Category: Antitrust & Trade Regulation

Apple, Inc. Probed by European Commission for Possible Antitrust Violations

In late June, the European Commission (EC) opened several formal cases investigating Apple’s mobile payment technology (Apple Pay) and various third-party and user agreements to determine whether the tech giant’s practices and policies infringe on competition rights and abuse market power. Specifically, the Commission will investigate the company’s terms and conditions integrating the payment feature into merchant applications and websites, and the imposition of its proprietary in-app purchase system and accompanying restrictions. The latter prevents third-party developers from informing their users of cheaper alternative purchases available outside the app. The investigations follow complaints made by Spotify, a music streaming service competitor, and an e-book/audiobook distributor competitor, according to the EC’s press release.

In a statement, EC Executive Vice President Margrethe Vestager said that the Commission needs to allay fears that Apple’s “gatekeeper role” in the distribution of apps and content to users does not distort market competition. The impetus, she said, was to ensure that “Apple’s measures do not deny consumers the benefits of new payment technologies, including better choice, quality, innovation and competitive prices.”

Apple is one of the latest tech targets to experience regulatory scrutiny. Facebook, Amazon, and Google are facing antitrust inquiries by EU member states, the European Commission, and the United States’ Department of Justice and Federal Trade Commission.

© MoginRubin LLP

ARTICLE BY the Competition Policy and Advocacy practice at MoginRubin.
For more on mobile payment portals, see the National Law Review Financial Institutions & Banking law section.

The DOJ and SEC Have Updated Their Foundational Foreign Corrupt Practices Act Resource

The U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) recently published an updated guide to the Foreign Corrupt Practices Act (FCPA), a key resource for corporate whistleblowers around the world.

The FCPA is a U.S. law that prohibits the payment of anything of value to foreign government officials in order to obtain a business advantage. The FCPA also requires publicly traded corporations to make and keep books and records that accurately reflect transactions of the corporation to ensure that no bribes were paid.

This singular law is extremely important to global corporate accountability because it ensures that U.S. companies can be held accountable for corrupt actions abroad. Additionally, because this law is a part of the Dodd-Frank Act, whistleblowers from around the world may anonymously and confidentially report such corruption to the SEC and receive an award for successful tips. The U.S. government has successfully prosecuted many foreign corporations under the FCPA and has issued millions of dollars in rewards to both U.S. and non-U.S. whistleblowers.

This new guide adheres to this standard by providing significant, easy to follow information on the scope of the FCPA, potential consequences for FCPA violations, and whistleblower protections. In this new edition, the DOJ and SEC expand their guidance on a number of issues citing new cases and the new DOJ FCPA Corporate Enforcement Policy, which all anticorruption advocates, including potential whistleblowers, and corporate compliance professionals should review and understand.

The complete list of topics on which updated definitions and guidance is provided is as follows:

  • Intermediaries

  • Gifts as bribes

  • Instrumentalities of foreign governments

  • Third party payments

  • The “local law defense”

  • Successor liability for corporations

  • Conspiracy liability

  • Applicable statutes of limitations

  • Criminal liability for accounting violations

  • Factors that the Justice Department considers in determining how to resolve a corporate criminal case

  • DOJ FCPA Corporate Enforcement Policy (a new official DOJ policy), including examples of when the DOJ will decline to prosecute

  • How corporate and individual cooperation is evaluated

  • Components of an effective compliance program

Copyright Kohn, Kohn & Colapinto, LLP 2020. All Rights Reserved.

For more on the Foreign Corrupt Practices Act, see the National Law Review Antitrust and Trade Regulation section.

Beware the COVID-19 Cure: The FTC Issues Warnings to Products Making COVID-19 Treatment Claims

With no approved vaccine, the world waits for the next big breakthrough in 2020’s medical emergency. Some companies already claim to have found it – and subsequently received warning letters from the Federal Trade Commission (FTC) for misbranding. The FTC is targeting companies promoting products with supposed COVID-19 cures, treatment or prevention for making illegal, unsubstantiated claims.

One of the FTC’s objectives is eliminating false and misleading information from the marketplace. The FTC Act defines false advertising as misleading in a “material respect,” which includes both affirmative statements and failure to “reveal facts material in the light of [the product’s] representations[.]” See 15 USC 55(a)(1).

The FTC accomplishes its goal by sending warning letters. Under the FTC Act, a product may be misbranded if it is promoted as a prevention, cure or treatment for COVID-19 – when in fact it has not been approved for such use by the Food and Drug Administration. Since March 2020, the FTC has issued more than 200 warning letters to various businesses that advertise wellness products and other services that allegedly address COVID-19.

In some instances, the claims involved a gross exaggeration of the product’s effectiveness. For example, the website “NothingsIncurable.com” advertised products alleged to “literally make you invulnerable.” The FTC concluded those claims constituted misbranding. But even when promotional statements do not include an explicit falsehood, overpromotion still can cross into misbranding. For example, businesses that claimed, “[this product] will target and increase your immunity to help ward off the COVID-19 virus” or that recommended their products as “scientifically proven to support healthy immune function” also were found to be misbranded.

In another example, a company included “Coronavirus” in the website navigation menu that led consumers to therapy kits intended to provide “specific nutrition” to “balance the terrain of the body to make it conducive to” its particular function. Although the product description did not reference COVID-19, the FTC concluded that the website navigation menu was suggestive enough to warrant a warning for misbranding.

