On July 13, 2021, the Securities and Exchange Commission (“SEC”) announced a partially settled enforcement action against a Special Purpose Acquisition Company (“SPAC”), the SPAC sponsor and the CEO of the SPAC, as well as the proposed merger target and the former CEO of the target for misstatements in a registration statement and amendments concerning the target’s technology and business risks.[1] As of the date of the enforcement action, the registration statement had not been declared effective and the proxy statement/prospectus had not been mailed to the SPAC shareholders. This action is notable because the allegations against the SPAC, its sponsor and its CEO are premised on a purported negligent deficiency in their due diligence, which failed to uncover alleged misrepresentations and omissions by the target and its former CEO. This action has important implications for SPACs, their sponsors and executives for their diligence on proposed acquisition targets.
Overview of the Action
In a settled administrative order, in which the respondents neither admit nor deny the allegations, the Commission alleged that disclosures contained in a Form S-4 filed by the SPAC were inaccurate because they both overstated the commercial viability of the target’s key product, and understated the risk pertaining to the target’s former CEO and a previous regulatory action regarding national security.
The settled administrative action against the target and the civil complaint against its former CEO, who is a Russian national, are premised on allegations of fraud: specifically, that the target and its former CEO (1) misrepresented that the target had “successfully tested” its key technology, when in fact a prior test did not meet criteria for success; and (2) omitted or made misstatements concerning the U.S. government’s concerns with national security and foreign ownership risks posed by the target CEO including concerns related to his affiliation with the target.
The target consented to a settlement finding a violation of the anti-fraud provisions of the securities laws, including Section 10(b) of the Securities Exchange Act and agreeing to pay a penalty of $7 million. In the separate civil complaint against the target’s former CEO, the Commission alleges violations of the same anti-fraud provisions.
Of greater significance is the settled action against the SPAC, its sponsor and CEO, which is premised on allegations of negligence in the conduct of their due diligence on the target, which failed to uncover the misrepresentations by the target and its former CEO and thus resulted in those misstatements or omissions being repeated in the proxy materials, even though those proxy materials had not yet been mailed to shareholders. The settled order alleges that: (1) although the SPAC engaged a technology consulting firm to conduct diligence on the target’s technology, the SPAC did not ask the consulting firm to review the target’s prior product test; and (2) although the SPAC was aware that the U.S. government had previously ordered the target CEO to divest from another unrelated technology company, and requested documentation from the target relating to the order, and was falsely told by the target that it did not have such documents, the SPAC nevertheless proceeded with the executing the merger agreement and filing the registration statement.
The SPAC, its sponsor and its CEO consented to violations (or causing violations) of the negligence-based anti-fraud provisions, including those relating to proxy solicitations – Sections 17(a)(3) of the Securities Act and 14(a) of the Securities Exchange Act and Rule 14a-9. The SPAC agreed to pay a penalty of $1 million and the CEO agreed to pay a penalty of $40,000. The SPAC’s sponsor also agreed to forfeit 250,000 of its founder shares in the event the merger receives shareholder approval. The SPAC and the target also agreed to offer PIPE investors in the SPAC the opportunity to terminate their subscription agreement.
Key Takeaways — Implications for SPAC and Acquiror Diligence
This latest enforcement action comes on the heels of a string of pronouncements by senior SEC officials earlier this year concerning the risks posed by the explosion of SPAC initial public offerings in 2020 and early 2021, including a potential misalignment of interests and incentives between SPAC sponsors and shareholders.[2]
In the press release announcing this enforcement action, SEC Chairman Gary Gensler took the unusual step of providing comments that echoed the concerns of senior officials and sent a clear message that even when the SPAC is “lied to” by the target, the SPAC and its executives are at risk for liability under the securities laws if their diligence fails to uncover misrepresentations or omissions by the target. Chairman Gensler stated, “This case illustrates risks inherent to SPAC transactions, as those who stand to earn significant profits from a SPAC merger may conduct inadequate due diligence and mislead investors. . . . The fact that [the target] lied to [the SPAC] does not absolve [the SPAC] of its failure to undertake adequate due diligence to protect shareholders. Today’s actions will prevent the wrongdoers from benefitting at the expense of investors and help to better align the incentives of parties to a SPAC transaction with those of investors relying on truthful information to make investment decisions.”
The SEC’s action has important implications for SPAC sponsors, as well as any acquiror conducting diligence on a prospective merger target.
- First, the SEC took action with respect to the initial Form S-4, filed on November 2, 2020, and two amendments, filed on December 14, 2020 and March 8, 2021, even though the Form S-4 has been subsequently amended (and presumably corrected) and has not yet been declared effective. The combined proxy statement/consent solicitation statement/prospectus contained in the Form S-4 has not yet been mailed to shareholders since it remains in preliminary form.
- Second, in view of the unusual posture of this case, it is clear that the SEC intends this to be a message case to SPAC sponsors on the level of scrutiny that will be imposed on their diligence of acquisition targets. Diligence should be reasonable under the circumstances. However, in an investigation, the government reviews the reasonableness of diligence with the dual benefits of hindsight and subpoena power not available to private enterprises engaged in commercial transactions. Moreover, the SEC is well-versed in conducting these types of investigations and the securities law provisions used here are the same well-established provisions used in typical negligent fraud actions filed by the Commission. Thus the lessons of this action are not limited to SPACs, but also apply to diligence conducted by any acquiror on a potential target where the merger will be subject to disclosure and shareholder approval.
- Third, when conducting diligence on potential targets, sponsors should keep in mind that, in the event a target’s business turns out not to be as represented, the reasonableness of the SPAC’s diligence may be reviewed under a harsh government spotlight. This action highlights the need for blank check companies and their founders to conduct and document thorough legal, financial and accounting due diligence review of potential targets, as well as industry-specific due diligence focused on a target’s business. Sponsors should also follow up appropriately on potential red flags identified during the due diligence process, including assessing the accuracy of, and basis for, factual statements about the target in public filings and investor materials and to identify risks related to the target’s business to investors. Ultimately, in the event open questions remain, sponsors will need to evaluate the feasibility of proceeding with a transaction or whether adequate disclosures can be made to address the attendant risks.
- Fourth, sponsors also may want to consider the inclusion of seller indemnification provisions or the use of representations and warranties insurance to protect the SPAC from losses resulting from the inaccuracy of the target’s representations and warranties in the acquisition agreement. Such provisions and the use of insurance are less typical in de-SPAC transactions than in traditional private M&A transactions. In fact, the SPAC in this Enforcement action and the target amended their merger agreement on June 29, 2021, among other things, to add a limited seller indemnity related to untrue statements of a material fact in the information provided by or on behalf of the target for inclusion in the SPAC’s SEC filings, or any omission of a material fact therein relating to the target.
- Fifth, this action is also notable for the SPAC sponsor’s agreement to forfeit a portion of its founder shares and the opportunity given to PIPE investors to terminate their subscription. These remedies may have been driven, in part, by the limited amount of cash working capital at the SPAC available for a settlement and also highlights the SEC’s desire to hold founders accountable for the actions of the SPAC, with such founder shares representing a significant value to a SPAC’s sponsor. Furthermore, the ability of PIPE investors to terminate their subscription agreements could meaningfully impact the SPAC’s ability to close its pending transaction without the additional financing to backstop potential redemptions by the SPAC’s public investors.
- Finally, this action is also notable because the SEC charged the SPAC, the SPAC sponsor and the CEO of the SPAC with violating the proxy rules, including Rule 14a-9, at the preliminary proxy statement stage. In other words, the SEC could have, but chose not to, simply allowed the SPAC to correct its misstatements and omissions in subsequent filings so that the definitive proxy statement that is mailed to SPAC shareholders is materially accurate.
The SEC’s decision to intervene in the middle of the de-SPAC process with an Enforcement action and a suite of remedial actions that includes requiring the target to engage an independent compliance consultant to conduct a comprehensive ethics and compliance program assessment of the target’s disclosure practices underscores the priority of the Enforcement Division’s continuing focus on SPACs.
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[1] Press Release, Securities and Exchange Commission, SEC Charges SPAC, Sponsor Merger Target, and CEOs for Misleading Disclosures Ahead of Proposed Business Combination (July 13, 2021), available at https://www.sec.gov/news/press-release/2021-124.
[2] March 31, 2021 Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies, available at https://www.sec.gov/news/public-statement/division-cf-spac-2021-03-31.
March 31, 2021 Public Statement: Financial Reporting and Auditing Considerations of Companies Merging with SPACs, available at https://www.sec.gov/news/public-statement/munter-spac-20200331.
Apr. 8, 2021 Public Statement: SPACs, IPOs and Liability Risk under the Securities Laws, available at https://www.sec.gov/news/public-statement/spacs-ipos-liability-risk-under-securities-laws
Apr. 12, 2021 Public Statement: Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”), available at https://www.sec.gov/news/public-statement/accounting-reporting-warrants-issued-spacs.
SEC Official Warns on Growth of Blank-Check Firms, Wall St. Journal (Apr. 7, 2021), available at https://www.wsj.com/articles/sec-official-warns-on-growth-of-blank-check-firms-11617804892.
Gibson, Dunn and Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Securities Enforcement, Securities Regulation and Corporate Governance, Capital Markets, or Mergers and Acquisitions practice groups, or the following authors:
Mark K. Schonfeld – New York (+1 212-351-2433, mschonfeld@gibsondunn.com)
Evan M. D’Amico – Washington, D.C. (+1 202-887-3613, edamico@gibsondunn.com)
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com)
Jonathan M. Whalen – Dallas (+1 214-698-3196, jwhalen@gibsondunn.com)
Tina Samanta – New York (+1 212-351-2469, tsamanta@gibsondunn.com)
Timothy M. Zimmerman – Denver (+1 303-298-5721, tzimmerman@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
In the last several years, M&A transaction planners have become increasingly focused on cybersecurity, privacy, and data protection risks, as technology advances and the regulatory regimes evolve. This recorded webcast focuses on how to design and manage an effective cybersecurity and privacy diligence plan. A group of experts, including US and European cybersecurity, privacy, and data protection lawyers, as well as M&A lawyers, discuss, among other things:
- The principal risks under relevant U.S. and European law
- The impact of the target company’s industry sector on the scope of the exercise
- The role of the buyer’s and seller’s internal experts, as well as outside consultants.
- Red flags that suggest the possibility of significant issues
- Key practice pointers
View Slides (PDF)
PANELISTS:
Ahmed Baladi is a partner in the Paris office and Co-Chair of the firm’s Privacy, Cybersecurity and Data Innovation Practice Group. His practice focuses on a wide range of privacy and cybersecurity matters including compliance, investigations and procedures before data protection authorities. He also advises companies and private equity clients in connection with all privacy and cybersecurity aspects of their cross-border M&A transactions.
Stephen Glover is a partner in the Washington, D.C. office and a member of the firm’s Mergers and Acquisitions Practice Group. Mr. Glover has an extensive practice representing public and private companies in complex mergers and acquisitions, including SPACs, spin-offs and related transactions, as well as other corporate matters. Mr. Glover’s clients include large public corporations, emerging growth companies and middle market companies in a wide range of industries. He also advises private equity firms, individual investors and others.
Saee Muzumdar is a partner in the New York office and a member of the firm’s Mergers and Acquisitions Practice Group. Ms. Muzumdar is a corporate transactional lawyer whose practice includes representing both strategic companies and private equity clients (including their portfolio companies) in connection with all aspects of their domestic and cross-border M&A activities and general corporate counseling.
Alexander H. Southwell is a partner in the New York office and Co-Chair of the firm’s Privacy, Cybersecurity and Data Innovation Practice Group. He is a Chambers-ranked former federal prosecutor and was named a “Cybersecurity and Data Privacy Trailblazer” by The National Law Journal. Mr. Southwell’s practice focuses on privacy, information technology, data breach, theft of trade secrets and intellectual property, computer fraud, national security, and network and data security issues, including handling investigations, enforcement defense, and litigation. He regularly advises companies and private equity firms on privacy and cybersecurity diligence and compliance.
Cassandra Gaedt-Sheckter is of counsel in the Palo Alto office where her practice focuses on data privacy, cybersecurity and data regulatory litigation, enforcement, transactional, and counseling representations. She has substantial experience advising companies on legal and regulatory compliance, diligence, and risks in transactions, particularly with respect to CCPA and CPRA as one of the leads of the firm’s CCPA/CPRA Task Force; GDPR; Children’s Online Privacy Protection Rules (COPPA); and other federal and state laws and regulations.
Vera Lukic is of counsel in the Paris office where her practice focuses on a broad range of privacy and cybersecurity matters, including assisting clients with multinational operations on their global privacy compliance programs, cross-border data transfers and data security issues, as well as representing clients in investigations, enforcement actions and litigation before the French data protection authority and administrative courts. She also regularly advises on data privacy aspects of M&A transactions, including with respect to carve-out and transition issues.
Lisa Zivkovic, Ph.D is an associate in the New York Office. She is a member of the Firm’s Privacy, Cybersecurity and Data Innovation, Technology Transactions, and Litigation practices groups. Ms. Zivkovic’s doctorate is a comparative history of data privacy in the US and European Union. She advises a wide range of clients, including technology, financial services, data aggregation and analytics, vehicle, and telematics companies, on new and complex legal and policy issues regarding global data privacy, cybersecurity, artificial intelligence, Internet of Things, and big data.
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 hours, of which 1.0 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 1.0 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.
Today, July 9, 2021, President Biden issued a sweeping Executive Order directing federal regulatory agencies to take a variety of steps that, if completed and upheld by the courts, would effect a sea change in the government’s regulation of businesses’ competitive practices.[1]
The Executive Order itself will have little immediate impact on regulated parties, although its tenor and objectives send an important message about the Administration’s perception of the business climate and enforcement priorities. The Order’s principal purpose is to set in motion a variety of proceedings before regulatory agencies. Interested parties will often (but not always) have the opportunity to participate in notice and comment rulemaking before the agencies. If the agencies exceed their statutory authority or fail to follow proper regulatory procedures, their actions typically will be subject to challenge in the courts.
General Overview of the Executive Order
The Executive Order is expansive—addressing 72 initiatives involving more than a dozen federal agencies. The Order’s premise is that the size and consolidation of American businesses has restricted competition and harmed consumers and workers. A White House “fact sheet” accompanying the Order expresses concern that “[f]or decades, corporate consolidation has been accelerating,” including in healthcare, financial services, agriculture, and other sectors.[2] The Order asserts this has resulted in higher prices and lower wages, along with reduced “growth and innovation.” In the technology sector, the Order states, “a small number of dominant Internet platforms use their power to exclude market entrants, to extract monopoly profits, and to gather intimate personal information that they can exploit for their own advantage.” “When past presidents faced similar threats from growing corporate power,” the accompanying fact sheet says, “they took bold action,” such as trust-busting by Theodore Roosevelt and “supercharged antitrust enforcement” under Franklin Roosevelt. The fact sheet then lays out the “decisive,” “whole-of-government effort” directed by President Biden in the Order.
