The UK Financial Conduct Authority (the “FCA”) has published a final notice (the “Final Notice”) detailing enforcement action taken against a Hong Kong asset manager for short selling disclosure rule breaches under the Short Selling Regulation (the “SSR”). The Final Notice provides a reminder to non-UK based asset managers of the extra-territorial reach of the SSR when trading in the UK and EU markets and of the need to ensure that they have the systems and controls in place to comply with the SSR. This client alert provides our clients with a refresher on the SSR and the key takeaways from this enforcement action.
Key takeaways
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What is the SSR?
The SSR came into force on 1 November 2012 and is intended to provide a harmonised framework for requirements and regulatory powers relating to short selling and entering into sovereign credit default swaps (“CDS”). In summary, the SSR:
- requires investors to notify the relevant national competent authority (“NCA”) of any net short positions in EU sovereign debt instruments and shares admitted to a trading venue in the EU;
- restricts uncovered short sales of shares and EU sovereign debt instruments;
- prohibits the entry into uncovered sovereign CDS; and
- provides NCAs and the European Securities and Markets Authority (“ESMA”) with powers to, amongst others, suspend or prohibit short selling.
The SSR has extra-territorial effect and ESMA has confirmed that the location of a transaction and the domicile or location of the parties to the transaction are irrelevant when assessing whether or not the SSR applies.
This client alert will focus on the requirement of investors to notify the relevant NCA of the net short positions they hold with respect to in-scope shares. For these purposes, “in-scope shares” are the shares of companies admitted to trading on a regulated market or a multilateral trading facility and derivatives relating to such financial instruments.
Why is short-selling reporting regarded by regulators as being important?
In September 2020, the FCA published Market Watch 63, the latest version of its periodic newsletter on market conduct and transaction reporting issues. Market Watch 63 reiterated the FCA’s view that it considers that short selling can contribute usefully to liquidity and price discovery, and therefore support open, effective markets that operate with integrity. However, the FCA stated that it is important that market participants ensure that they continue to meet their obligations under the SSR as this give appropriates transparency to short selling activity and support the orderly functioning of the market.
What are the SSR notification thresholds for in-scope shares?
The SSR sets out transparency requirements for net short positions in relevant shares. There are two types of disclosure, private and public.
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Private disclosure |
Public disclosure |
An investor must notify the relevant NCA of a net short position it has in relation to in-scope shares:
| An investor must notify the relevant NCA of a net short position it has in relation to in-scope shares:
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What is the method and timing of private and public disclosures?
In the UK, the FCA has confirmed that disclosures of net short positions should be made by sending a completed notification form to it by email. A disclosure must be made by 3.30 pm on the trading day following the day on which the person reaches, falls below or passes through the relevant threshold. The key difference is that the SSR requires public disclosures to be published on a website maintained by the relevant NCA.
Will Brexit have an impact on the SSR as implemented in the UK?
The SSR, an EU regulation, is directly applicable and will form part of UK law at the end of the Brexit transition period under the European Union (Withdrawal) Act 2018. The SSR will be amended in the UK to ensure that it will operate effectively after 31 December 2020. There will, therefore, be two versions post-transition period, the EU SSR and the UK SSR. Investors will need to ensure that they have systems and controls in place to comply with both the EU SSR and the UK SSR.
Has COVID had an impact on the reporting thresholds?
On 16 March 2020, ESMA issued a decision to temporarily amend the threshold for notifying net short positions to NCA under the SSR from 0.2% of issued share capital to 0.1%. The FCA confirmed that this decision would apply in the UK. However, the FCA stated that systems changes would be required and firms should continue to report at the previous thresholds until further notice. On 31 March 2020, the FCA confirmed that the required changes to its systems had been made and that it would be ready to receive notifications at the lower threshold from 6 April 2020. Firms were not required to amend and resubmit notifications submitted to the FCA between 16 March 2020 and 3 April 2020.
On 11 June 2020, ESMA issued a decision renewing its original decision on 16 March 2020 amending the threshold from 17 June 2020 for a period of 3 months. On 16 September 2020, ESMA further renewed the March decision from 18 September 2020 for another period of 3 months. Firms should continue reporting at the lower threshold to the relevant NCA.
What enforcement action has the FCA taken?
On 14 October 2020, the FCA published the Final Notice it issued to Asia Research and Capital Management Ltd (“ARCM”), fining it £873,118 for breaches of short selling disclosure rules under the SSR. ARCM is a Hong Kong-based asset manager that trades infrequently in EU markets.
From February 2017 to July 2019, ARCM failed to make 155 notifications to the FCA and 153 disclosures to the public of its net short position in a UK listed company. By July 2019, ARCM had built a net short position equivalent to 16.85% of the issued share capital of the UK listed company. This position was held for a further 106 trading days before being notified to the FCA and disclosed to the public. ARCM agreed to resolve the matter and qualified for a 30% discount under the FCA’s executive settlement procedures.
The FCA considered the failings to be particularly serious given:
- the failures to comply with its obligations under the SSR were multiple and occurred over a long period of time;
- ARCM did not inform it promptly on discovering its failure and instead notified it only after it had reviewed and collated the relevant data for disclosure; and
- the size of the position was the largest net short position held in an issuer admitted to the FCA’s Official List with shares admitted to trading on the Main Market of the London Stock Exchange.
What steps should firms be taken to ensure ongoing compliance?
The enforcement action against ARCM demonstrates that the FCA is willing to take action against investors for breaches of the SSR, even if that investor only trades infrequently in the UK. All firms trading in the UK and EU markets should maintain systems and controls to ensure ongoing compliance with the SSR. Firms would be well advised to undertake a review of their current systems and controls. This will involve monitoring developments in the parallel UK and EU versions of the SSR after the end of the current Brexit transition period.
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 in the firm’s Financial Institutions practice group, or the following authors in London:
Michelle M. Kirschner (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)
Matthew Nunan (+44 (0) 20 7071 4201, mnunan@gibsondunn.com)
Martin Coombes (+44 (0) 20 7071 4258, mcoombes@gibsondunn.com)
Chris Hickey (+44 (0) 20 7071 4265, chickey@gibsondunn.com)
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Singapore partner Robson Lee is the author of “Rising corporate failures and new Act on insolvency, restructuring and dissolution,” [PDF] published by NextInsight on November 7, 2020. He was assisted by Singapore associates Marcus Tan and Eliza Teo.
COVID-19 has shone a bright light on the critical role that ESG considerations can play for companies and firms. Questions of corporate purpose and the meaning of “success” have been reprised and are being carefully considered in the context of an active debate around stakeholder capitalism. Critically, the role and expectations of directors and management in pursuing a sustainability agenda have risen to the top of the agenda for corporates, legislatures and regulators alike.
But what constitutes “good governance” in the context of ESG and how do boards and senior managers address the complex web of rules, regulations, standards and frameworks which apply at a national, regional and global level? During this webinar, members of the ESG Practice Group of Gibson Dunn (London) will provide some insights to help navigate the global ESG landscape from a UK perspective, touching on key rules and regulations, forthcoming developments and trends, and practical tips including:
- An overview of the ESG landscape
- How boards are fulfilling their directors’ duties in the wake of the new vision of the “purposeful company” including engagement with stakeholder groups
- Key reporting and disclosure requirements
- Governance structures and features that underpin effective, integrated ESG business models
- Market trends and emerging rules, regulations and policy changes
- Risk mitigation, litigation risk and shareholder pressures
- Practical guidance and examples for boards and managers
View Slides (PDF)
PANELISTS:
Selina Sagayam is a partner in Gibson Dunn’s international corporate team. Her practice focuses on international corporate finance transactional work, including public and private M&A, joint ventures, international equity capital markets offerings and advisory work focused on corporate governance, shareholder activism and securities law advice. Regarded as one of the leading public M&A advisers in the UK, Ms. Sagayam has advised on hostile, competitive and recommended takeovers. Ms. Sagayam is also noted for her expertise in financial services and regulatory advice. She advises boards and senior management of international corporations, exchanges, regulators, investment banks, and financial sponsors (private equity and hedge funds) on such issues. Her experience as a senior secondee at the UK takeover Panel and also as a non-executive director of a FTSE250 company has positioned her uniquely in her practice area. Ms. Sagayam established and co-chairs the firm’s UK ESG Practice Group.
Susy Bullock is a partner in Gibson Dunn’s international litigation team. Ms. Bullock specializes in commercial litigation and investigations, and business and human rights. Previously Ms. Bullock was Head of Litigation for Europe, the Middle East and Africa at UBS and had responsibility for all litigation and contentious regulatory matters in the EMEA region for the bank including commercial and white-collar criminal litigation, as well as certain internal investigations. In a business and human rights context, Ms. Bullock has supported the Thun Group of banks since 2016 and has also participated in various consultations of the UN Office of High Commissioner for Human Rights. Ms. Bullock can advise clients on sustainability and corporate social responsibility matters such as supply chain issues and investigations, non-financial disclosures and Modern Slavery Act 2015 compliance, and disputes. Ms. Bullock co-chairs the firm’s UK ESG Practice Group.
Anna Howell is a partner in Gibson Dunn’s international corporate team, a co-chair of the Oil & Gas practice, and a member of the firm’s Energy & Infrastructure, M&A, Private Equity, and UK ESG practice groups. Ms. Howell advises on complex cross-border transactions and advisory work in the energy sector with a particular focus on alternative energy, renewables, gas and liquefied natural gas (LNG). Over her 25+ year career she has advised high-profile clients on some of their most prestigious and challenging mandates, including first entries into both mature and emerging markets throughout Europe, Africa, Latin America, Asia Pacific, and the Middle East. Ms. Howell has advised clients on re-use and repurposing in the context of decommissioning as well as switching to cleaner fuels, energy efficiency, sustainability and emissions trading. Ms. Howell spent over 11 years practising in Asia and has worked in London, Singapore, Hong Kong and Beijing.
The third quarter of 2020 saw a noticeable surge in Artificial Intelligence (“AI”)-related regulatory and policy proposals. The European Union (“EU”) has emerged as a pacesetter in AI regulation, taking significant steps towards a long-awaited comprehensive and coordinated regulation of AI at EU level—evidence of the European Commission’s (the “Commission”) ambition to exploit the potential of the EU’s internal market and position itself as a major player in sustainable technological innovation. In this update, we review some of the recent policy initiatives in the EU ahead of the Commission’s long-awaited legislative proposals expected in early 2021.
In the U.S., the third quarter of 2020 saw a number of bipartisan bills passed in the U.S. House of Representatives seeking to develop and refine U.S. national AI policy and adopt measures promoting the ethical and equitable use of AI technologies and consumer protection measures.
As global AI policy develops, we are observing some interesting themes emerging, one of which is stakeholders’ varying levels of comfort with the lack of a universal definition of AI. Some commentators have suggested that undue effort should not be expended on defining AI since it is a dynamic technology that will continue to change.[1] At the same time, global lawmakers are already reviewing and passing regulations that focus on certain categories of AI, often in the absence of clear definitions and delineations between certain AI applications that will impact the scope of regulation (see, e.g., the European Parliament’s discussion about a possible regulation of “all” AI applications, discussed further at I. below), creating legal uncertainty for regulators and businesses alike. We will continue to monitor these policy trends and provide a comprehensive analysis in our forthcoming 2020 Artificial Intelligence and Automated Systems Annual Legal Review.
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Table of Contents
U.S. Federal Legislation & Policy
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I. EU LEGISLATION & POLICY
In past years, EU discussions about regulating AI technologies had been characterized by a restrictive “regulate first” approach.[2] However, the regulatory road map presented by the Commission in February under the auspices of its new digital strategy eschewed, for example, blanket technology bans and proposed a more nuanced “risk-based” approach to regulation, emphasizing the importance of “trustworthy” AI but also acknowledging the need for Europe to both remain innovative and competitive in a rapidly growing space and avoid fragmentation of the single market resulting from differences in national legislation. As discussed further below, there is some evidence of a growing dissonance between EU members with respect to the balance between technological innovation and risk, and a European consensus on a harmonized legal framework is far from realized.
The Commission’s “White Paper on Artificial Intelligence – A European approach to excellence and trust” (the “White Paper”) sets out a road map designed to balance innovation, ethical standards and transparency.[3] As noted in our client alert “EU Proposal on Artificial Intelligence Regulation Released,” the White Paper favors a risk-based approach with sector- and application-specific risk assessments and requirements, rather than blanket sectoral requirements or bans—earmarking a series of “high-risk” technologies for future oversight, including those in “critical sectors” and those deemed to be of “critical use.”[4] The Commission also released a series of accompanying documents: the “European Strategy for Data” (“Data Strategy”)[5] and a “Report on the Safety and Liability Implications of Artificial Intelligence, the Internet of Things and Robotics” (“Report on Safety and Liability”).[6]
While the Commission’s comprehensive legislative proposal is not anticipated before early 2021, the EU policy landscape remains dynamic. Companies active in AI should closely follow recent developments in the EU, given the proposed geographic reach of the future AI legislation, which is likely to affect all companies doing business in the EU.
A. European Commission’s AI White Paper Consultation and “Inception Impact Assessment”
As we reported in our Artificial Intelligence and Automated Systems Legal Update (1Q20), in January 2020, the EC launched a public consultation period and requested comments on the proposals set out in the White Paper and the Data Strategy, providing an opportunity for companies and other stakeholders to provide feedback and shape the future EU regulatory landscape. The consultation closed on June 14. In July, the Commission published a summary report on the consultation’s preliminary findings.[7] Over 1,250 stakeholders from all over the world responded, providing feedback on the proposed policy and regulatory framework on AI. Respondents raised concerns about the potential for AI to breach fundamental rights or lead to discriminatory outcomes, but they were divided on whether new compulsory requirements should be limited to high-risk applications.
On the heels of the White Paper Consultation, the Commission launched an “Inception Impact Assessment” initiative for AI legislation in July, aiming to define the Commission’s scope and goals for AI legislation with a focus on ensuring that “AI is safe, lawful and in line with EU fundamental rights.”[8] The Commission’s road map builds on the proposals in the White Paper and provides more detail on relevant policy options and policy instruments, from a “baseline” policy (involving no policy change at the EU level) through various alternative options following a “gradual intervention logic,” ranging from a nonlegislative, industry-led, “soft law” approach (Option 1) through a voluntary labelling scheme (Option 2), to comprehensive and mandatory EU-level legislation for all or certain types of AI applications (Option 3), or a combination of any of the options above taking into account the different levels of risk that could be generated by a particular AI application (Option 4).[9] Another core question relates to the scope of the initiative, notably how AI should be defined (narrowly or broadly) (e.g., machine learning, deep neural networks, symbolic reasoning, expert systems, automated decision-making).
Substantively, the road map reiterates that the Commission is particularly concerned with a number of specific, significant AI risks that are not adequately covered by existing EU legislation, such as cybersecurity, the protection of employees, unlawful discrimination or bias, the protection of EU fundamental rights, including risks to privacy, and protecting consumers from harm caused by AI (both through existing and new product safety legislation). Continued focus remains on the need for legal certainty, both for businesses marketing products involving AI in the EU, and for market surveillance and supervisory authorities. The feedback period for the road map closed in September, and the completion of the Inception Impact Assessment is scheduled for December 2020. As noted, these policy proposals are intended to culminate in proposed regulation, which is expected to be unveiled by the Commission in the first quarter of 2021.
B. European Parliament Votes on Proposals regarding the Regulation of Artificial Intelligence
Earlier this year, the European Parliament (the “Parliament”) set up a special committee to analyze the impact of artificial intelligence on the EU economy.[10] The new committee chair, Dragoș Tudorache, noted that “Europe needs to develop AI that is trustworthy, eliminates biases and discrimination, and serves the common good, while ensuring business and industry thrive and generate economic prosperity.”[11]
In April, the Parliament’s Legal Affairs Committee (“JURI”) published three draft reports to the Commission providing recommendations on a framework for AI liability, copyright protection for AI-assisted human creations, safeguards within the EU’s patent system to protect the innovation of AI developers, and AI ethics and “human-centric AI.”[12] The three legal initiatives, summarized in final reports and recommendations outlined in more detail below, were adopted by the plenary on October 20, 2020.[13]
1. Report with Recommendations to the Commission on a Framework of Ethical Aspects of Artificial Intelligence, Robotics and Related Technologies
The legislative initiative urges the Commission to present a legal framework outlining the ethical principles and legal obligations to be followed when developing, deploying and using artificial intelligence, robotics and related technologies in the EU including software, algorithms and data, protection for fundamental rights. The initiative also calls for the establishment of a “European Agency for Artificial Intelligence” and a “European certification of ethical compliance.”[14]
The proposed legal framework is premised on several guiding principles, including “human-centric and human-made AI; safety, transparency and accountability; safeguards against bias and discrimination; right to redress; social and environmental responsibility; and respect for privacy and data protection.”[15] High-risk AI technologies, which include machine learning and other systems with the capacity for self-learning, should be designed to “allow for human oversight and intervention at any time, particularly where a functionality could result in a serious breach of ethical principles and could be dangerous.”[16] Some of the high-risk sectors identified are healthcare, public sector and finance, banking and insurance.
2. Report with Recommendations to the Commission on a Civil Liability Regime for Artificial Intelligence
The Report calls for a future-oriented civil liability framework that makes front- and back-end operators of high-risk AI strictly liable for any resulting damage and provides a “clear legal framework [that] would stimulate innovation by providing businesses with legal certainty, whilst protecting citizens and promoting their trust in AI technologies by deterring activities that might be dangerous.”[17] While it does not take the position that a new EU liability regime is necessary, the Report identifies a gap in the existing EU product liability regime with respect to the liability of operators of AI-systems in the absence of a contractual relationship with potential victims, proposing a dual approach: (1) strict liability for operators of “high-risk AI-systems” akin to the owner of a car or pet; or (2) a presumption of fault towards the operator for harm suffered by a victim by a non-“high-risk” AI system, with national law regulating the amount and extent of compensation as well as the limitation period in case of harm caused by the AI-system.[18] Multiple operators would be held jointly and severally liable, subject to a maximum liability of €2 million. The Report defines criteria on which AI-systems can qualify as high-risk in the Annex, proposing that a newly formed standing committee, involving national experts and stakeholders, should support the Commission in its review of potentially high-risk AI-systems.
3. Report on Intellectual Property Rights for the Development of Artificial Intelligence Technologies
The Report emphasizes that EU global leadership in AI requires an effective intellectual property rights (“IP”) system and safeguards for the EU’s patent system in order to protect and incentivize innovative developers, balanced with the EU’s ethical principles for AI and consumer safety.[19] Notably, the Report distinguishes between AI-assisted human creations and AI-generated creations, taking the position that AI should not have a legal personality and that ownership of IP rights should only be granted to humans. Where AI is used only as a tool to assist an author in the process of creation, the current IP legal framework should remain applicable. Nonetheless, the Report recommends that AI-generated creations should fall under the scope of the EU IP regime in order to encourage investment and innovation, subject to protection under a specific form of copyright.
C. A Lack of Consensus between EU Members on the Balance to Be Struck between Innovation and Safety
Although the Commission is seeking to impose a comprehensive and harmonious framework for AI regulation across all member states, it is far from clear that consensus exists as to the scope of regulatory intervention. In October, 14 EU members (Denmark, Belgium, the Czech Republic, Finland, France, Estonia, Ireland, Latvia, Luxembourg, the Netherlands, Poland, Portugal, Spain and Sweden) published a joint position paper urging the Commission to espouse a “soft law approach” that takes into account the fast-evolving nature of AI technologies.[20] The paper calls for the adoption of “self-regulation, voluntary labelling and other voluntary practices as well as a robust standardisation process as a supplement to existing legislation that ensures that essential safety and security standards are met” to allow regulators to learn from technology and identify potential regulatory challenges without stymieing innovation.