Summary

The FTC warning letters advise businesses that “under the FTC Act, 15 U.S.C. § 41 et seq.,” they are prohibited from advertising “that a product or service can prevent, treat, or cure human disease unless you possess competent and reliable scientific evidence, including, when appropriate, well-controlled human clinical studies, substantiating that the claims are true at the time they are made.” In addition, products that claim or imply the ability to mitigate, prevent, treat, diagnose or cure COVID-19 must be approved drugs under section 505(a) of the Federal Food, Drug and Cosmetic Act. In each case, the FTC required a response from the business within 48 hours, detailing the actions taken to address the FTC’s concerns.

During this unprecedented health crisis, companies that sell consumer products should exercise caution when mentioning COVID-19 in advertising or promotional statements. Mentioning COVID-19 in relation to a product, even if the product is intended to address more routine health issues, could be misleading.

© 2020 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.

For more on COVID-19, see the National Law Review Coronavirus News section.

FTC Attorney Discusses Regulatory Focus on Payment Processing Industry

The Federal Trade Commission consistently seeks to expand the scope of potential liability for deceptive advertising practices.  From substantial assistance liability under the FTC’s Telemarketing Sales Rule to theories of agency or vicarious liability, ad agencies, ad networks, lead buyers and aggregators, lead purchasers, merchants and payment processors are all potentially accountable for facilitating the actions or omissions of those that they do business with.

Consider the latter and the FTC’s recent assault on the payment processing industry.  It amply highlights third party accountability remedial theories and the imposition of reasonable monitoring duties.

In January 2020, the FTC announced that an overseas payment processor and its former CEO settled allegations that they enabled a deceptive “free trial” offer scheme.  According to the complaint, the company, its principals and related entities marketed supposed “free trial” offers for personal care products and dietary supplements online, but instead billed consumers the full price of the products and enrolled them in negative option continuity plans without their consent.

To further the scheme, the defendants allegedly used dozens of shell companies and straw owners in the United States and the United Kingdom to obtain and maintain the merchant accounts needed to accept consumers’ credit and debit card payments, an illegal practice known as “credit card laundering.”

The FTC subsequently filed an amended complaint adding a Latvian financial institution and its former CEO to the case, alleging that they illegally maintained merchant accounts for the other defendants in the name of shell companies and enabled them to evade credit card chargeback monitoring programs.

In a press release, FTC attorney Andrew Smith, Director of the Bureau of Consumer Protection, stated that “[t]he FTC will continue to aggressively pursue payment processors that are complicit in illegal conduct, whether they operate at home or abroad.”

The FTC also recently announced that a payment processor for an alleged business coaching scheme settled charges that it ignored warning signs its client was operating an unlawful business coaching and investment scheme.  Here, according to the FTC’s complaint, the company for years processed payments for a purported scheme that charged consumers hundreds of millions of dollars for allegedly worthless business coaching products, and that the company ignored numerous signs that the business was allegedly fraudulent.

The red flags listed in the complaint include questions about whether the company was a domestic or international company, the nature of its business model, the company’s purported history of excessive chargebacks, and claims the company allegedly made in its marketing materials.

Notably, the complaint also alleged that the company failed to follow its own internal policies and failed to review its clients’ business practices in detail, which, according to the FTC, would have revealed numerous elements that should have eliminated the client under those policies.

According to the FTC, even after the company took on the client, the client’s processing data immediately raised red flags related to the quantity of charges it processed and the number of refunds and chargebacks associated with those charges.  When the client experienced excessive chargeback rates, instead of adequately investigating the causes of the chargebacks, the company responded by requiring the client to work closely with chargeback prevention companies, according to the FTC.  The FTC alleged that the company failed to monitor the products its client was selling and the claims it was making to sell those products.

Again, the Director of the FTC’s BCP conveyed that “[i]gnoring clear signs that your biggest customer is a bogus online business opportunity is no way to operate a payment processing business.”  “And, it’s a sure-fire way to get the attention of the FTC,” Smith stated.

Most recently, the FTC announced that a payment processor that allegedly helped perpetuate multiple scams has been banned under the terms of a settlement with the agency and the State of Ohio.  Here, the FTC alleged that the defendants used remotely created payment orders and remotely created checks to facilitate payments for unscrupulous merchants, allowing them to draw money from consumer victims’ bank accounts.

Reaffirming the FTC’s focus on the payment processing industry, FTC lawyer Andrew Smith stated that “[p]ayment processors who help scammers steal people’s money are a scourge on the financial system.”  “When we find fraud, we are committed to rooting out payment processors and other companies who actively facilitate and support these fraudulent schemes,” Smith stated.

The FTC is aggressively policing payment processors that bury their heads in the sand or go a step further and help cover up their clients’ wrongdoing.  Either course of conduct could land them in legal hot water.

The settlement terms of the matters above include permanent bans, hefty monetary judgments and the surrender of assets.

© 2020 Hinch Newman LLP

Declaring National Emergency, President Trump Orders Restrictions on Electrical Equipment Supplied By “Foreign Adversaries”

In an Executive Order issued on May 1, 2020, President Trump declared that the unrestricted supply of electrical equipment from foreign countries represents an “unusual and extraordinary threat to the national security, foreign policy, and economy of the United States” because foreign adversaries may use such equipment to sabotage the nation’s electric power supply. While the scope of the order will not be clear until rules to carry it out are put in place, the order could prove disruptive to the supply chains for substations, transformers, and other equipment essential to operation of the nation’s electric power system, as well as to a new generation of “smart grid” devices that are transforming the electric grid, especially for devices that are manufactured in China.