The Order addresses matters as diverse as the cost of hearing aids, airline payments for delayed baggage, the price of beef, and international shipping fees. It “directs” executive branch agencies like the Department of Transportation (“DOT”) to take certain action and “encourages” independent agencies like the Federal Trade Commission (“FTC”) to consider others. Nonetheless, independent agencies like the FTC should be expected to pursue each of the actions the Order identifies. Indeed, some of the initiatives outlined in the Order relate to matters for which agencies are already engaging in rulemakings.
Initiatives in the Order include:
Agriculture
- The Order directs the United States Department of Agriculture (“USDA”) to consider issuing new rules regulating competition in the farming industry.
- The Order “encourages” the Federal Trade Commission (“FTC”) to address restrictions on third-party repair or self-repair, such as restrictions prohibiting farmers from repairing their own tractors.
Healthcare
- The Order encourages the FTC to consider a rule addressing agreements in the prescription drug industries, such as settlements of patent litigation to delay the market entry of generic drugs or biosimilars.
- The Order directs the United States Department of Health and Human Services (“HHS”) to consider issuing proposed rules allowing hearing aids to be sold over the counter.
Labor Markets
- The Order encourages the FTC “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
- The Order encourages the FTC to consider a rule addressing occupational licensing restrictions.
- The Order encourages the FTC and the Department of Justice (“DOJ”) to revise existing antitrust guidance to “better protect workers from wage collusion.”
Merger Review
- The Order encourages the FTC and DOJ “to review the horizontal and vertical merger guidelines and consider whether to revise those guidelines.”
Technology
- The Order encourages the FTC to consider a rule addressing data collection and surveillance practices.
- The Order encourages the FTC to consider a rule addressing “unfair competition in major Internet marketplaces.”
Transportation
- The Order directs the DOT to “publish for notice and comment a proposed rule requiring airlines to refund baggage fees when a passenger’s luggage is substantially delayed and other ancillary fees when passengers pay for a service that is not provided.”
- The Order encourages the Federal Maritime Commission to consider a rule “to improve detention and demurrage practices and enforcement of related Shipping Act prohibitions.”
Next Steps, and Implications for Our Clients
The Order is a significant and bold pronouncement of the Administration’s position on competition matters and business practices generally. However, its ultimate importance will depend principally on agencies’ success in implementing the changes the Order identifies. Many of the changes sought by the Order will require notice and comment rulemaking, a process that often takes years. In rulemakings, agencies must conduct appropriate analyses; draft and issue a proposed rule; invite and consider the public’s comments on the proposal; and then revise and finalize the rule in light of those comments and the evidence in the record. A hasty, sloppy rule—or one that gives insufficient attention to important problems identified by commenters, such as the absence of statutory authority or constitutional problems—is legally vulnerable.
Agencies must base and justify their regulatory action on their own statutory authority; the Order is not a basis for an agency to take actions that are not statutorily authorized by Congress.
Companies concerned about specific directives in the Order should begin making plans now to ensure those concerns are amply documented before the agency when rulemaking proceedings begin. Substantial, evidence-based rulemaking comments—whether submitted directly by a company, or by a trade association—are often very helpful to agencies in identifying changes they should make to their initial proposals. And, if those comments are ignored, they can provide a strong foundation for a successful legal challenge.
Focus on the FTC
The FTC will be responsible for some of the Order’s most significant directives. For the FTC to simultaneously address such a large number of competition initiatives would be a historical novelty—the FTC has only issued one competition rule in its entire history.[3] That rule was issued in the 1960s, never enforced, and later withdrawn.[4]
Procedurally, the FTC recently streamlined its rulemaking procedures and gave the Chair more control over the process.[5] FTC Commissioner Wilson, who dissented from the procedural changes, expressed concern that they compromised the impartiality of the rulemaking process and unduly limited public input. And substantively, while any rulemaking must be based on a factual record, several of the initiatives outlined in the Order appear inconsistent with longstanding FTC enforcement policy and governing law. For example, the fact sheet accompanying the Order objects that “rapid[] consolidation” in the shipping industry has resulted in 10 shippers controlling 80% of the market. But under the long-standing Horizontal Merger Guidelines of the Department of Justice and Federal Trade Commission that are cited regularly by the courts, such a market likely would be considered “unconcentrated.”[6] To the extent the FTC takes actions that conflict with courts’ interpretation of antitrust law, or that constitute a significant and unexplained deviation from existing enforcement policies, its initiatives may be subject to legal challenge.
Similarly, while the fact sheet accompanying the Order suggests the FTC is to “ban” non-compete agreements, such a sweeping rule by the agency likely would be invalidated in court. The Order therefore more modestly encourages the agency to “curtail” non-compete “clauses” and agreements “that may unfairly limit worker mobility”; still, even a rule adopting this narrower approach would be subject to legal challenge, particularly if not drawn with great care and precision. Indeed, given that many states already require non-compete agreements to be reasonable in their scope, it is unclear how—if at all—a federal effort to curtail such agreements that “unfairly” limit worker mobility would change the legal landscape.
Expansive rulemaking could also expose the FTC to legal challenges under the constitutional “nondelegation doctrine,” which limits the extent to which Congress may delegate lawmaking power to administrative agencies. Although the nondelegation doctrine has seldom been invoked by the Supreme Court since the New Deal Era, in 2019 five Supreme Court justices expressed interest in reviving the doctrine.[7] Those five justices constitute a majority of the current Supreme Court. The FTC Act, which delegates to the FTC the authority to regulate “unfair” behavior, may be susceptible to a challenge on the grounds that Congress must provide concrete guidance to cabin the FTC’s exercise of its delegated power.
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[1] Executive Order on Promoting Competition in the American Economy (July 9, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/.
[2] FACT SHEET: Executive Order on Promoting Competition in the American Economy, (July 9, 2021), https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-on-promoting-competition-in-the-american-economy/.
[3] FTC Commissioner Noah Joshua Phillips, Non-Compete Clauses in the Workplace: Examining Antitrust and Consumer Protection Issues, (Jan. 9, 2021), available here.
[4] Id.
[5] Statement of FTC Commissioner Rebecca Kelly Slaughter (July 1, 2021), available here.
[6] U.S. Dept. of Justice and the Federal Trade Commission, Horizontal Merger Guidelines, (Aug. 19, 2010), https://www.ftc.gov/sites/default/files/attachments/merger-review/100819hmg.pdf (explaining that a Herfindahl-Hirschman Index of less than 1500 is “[u]nconcentrated”).
[7] Gundy v. United States, 139 S. Ct. 2116 (2019) (Gorsuch J., dissenting) (joined by Chief Justice Roberts and Justice Thomas); Id. at 2131 (Alito, J., concurring); Paul v. United States, 140 S. Ct. 342 (2019) (Kavanaugh, J., concurring in denial of certiorari).
The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Helgi Walker, Rachel Brass, Kristen Limarzi, Michael Perry, Stephen Weissman, Jason Schwartz, Katherine Smith, and Chad Squitieri.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following in the firm’s Administrative Law and Regulatory, Antitrust and Competition or Labor and Employment practice groups.
Administrative Law and Regulatory Group:
Eugene Scalia – Washington, D.C. (+1 202-955-8543,escalia@gibsondunn.com)
Helgi C. Walker – Washington, D.C. (+1 202-887-3599, hwalker@gibsondunn.com)
Antitrust and Competition Group:
Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Kristen C. Limarzi – Washington, D.C. (+1 202-887-3518, klimarzi@gibsondunn.com)
Michael J. Perry – Washington, D.C. (+1 202-887-3558, mjperry@gibsondunn.com)
Stephen Weissman – Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)
Labor and Employment Group:
Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On July 7, 2021, Colorado Governor Jared Polis signed into law the Colorado Privacy Act (“CPA”), making Colorado the third state to pass comprehensive consumer privacy legislation, following California and Virginia.
The CPA will go into effect on July 1, 2023.[1] In many ways, the CPA is similar—but not identical—to the models set out by its California and Virginia predecessors the California Consumer Privacy Act (“CCPA”), the California Privacy Rights Enforcement Act (“CPRA”) and the Virginia Consumer Data Protection Act (“VCDPA”). The CPA will grant Colorado residents the right to access, correct, and delete the personal data held by organizations subject to the law. It also will give Colorado residents the right to opt-out of the processing of their personal data for purposes of targeted advertising, sale of their personal data, and profiling in furtherance of decisions that produce legal or similarly significant effects on the consumer. In ensuring that they are prepared to comply with the CPA, many companies should be able to build upon the compliance measures they have developed for the California and Virginia laws to a significant extent.
The CPA does, however, contain a few notable distinctions when compared to its California and Virginia counterparts. First, the CPA applies to nonprofit entities that meet certain thresholds described more fully below, whereas the California and Virginia laws exempt nonprofit organizations. Similar to the VCDPA and unlike the CPRA—the California law slated to replace the CCPA in 2023—the CPA does not apply to employee or business-to-business data. Like the VCDPA, the CPA will not provide a private right of action.[2] Instead, it is enforceable only by the Colorado Attorney General or state district attorneys. The laws in all three states differ with respect to the required process for responding to a consumer privacy request and the applicable exceptions for responding to such requests.
Finally, in addition to adopting certain terminology such as “personal data,” “controller” and “processor,” most commonly used in privacy legislation outside the United States, the CPA applies certain obligations modeled after the European Union’s General Data Protection Regulation (“GDPR”), including the requirement to conduct data protection assessments. Further, the CPA imposes certain obligations on data processors, including requirements to assist the controller in meeting its obligations under the statute and to provide the controller with audit rights, deletion rights, and the ability to object to subprocessors. Companies that have undergone GDPR compliance work thus will have a leg up with respect to these obligations.
The CPA gives the Attorney General rulemaking authority to fill some notable gaps in the statute. Among them are how businesses should implement the requirement that consumers have a universal mechanism to easily opt out of the sale of their personal data or its use for targeted advertising, which must be implemented by July 1, 2023. In addition, as Governor Polis noted in a signing statement, the Colorado General Assembly already is engaged in conversations around enacting “clean-up” legislation to further refine the CPA.[3]
The following is a detailed overview of the CPA’s provisions.
I. CPA’s Key Rights and Provisions
A. Scope of Covered Businesses, Personal Data, and Exemptions
1. Who Must Comply with the CPA?
The CPA applies to any legal entity that “conducts business in Colorado or produces or delivers commercial products or services that are intentionally targeted to residents of Colorado” and that satisfies one or both of the following thresholds:
- During a calendar year, controls or processes personal data of 100,000 or more Colorado residents; or
- Both derives revenue or receives discounts from selling personal data and processes or controls the personal data of 25,000 or more Colorado residents.[4]
In other words, the CPA will likely apply to companies that interact with Colorado residents, or process personal data of Colorado residents on a relatively large scale, including non-profit organizations. Like the California and Virginia laws, the CPA does not define what it means to “conduct business” in Colorado. However, in the absence of further guidance from the Attorney General, businesses can assume that economic activity that triggers tax liability or personal jurisdiction in Colorado likely will trigger CPA applicability.
Notably, like the VCDPA (and unlike the CCPA), the statute does not include a standalone revenue threshold for determining applicability separate from the above thresholds regarding contacts with Colorado. Therefore, even large businesses will not be subject to the CPA unless they fall within one of the two categories above, which focus on the number of Colorado residents affected by the business’s processing or control of personal data.
The CPA contains a number of exclusions, including both entity-level and data-specific exemptions. For instance, it does not apply to certain entities, including air carriers[5] and national securities associations.[6] Employment records and certain data held by public utilities, state government, and public institutions of higher education are also exempt.[7] The CPA also exempts data subject to various state and federal laws and regulations, including the Gramm-Leach-Bliley Act (“GLBA”), Health Insurance Portability and Accountability Act (“HIPAA”), Fair Credit Reporting Act (“FCRA”), and the Children’s Online Privacy Protection Act (“COPPA”).[8] Like the California and Virginia laws, however, these latter exemptions do not apply at the entity level and instead only apply to data that is governed by and processed in accordance with such laws.
The CPA also explicitly exempts a wide variety of activities in which controllers and processors might engage, such as responding to identity theft, protecting public health, or engaging in internal product-development research.[9]
2. Definition of “Personal Data” and “Sensitive Data”
The CPA defines personal data as “information that is linked or reasonably linkable to an identified or identifiable individual,” but excludes “de-identified data or publicly available information.”[10] The CPA defines “publicly available information” as information that is “lawfully made available from federal, state, or local government records” or that “a controller has a reasonable basis to believe the consumer has lawfully made available to the general public.”[11] The CPA further does not apply to data “maintained for employment records purposes.”[12]
As discussed below, opt-out rights apply to certain processing of personal data, while opt-in consent must be obtained prior to processing categories of data that are “sensitive.” The statute defines “sensitive data” to mean “(a) personal data revealing racial or ethnic origin, religious beliefs, a mental or physical health condition or diagnosis, sex life or sexual orientation, or citizenship or citizenship status; (b) genetic or biometric data that may be processed for the purpose of uniquely identifying an individual; or (c) personal data from a known child.”[13]
B. Consumer Rights Under the Colorado Privacy Act
A “consumer” under the CPA is a Colorado resident who is “acting only in an individual or household context.”[14] Like the VCDPA, the CPA expressly exempts individuals acting in a “commercial or employment context,” such as a job applicant, from the definition of “consumer.”[15] This contrasts with the CPRA, which does not exempt business-to-business and employee data, and the CCPA’s exemptions for such data that are set to expire in 2023.
1. Access, correction, deletion, and data portability rights
The CPA gives Colorado consumers the right to access, correct, delete, or obtain a copy of their personal data in a portable format.[16]
Controllers must provide consumers with “a reasonably accessible, clear, and meaningful privacy notice.”[17] Those notices must tell consumers what types of data controllers collect, how they use it and what personal data is shared with third parties, with whom they share it, and “how and where” consumers can exercise their rights.[18]
To exercise their rights over their personal data, consumers must submit a request to the controller.[19] Controllers cannot require consumers to create an account to make a request about their data,[20] and they also cannot discriminate against consumers for exercising their rights, such as by increasing prices or reducing access to products or services.[21] However, they can still offer discounts and perks that are part of loyalty and club-card programs.[22]
2. Right to opt-out of sale of personal data, targeted advertising, and profiling
As under the VCDPA, under the CPA consumers have the right to opt out of the processing of their non-sensitive personal data for purposes of targeted advertising, the sale of personal data, or “profiling in furtherance of decisions that produce legal or similarly significant effects.”[23] The CPA, like the CCPA, adopts a broad definition of “sale” of personal data to mean “the exchange of personal data for monetary or other valuable consideration by a controller to a third party.”[24] However, the CPA contains some broader exemptions from the definition of “sale” than the CCPA, including for the transfer of personal data to an affiliate or to a processor or when a consumer directs disclosure through interactions with a third party or makes personal data publicly available.[25]
If the controller sells personal data or uses it for targeted advertising, the controller’s privacy notice must “clearly and conspicuously” disclose that fact and how consumers can opt out.[26] In addition, controllers must provide that opt-out information in a “readily accessible location outside the privacy notice.”[27] However, the CPA, like the VCDPA, does not specify how controllers must present consumers with these opt-out rights.
