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Brexit – Standardization and Innovation: What’s Ahead?

We have previously reviewed developments leading to the Brexit vote, the negotiating process that is now unfolding, possible alternative/outcomes and the likely implications as the UK resets its relationship with the EU.

This post focuses on Brexit risks and uncertainty related to standardization and innovation. As with the issues relating to competition policy/procedure, questions on standardization and innovation remain to be answered as the terms and timing of the UK Brexit are played out and as businesses, governments and individuals take their own actions – whether large or small, intentional or inadvertent.

Suffice to say, there will likely, over time, be divergences and penalties that will not only change the “rules of the game” but as well undercut important drivers for product development, innovation, consumer welfare and economic progress. Even in the best of cases (whatever that may be), inevitable divergent paths presages difficult times ahead for the UK, the EU and its trading partners – less transparency, less consensus, greater costs and increased uncertainty. However dead the US/EU TTIP free trade agreement may be in this political season, Brexit is one of the nails in the TTIP coffin.

It is useful to reiterate, as said before, that the EU was created to merge “essential” interests of previously rivaling nations and to build a foundation for an economic community of “destinies henceforth shared.” Critical to the achievement of such goals was considered the harmonization of trading terms and conditions and promotion of economic progress through innovation. Brexit undercuts such lofty goals and underscores continuing differences, prejudices and suspicions. While such terms may have an emotional element, they pose serious real practical costs.

For issues of standardization (“harmonization”) and innovation, the outcome of the Brexit process will have important implications. As explained in more detail below, harmonized standards across as wide a trading area as possible produces substantial economies of scale and efficiencies. In a similar fashion, innovation is best stimulated in an environment of expanding demand opportunities and through easily-accessed funding opportunities. Brexit threatens the UK and even the EU with risks on both counts. To the extent that divergence between standards applicable in the UK and the EU emerge, companies will face reduced market opportunities, reduced scale economies, increased costs and inefficiencies. In the same vein, innovation thrives in the freest and largest markets possible. As important, potential innovators need ready access to funding for their projects. Brexit threatens both a diminution of opportunities and resources available to fund such activities.

While it is premature to predict the outcome of the Brexit endgame, there a number of templates that have varying impacts on product standards and innovation. Among the choices facing the UK and its former EU counterparts are potential worlds in which the UK is 1) a member of the European Free Trade Association (“EFTA”) (e.g., Switzerland), 2) a member of the European Economic Area (“EEA”) (e.g., Norway, Iceland and Lichtenstein; 3) a member of a newly negotiated or already existing free trade customs union with the EU (e.g. Morocco, Tunisia, Israel and Turkey, etc.); 4) a member (albeit, a continuing one, of the World Trade Organization (“WTO”) and the European Patent Convention (“EPC”); or 5) a variant of some or all of the above. Obviously, the UK cannot dictate the outcome alone. Brexit is a negotiation likely to be affected by political, economic and cultural tensions.

The implications of these choices will have important outcomes on questions of product standardization and innovation. These outcomes will, of course, vary. First, on the one hand, whatever the Brexit outcome may be, the UK will still have a substantial body of EU-generated (uniformed, harmonized) laws and regulations on its books which will continue in full force and effect in the UK, unless repealed. There would not seem to be any substantial rush, logic or incentive to change them. At least in the short term, there would appear to be continued convergence, not immediate divergence.

On the other hand, if Brexit takes the form of an EFTA or EEA, there will be, going forward, no automatic direct effect of new EU legislation within the UK. Importantly, the UK will no longer have any direct say in such new laws and policies. Assuming no EFTA- or EEA-like EU relationship, the UK can always fall back on its WTO rights through WTO enforced agreements (to which the UK and the EU are signatories). The WTO Agreements on Technical Barriers to Trade and Sanitary and Phytosanitary Measures are two examples with obvious relevance to standardization. Nevertheless, any of these alternatives carry potentially risks, financial implications and process inefficiencies, when compared to the EU regulatory process (however cumbersome it may appear).

In addition, however desirable free/harmonized and tariff-free movement of goods and services may be, such benefits may be impacted if not linked with free movement of people and capital that seems likely to be lost through Brexit. As noted below, this will be particularly the case with innovation, which depends on available capital as well as bright inquiring minds.