This approach may be met with challenge from Germany, the current chair of the EU presidency, which has expressed concern over certain Commission proposals to apply restrictions on AI applications deemed to be of high-risk only, and would prefer a broader regulatory reach for technologies that would be subject to the new framework, as well as mandatory, detailed rules for data retention, biometric remote identification and human supervision of AI systems.[21]
On November 5, a German AI inquiry committee (Enquete-Kommission Künstliche Intelligenz des Deutschen Bundestages, hereafter the “Committee”) presented its final report, which provides broad recommendations on how society can benefit from the opportunities inherent in AI technologies (defined in the report as “lernende Systeme” or “self-learning systems”) while acknowledging the risks they pose. The Committee’s work placed a focus on legal and ethical aspects of AI and its impact on the economy, public administration, cybersecurity, health, work, mobility, and the media.[22] The Committee advocates for a “human-centric” approach to AI, a harmonious Europe-wide strategy, a focus on interdisciplinary dialog in policy-making, setting technical standards, legal clarity on testing of products and research, and the adequacy of digital infrastructure. At a high level, the Committee’s specific recommendations relate to (1) data-sharing and data standards; (2) support and funding for research and development; (3) a focus on “sustainable” and efficient use of AI; (4) incentives for the technology sector and industry to improve scalability of projects and innovation; (5) education and diversity; (6) the impact of AI on society, including the media, mobility, politics, discrimination and bias; and (7) regulation, liability and trustworthy AI. The committee was set up in late 2018 and comprises 19 members of the German parliament and 19 external experts. We will provide a more detailed analysis of the Committee’s final report in our forthcoming 2020 Artificial Intelligence and Automated Systems Annual Legal Review.
D. UK ICO Guidance on AI and Data Protection
On July 30, 2020, the UK Information Commissioner’s Office (“ICO”) published its final guidance on Artificial Intelligence (the “Guidance”).[23] Intended to help organizations “mitigate the risks of AI arising from a data protection perspective without losing sight of the benefits such projects can deliver,” the Guidance sets out a framework and methodology for auditing AI systems and best practices for compliance with the UK Data Protection Act 2018 and data protection obligations under the EU’s General Data Protection Regulation (“GDPR”). The Guidance proposes a “proportionate and risk-based approach” and recommends an auditing methodology consisting of three key parts: auditing tools and procedures for use in audits and investigations; detailed guidance on AI and data protection; and a tool kit designed to provide further practical support to organizations auditing the compliance of their own AI systems (which is forthcoming). The guidance addresses four overarching principles:
- Accountability and governance in AI—including data protection impact assessments (“DPIAs”), understanding the relationship and distinction between controllers and processors in the AI context, as well as managing, and documenting decisions taken with respect to competing interests between different AI-related risks (e.g., trade-offs);
- Fair, lawful and transparent processing—including how to identify lawful bases (and using separate legal bases for processing personal data at each stage of the AI development and deployment process), assessing and improving AI system performance, mitigating potential discrimination, and documenting the source of input data as well as any inaccurate input data or statistical flaw that might impact the output of the AI system.
- Data minimization and security—including guidance to technical specialists on data security issues common to AI, types of privacy attacks to which AI systems are susceptible, compliance with the principle of data minimization (the principle of identifying the minimum amount of personal data needed, and to process no more than that amount of information), and privacy-enhancing techniques that balance the privacy of individuals and the utility of a machine learning system during the training and inference stages.[24]
- Compliance with individual data subject rights—including data subject rights in the context of data input and output of AI systems, rights related to automated decision, and requirements to design AI systems to facilitate effective human review and critical assessment and understanding of the outputs and limitations of AI systems.
The Guidance also emphasizes that data protection risks should be considered at an early stage in the design process (e.g., “safety by design”) and that the roles of the different parties in the AI supply chain should be clearly mapped at the outset. Of note is also the recommendation that training data be stored at least until a model is established and unlikely to be retrained or modified. The Guidance refers to, but does not provide guidance on, the anonymization or pseudonymization of data as a privacy-preserving technique, but notes that the ICO is currently developing new guidance in this field.[25]
The ICO encourages organizations to provide feedback on the Guidance to make sure that it remains “relevant and consistent with emerging developments.”
II. U.S. FEDERAL LEGISLATION & POLICY
A. AI in Government Act of 2020 (H.R. 2575)
First introduced by Rep. Jerry McNerney (D-CA) on May 8, 2019, the AI in Government Act of 2020 (H.R. 2575) was passed by the House on September 14, 2020 by voice vote.[26] The bill aims to promote the efforts of the federal government in developing innovative uses of AI by establishing the “AI Center of Excellence” within the General Services Administration (“GSA”), and requiring that the Office of Management and Budget (“OMB”) issue a memorandum to federal agencies regarding AI governance approaches. It also requires the Office of Science and Technology Policy to issue guidance to federal agencies on AI acquisition and best practices.
Senators Rob Portman (R-OH) and Cory Gardner (R-CO) are cosponsoring an identical bill, S. 1363, which was approved by the U.S. Senate Homeland Security and Governmental Affairs Committee in November 2019.[27] Sen. Portman described the bipartisan legislation, which remains pending in the Senate, as “the most significant AI policy change ever passed by Congress.”
B. Consumer Safety Technology Act (H.R. 8128)
On September 29, the House passed the Consumer Safety Technology Act (H.R. 8128), previously named the “AI for Consumer Product Safety Act.” If enacted, the bill would direct the U.S. Consumer Product Safety Commission (“CPSC”) to establish a pilot program to explore the use of artificial intelligence for at least one of the following purposes: (1) tracking injury trends; (2) identifying consumer product hazards; (3) monitoring the retail marketplace for the sale of recalled consumer products; or (4) identifying unsafe imported consumer products. The bill has been referred to the Senate Committee on Commerce, Science, and Transportation.
C. Bipartisan U.S. Lawmakers Introduce Legislation to Create a National AI Strategy
On September 16, 2020, Reps. Robin Kelly (D-Ill.) and Will Hurd (R-Texas), after coordination with experts and the Bipartisan Policy Center, introduced a concurrent resolution calling for the creation of a national AI strategy.[28] This Resolution proposes four pillars to guide the strategy:[29]
- Workforce: Fill the AI talent gap and prepare American workers for the jobs of the future, while also prioritizing inclusivity and equal opportunity;[30]
- National Security: Prioritize the development and adoption of AI technologies across the defense and intelligence apparatus;
- Research and Development: Encourage the federal government to collaborate with the private sector and academia to ensure America’s innovation ecosystem leads the world in AI; and
- Ethics: Develop and use AI technology in a way that is ethical, reduces bias, promotes fairness, and protects privacy.
D. Artificial Intelligence Education Act
On September 24, 2020, Reps. Paul D. Tonko (D-NY) and Guy Reschenthaler (R-PA) introduced the Artificial Intelligence Education Act (H.R. 8390).[31] The bipartisan legislation would establish grant support within the National Science Foundation to fund the creation of easily accessible K-12 lesson plans for schools and educators.[32] The bill has been referred to the Committee on Science, Space, and Technology and the Committee on Education and Labor.
III. INTELLECTUAL PROPERTY
A. USPTO Releases Report on Artificial Intelligence and Intellectual Property Policy
On October 6, 2020, the U.S. Patent and Trademark Office (“USPTO”) published a report “Public Views on Artificial Intelligence and Intellectual Property Policy” (the “Report”).[33] The Report catalogs the roughly 200 comments received in response to the USPTO’s request for comments issued in October 2019 (as reviewed in our client alert USPTO Requests Public Comments On Patenting Artificial Intelligence Inventions).[34] The USPTO requested feedback on issues such as whether current laws and regulations regarding patent inventorship and authorship of copyrighted work should be revised to take into account contributions other than by natural persons.
A general theme that emerges from the report is concern over the lack of a universally acknowledged definition of AI, and a majority view that current AI (i.e., AI that is not considered to be artificial general intelligence, or “AGI”) can neither invent nor author without human intervention. The comments also suggested that existing U.S. intellectual property laws are “calibrated correctly to address the evolution of AI” (although commenters were split as to whether any new classes of IP rights would be beneficial to ensure a more robust IP system), and that “human beings remain integral to the operation of AI, and this is an important consideration in evaluating whether IP law needs modification in view of the current state of AI technology.”[35]
The key comments sound in eight categories:
1. Elements of an AI Invention
AI has no universally recognized definition, but can be understood as computer functionality that mimics human cognitive functions, e.g., the ability to learn. AI inventions include inventions embodying an advance in AI itself (e.g., improved models or algorithms), inventions that apply AI to a field other than AI, and inventions produced by AI itself. The current state of the art is limited to ‘narrow’ AI, as opposed to artificial general intelligence akin to human intelligence.
2. Conception and Inventorship
The vast majority of public commenters asserted that current inventorship law is equipped to handle inventorship of AI technologies and that the assessment of conception should remain fact-specific. The use of an AI system as a tool by a natural person does not generally preclude a natural person from qualifying as an inventor if he or she contributed to the conception of the claimed invention. Many commenters took issue with the premise that, under the current state of the art, AI systems were advanced enough to “conceive” of an invention. As one commenter put it, “the current state of AI technology is not sufficiently advanced at this time and in the foreseeable future so as to completely exclude the role of a human inventor in the development of AI inventions.”[36] Some commenters suggested that the USPTO should revisit the question when machines begin achieving AGI (i.e., when science agrees that machines can “think” on their own). A minority of commenters suggested that AGI was a present reality that needed to be addressed today.
3. Ownership of AI Inventions
The vast majority of commenters stated that no changes should be necessary to the current U.S. law—that only a natural person or a company (via assignment) should be considered the owner of a patent or an invention. However, a minority of responses stated that while inventorship and ownership rights should not be extended to machines, consideration should be given to expanding ownership to a natural person who trains an AI process, or who owns/controls an AI system.
4. Subject Matter Eligibility under 35 U.S.C. § 101
Many commenters asserted that there are no patent eligibility considerations unique to AI Inventions, and that AI inventions should not be treated any differently than other computer-implemented inventions. This is consistent with how the USPTO currently examines AI inventions today: claims to an AI invention that fall within one of the four statutory categories and are patent-eligible under the Alice/Mayo test[37] will be patent subject matter-eligible under 35 U.S.C. § 101. While some AI inventions may not pass muster under the subject matter eligibility analysis because they can be characterized as certain methods of organizing human activity, mental processes, or mathematical concepts, as one commenter noted, the complex algorithms that underpin AI inventions have the ability to yield technological improvements. In addition, claims directed to an abstract idea will still be patent-eligible if the additional claim elements, considered individually or as an ordered combination, amount to significantly more than the abstract idea so as to transform them into patent-eligible subject matter.
5. Written Description and Enablement under 35 U.S.C. § 112(a)
The majority of commenters agreed that there are no unique disclosure considerations for AI inventions. One commenter stated that the principles set forth in the USPTO’s examiner training materials regarding computer-implemented inventions “are similarly applicable to AI-related inventions as to conventional algorithmic solutions.” However, some commenters indicated that there are significant and unique challenges to satisfying the disclosure requirements for an AI invention since even though the input and output may be known by the inventor, the logic in between is in some respects unknown. Commenters noted that proper enforcement of the description requirement is imperative for patent quality. USPTO takes the position that whether a specification provides enabling support for the claimed invention is “intensely fact-specific.”
Commenters suggest that there are differing views on the predictability of AI systems. One commenter stated that “most current AI systems behave in a predictable manner and that predictability is often the basis for the commercial value of practical applications of these technologies.” Others noted that some AI inventions may operate in a black box because there is an “inherent randomness in AI algorithms,” making it appropriate to “apply the written description requirement and the enablement factors from In re Wands.”[38]
Commenters presented differing views as to the predictability of AI inventions. Some explained that AI inventions generally behave predictably in their practical applications (that fact being a basis for their commercial value), whereas some AI inventions might be less predictable due to inherent randomness in their algorithms. This unpredictability may make it appropriate to consider established factors such as the level of predictability in the art, amount of direction provided by the inventor, existence of working examples, and quantity of experimentation necessary to make or use the invention based on the content of the disclosure.
6. Level of Ordinary Skill in the Art
The USPTO noted that AI is capable of being applied to various disciplines, a tendency that requires an assessment of how it is affecting seemingly disparate fields of innovation since it may have “the potential to alter the skill level of the hypothetical ‘ordinary skilled artisan,’ thereby affecting the bar for nonobviousness.” Many commenters asserted that AI has the potential to affect the level of ordinary skill in an art and that the present legal framework for assessing the person of ordinary skill in the art is “adequate to determine the impact of AI-based tools in a given field.” However, commenters cautioned that widespread use of AI systems have not yet permeated all fields and discouraged the USPTO from declaring that the application of conventional AI is an exercise of ordinary skill in the art.
7. Prior Art Considerations
The majority of commenters stated that there were no prior art considerations unique to AI inventions and that current standards were sufficient. However, some commenters indicated that there were prior art considerations unique to AI inventions, many of which focused on the proliferation of prior art, such as the generation of prior art by AI, and the difficulty in finding prior art, such as source code related to AI. Others indicated that while no prior art considerations unique to AI inventions currently existed, depending on how sophisticated AI becomes in the future, unique AI prior art could become relevant. Among all the responses, a common theme was the importance of examiner training and providing examiners with additional resources for identifying and finding AI-related prior art.
8. New IP Protections for Data Protection and Other Issues
The USPTO noted that data protection under current U.S. law is limited in scope, and the U.S. does not currently have intellectual property rights protections solely focused on data for AI algorithms. In their responses to the question of whether any new forms of IP protections are needed for AI inventions, commenters noted the importance of “big data” in developing and training AI systems, but were equally divided between the view that new intellectual property rights were necessary to address AI inventions and the belief that the current U.S. IP framework was adequate to address AI inventions. Generally, however, commenters who did not see the need for new forms of IP rights suggested that developments in AI technology should be monitored to ensure needs were keeping pace with AI technology developments.
Those requesting new IP rights focused on the need to protect the data associated with AI, particularly in the context of machine learning systems. One opinion stated that companies that collect large amounts of data have a competitive advantage relative to new entrants to the market and that “[t]here could be a mechanism to provide access to the repositories of data collected by large technology companies such that proprietary rights to the data are protected but new market entrants and others can use such data to train and develop their AI.”[39] Commentators took the view that training data is currently protectable as a trade secret or, in the event that the training data provides some new and useful outcome, as a patent, but thought that there may be gaps in IP protection for trained models. Commenters did not provide concrete proposals on how any newly created IP rights should function, and many called on the USPTO to further consult the public on the issue. Commenters also stressed the need for examiner technical training and a call for memorializing guidance specific to AI for patent examiners.
Finally, in response to a question about whether policies and practices of other global patent agencies should inform the USPTO’s approach, there was a divide between commentators advocating for an evolution of global laws in a common direction, and those who cautioned against further attempts to harmonize international patent laws and procedures “because U.S. patent law is the gold standard.”[40]
We will continue to monitor developments in this space and report on any action USPTO may take in response to these comments.
IV. AUTONOMOUS VEHICLES
A. SELF-DRIVE Act Reintroduced in U.S. Congress
Federal regulation of autonomous vehicles had so far faltered in the new Congress, leaving the U.S. without a federal regulatory framework while the development of autonomous vehicle technology continues apace. However, on September 23, 2020, Rep. Bob Latta (R-OH) reintroduced the Safely Ensuring Lives Future Deployment and Research In Vehicle Evolution (“SELF DRIVE”) Act.[41] As we have addressed in previous legal updates,[42] the House previously passed the SELF DRIVE Act (H.R. 3388) by voice vote in September 2017, but its companion bill (the American Vision for Safer Transportation through Advancement of Revolutionary Technologies (“AV START”) Act (S. 1885)) stalled in the Senate.
The bill empowers the National Highway Traffic Safety Administration (“NHTSA”) with the oversight of manufacturers of Highly Automated Vehicles (“HAVs”) through enactment of future rules and regulations that will set the standards for safety and govern areas of privacy and cybersecurity relating to such vehicles. The bill also requires vehicle manufacturers to inform consumers of the capabilities and limitations of a vehicle’s driving automation system and directs the Secretary of Transportation to issue updated or new motor vehicle safety standards relating to HAVs.
One key aspect of the bill is broad preemption of the states from enacting legislation that would conflict with the Act’s provisions or the rules and regulations promulgated under the authority of the bill by the NHTSA. While state authorities would likely retain their ability to oversee areas involving human driver and autonomous vehicle operation, the bill contemplates that the NHTSA would oversee manufacturers of autonomous vehicles, just as it has with non-autonomous vehicles, to ensure overall safety. In addition, the NHTSA is required to create a Highly Automated Vehicle Advisory Council to study and report on the performance and progress of HAVs. This new council is to include members from a wide range of constituencies, including members of the industry, consumer advocates, researchers, and state and local authorities. The intention is to have a single body (the NHTSA) develop a consistent set of rules and regulations for manufacturers, rather than continuing to allow the states to adopt a web of potentially widely differing rules and regulations that may ultimately inhibit development and deployment of HAVs.
In a joint statement on the bill, Energy and Commerce Committee Republican Leader Rep. Greg Walden (R-OR) and Communications and Technology Subcommittee Republican Leader Rep. Bob Latta (R-OH) noted that “[t]here is a clear global race to AVs, and for the U.S. to win that race, Congress must act to create a national framework that provides developers certainty and a clear path to deployment.”[43] The bill has been referred to the House Energy and Commerce Committee and awaits further action.[44]
B. European Commission Report on the Ethics of Connected and Automated Vehicles
In September 2020, the Commission published a report by an independent group of experts on the ethics of connected and automated vehicles (“CAVs”).[45] The report—which promotes the “systematic inclusion of ethical considerations in the development and use of CAVs”[46]—sets out twenty ethical recommendations on road safety, privacy, fairness, AI explainability, responding to dilemma situations, clear testing guidelines and standards, the creation of a culture of responsibility for the development and deployment of CAVs, auditing CAV algorithmic decision-making reducing opacity, as well as the promotion of data, algorithm and AI literacy through public participation. The report applies a “Responsible Research and Innovation” approach that “recognises the potential of CAV technology to deliver the […] benefits [reducing the number of road fatalities and harmful emissions from transport, improving the accessibility of mobility services]” but also incorporates a broader set of ethical, legal and societal considerations into the development, deployment and use of CAVs and to achieve an “inherently safe design” based on a user-centric perspective.[47] The report builds on the Commission’s strategy on Connected and Automated Mobility.[48]
C. Proposed German Legislation on Autonomous Driving
The German government intends to pass a law on autonomous vehicles (“Gesetz zum autonomen Fahren”) by mid-2021.[49] The new law is intended to regulate the deployment of CAVs in specific operational areas by the year 2022 (including Level 5 “fully automated vehicles”), and will define the obligations of CAV operators, technical standards and testing, data handling, and liability for operators. The proposed law is described as a temporary legal instrument pending agreement on harmonized international regulations and standards.
Moreover, the German government also intends to create, by the end of 2021, a “mobility data room” (“Datenraum Mobilität”), described as a cloud storage space for pooling mobility data coming from the car industry, rail and local transport companies, and private mobility providers such as car sharers or bike rental companies.[50] The idea is for these industries to share their data for the common purpose of creating more efficient passenger and freight traffic routes, and support the development of autonomous driving initiatives in Germany.
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[1] United States Patent and Trademark Office, Public Views on Artificial Intelligence and Intellectual Property Policy (Oct. 2020), at 2 (summarizing responses by stakeholders to the USPTO’s request for public comment), available at https://www.uspto.gov/sites/default/files/documents/USPTO_AI-Report_2020-10-07.pdf.
[2] H. Mark Lyon, Gearing Up For The EU’s Next Regulatory Push: AI, LA & SF Daily Journal (Oct. 11, 2019), available at https://www.gibsondunn.com/wp-content/uploads/2019/10/Lyon-Gearing-up-for-the-EUs-next-regulatory-push-AI-Daily-Journal-10-11-2019.pdf.
[3] EC, White Paper on Artificial Intelligence – A European approach to excellence and trust, COM(2020) 65 (Feb. 19, 2020), available at https://ec.europa.eu/info/sites/info/files/commission-white-paper-artificial-intelligence-feb2020_en.pdf.
[4] Id. Industries in critical sectors include healthcare, transport, police, recruitment, and the legal system, while technologies of critical use include such technologies with a risk of death, damage or injury, or with legal ramifications.