The CPA permits consumers to communicate this opt out through technological means, such as a browser or device setting.[28] By July 1, 2024, consumers must be allowed to opt out of the sale of their data or its use for targeted advertising through a “user-selected universal opt-out mechanism.”[29] Opting-out of profiling, however, does not appear to be explicitly addressed by this mechanism. Exactly what the universal opt-out mechanism will look like will be up to the Attorney General, who will be tasked with defining the technical requirements of such a mechanism by July 1, 2023.[30]
3. New rights to opt-in to the processing of “sensitive” data and to appeal
a. Right to opt-in to the processing of “sensitive” data”
Similar to the VCDPA, controllers must first obtain a consumer’s opt-in consent before processing “sensitive data,” which includes children’s data; genetic or biometric data used to uniquely identify a person; and “personal data revealing racial or ethnic origin, religious beliefs, a mental or physical health condition or diagnosis, sex life or sexual orientation, or citizenship or citizenship status.”[31] Unlike the VCDPA, however, the CPA does not define “biometric” data.
Consent can be given only with a “clear, affirmative act signifying a consumer’s freely given, specific, informed, and unambiguous agreement,” such as an electronic statement.[32] Like its California counterparts, the CPA further specifies that consent does not include acceptance of broad or general terms, “hovering over, muting, pausing, or closing a given piece of content,” or consent obtained through the use of “dark patterns,” which are “user interface[s] designed or manipulated with the substantial effect of subverting or impairing user autonomy, decision making, or choice.”[33]
b. Right to appeal
Like its counterparts, the CPA provides that controllers must respond to requests to exercise the consumer rights granted by the statute within 45 days, which the controller may extend once for an additional 45-day period if it provides notice to the requesting consumer explaining the reason for the delay.[34] A controller cannot charge the consumer for the first such request the consumer makes in any one-year period, but can charge for additional requests in that year. [35] The CPA, like the VCDPA (but unlike the CCPA/CPRA), requires controllers to establish an internal appeals process for consumers when the controller does not take action on their request.[36] The appeals process must be “conspicuously available and as easy to use as the process for submitting the request.”[37] Once controllers act on the appeal—which they must do within 45 days, subject to an additional extension of 60 days if necessary—they must also tell consumers how to contact the Attorney General’s Office if the consumer has concerns about the result of the appeal.[38]
C. Business Obligations
1. Data Minimization and technical safeguards requirements
Like the California and Virginia laws, the CPA limits businesses’ collection and use of personal data and requires the implementation of technical safeguards.[39] The CPA explicitly limits the collection and processing by controllers of personal data to that which is reasonably necessary and compatible with the purposes previously disclosed to consumers.[40] Relatedly, controllers must obtain consent from consumers before processing personal data collected for another stated purpose.[41] Also, under the CPA controllers and processors must take reasonable measures to keep personal data confidential and to adopt security measures to protect the data from “unauthorized acquisition” that are “appropriate to the volume, scope, and nature” of the data and the controller’s business.[42]
2. GDPR-like requirements – data protection assessments, data processing agreements, restrictions on processing personal data
The CPA, like the VCDPA, requires controllers to conduct “data protection assessments,” similar to the data protection impact assessments required under the GDPR, to evaluate the risks associated with certain processing activities that pose a heightened risk – such as those related to sensitive data and personal data for targeted advertising and profiling that present a reasonably foreseeable risk of unfair or deceptive treatment or unlawful disparate impact to consumers – and the sale of personal data.[43] Unlike the GDPR, however, the CPA does not specify the frequency with which these assessments must occur. The CPA requires controllers to make these assessments available to the Attorney General upon request.[44]
The CPA also requires controllers and processors to contractually define their relationship. These contracts must include provisions related to, among other things, audits of the processor’s actions and the confidentiality, duration, deletion, and technical security requirements of the personal data to be processed.[45]
D. Enforcement
The CPA is enforceable by Colorado’s Attorney General and state district attorneys, subject to a 60-day cure period for any alleged violation until 2025 (in contrast to the 30-day cure period under the CCPA and VCDPA and the CPRA’s elimination of any cure period).[46] Local laws are pre-empted and consumers have no private right of action.[47] A violation of the CPA constitutes a deceptive trade practice for purposes of the Colorado Consumer Protection Act, with violations punishable by civil penalties of up to $20,000 per violation (with a “violation” measured per consumer and per transaction).[48] The Attorney General or district attorney may enforce the CPA by seeking injunctive relief.
In addition to rulemaking authority to specify the universal opt-out mechanism, the Colorado Attorney General is authorized to “adopt rules that govern the process of issuing opinion letters and interpretive guidance to develop an operational framework for business that includes a good faith reliance defense of an action that may otherwise constitute a violation” of the CPA.[49]
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As we counsel our clients through GDPR, CCPA, CPRA, VCDPA, and CPA compliance, we understand what a major undertaking it is and has been for many companies. As discussed above, the CPA resembles the VCDPA in several respects, including by requiring opt-in consent for the processing of “sensitive data,” permitting appeal of decisions by companies to deny consumer requests, as well as by imposing certain GDPR-style obligations such as the requirement to conduct data protection assessments. Because many of the privacy rights and obligations in the CPA are similar to those in the GDPR, CCPA, CPRA, and/or VCDPA, companies should be able to strategically leverage many of their existing or in-progress compliance efforts to ease their compliance burden under the CPA.
In light of this sweeping new law, we will continue to monitor developments, and are available to discuss these issues as applied to your particular business.
_________________________
[1] Sec. 7(1), Colorado Privacy Act, Senate Bill 21-190, 73d Leg., 2021 Regular Sess. (Colo. 2021), to be codified in Colo. Rev. Stat. (“C.R.S.”) Title 6.
[2] E.g.,C.R.S. §§ 6-1-1311(1); 6-1-108(1).
[3] SB 21-190 Signing Statement, available at https://drive.google.com/file/d/1GaxgDH_sgwTETfcLAFK9EExPa1TeLxse/view.
[7] C.R.S. § 6-1-1304(2)(k), (n), (o).
[8] E.g., C.R.S. §§ 6-1-1304(2)(e), (i)(II), (j)(IV), (q).
[11] C.R.S. § 6-1-1303(17)(b).
[16] C.R.S. § 6-1-1306(1)(b)-(e).
[20] C.R.S. §§ 6-1-1306(1); 6-1-1308(1)(c)(I).
[21] C.R.S. § 6-1-1308(1)(c)(II), (6).
[23] C.R.S. § 6-1-1306(1)(a)(I).
[24] C.R.S. § 6-1-1303(23)(a) (emphasis added).
[25] C.R.S. § 6-1-1303(23)(b).
[26] C.R.S. § 6-1-1308(1)(b); see also 6-1-1306(1)(a)(III), 6-1-1306(1)(a)(IV)(C).
[27] C.R.S. § 6-1-1306(1)(a)(III).
[28] C.R.S. § 6-1-1306(1)(a)(II).
[29] C.R.S. § 6-1-1306((1)(a)(IV).
[30] C.R.S. § 6-1-1306((1)(a)(IV)(B).
[33] C.R.S. § 6-1-1303(5), (9).
[34] C.R.S. § 6-1-1306(2)(a)-(b).
[37] C.R.S. § 6-1-1306(3)(a)-(b).
[38] C.R.S. § 6-1-1306(3)(b)-(c).
[39] See generally C.R.S. §§ 6-1-1305, 6-1-1308(2)-(5).
[40] C.R.S. § 6-1-1308(2)-(4).
[42] C.R.S. §§ 6-1-1305(3)(a); 6-1-1308(5).
[45] C.R.S. § 6-1-1305(3)-(5).
[46] C.R.S. §§ 6-1-1311(1)(a), (d).
[47] C.R.S. §§ 6-1-1311(1)(b); 6-1-1312.
[48] C.R.S. § 6-1-1311(1)(c); see C.R.S. § 6-1-112(a).
This alert was prepared by Ryan Bergsieker, Sarah Erickson, Lisa Zivkovic, and Eric Hornbeck.
Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any member of the firm’s Privacy, Cybersecurity and Data Innovation practice group.
Privacy, Cybersecurity and Data Innovation Group:
United States
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202-887-3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Robert K. Hur – Washington, D.C. (+1 202-887-3674, rhur@gibsondunn.com)
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Ashley Rogers – Dallas (+1 214-698-3316, arogers@gibsondunn.com)
Deborah L. Stein – Los Angeles (+1 213-229-7164, dstein@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com)
Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0)1 56 43 13 00, abaladi@gibsondunn.com)
James A. Cox – London (+44 (0) 20 7071 4250, jacox@gibsondunn.com)
Patrick Doris – London (+44 (0) 20 7071 4276, pdoris@gibsondunn.com)
Kai Gesing – Munich (+49 89 189 33-180, kgesing@gibsondunn.com)
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, bgrinspan@gibsondunn.com)
Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Alejandro Guerrero – Brussels (+32 2 554 7218, aguerrero@gibsondunn.com)
Vera Lukic – Paris (+33 (0)1 56 43 13 00, vlukic@gibsondunn.com)
Sarah Wazen – London (+44 (0) 20 7071 4203, swazen@gibsondunn.com)
Asia
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
Connell O’Neill – Hong Kong (+852 2214 3812, coneill@gibsondunn.com)
Jai S. Pathak – Singapore (+65 6507 3683, jpathak@gibsondunn.com)
Gibson Dunn’s Supreme Court Round-Up provides summaries of the Court’s opinions from this Term, a preview of cases set to be argued next Term, and other key developments on the Court’s docket. In the October 2020 Term, the Court heard argument in 57 cases, including 2 original-jurisdiction cases, and Gibson Dunn was counsel or co-counsel for a party in 4 of those cases.
Spearheaded by former Solicitor General Theodore B. Olson, the Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions. The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions. The Round-Up provides a concise, substantive analysis of the Court’s actions. Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next. The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions.
To view the Round-Up, click here.
Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. During the Supreme Court’s 5 most recent Terms, 9 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 15 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the areas of intellectual property, separation of powers, and federalism. Moreover, although the grant rate for petitions for certiorari is below 1%, Gibson Dunn’s petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 32 petitions for certiorari since 2006.
* * * *
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group.
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Orange County partner Oscar Garza, of counsel Matthew Bouslog and associate Douglas Levin are the authors of “The Current State of Play: the Bankruptcy Code ‘Safe Harbor’ After Merit Management” [PDF] published by the Norton Journal of Bankruptcy Law and Practice in April 2021.
Reprinted from Norton Journal of Bankruptcy Law and Practice, Vol. 30 No. 2 (April 2021), with permission of Thomson Reuters. Copyright © 2021. Further use without the permission of Thomson Reuters is prohibited. For further information about this publication, please visit https://legal.thomsonreuters.com/en/products/law-books or call 800.328.9352.
On June 23, 2021, the U.S. Supreme Court held 6-3 that a California regulation granting labor organizations a right of access to agricultural employers’ property to solicit support for unionization, constitutes a “per se” physical taking under the Fifth Amendment. Finding that “the regulation here is not transformed from a physical taking into a use restriction just because the access granted is restricted to union organizers, for a narrow purpose, and for a limited time” the Court’s decision in Cedar Point Nursery v. Hassid arguably signals an expanded definition of physical takings which potentially could encompass additional government regulations. The Court’s analysis, however, was strongly influenced by the relative intrusiveness and persistence of the intrusions authorized by the California regulation before it—which the Court analogized to a traditional “easement”— and which it distinguished from more limited tortious intrusions akin to trespasses and from traditional health and safety inspections, neither of which raise takings issues. It is therefore too soon to know whether Cedar Point will markedly alter takings jurisprudence.
I. Background
The California Agricultural Labor Relations Act of 1975 grants union organizers a right to take access to the property of agricultural employers for the purposes of soliciting the support of agricultural workers by filing written notice with the state’s Agricultural Labor Relations Board and providing a copy of the notice to the employer. Under the regulation, agricultural employers must allow the organizers to enter and remain on the premises for up to three hours per day, 120 days per year. Agricultural employers who interfere with the organizers’ right of entry onto their property may be subjected to sanctions for unfair labor practices.
In 2015, organizers from the United Farm Workers sought entry into Cedar Point Nursery and Fowler Packing Company without providing written notice. After the organizers entered Cedar Point and engaged in disruptive behavior, Cedar Point filed a charge against the union for entering the property without notice; the union responded with its own charge against Cedar Point for committing an unfair labor practice. The union filed a similar charge against Fowler Packing Company, from which they were as been blocked from accessing altogether.
The District Court dismissed the employers’ complaints, rejecting their argument that the regulation constituted a per se physical taking. The Court of Appeals affirmed, evaluating the claims under the multi-prong balancing test that applies to use restrictions. The U.S. Supreme Court disagreed with the lower courts and reversed, finding that the regulation did qualify as a per se physical taking because it granted a formal entitlement to enter the employers’ property that was analogous to an easement, thereby appropriating a right of access for union organizers to physically invade the land, and impair the property owner’s “right to exclude” people from its property.
II. Issues & Holding
The U.S. Constitution requires the government to provide just compensation whenever it effects a taking of property. Under a straightforward application of takings doctrine, just compensation will always be required when the government commits a per se physical taking by physically occupying or possessing property without acquiring title. Takings claims arising from regulations that restrict an owner’s ability to use their property are less clear-cut. Such claims will be evaluated under a multi-prong balancing test, and just compensation is only required if it is determined that the regulation “goes too far” as a regulatory taking.
The outcome of this particular case turned on whether the Court viewed the California regulation as a per se physical taking, for which just compensation generally is required, or as a “regulatory” taking, the doctrine applied to use restrictions and under which compensation is required only if the restriction “goes too far.” The Court found that the California access provision qualified as a per se physical taking because it did not merely restrict how the owner used its own property, but it appropriated the owner’s “right to exclude” for the government itself or for a third party by granting organizers the right physically to enter and occupy the land for periods of time. Under the Court’s holding, the fact that the physical appropriation arose from a regulation was immaterial to its classification as a per se taking. As the Court explained, although use restrictions are often analyzed as “regulatory takings,” “[t]he essential question is not whether the government action at issue comes garbed as a regulation (or statute, or ordinance, or miscellaneous decree). It is whether the government has physically taken property for itself or someone else—by whatever means—or ha instead restricted a property owner’s ability to use his own property.”
