolve whether Miller was an employee or independent contractor of the film production company to which he assigned his rights at the time that he wrote the screenplay for Friday the 13th. This required the Second Circuit to decide as a matter of first impression what body of federal law governed Miller’s employment status under the Copyright Act.

The production companies first argued that “Miller’s WGA membership ‘inherently’ created an employer-employee relationship” pursuant to the National Labor Relations Act (the “NLRA”), under which screenwriters are permitted to unionize because they are classified as production companies’ employees.[13] The Second Circuit rejected that argument because “the definition of ‘employee’ under copyright law is grounded in the common law of agency” and “serves different purposes than do the labor law concepts regarding employment relationships,” such that there was “no sound basis for using labor law to override copyright law goals.”[14]

In reaching this conclusion, the Court provided a thorough overview of the Supreme Court’s decision in Community for Creative Non-Violence v. Reid, which set forth a thirteen-factor test for determining in the copyright context whether the creator of a work did so as an employee or as an independent contractor.[15] As explained in Reid, the Copyright Act provides a “restrictive definition of employment, one aimed at limiting the contours of the work-for-hire determination and protecting authors.”[16] In the labor and employment law context, on the other hand, “the concept of employment is broader, adopting a more sweeping approach suitable to serve workers and their collective bargaining interests and establishing rights” related to their compensation and safety, among other issues.[17] Stated otherwise, “[t]hat labor law was determined to offer labor protections to independent writers does not have to reduce the protections provided to authors under the Copyright Act.”[18] The Court of Appeals thus found that in analyzing whether the Friday the 13th screenplay was a work-for-hire, “[t]he District Court correctly set aside NLRA-based doctrine in favor of common law principles and the Reid factors” “regardless of Miller’s employment status under the NLRA and his membership in the WGA.”[19]

Having failed to persuade the Second Circuit to follow principles of labor law to find that Miller was an employee when he wrote the script, the production companies next argued that Miller’s WGA membership should have been considered as an additional factor in applying the Reid multi-factor work-for-hire test. The Second Circuit deemed this argument “simply another attempt to shift Reid’s analytic focus from agency law to labor law and convince us the labor law framework governs here.”[20] Because Reid “instructs [courts] to look at the overall context of the parties’ relationship based on . . . specific factors,” Miller’s WGA membership did “not alter or control [the Second Circuit’s] analysis of the Reid factors for copyright purposes.”[21] Rather, it was “relevant only insofar as it informs [the] analysis of other factors, namely whether Miller received benefits commonly associated with an employment relationship.”[22]

Applying the Reid factors, the Second Circuit proceeded to analyze whether Miller created the screenplay as an employee or as an independent contractor. In doing so, it found that only three of Reid’s thirteen factors—that the hiring party exercised some control over Miller’s writing, that the hiring party was a business entity, and that soliciting the screenplay was part of its regular business—supported the production companies’ arguments for classifying the screenplay as a work-for-hire under the Copyright Act. On balance, however, the Second Circuit found that the factors “weigh[ed] decisively in Miller’s favor,” leading the Court of Appeals to affirm the District Court’s finding that Miller had created the screenplay as an independent contractor.[23] Accordingly, under the Copyright Act, Miller had the right to terminate his decades-earlier transfer of the copyright to the screenplay for Friday the 13th.

Conclusion

For purposes of applying the Copyright Act’s termination provisions, Horror Inc. held that whether a work was “made for hire”—which in this case turned on the creator’s status as an employee or independent contractor—is strictly governed by copyright law principles, rather than labor and employment law. Accordingly, it further held that to the extent the creator of a work is a union member, that fact has no independent weight in determining whether the creator was in an employment relationship with the entity for whom the work was created. These determinations may have significant implications for a broad array of copyrighted works, the ownership of which may be similarly subject to the Copyright Act’s termination provisions.

___________________________

[1] Horror Inc. v. Miller, No. 18-3123-cv, 2021 WL 4468980 (2d Cir. Sept. 30, 2021).

[2] 17 U.S.C. §§ 101 et seq.