The vulnerability of the electric system to malicious software and other threats embedded in equipment or components manufactured in the territory of hostile powers has long been recognized as a potential problem. In fact, the North American Electric Reliability Corporation, the entity responsible for promulgating and enforcing mandatory electric reliability standards, has developed a reliability standard (CIP-013-1) governing “Supply Chain Risk Management,” although the effective date for the standard was recently delayed by the Federal Energy Regulatory Commission due to the COVID-19 crisis.

In contrast to CIP-013-1, which requires each entity subject to the standard to develop its own plan for ensuring that relevant supply chains are free from cybersecurity risks, the new Executive Order contemplates a top-down approach, in which certain “foreign adversaries” would be identified and imports from those “adversaries” would be prohibited, although transactions with certain vendors would be allowed if they are on a “pre-approval” list. Notably, the Executive Order applies “notwithstanding any contract entered into or any license or permit granted prior to the date of this order” and authorizes the Secretary of Energy to act against “pending transactions” that might violate the order. Hence, the Executive Order could be applied retroactively, particularly to transactions that are now in process.

This aspect of the Executive Order is particularly troubling because it is likely to be at least several months before the exact reach of the Order is known. The Order directs the Secretary of Energy, in cooperation with other federal departments, to promulgate rules carrying out the Executive Order within 150 days. It is likely that the list of “foreign adversaries” will include China, which is an important link in the supply chain for many companies, as well as Russia, Iran, and North Korea. But that remains an unknown, as does the list of suppliers that might be included on the pre-approved list. The Executive Order is limited to the “bulk electric system”—high voltage transmission lines, substations, and related equipment – but contains a provision that could expand its reach to electric distribution systems, an area generally left to state regulation, based on recommendations from a security task force to be formed under the Executive Order.

The Executive Order creates new and potentially serious regulatory, contractual, and supply chain management issues for companies engaged in operation of the bulk electric system, in the manufacture of equipment necessary for operating the bulk electric system, and for emerging “smart grid” technologies that promise to improve the operation and efficiency of the bulk electric system.

© 2020 Beveridge & Diamond PC

For more on America’s electric infrastructure, see the National Law Review Environmental, Energy & Resource law section.

COVID-19 Update: Don’t Be a Target: What Business Should Know about State Attorney General Reactions to COVID-19

In any time of crisis, there is heightened risk for fraud and scams. While United States Attorney General Barr has warned of scams and other illegal acts on the federal level,1 it is with the state Attorneys General (“AGs”) where the rubber hits the road in enforcing social distancing orders, investigating companies for alleged price gouging, continuing ongoing investigations, and overseeing lending relief efforts. As the economy begins to reopen on a state-by-state and sector-by-sector basis, companies must be vigilant in protecting themselves from the next wave of scrutiny by state AGs.

During normal times, state AGs rely upon their state’s Consumer Protection Act and Unfair or Deceptive Acts or Practices (UDAP) statutes to fight against perceived fraud. During the COVID-19 crisis, state AGs have taken the additional step of issuing Civil Investigative Demands, mostly focused on the issue of price gouging, or an instance in which a company allegedly inflates prices above a perceived acceptable level based not solely on supply and demand, but also on leveraging, in this case, the COVID-19 pandemic to the detriment of the consumer. Allegations of price gouging often appear during or immediately following natural disasters, an example of which would be heightened prices for essential products such as generators and flashlights in historically hard-hit areas such as Florida or New Orleans during the Atlantic hurricane season. In the current environment, state AGs across the country are each receiving literally hundreds of consumer complaints alleging that companies are similarly raising prices on necessities.2 Online platforms for third-party sellers are particularly vulnerable to state AGs in this environment, with most people sheltering in place and fulfilling the majority of their purchasing needs through online retail. In fact, 33 state AGs sent a letter to Amazon.com, Inc., Facebook, Inc., Craigslist, Inc. and eBay Inc. to request enhanced procedures to protect against price gouging on their respective platforms.3 Ironically, companies such as Facebook, Google, Navient, and others that have been targeted by state AGs, often on extremely flimsy legal grounds, are now being asked by those same regulators to continue their efforts to step up to assist in this pandemic. And those companies, and so many others, are doing just that.

However, there are indeed some bad actors. In one well-publicized example, two Tennessee men hoarded over 17,000 bottles of hand sanitizer with the intent to sell them for up to $70 per bottle and was immediately met by an expedited investigation by Tennessee AG Herbert Slatery.4 Other examples have abounded: Massachusetts AG Maura Healey unilaterally expanded her state’s price gouging regulations, which had previously been limited to gasoline and petroleum products, to include “all goods or services necessary for the health, safety or welfare of the public”;5 New York AG Letitia James sent cease and desist letters to merchants that were allegedly engaging in price gouging related to the sale of hand sanitizer and disinfectant;6 New Jersey AG Gurbir Grewal has sent over 80 cease and desist letters after receiving more than 600 complaints of COVID-19-related price gouging and other related consumer protection violations;7 Florida AG Ashley Moody activated a “Price gouging Hotline” and opened an investigation into third-party sellers accused of price gouging on essential goods through accounts on Amazon;8 and finally, 20 state AGs have implored 3M Company to create a database and accounting of the distribution and pricing of 3M’s N95 respirator masks, including urging 3M to publish its policies prohibiting price gouging.