The Court supported its holding with past takings jurisprudence. Under the landmark case Loretto v. Teleprompter Manhattan CATV Corp., any regulation that authorizes a permanent physical invasion of property qualifies as a taking. 458 U.S. 419 (1982). The Court clarified that Loretto did not require a finding that a per se physical taking had not occurred since the invasion was only temporary and intermittent rather than permanent and ongoing, because the key element of a taking under Loretto is the physical invasion itself. While the duration and frequency of the physical invasion may bear on the amount of compensation due, it does not alter its classification as a per se taking. By authorizing third parties to physically invade agricultural employers’ property, the California regulation amounted to the government having taken a property interest analogous to a servitude or easement, and such actions have historically been treated as per se physical takings. The Court also made clear that a physical invasion need not match precisely the definition of “easement” under state law to qualify as a taking.
The Court also considered the seminal case of PruneYard Shopping Center v. Robins, in which the California Supreme Court used the multi-factor balancing test to find that a restriction on a privately owned shopping center’s right to exclude leafleting was not a taking. 447 U.S. 74 (1980). The Court pointed out that unlike the California agricultural property, the shopping center in PruneYard was open to the public. Finding a significant difference between “limitations on how a business generally open to the public may treat individuals on the premises” and “regulations granting a right to invade property closed to the public,” the Court rejected the argument that PruneYard stood for the proposition that limitations on a property owner’s right to exclude must always be evaluated as regulatory rather than per se takings.
Finally, the Court confirmed that its holding would not disturb ordinary government regulations. The Court noted that isolated physical invasions are properly analyzed as torts (trespasses), and not takings, that many government-authorized restrictions simply reflect longstanding common limitations on property rights (such as ruled requiring property owners to abate nuisances), and, most importantly, that its analysis would not affect traditional health and safety inspections that require entry onto private property will generally not constitute a taking. Such inspections are generally permitted on the theory that the government could have refused to license the commercial activity in question, and that an access requirement is thus proportional to that “benefit” and constitutional.
III. Takeaways
The decision does not expand the scope of per se takings to encompass regulations which merely restrict the use of property without physically invading the land. Legislative restrictions that do not involve a physical invasion will still be evaluated under the multi-prong balancing test before just compensation is required. This decision does not alter the legality of certain categories of government-authorized physical invasions, such government health and safety inspections. It is however a reaffirmation that there are limits to the government’s ability to mandate public access to private property.
The following Gibson Dunn attorneys prepared this client update: Amy Forbes.
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 leaders and members of the firm’s Land Use and Development or Real Estate practice groups in California:
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In this update, we look at the key employment law considerations our clients face across the UK, France and Germany connected to a return to the workplace in the near future, including: (i) ensuring a “Covid-secure” workplace’ and whether to continue to offer flexible working arrangements in the future; (ii) whether to implement an employee Covid-19 vaccination policy (and if so, whether it should be compulsory or voluntary); and (iii) vaccination certification logistics and the facilitation of Covid-19 testing for employees. The legal and commercial issues around Covid-19 continue to be fast-developing, alongside guidance from governments and national authorities, which employers and lawyers alike will continue to monitor closely in the coming months.
1. A return to the workplace
UK
On 5 July 2021, the Prime Minister announced the UK government’s plans to lift the remaining Covid-19 legal restrictions in England from 19 July 2021 following a further review of the health crisis on 12 July 2021 (with varying timeframes across the other nations of the United Kingdom). Should the lifting of restrictions be confirmed on 12 July, it is expected that there will no longer be legal limits on social contact or social distancing, or mandatory face covering requirements except in certain specific settings (such as healthcare settings). Event and venue capacity caps are also expected to be dropped and venues such as nightclubs should be permitted to reopen. UK employers are therefore anticipating a return to the workplace over the next few months, with the government’s message of “work from home where you can” expected to be removed from 19 July 2021.
With a safe return to the workplace in mind, to the extent they have not done so already, employers should be ensuring their workplaces are “Covid-secure” and risk assessments have been conducted in line with the UK’s Health and Safety Executive’s regularly updated guidelines which are scheduled for further review on 19 July 2021. Practical measures to be put in place will vary depending on the nature of the workplace and industry-specific guidelines, but employers may need to (or wish to) produce policy documents to outline protocols covering meetings, hand washing, mask-wearing, shielding and self-isolation in the event of exposure to Covid-19. In terms of the practical logistics of a return to the workplace, employers should consider whether they wish to continue flexible working arrangements that may currently be in place for their workforce including working from home, the rotation of teams with allocated days to attend the workplace and even specifying arrival and departure times to avoid “bottle necks” in reception areas. UK employers have a duty to consult with employees on matters concerning health and safety at work so will need to engage with their workforce and any relevant unions in good time in advance of a return to the workplace.
Some UK employers will also be preparing for the anticipated end of UK government financial support towards employer costs through the Coronavirus Job Retention Scheme (which is currently set to run until the end of September 2021), the reintegration of furloughed employees, managing levels of accrued untaken annual leave which employers may seek to require their employees take at specific times to ensure it is well distributed, the management of employees who are reluctant to return to the workplace and their options in terms of disciplinary processes and navigating potential employment claims associated with any such processes, as well as potential headcount reductions and redundancies.
Germany
The home office regulations in Germany were tightened in spring of this year, ending in June. Unlike the UK, Germany had to face a serious “third wave” of Covid-19 infections in spring. Until April 2021, German law only stipulated an obligation for employers to provide working-from-home opportunities whenever possible. However, after intense public discussions, the government imposed an additional and enforceable obligation for employees to actually make use of such offers. Due to the rapidly falling numbers of infections in Germany during early summer, the government announced that the working-from-home obligation shall cease from the end of June.
However, a fast return to the status before the pandemic is still highly unlikely. Many large entities have already announced that they will provide non-mandatory work-from-home opportunities to their employees after the end of June in order to allow all employees to return to the office when they feel comfortable doing so. Some entities may no longer have the capacity to provide office space to all employees every day, five days per week.
Due to the recent and unpredictable development of the Delta variant and generally possible increasing infections in autumn, employers are well advised to keep the work-from-home infrastructure for a potential mandatory return to the home office in place.
France
The health crisis has led employers in France to adopt strict measures to prevent the spread of Covid-19 which have varied in intensity depending on the period of the pandemic in question. These measures have required a great deal of work by Human Resources personnel, who have had to adapt to many recommendations from the French government including the National Health Protocol for companies (hereinafter the “Health Protocol”) – a driving force which is regularly updated according to the ever-evolving health situation.
On Thursday, 29 April 2021, President Emmanuel Macron unveiled a 4-step plan to ease lockdown in France, with key dates on 3 May 2021, 19 May 2021, 9 June 2021, and 30 June 2021, which is progressively accompanied by an easing of the Health Protocol. As of 9 June 2021, working from home is no longer the rule for all workplaces and, where applicable, it is now up to the employer to prescribe a minimum number of days per week for employees to work from home or from the workplace within the framework of local social dialogue. In this way, the easing of the Health Protocol is slowly handing back decision-making authority to employers by allowing them to determine the right proportion of at home/onsite days for their employees. However, all hygiene and social distancing rules must continue to be followed by employers, as well as the promotion of remote meetings where possible.
As the physical risks of returning to the workplace reduce, employers must continue to monitor and account for the psychosocial risks, insofar as a return to the workplace may be a source of anxiety for employees (such as the fear of having lost their professional reflexes or the fear of physical contamination). Employers must therefore remain vigilant on these issues as they manage the return of their workforce.
2. Vaccination policies
UK
The UK government’s Department of Health and Social Care has said that it is aiming to have offered a Covid-19 vaccination to all adults in the UK by the end of July 2021, although the vaccination is not mandatory. In his 5 July 2021 announcement, the Prime Minister confirmed that the government plans to recognise the protection afforded to fully-vaccinated individuals in relation to self-isolation requirements upon return from travel abroad or contact with an individual who has tested positive for Covid-19. Employers are therefore considering some of the following issues with respect to the vaccination of their workforce:
(i) Whether to introduce voluntary vaccination policy or vaccination as a contractual obligation or pre-requisite to employment for new recruits: UK health and safety legislation requires employers to take reasonable steps to reduce workplace risks, and some employers will be of the view that requiring (or encouraging) employee vaccination is a reasonable step to take towards protecting their workforce from the risks of Covid-19 in the workplace. This assessment is likely to depend largely on the nature of the work being done, the workforce (its interaction generally and with third parties) and the nature of the workplace.
Proposed amendments to the Health and Social Care Act 2008 (Regulated Activities) Regulations 2014 (SI 2014/2936) will make it mandatory from October 2021 for anyone working in a regulated care home in England to be fully vaccinated against Covid-19 (subject to a grace period). This includes all workers, agency workers, independent contractors and volunteers who may work onsite. The government is currently considering whether this mandatory vaccination policy should apply to other healthcare and domiciliary care settings. In the meantime, many employers who are not bound by this policy are nevertheless considering introducing a vaccination policy, whether voluntary or compulsory. Any vaccination policy must be implemented carefully and thoughtfully.
(ii) Employees who refuse the Covid-19 vaccination: Employees may be reluctant or refuse to have the Covid-19 vaccination for a variety of reasons such as their health, religious beliefs or simply personal choice. Depending on whether employers choose to encourage their employees to have the vaccination through a voluntary policy, or make vaccination a mandatory contractual requirement, where employees decline vaccination, employers will need to consider: (a) whether they need to take additional steps to protect the health and safety of those unvaccinated employees or others, including addressing any measures to ensure the workplace is “Covid-secure” or extending working-from-home flexibility for unvaccinated employees; (b) whether disciplinary action (including dismissal) is an option; and (c) how best to manage the risk of potential employment claims.
Employers will be seeking to balance their obligations to protect their workforce under health and safety legislation (which may in part be achieved through high levels of workforce vaccination), reporting obligations in respect of diseases appearing in the workplace (which include Covid-19) and their general duty of care towards employees on the one hand, with employees’ right to refuse the vaccination and the risk of potential employment claims on the other.
(iii) Data protection implications: Employers who collect information relating to whether their employees have been vaccinated will be processing special category personal data, which means they must comply with the requirements of the UK data protection laws in respect of such processing. As such, employers processing vaccination data will need a lawful basis to do so under Article 6(1) of the UK GDPR as well as meeting one of the conditions for processing under Article 9. Furthermore, any such processing must be done in a transparent way so relevant privacy notices will need to be updated and employers must ensure that they also take account of data minimisation and data security obligations. Specifically, they should ensure they do not retain the information for longer than necessary or record more information than they need for the purpose for which it is collected (i.e., protecting the workforce), as well as ensuring any such data remains accurate and safe from data breaches.
Whether an employer has a legal basis for processing this special category personal data will depend on the context of their employees’ work, the relevant industry and other factors such as the interaction of their workforce with each other as well as clients or other third parties.
Germany
The German government lifted its vaccination prioritization system on 7 June 2021. Most recently, occupational doctors (Betriebsärzte) have been involved in the vaccination campaign as well in order to accelerate it.
Employers may be interested in reaching the highest possible vaccination rate amongst their employees. There are not only economic reasons for such an approach (e.g., to mitigate the risk of disrupted production as a result of quarantine measurements), employers also have a legal obligation towards their employees to protect them and create a safe work environment. In this regard, however, there are crucial points to consider:
(i) So far, there is no indication for the lawfulness of an obligatory vaccination: It is quite clear that there is no justification for the state to make vaccination mandatory for its citizens – mainly for constitutional reasons. The legality of a contractual vaccination obligation imposed by the employer is also widely opposed in Germany.
(ii) Alternatively – and less risky from a legal perspective –, employers may consider a cooperative approach to achieve a high percentage of vaccinated employees: This could include different measures to increase willingness to be vaccinated amongst the workforce, e.g., by providing information about the vaccine, highlighting the advantages, or offering the vaccination through the company’s medical provider. A more controversial method is to consider rewards for vaccinated employees. There is no case law yet on the issue of whether employers can legally grant such bonuses. However, an incentive will most likely be considered lawful if the bonus stays within a reasonable range. Only in such a case, a completely voluntary decision for each employee to decide for or against a vaccination can be assumed. Even negative incentives can be justified under special circumstances. Therefore, absent any statutory rules on this issue it seems reasonable and appropriate to deny non-vaccinated employees access to common areas like close-area production areas, warehouses, or the cafeteria in order to avoid a spread of infections. On the other hand, it is not admissible to threaten an employee with termination if that employee decides against vaccination.
(iii) Data protection implications: Given the fact that the new UK GDPR is an almost verbatim adoption of the EU GDPR, the data protection implications for the UK and the EU, including Germany and France, are basically identical. Articles 6 and 22 of the EU GDPR can provide the necessary basis to legally handle the processing of health data like the vaccination status. Nonetheless, employers will have to make sure this is done in a transparent fashion and the information is not kept longer than absolutely necessary.
In the event that employers offer bonuses to employees for getting vaccinated, compliance with the EU GDPR is less problematic as the employees will likely provide their personal data on a voluntary basis. However, to comply with the EU GDPR, employers must ensure they have explicit consent for the data processing.
France
In France, vaccination against Covid-19 has been progressively extended to new audiences in stages and in line with accelerated vaccine deliveries. Since 31 May 2021, vaccination has been available to all over 18 years’ old including those without underlying health conditions. As of 15 June 2021, it has been available to all young people aged between 12 to 18 years’ old.
(i) No obligation to get vaccinated: Employees are encouraged to be vaccinated as part of the vaccination strategy set out by France’s health authorities. However vaccination against Covid-19 remains voluntary and there should be no consequences from an employer if an employee refuses vaccination. Indeed, the mandatory or simply recommended nature of any occupational vaccination is decided by the French Ministry of Health (Ministère de la Santé) following the opinion of the French High Authority of Health (Haute Autorité de Santé). In the case of Covid-19, the mandatory nature of the vaccination has not yet been confirmed. Therefore, employers cannot request employees get vaccinated as a condition of returning to the workplace. In the same way, vaccinated employees will not be able to refuse to return to the workplace on the grounds that their colleagues have not been vaccinated.