[5] EC, A European strategy for data, COM (2020) 66 (Feb. 19, 2020), available at https://ec.europa.eu/info/files/communication-european-strategy-data_en.
[6] EC, Report on the safety and liability implications of Artificial Intelligence, the Internet of Things and robotics, COM (2020) 64 (Feb. 19, 2020), available at https://ec.europa.eu/info/files/commission-report-safety-and-liability-implications-ai-internet-things-and-robotics_en.
[7] EC, White Paper on Artificial Intelligence: Public consultation towards a European approach for excellence and trust, COM (2020) (July 17, 2020), available at https://ec.europa.eu/digital-single-market/en/news/white-paper-artificial-intelligence-public-consultation-towards-european-approach-excellence.
[8] EC, Artificial intelligence – ethical and legal requirements, COM (2020) (June 2020), available at https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12527-Requirements-for-Artificial-Intelligence.
[10] European Parliament, Setting up a special committee on artificial intelligence in a digital age, and defining its responsibilities, numerical strength and term of office (June 18, 2020), available at https://www.europarl.europa.eu/doceo/document/TA-9-2020-0162_EN.html; the European Parliament is also working on a number of other issues related to AI, including: the civil and military use of AI (legal affairs committee); AI in education, culture and the audio-visual sector (culture and education committee); and the use of AI in criminal law (civil liberties committee).
[11] European Parliament, News Report, AI rules: what the European Parliament wants (Oct. 21, 2020), available at https://www.europarl.europa.eu/news/en/headlines/society/20201015STO89417/ai-rules-what-the-european-parliament-wants.
[12] European Parliament, Parliament leads the way on first set of EU rules for Artificial Intelligence (Oct. 20, 2020), available at https://www.europarl.europa.eu/news/en/press-room/20201016IPR89544/.
[13] In addition, the Parliament announced that it had approved two separate legislative initiative reports calling on the Commission to address and tackle current shortcomings in the online environment in its Digital Services Act (“DSA”) package, due to be presented in December 2020. In particular, the Parliament noted that the EU aims to shape the digital economy at the EU level, as well as set the standards for the rest of the world. In addition, the Parliament outlined in its reports that all digital service providers established in non-EU must adhere to the DSA’s rules when their services are also aimed at consumers or users in the EU.
[14] European Parliament, Report with recommendations to the Commission on a framework of ethical aspects of artificial intelligence, robotics and related technologies (2020/2012 (INL)) (Oct. 8, 2020), available at https://www.europarl.europa.eu/doceo/document/A-9-2020-0186_EN.pdf; European Parliament, Resolution of 20 October 2020 with recommendations to the Commission on a framework of ethical aspects of artificial intelligence, robotics and related technologies (2020/2012 (INL)) (Oct. 20, 2020), available at https://www.europarl.europa.eu/doceo/document/TA-9-2020-0275_EN.pdf.
[15] Press Release, European Parliament, Parliament leads the way on first set of EU rules for Artificial Intelligence (Oct. 20, 2020), available at https://www.europarl.europa.eu/news/en/press-room/20201016IPR89544/.
[17] Press Release, European Parliament, Parliament leads the way on first set of EU rules for Artificial Intelligence (Oct. 20, 2020), available at https://www.europarl.europa.eu/news/en/press-room/20201016IPR89544/.
[18] European Parliament, Report with recommendations to the Commission on a civil liability regime for artificial intelligence (2020/2014 (INL)) (Oct. 5, 2020), available at https://www.europarl.europa.eu/doceo/document/A-9-2020-0178_EN.pdf; European Parliament, Resolution of 20 October 2020 with recommendations to the Commission on a civil liability regime for artificial intelligence (2020/2014 (INL)), available at https://www.europarl.europa.eu/doceo/document/TA-9-2020-0276_EN.pdf.
[19] European Parliament, Report on intellectual property rights for the development of artificial intelligence technologies (2020/2015(INI)) (Oct. 2, 2020), available at https://www.europarl.europa.eu/doceo/document/A-9-2020-0176_EN.pdf; European Parliament, Resolution of 20 October 2020 on intellectual property rights for the development of artificial intelligence technologies (2020/2015(INI)) (Oct. 20, 2020), available at https://www.europarl.europa.eu/doceo/document/TA-9-2020-0277_EN.pdf.
[20] Innovative And Trustworthy AI: Two Sides Of The Same Coin, Position paper on behalf of Denmark, Belgium, the Czech Republic, Finland, France, Estonia, Ireland, Latvia, Luxembourg, the Netherlands, Poland, Portugal, Spain and Sweden, available at https://em.dk/media/13914/non-paper-innovative-and-trustworthy-ai-two-side-of-the-same-coin.pdf; see also https://www.euractiv.com/section/digital/news/eu-nations-call-for-soft-law-solutions-in-future-artificial-intelligence-regulation/.
[21] Stellungnahme der Bundesregierung der Bundesrepublik Deutschland zum Weißbuch zur Künstlichen Intelligenz – ein europäisches Konzept für Exzellenz und Vertrauen, COM (2020) 65 (June 29, 2020), available at https://www.ki-strategie-deutschland.de/files/downloads/Stellungnahme_BReg_Weissbuch_KI.pdf; see also Philip Grüll, Germany calls for tightened AI regulation at EU level, Euractiv (July 1, 2020), available at https://www.euractiv.com/section/digital/news/germany-calls-for-tightened-ai-regulation-at-eu-level/.
[22] Deutscher Bundestag, Enquete-Kommission, Künstliche Intelligenz – Gesellschaftliche Verantwortung und wirtschaftliche, soziale und ökologische Potenziale, Kurzzusammenfassung des Gesamtberichts (Oct. 28, 2020), available at https://www.bundestag.de/resource/blob/801584/102b397cc9dec49b5c32069697f3b1e3/Kurzfassung-des-Gesamtberichts-data.pdf.
[23] UK ICO, Guidance on AI and data protection (July 30, 2020), available at https://ico.org.uk/for-organisations/guide-to-data-protection/key-data-protection-themes/guidance-on-ai-and-data-protection/.
[24] Examples of such privacy-enhancing techniques include perturbation or adding ‘noise’, synthetic data, and federated learning.
[25] On the topic of data minimization, see further the European Data Protection Board’s (“EDPB”) Draft Guidelines on the Principles of Data Protection by Design and Default under Article 25 of the GDPR, adopted on October 20, 2020 after a public consultation and available here.
[26] H.R. 2575, 116th Congress (2019-2020).
[27] The Ripon Advance, GOP senators praise House passage of AI in Government Act (Sept. 16, 2020), available at https://riponadvance.com/stories/gop-senators-praise-house-passage-of-ai-in-government-act/?_sm_au_=iVV6kKLFkrjvZrvNFcVTvKQkcK8MG; Rob Portman, House Passes Portman, Gardner Bipartisan Legislation to Improve Federal Government’s Use of Artificial Intelligence (Sept. 14, 2020), available at https://www.portman.senate.gov/newsroom/press-releases/house-passes-portman-gardner-bipartisan-legislation-improve-federal?_sm_au_=iVV6kKLFkrjvZrvNFcVTvKQkcK8MG.
[28] Robin Kelly, Kelly, Hurd Introduce Bipartisan Resolution to Create National Artificial Intelligence Strategy (Sept. 16, 2020), available at https://robinkelly.house.gov/media-center/press-releases/kelly-hurd-introduce-bipartisan-resolution-to-create-national-artificial?_sm_au_=iVV6kKLFkrjvZrvNFcVTvKQkcK8MG; H.Con.Res. 116, 116th Congress (2019-2020).
[29] Bipartisan Policy Center, A National AI Strategy (Sept. 1, 2020), available at https://bpcaction.org/wp-content/uploads/2020/09/1-Pager-on-National-AI-Strategy-Resolution-.pdf?_sm_au_=iVV6kKLFkrjvZrvNFcVTvKQkcK8MG.
[30] On September 10, the House Budget Committee held a hearing to discuss the impact of Artificial Intelligence on the U.S. economy, and specifically on what role technology should play in the country’s recovery post-COVID-19. Witness Darrell West, Ph.D., of Brookings Institution warned that the rapid integration of AI technologies developed in the private sector could affect the American workforce by causing job losses and job dislocation.
[31] H.R. 8390, 116th Congress (2019-2020).
[32] Paul D. Tonko, Tonko, Reschenthaler Introduce Artificial Intelligence Education Act (Sept. 24, 2020), available at https://tonko.house.gov/news/documentsingle.aspx?DocumentID=3142.
[33] United States Patent and Trademark Office, USPTO releases report on artificial intelligence and intellectual property policy (Oct. 6, 2020), available at https://www.uspto.gov/about-us/news-updates/uspto-releases-report-artificial-intelligence-and-intellectual-property?_sm_au_=iVV6kKLFkrjvZrvNFcVTvKQkcK8MG.
[34] United States Patent and Trademark Office, Public Views on Artificial Intelligence and Intellectual Property Policy (Oct. 2020), available at https://www.uspto.gov/sites/default/files/documents/USPTO_AI-Report_2020-10-07.pdf. On October 30, 2019, the USPTO also issued a request for comments on Intellectual Property Protection for Artificial Intelligence Innovation, on IP policy areas other than patent law. The October 2020 USPTO publication summarizes the responses by commentators at Part II from p. 19 of the Report onwards.
[37] Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 573 U.S. 208, 221 (2014); Mayo Collaborative Servs. v. Prometheus Labs., Inc., 566 U.S. 66 (2012).
[38] In re Wands 858 F.2d 731 (Fed. Cir. 1988).
[41] H.R. __ 116th Congress (2019-2020).
[42] For more information, please see our legal updates Accelerating Progress Toward a Long-Awaited Federal Regulatory Framework for Autonomous Vehicles in the United States and 2019 Artificial Intelligence and Automated Systems Annual Legal Review.
[43] Energy & Commerce Committee Republicans, Press Release, E&C Republicans Continue Leadership on Autonomous Vehicles (Sept. 23, 2020), available at https://republicans-energycommerce.house.gov/news/press-release/ec-republicans-continue-leadership-on-autonomous-vehicles/.
[44] State regulatory activity has continued to accelerate, adding to the already complex mix of regulations that apply to companies manufacturing and testing HAVs. Over half of all U.S. states have enacted legislation related to autonomous vehicles; see further Nathan Benaich & Ian Hogarth, State of AI Report (Oct. 1, 2020), at 93, available at https://docs.google.com/presentation/d/1ZUimafgXCBSLsgbacd6-a-dqO7yLyzIl1ZJbiCBUUT4/edit#slide=id.g893233b74e_0_0; National Conference of State Legislatures, Autonomous Vehicles: Self-Driving Vehicles Enacted Legislation (Feb. 18, 2020), available at https://www.ncsl.org/research/transportation/autonomous-vehicles-self-driving-vehicles-enacted-legislation.aspx. As outlined in our 2019 Artificial Intelligence and Automated Systems Annual Legal Review, state regulations vary significantly. Also, in November 2020, Massachusetts voters are deciding on whether or not to add “mechanical” vehicle telematics data—real-time updates from a car’s sensors transmitted to an automaker’s private servers—to the list of information that Original Equipment Manufacturers (“OEMs”) have to share with independent mechanics under the state’s landmark “Right to Repair” law. Telematics data was purposefully excluded from the original 2013 law. If passed, the amendment would require automakers who want to do business in the state to make that data accessible through a smartphone app for owners starting in 2022. See Rob Stumpf, There’s Another Huge Right to Repair Fight Brewing in Massachusetts, The Drive (Oct. 13, 2020), available at https://www.thedrive.com/news/36980/theres-another-huge-right-to-repair-fight-brewing-in-massachusetts.
[45] European Commission, Press Release, New recommendations for a safe and ethical transition towards driverless mobility, COM (2020) (Sept. 18, 2020), available at https://ec.europa.eu/info/news/new-recommendations-for-a-safe-and-ethical-transition-towards-driverless-mobility-2020-sep-18_en.
[47] European Commission, Directorate-General for Research and Innovation, Independent Expert Report, Ethics of Connected and Automated Vehicles: Recommendations on road safety, privacy, fairness, explainability, and responsibility (Sept. 18, 2020), at 4, available here.
[48] EC, Connected and automated mobility in Europe, COM(2020) (June 22, 2020), available at https://ec.europa.eu/digital-single-market/en/connected-and-automated-mobility-europe.
[49] Bundesministerium für Verkehr und digitabe Infrastruktur, Gesetz zum autonomen Fahren (Oct. 2020), available at https://www.bmvi.de/SharedDocs/DE/Artikel/DG/gesetz-zum-autonomen-fahren.html; see also Josef Erl, Autonomes Fahren: Deutschland soll Weltspitze werden, Mixed.de (Oct. 31, 2020), available at https://mixed.de/autonomes-fahren-deutschland-soll-weltspitze-werden/.
[50] Daniel Delhaes, Deutsche Autoindustrie erwägt, ihre Datenschätze zu bündeln, Handelsblatt (July 9, 2020), available at https://www.handelsblatt.com/technik/sicherheit-im-netz/autonomes-fahren-deutsche-autoindustrie-erwaegt-ihre-datenschaetze-zu-buendeln/26164062.html?ticket=ST-2824809-tuIGjXYQywf7MHzRurpa-ap4.
The following Gibson Dunn lawyers prepared this client update: H. Mark Lyon, Frances Waldmann and Tony Bedel.
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 Artificial Intelligence and Automated Systems Group, or the following authors:
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Frances A. Waldmann – Los Angeles (+1 213-229-7914,fwaldmann@gibsondunn.com)
Please also feel free to contact any of the following practice group members:
Artificial Intelligence and Automated Systems Group:
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The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. The U.S. Department of Justice has issued statements and guidance indicating some new thinking in the Trump Administration about its approach to FCA cases that may signal a meaningful shift in its enforcement efforts. But at the same time, newly filed FCA cases remain at historical peak levels and the DOJ has enjoyed ten straight years of nearly $3 billion or more in annual FCA recoveries. The government has also made clear that it intends vigorously to pursue any fraud, waste and abuse in connection with COVID-related stimulus funds. As much as ever, any company that deals in government funds—especially in the health care sector—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves.
The panel discusses developments in the FCA, including:
- The latest trends in FCA enforcement actions and associated litigation affecting health care providers;
- Updates on the Trump Administration’s approach to FCA enforcement, including developments with recent DOJ Civil Division personnel changes and DOJ’s use of its statutory dismissal authority;
- The coming surge of COVID-related FCA enforcement actions; and
- The latest developments in FCA case law, including developments in particular FCA legal theories affecting your industry and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.
View Slides (PDF)
PANELISTS:
Winston Y. Chan is a partner in the San Francisco office. He has particular experience representing clients in enforcement actions and investigations by the DOJ, the Department of Health and Human Services Office of Inspector General, and State Attorneys General under the False Claims Act and related statutes. He previously served as an Assistant United States Attorney in the Eastern District of New York, where he served in a number of supervisory roles, including as Health Care Fraud Coordinator overseeing qui tam and whistleblower investigations involving allegations of False Claims Act violations, kickbacks, misbranding and off-label promotion.
Jonathan M. Phillips is a partner in the Washington, D.C. office where he focuses on compliance, enforcement, and litigation in the health care and government contracting fields, as well as other white collar enforcement matters and related litigation. A former Trial Attorney in DOJ’s Civil Fraud section, he has particular experience representing clients in enforcement actions by the DOJ, Department of Health and Human Services, and Department of Defense brought under the False Claims Act and related statutes.
Julie Schenker is a litigation associate in the Washington, D.C. office where she focuses on health care enforcement and compliance matters, other white collar defense and investigations, and related litigation. She has represented health care provider clients in investigations by the DOJ, and the Department of Health and Human Services Office of Inspector General, and she has experience advising clients regarding the False Claims Act, Anti-Kickback Statute, and Stark Law, as well as other health care related matters.
Jessica Wright is an associate in the San Francisco office. She practices in the firm’s Litigation Department and is a member of the White Collar Defense and Investigations and Securities Litigation Practice Groups where she represents companies dealing with FCA investigations, securities fraud allegations, and trade secret related matters.
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“As our planet increasingly faces the unpredictable consequences of climate change and resource depletion, urgent action is needed to adapt to a more sustainable model…To achieve more sustainable growth, everyone in society must play a role. The financial system is no exception. Re-orienting private capital to more sustainable investments requires a comprehensive rethinking of how our financial system works. This is necessary if the EU is to develop more sustainable economic growth, ensure the stability of the financial system, and foster more transparency and long-termism in the economy.” (Press release, European Commission: Sustainable Finance: Commission’s Action Plan for a greener and cleaner economy (8 March 2018)). |
The European Commission’s Sustainable Finance Action Plan[1] (the “Action Plan”) proposed a package of measures including, amongst other initiatives, a regulation imposing sustainability-related disclosures on financial market participants (“SFDR”[2]) and a regulation to establish an EU-wide common language (or taxonomy) to identify the extent to which economic activities can be considered sustainable (the “Taxonomy Regulation”[3]). This briefing note provides an overview of the Taxonomy Regulation and the SFDR and discusses their impact on private fund managers, including non-EU managers who market their funds into the EU and/or the United Kingdom under the applicable national private placement regimes.
Each of the Taxonomy Regulation and the SFDR apply to “financial market participants”, a term which is broadly defined and includes (amongst others): (i) alternative investment fund managers (“AIFMs”); and (ii) MiFID[4] investment firms that provide portfolio management services, and to “financial products” made available by them. “Financial products” include (amongst other things) alternative investment funds (“AIFs”) managed by AIFMs and portfolios managed by MiFID firms.
The term “financial market participant” clearly includes AIFMs which are authorised under the AIFMD[5]. There is a lack of clarity for non-EU AIFMs in the text of both pieces of legislation. However, according to guidance on the Taxonomy Regulation, the disclosure requirements on financial market participants, which build on the obligations in the SFDR should “apply to anyone offering financial products in the European Union, regardless of where the manufacturer of such products is based”. Consequently, it is clear that the disclosure obligations will apply to non-EU AIFMs that market their AIFs into the EEA (and the UK) pursuant to the national private placement regimes under Article 42 of the AIFMD.
SUSTAINABLE FINANCE DISCLOSURE REGULATION
The aim of the SFDR is to introduce harmonised requirements in relation to the disclosures to end investors on the integration of sustainability risks, on the consideration of adverse sustainability impacts, on sustainable investment objectives or on the promotion of environmental and/or social characteristics, in investment decision-making.
Many of the framework requirements under the SFDR will apply from 10 March 2021, although some of the requirements for funds with sustainable investment as an objective or which promote environmental and/or social characteristics will come into force on 1 January 2022 and 1 January 2023. In addition to the framework requirements, the SFDR is to be supplemented by more detailed requirements set out in the regulatory technical standards (“RTS”) which are yet to be finalised. The RTS should have applied from 10 March 2021. However, the European Commission has recently, in a letter addressed to certain trade associations, confirmed that there will be a delay in the application of the RTS requirements, although no date has yet been announced for their future application (there is some expectation that the application date will be closer to 1 January 2022).
The European Commission has, however, made clear that all of the requirements and general principles contained in the SFDR itself will remain applicable to firms from 10 March 2021. Fund managers are, therefore, expected to take a principles-based approach to compliance with the SFDR and evidence this on a best efforts basis. It is considered by the European Commission that firms are already likely complying with certain product-level disclosure requirements as a result of existing sectoral legislation. This seems, however, to be an overly optimistic view, as (for example) much of the sectoral legislation does not go into the level of prescription set out in the SFDR.
The disclosures required by the SFDR include both manager-level disclosures (i.e. at the level of the AIFM or MiFID investment firm) and also product-level disclosures (i.e. at the level of the AIF or portfolio). The disclosures must be made in pre-contractual information to investors, in periodic investor reporting and publicly on the manager’s website. Importantly, the SFDR does not apply only to managers of AIFs or portfolios with a sustainable investment objective or promoting environmental and/or social characteristics. While there are enhanced disclosures for such AIFs/portfolios, the SFDR requires disclosures to be made by all in-scope “financial market participants”.