Businesses that remain open should be mindful of the additional steps taken to ensure compliance with social distancing regulations. For example, Vermont AG T.J. Donovan issued a directive for law enforcement outlining guidance for the enforcement of the state’s COVID-19 Executive Order that, among other things, extended authority to the state Department of Public Safety to inspect the premises and records of any employer to ensure compliance with the Executive Order.9 Other state AGs are enforcing their states’ Executive Orders with similar diligence: New York AG James ordered over 70 medical transportation companies to stop providing group rides;10 Michigan AG Dana Nessel sent a letter to home improvement store Menards in the wake of reports that the retailer had engaged in business practices that would endanger consumers and employees contrary to the Executive Order issued by Michigan Governor Gretchen Whitmer;11 and Delaware law enforcement officials even issued cease and desist orders to a barber shop and a tobacco shop.12

As the economy begins to incrementally ‘reopen’ in the weeks and months to come, companies should document every step taken to protect their customers and employees as well as the rationale underlying those measures. The far-reaching effects of the COVID-19 pandemic are unlikely to subside until a vaccine becomes publicly available. Thus, state AGs are likely to continue to probe companies aggressively about safety measures taken to protect their customers and employees; adherence to government policies and interpretative guidance; their definition of essential employees; and whether the company contributed to the spread of the virus.

State AGs are the top law enforcement officers in their states and will continue to act to protect their citizens during, and long after, the COVID-19 crisis is over. Industry should be on the lookout for measures taken by state AGs to identify and prosecute fraud and perceived price gouging during the COVID-19 pandemic, and should comply with laws and Executive Orders as diligently as possible. What constitutes the requisite compliance with social distancing – both now and as the economy begins to reopen – and what constitutes an essential service are often somewhat subjective and may require the consult of counsel. Cadwalader’s state AG practice is regularly in close communication with state AG offices and is well-positioned to provide guidance to clients that may be in receipt of an inquiry from a state AG, and we stand ready to continue to assist clients as they navigate the implications of the COVID-19 pandemic.

1   https://www.justice.gov/opa/pr/attorney-general-william-p-barr-urges-american-public-report-covid-19-fraud

2 https://www.cadwalader.com/state-attorney-general-insider/index.php?nid=6&eid=34

3  https://www.attorneygeneral.gov/wp-content/uploads/2020/03/03_25_2020_Multistate-letter.pdf

4   On April 21, 2020, Tennessee AG Slatery announced that a settlement had been reached with the two men to resolve allegations of price gouging; all supplies were surrendered to a nonprofit organization in Tennessee and a portion of the supplies were distributed to officials in Kentucky, and the two men were prohibited from selling emergency or medical supplies grossly in excess of the price generally charged during any declared state of abnormal economic disruption related to the COVID-19 pandemic.

5  https://www.mass.gov/news/ag-healey-issues-emergency-regulation-prohibiting-price gouging-of-critical-goods-and-services

6  https://ag.ny.gov/press-release/2020/ag-james-price gouging-will-not-be-tolerated

7  https://www.njconsumeraffairs.gov/News/Pages/03172020.aspx

8   http://www.myfloridalegal.com/newsrel.nsf/newsreleases/A32615BF3942B33E8525854300514289?Open&

9  https://www.attorneygeneral.gov/wp-content/uploads/2020/03/03_25_2020_Multistate-letter.pdf

10  https://ag.ny.gov/press-release/2020/attorney-general-james-orders-78-transport-providers-immediately-stop-endangering

11  https://www.michigan.gov/coronavirus/0,9753,7-406-98158-523976–,00.html

12 https://www.delawarepublic.org/post/delaware-flagging-non-essential-businesses-open-during-shutdown

© Copyright 2020 Cadwalader, Wickersham & Taft LLP

For more on AG’s Enforcement Activities around COVID-19 Fraud see the National Law Review Coronavirus News section.

FCPA Landmines Beneath the Surface of the COVID-19 Crisis

COVID-19 took the world by surprise and continues to spread across the globe in more than 210 countries and counting.  The outbreak in the United States escalated rapidly, with over 585,000 confirmed cases as of April 14, 2020.  The federal government and a number of hard-hit states were caught off guard, and soon learned that their inventories of personal protective equipment (“PPE”) and other life-saving equipment such as test kits and ventilators were insufficient to keep pace with the pandemic.  The demand for equipment to fight COVID-19 skyrocketed and government and commercial entities have shifted into high gear to respond.  Whether motivated by humanitarian concern or commercial enterprise, many state and local governments, companies and individuals are now looking abroad to procure critical supplies on an expedited basis.  At the same time, many foreign industrial manufacturers are positioning themselves for the high demand of exports by adapting their facilities to produce PPE.  For example, Chinese electric car maker BYD announced on March 13, 2020 it is now the largest face mask factory in the world—less than one month after converting its facilities in response to the pandemic.  In the midst of these exigent circumstances, the global supply chain landscape is replete with Foreign Corrupt Practices Act landmines—and well-intentioned companies hoping to partner with foreign PPE manufacturers could become a casualty if they don’t watch their step.