As an employer cannot force an employee to be vaccinated, one big question arises in relation to those employees whose jobs require them to travel abroad regularly, particularly to countries where entry is allowed or denied according to Covid-19 vaccination status. Although no position has been taken in France on this subject for the moment, it seems likely that an employer will be able to require such an employee to prove that they has been vaccinated before allowing them to travel on company business.
(ii) Compliance with strict confidentiality and the EU GDPR: An employer cannot disclose information relating to an employee’s vaccination status, nor their willingness to be vaccinated, to another person under the EU GDPR. It is therefore, not possible for an employer to organise for a vaccination invitation to be sent to individual employees identified as vulnerable or whose job requires proof of vaccination. Indeed, such a process would allow the employer to obtain confidential information concerning the health of the employees in question, which is contrary to medical secrecy and which data is considered “sensitive” health data under the EU GDPR.
(iii) Involvement of occupational health services: The Covid-19 vaccination may be performed by occupational health services. If an employee chooses to go through this service, they are allowed to be absent from work during their working hours. No sick leave is required and the employer cannot object to their absence. In other situations, in particular if an employee chooses to be vaccinated in a vaccinodrome or at their doctor’s practice, there is no right to leave. However, in our opinion, the employer must facilitate the vaccination of employees in order to comply with its health and safety obligations.
3. Vaccination certification and Covid testing
UK
Vaccination certification
The UK government has introduced a Covid-19 vaccination status certification system known as the “NHS COVID Pass”. The Pass can be downloaded onto the NHS App on an individual’s smartphone and be used within the UK and abroad by those who have received a Covid-19 vaccination to demonstrate their vaccination status. In his 5 July 2021 announcement, the Prime Minister confirmed that a Covid-19 vaccination certificate will not be legally required as a condition of entry to any venue or event in the UK, but businesses may make use of the NHS Covid Pass certification if they wish to do so. Employers may therefore ask their employees to show their NHS Covid Pass as a condition to returning to the workplace or particiating in certain activites, but to the extent they do so, the employment and data privacy issues noted above will need to be considered in advance to ensure employers do not expose themselves to risk of claims.
Covid testing
Since April 2021, the UK government has made Covid-19 lateral flow tests available at no cost to everyone in England. Under its current workplace testing scheme, free rapid lateral flow tests will continue to be made available until the end of July 2021. UK government guidance encourages employers to offer regular (twice weekly) testing to their on-site employees to reduce the risk of Covid-19 transmission in the workplace, although such testing programs are voluntary. Employers who propose introducing Covid-19 testing for their workforce will need to consider the risks and implications of doing so, including: (i) the terms of any policy around Covid-19 testing, including whether testing will be mandatory or voluntary and the extent to which they need to consult with the workforce ahead of introducing such policy; and (ii) how to manage employee reluctance to submit to testing, and whether disciplinary proceedings will be appropriate or feasible, taking into account the risk of claims from their employees.
Germany
Vaccination certification
On 17 March 2021, the European Commission presented its proposal to create a Digital Green Certificate. It aims to standardize the mechanism by which a vaccination certificate is verified throughout the EU and to facilitate the right of free movement for EU citizens. Germany recently presented a new digital application for this certificate, the “CovPass-App”. Additionally, the newest version of the “Corona Warn App” is also capable of saving and displaying an individual’s vaccination certificate. It is possible to check their immunization status by scanning a QR-code on “the CovPassCheck App” and users are able to get their certificate uploaded to the application on their smartphone at selected pharmacies and doctors.
Regardless of the abstract possibilities of verification, employers in Germany and the EU will have to consider if and how they would like to use these tools. For instance, certificates might open up options to release employees from potential test obligations or work-from-home orders. At the same time, employers will have to observe aforementioned data protection implications and avoid unlawful discrimination or indirect vaccination obligations.
Covid testing
In Germany, rapid testing is currently free of charge and widely available. In addition, employers are required to offer at least two rapid tests a week for employees that are required to work onsite. The German government has declared that whilst employers’ no longer have an obligation to offer work-from-home opportunities, their obligation to offer rapid tests to employees will remain after the end of June. However, employees are not legally required to make use of this offer. This raises the question for employers whether or not they should make these tests mandatory. The legality of mandatory testing has not been assessed by a German court yet. It will depend primarily on the outcome of the balancing of the conflicting interests of employers and employees. While employees may claim a general right of privacy and cannot be required to undergo medical testing, employers can argue that they have a legal obligation to ensure the safety of their other employees.
Currently, one can argue that, due to the current extraordinary pandemic situation, the interests of the employer generally outweigh reservations of the employee against being tested or testing themselves. However, this might very well change when the number of cases continues to drop and the vaccination rate rises. Thus, employers electing to apply such measures are well-advised to monitor the nationwide and even local epidemiological developments closely and adapt their policies accordingly.
Again, the test results are “health data” that fall within the scope of the EU GDPR. Therefore, the data protection implications mentioned above apply accordingly. In the event that entities are having a works council, potential questions of co-determination rights according to the Works Constitution Act (BetrVG) have to be considered as well.
France
Vaccination certification
The French government has deployed a new application feature called TousAntiCovid-Carnet, which is part of the European work on the Digital Green Certificate. It is a digital “notebook” that allows electronic storage of test result certificates as well as vaccination certificates. For the French Data Protection Authority (“CNIL”), the voluntary nature of the use of this application must remain an essential guarantee of the system. Consequently, its use must not constitute a condition for the free movement of persons, subject to a few exceptions. Employers are therefore (in line with the health and safety obligations) invited to publicize this system and to encourage employees to download the application, but they cannot make it compulsory, either through internal regulations or by any other means. Any attempts to do so would be vitiated by illegality. Moreover, if the application is installed on a work phone, the employer will not be able to access the declared data, according to the French Ministry of Labor (Ministère du Travail).
In any case, if a French law that required people to have a vaccination passport and/or to download an application was to enacted, each employer would have to ensure compliance with such a law. But, until then, this is not the case.
Covid testing
Companies may carry out Covid-19 screening operations with antigenic tests at their own expense, on a voluntary basis and in compliance with medical confidentiality. They may also provide their employees with self-tests in compliance with the same rules, along with instructions provided by a health professional. On the one hand, employee rights to privacy prevent a negative test result from being communicated to the employer – an employee does not have to inform their employer that they have taken a test at all in such a situation. On the other hand, in the event of a positive test, an employee must inform their employer of the positive result – an employee, like an employer, has a health and safety obligation to take care of their own health and safety, which in turn impacts his colleagues.
* * *
We are looking forward to navigating these issues with our clients in the coming months and would be pleased to discuss any of the points raised in this alert.
The following Gibson Dunn attorneys assisted in preparing this client update: James Cox, Nataline Fleury, Mark Zimmer, Heather Gibbons, Georgia Derbyshire, Jurij Müller, and Joanna Strzelewicz.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these and other developments. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, or the following authors and members of the Labor and Employment practice group in Europe:
United Kingdom
James A. Cox (+44 (0) 20 7071 4250, jcox@gibsondunn.com)
Georgia Derbyshire (+44 (0) 20 7071 4013, gderbyshire@gibsondunn.com)
Kathryn Edwards (+44 (0) 20 7071 4275, kedwards@gibsondunn.com)
Germany
Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com)
Jurij Müller (+49 89 189 33-162, jmueller@gibsondunn.com)
France
Nataline Fleury (+33 (0) 1 56 43 13 00, nfleury@gibsondunn.com)
Charline Cosmao (+33 (0) 1 56 43 13 00, ccosmao@gibsondunn.com)
Claire-Marie Hincelin (+33 (0) 1 56 43 13 00, chincelin@gibsondunn.com)
Léo Laumônier (+33 (0) 1 56 43 13 00, llaumonier@gibsondunn.com)
Joanna Strzelewicz (+33 (0) 1 56 43 13 00, jstrzelewicz@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
This edition of Gibson Dunn’s Federal Circuit Update summarizes the Supreme Court’s decisions in Arthrex and Minerva Surgical. It also discusses recent Federal Circuit decisions concerning patent eligibility, subject matter jurisdiction, prosecution laches, and more Western District of Texas venue issues. The Federal Circuit announced that it will resume in-person arguments in September.
Federal Circuit News
Supreme Court:
United States v. Arthrex, Inc. (U.S. Nos. 19-1434, 19-1452, 19-1458): As we summarized in our June 21, 2021 client alert, the Supreme Court held 5-4 that the Appointments Clause does not permit administrative patent judges (APJs) to exercise executive power unreviewed by any Executive Branch official. The Director therefore has the authority to unilaterally review any Patent Trial and Appeal Board (PTAB) decision. The Court held 7-2 that 35 U.S.C. § 6(c) is unenforceable as applied to the Director and that the appropriate remedy is a limited remand to the Acting Director to decide whether to rehear the inter partes review petition, rather than a hearing before a new panel of APJs. Gibson Dunn partner Mark A. Perry is co-counsel for Smith & Nephew, and argued the case before the Supreme Court.
In response to the Court’s decision, the Federal Circuit issued an order requiring supplemental briefing in Arthrex-related cases. In addition, the PTAB implemented an interim Director review process. Review may now be initiated sua sponte by the Director or may be requested by a party to a PTAB proceeding. The PTAB published “Arthrex Q&As,” which provides more details on the interim Director review process.
Minerva Surgical Inc. v. Hologic Inc. (U.S. No. 20-440): As we summarized in our June 30, 2021 client alert, the Supreme Court upheld the doctrine of assignor estoppel in patent infringement actions, concluding in a 5-4 decision that a patent assignor cannot, with certain exceptions, subsequently challenge the patent’s validity. The Court indicated that the doctrine may have been applied too broadly in the past and provided three examples of when an assignor has an invalidity defense: (1) when an employee assigns to her employer patent rights to future inventions before she can possibly make a warranty of validity as to specific patent claims, (2) when a later legal development renders irrelevant the assignor’s warranty of validity at the time of assignment, and (3) when the patent claims change after assignment and render irrelevant the assignor’s validity warranty.
The Court did not add any new cases originating at the Federal Circuit.
The Court denied the petition in Warsaw Orthopedic v. Sasso (U.S. No. 20-1284) concerning state versus federal court jurisdiction.
The following petitions are still pending:
- Biogen MA Inc. v. EMD Serono, Inc. (U.S. No. 20-1604) concerning anticipation of method-of-treatment patent claims. Gibson Dunn partner Mark A. Perry is counsel for the respondent.
- American Axle & Manufacturing, Inc. v. Neapco Holdings LLC (U.S. No. 20‑891) concerning patent eligibility under 35 U.S.C. § 101, in which the Court has invited the Solicitor General to file a brief expressing the views of the United States.
- PersonalWeb Technologies, LLC v. Patreon, Inc. (U.S. No. 20-1394) concerning the Kessler
Other Federal Circuit News:
The Federal Circuit announced that, starting with the September 2021 court sitting, the court will resume in-person arguments. The court has issued Protocols for In-Person Argument, as well as a new administrative order implementing these changes, which are available on the court’s website.
Upcoming Oral Argument Calendar
The list of upcoming arguments at the Federal Circuit is available on the court’s website.
Live streaming audio is available on the Federal Circuit’s new YouTube channel. Connection information is posted on the court’s website.
Key Case Summaries (June 2021)
Yu v. Samsung Electronics Co. (Fed. Cir. No. 20-1760): Yu appealed a district court’s order finding that the asserted claims of Yu’s patent (titled “Digital Cameras Using Multiple Sensors with Multiple Lenses”) were ineligible under 35 U.S.C. § 101.
The district court granted the defendants’ motion to dismiss under § 101 on the basis that the asserted claims were directed to “the abstract idea of taking two pictures and using those pictures to enhance each other in some way.”
The Federal Circuit (Prost, J., joined by Taranto, J.) affirmed. At Step 1 of the Alice analysis, the majority “agree[d] with the district court that claim 1 is directed to the abstract idea of taking two pictures (which may be at different exposures) and using one picture to enhance the other in some way,” noting that “the idea and practice of using multiple pictures to enhance each other has been known by photographers for over a century.” At Step 2, the majority “conclude[d] that claim 1 does not include an inventive concept sufficient to transform the claimed abstract idea into a patent-eligible invention” because “claim 1 is recited at a high level of generality and merely invokes well-understood, routine, conventional components to apply the abstract idea.” In so concluding, the majority stated that the recitation of “novel subject matter . . . is insufficient by itself to confer eligibility.”
Judge Newman dissented, writing that the camera at issue “is a mechanical and electronic device of defined structure and mechanism; it is not an ‘abstract idea.’”
Chandler v. Phoenix Services (Fed. Cir. No. 20-1848): The panel (Hughes, J., joined by Chen and Wallach, J.J.) held that because Chandler’s cause of action arises under the Sherman Act, rather than patent law, and because the claims do not depend on a resolution of a substantial question of patent law, the Court lacked subject matter jurisdiction. The Court discussed a recent decision, Xitronix I, in which the Court found it lacked jurisdiction. There, the Court held that a Walker Process claim does not inherently present a substantial issue of patent law. Further, in this case, there was a prior decision that found the ’993 patent unenforceable. Thus, the transferee appellate court would have little need to discuss patent law issues. This case would not alter the validity of the ’993 patent and any discussion of the patent would be “merely hypothetical.” Thus, the Court stated this was an antitrust case and there was not proper jurisdiction simply because a now unenforceable patent was once involved in the dispute.
Hyatt v. Hirshfeld (Fed. Cir. No. 18-2390): Hyatt, the patent applicant, filed a 35 U.S.C. § 145 action against the Patent Office with respect to four patent applications. The Patent Office appealed the District Court of the District of Columbia’s judgment that the Patent Office failed to carry its burden of proving prosecution laches.
The panel (Reyna, J., joined by Wallach and Hughes, J.J.) held that the Patent Office can assert a prosecution laches defense in an action brought by the patentee under 35 U.S.C. § 145, reasoning that the language of § 282 demonstrates Congress’s desire to make affirmative defenses, including prosecution laches, broadly available. Further, the Court stated the Patent Office can assert the prosecution laches defense in a § 145 action even if it did not previously issue rejections based on, or warnings regarding, prosecution laches during the prosecution of the application. Still, the PTO’s failure to previously warn an applicant or reject claims based on prosecution laches may be part of the totality of the circumstances analysis in determining prosecution laches.
The Court found that the Patent Office’s prosecution laches evidence and arguments presented at trial shifted the burden to Hyatt to show by a preponderance of evidence he had a legitimate, affirmative reason for his delay, and the Court remanded the case to afford Hyatt an opportunity to present such evidence.
Amgen Inc. v. Sanofi (Fed. Cir. No. 20-1074): On June 21, 2021, the court denied Amgen’s petition for panel rehearing and rehearing en banc. The panel wrote separately to explain that it had not created a new test for enablement.