Manager-level disclosures
At the level of the manager, a financial market participant must disclose the following:
- Information on its website about its policies on the integration of sustainability risks into its investment decision-making processes – in order to comply, managers will need to ensure that they integrate an assessment of not only all relevant financial risks, but also all relevant sustainability risks that may have a material negative impact on the financial return of investments made, into their due diligence processes[6]. This will require firms to review all relevant investment decision-making processes and policies in order to understand how sustainability risks are currently integrated (if at all).
- Information on its website regarding its consideration (or not) of principal adverse impacts of investment decisions on sustainability factors – firms will need to make a commercial decision on whether or not they will consider the principal adverse impacts of investment decisions on sustainability factors. To the extent that a firm decides to consider such impacts, it will be required to publish a statement on its website on its due diligence policies with respect to those impacts. Those firms who choose not to consider adverse impacts of investment decisions on sustainability factors will be required to publish and maintain on their websites clear reasons for why they do not do so, including (where relevant) information as to whether and when they intend to consider such adverse impacts.[7]
- Information in remuneration policy and on its website as to how its remuneration policy is consistent with the integration of sustainability risks – firms will be required to revisit their existing remuneration policies and include in those policies and on their websites information on how the remuneration policies promote sound and effective risk management with respect to sustainability risks and how the structure of remuneration does not encourage excessive risk-taking with respect to sustainability risks and is linked to risk-adjusted performance.
Product-level disclosures
At the level of each AIF/portfolio (regardless of whether the AIF/portfolio has a sustainable investment objective or promotes environmental and/or social characteristics), the following must be disclosed:
- Information in pre-contractual disclosures to investors about the manner in which sustainability risks are integrated into investment decision-making and the likely impacts of sustainability risks on the returns of the AIF/portfolio – a financial market participant may decide at product-level that sustainability risks are not relevant to the particular AIF/portfolio. In such case, clear reasons must be given as to why they are not relevant.
- Information in pre-contractual disclosures to investors as to whether and how the particular AIF/portfolio considers principal adverse impacts on sustainability factors (by 30 December 2022) – a financial market participant may decide not to consider principal adverse impacts of their investment decisions on sustainability factors at the level of the AIF/portfolio. In which case, clear reasons must be provided as to why they are not taken into account.
- Information in periodic reports on principal adverse impacts on sustainability factors (from 1 January 2022).
For an AIFM, the pre-contractual disclosures mean the disclosures which an AIFM is required to make to investors before they invest in an AIF pursuant to Article 23 of the AIFMD and the periodic reports mean the annual report which is required to be produced pursuant to Article 22 of the AIFMD. In the context of a MiFID investment firm, the pre-contractual disclosures mean the information that is required to be provided to a client before providing services pursuant to Article 24(4) of MiFID. The periodic reports for MiFID firms refer to the reports required to be provided to clients pursuant to Article 25(6) of MiFID.
Disclosures for sustainable products
The SFDR identifies that products with “various degrees of ambition” have been developed to date. Therefore, the SFDR draws a distinction between financial products which have a sustainable investment objective and those which promote environmental and/or social characteristics. Different disclosure requirements apply to each.
Products promoting environmental and/or social characteristics
In relation to financial products promoting environmental and/or social characteristics (provided that the investee companies in which investments are to be made follow good governance practices[8]) (“Article 8 AIFs/portfolios”), the following must be disclosed at product level in the investor pre-contractual disclosures:
- information on how those characteristics are met;
- where an index has been designated as a reference benchmark, information on whether and how the index is consistent with those characteristics; and
- information as to where than index can be found.
Information is also required in the periodic reports for the AIF/portfolio on the extent to which the environmental or social characteristics are met. As this information relates to complete financial years, this requirement will apply from 1 January 2022.
In addition, this information must be published and maintained on the manager’s website together with information on the methodologies used to assess, measure and monitor the environmental and/or social characteristics, including data sources, screening criteria for the underlying assets and the relevant sustainability factors used to measure the environmental or social characteristics.
Products with a sustainable investment objective
In the case of an AIF/portfolio with a sustainable investment objective (“Article 9 AIFs/portfolios”) where an index has been designated as a reference benchmark, product-level pre-contractual disclosures must include:
- information on how the designated index is aligned with the investment objective; and
- an explanation as to why and how the designated index aligned with the objective differs from a broad market index.
Where no index has been designated, pre-contractual disclosures will include an explanation of how the sustainable investment objective is to be attained. Where the AIF/portfolio has a reduction in carbon emissions as its objective, the information to be disclosed must include the objective of low carbon emission exposure in view of achieving the long-term global warming objectives of the Paris Agreement.
Information is also required to be disclosed in the periodic reports for the AIF/portfolio on: (i) the overall sustainability-related impact of the AIF/portfolio by means of relevant sustainability indicators; and (ii) where an index is designated as a reference benchmark, a comparison between the overall sustainability-related impact with the impacts of the designated index and of a broad market index through sustainability indicators.
In addition, this information must be published and maintained on the manager’s website together with information on the methodologies used to assess, measure and monitor the impact of the sustainable investments selected for the AIF/portfolio, including data sources, screening criteria for the underlying assets and the relevant sustainability factors used to measure the environmental or social characteristics.
TAXONOMY REGULATION
The Taxonomy Regulation establishes an EU-wide classification system to provide a common language (i.e. taxonomy) to define environmentally sustainable economic activities. It also sets out six environmental objectives, including climate change mitigation, climate change adaption and transition to a circular economy and provides that for an economic activity to be environmentally sustainable it must make a “substantial contribution” to at least one of the environmental objectives and not cause any significant harm to any of the others.
The Taxonomy Regulation also amends the SFDR in certain respects as regards disclosures required for financial products that have a sustainable investment objective or promote environmental characteristics and requires negative disclosure for those AIFs/portfolios which do not have such objectives/characteristics.
An economic activity is considered to be environmentally sustainable for the purposes of the Taxonomy Regulation if:
1) it makes a “substantial contribution” to one or more of the six environmental objectives;
2) it does “no significant harm” to any of the six environmental objectives;
3) it is carried out in accordance with certain minimum safeguards[9]; and
4) it complies with technical screening criteria[10].
The six environmental objectives are:
- climate change mitigation;
- climate change adaptation;
- sustainable use and protection of water and marine resources;
- transition to a circular economy;
- pollution prevention and control; and
- protection and restoration of biodiversity and ecosystems.
The Annex to this alert provides an overview of what “substantial contribution” and “significant harm” means for each of the six environmental objectives.
Amendments to the SFDR
The Taxonomy Regulation makes certain amendments to the SFDR in relation to the pre-contractual and periodic reporting requirements for Article 8 AIFs/portfolios and Article 9 AIFs/portfolios where they invest in an economic activity that contributes to one or more of the environmental objectives set out in the Taxonomy Regulation. Additional pre-contractual and periodic disclosures are required for such products, including: information on the environmental objective(s) which is contributed to and a description of how and to what extent the investments are in economic activities that qualify as environmentally sustainable under the Taxonomy Regulation.
The Taxonomy Regulation also makes changes for other financial products too which are neither an Article 8 AIF/portfolio or Article 9 AIF/portfolio by requiring a negative disclosure using the following words: “The investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities.”
The amendments made to the SFDR by the Taxonomy Regulation will apply from 1 January 2022 in some cases and 1 January 2023 in others, depending on which environmental objective is contributed to by the AIF/portfolio.
BREXIT: IMPACT IN THE UK
The UK left the EU in January 2020 and the agreed transition period will expire on 31 December 2020. As the disclosure obligations under the SFDR and the Taxonomy Regulation will not apply until after the end of the transition period, they do not form part of the so-called “retained EU law” in the UK from 1 January 2021. In relation to the Taxonomy Regulation, for example, the UK government has stated that it will retain the taxonomy framework, including the high level environmental objectives, however the Regulation’s disclosure requirements will not form part of this (given that they are set to apply as from a date post-transition period). As the delegated legislation containing the technical standards has not, so far, been published by the European Commission, the government has not yet been in a position to comment as to the extent of the UK’s alignment with the EU on this after the transition period[11].
Also, with regard to the SFDR, the Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2020 provide that the SFDR will continue to apply in part in the UK when the Brexit transition period ends, with key omissions relating, for example, to the upcoming technical standards and financial product-specific disclosure requirements.
ANNEX
| Environmental objective | “Substantial contribution” | “Significant harm”[12] |
|
Climate change mitigation |
The process of holding the increase in the global average temperature to below 2°C and pursuing efforts to limit it to 1.5°C above pre-industrial levels, as set out in the Paris Agreement. The economic activity will substantially contribute to the stabilisation of greenhouse gas concentrations in the atmosphere, including through process or product innovation by, for example:
|
Significant greenhouse gas emissions. |
|
Climate change adaptation |
The process of adjustment to actual and expected climate change and its impacts. Broadly, this includes substantially reducing the risk of the adverse impact, or substantially reducing the adverse impact, of the current and expected future climate on (i) other people, nature or assets; or (ii) the economic activity itself, in each case without increasing the risk of an adverse impact on other people, nature and assets. |
An increased adverse impact of the current and expected climate on people, nature and assets. |
|
Sustainable use and protection of water and marine resources |
The activity substantially contributes to achieving the good status of water bodies or marine resources, or to preventing their deterioration, through certain means, including, for example, through improving water management and efficiency. |
Detriment to the good status, or where relevant the good ecological potential, of water bodies, including surface waters and groundwaters, or to the good environmental status of marine waters. |
|
Transition to a circular economy |
Maintaining the value of products, materials and other resources in the economy for as long as possible, enhancing their efficient use in production and consumption. The activity substantially contributes to the circular economy by (among other things):
|
|
|
Pollution prevention and control |
The economic activity will substantially contribute to the protection and restoration of biodiversity and ecosystems by, for example, sustainable agricultural practices, sustainable forest management and nature and biodiversity conservation. |
Detriment to a significant extent to the good condition and resilience of ecosystems or where that activity is detrimental to the conservation status of habitats and species, including those of community interest. |
|
Protection and restoration of biodiversity and ecosystems |
The economic activity will substantially contribute to the protection and restoration of biodiversity and ecosystems by, for example, sustainable agricultural practices, sustainable forest management and nature and biodiversity conservation. |
Detriment to a significant extent to the good condition and resilience of ecosystems or where that activity is detrimental to the conservation status of habitats and species, including those of community interest. |
____________________________
[1] Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions – Action Plan: Financing Sustainable Growth, 8 March 2018
[2] Regulation (EU) 2020/852 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector
[3] Regulation (EU) 2019/2088 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088
[4] Markets in Financial Instruments Directive (Directive 2014/65/EU)
[5] Alternative Investment Fund Managers Directive (Directive 2011/61/EU)
[7] Note that large financial market participants (broadly, those with an average number of 500 employees during the financial year) will not have the option. From 30 June 2021 they must consider adverse impacts of their investment decisions on sustainability factors.
[8] “Good governance practices” is not defined in the SFDR. It is clear from the text that the European legislators intended it to be interpreted widely. Examples of good governance practices include: sound management structures, employee relations, remuneration of staff and tax compliance.
[9] OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, including the principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work and the International Bill of Human Rights.
[10] These technical screening criteria will be established by the European Commission in accordance with the provisions of the Taxonomy Regulation.
[11] Letter from John Glen, Economic Secretary to the Treasury, to Sir William Cash, Chair of the European Scrutiny Committee: 9355/18: Proposal for a Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment (28 May 2020)
[12] Further details regarding “no significant harm” to be set out in the technical screening criteria.
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 in the firm’s Financial Institutions practice group, or the following authors in London:
Michelle M. Kirschner (+44 (0)20 7071 4212, mkirschner@gibsondunn.com)
Chris Hickey (+44 (0)20 7071 4265, chickey@gibsondunn.com)
Martin Coombes (+44 (0)20 7071 4258, mcoombes@gibsondunn.com)
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
London partner Ali Nikpay is the author of “We need to make our regulators more politically accountable” [PDF] published by The Telegraph on November 1, 2020.
London partners Nicholas Tomlinson, Michelle Kirschner, Benjamin Fryer, Gregory Campbell, and Deirdre Taylor, of counsel Josh Tod, and associates Tamas Lorinczy, Joanne Hughes, Chris Hickey, Fareed Muhammed, Charlie Osborne and Sarah Parker are the authors of “Private equity in the UK (England and Wales): market and regulatory overview” [PDF] published by Thomson Reuters Practical Law in its Private Equity Global Guide 2020 in October 2020.
New York partner Akiva Shapiro is the author of “A Tokyo Sequel to ‘Chariots of Fire’” [PDF] published by The Wall Street Journal on October 29, 2020.
On October 23, 2020, the UK Serious Fraud Office published a new chapter from its internal Operational Handbook, which it describes as “comprehensive guidance on how we approach Deferred Prosecution Agreements (DPAs), and how we engage with companies where a DPA is a prospective outcome.”
At the time of its publication, the Director of the SFO, Lisa Osofsky, remarked, “Publishing this guidance will provide further transparency on what we expect from companies looking to co-operate with us.” Director Osofsky’s full remarks are here: https://www.sfo.gov.uk/2020/10/23/serious-fraud-office-releases-guidance-on-deferred-prosecution-agreements/.
The 2020 DPA Guidance (“the Guidance”) is here: https://www.sfo.gov.uk/publications/guidance-policy-and-protocols/sfo-operational-handbook/deferred-prosecution-agreements/.
In Director Osofsky’s remarks, it is worth observing that she states “DPAs require the company to admit to the misconduct, pay a financial penalty and agree to adhere to conditions set out by the prosecutor to ensure future co-operation and compliance.”
In fact, the underlying statute that created DPAs is clear that a party need not admit guilt[1] and the new Guidance, when addressing the content of the Statement of Facts, also makes plain it is not necessary.[2] There has therefore been no change in the law or the SFO’s requirements with respect to completing a DPA.
The Guidance contains very little new content compared with what is already set out in the DPA Code of Practice (published in January 2014),[3] which is referenced almost 100 times in the Guidance. It should not be forgotten that the DPA Code of Practice remains in force and is the lead document for consideration, with its publication and consideration required by law and it having been laid before Parliament.[4]
So what is new?
- The Guidance contains a section on “Parallel Investigations” with other agencies that counsels the prosecutor to ensure that they coordinate early with other agencies and de-conflict. The purpose of the Guidance is to facilitate smooth and expeditious investigations that do not prejudice one another. Whilst this detail is not in the DPA Code of Practice, it is covered extensively in other prosecution guidance.[5]
- There is a section in the Guidance on the naming of individuals in the Statement of Facts that accompanies the DPA and contains a description of the conduct. The Guidance counsels the prosecutor to consider redaction or anonymization. In practice, this has been the case for the majority of Statements of Fact agreed to date; alternatively, publication has been delayed until the conclusion of the trial of individuals to avoid prejudice to their trials.
- Under “Corporate compliance programmes,” the prosecutor is counselled when requiring remediation terms to consider whether it is necessary and proportionate to require the company to adopt the use of data analytics to test compliance controls and behaviour.
- The section on “Monitors” is interesting for what it does not say, rather than what it does say. It does not repeat the guidance provided in the DPA Code of Practice that “An important consideration for entering into a DPA is whether [the Company] already has a genuinely proactive and effective corporate compliance programme. The use of monitors should therefore be approached with care.” The language in the DPA Code of Practice signals a presumption that those offered a DPA are unlikely to be required to have a monitor in place. Rarely will a term requiring a monitor be consistent with the DPA Code of Practice and therefore meet the statutory requirement for terms to be “fair, reasonable and proportionate.”[6]
- On “Sale or merger” the Guidance suggests that DPAs should include a term that requires the consent of the SFO to such a sale or merger. This is new but so far has not featured as a term in any of the DPAs agreed to date.[7] Prior DPAs make it a requirement to make it a term of a subsequent sale or merger that the acquirer be bound by the terms of the DPA.
- The section on “Compensation” provides more detail than the DPA Code of Practice. However, it does no more than rehearse the well-established criminal law principles that determine when compensation should be sought and awarded, and which have been applied by the Court in prior DPAs.
- Under a heading enticingly titled “Calculating the profits to be disgorged,” the Guidance disappoints in saying only that “Calculating the profits achieved on account of the relevant conduct may not be a straightforward exercise; and it may be helpful to obtain accountancy expertise.”
- The last four DPA’s have imposed an obligation to self-report serious new misconduct that becomes known during the term of the DPA. In a section of the Guidance headed “Compliance with terms,” it states that “If any suspected wrongdoing relating to the Company is self-reported, or is otherwise discovered, during the term of the DPA, the prosecutor should consider what if any impact such conduct has on the Company’s obligations under the DPA, the SFO’s investigation of the Company [sic].” If a company self-reports pursuant to a term in a DPA, it will not be in breach. But if it were discovered that the company failed to self-report, that may, subject to the rules of evidence, be treated by the SFO as a breach. Further, the self-reporting or discovery of new serious misconduct has the potential for the SFO to seek a variation of the terms of the DPA in order to amend or supplement its terms.[8]
The commission of a further serious offence, let alone the suspicion of one during the term of a DPA, would not amount to a breach of a DPA without an express term to that affect. To date, no DPA has contained such a term. In most instances, it would be impractical given the length of time it typically takes to investigate and prosecute new cases. By the time the SFO established that an offence had been committed, the DPA will likely have expired. Any breach proceedings in respect of the DPA must commence during the term of the DPA.[9] A term that would make it possible to breach a DPA in the event of an unproven suspicion would arguably not be fair, reasonable and proportionate.
Self-Reporting
Self-reporting features in a non-exhaustive list of public interest factors in the DPA Code of Practice that point in favour of a DPA instead of prosecution. Each of the specified public interest factors along with others that might be case-specific are to be balanced by the prosecutor in exercising their discretion whether to conclude a case by way of a DPA.[10] It has always been the case that self-reporting is not essential, albeit a factor that will carry considerable weight. This was affirmed in the January 2020 Airbus DPA where the court said “…there is no necessary bright line between self-reporting and co-operation.” If it were unclear, the Guidance now makes this plain at footnote 15, which provides, “[t]he failure of a Company to self-report is not a bar to DPA negotiations per se but must be considered as a factor when assessing whether a DPA is in the public interest.” [11]
The Guidance also makes clear that a self-report does not have to be immediate by stating, “Voluntary self-reporting suspected wrongdoing within a reasonable time of those suspicions coming to light is an important aspect of co-operation.” This mirrors the language in the DPA Code of Practice, so it also does not mark a change in policy.[12]
Conclusion
The Guidance does not materially assist companies to understand what the SFO expects in terms of co-operation beyond what was previously published. Those aspects of the Guidance that are not already in the DPA Code of Practice are found in alternative guidance or in prior DPAs, are matters of procedure addressed specifically to prosecutors or are light on detail.
Consistent with Director Osofsky’s commendation of the SFO’s most recent DPA for having “real teeth,”[13] the Guidance suggests that the SFO is considering seeking increasingly onerous terms in DPAs. The challenge for the SFO will be that, should it continue down such a track, the incentives that a DPA is designed to offer will be diminished, ultimately disincentivizing the co-operation they are designed to encourage.
______________________
[1] Crime and Courts Act 2013, Schedule 17, paragraph 5(1). See also DPA Code of practice, paragraph 6.3 which confirms guilt need not be admitted but the contents and meaning of key documents referred to in the Statement of Facts will require admission.
[2] “There is no requirement for formal admissions of guilt in respect of the offences charged on the indictment.” Guidance, section “Statement of Facts”
[3] https://www.cps.gov.uk/sites/default/files/documents/publications/dpa_cop.pdf.
[4] Crime and Courts Act 2013, Schedule 17, paragraph 6.
[5] Such as the Director of Public Prosecutions’ “Guidance on the handling of cases where the jurisdiction to prosecute is shared with prosecuting authorities overseas,” (https://www.cps.gov.uk/publication/directors-guidance-handling-cases-where-jurisdiction-prosecute-shared-prosecuting ), “Annex A – Eurojust Guidelines For Deciding ‘Which Jurisdiction Should Prosecute?’”
(https://www.eurojust.europa.eu/sites/default/files/Publications/Reports/2016_Jurisdiction-Guidelines_EN.pdf)
and the “Agreement for Handling Criminal Cases with Concurrent Jurisdiction between the United Kingdom and the United States of America.”