Anticipated FCPA Enforcement in the Wake of the COVID-19 Pandemic

The Foreign Corrupt Practices Act of 1977 (“FCPA”) makes it unlawful for any commercial enterprise, or individual representing one, to offer, promise to pay, or direct or authorize another individual to pay money or anything of value to a foreign government official for the purpose of expanding or maintaining their commercial interests.  15 U.S.C. §§ 78dd-1, et seq.  The FCPA also requires publicly traded companies “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.”  Id.  The statute has a criminal and civil bite; the DOJ is responsible for all criminal enforcement of the FCPA and civil enforcement of its bribery provisions, and the SEC is responsible for civil enforcement of the FCPA’s “books and records” provisions if securities are involved.  The DOJ and SEC rarely enforced the FCPA in its first three decades of existence.  These agencies, however, have aggressively interpreted and enforced the law since the turn of the century.  From 2000 to 2019, the DOJ brought 235 enforcement actions and the SEC brought 168 enforcement actions, together involving over $11 billion in monetary resolutions.  In 2019, the U.S. Government collected more in a single year through DOJ and SEC actions against companies in FCPA cases than ever before.  There are several FCPA-related considerations for companies to keep in mind as they navigate business during the COVID-19 pandemic.

Indeed, U.S. companies would be wise to assume the government will persist in its aggressive “a bribe is a bribe” approach to the FCPA, even in the midst of a worldwide health crisis.  First, corruption tends to thrive in times of crisis.  Weaknesses in governmental systems become exposed, and those with nefarious intent, or just too much aggressiveness, seize on the opportunity to exploit the panic, fear and suffering that accompanies disasters.  Increased corruption, in turn, often results in increased enforcement.  The financial crisis of 2008, for example, increased FCPA enforcement.  As companies faced pressure to obtain business and even maintain operational status during the crisis, their focus on FCPA compliance decreased.  The global economy came to a halt, and many companies decided to quickly merge and consolidate.  The speed of these consolidations resulted in the discovery by some acquiring companies of questionable payments and accounting practices both pre- and post-merger, resulting in increased FCPA compliance risks.  The DOJ and SEC were alerted and brought more FCPA enforcement actions and imposed higher civil fines from 2008 to 2011 than ever before.

Second, although the current administration has not directly addressed whether and to what extent it will pursue FCPA enforcement actions as a result of the COVID-19 pandemic, the DOJ and SEC have announced their intent to prioritize coronavirus-related fraud schemes.  For example, on March 20, 2020, the DOJ issued a press release announcing that Attorney General William P. Barr “is urging the public to report suspected fraud schemes related to COVID-19” and directing all U.S. Attorneys to prioritize investigating and prosecuting such schemes.  Four days later, the DOJ established the COVID-19 Hoarding and Price Gouging Task Force “to address COVID-19-related market manipulation, hoarding, and price gouging.”  Given the global supply chain pressure points and implications of the COVID-19 crisis, it would not be a stretch for the administration to extend its prioritization of such COVID-19-related fraud cases to include COVID-19-related global anti-corruption and bribery cases.

Third, the federal government is in the process of rolling out over two trillion dollars in aid and recovery funding in response to the coronavirus pandemic, and it likely will be eager to replenish its resources after such an unprecedented relief package.  The FCPA historically has generated significant revenue for the U.S. Government, and all criminal fines, civil penalties and disgorged profits resulting from FCPA violations go directly into the U.S. Treasury.  When the COVID-19 crisis curve drops in the U.S., the DOJ, SEC, and federal prosecutors could turn to the FCPA to assist the U.S. Government in bouncing back from the financial impact of the pandemic.

Finally, the current administration and others have been critical of China’s response to the COVID-19 crisis; Secretary of State Mike Pompeo, for example, remarked in a March 5, 2020 press conference that “there was information [from China] that could have been made available more quickly and data that could have been provided and shared among health professionals across the world.”  Further, on March 12, 2020, Chinese Foreign Ministry spokesman Zhao Lijian suggested, via Twitter, that the U.S. has not been transparent and that the U.S. Army may have brought the epidemic to Wuhan, China.  In the wake of a potential diplomatic fallout between the U.S. and China, the administration may be particularly vigilant of and aggressive toward U.S.-China deals implicating the FCPA.

Potential FCPA Landmines

American companies that import goods or supplies from abroad frequently rely on customs agents and third-party brokers to assist them in maneuvering the often complex customs process.  The use of such agents, however, may expose companies to FCPA compliance risks.  Numerous FCPA enforcement actions brought by the DOJ and the SEC have focused on improper payments made by third-party agents to government officials to secure customs clearance or additional business.

For example, on September 26, 2019, the SEC announced that a Wisconsin-based digital and print marketing provider agreed to pay nearly $10 million to settle charges that it violated the FCPA by engaging in multiple bribery schemes in Peru and China.  The SEC Order found that from 2010 to 2015 the company’s China-based subsidiary used sham sales agents to make and promise improper payments to employees of private and governmental customers to secure business.  Similarly, on February 28, 2020, an American communication technology provider settled FCPA charges with the SEC and DOJ for $8.8 million for using resellers and distributors in China to bribe government officials.

As companies face intense pressure to quickly obtain goods and clear them through the customs process to mitigate the healthcare and economic consequences posed by COVID-19, the risk of FCPA violations runs high.  For example, a customs official could refuse to allow the export of PPE without a bribe, and a company employee may be desperate enough to decide that the payment is worth making to preserve his or her employment at a time when company revenues are declining, non-performing employees are subject to lay-offs and furloughs, and sales expectations and revenues remain high.  Further, a company venturing into uncharted terrain by seeking to purchase high-demand and scarce products abroad to compensate for losses in traditional lines of business might face increased risks of bribery and corruption primarily due to inexperience.  Indeed, the pressure to maintain business or get back to “business as usual” may lead some employees to get dangerously close to or even cross ethical boundaries by committing bribery or other similar misconduct.