[3] 17 U.S.C. § 201(a).

[4] Community for Creative Non-Violence v. Reid, 490 U.S. 730, 737 (1989).

[5] 17 U.S.C. § 101.

[6] 17 U.S.C. § 201(b).

[7] 17 U.S.C. § 201(d).

[8] 17 U.S.C. § 203.

[9] H.R. Rep. No. 94-1476, 24^th Cong. 2d Sess. at 124 (1976)

[10] 17 U.S.C. § 203(a) (termination right applies “[i]n the case of any work other than a work made for hire”).

[11] Horror Inc., 2021 WL 4468980, at *1-2.

[12] Id. at *3.

[13] Id. at *6.

[14] Id.

[15] 490 U.S. at 737.

[16] Horror Inc., 2021 WL 4468980, at *8.

[17] Id. at *8.

[18] Id. at *10.

[19] Id.

[20] Id. at *11.

[21] Id. at *12.

[22] Id.

[23] Id. at *19.

The following Gibson Dunn lawyers assisted in the preparation of this client update: Brian Ascher, Ilissa Samplin, Michael Nadler, and Doran Satanove.

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 the following leaders and members of the firm’s Media, Entertainment & Technology Practice Group:

Media, Entertainment and Technology Group:
Scott A. Edelman – Co-Chair, Los Angeles (+1 310-557-8061, sedelman@gibsondunn.com)
Kevin Masuda – Co-Chair, Los Angeles (+1 213-229-7872, kmasuda@gibsondunn.com)
Benyamin S. Ross – Co-Chair, Los Angeles (+1 213-229-7048, bross@gibsondunn.com)
Orin Snyder – New York (+1 212-351-2400, osnyder@gibsondunn.com)
Brian C. Ascher – New York (+1 212-351-3989, bascher@gibsondunn.com)
Anne M. Champion – New York (+1 212-351-5361, achampion@gibsondunn.com)
Michael H. Dore – Los Angeles (+1 213-229-7652, mdore@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Ilissa Samplin – Los Angeles (+1 213-229-7354, isamplin@gibsondunn.com)
Nathaniel L. Bach – Los Angeles (+1 213-229-7241,nbach@gibsondunn.com)

Please also feel free to contact the following practice leaders:

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

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

Munich partner Michael Walther and associate Richard Roeder are the co-authors of the “Germany” [PDF] chapter of International Comparative Legal Guides’ Sanctions 2022, 3rd Edition published in October 2021.

On September 22, 2021, the Public Company Accounting Oversight Board (the “PCAOB”) adopted a final rule (the “Final Rule”) implementing the Holding Foreign Companies Accountable Act (the “HFCAA”), which became law in December 2020 and prohibits foreign companies from listing their securities on U.S. exchanges if the company has been unavailable for PCAOB inspection or investigation for three consecutive years. The Final Rule (available here) requires U.S. Securities and Exchange Commission (the “SEC”) approval before it goes into effect.

In May 2021, the SEC adopted interim final amendments (the “Amendments”, available here) to certain forms, including Forms 20-F and 10-K, to implement the disclosure and submission requirements of the HFCAA. In June 2021, the Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”), which, if signed into law, would reduce the time period for the delisting of foreign companies under the HFCAA to two consecutive years, instead of three years.

Three aspects of the HFCAA and the PCAOB’s Final Rule should be kept in mind.

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The following Gibson Dunn attorneys assisted in preparing this update: Michael Scanlon, David Lee, David Ware, and Maggie Zhang.

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To continue assisting US companies with planning for SEC reporting and capital markets transactions into 2022, we offer our annual SEC Desktop Calendar. This calendar provides both the filing deadlines for key SEC reports and the dates on which financial statements in prospectuses and proxy statements must be updated before use (a/k/a financial staleness deadlines).

You can download a PDF of Gibson Dunn’s SEC Desktop Calendar for 2022 at the link below.

https://www.gibsondunn.com/wp-content/uploads/2021/09/SEC-Filing-Deadline-Calendar-2022.pdf

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