(https://www.cps.gov.uk/sites/default/files/documents/legal_guidance/Agreement-handling-criminal-cases-concurrent-jurisdiction-UK-USA.pdf).
[6] Crime and Courts Act 2013, Schedule 17, paragraphs 7(1)(b) and 8(1)(b).
[7] At the time of writing there remains an unpublished DPA in respect of Airline Services Limited.
[8] See also Crime and Courts Act 2013, Schedule 17, paragraph 10.
[9] Crime and Courts Act 2013, Schedule 17, paragraph 9(1).
[10] DPA Code of Practice, paragraphs 2.6 and 2.8.
[11] See also SFO v Airbus SE, January 31, 2020 at paragraph 68.
[12] DPA Code of Practice, paragraph 2.8.2 i.
[13] Future Challenges in Economic Crime: A View from the SFO, Royal United Services Institute, October 8, 2020, (https://www.sfo.gov.uk/2020/10/09/future-challenges-in-economic-crime-a-view-from-the-sfo/).
This client alert was prepared by Sacha Harber-Kelly and Steve Melrose.
Mr. Harber-Kelly is a former prosecutor at the SFO and was appointed to lead the SFO’s engagement in the cross-governmental working group which devised the DPA legislative framework, and subsequently appointed to draft the DPA Code of Practice, which sets out how prosecutors will operate the DPA regime.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you would like to discuss this alert in detail, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s UK disputes practice.
Philip Rocher (+44 (0)20 7071 4202, procher@gibsondunn.com)
Patrick Doris (+44 (0)20 7071 4276, pdoris@gibsondunn.com)
Sacha Harber-Kelly (+44 (0)20 7071 4205, sharber-kelly@gibsondunn.com)
Charles Falconer (+44 (0)20 7071 4270, cfalconer@gibsondunn.com)
Allan Neil (+44 (0)20 7071 4296, aneil@gibsondunn.com)
Steve Melrose (+44 (0)20 7071 4219, smelrose@gibsondunn.com)
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Since the last presidential election, there have been several regulatory developments that go to the heart of the U.S. dual banking system – the quintessentially American system under which banking entities may choose either a state or federal charter. These developments have occurred at the Office of the Comptroller of the Currency (OCC), the regulator of national banks. Perceived as increasing both the number of federally regulated entities and the scope of preemption of state consumer law, these developments have been challenged by state regulators in New York, California and Illinois, and others, in lawsuits that are now pending. Potential issues for the upcoming election, therefore, may be the extent of state-federal regulatory balance and the degree of judicial control over federal regulatory actions. On the latter point, litigation over these developments will play out with a changed Supreme Court and one at which certain Justices have begun to question the traditional deference paid to regulators’ interpretations of the statutes they administer. This Alert discusses the relevant issues at stake.
I. Fintech/Payments Charters
At the end of the Obama Administration, then-Comptroller Thomas Curry stated that the OCC had the authority under the National Bank Act to grant special purpose national bank charters to fintech companies “engaged in the business of banking,” including to companies that did not take deposits. After his departure, the OCC slowly fleshed out a framework for evaluating such charters. Late this August, Acting Comptroller Brian Brooks seemed to accelerate this process by stating that the OCC was prepared to begin accepting charter applications for national banks engaged only in payments activities.The OCC’s actions were challenged by state financial regulators. Most significantly, the New York Department of Financial Services (NYDFS) sued the OCC regarding the special purpose national bank charter. Last fall, NYDFS won an initial victory in the United States District Court for the Southern District of New York, where Judge Victor Marrero held that the suit was ripe for adjudication and that the OCC had no authority to issue charters for non-deposit taking banks other than those that Congress had specifically authorized, such as national trust banks.[1]
The OCC appealed this case to the U.S. Court of Appeals for the Second Circuit (Second Circuit), where briefs have been filed, including on the issue of whether, absent congressional authorization of exceptions, a federal charter to engage in the “business of banking” in the National Bank Act always requires deposit taking.
II. The OCC’s “Valid When Made” and “True Lender” Regulations
The OCC’s second action was to promulgate, in June 2020, a final regulation that would overturn the decision of the Second Circuit in the Madden v. Midland Funding, LLC case.[2] In Madden, the Second Circuit held that a borrower could assert a usury defense against a nonbank company that had purchased a loan originally made by a national bank, even though the loan when originally made was not usurious because of the National Bank Act’s interest-rate exportation provision, 12 U.S.C. § 85 (Section 85), which allows a national bank to charge nationally the interest rate permitted under the laws of the state in which the bank is located.[3]
The OCC’s regulation (Valid When Made Regulation) overrides the Madden holding and gives nonbank purchasers of loans from national banks and federal thrifts, including fintech lending companies that have national bank lending partners, the same usury protection as is available to national banks under Section 85.[4]
In late July, the States of California, Illinois and New York sued the OCC in the United States District Court for the Northern District of California, seeking declaratory and injunctive relief. The States argued that the Valid When Made Regulation was invalid as arbitrary and capricious and contrary to law, and that only Congress had the authority to overrule the Madden decision.[5]
Finally, just yesterday, the OCC finalized a second regulation relevant to this area. This regulation (True Lender Regulation) clarifies when a national bank or federal thrift is the “lender” for purposes of Section 85 and other statutes. It states that a national bank or federal thrift is the true lender if, as of the date of origination, it (1) is named as the lender in the loan agreement or (2) funds the loan.[6] The rule also specifies that if, as of the date of origination, one bank is named as the lender in the loan agreement for a loan and another bank funds that loan, the bank that is named as the lender in the loan agreement makes the loan.[7] State regulators may be expected to claim that, taken together, the True Lender Regulation and Valid When Made Regulation will facilitate so-called “rent a bank” schemes by nonbank lenders to avoid state usury and other consumer protection requirements.
III. Dual Banking System Effects
The special purpose national bank charter and Valid When Made and True Lender Regulations clearly implicate the dual banking system and particularly as applied to fintech companies. For example, to the extent that payments companies currently engage in money transmission, they must become licensed in every state having jurisdiction. A single federal non-depository bank charter for such entities is appealing from an efficiency standpoint and would likely attract many applicants. Similarly, some fintech lending companies partner with bank lenders, with the fintech acquiring the loan from the bank after it is made and then seeking to benefit from federal preemption. Certain states have alleged that this practice creates loopholes in their licensing and consumer protection schemes. It is therefore not surprising that states and regulators in jurisdictions with active consumer regulation have chosen to go to court to challenge the OCC’s actions.
IV. Preemption and Judicial Deference: The Watters and Cuomo Cases and Beyond
It has been some time since significant decisions were handed down in cases involving the OCC and the National Bank Act – one has to look at Waters v. Wachovia Bank, N.A. in 2007 and Cuomo v. The Clearing House Association L.L.C. in 2009, both in the United States Supreme Court. Both cases were closely decided; Waters was 5-3 and Cuomo was 5-4. Waters held that national bank operating subsidiaries – subsidiaries that engaged in activities permissible for national banks – were not subject to state registration and examination requirements, but only the “visitorial powers” of the OCC.[8] Cuomo held that it was not a reasonable interpretation of the “visitorial powers” provision of the National Bank Act to preempt state enforcement of – as opposed to supervision with respect to – state consumer law against national banks.[9] Waters thus upheld the OCC’s position with respect to one aspect of the preemptive effect of the National Bank Act’s visitorial powers clause, while Cuomo rejected one. Interestingly, although the cases were closely decided, the split of the Justices was unusual: Justice Scalia and Chief Justice Roberts joined Justice Stevens’ dissent in Waters that favored the state regulators, and Justice Scalia wrote the opinion in Cuomo, which was joined by the Court’s more liberal Justices, holding that the OCC could not preempt state enforcement.[10]
Since the two cases were decided, the composition of the Supreme Court has changed substantially, and in particular, Justices Gorsuch, Kavanaugh, and Barrett have replaced Justices Scalia, Kennedy, and Ginsburg. The changed composition has resulted in speculation that the classic Chevron doctrine of deference to administrative agency interpretations of ambiguous statutes may, in an appropriate case, be refined. Justice Ginsburg wrote a classic example of Chevron deference in her opinion upholding the OCC in the famous VALIC bank annuities case. Justice Gorsuch, like Justice Thomas, has publicly criticized Chevron.
It is of course speculative whether any of the current actions against the OCC will reach the Supreme Court or how the Court might rule in them. It is certainly possible, however, that despite some commentators’ wishes, the ultimate resolution to the issues raised by the fintech/payments charter and Valid When Made/True Lender regulations will depend not on policy judgments, but rather such traditional approaches to statutory construction as textual analysis of the National Bank Act and applying canons of construction, and without exhibiting Merovingian supineness to the OCC’s interpretation.
V. The National Trust Bank Charter
With regulation unsettled, one of the special purpose national bank entities that bears a close look by companies seeking to innovate banking is the national trust bank charter. As even the District Court in Lacewell v. OCC conceded, Congress has specifically authorized the OCC to grant federal charters to non-depository institutions engaged in fiduciary activities.[11] Under the OCC’s regulations, these activities include acting as trustee, executor, administrator, registrar of stocks and bonds, transfer agent, guardian, assignee, receiver, or custodian under a uniform gifts to minors act; investment adviser, if the bank receives a fee for its investment advice; any capacity in which the bank possesses investment discretion on behalf of another; or any other similar capacity that the OCC authorizes.[12]
More importantly, although a national trust bank does not accept deposits, it may engage in other activities that are authorized as part of the “business of banking” under 12 U.S.C. 24(SEVENTH) and are related to its business plan.[13] Such activities would include foreign currency activities (including virtual currency activities) and payments. A national trust bank is required to have bona fide fiduciary activities as part of its business plan, but it is not prevented from exercising other related incidental banking powers.[14]
There are other advantages to the national trust bank charter. A national trust bank benefits in the same manner as a national bank from federal preemption. A national trust bank is permitted to become a member of the Federal Reserve System. Controlling shareholders of national trust banks are not regulated as bank holding companies.
Conclusion
The Comptroller of the Currency may be removed by a President only “upon reasons to be communicated by [the President] to the Senate.”[15] A change in Administrations could well mean a change in Comptrollers. Whether the “special purpose” non-depository charter continues to be embraced by the OCC under a Democratic President is an open question (but only an open one, as it was President Obama’s Comptroller, Thomas Curry, who first proposed the national fintech charter). Even so, it is reasonable to expect the state litigation over special purpose charters to continue for some time. National trust bank charters do have explicit authorization by Congress; such entities, assuming that the bank has a bona fide fiduciary business, can engage in incidental banking activities like currency activities and payments that are related to the business plan and therefore may offer an alternative route forward to some firms until the larger questions affecting the U.S. dual banking system are resolved.
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[1] Lacewell v. OCC, Case 1:18-cv-08377-VM (S.D.N.Y. Oct. 21, 2019).
[2] Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).
[4] OCC, Final Rule: Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, 85 Fed. Reg. 33530 (June 2, 2020).
[5] People of the State of California, People of the State of Illinois, People of the State of New York v. The Office of the Comptroller of the Currency, Case No. 20-cv-5200 (N.D. Cal. 2020).
[6] OCC, Final Rule: National Banks and Federal Savings Associations as Lenders, available at https://www.occ.gov/news-issuances/federal-register/2020/nr-occ-2020-139a.pdf.
[10] See id.; Waters, 550 U.S. 1, 22 (2007) (Stevens, J.).
[13] See, e.g., OCC Conditional Approval 877 (December 13, 1999) (“The OCC has not limited the operations of trust banks to the exercise of fiduciary powers, but has permitted a range of incidental and nonfiduciary activities. The OCC, when it chartered Trust Co., did not restrict or address its insurance agency activities. Hence, Trust Co.’s charter is sufficiently broad to encompass its proposed insurance and annuity sale[s].”).
The following Gibson Dunn lawyers assisted in preparing this client update: Arthur S. Long and Samantha J. Ostrom.
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Houston partner Hillary Holmes and Dallas associate Louis Matthews are the authors of “How to Raise Energy Capital in Tough Times” [PDF] published in the October 2020 issue of Oil and Gas Investor.
With more than 130 competition authorities around the world, companies face numerous challenges in managing antitrust investigations outside the United States. This program helps keep in-house counsel a step ahead of the competition authorities in Latin America, Europe, Asia, and Oceania by highlighting their enforcement priorities in the coming year. The panel discusses the top ten issues to consider when facing a domestic investigation in a non-US jurisdiction, including key decisions companies should address in the first hours and days after an investigation is launched, and strategies to effectively advocate for an authority to close its investigation.
View Slides (PDF)
PANELISTS:
Scott Hammond is a partner in the Washington, D.C. office and co-chair of the firm’s Antitrust and Competition Practice Group. He focuses on cartel investigations conducted by the US DOJ and by competition authorities abroad. From 2005 to 2013, Scott served as the US DOJ’s Deputy Assistant Attorney General for Criminal Antitrust Enforcement and oversaw all of the US DOJ’s domestic and international criminal antitrust investigations and litigation and was the principal point of contact for cartel matters with senior competition officials abroad. Scott serves as global coordinating counsel in cross border government investigations running in parallel with US DOJ investigations and as bridge counsel for multinational companies before competition authorities in Latin America, Asia and Europe.
Kristen Limarzi is a partner in the Washington, D.C. office, where her practice focuses on investigations, litigation, and counseling on antitrust merger and conduct matters, as well as appellate and civil litigation. Kristen previously served as the Chief of the Appellate Section of the U.S. Department of Justice’s Antitrust Division, where she led a team of more than a dozen professionals litigating appeals in the Division’s civil and criminal enforcement actions and participating as amicus curiae in private antitrust actions.
Jeremy Robison is a partner in the Washington, D.C. office. His practice focuses on defending companies and individuals involved in antitrust investigations by U.S. and international enforcement authorities, conducting internal investigations, and advising companies on antitrust compliance programs and policies. Jeremy has represented clients from a range of industries in antitrust investigations, including in the financial services, pharmaceutical, defense, healthcare, and technology sectors.
Sarah Akhtar is an associate in the Washington D.C. Office. She is a member of the firm’s Litigation, Appellate and Constitutional Law, and Antitrust practice groups. Prior to joining the firm, Ms. Akhtar clerked for Chief Judge R. Guy Cole, Jr. of the U.S. Court of Appeals for the Sixth Circuit. She earned her undergraduate degree with honors from Harvard University, where she was Editor-in-Chief of the Harvard International Review.
On Monday, October 5, 2020 the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) published long-awaited controls on six categories of “emerging technologies.”[1] These new controls come nearly two years after BIS first solicited public comments on the types of items that should be covered and the types of controls that should be implemented to fulfill the requirements of the Export Control Reform Act (“ECRA”). This announcement suggests that this long delay may have been due in part to BIS’s successful efforts to ensure that these controls were adopted by multilateral export control organizations of which the U.S. and many of its allies are members.
These new multilateral controls will have significant implications for companies operating in certain high technology sectors, such as biotechnology, artificial intelligence, and advanced materials. Companies will now almost always require authorization from BIS in order to provide certain items to most jurisdictions outside the United States or even to share important technical knowledge about those items with foreign national employees (under BIS’s “deemed exports” controls). Companies operating in these sectors—particularly those that participate directly or indirectly in semiconductor manufacturing or production—should also be prepared for additional controls to be implemented in the near term. Finally, foreign investors in U.S. businesses will want to be mindful of the ways in which these new controls will affect the ability of the Committee on Foreign Investment in the United States (“CFIUS”) to review, block, or impose mitigation measures upon their investments in U.S. businesses that deal in these newly controlled technologies.
Key Takeaways
- BIS recently began announcing controls on emerging and foundational technologies, and companies operating in certain high technology sectors—particularly those that participate directly or indirectly in semiconductor manufacturing or production—should be prepared for additional controls in the near term.
- Thus far BIS has prioritized multilateral implementation over speed of imposition. Congressional pressure may speed imposition somewhat, but we still expect BIS to work with international partners given the benefits of multilateral adoption and ECRA requirements.
- BIS determinations regarding what constitutes emerging and foundational technologies impact both the scope of CFIUS mandatory jurisdiction and criteria for its application. Any technologies BIS controls as emerging or foundational will be considered “critical technologies.” Certain non-passive foreign investment in U.S. companies dealing with critical technologies must receive CFIUS review and approval.
Background
On August 13, 2018, President Trump signed the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (“FY 2019 NDAA”), an omnibus bill to authorize defense spending that like many other annual NDAA bills also includes amendments unrelated to defense spending. In 2018 those amendments included significant updates to both CFIUS and the U.S. export controls regime.[2] In addition to placing the U.S. export controls regime on firmer statutory footing for the first time in decades, ECRA significantly expanded the President’s authority to regulate and enforce export controls by requiring the Secretary of Commerce to establish controls on the export, re-export, or in-country transfer of “emerging or foundational technologies.”[3]
ECRA was passed alongside the Foreign Investment Risk Review Modernization Act (“FIRRMA”), which reformed the CFIUS review process for inbound foreign investment in an effort to enhance the tools used to address the threats posed by foreign investment in U.S. critical technology companies, among other risks.[4] As FIRRMA was negotiated, a proposed mechanism to regulate outbound investments—such as joint ventures or licensing agreements—through the CFIUS process was ultimately replaced by ECRA, which instead granted BIS the authority to identify and regulate the transfer of these emerging and foundational technologies via U.S. export controls.[5]
ECRA did not offer a precise definition of the “emerging technologies” to be controlled by BIS. Instead, it included criteria for BIS to consider when determining what technologies will fall within this area of BIS control. It was initially thought that these controls might focus strictly on “technology,” which under the EAR does not include end-items, commodities, or software. Instead, “technology” refers to the information, in tangible or intangible form, necessary for the development, production, or use of such goods or software.[6] Technology may include written or oral communications, blueprints, schematics, photographs, formulae, models, or information gained through mere visual inspection.[7] However, as discussed further below, BIS opted for a broader reading of this term to reach goods, software, and technical know-how.
On November 19, 2018, BIS published a request for the public’s assistance in identifying “emerging technologies” essential for U.S. national security that should be subject to new export restrictions.[8] For a longer discussion of the advance notice of proposed rulemaking (“ANPRM”), see our previous alert, New Export Controls on Emerging Technologies – 30-Day Public Comment Period Begins. The ANPRM broadly described emerging technologies as “those technologies essential to the national security of the United States that are not already subject to export controls under the Export Administration Regulations (“EAR”) or the International Traffic in Arms Regulations (“ITAR”).”[9] The ANPRM suggested that technologies would be considered “essential to the national security of the United States” if they “have potential conventional weapons, intelligence collection, weapons of mass destruction, or terrorist applications or could provide the United States with a qualitative military or intelligence advantage.”[10]
In narrowing down which of these technologies would be subject to new export controls, BIS also considered the development of emerging technologies abroad, the effect of unilateral export restrictions on U.S. technological development, and the ability of export controls to limit the spread of these emerging technologies in foreign countries. In making this assessment and further narrowing the category of affected technologies, BIS was also to consider information from a variety of interagency sources, as well as public information drawn from comments submitted in response to the ANPRM.
While the ANPRM did not provide concrete examples of “emerging technologies,” BIS did provide a list of technologies currently subject to limited controls that could be considered “emerging” and subject to new, broader controls. These include the following: (1) biotechnology; (2) artificial intelligence and machine learning; (3) position, navigation, and timing (“PNT”) technology; (4) microprocessor technology; (5) advanced computing technology; (6) data analytics technology; (7) quantum information and sensing technology; (8) logistics technology; (9) additive manufacturing; (10) robotics; (11) brain-computer interfaces; (12) hypersonics; (13) advanced materials; and (14) advanced surveillance technologies.