Best Practices

Companies seeking to procure goods and supplies abroad during the COVID-19 pandemic should consider the following best practices to avoid falling out of compliance with the FCPA:

  1. Maintain a Strong Compliance Presence

Company management should reinforce and reiterate the company’s commitment to its anti-corruption and anti-fraud compliance programs. Many companies are taking proactive steps to ensure the safety and well-being of their employees, cope with new “Work From Home” policies, and brace for the financial impact of the pandemic.  While a heightened focus on these critical areas right now is understandable, it is important now more than ever for companies and their compliance officers to remind employees, especially those responsible for facilitating the acquisition and importation of goods and supplies from abroad, of the company’s commitment to ethical business practices.

  1. Emphasize Reporting Procedures for Suspected FCPA Violations

Company management should conduct anti-corruption training for employees to ensure they are capable of recognizing unethical and potentially illegal conduct, and their responsibilities for reporting it according to company policies and procedures.  Compliance departments should test their reporting procedures to ensure employees are at ease in reporting any suspected FCPA violations through multiple avenues, and compliance officers should similarly test their ability to respond appropriately to reasonable suspicions of illegal activity.

  1. Increase Screenings and Transaction Review

Finally, company management should consider increasing due diligence efforts and taking a “deeper dive” when it comes to interacting with new suppliers, agents, and distributors. For example, companies should pay particular attention to whether the individual being reviewed is related to any public officials in their country of residence, has a history of employment or business dealings with the government, and whether they previously have been the subject of any corruption complaints, investigations or negative news events.  Further, companies that have instituted quantity, financial, or country of origin thresholds for reviews of transactions, expenses, and other aspects of company business for corruption risk, should consider adjusting such thresholds to include a broader and more conservative review process, at least until the COVID-19 pandemic and related equipment and supply demands substantially decrease.

Like all Blogs, this one is for information purposes only. It is not legal advice and does not form an attorney client relationship. As you are aware, things are changing quickly and there is no clear-cut authority or bright line rules in this area. This Blog does not reflect an unequivocal statement of the law, but instead represents our best interpretation of where things currently stand. This Blog does not address the potential impacts of the numerous other local, state, and federal orders that have been issued in response to the COVID-19 pandemic, including, without limitation, potential liability should an employee become ill, requirements regarding family leave, sick pay, and other issues.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.

For more on COVID-19 & Global Trade, see the National Law Review Coronavirus News section.

Gin Manufacturer Bacardi Avoids Lawsuit for Its Use of “Grains of Paradise”

A federal judge in the Southern District of Florida recently dismissed an action alleging that Bacardi’s use of a botanical called “grains of paradise” in its gin was “harmful and illegal,” holding that the statute on which the lawsuit was based was preempted by federal law. Marrach v. Bacardi U.S.A, 19-cv-23856 (S.D. Fla. Jan. 28, 2020).

The complaint alleged a violation of the Florida Deceptive and Unfair Trade Practices Act. While Plaintiff himself suffered no harm from the drink, he cited a nineteenth-century provision forbidding the adulteration of alcoholic beverages with “grains of paradise” to support his claim that Bacardi’s use of the botanical was illegal. However, Bacardi argued in its motion to dismiss that the complaint was preempted because the Federal Food, Drug and Cosmetic Act (FDCA) permits the use of “grains of paradise.”

In an opinion that did not mince words, Judge Robert N. Scola granted the motion to dismiss, opening with the observation: “Numerous class actions have greatly benefited society such as Brown v. Board of Education, In re Exxon Valdez, and In re Agent Orange Product Liability Litigation. This is not one of those class actions.” He noted that the Food Additives Amendment of 1958 granted the FDA broad authority to monitor and control the introduction of food additives, signaling Congress’s intent to prevent rules unnecessarily prohibiting access to safe food additives. Judge Scola held that the Florida statute, which criminalizes adulterating liquor with grains of paradise, frustrated this purpose and was therefore preempted because it was in conflict with federal law.

Plaintiff attempted to counter this reasoning by arguing that the 21st Amendment gave states the right to regulate liquor, thereby overriding any argument that federal law governed in this matter. Judge Scola disagreed. As an initial matter, “the 21st Amendment does not in any way diminish the reach of the Supremacy Clause,” and therefore has neither the intent nor effect of undermining federal preemption of inconsistent state law. Moreover, Judge Scola noted that other courts have found similar state law prohibitions on food additives to be preempted by the FDCA.

Like previous cases we have covered on this blog, the decision underscores the FDA’s broad regulatory authority over food and beverage products which cannot be circumvented by plaintiffs simply by bringing claims under state law. In doing so, it provides important assurance to manufacturers of such products that their reliance on federal law will not be undercut by arcane state provisions.

© 2020 Proskauer Rose LLP.

For more on food & beverage authority, see the National Law Review Biotech Food & Drug section.

U.S.-China Trade Deal Shows Potential for Improved U.S. Intellectual Property Rights in China

A result of negotiating techniques from Donald Trump’s book “The Art of the Deal” or a result of strategies from the ancient Chinese military strategy treatise “The Art of War”?