As we summarized in our February alert, the panel had held that the claims at issue were not enabled because undue experimentation would be required to practice the full scope of the claims. The panel had explained that there are “high hurdles in fulfilling the enablement requirement for claims with broad functional language.”
In re: Samsung Electronics Co., Ltd. (Fed Cir. No. 21-139): Samsung and LG sought writs of mandamus ordering the United States District Court for the Western District of Texas to transfer the underlying actions to the United States District Court for the Northern District of California. The panel (Dyk, J., joined by Lourie and Reyna, J.J.) granted the petition.
The panel first held that plaintiffs’ venue manipulation tactics must be disregarded and so venue in the Northern District of California would have been proper under § 1400(b). The panel explained that the presence of the Texas plaintiff “is plainly recent, ephemeral, and artificial—just the sort of maneuver in anticipation of litigation that has been routinely rejected.”
With respect to the merits of the transfer motion, the panel explained that the district court (1) “clearly assigned too little weight to the relative convenience of the Northern District of California,” (2) “provided no sound basis to diminish the[] conveniences” of willing witnesses in the Northern District of California, and (3) “overstated the concern about waste of judicial resources and risk of inconsistent results in light of plaintiffs’ separate infringement suit … in the Western District of Texas.” With respect to local interest, the panel rejected the district court’s position that “‘it is generally a fiction that patent cases give rise to local controversy or interest.’” It also explained that “[t]he fact that infringement is alleged in the Western District of Texas gives that venue no more of a local interest than the Northern District of California or any other venue.” Finally, with respect to court congestion, the panel stated that “even if the court’s speculation is accurate that it could more quickly resolve these cases based on the transferee venue’s more congested docket, … rapid disposition of the case [was not] important enough to be assigned significant weight in the transfer analysis here.”
In re: Freelancer Ltd. (Fed. Cir. No. 21-151) (nonprecedential): Freelancer Limited petitioned for a writ of mandamus instructing Judge Albright in the Western District of Texas to stay proceedings until Freelancer’s motion to dismiss is resolved. Freelancer’s motion was fully briefed as of March 4, 2021. Freelancer subsequently filed a motion to stay proceedings pending resolution of the motion to dismiss, and the stay motion was fully briefed as of April 21, 2021. A scheduling order has been entered in the case, and the plaintiff’s opening claim construction brief was filed on May 27, 2021. Freelancer then filed its mandamus petition. Neither of Freelancer’s motions has been resolved.
The Federal Circuit (Taranto, J., Hughes, J., and Stoll, J.) denied the petition. The court stated that “Freelancer has identified no authority establishing a clear legal right to a stay of all proceedings premised solely on the filing of a motion to dismiss the complaint.” The court further stated that “any delay in failing to resolve either of Freelancer’s pending motions to dismiss and stay proceedings is [not] so unreasonable or egregious as to warrant mandamus relief.” The court noted, however, that any “significant additional delay may alter [its] assessment of the mandamus factors in the future,” made clear that it “expect[ed] . . . that the district court w[ould] soon address the pending motion to dismiss or alternatively grant a stay.”
In re: Volkswagen Group of America, Inc. (Fed. Cir. No. 21-149) (nonprecedential): Volkswagen petitioned for a writ of mandamus directing the United States District Court for the Western District of Texas to dismiss or to transfer to the United States District Court for the Eastern District of Michigan. Alternatively, Volkswagen sought to stay all deadlines unrelated to venue until the district court rules on the pending motion to dismiss or transfer.
The Federal Circuit (Taranto, J., Hughes, J., and Stoll, J.) denied the petition. Because the district court had indicated that it will resolve that motion before it conducts a Markman hearing in this case, Volkswagen was unable to show that it is unable to obtain a ruling on its venue motion in a timely fashion without mandamus. The Court noted, however, that the district court’s failure to issue a ruling on Volkswagen’s venue motion before a Markman hearing may alter our assessment of the mandamus factors.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit. Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert:
Blaine H. Evanson – Orange County (+1 949-451-3805, bevanson@gibsondunn.com)
Jessica A. Hudak – Orange County (+1 949-451-3837, jhudak@gibsondunn.com)
Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups:
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)
Appellate and Constitutional Law Group:
Allyson N. Ho – Dallas (+1 214-698-3233, aho@gibsondunn.com)
Mark A. Perry – Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Decided July 1, 2021
Americans for Prosperity Foundation v. Bonta, No. 19-251, consolidated with Thomas More Law Center v. Bonta, No. 19-255
Today, the Supreme Court held 6-3 that California’s requirement that non-profit organizations disclose their donor lists unconstitutionally burdens those organizations’ expressive association rights, in violation of the First Amendment.
Background:
The California Attorney General requires private charities that operate or fundraise in California to register annually with the state. Registration entails filing various tax forms, including Schedule B to IRS Form 990—which requires charitable organizations to list the names and addresses of contributors that donated more than $5,000 or 2% of the organization’s budget during the tax year. California informed charities that their Schedule B disclosures would be kept confidential; in reality, however, California law required public disclosure of these documents until 2016. The state’s asserted justification for the disclosure requirement is a law-enforcement interest in regulating non-profit activity. Two non-profit organizations challenged the disclosure requirement as unconstitutional, arguing that it chills expressive association by exposing donors to harassment and that less-restrictive means are available to California to further its asserted interest. The Ninth Circuit upheld the disclosure requirement, holding that “exacting” scrutiny—not “strict” scrutiny—applied, and the requirement was sufficiently related to an important government interest.
Issue:
(1) Whether exacting scrutiny or strict scrutiny applies to disclosure requirements that burden nonelectoral, expressive association rights; and (2) whether California’s disclosure requirement violates charities’ and their donors’ freedom of association and speech facially or as applied to Petitioners.
Court’s Holding:
(1) The Court’s holding on the standard of review was fractured: A three-Justice plurality stated that disclosure laws like California’s must satisfy exacting scrutiny. While one Justice in the majority would have applied strict scrutiny, two others declined to resolve the issue. (2) A majority of the Court held that California’s law is facially unconstitutional under exacting scrutiny. California’s interest in administrative convenience is weak, and a blanket disclosure requirement for organizations not suspected of wrongdoing is not narrowly tailored to this interest.
“There is a dramatic mismatch . . . between the interest that the Attorney General seeks to promote and the disclosure regime that he has implemented in service of that end.”
Chief Justice Roberts, writing for the Court
What It Means:
- The Court’s ruling protects the sensitive donor information of non-profit organizations, ensuring that individuals may contribute to charitable organizations without fear of harassment from compelled disclosure. The ruling also calls into question the constitutionality of similar donor disclosure requirements in the federal “For the People Act” reintroduced in January 2021, and which has passed in the House and currently awaits a vote in the Senate.
- Today’s decision may have implications for mandatory disclosure requirements beyond the associational context. In writing for the Court, the Chief Justice emphasized that “[t]he ‘government may regulate in the [First Amendment] area only with narrow specificity,’ . . . and compelled disclosure regimes are no exception.” Op. 10. The Court’s holding suggests that other compelled disclosure regimes that lack narrow tailoring could be challenged under the First Amendment. It remains to be seen how the Court will apply today’s decision to other compelled disclosures.
- The Court’s decision continues its trend of affording robust constitutional protection to non-profit organizations, but leaves the standard of review for compelled-speech cases undefined. The Court has often employed strict scrutiny in assessing other First Amendment free-speech and religious liberty-challenges brought by non-profit organizations, and the Court could find only a plurality for the “exacting scrutiny” standard of review applied here. Other members of the Court indicated that government regulation of a wide range of protected First Amendment activity generally must pass strict scrutiny.
- A plurality of the Court applied Buckley v. Valeo, 424 U.S. 1 (1976)—which applied exacting scrutiny to limits on expenditures by political campaigns—to the broader context of compelled speech, and did not cabin it to the context of elections.
- In an opinion by Justice Sotomayor, three Justices dissented on the ground that California’s disclosure requirement did not burden the donors’ First Amendment rights, and so no tailoring of the law was required.
The Court’s opinion is available here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:
Appellate and Constitutional Law Practice
| Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com | Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com | Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com | Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com |
| Thomas G. Hungar +1 202.887.3784 thungar@gibsondunn.com | Douglas R. Cox +1 202.887.3531 dcox@gibsondunn.com | Jason J. Mendro +1 202.887.3726 jmendro@gibsondunn.com |
Century City partner Scott Edelman and Los Angeles associate Jillian London are the authors of “Judge ignored facts, law while taking knife to assault weapons ban,” [PDF] published by the Daily Journal on June 28, 2021.
Washington, D.C. partner Judith Alison Lee and associates Audi Syarief and Claire Yi are the authors of “United States sanctions against Myanmar’s military conglomerates” [PDF] published by Financier Worldwide in June 2021.
Decided June 29, 2021
PennEast Pipeline Co. v. New Jersey, No. 19-1039
Today, the Supreme Court held in a 5-4 decision that the Natural Gas Act authorizes a private party who has obtained federal government approval to exercise eminent domain power along a federally approved pipeline route to sue a State to condemn state land.
Background:
The Natural Gas Act, 15 U.S.C. § 717 et seq., delegates the federal government’s power to take property by eminent domain to private parties that have been issued a certificate of public convenience and necessity by the Federal Energy Regulatory Commission (FERC). PennEast Pipeline obtained a certificate from FERC to build an interstate natural gas pipeline and sued New Jersey under the Natural Gas Act to condemn properties that the State owned or had an easement over along the pipeline route. New Jersey sought to dismiss the condemnation suits for lack of jurisdiction, citing the State’s sovereign immunity under the Eleventh Amendment and PennEast’s failure to satisfy the jurisdictional requirements of the Natural Gas Act. The district court ruled in favor of PennEast. The Third Circuit reversed, holding that the Natural Gas Act does not clearly delegate to private parties the federal government’s exemption from a State’s sovereign immunity.
Issue:
Does the Natural Gas Act authorize private parties to exercise the federal government’s eminent domain power to condemn state land in which a State claims an interest?
Court’s Holding:
Yes. The Natural Gas Act delegates to private parties the federal government’s power to take property by eminent domain, and States do not have sovereign immunity from the exercise of that power.
“Since the founding, the Federal Government has exercised its eminent domain authority through both its own officers and private delegatees. And it has used that power to take property interests held by both individuals and the States. Section 717f(h) is an unexceptional instance of this established practice.”
Chief Justice Roberts, writing for the Court
What It Means:
- The Supreme Court’s decision prevents States from having a de facto veto over interstate pipelines found to be in the public interest and authorized by the Federal Energy Regulatory Commission. The Court explained that States consented to the exercise of federal eminent domain power in the plan of the Constitutional Convention and consequently “have no immunity left to waive or abrogate when it comes to condemnation suits by the Federal Government and its delegatees.”
- The Court explained that Congress added the eminent domain authority to “remedy” a “defect” in the Natural Gas Act that left pipeline certificate holders with “only an illusory right to build” pipelines authorized by the federal government.
- In dissent, Justice Barrett—joined by Justices Thomas, Kagan, and Gorsuch—emphasized that “States did not surrender their sovereign immunity to suits authorized pursuant to Congress’ power to regulate interstate commerce” and “no historical evidence” supports a different result for private condemnation suits against States.
- Justice Gorsuch, joined by Justice Thomas, wrote a separate dissenting opinion to clarify that a State’s structural immunity, waivable by consent, is distinct from its Eleventh Amendment immunity.
The Court’s opinion is available here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:
Appellate and Constitutional Law Practice
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| Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com | Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com |
Related Practice: Energy
| Michael P. Darden +1 346.718.6789 mpdarden@gibsondunn.com | Anna P. Howell +44 (0) 20 7071 4241 ahowell@gibsondunn.com | Brad Roach +65 6507 3685 broach@gibsondunn.com |
| William S. Scherman +1 202.887.3510 wscherman@gibsondunn.com |
Decided June 29, 2021
Minerva Surgical Inc. v. Hologic Inc., No. 20-440
Today, the Supreme Court upheld the doctrine of assignor estoppel in patent cases, concluding in a 5-4 decision that a patent assignor cannot, with certain exceptions, subsequently challenge the patent’s validity.
Background:
Csaba Truckai co-invented the NovaSure system, a medical device that uses radiofrequency energy to perform endometrial ablations. In 1998, Truckai and his four co-inventors filed a patent application covering the NovaSure system and later assigned their interest in the patent application and any future continuing applications to Truckai’s company, Novacept. Truckai sold Novacept to Cytyc Corporation in 2004, and Hologic acquired Cytyc in 2007.
In 2008, Truckai founded Minerva and developed a new device that uses thermal energy, rather than radiofrequency energy, to perform endometrial ablations. In 2015, Hologic sued Minerva, alleging that Minerva’s device infringed one of its NovaSure patents. The district court held that the doctrine of assignor estoppel barred Minerva from challenging the patent’s validity. The Federal Circuit affirmed in relevant part, declining to abrogate the doctrine, which federal courts have applied since 1880.
Issue:
May a defendant in a patent infringement action who assigned the patent, or is in privity with an assignor of the patent, have a defense of invalidity heard on the merits?
Court’s Holding:
Sometimes. The doctrine of assignor estoppel survives, although it applies only when the invalidity defense conflicts with an explicit or implicit representation the assignor made in assigning her patent rights. Absent that kind of inconsistency, a defendant in a patent infringement action who assigned the patent may have a defense of invalidity heard on the merits.
What It Means:
- This decision marks the first time that the Supreme Court has directly considered the viability of the assignor estoppel doctrine (the Supreme Court implicitly approved of the doctrine in 1924), and it largely secures the interests of assignees who have relied on the unanimous consensus of federal courts upholding this longstanding doctrine.
- However, the Court indicated that the doctrine may have been applied too broadly in the past, and that assignors should be estopped from contesting validity only when they have made a representation regarding validity as part of the assignment.
- The Court provided three examples of when an assignor has an invalidity defense: (1) when an employee assigns to her employer patent rights to future inventions before she can possibly make a warranty of validity as to specific patent claims, (2) when a later legal development renders irrelevant the assignor’s warranty of validity at the time of assignment, and (3) when the patent claims change after assignment and render irrelevant the assignor’s validity warranty.
- The Court reasoned that assignor estoppel furthers patent policy goals: The doctrine gives assignees confidence in the value of what they have purchased by preventing assignors (who are “especially likely infringers because of their knowledge of the relevant technology”) from raising invalidity defenses. The Court explained that this confidence will raise the price of patent assignments and in turn may encourage invention.