As the regulated community waited to see what technologies would be considered “emerging” and what types of controls would be imposed, there was also some uncertainty regarding the way in which these new controls would be implemented. ECRA required BIS to coordinate with U.S. allies and international export control regimes to encourage widespread adoption of similar controls on the items it determined were “emerging technologies.” Ensuring such international coordination would protect against the development of a fragmented regulatory environment that could promote the offshoring of “emerging technology” development and production from the U.S. to other jurisdictions by companies seeking to avoid U.S. export controls. Unilateral U.S. controls might also encourage and enable non-U.S. companies to rush in and backfill the effective void created once U.S. companies could no longer freely export their technology to jurisdictions where they might otherwise compete.[11] In several similar areas, the United States had recently adopted a “control-now-cooperate-later” approach, taking unilateral action to amend its trade controls, foreign direct investment, and procurement regulations in ways that might encourage other countries to take similar steps but not waiting for other countries to agree the controls are necessary. However, in this case BIS officials gave early indications that they planned to present the new controls for adoption by multilateral export control bodies before implementing the controls in the United States.
Emerging Technologies
Consistent with the approach to multilateralize such controls as a first step, and with one notable exception discussed below, the initial round of “emerging technology”—adopted earlier this year—were implemented following their adoption by the Australia Group, a multilateral forum that maintains export controls on a list of chemicals, biological agents, and related equipment and technology. On June 17, 2020, BIS designated the first emerging technologies, adding certain chemical weapons precursors and biological equipment to the Commerce Control List (“CCL”) for increased export controls.[12] In its announcement of the new controls, BIS indicated that the agency had not only completed the ECRA-described interagency process to determine that the newly controlled items were “emerging technologies” but had also secured multilateral adoption of these controls at the Australia Group’s Intersessional Implementation Meeting in February 2020.
The newly controlled items include the following:
- Twenty-four precursor chemicals, including chemical mixtures where at least one of the controlled chemicals constitutes 30 percent or more of the mixture;
- Single-use cultivation chambers with rigid walls and related technology; and
- Middle East respiratory syndrome-related coronavirus (MERS-related coronavirus) due to its homology with severe acute respiratory syndrome-related coronavirus (SARS-related coronavirus) and its potential use in biological weapons activities.
These items, which were not previously subject to licensing requirements for export to most jurisdictions, now require authorization for export to most destinations. However, licenses are still not required for exports of the precursor chemicals or cultivation chambers to Australia Group member states.[13]
In addition, the final rule announced on October 5 added six new previously unregulated emerging technologies to the CCL for increased export controls. This second round of emerging technology controls focused primarily on items used in semiconductor manufacturing and development, along with surveillance equipment and certain spacecraft. Like the initial round of “emerging technologies,” these items were added to the CCL to implement changes agreed to by a multilateral organization that oversees international development of controls on dual-use items. Specifically, these new controls implemented a decision taken by the governments participating in the Wassenaar Arrangement at the group’s December 2019 Plenary meeting.[14] BIS, together with its interagency partners, had also concluded that these six technologies are recently developed or developing technologies that are essential to U.S. national security and therefore warranted treatment as “emerging technologies.”
The six categories of controlled items include the following:
1. Hybrid additive manufacturing (“AM”)/computer numerically controlled (“CNC”) tools;
The first control on additive manufacturing and computer numerically controlled tools was added as Note 4 to ECCN 2B001 in response to machine tool manufacturers adding multiple capabilities to their machines. Items captured under this control will now require an export license to most countries for national security (“NS”) reasons but will also be eligible for the Strategic Trade Authorization (“STA”) license exception,[15] as well as any other applicable transaction-based exceptions.
2. Certain computational lithography software designed for the fabrication of extreme ultraviolet masks (“EUV”);
The second modification updates ECCN 3D003 to control electronic design automation (“EDA”) or computational lithography software developed for extreme ultraviolet masks. Software captured under this control will require an export license to most countries for NS and anti-terrorism (“AT”) reasons but will also be eligible for the Technology and Software Under Restriction (“TSR”) license exception,[16] STA, and other transaction-based license exceptions.
3. Technology for finishing wafers for 5nm production;
The third addition creates ECCN 3E004 to control technology for the production of substrates for high-end integrated circuits. Technology captured under this control will require an export license to certain countries for NS reasons and AT reason but will be eligible for TSR, STA, and other transaction-based license exceptions.
4. Forensics tools that circumvent authentication or authorization controls on a computer or communications device and extract raw data;
The fourth control adds ECCN paragraph 5A004.b to control digital forensics and investigative tools that circumvent authentication or authorization mechanisms and extract raw data from a computer or communications device. This control was added because BIS determined that items previously used primarily for law enforcement tools were increasingly being used by militaries to extract time-critical information from devices found on the battlefield. This control does not capture items that extract unprotected data, or items that extract simple user data. Tools captured under this control will require an export license to most countries for NS and AT reasons, and an encryption item license requirement applies. These tools will be eligible for Limited Value Shipment (“LVS”)[17] and Encryption Commodities, Software, and Technology (“ENC”)[18] license exceptions.
5. Software for monitoring and analysis of communications and metadata acquired from a telecommunications service provider via a handover interface; and
The fifth control adds ECCN paragraph 5D001.e to control software specially designed or modified for use by law enforcement to analyze the content of communications acquired from a handover interface—a tool allowing law enforcement to request and receive intercepted communications from communications service providers. According to BIS, such software can be used by international actors in ways that are contrary to U.S. national security. BIS has clarified that this new control does not apply to network management tools or banking software. Software captured under this control will require an export license to most countries for NS and AT reasons, and is eligible for TSR for Country Group A:5 countries and STA license exceptions.
6. Sub-orbital aircraft.
The sixth control adds “sub-orbital craft” to paragraph 9A004.h. This does not include “spacecraft,” which is limited to satellites and space probes. Items captured under this control will require an export license for NS, AT, and regional stability (“RS”), and anti-terrorism reasons, and will be eligible for STA and may be eligible for LVS at $1,500.
The Notable Exception – 0Y521 Controls on Geospatial Imagery Artificial Intelligence
What BIS has chosen not to target multilaterally is just as interesting as what it has.
With one notable exception, BIS has previously avoided imposing emerging technology controls on artificial intelligence (“AI”) broadly, suggesting that BIS took seriously arguments from many sectors that broad controls on U.S. AI technology might be too late or unworkable for several reasons.
However, almost as soon as BIS learned of a specific emerging AI technology with significant national security implications, BIS took unilateral action using another export control authority to control its export from the United States. On January 3, 2020, BIS announced that it would be imposing new export controls on certain types of artificial intelligence software specially designed to automate the analysis of geospatial imagery in response to emergent national security concerns related to the newly covered software. Covered software includes products that employ artificial intelligence to analyze satellite imagery and identify user-selected objects. As a result of the new controls, a license from BIS is now required to export the geospatial imagery software to all countries, except Canada, or to transfer the software to foreign nationals. The only exception to this license requirement is for software transferred by or to a department or agency of the U.S. Government.
BIS deployed a rarely used tool for temporarily controlling the export of emerging technologies—the 0Y521 Export Controls Classification Number (“ECCN”). This special ECCN category allows BIS to impose export restrictions on previously uncontrolled items that have “significant military or intelligence advantage” or when there are “foreign policy reasons” supporting restrictions on its export. Although these controls would only last one year, items subjected to these controls can be moved to a more permanent ECCN before the expiration of the classification.
BIS’ use of the 0Y521 control for this technology demonstrates that BIS can and will impose unilateral controls when the export of emerging technologies from the United States poses an imminent threat to U.S. national security or foreign policy interests.
Looking Ahead, BIS Controls on Foundational Technologies
On August 27, 2020, BIS published an ANPRM seeking public comment on criteria for identifying these “foundational technologies.”[19] The comment period will close on October 26, 2020. Like emerging technologies, ECRA also did not offer a precise definition of the “foundational technologies” to be controlled by BIS. Unlike emerging technologies, however, those determined to be “foundational” may already be restricted with an ECCN on the CCL.
In contrast to the ANPRM for emerging technologies, the foundational technologies ANPRM did not provide a list or categories of specific items that BIS is considering for export controls. However, like it has for emerging technology controls, BIS has clarified that the term foundational technologies includes not only “technology” but also “commodities” and “software,” as those terms are defined in the EAR. While the ANPRM did not provide a list of specific items or categories of items on which it requested comment, it did provide examples of types of technologies that would be subject to additional controls as foundational technologies, including:
- Semiconductor manufacturing equipment and associated software, tools, lasers, sensors and underwater systems that can be tied to indigenous military innovation efforts in China, Russia, or Venezuela;
- Items designated as EAR99 or controlled only for AT reasons that are utilized or required for innovation in developing weapons, enabling foreign intelligence collection activities, or have weapons of mass destruction applications; and
- Technologies that have been the subject of illicit procurement attempts which may demonstrate some level of dependency on U.S. technologies to further foreign military or intelligence capabilities in countries of concern or development of weapons of mass destruction.
In response to criticism levied in public comments on the ANPRM for emerging technologies, BIS introduced a way in this ANPRM to allow private sector companies and other organizations to submit private information that can be redacted in published versions of their comments. We think that this will invite additional comments from companies who would like to better inform BIS rulemaking but also not risk the loss of business competitive information.
CFIUS Consequences
Importantly, any technologies that BIS has controlled or will control as emerging or foundational through these rulemaking processes will be also considered “critical technologies” with respect to a CFIUS national security review, including the determination of whether a mandatory CFIUS filing requirement applies.[20] FIRRMA now requires that certain non-passive foreign investment in U.S. companies dealing with critical technologies receive CFIUS review and approval. Under CFIUS’s new regulations implemented this year, CFIUS must receive advance notice of certain types of non-passive foreign investment in U.S. companies that design, test, manufacture, fabricate, or develop critical technologies—including emerging and foundational technologies identified by BIS—if a license would be required to export those technologies to the foreign investor or certain of its parent entities. In this regard, BIS’s final determination regarding what constitutes emerging and foundational technologies impacts not only the scope of CFIUS’s new mandatory jurisdiction but also the criteria for its application.
Displeased with the pace with which BIS is implementing the new emerging and foundational technology controls, some in Congress are pushing to grant CFIUS even more jurisdiction over these items. In September, the House of Representatives Republican-led China Task Force published a report arguing that the absence of a complete control list is impeding both the implementation of the ECRA and the operation of CFIUS’s expanded jurisdiction.[21] Additionally, on August 6, 2020, Senators Tillis (R-NC), Rubio (R-FL), and Cornyn (R-TX, who previously sponsored FIRRMA) introduced legislation to expand CFIUS’s jurisdiction to review foreign investments in emerging and foundational technology in the United States[22] Rather than waiting for BIS rulemaking to complete its identification of emerging and foundational technologies, this bill would allow the CFIUS chair and one other member of CFIUS to designate technologies as emerging or foundational. This bill does not yet have bipartisan support, nor has a companion bill been introduced in the House of Representatives. While this bill may never become law, it is illustrative of the feeling among some Congressional Republicans that BIS is taking too long to identify foundational and emerging technologies and could result in more designations of “emerging technologies” and a faster timeline for the implementation of the “foundational technology” controls.
Conclusion
The first two rounds of “emerging technology” controls described here are not likely to be the last. Consistent with BIS’s own suggestions and with the increased Congressional pressure it is receiving, we expect that BIS will continue to intermittently release lists of new emerging technologies for addition to the CCL.
However, the first rounds of controls do offer some indication of how future controls are likely to be implemented. BIS has made clear that it is not only targeting “technology,” as defined in the EAR, but is more broadly looking to control goods and software as well. Rather than creating entirely new categories of controls for these items, BIS has also shown a preference for amending existing controls to add newly covered items. Additionally, in both rounds, BIS has prioritized multilateral implementation over speed of imposition. Congressional pressure could threaten this method, but given the significant benefits of multilateral adoption (especially in the wake of China’s own newly-adopted export control law) and the requirements of ECRA, we would still expect BIS to work with its international partners to help standardize implementation of the new controls on both emerging and foundational technologies. Finally, the new emerging technology controls and the foundational technology ANPRM suggest that BIS is particularly focused on semiconductor manufacturing equipment and associated software tools. This is consistent with other recent BIS actions aimed primarily at limiting China’s access to the cutting-edge tools and technology required to produce these critical computing components.
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[1] Implementation of Certain New Controls on Emerging Technologies Agreed at Wassenaar Arrangement 2019 Plenary, https://www.federalregister.gov/documents/2020/10/05/2020-18334/implementation-of-certain-new-controls-on-emerging-technologies-agreed-at-wassenaar-arrangement-2019.
[2] Export Control Reform Act of 2018, Pub. L. No. 115-232, §§ 1751-1781 (2018).
[4] Foreign Investment Risk Review Modernization Act of 2018, Pub. L. No. 115-232, §§ 1701-28 (2018).
[5] Export Control Reform Act of 2018, Pub. L. No. 115-232, §§ 1758 (2018).
[8] Review of Controls for Certain Emerging Technologies, 83 Fed. Reg. 58,201 (advance notice of proposed rulemaking Nov. 19, 2018), https://www.gpo.gov/fdsys/pkg/FR-2018-11-19/pdf/2018-25221.pdf.
[9] Emerging Technologies ANPRM, supra note 1 at 58,201.
[11] These are general observations that one can make regarding the imposition of new unilateral export controls, but not all kinds of emerging technologies are likely to be impacted such controls in the same way. Depending on a range of background conditions, such as the nature of collaboration and economies of innovation in different areas of emerging technologies, the impact of export controls on their continuing development will differ. For an in-depth discussion of these factors and a comparison of how they will impact two areas of emerging technology – hypersonics and artificial intelligence – see our recently published article in the NATO Legal Gazette. C. Timura, J.A. Lee, R. Pratt and S. Toussaint, U.S. Export Controls: The Future of Disruptive Technologies, NATO LEGAL GAZETTE, 41: 96-124 (Oct. 2020).
[12] Implementation of the February 2020 Australia Group Intersessional Decisions: Addition of Certain Rigid-Walled, Single-Use Cultivation Chambers and Precursor Chemicals to the Commerce Control List, https://www.govinfo.gov/content/pkg/FR-2020-06-17/pdf/2020-11625.pdf.
[13] The Australia Group member states are: Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, European Union, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Malta, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom, and United States. See Australia Group Participants, The Australia Group, https://www.dfat.gov.au/publications/minisite/theaustraliagroupnet/site/en/participants.html.
[14] The participating states of the Wassenaar Arrangement are: Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, India, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Republic of Korea, Romania, Russian Federation, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom, and United States. See About Us, The Wassenaar Arrangement, https://www.wassenaar.org/about-us/.
[15] License Exception STA permits exports, reexports, and in-country transfers without a license that would otherwise be required for specified items on the CCL to destinations posing a low risk of unauthorized or impermissible uses.
[16] License Exception TSR permits exports and reexports of technology and software where the CCL indicates a license requirement to the ultimate destination for NS reasons only, TSR is noted in the CCL, and the software or technology is destined to Country Group B.
[17] License Exception LVS permits exports and reexports in a single shipment of eligible commodities where LVS is noted on the CCL, the net value of the commodities does not exceed the amount specified in the LVS paragraph for the entry on the CCL, and the commodities are destined to Country Group B.
[18] License Exception ENC permits export, reexport, and in-country transfer of systems, equipment, commodities, and components classified under ECCN 5A002, 5B002, equivalent or related software and technology classified under 5D002 or 5E002, and “cryptanalytic items” and digital forensics items classified under ECCN 5A004, 5D002, or 5E002.
[19] Identification and Review of Controls for Certain Foundational Technologies, 85 Fed. Reg. 52,934 (advance notice of proposed rulemaking Aug. 27, 2020), https://www.federalregister.gov/documents/2020/08/27/2020-18910/identification-and-review-of-controls-for-certain-foundational-technologies [hereinafter, “Foundational Technologies ANPRM”].
[20] Foreign Investment Risk Review Modernization Act of 2018, Pub. L. No. 115-232, § 1703 (2018).
[21] China Task Force Report, https://medium.com/@ChinaTaskForce/china-task-force-report-1dbc47d05f8f.
[22] Tillis, Cornyn & Rubio Introduce Legislation to Protect Our Most Valuable Technology from China, https://www.tillis.senate.gov/2020/8/tillis-cornyn-rubio-introduce-legislation-to-protect-our-most-valuable-technology-from-china.
The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam Smith, Chris Timura, Stephanie Connor, R.L. Pratt and Allison Lewis.
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New York partner Arthur Long is the author of “After a Decade, What is Settled About Dodd-Frank?” [PDF] published by the American Bar Association’s Banking Law Committee Journal in September 2020.
The False Claims Act (“FCA”) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. The U.S. Department of Justice has issued statements and guidance indicating some new thinking in the Trump Administration about its approach to FCA cases that may signal a meaningful shift in its enforcement efforts. But at the same time, newly filed FCA cases remain at historical peak levels and the DOJ has enjoyed ten straight years of nearly $3 billion or more in annual FCA recoveries. The government has also made clear that it intends to pursue vigorously any fraud, waste and abuse in connection with COVID-related stimulus funds. As much as ever, any company that deals in government funds—especially in the life sciences sector—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves.
Please join us to discuss developments in the FCA, including:
- The latest trends in FCA enforcement actions and associated litigation affecting drug and device manufacturers;
- Updates on the Trump Administration’s approach to FCA enforcement, including developments with recent DOJ Civil Division personnel changes and DOJ’s use of its statutory dismissal authority;
- The coming surge of COVID-related FCA enforcement actions; and
- The latest developments in FCA case law, including developments in particular FCA legal theories affecting your industry and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.
View Slides (PDF)
PANELISTS:
Stuart F. Delery is a partner in the Washington, D.C. office. He represents corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Previously, as the Acting Associate Attorney General of the United States (the third-ranking position at the Department of Justice) and as Assistant Attorney General for the Civil Division, he supervised the DOJ’s enforcement efforts under the FCA, FIRREA and the Food, Drug and Cosmetic Act.
Marian J. Lee is a partner in the Washington, D.C. office, where she provides FDA regulatory and compliance counseling to life science and health care companies. She has significant experience advising clients on FDA regulatory strategy, risk management, and enforcement actions.
John D. W. Partridge is a partner in the Denver office where he focuses on white collar defense, internal investigations, regulatory inquiries, corporate compliance programs, and complex commercial litigation. He has particular experience with the FCA and the Foreign Corrupt Practices Act (“FCPA”), including advising major corporations regarding their compliance programs.
Jonathan M. Phillips is a partner in the Washington, D.C. office where he focuses on compliance, enforcement, and litigation in the health care and government contracting fields, as well as other white collar enforcement matters and related litigation. A former Trial Attorney in DOJ’s Civil Fraud section, he has particular experience representing clients in enforcement actions by the DOJ, Department of Health and Human Services, and Department of Defense brought under the FCA and related statutes.
Today, a majority of the Senate Judiciary Committee voted to approve Judge Amy Coney Barrett to fill the seat on the Supreme Court of the United States vacated by the passing of Justice Ruth Bader Ginsburg. If confirmed by the full Senate, Judge Barrett would become the third female Justice to serve on the current Supreme Court, and the fifth female Justice in history.
To assess Judge Barrett’s likely impact on the Supreme Court, our Appellate and Constitutional Law Practice Group has analyzed a sample of her written opinions in her three years as a Judge on the United States Court of Appeals for the Seventh Circuit. As of the date she was nominated for the Supreme Court (September 29, 2020), Judge Barret had written 92 judicial opinions, including 81 majority opinions, 4 concurrences, and 7 dissents. In her responses to the Senate Judiciary Committee’s questionnaire, Judge Barrett identified ten of these, as well as a per curiam decision, as her “most significant” opinions.[*]
Below, we briefly summarize a number of Judge Barrett’s opinions, and a couple of her law review articles, that may provide insights to her approach to several key areas of law, including (1) administrative law, (2) arbitration, (3) class actions and collective actions, (4) constitutional and statutory interpretation, (5) due process, (6) First Amendment, (7) Fourth Amendment, (8) immigration, (9) intellectual property, (10) labor and employment, (11) personal jurisdiction, (12) Second Amendment, (13) standing, (14) stare decisis, and (15) subject-matter jurisdiction.