Who knows, but on January 15, 2020, the United States (“U.S.”) and China signed Phase One of the Economic and Trade Agreement between the U.S. and China (the “Agreement”).  The Agreement, which is set to go into force on February 14, 2020, attempts to end or at least ease the trade war tensions between the world’s two economic behemoths.  The Agreement, amongst other issues, addresses protection and enforcement of U.S. intellectual Property (“IP”) rights in China.  While the Agreement does not resolve all IP protection and enforcement concerns faced by U.S. businesses in China, it is certainly a step in the right direction.

The importance of IP in establishing a fair and balanced bilateral economic and trade relationship is evident in the fact that the entire first two chapters of the Agreement are dedicated to IP protection and enforcement in China.  The Agreement addresses numerous areas of IP, including trade secrets, pharmaceutical related IP, patents, piracy and counterfeiting, trademarks, technology transfer, and other related topics.

The Agreement puts much of the responsibility on China to revamp its laws and develop new policies and procedures to implement the provisions of the Agreement and to address the long-standing concerns that have existed with regard to protection and enforcement of U.S. IP in China.

Discussed below are some of the areas under the Agreement where China has agreed to implement new laws and procedures to protect U.S. intellectual property.  In return, the U.S. has agreed to affirm that it already has equivalent or similar protection and enforcement mechanisms in place.

Trade Secrets

  • The definition of trade secret is expanded to include confidential business information.
  • The scope of acts that constitutes trade secret misappropriation is broadened to include electronic intrusions, breaches or inducement of a breach of duty not to disclose, and other unauthorized disclosures or uses.
  • Implements burden-shifting in civil proceedings, shifting to the accused party where the holder of a trade secret has produced evidence of a reasonable indication of trade secret misappropriation by the accused party.
  • Adopts provisional measures to prevent the use of misappropriated trade secrets.
  • Eliminates the requirement that the holder of a trade secret establishes actual losses prior to initiation of a criminal investigation for misappropriation.
  • Provides for the application of criminal procedures and penalties to address willful trade secret misappropriation through theft, fraud, physical or electronic intrusion for an unlawful purpose.
  • Prohibits the unauthorized disclosure of undisclosed information, trade secrets, or confidential business information by government personnel involved in government proceedings in which such information is submitted and provides criminal, civil, and administrative penalties for such unauthorized disclosure.

Pharmaceutical-Related Intellectual Property

  • Permits pharmaceutical patent applicants to rely on supplemental data to satisfy relevant requirements for patentability, during patent examination proceedings, patent review proceedings, and judicial proceedings.
  • Provides (a) a system to provide notice to a patent holder, licensee, or holder of marketing approval, that a person is seeking to market that product during the term of an applicable patent claiming the approved product or its approved method of use; (b) adequate time and opportunity for such a patent holder to timely seek available remedies; and (c) procedures for judicial or administrative proceedings and expeditious remedies, for resolution of disputes concerning the validity or infringement of an applicable patent claiming an approved pharmaceutical product.
  • With regard to pharmaceutical-related patents on new products and methods of use, provides an extension of the patent term, due to unreasonable curtailment of the patent term as a result of the marketing approval process, of up to five years, and may limit the resulting effective patent term to no more than 14 years from the date of marketing approval in China.

Patents

  • Provides patent term extensions to compensate for unreasonable delays that occur in granting the patent or during pharmaceutical product marketing approvals. For this provision, an unreasonable delay shall at least include a delay in the issuance of the patent of more than four years from the date of filing, or three years after a request for examination of the application, whichever is later.

Piracy and Counterfeiting on E-Commerce Platforms

  • Provides enforcement procedures that permit effective and expeditious action by right holders against infringement that occurs in the online environment, including an effective notice and takedown system to address infringement.
  • Provides that e-commerce platforms may have their operating licenses revoked for repeated failures to curb the sale of counterfeit or pirated goods.

Geographical Indications

  • Provides that when determining whether a term is generic in China, how consumers understand the term in China will be taken in to account.

Manufacture and Export of Pirated and Counterfeit Goods

  • Provides effective and expeditious enforcement action against the related products of counterfeit medicines and biologics, including active pharmaceutical ingredients, bulk chemicals, and biological substances.
  • Sharing with the U.S. the registration information of pharmaceutical raw material sites that have been inspected and that comply with the requirements of Chinese laws and regulations; and publishing data on enforcement measures, including seizures, revocations of business licenses, fines, and other actions taken by the National Medical Products Administration, Ministry of Industry and Information Technology, or any successor entity.
  • Significantly increasing the number of enforcement actions and publishing data online on the measurable impact of these actions each quarter.
  • Seizing and destroying counterfeit or pirated goods, including the materials and implements used in the manufacture or creation of such pirated or counterfeit goods.
  • Requiring a counterfeiter to pay right holders the profits from infringement or damages adequate to compensate for the injury from the infringement.
  • Increase the number of trained personnel to inspect for counterfeit and pirated goods.
  • Ensure that all government agencies and all entities that the government owns or controls install and use only licensed software.

Trademarks

  • Provide for criminal enforcement if there is “reasonable suspicion” based on articulable facts that a criminal violation of an intellectual property right has occurred.
  • Provide civil and criminal penalties sufficient to deter future intellectual property theft or infringements. 