The Court’s opinion is available here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:
Appellate and Constitutional Law Practice
| Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com | Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com | Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com |
| Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com |
Related Practice: Intellectual Property
| Kate Dominguez +1 212.351.2338 kdominguez@gibsondunn.com | Josh Krevitt +1 212.351.4000 jkrevitt@gibsondunn.com | Y. Ernest Hsin +1 415.393.8224 ehsin@gibsondunn.com |
| Jane M. Love, Ph.D. +1 212.351.3922 jlove@gibsondunn.com |
Introduction and Overview
On 25 June 2021, the UK Supreme Court rendered its judgment in General Dynamics United Kingdom Limited v The State of Libya.[1] This much anticipated decision provides important guidance concerning the interaction of State immunity principles with the rules applicable to the service of enforcement proceedings on States. The decision has significant practical consequences for the enforcement of arbitral awards against States, with the dissenting opinion of the minority making plain the difficulty faced by the courts in seeking to balance, on the one hand, the potentially competing considerations of respecting the arbitral process with, on the other hand, the traditional privileges accorded to States when responding to English proceedings.
By a majority of 3:2 (Lord Lloyd-Jones, Lady Arden and Lord Burrows comprising the majority), the Supreme Court allowed Libya’s appeal and concluded that Section 12 of the State Immunity Act 1978 (the “SIA”) requires service of either the arbitration claim form or the enforcement order made by the English court (depending on the circumstances) in order to properly institute arbitration enforcement proceedings against a State. Such service must be effected via the UK’s Foreign, Commonwealth and Development Office (the “FCDO”)[2] and the State must then respond within two months. The majority found that this formal service procedure is mandatory and cannot be dispensed with. In doing so, the majority reversed the Court of Appeal’s 2019 judgment which had signalled greater flexibility in the interpretation of the strict rules on service.
Background
Arbitration Award
The arbitral award in question was rendered in relation to a dispute between General Dynamics and Libya arising from a contract for the supply of communication systems to Libya. The dispute was referred to arbitration before an ICC tribunal seated in Geneva in which Libya fully participated. On 5 January 2016, the tribunal rendered an award in excess of £16 million in favour of General Dynamics, together with interest and costs (the “Award”). Libya has not paid any sums under the Award.
The Enforcement Order and Set Aside Proceedings
General Dynamics applied to the English courts to enforce the Award in the United Kingdom. Civil Procedure Rules (“CPR”) Rule 62.18, which governs applications for permission to enforce most arbitration awards,[3] permits such applications to be made without notice in an arbitration claim form.
Following an ex parte hearing in July 2018, an order was made by Mr Justice Teare (i) granting permission to enforce the Award; and (ii) dispensing with service of both the arbitration claim form and the enforcement order itself, pursuant to CPR Rules 6.16 and 6.28 (which allow the court to dispense with a service requirement in “exceptional circumstances”). Teare J found that exceptional circumstances existed due to the practical difficulties of serving Libya at the time, including because there were two competing governments as well as a state of civil unrest (which had led to the closure of the British Embassy, among other things). The Court found that there was uncertainty as to the time which would be required to effect service through the FCDO, and doubts as to whether this was possible at all.
Subsequently, Libya applied to set aside those parts of Teare J’s order dispensing with service. Libya relied upon Section 12(1) of the SIA, which requires service through the FCDO of “any writ or other document required to be served for instituting proceedings against a State”. Section 12(2) of the SIA further provides that a State cannot be required to “enter[] an appearance [in]” the proceedings until the expiry of two months after service via the FCDO.
Libya’s set aside application was granted via a decision of Lord Justice Males on 18 January 2019.[4] General Dynamics appealed to the Court of Appeal.
The Court of Appeal Proceedings
In a decision dated 3 July 2019, the Court of Appeal restored Teare J’s finding that Section 12(1) of the SIA did not require service of either the arbitration claim form or the order permitting enforcement.[5] The Court of Appeal’s reasoning was that: (i) although the arbitration claim form is a document instituting proceedings under Section 12(1), CPR Rule 62.18 does not contain a requirement to serve the arbitration claim form; and (ii) while CPR Rule 62.18(8)(b) requires an order permitting the enforcement of an arbitral award to be served, such an order is not the document “instituting” the proceedings and therefore does fall within the remit of Section 12(1).
The Court of Appeal also found that, because there is no statutory requirement to serve either the arbitration claim form or the enforcement order, the court could dispense with service under CPR Rules 6.16 and/or 6.28. The Court of Appeal agreed with Teare J’s exercise of discretion in dispensing with the requirement for service of the order permitting enforcement of the award on the basis that there were “exceptional circumstances” (a discretion that Males LJ had also said he would have exercised, had he found that he had the power to do so[6]). The Court of Appeal essentially approved the findings of Teare J and Males LJ regarding the dangerous and complex circumstances in Libya.
Libya appealed the Court of Appeal’s judgment to the Supreme Court.
The Supreme Court Judgment
The majority allowed Libya’s appeal, essentially on three bases.
Firstly, the majority focused on “the importance of the defendant state receiving notice of the proceedings against it so that it had adequate time and opportunity to respond to proceedings of whatever nature which affected its interests”.[7] As such, it held that, in cases where Section 12(1) of the SIA applies, the procedure for service on a defendant State through the FCDO is mandatory and exclusive.[8]
The minority, on the other hand, adopted a purposive construction of Section 12 of the SIA, noting that Parliament intended the applicability of Section 12(1) to depend on what was required by the relevant court rules.[9] In their view, this interpretation would give effect to the intention of the legislature to prevent States avoiding service (and thus obstructing the enforcement of awards),[10] and to hold States to their legal obligations.[11] The minority also drew attention to the potential chilling effect of the majority’s conclusion, as parties might be deterred from dealing with States (thereby restricting those States’ ability to operate in the global marketplace).[12] The minority also favoured an approach promoting “speedy and effective enforcement of arbitral awards”, and a “restrictive doctrine of state immunity”, particularly where a State has agreed to and participated in the arbitral process.[13]
Secondly, the majority concluded that there is no power to dispense with service of an enforcement order under CPR Rules 6.16 and/or 6.28,[14] holding that the CPR cannot override the SIA and give the court a discretion to dispense with a statutory requirement found in the SIA.
Finally, the majority was not persuaded by General Dynamics’ arguments on the basis of Article 6 (right to a fair trial) of the European Convention on Human Rights (the “ECHR”). General Dynamics argued that Section 12(1) of the SIA should be construed, pursuant to Section 3 of the Human Rights Act 1998 (the “HRA”)[15] and/or common law principles, to allow the court to make alternative directions as to service in “exceptional circumstances”.[16]
The majority rejected this argument, holding that the procedure prescribed by Section 12(1) of the SIA (i) is a proportionate mechanism for pursuing the legitimate objective of a workable means of service and (ii) conforms with the requirements of international law and comity, in circumstances of considerable international sensitivity. It therefore did not consider the procedure to infringe Article 6 of the ECHR, or to engage the common law principle of legality.[17]
Comment
The majority’s decision has now settled that there must always be a document that is “required to be served for instituting proceedings against a State”. In the context of enforcing arbitral awards, that document will either be the claim form (if the court requires it to be served) or the enforcement order itself. Further, such service must be via the FCDO (the FCDO, however, has no general discretion to decline to effect service).[18]
Whilst the Supreme Court’s decision provides welcome clarification of the service requirements in relation to States and the interpretation of Section 12 of the SIA, the reservations expressed in the dissenting judgment make plain that the decision will not be universally celebrated. Diplomatic service via the FCDO is often far from straightforward, particularly where it involves a recalcitrant State facing a substantial arbitral award. Lord Stephens highlighted the potential for the majority’s decision to embolden such States, with the potential for them to obtain “de facto” immunity, where they would otherwise not have it, by “being obstructive about service”.[19] At a minimum, the decision opens the door for further delays and prejudice to award creditors, thereby potentially undermining the arbitral process even where the State against which enforcement is sought had already expressly consented to and actively participated in that process.
________________________
[1] General Dynamics United Kingdom Ltd v State of Libya [2021] UKSC 22 (Lloyd-Jones, Briggs, Arden, Kitchin and Burrows JJSC).
[2] Formerly known, and referred to in some of the lower court decisions described below, as the “Foreign and Commonwealth Office”, or the “FCO”.
[3] There is a separate procedure for the enforcement of International Centre for Settlement of Investment Disputes (ICSID) awards, set out at CPR Rule 62.21.
[4] General Dynamics United Kingdom Ltd v Libya [2019] EWHC 64 (Comm) (Males LJ).
[5] General Dynamics United Kingdom Ltd v The State of Libya [2019] EWCA Civ 1110 (Sir Terence Etherton MR, Longmore and Flaux LLJ).
[6] General Dynamics United Kingdom Ltd v Libya [2019] EWHC 64 (Comm) at [89] (Males LJ).
[7] General Dynamics United Kingdom Ltd v State of Libya [2021] UKSC 22, at [73]-[75] (Lloyd-Jones JSC, citing the decision of Kannan Ramesh J (in the High Court of Singapore) in Van Zyl v Kingdom of Lesotho [2017] SGHC 104; [2017] 4 SLR 849). See also, e.g., [65]-[66] (Lloyd-Jones JSC, citing, inter alia, Hamblen J in L v Y Regional Government of X [2015] EWHC 68 (Comm); [2015] 1 WLR 3948).
[8] Subject only to the possibility of service in accordance with Section 12(6) of the SIA in a manner agreed by the defendant State. Id., at [37], [76(2)] (Lloyd-Jones JSC). See also, id., at [96] (Lady Arden JSC, who engaged in more of a discussion of the concepts of “open textured expressions” and “functional equivalence” in statutory construction).
[9] Id., at [165]-[166], [177], [189]-[191], [200], [231] (Stephens JSC).
[10] See, e.g., id., at [109]-[110] (Stephens JSC).
[11] See, e.g., id., at [134], [145] (Stephens JSC).
[12] See, e.g., id., at [145], [166], [197] (Stephens JSC).
[13] Id., at [171] (Stephens JSC, approving Unión Fenosa Gas SA v Egypt [2020] EWHC 1723 (Comm)).
[14] Id., at [81] (Lloyd-Jones JSC).
[15] The HRA gives effect in UK domestic law to the rights guaranteed by the ECHR. The HRA was enacted after the SIA was passed by the UK Parliament.
[16] General Dynamics United Kingdom Ltd v State of Libya [2021] UKSC 22, at [82] (Lloyd-Jones JSC).
[17] Id., at [84]-[85] (Lloyd-Jones JSC).
[18] Id., at [33] (Lloyd-Jones JSC) and [214]-[215] (Stephens JSC).
[19] Id., at [109] (Stephens JSC).
The following Gibson Dunn lawyers assisted in the preparation of this client update: Doug Watson, Ceyda Knoebel, Piers Plumptre, Alexa Romanelli and Theo Tyrrell.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s International Arbitration, Judgment and Arbitral Award Enforcement or Transnational Litigation practice groups, or any of the following in London:
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28. Juni 2021
Zum BMF-Schreiben vom 24.03.2021: Das Bundesministerium der Finanzen (BMF) hat vor kurzem zur körperschaftsteuerlichen Anerkennung von Gewinnabführungsverträgen Stellung genommen. Dies gibt Anlass, insbesondere sog. Altverträge, die vor dem 27.02.2013 abgeschlossen oder letztmals geändert worden sind, zu prüfen und ggf. anzupassen.
I. Hintergrund
Mit dem Gesetz zur Fortentwicklung des Sanierungs- und Insolvenzrechts vom 22.12.2020 wurde § 302 Abs. 3 Satz 2 AktG mit Wirkung zum 01.01.2021 um einen Verweis auf den ebenfalls neu eingeführten Restrukturierungsplan ergänzt. Obwohl mit dem Verweis auf den Restrukturierungsplan keine Änderung körperschaftsteuerrechtlicher Regelungen verfolgt wurde, kann die Gesetzesänderung dennoch Auswirkungen auf bestimmte Gewinnabführungsverträge haben und ihre Anpassung erforderlich machen, da u.U. die Voraussetzungen der körperschaftlichen Organschaft andernfalls nicht mehr erfüllt sind.
In § 302 AktG ist die Verlustübernahmepflicht des anderen Vertragsteils bei Bestehen bestimmter Unternehmensverträge geregelt. § 302 Abs. 3 Satz 1 AktG enthält ein diesbezügliches Verzichts- und Vergleichsverbot in Bezug auf den entsprechenden Ausgleichsanspruch. Ausnahmen von diesem Verbot sind in § 302 Abs. 3 S. 2 AktG geregelt. Der Katalog der Ausnahmen wurde mit dem Gesetz zur Fortentwicklung des Sanierungs- und Insolvenzrechts um den Fall ergänzt, dass die Ersatzpflicht in einem Restrukturierungsplan geregelt wird.
Der Wortlaut des § 302 AktG ist jedoch auch für das Körperschaftsteuergesetz von Bedeutung. Die Voraussetzungen einer steuerrechtlichen Organschaft mit einer anderen als den in § 14 KStG aufgeführten Kapitalgesellschaften sind in § 17 KStG geregelt. Unter diese „anderen“ Gesellschaften fällt insbesondere die GmbH. Die bis 26.02.2013 gültige Fassung des § 17 S. 2 Nr. 2 KStG setzte eine Verlustübernahme „entsprechend den Vorschriften“ des § 302 AktG voraus. Seit der Anpassung durch das Gesetz zur Änderung und Vereinfachung der Unternehmensbesteuerung und des steuerrechtlichen Reisekostenrechts vom 20.02.2013 ist seither gemäß § 17 S. 2 Nr. 2 KStG (a.F.) (nunmehr § 17 Abs. 1 S. 2 Nr. 2 KStG) Voraussetzung, dass eine Verlustübernahme durch Verweis auf die Vorschriften des § 302 AktG in seiner jeweils gültigen Fassung vereinbart wird. Erforderlich ist demnach ein sog. dynamischer Verweis; von der Neuregelung in 2013 waren jedoch nur Gewinnabführungsverträge erfasst, die nach dem 26.02.2013 abgeschlossen oder geändert wurden. Sog. Altverträge, die vor dem 27.02.2013 abgeschlossen oder letztmalig geändert wurden, waren für Zwecke der Organschaft weiterhin anzuerkennen, selbst wenn diese lediglich einen statischen Verweis auf § 302 AktG oder eine Wiederholung des damaligen Wortlauts enthalten.
Die nun vorgenommene Änderung des Wortlautes des § 302 AktG führt allerdings dazu, dass bei Altverträgen keine Verlustübernahme mehr entsprechend den Vorschriften des § 302 AktG vereinbart ist und im Ergebnis auch die Vorgaben des § 17 S. 2 Nr. 2 KStG in seiner alten Fassung nicht mehr erfüllt sind.