(1) Administrative Law
- Meza Morales v. Barr, 963 F.3d 629 (7th Cir. 2020). Writing for a unanimous panel, Judge Barrett held that immigration judges have the authority to administratively close cases—a procedural device that temporarily takes a removal case off of an immigration judge’s calendar, preventing the case from moving forward. In doing so, she embraced the Supreme Court’s admonition that courts should not “leap too quickly to the conclusion that a rule is ambiguous.” Applying the “traditional tools of construction,” Judge Barrett rejected the Attorney General’s interpretation of the “thorny but not ambiguous” immigration regulation.
- Williams v. Wexford Health Sources, Inc., 957 F.3d 828 (7th Cir. 2020). In a concurring opinion, Judge Barrett argued that an inmate had failed to exhaust his administrative remedies before filing a civil rights action under 42 U.S.C. § 1983, as required by the Prison Litigation Reform Act. Because the inmate could have filed a “standard grievance” after the prison had determined that his “emergency grievance” did not warrant fast-track treatment, there were still additional remedies available to him.
(2) Arbitration
- Wallace v. GrubHub, 970 F.3d 798 (7th Cir. 2020).* In a unanimous opinion written by Judge Barrett, a Seventh Circuit panel adopted a narrow view of the Section 1 exemption to the Federal Arbitration Act for transportation workers engaged in interstate commerce, holding that certain food delivery drivers were required to arbitrate their claims. The drivers argued that they engaged in interstate commerce by carrying goods that had moved across state lines. But the panel rejected that argument because “to fall within the exemption,” a class of workers “must be connected not simply to the goods, but to the act of moving those goods across state or national borders.” The panel observed that the drivers’ interpretation would sweep in numerous categories of workers whose occupations have nothing to do with interstate transport—a reading inconsistent with the “stringent” requirement that the class of workers “‘actually’” is engaged in interstate commerce.
(3) Class Actions and Collective Actions
- Herrington v. Waterstone Mortg. Corp., 907 F.3d 502 (7th Cir. 2018). Writing for a unanimous panel, Judge Barrett held that the availability of class or collective arbitration is a threshold question of arbitrability that the court must decide unless the parties have clearly and unmistakably delegated the question to an arbitrator. Although the Supreme Court held that waivers of class arbitration for employment claims are enforceable in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), it did not determine who should interpret an arbitration agreement to decide whether it waived or authorized that procedure. Following the reasoning of “every federal court of appeals to reach the question,” Judge Barrett held that the availability of class or collective arbitration was so “fundamental” an issue as to belong in the category of “gateway” questions presumptively reserved to the court to decide.
- Weil v. Metal Techs., Inc., 925 F.3d 352 (7th Cir. 2019). In a unanimous opinion by Judge Barrett, the panel affirmed the decertification of class and collective actions under the Fair Labor Standards Act (FLSA) and Indiana wage laws. After the district court’s initial certification order, the plaintiffs failed to provide classwide evidence that the employees in the class “were actually working without compensation.” The plaintiffs therefore lacked “both a theory of liability and proof of any injury” to support certification. Judge Barrett emphasized the Seventh Circuit’s “repeated assertions that district courts have wide discretion in managing class and collective actions” under Rule 23 and the Fair Labor Standards Act, including revisiting prior certification rulings.
(4) Constitutional and Statutory Interpretation
- In her nomination speech, Judge Barrett stated that the textualist judicial philosophy of Justice Scalia—for whom she clerked—is “mine too.” She echoed this sentiment at her confirmation hearings, emphasizing that a judge tasked with interpretation must set aside her policy views and apply the law as written. On the Seventh Circuit, Judge Barrett has shown a willingness to engage in “intense grammatical parsing” when necessary to determine textual meaning. Gadelhak v. AT&T Servs., Inc., 950 F.3d 458, 460 (7th Cir. 2020). She also has indicated discomfort with arguments from extratextual considerations, such as legislative history or congressional inaction. Cook Cty., Illinois v. Wolf, 962 F.3d 208, 250 (7th Cir. 2020) (Barrett, J., dissenting).
(5) Due Process
- A.F. Moore & Assocs., Inc. v. Pappas, 948 F.3d 889 (7th Cir. 2020).* Writing for a unanimous panel, Judge Barrett held that the Tax Injunction Act, which generally strips federal courts of jurisdiction over challenges to state and local taxes, did not prohibit taxpayers from bringing equal protection and due process claims in federal court. This is because, as Judge Barrett explained, Illinois state courts do not offer an adequate forum for taxpayers’ constitutional claims, since Illinois tax-objection procedures do not allow taxpayers to challenge anything other than the correctness of the assessor’s valuation. Because these procedures provide “no remedy at all” for the taxpayers’ claims, the Tax Injunction Act did not apply.
- Cleven v. Soglin, 903 F.3d 614 (7th Cir. 2018). Judge Barrett, writing for a unanimous panel, rejected a city employee’s procedural due process challenge against the city based on an alleged deprivation of his retirement funds. Assuming without deciding that the temporary loss of these funds qualified as a lost property right, Judge Barrett reasoned that the plaintiff still could not show inadequate process, because the state offered a procedure—a writ of mandamus—to challenge any violation of state law. Since the writ provided a meaningful post-deprivation remedy for redressing property deprivation, the panel concluded that petitioner’s due process rights had been satisfied.
- Doe v. Purdue Univ., 928 F.3d 652 (7th Cir. 2019).* Writing for a unanimous panel, Judge Barrett held that a student, John Doe, adequately alleged that a university violated due process by using constitutionally flawed procedures to find him guilty of sexual violence. Judge Barrett first analyzed whether John had lost a liberty or property interest when he was found guilty and punished. While agreeing with the university that John could establish no property interest in continuing his education, Judge Barrett concluded that he was deprived of a protected liberty interest: By finding John guilty of sexual violence—causing his expulsion from the Navy ROTC program—and telling the Navy about this finding, the university denied John “his freedom to pursue naval service, his occupation of choice.” Judge Barrett next evaluated the procedures the university used to determine John’s guilt, finding them far short of what was required under the Due Process Clause. Because John alleged that the university withheld evidence on which it relied, failed to investigate evidence that would support John’s case, and conducted a deficient hearing, Judge Barrett held that he had pleaded facts sufficient to state a claim under the Fourteenth Amendment.
- Green v. Howser, 942 F.3d 772 (7th Cir. 2019). In an opinion by Judge Barrett, a unanimous panel held that sufficient evidence existed to support a jury verdict in favor of a mother who had sued her parents under 42 U.S.C. § 1983 for conspiring with state law enforcement officials to violate her due process right to make decisions regarding the care, custody, and control of her child. Finding “plenty of evidence” from which a jury could conclude that the mother’s parents conspired with law enforcement officials to forcibly gain custody of her child, Judge Barrett rejected the argument that no reasonable jury could find a violation of the mother’s due process rights.
(6) First Amendment
- Grussgott v. Milwaukee Jewish Day Sch., Inc., 882 F.3d 655 (7th Cir. 2018) (per curiam).* Judge Barrett joined a panel concluding that a teacher at a Jewish school was a “minister” under the Supreme Court’s decision in Hosanna-Tabor Evangelical Lutheran Church & School v. E.E.O.C., 565 U.S. 171 (2012), and thus the teacher’s Americans with Disabilities Act claim was barred by the First Amendment’s ministerial exception to employment-discrimination laws. The ministerial exception “allow[s] religious employers the freedom to hire and fire those with the ability to shape the practice of their faith.” To determine whether an employee was a “minister” covered by the exception, the Supreme Court in Hosanna-Tabor looked to the employee’s title, the substance reflected in that title, the employee’s use of that title, and “the important religious functions she performed for the Church.” Hosanna-Tabor, 565 U.S. at 192. The panel in Grussgott emphasized that the Supreme Court had “expressly declined” to adopt a “rigid formula” for the ministerial-exception test. In Grussgott, the teacher’s title and use of that title “cut[] against applying the ministerial exception” while the substance reflected in her title and her performing important religious functions—such as her “integral role in teaching her students about Judaism”—supported applying the ministerial exception. Explaining that “it would be overly formalistic to call th[e] case a draw simply because two ‘factors’ point[ed] each way” while cautioning that “all facts must be taken into account and weighed on a case-by-case basis,” the panel concluded that the “duties and functions” of the teacher’s position were enough to apply the ministerial exception. The Supreme Court’s later decision in Our Lady of Guadalupe School v. Morrissey-Berru, 140 S. Ct. 2049 (2020), was consistent with this non-formulaic approach to the ministerial exception.
(7) Fourth Amendment
- Rainsberger v. Bennett, 913 F.3d 640 (7th Cir. 2019).* In a unanimous opinion by Judge Barrett, a panel denied qualified immunity to a police detective who allegedly lied in a probable-cause affidavit that led prosecutors to charge the plaintiff with murdering his mother. The affidavit stated, for example, that the plaintiff placed a call from his mother’s home an hour before he claimed to have found her dead, but the call actually occurred a few minutes after he said he arrived. The detective argued that the alleged misrepresentations were immaterial because probable cause existed even without them, but the panel determined that the remaining evidence did not support a finding of probable cause. And because it is clearly established that it violates the Fourth Amendment to use deliberately falsified allegations to demonstrate probable cause, the panel concluded, the detective was not entitled to qualified immunity.
- Torry v. City of Chicago, 932 F.3d 579 (7th Cir. 2019). Writing for a unanimous panel, Judge Barrett rejected the plaintiffs’ argument that proving reasonable suspicion for a Terry stop required police officers to have some independent memory of what they knew at the time. Rather, as Judge Barrett explained, “the Fourth Amendment does not govern how an officer proves that he had reasonable suspicion for a Terry stop; he can rely on evidence other than his memory to establish what he knew when the stop occurred.” Judge Barrett also affirmed the lower court’s finding that the officers were entitled to qualified immunity. Because the Terry stop did not violate clearly established law, qualified immunity applied regardless of whether the stop violated the Fourth Amendment, which the panel concluded they “need not consider.”
- United States v. Kienast, 907 F.3d 522 (7th Cir. 2018). Judge Barrett, writing for a unanimous panel, held that the district courts did not err by declining to suppress the evidence obtained by searches that the defendants alleged were unlawful, because the good-faith exception to the exclusionary rule applied. Reasoning that suppression of evidence “is not a personal constitutional right” but rather “a judge-made rule meant to deter future Fourth Amendment violations,” Judge Barrett concluded that suppression was not justified because it would have no deterrent effect on FBI agents’ reliance on a warrant that the magistrate judge allegedly had no authority to issue. Judge Barrett also rejected the defendants’ argument that FBI agents acted in bad faith, concluding instead that “[t]he record establishes that the FBI acted reasonably” in preparing the affidavits and executing the warrants. Because the good-faith exception applied, the panel declined to consider whether the searches violated the Fourth Amendment.
- United States v. Vaccaro, 915 F.3d 431 (7th Cir. 2019). In an opinion by Judge Barrett, a unanimous panel held that a Terry pat-down frisk and the search of the defendant’s car were lawful. Judge Barrett first rejected the defendant’s argument that the Terry frisk was unreasonable. Because the record admitted of more than one permissible reading of the evidence, the district court did not clearly err in finding that the defendant “made furtive movements before leaving the car,” which aroused reasonable suspicion to justify a pat-down search. Judge Barrett next evaluated whether the sweep of the defendant’s car was lawful. While admitting that the sweep was “a closer call,” Judge Barrett concluded that it, too, was permissible because the officers reasonably suspected that the defendant was dangerous and could gain “immediate control” of weapons in his car, notwithstanding that he was handcuffed in the back of a squad car. On this last point, Judge Barrett explained that because the defendant’s detention was a Terry stop, and did not amount to an arrest, he “admitt[ed] that he would have been allowed to return to his car, … [where] he could have gained ‘immediate control of weapons.’”
(8) Immigration
- Cook Cty., Illinois v. Wolf, 962 F.3d 208 (7th Cir. 2020).* Judge Barrett, dissenting from the panel opinion, contended that the definition of “public charge” adopted by the Department of Homeland Security was a reasonable interpretation of the statutory language, which provides that a noncitizen may be denied admission or adjustment of status if he or she “is likely at any time to become a public charge.” The government defined “public charge” as any noncitizen who receives certain cash or noncash government benefits for more than 12 months in the aggregate in a 36-month period. The majority, over Judge Barrett’s dissent, concluded that the term “public charge” necessarily required a higher degree of government dependence. Judge Barrett, in contrast, would have held that under Chevron step two, the government’s broad definition was reasonable. Judge Barrett engaged in a detailed discussion of statutory framework and, citing Justice Scalia, expressed skepticism of plaintiffs’ legislative-inaction arguments. “At bottom,” she explained, “the plaintiffs’ objections reflect disagreement with [a] policy choice and … [l]itigation is not the vehicle for resolving policy disputes.” Judge Barrett declined to address plaintiffs’ other challenges because the district court did not reach them and the plaintiffs barely briefed them.
- Yafai v. Pompeo, 912 F.3d 1018 (7th Cir. 2019).* Judge Barrett, over a dissent, affirmed the district court’s dismissal under the doctrine of consular nonreviewability of a Yemeni husband and wife’s claims that a consular officer improperly denied the wife’s application for an immigrant visa. Observing that Congress has delegated the power to determine who may enter the country to the Executive Branch and that courts generally have no authority to second-guess the Executive’s decisions, Judge Barrett concluded that the consular officer provided a facially legitimate and bona fide reason for denying the wife’s application. The officer cited a valid statutory basis and provided the factual predicate for his decision and, Judge Barrett stressed, under Kleindienst v. Mandel, 408 U.S. 753 (1972), the court cannot “look behind the exercise of that discretion.” Judge Barrett also concluded that the “bad faith” exception to Mandel did not apply because plaintiffs failed to make “an affirmative showing” that the officer denied the wife’s visa in bad faith. The dissent maintained that the majority’s “view of the doctrine sweeps more broadly than required by the Supreme Court and [the Seventh Circuit’s] own precedent.”
- Alvarenga-Flores v. Sessions, 901 F.3d 922 (7th Cir. 2018). Judge Barrett, over a dissent, held that substantial evidence supported the immigration judge’s adverse credibility finding. Judge Barrett noted that the court “afford[s] significant deference to an agency’s adverse credibility determination,” and may reverse such determinations only “if the facts compel an opposite conclusion.”
(9) Intellectual Property
- J.S.T. Corp. v. Foxconn Interconnect Tech. Ltd., 965 F.3d 571 (7th Cir. 2020). In a unanimous opinion by Judge Barrett, the panel affirmed the dismissal for lack of personal jurisdiction of a suit for misappropriation of trade secrets. In so ruling, Judge Barrett analyzed the distinctions between different forms of intellectual property law. She distinguished trade secret law, which focuses on the defendants’ alleged acts, from both “trademark law, in which consumer confusion can be at the heart of the underlying claim,” and “patent law, in which the sale of a patented invention to a consumer can be an act of infringement, even if the seller is unaware of the patent.” Because the defendants’ alleged acts of trade secret misappropriation were all completed outside of the forum state, Judge Barrett concluded that the court lacked personal jurisdiction over those claims on these facts. This decision is also an example of Judge Barrett’s jurisprudence on personal jurisdiction.
- PMT Mach. Sales, Inc. v. Yama Seiki USA, Inc., 941 F.3d 325 (7th Cir. 2019). In a unanimous opinion by Judge Barrett, the panel affirmed the entry of summary judgment against a plaintiff suing under Wisconsin’s Fair Dealership Law. That state law provides contractual protections to “dealerships,” which it defines to include agreements granting persons the right to “use a trade name [or] trademark.” Judge Barrett reasoned that the mere inclusion of another party’s logos on the plaintiff’s website did not qualify as “use” of those trademarks sufficient to establish it as a “dealership” entitled to protection under the Wisconsin law.
(10) Labor and Employment
- Smith v. Rosebud Farm, Inc., 898 F.3d 747 (7th Cir. 2018). Writing for a unanimous court, Judge Barrett held that the district court properly denied an employer’s post-trial motion for judgment as a matter of law on a male employee’s Title VII sex discrimination claim. Judge Barrett reasoned that the evidence supported the jury’s finding that the employee’s coworkers harassed the plaintiff because he was male, rather than engaging in across-the-board and nondiscriminatory “sexual horseplay,” because the shop was a mixed-sex workplace and only men were groped and taunted.
- EEOC v. Costco Wholesale Corp., 903 F.3d 618 (7th Cir. 2018).* Writing for a unanimous court, Judge Barrett held that the district court properly denied Costco’s post-trial motion for judgment as a matter of law on a Title VII hostile work environment claim, because sufficient evidence supported the jury’s finding that a customer’s year-long stalking of a Costco employee was severe or pervasive enough to render the work environment hostile. Judge Barrett explained that harassment does not need to be “overtly sexual to be actionable under Title VII,” but instead “can take other forms, such as demeaning, ostracizing, or even terrorizing the victim because of her sex.” Judge Barrett also held that the district court was correct that the employee could not recover backpay for the period of time after Costco fired her, because the employee did not return to work after a year-long medical leave and thus was not constructively discharged. But Judge Barrett held that the employee may be entitled to backpay for some or all of her time on unpaid medical leave that she took after being traumatized by the customer’s stalking. Judge Barrett remanded for the district court to consider the unpaid-leave issue in the first instance.
- Fessenden v. Reliance Std. Life Ins. Co., 927 F.3d 998 (7th Cir. 2019). Writing for a unanimous panel, Judge Barrett held that a court owes no deference to a benefits plan administrator that, in issuing a benefits decision, misses a deadline imposed by regulations governing the Employee Retirement Income Security Act (ERISA). Although a court may apply an “arbitrary and capricious” standard of review to a plan administrator’s decision that “substantially complies” with other procedural requirements, a “deadline is a bright line,” and a court must apply a de novo standard of review if a plan administrator misses a regulatory deadline. Judge Barrett reasoned that adopting a “substantial compliance” exception under the common law would contravene the regulations’ plain text, which provide that “in no event shall” an extension of time exceed the allotted period. Judge Barrett also explained that a substantial compliance exception would be incompatible with the doctrine itself because a party seeking benefits has exhausted remedies when the regulatory deadlines for a benefits determination lapse, and thus can file suit—and yet, in that circumstance, the district court would have no administrative decision to review. In reaching this conclusion, Judge Barrett expressly disagreed with several other circuits that have applied the substantial compliance exception to missed ERISA deadlines.
(11) Personal Jurisdiction
- Lexington Ins. Co. v. Hotai Ins. Co., 938 F.3d 874 (7th Cir. 2019). Judge Barrett held for a unanimous panel that a district court in Wisconsin lacked personal jurisdiction over two Taiwanese insurance companies that had contracted with the suppliers of the plaintiff bike retailer to provide worldwide insurance coverage for both the suppliers and the bike distributor. Judge Barrett stated that the plaintiff had “failed to demonstrate that either [of the insurance companies] made any purposeful contact with Wisconsin before, during, or after the formation of the insurance contracts.” The fact that the insurance companies had agreed to indemnify the bike distributor, who did business out of Wisconsin, was insufficient, because “it is a defendant’s contacts with the forum state, not with the plaintiff, that count.” Judge Barrett further rejected that any “collateral financial benefits” of the insurance companies’ arrangement gave rise to personal jurisdiction.
(12) Second Amendment
- Kanter v. Barr, 919 F.3d 437 (7th Cir. 2019).* Judge Barrett dissented from a panel decision holding that felon dispossession statutes prohibiting firearm possession by persons convicted of felonies did not violate the Second Amendment. The panel majority applied intermediate scrutiny and concluded that the statutes were substantially related to the important government interest of “keeping firearms away from persons, such as those convicted of serious crimes, who might be expected to misuse them.” In her dissent, Judge Barrett adopted an originalist framework for analyzing the Second Amendment in which “all people have the right to keep and bear arms” unless “history and tradition” support a legislature’s “power to strip certain groups of that right.” Applying that framework, Judge Barrett explained that historically, legislatures have had the power to prohibit dangerous people from possessing guns, but not the power to strip felons—both violent and nonviolent—of their right to bear arms simply because of their status as felons. After noting the government’s “undeniably compelling interest in protecting the public from gun violence,” Judge Barrett concluded the dispossession statutes were “unconstitutional as applied to” the plaintiff, who did not belong to “a dangerous category” of felons—he was convicted of mail fraud—and did not have any “individual markers of risk,” such as a history showing a proclivity for violence.