Implementation

  • Within 30 working days after the date of entry into force of this Agreement, China will present an action plan to strengthen intellectual property protection and shall include measures that China will take to implement its obligations and the date by which each measure will go into effect.

Technology Transfer

  • Provides that U.S. businesses are able to operate openly and freely in China without any force or pressure to transfer key technology as a requirement for operating in China.

What does this all mean?  Well it’s hard to tell really at this point as the Agreement does not actually implement any new laws or regulations, but rather is a bunch of promises between China and the U.S.  Until China implements new laws or regulations to fulfill its promises we can really only speculate on its true impact.  Of course, implementation of new laws or regulations is only effective if there is suitable enforcement to back it up.  However, most would agree that if China does fulfill its obligations we can expect to see stronger economic and trade relations between the U.S. and China, in particular giving U.S. businesses greater confidence and predictability in protecting and enforcing their IP rights in China.

© 2020 Ward and Smith, P.A.. All Rights Reserved.

For more on international trade negotiations, see the National Law Review Antitrust & Trade Regulation law section.

National Security vs. Investment: Are we striking the right balance?

The U.S. Treasury Department’s final regulations, giving it more power to scrutinize any national security risks that may arise from deals between U.S. and foreign companies, are scheduled to go into effect this week, Feb. 13, 2020.

CFIUS New Regulations

The regs implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) and provide the interagency Committee on Foreign Investment in the United States (CFIUS) broader authority over certain investments and real estate transactions. Critics say the regs will change cross-border M&A deal-making for years to come, and advance increasingly protectionist U.S. policy.

Treasury Secretary Steven T. Mnuchin said the regs will strengthen national security and “modernize the investment review process,” while maintaining “our nation’s open investment policy by encouraging investment in American businesses and workers, and by providing clarity and certainty regarding the types of transactions that are covered.”

We have previously described in the MoginRubin Blog how not everyone shares the Treasury Secretary’s respect for CFIUS.

Financial writer and author Robert Teitelman described it in an article for Barron’s as “a creature from the shadows of the administrative state” that “defines obscurity in the federal government.” He said it “encourages the very practices the administration condemns in China.” Hernan Cristerna, co-head of global mergers and acquisitions at JPMorgan Chase, told the New York Times that CFIUS is the “No. 1 weapon in the Trump administration’s protectionist arsenal” and called it “the ultimate regulatory bazooka.”

Enacted in August 2018, FIRRMA gives CFIUS much greater reach into deals where national security is a potential issue. Specifically, the law extends CFIUS’s jurisdiction over “certain non-controlling investments into U.S. businesses involved in critical technology, critical infrastructure, or sensitive personal data. Big data, artificial intelligence, nanotechnology, and biotechnology are among the specific technologies the law was designed to protect. It also establishes CFIUS’s jurisdiction over real estate deals.

The regulations limit CFIUS’s application of its expanded jurisdiction to “certain categories of foreign persons,” and has “initially” designated a handful of countries as “excepted foreign states.” They are Australia, Canada, and the U.K., countries with which the U.S. has “robust intelligence sharing and defense industrial base integration mechanisms.” The list may be expanded in the future, according to the regs.

‘Controlling interest’ redefined.

Attorneys, in-house counsel and other professionals deeply involved in cross-border transactions are already experiencing some nuts and bolts changes that other professionals want to be aware of.

For example, deals that would give foreign companies “controlling interest” are no longer the only deals the committee will examine; it is now interested in deals that would transfer non-controlling but “substantial interest” when critical technologies, critical infrastructure, or the private data of U.S. citizens are involved. Deals that fall into these categories now require filing; previously they were optional. Deals that would once have sailed through scrutiny may now be delayed by investigations. CFIUS also has more time to review transactions. The initial stage ends within 45 days and the second phase can last from 45 to 60 days. Filing fees are set but cannot be more than 1% of the value of the transaction or $300,000, whichever figure is lower. And, of course, there is increased risk that they be ultimately be blocked.

The regs include a new definition of “principal place of business” as the “primary location where an entity’s management directs, controls, or coordinates the entity’s activities, or, in the case of an investment fund, where the fund’s activities and investments are primarily directed, controlled, or coordinated by or on behalf of the general partner, managing member, or equivalent.” If the entity is determined to be in the U.S. and has represented in its most recent submission or filing to a U.S. or foreign government that if either its principal place of business, principal office and place of business, address of principal executive offices, address of headquarters, or equivalent, is outside the U.S. then that location is deemed the entity’s principal place of business unless it can prove that the location has changed since the filing.

These new regulations will impact many purely private cross-border transactions, especially in the areas of critical infrastructure, sensitive personal data, and real estate.

Early consideration important.

M&A counsel must now consider CFIUS implications early-on, not only to avoid delay and frustration, but to account for CFIUS clearance in deal timing and closing deadlines. Fines may be levied if CFIUS notices are not timely filed.

Fund managers who make large investments in U.S. companies can also expect to be asked to represent in deal documents that their funds or investors do not require a mandatory CFIUS filing.

For more background and additional insights, please read our previous post, CFIUS: A Guardian of National Security or a Protectionist Tool? Also, you can download the regulations from the MoginRubin website:  Part-800-Final-Rule-Jan-17-2020  & Part-802-Final-Rule-Jan-17-2020

© MoginRubin LLP

ARTICLE BY Dan Mogin and  Jennifer M. Oliver of MoginRubin.
For more on CFIUS regulations, see the National Law Review Global Law section.