II. Betroffene Verträge
Für Gewinnabführungsverträge, die nach dem 26.02.2013 abgeschlossen oder geändert wurden, ist nach § 17 Abs. 1 S. 2 Nr. 2 KStG in seiner gegenwärtigen Fassung ohnehin schon ein expliziter dynamischer Verweis auf § 302 AktG erforderlich. Für diese sog. Neuverträge – soweit sie den Anforderungen des § 17 Abs. 1 S. 2 Nr. 2 KStG entsprechen – besteht durch die jetzige Änderung in § 302 AktG kein Anpassungsbedarf.
Für sog. Altverträge, die vor dem 27.02.2013 abgeschlossen oder letztmalig geändert wurden und die noch einen statischen Verweis auf – die nun nicht mehr aktuelle Fassung des – § 302 AktG enthalten, besteht Anpassungsbedarf.
III. Stellungnahme der Finanzverwaltung
In Bezug auf die steuerrechtlichen Auswirkungen der Änderung des § 302 AktG nahm das BMF in seinem Schreiben vom 24.03.2021 (DStR 2021, 803) Stellung. Für vor dem 27.02.2013 abgeschlossene oder letztmalig geänderte Gewinnabführungsverträge gelte Folgendes:
„Aufgrund der am 1.1.2021 in Kraft getretenen Änderung des § 302 AktG […] ist für die weitere Anerkennung der Organschaft nach § 17 KStG Voraussetzung, dass die bisherigen Vereinbarungen zur Verlustübernahme im Gewinnabführungsvertrag angepasst werden […]. Dabei muss nach aktueller Rechtslage die Verlustübernahme durch Verweis auf die Vorschriften des § 302 AktG in seiner jeweils gültigen Fassung (dynamischer Verweis) gemäß § 17 Abs. 1 S. 2 Nr. 2 KStG vereinbart werden.
Der Anerkennung der Organschaft steht es für Veranlagungszeiträume ab 2021 nicht entgegen, wenn die Anpassung der Altverträge zur Aufnahme des dynamischen Verweises nach § 17 Abs. 1 S. 2 Nr. 2 KStG spätestens bis zum Ablauf des 31.12.2021 vorgenommen wird.“
IV. Anpassung von Gewinnabführungsverträgen
Wie in der Stellungnahme des BMF angegeben ist für die Wirksamkeit einer Organschaft das Einfügen eines dynamischen Verweises in Altverträge erforderlich: Die nunmehr aufgrund der Änderung des § 302 AktG vorzunehmende Anpassung der Vereinbarung zur Verlustübernahme führt dazu, dass aufgrund § 17 Abs. 1 S. 2 Nr. 2 KStG in Altverträgen nun ein dynamischer Verweis auf § 302 AktG aufzunehmen ist.
Die Änderung ist nach der Stellungnahme des BMF bis zum Ablauf des 31.12.2021 vorzunehmen. Dabei soll nach Auffassung des BMF die notarielle Beurkundung des Zustimmungsbeschlusses der Organgesellschaft (zur privatschriftlichen Änderungsvereinbarung des Gewinnabführungsvertrags) und die Anmeldung der Änderung zur Eintragung ins Handelsregister bis zum 31.12.2021 ausreichen. Diese Aussage kann jedoch in ihrer Belastbarkeit hinterfragt werden, da es ja noch offen sei, ob die Rechtsprechung diesen Grundsätzen folgen und nicht ggf. doch auf die (zivilrechtlich erforderliche) Eintragung im Handelsregister abstellen werde. Es empfiehlt sich daher, auch die Handelsregistereintragung bis spätestens zum 31.12.2021 zu bewirken.
Die Anpassung des Gewinnabführungsvertrages zur Aufnahme eines dynamischen Verweises auf § 302 AktG soll nach Auffassung des BMF keinem Neuabschluss des Gewinnabführungsvertrages gleichgestellt sein. Eine neue Mindestlaufzeit iSd § 14 Abs. 1 S. 1 Nr. 3 S. 1 KStG werde durch diese Anpassung nicht in Gang gesetzt. Nicht erforderlich sei eine Anpassung von Altverträgen hingegen, wenn die Organschaft mit oder vor Ablauf der Umsetzungsfrist für die Änderungsvereinbarung zum 01.01.2022 beendet würde.
Wird die nach dem BMF-Schreiben geforderte Anpassung der betroffenen Altverträge nicht vorgenommen, kann die Organschaft für den Veranlagungszeitraum 2021 und zukünftige Veranlagungszeiträume steuerlich nicht anerkannt werden.
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Decided June 25, 2021
TransUnion LLC v. Ramirez, No. 20-297
Today, the Supreme Court ruled 5-4 that every member of a class certified under Rule 23 must establish Article III standing in order to be awarded individual damages.
Background:
In February 2011, Sergio Ramirez was unable to purchase a car after a TransUnion credit report incorrectly flagged him as a “Specially Designated National” (“SDN”) who is prohibited from transacting business in the United States for national security reasons. When Ramirez requested a copy of his credit report, TransUnion mailed him a report that redacted the SDN alert and a separate letter notifying him of the alert but not how to correct inaccurate information.
Ramirez filed a putative class action against TransUnion alleging violations of the Fair Credit Report Act (“FCRA”) for failing to ensure the accuracy of the SDN alerts, to disclose the entire credit report to class members, and to include a summary of rights in the mailed letters. A jury found in favor of the class on all three claims and awarded $8 million in statutory damages and $52 million in punitive damages.
The Ninth Circuit affirmed the district court’s certification of the class. Although most of the absent class members did not suffer injury from having their credit reports disclosed to third parties, the court concluded that all class members had the requisite Article III standing to recover damages because of the risk of harm to their privacy, reputational, and informational interests protected by the FCRA. The court affirmed the jury’s award of statutory damages but vacated the punitive damages award.
Issue:
Whether all class members must have Article III standing to recover individual damages in federal court.
Court’s Holding:
Yes. Every member of a class action must satisfy Article III standing requirements in order to recover individual damages, and proof of a statutory violation without a showing of concrete harm is insufficient to satisfy Article III.
“Every class member must have Article III standing in order to recover individual damages. ‘Article III does not give federal courts the power to order relief to any uninjured plaintiff, class action or not.’”
Justice Kavanaugh, writing for the Court
What It Means:
- The Supreme Court held that all class members must demonstrate standing at each stage of litigation “for each claim that they press and for each form of relief that they seek.” The Court explained that “an injury in law is not an injury in fact,” and “[o]nly those plaintiffs who have been concretely harmed by a defendant’s statutory violation” have standing. Although all the class members suffered a statutory violation, most did not experience a “physical, monetary, or cognizable intangible harm” necessary to establish a concrete injury under Article III.
- The Court’s decision clarifies an issue left ambiguous in Spokeo, Inc. v. Robins, 578 U.S. 330 (2016): whether the violation of a federal statute alone is sufficient to confer Article III standing. The Court held that a violation of a federal statute is not, without more, sufficient for Article III standing. The ruling could have ramifications for other types of class actions asserting violations of federal statutes.
- The Court’s decision also resolves a circuit split as to whether the mere risk of inaccurate consumer data being disseminated is sufficient to confer standing. As the Court explained, class members whose internal credit files were not disseminated to third parties did not have Article III standing because “there is ‘no historical or common-law analog where the mere existence of inaccurate information, absent dissemination, amounts to concrete injury.’”
- In dissent, Justice Thomas—joined by Justices Breyer, Sotomayor, and Kagan—decried the Court’s decision as “remarkable in both its novelty and effects” because the Court has “[n]ever before . . . declared that legal injury is inherently insufficient to support standing.”
- The decision left undecided whether Ramirez’s claims were “typical” of the other class members’ claims. Instead, the Court remanded the case so the Ninth Circuit could determine whether class certification continues to be appropriate in light of the decision.
The Court’s opinion is available here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:
Appellate and Constitutional Law Practice
| Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com | Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com | Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com |
| Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com |
Related Practice: Class Actions
| Christopher Chorba +1 213.229.7396 cchorba@gibsondunn.com | Kahn A. Scolnick +1 213.229.7656 kscolnick@gibsondunn.com |
On June 21, 2021, the U.S. Department of Justice’s Antitrust Division (“DOJ”) announced that two officers of Endeavor Group Holdings Inc. have resigned their positions on the board of directors of Live Nation Entertainment Inc. in the wake of concerns expressed by DOJ that the two companies formed an illegal interlocking directorate under the antitrust laws. The announcement is a reminder that companies must continue to be mindful of potential antitrust concerns when their current or prospective directors or officers serve in similar roles at other entities.
Background
Common ownership issues frequently arise in the context of interlocking directorates: competing firms that share common officers or directors. An interlocking directorate raises antitrust concerns because of the perceived risk that the officer or director may serve as the conduit for an anticompetitive agreement or information exchange. An antitrust investigation into a potential interlock may force the resignation of key officers or directors, delay the closing of a proposed transaction, or trigger consumer class actions alleging collusion. As such, it is important to be aware of applicable statutes in this area and implement appropriate measures to detect problematic interlocks before they create potential antitrust concerns.
Clayton Act, Section 8
Section 8 of the Clayton Act (15 U.S.C. § 19) is the primary vehicle by which the U.S. antitrust agencies police interlocking directorates.[1] In general, the statute prohibits one person from being an officer (defined as an “officer elected or chosen by the Board of Directors”) or director at two companies that are “by virtue of their business and location of operation, competitors.” Section 8 broadly defines “competitors” to include any two corporations where “the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.” Section 8 is broad and potentially applies where two competing companies have an officer or director in common, subject to certain exceptions.
There are three potential safe harbors from Section 8 liability:
1) The competitive sales of either company are less than 2% of that company’s total sales;
2) The competitive sales of each company are less than 4% of that company’s total sales; or
3) The competitive sales of either company are less than $3,782,300 as of January 21, 2021.
While there are no penalties or fines imposed due to a Section 8 violation, the statute requires that the parties eliminate the interlock if a violation is found to have occurred.
Enforcement and Compliance
While enforcement actions such as the one against Endeavor and Live Nation are relatively rare, companies need to continually evaluate Section 8 concerns both for existing officers and directors as well as when vetting potential officers or director candidates.
In practice, determining whether a potential interlock exists and whether any safe harbors may apply requires a careful analysis of the products or markets in which the two firms compete. Rightly or wrongly, the antitrust agencies in the past have taken a broad view when determining whether two companies compete for purposes of Section 8, sometimes not limited by well-established market definition analysis.
Section 8 issues can also arise if a growing corporate subsidiary or acquisition may bring it into new arenas of competition and create potential overlaps that fall outside of Section 8 safe harbors. Where an interlock exists but is within Section 8 safe harbors, counsel should monitor the situation periodically to confirm the safe harbor continues to apply.
Finally, other antitrust statutes, particularly Section 1 of the Sherman Act (which prohibits agreements that unreasonably restrain trade), continue to apply even if the interlock is within the Section 8 safe harbors. A sound compliance plan will therefore also establish procedures to prevent sharing of competitively sensitive information and avoid situations that could create the appearance of potential competition concerns.
_______________________
[1] A separate statute, the Depository Institution Management Interlocks Act, governs director interlocks between unaffiliated depository institutions (FDIC-insured banks, thrifts, credit unions, and trust companies), between unaffiliated depository institution holding companies (bank and thrift holding companies), and between their nonbank affiliates.
The following Gibson Dunn attorneys assisted in preparing this client update: Elizabeth Ising, Stephen Weissman, Cassandra Tillinghast and Chris Wilson.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition or Securities Regulation and Corporate Governance practice groups, or the following:
Antitrust and Competition Group:
Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
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Securities Regulation and Corporate Governance Group:
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Decided June 25, 2021
HollyFrontier Cheyenne Refining, LLC v. Renewable Fuels Association, No. 20-472
Today, the Supreme Court held 6-3 that the Clean Air Act authorizes the EPA to exempt a small refinery from compliance with the renewable fuel standards program, even if the small refinery had not received an exemption each year since the program commenced in 2011.
Background:
The renewable fuel standard program in the Clean Air Act (“CAA”) requires refiners and importers of transportation fuel to blend certain amounts of renewable fuels into their products. The CAA exempted small refineries from the program until 2011, and provided that small refineries could “at any time petition [the EPA] for an extension of the exemption … for the reason of disproportionate economic hardship.” The EPA granted exemptions to three small refineries that had not continuously received exemptions since 2011. The Tenth Circuit vacated the EPA’s exemption orders, holding that a small refinery may not receive “an extension of the exemption” unless it has a continuous, unbroken history of exemptions since the program commenced.
Issue:
Whether the EPA may grant an extension of the hardship exemption to a small refinery that has not received continuous extensions of the initial exemption for every year since 2011.
Court’s Holding:
The EPA may grant extensions of the hardship exemption to small refineries that have not received prior extensions because the CAA permits small refineries to petition EPA “at any time.”
“[T]he key phrase at issue before us … means exactly what it says: A small refinery can apply for … a hardship extension ‘at any time.’”
Justice Gorsuch, writing for the Court
What It Means:
- The Court’s decision confirms that the CAA itself does not preclude small refineries from obtaining the hardship exemption simply because they did not obtain an exemption for one or more prior years.
- The Court observed that both sides presented “plausible accounts of legislative purpose and sound public policy,” but concluded that “[n]either the statute’s text, structure, nor history afford [it] sufficient guidance to be able to choose … between the parties’ competing narratives.” As a result, the Court rested its decision on “the statute’s text”—which, the Court held, “nowhere commands a continuity requirement.”
- The Court noted that the Tenth Circuit’s contrary interpretation would force small refineries that once attained, but could not maintain, compliance with the program’s requirements “to exit the market” but permit “the least compliant [small] refineries” that never comply with the program’s requirements to continue operating.
- The Court did not address the Tenth Circuit’s alternative ruling that EPA may not grant an exemption based on hardship flowing from “something other than” compliance with the program’s obligations, such as economic hardship caused by other factors.
- In January 2021, EPA announced that it would cease granting hardship exemptions to small refineries that had not received continuous exemptions since 2011. It is uncertain whether EPA will begin granting hardship exemptions again in light of the Court’s decision or withhold hardship exemptions on other grounds.
The Court’s opinion is available here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:
Appellate and Constitutional Law Practice
| Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com | Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com | Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com |
| Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com |
Related Practice: Environmental Litigaton and Mass Tort
| Daniel W. Nelson +1 202.887.3687 dnelson@gibsondunn.com | Stacie B. Fletcher +1 202.887.3627 sfletcher@gibsondunn.com | David Fotouhi +1 202.955.8502 dfotouhi@gibsondunn.com |
Los Angeles partners Theodore J. Boutrous Jr. and Theane Evangelis are the authors of “10 Years Of Dukes: A Resounding Class Certification Legacy,” [PDF] published by Law360 on June 25, 2021. Los Angeles associate Andrew Kasabian contributed to the article.