(13) Standing
- Casillas v. Madison Ave. Assocs., Inc., 926 F.3d 329 (7th Cir. 2019).* Judge Barrett held for a unanimous panel that the plaintiff lacked standing under Article III to sue a debt collector for failure to include all statutorily required information in a debt-collection letter. The omitted information related to the requirement that any objection to the asserted debt be made in writing, but Judge Barrett observed that the plaintiff “did not allege that [the debt collector’s] actions harmed or posed any real risk of harm to her interests under the [Fair Debt Collection Practices] Act.” The plaintiff, Judge Barrett noted, “did not allege that she tried to dispute or verify her debt orally and therefore lost or risked losing the statutory protections,” nor did she “allege that she ever even considered contacting [the debt collector].” Judge Barrett also rejected the plaintiff’s alternative argument that she had suffered an “informational injury,” explaining that “the bare harm of receiving inaccurate or incomplete information” is not a cognizable harm for Article III standing purposes.
- Protect Our Parks Inc. v. Chicago Park Dist., 971 F.3d 722 (7th Cir. 2020). Writing for a unanimous panel, Judge Barrett held that plaintiffs challenging Chicago’s plan to transfer control of public land to the Barack Obama Foundation to construct a presidential memorial center lacked standing to pursue their state-law claims. The plaintiffs claimed that Chicago breached Illinois’ public trust doctrine by transferring control of public lands for private use. Judge Barrett held that the plaintiffs lacked standing to pursue the state-law claims, explaining that the fact that Illinois state courts have heard similar cases does not control the standing inquiry in federal court, and that a desire that the government follow the law is not sufficient. Judge Barrett also affirmed the district court’s dismissal of the federal takings claims on the ground that the plaintiffs lacked a cognizable property interest in the public land.
- Carello v. Aurora Policemen Credit Union, 930 F.3d 830 (7th Cir. 2019). Judge Barrett held for a unanimous panel that a plaintiff lacked standing to sue a credit union under the Americans with Disabilities Act for failing to offer a website that could be read aloud by a screen reader, because the plaintiff was legally ineligible to become a member in the credit union. Judge Barrett explained that “[b]ecause Illinois has erected a neutral legal barrier to [the plaintiff’s] use of the Credit Union’s service, the Credit Union’s failure to accommodate the visually impaired in the provision of its services cannot affect him personally.” Judge Barrett further rejected the plaintiff’s theory that he had suffered an “informational injury,” because the case was “about accessibility accommodations, not disclosure.”
- Gadelhak v. AT&T Servs., Inc., 950 F.3d 458 (7th Cir. 2020), cert. filed, No. 20‑209 (U.S. Aug. 21, 2020). Before addressing the merits of this case arising under the Telephone Consumer Protection Act (TCPA), Judge Barrett first considered whether the plaintiff had standing, even though no party had raised the issue. She concluded for the unanimous panel that a plaintiff who receives unwanted marketing text messages has suffered a sufficiently “concrete” injury for Article III purposes, because “[t]he common law has long recognized actions at law against defendants who invaded the private solitude of another by committing the tort of ‘intrusion upon seclusion.’” Moreover, in enacting the TCPA, “Congress decided that automated telemarketing can pose this same type of harm to privacy interests.” Judge Barrett therefore broke with the Eleventh Circuit, instead siding with the Second and Ninth Circuits holding that the receipt of “unwanted text messages can constitute a concrete injury-in-fact for Article III purposes.”
(14) Stare Decisis
- Stare Decisis and Due Process, 74 U. Colo. L. Rev. 1011 (2003). As a professor, Judge Barrett has questioned whether an inflexible view of stare decisis—which “effectively forecloses a litigant from meaningfully urging error-correction” in future cases—“unconstitutionally deprives a litigant of the right to a hearing on the merits of her claims.” “Generally speaking,” then-Professor Barrett wrote, “if a litigant demonstrates that a prior decision clearly misinterprets the statutory or constitutional provision it purports to interpret, the court should overrule the precedent.”
- Statutory Stare Decisis in the Courts of Appeals, 73 Geo. Wash. L. Rev. 317 (2005). The Supreme Court has long afforded “special force” to stare decisis in the realm of statutory interpretation. As a professor, however, Judge Barrett has questioned whether the courts of appeals should apply the same “super-strong stare decisis” to their own statutory interpretations. “It is one thing,” for example, “to claim that congressional silence signals approval of a decision from the Supreme Court; it is another thing to claim that congressional silence signals approval of a decision from any of the courts of appeals.” Then-Professor Barrett wrote that it is “hard to see why the precedential effect of statutory interpretations in the courts of appeals should be anything more than the simple presumption against overruling that all opinions enjoy.”
(15) Subject-Matter Jurisdiction
- Groves v. United States, 941 F.3d 315 (7th Cir. 2019). In an opinion authored by Judge Barrett, a unanimous panel overruled Seventh Circuit precedent that permitted district courts to recertify their decisions for interlocutory appeal after the expiration of the 10‑day filing window in order to give the appealing party more time to file a petition to appeal with the court of appeals. Judge Barrett explained that the Supreme Court’s more recent decisions had made clear that courts lack discretion to either directly or indirectly extend jurisdictional deadlines, such as the 10-day deadline for filing a petition for interlocutory review. Judge Barrett also rejected the appealing party’s argument that the 10-day limitation was not jurisdictional, holding that the statute setting the deadline “speak[s] to the power of the court rather than to the rights or obligations of the parties.”
- Webb v. FINRA, 889 F.3d 853 (7th Cir. 2018). Judge Barrett held, over a partial dissent, that the federal courts lacked diversity jurisdiction because the amount in controversy did not exceed the statutory threshold of $75,000. The plaintiffs sued the Financial Industry Regulatory Authority, Inc. (FINRA), arguing that FINRA had breached its contract to arbitrate the plaintiffs’ underlying dispute with their former employer, and seeking to obtain their fees for attempting to arbitrate the dispute and for the litigation. Although no party raised a jurisdictional challenge, the court sua sponte ordered supplemental briefing on jurisdiction. Judge Barrett held that the law recognized no right to recover expenses and fees the plaintiffs incurred in either arbitration or in litigation, and that the amount in controversy therefore did not exceed $75,000. Judge Barrett also rejected the alternative theory, offered by FINRA, that the claims arose under federal securities law, explaining that the case presented no questions requiring interpretation of a federal law.
- Wisconsin Cent. Ltd. v. TiEnergy LLC, 894 F.3d 851 (7th Cir. 2018), cert. denied, 139 S. Ct. 918 (2019). Judge Barrett held for a unanimous panel that the court of appeals and district court below had jurisdiction over this dispute involving fees owed for the delayed return of rail cars. The panel had sua sponte raised two issues of jurisdiction and solicited supplemental briefing. On the first, Judge Barrett held that the absence of a separate document setting forth the final judgment with respect to a third-party claim did not divest the appellate court of jurisdiction, because the district court “clearly signaled in its opinion that it was finished with the case.” On the second, Judge Barrett concluded that the district court had federal question jurisdiction over the case, because the plaintiff had brought suit pursuant to a federal law assigning liability for the payment of transportation rates, including fees for the delayed return of rail cars.
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[*] Decisions denoted with an asterisk (*) are decisions that Judge Barrett identified as her “most significant” decisions.
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 Gibson Dunn lawyer with whom you usually work, any member of the firm’s Appellate and Constitutional Law practice group, or the following:
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Mark A. Perry – Washington, D.C. (+1 202.887.3667, mperry@gibsondunn.com)
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© 2020 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 webcast covers the authorities of the United States Government to address foreign influence in business and public affairs in the United States. We discuss the Foreign Agents Registration Act, the Lobbying Disclosure Act, export controls, and CFIUS. The webcast also covers recent policy statements by the Department of Justice and other regulators.
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PANELISTS:
Zainab Ahmad, a partner in New York, joined the firm after serving as Senior Assistant Special Counsel in Special Counsel Robert S. Mueller’s Office. She was previously Deputy Chief of the National Security and Cybercrime section at the U.S. Attorney’s Office in the Eastern District of New York. Ms. Ahmad is a decorated former prosecutor who has received both of DOJ’s highest honors, the Attorney General’s Award and the FBI Director’s Award, and whose work prosecuting terrorists was profiled by The New Yorker magazine. Her practice focuses on white collar defense and investigations, including corruption, anti-money laundering, sanctions and FCPA issues. She also advises clients regarding data privacy and cybersecurity matters. Her practice is international and focuses on cross-border issues; she is fluent in Urdu and Hindi.
Stuart Delery, a partner in Washington, D.C., was the Acting Associate Attorney General, the No. 3 position in the Justice Department, where he oversaw the civil and criminal work of five litigating divisions — Antitrust, Civil, Tax, Civil Rights, and Environment and Natural Resources — as well as other components. His practice focuses on representing corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement.
Roscoe Jones is counsel in the Washington, D.C. office, and a member of the firm’s Public Policy, Congressional Investigations, and Crisis Management groups. Mr. Jones formerly served as Chief of Staff to U.S. Representative Abigail Spanberger, Legislative Director to U.S. Senator Dianne Feinstein, and Senior Counsel to U.S. Senator Cory Booker, among other high-level roles on Capitol Hill.
Adam M. Smith, a partner in Washington, D.C., was the Senior Advisor to the Director of the U.S. Treasury Department’s OFAC and the Director for Multilateral Affairs on the National Security Council. His practice focuses on international trade compliance and white collar investigations, including with respect to federal and state economic sanctions enforcement, the FCPA, embargoes, and export controls. He routinely advises multi-national corporations regarding regulatory aspects of international business.
The United Nations Convention on International Settlement Agreements Resulting from Mediation (the “Singapore Convention” or the “Convention”) came into force on 12 September 2020.[1] The Singapore Convention is a significant step for international commercial dispute resolution, enabling enforcement of mediated settlement agreements among its signatories. For international businesses this means that they are presented with another viable and effective alternative to litigation and arbitration in resolving their cross-border disputes, especially during the global COVID-19 pandemic.[2]
Key Features of the Convention
By facilitating a negotiated settlement between parties, mediation can usually provide them with a faster, more cost-effective and commercial method of resolving disputes than resorting to litigation and arbitration. With the aid of neutral and qualified professionals, mediated settlements focus parties onto what really matters to them, ironing out their differences swiftly in confidentiality while preserving businesses’ reputation and their long term relationship. However, until the Singapore Convention, no harmonised enforcement mechanism existed for these negotiated settlements. Hence, the only remedy for a party who was faced with an opponent refusing to honour the terms of such negotiated settlement, was to bring an action for breach of contract and then seek to have the subsequent judgment enforced, potentially in multiple jurisdictions. This was an expensive and inefficient deterrent for parties to even consider mediation for the resolution of their disputes, so they instead turned to arbitration or litigation from the outset.
Now, the Singapore Convention has the potential to greatly increase the appeal of mediation as a mechanism of resolving commercial disputes with a cross-border dimension. The Convention provides parties who have agreed a mediated settlement with a uniform and efficient mechanism to enforce the terms of that agreement in other jurisdictions, in the way that the New York Convention on the Recognition and Enforcement of Arbitral Awards (the “New York Convention”) does for international arbitral awards.
Where a State has ratified the Convention, the Convention commands that a relevant court (or other competent authority) in that State enforces an international mediated settlement agreement in accordance with the Convention and its own rules of procedure, without the parties needing to initiate new proceedings for its recognition and enforcement. Provided the settlement agreement falls within the scope of the Convention, the negotiated settlement can also be invoked as a defence by the parties, preventing further litigation or arbitration of a matter already settled by the agreement.
Conditions for Enforcement
The Convention applies to international mediated settlement agreements concluded in writing and which resolve a commercial dispute. A settlement agreement will be classified as “international” under the Convention if the parties have their place of business in different States or the parties’ place of business is different from the State in which a substantial part of the obligations under the settlement agreement is performed or with which the subject matter of the settlement agreement is most closely related. The Convention excludes from its scope agreements arising from transactions engaged in by one of the parties (a consumer) for personal, family or household purposes, or whose subject matter concerns family, inheritance or employment law. The Convention also does not apply to settlement agreements that have been concluded during court proceedings (and which are therefore already enforceable as a judgment) and to settlement agreements that are enforceable as an arbitral award. In addition, signatory States have the option to make reservations to the application of the Convention, excluding settlements involving them or their government agencies; or agreeing to apply the Convention only to the extent that disputing parties have agreed to its application. So far, Belarus and Iran have made reservations to that effect.
A party seeking to enforce a settlement agreement under the Convention will have to show that it resulted from mediation. The Convention sets out a number of ways parties can do this, including provision of a settlement agreement signed by the mediator herself/himself or confirmation that a mediation was carried out; or an attestation by the institution that administered the mediation. When none of these are available, the Convention also allows proof by any other evidence acceptable to the relevant competent authority enforcing the agreement.
Similar to the New York Convention, there are limited grounds for refusal to enforce a mediated settlement agreement under the Singapore Convention. These include cases where:
- a party is under some kind of incapacity when entering the settlement agreement;
- the settlement agreement is null and void, inoperative or incapable of being performed under the law to which the parties have validly subjected it;
- the settlement agreement is not binding, or final according to its terms; or has been subsequently modified;
- the obligations in a settlement agreement have been performed, or are not clear or comprehensible; or granting relief would be otherwise contrary to its terms;
- there was a serious breach by the mediator of the applicable standards without which a party would not have entered into the settlement agreement; and
- there was a failure by the mediator to disclose to the parties circumstances that raise justifiable doubts as to the mediator’s impartiality or independence and such failure to disclose had a material impact or undue influence on a party without which failure that party would not have entered into the settlement agreement.
Likewise, if granting relief would be contrary to public policy in the enforcing State or the subject matter of the dispute is not capable of settlement by mediation under the laws of the enforcing State, then enforcement can be refused by the competent authority of such State as it is the case under the New York Convention.
Interestingly, the Singapore Convention does not have a reciprocity requirement like the New York Convention, meaning that a mediation performed anywhere in the world could potentially be recognised and enforced in a ratifying State.
Acceptance of the Convention
On the first day the Singapore Convention opened for signature (7 August 2019), 46 States including the U.S., Singapore, and China signed the Convention. This rose to 53 by January 2020. At the time of writing (October 2020), six of these signatories have ratified the Convention (Singapore, Qatar and Fiji for whom the Convention came into force on 12 September 2020, followed by Saudi Arabia in November 2020, Belarus in January 2021 and Ecuador in March 2021).[3] None of the EU Member States or the EU itself have signed the Convention yet.[4] Similarly, according to a policy statement from the UK Government in June 2020 and the following Parliamentary discussions in September 2020, no formal decision has yet been taken on whether the UK should join the Convention.[5]
Like the New York Convention, the Singapore Convention requires implementation into domestic legislation. Thus, the corresponding UNCITRAL Model Law on International Commercial Mediation and International Settlement Agreements Resulting from Mediation adopted by the United Nations General Assembly in 2018 (amending the UNCITRAL Model Law on International Commercial Conciliation, 2002)[6] will also assist signatory countries by providing the legal framework and procedures for implementing the Convention.
Why Is the Singapore Convention More Important Now?
As with everything in the current challenging climate, the impact of the COVID-19 pandemic on the civil justice systems and formal dispute resolution methods has been palpable. Since the early months of 2020, businesses have been forced to search for alternative means of resolving their mounting disputes, allowing them to fast-track resolution before things escalate into intractable ends.
As such, the Convention’s entry into force is more than timely. If the current uptake by signatories and the historic experience with the New York Convention in terms of promoting arbitration globally are anything to go by, things are looking very positive for the future of mediation and the Singapore Convention. It is without a doubt that the Convention is a momentous step in growing and developing mediation globally and providing a viable alternative to the current dispute resolution gridlock.
That is probably why international institutions for mediation have been quick to see the opportunities lying ahead. For example, in May 2020, the Singapore International Mediation Centre launched the SIMC COVID-19 Protocol with the aim of providing “a swift and inexpensive route to resolve commercial disputes during the COVID-19 period” by introducing expedited online mediation procedures.[7] Likewise, the London Court of International Arbitration has updated its Mediation Rules for the first time in eight years, effective from 1 October 2020.[8]
Unsurprisingly, Singapore is playing a pioneering role in Asia for the promotion of the Convention and mediation, to further solidify Singapore’s place as an international dispute resolution hub. Its proactivity has a high chance of paying off to cement that position in the long run, especially because mediation is viewed as a means of dispute resolution consistent with Asian business culture, as it encourages parties to work towards an acceptable and face-saving outcome, preserving the commercial relationships. Indeed, various Asian jurisdictions have already enacted mediation legislation in recent years, including Singapore, Hong Kong, Malaysia and China. Thus, the Convention is one more step in the right direction for Singapore, perhaps giving it the slight edge over its biggest rival in the region—Hong Kong—as an alternative dispute resolution centre.
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[1] Available at: https://uncitral.un.org/en/texts/mediation/conventions/international_settlement_agreements.
[2] See our previous alert on the Convention here: https://www.gibsondunn.com/singapore-convention-on-mediation-and-the-path-ahead/.
[3] See here for a full list of signatories.
[4] However, please note that the Member States have the benefit of the Mediation Directive No.2008/52/EC which allows the enforcement of cross-border mediated settlement agreements through the national courts of EU Member States.
[6] Available at: https://uncitral.un.org/en/texts/mediation/modellaw/commercial_conciliation.
[7] Available at: http://simc.com.sg/simc-covid-19-protocol/.
[8] See https://www.lcia.org/lcia-rules-update-2020.aspx.
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 and Transnational Litigation practice groups, or the following:
Cyrus Benson – London (+44 (0) 20 7071 4239, cbenson@gibsondunn.com)
Penny Madden Q.C. – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Jeffrey Sullivan – London (+44 (0) 20 7071 4231, jeffrey.sullivan@gibsondunn.com)
Rahim Moloo – New York (+1 212-351-2413, rmoloo@gibsondunn.com)
Ceyda Knoebel – London (+44 (0)20 7071 4243, cknoebel@gibsondunn.com)
Brad Roach – Singapore (+65 6507 3685, broach@gibsondunn.com)
Robson Lee – Singapore (+65 6507-3684, rlee@gibsondunn.com)
Brian Gilchrist – Hong Kong (+852 2214 3820, bgilchrist@gibsondunn.com)
Elaine Chen – Hong Kong (+852 2214 3821, echen@gibsondunn.com)
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
After the COVID-19 pandemic seemed to close the IPO market overnight, over the past few months IPOs have roared back to life in an incredibly active market. While some parts of the process have remained steady, the current environment has raised unforeseen challenges and novel practices for issuers, underwriters and their counsel in the IPO process. This short webcast will break down the current market and the key legal, financial and execution issues affecting IPOs in late 2020, as well as best practices for successfully navigating the IPO process in the current environment. Please join our expert panelists as they discuss recent developments, market trends and disclosure considerations in the IPO market, as well as current expectations for the future of the IPO process.
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PANELISTS:
Peter W. Wardle is Co-Partner in Charge of the Los Angeles office of Gibson, Dunn & Crutcher. He is a member of the firm’s Corporate Transactions Department and Co-Chair of its Capital Markets Practice Group. Mr. Wardle’s practice includes representation of issuers and underwriters in equity and debt offerings, including IPOs and secondary public offerings, and representation of both public and private companies in mergers and acquisitions, including private equity, cross border, leveraged buy-out, distressed and going private transactions. He also advises clients on a wide variety of general corporate and securities law matters, including corporate governance issues.
Stewart McDowell is a partner in the San Francisco office of Gibson, Dunn & Crutcher. She is a member of the firm’s Corporate Transactions Practice Group, Co-Chair of the Capital Markets Practice Group. Ms. McDowell’s practice involves the representation of business organizations as to capital markets transactions, mergers and acquisitions, SEC reporting, corporate governance and general corporate matters. She has significant experience representing both underwriters and issuers in a broad range of both debt and equity securities offerings. She also represents both buyers and sellers in connection with U.S. and cross-border mergers, acquisitions and strategic investments.