A comprehensive analysis of potential risks for product standardization is beyond the scope of this post. However, fundamental to the standard setting process are agreements on mutual recognition of standards through conformity assessment procedures. Within the EU, these principles have been central to the creation of the European common market from the outset – “elimination as between member states of … quantitative restrictions on the import and export of goods and all measures having equivalent effect.” Outside the EU, there are many examples. Such mutual recognition/conformity assessment procedures lie at the heart, for example, of the WTO Technical Barriers to Trade Agreement, referenced above. These principles have served well the mutual interests of the United States and the European Union (among others). However, such a system, as noted above, would, relatively speaking, never be as cohesive as the EU’s system in which the UK participated since joining in 1973.

With Brexit, the UK will no longer be able to influence directly the standards setting process that results in EU legislation – e.g., regulations – that are binding and have direct effect in EU member states. Brexit poses risks in other sectors where EU regulation provided uniform, EU-wide market direction and procedures. Brexit will make standard setting more cumbersome, more costly and more likely to create differences and tensions.

That said, it should be recognized that standard setting as well is often undertaken on a sectoral basis. There are many examples of industries in which standards are set not on an EU or a national basis but on a multinational or even global basis. This is true, for example, in the motor vehicle sector in which efforts at harmonization of vehicle regulations have long been undertaken through organizations like the United Nations Economic Commission for Europe. Outside this sector, there are as well myriad European focused organizations like the European Committee for standardization (“CEN”) and the European Telecommunications Standards Institute (“ETSI”) that promote harmonized standards. Thus, for standards, Brexit may prove to have an uneven effect depending on the particular issue and the particular sector. For the UK and for companies doing business in the UK, Brexit will, on balance nevertheless, produce uncertainties, less transparency, less leverage, greater complexity, delay and increeased costs.

Brexit poses similar issues and concerns for innovation. Innovation depends on idea creation. Idea creation does not exist in a vacuum. It depends on a structure facilitating creativity that is dependent on funding (whether one likes it or not), free exchange of ideas and structures/vehicles for product development. The UK has long had a tradition of educational excellence and research. Brexit does not so much threaten extinction of such values as it threatens the UK with a diminution of available funds, reduced opportunities for collaboration and free exchange of ideas among creators of innovation and loss of a critical seat at the table where policies and priorities are determined. As a member of the EU, the UK participated fully as an EU member not only in the funding available from programs like Horizon 2020 (which has nearly €80 billion in funding available) and the EU framework programs (funding so-called “networks of excellence” in critical areas like breast cancer research). Brexit will substantial diminish UK involvement in the creation and guiding of the programs in the first instance.

There is debate about what the exact amount of the loss of funding with Brexit will be (in monetary and percentage terms). Some say that the EU has accounted for less than 5% of UK R&D. Opponents of Brexit counter that the EU provides funding for more than 15% of UK science grants (up over 70% since 2007). Whatever is the correct way to evaluate the impact of Brexit, no one can dispute that UK research and innovation institutions/centers/universities will be net losers as a result of Brexit. While non-EU members can participate in programs like Horizon 2020 (and any follow-on programs after 2020), such participation by the UK would be as an associate member. As an associate member, its participation would appear to be limited to only certain “pillars” (e.g., “Excellent Science” but not “Industrial Leadership” and “Societal Concern”). The UK would not receive any EU funding if as an associate member the UK’s GDP is above a certain level (almost surely the case for the UK) and if, as was the case with Switzerland recently, the associate member would be deemed to hinder free circulation of people.

Alternatives for the UK outside the EU to have the same level of participation in and influence in the development of European innovative ideas will clearly be diminished. Some argue that UK should turn its attention on innovation opportunities in countries like the United States, Australia and Canada. While clearly those destinations have and will continue have cutting-edge research and development opportunities, they enforce visa restrictions that the UK did not face with the EU before Brexit. Equally important is the potential loss, while hard to measure and quantify, of diminished intellectual exchange and dialogue that will come as a result not only from the restrictions on EU students and scientists studying/working/innovating in the UK but as well the barriers UK students and scientists will face when seeking to study/work/innovate in EU institutions/laboratories and universities.

ARTICLE BY Howard W. Fogt, David T. Ralston Jr., Rouget F. Henschel & Sophie Lignier of Foley & Lardner LLP

Two Timing Employee Caught in the Act – Uber Unfortunate!

An employee of West Australian Newspapers Limited (WAN) who moonlighted for Uber was caught in the act when, one Saturday night, he picked up a WAN manager.

Despite being well and truly busted, the employee (who worked night shifts as WAN’s newspaper machinist) denied having any affiliation with Uber, saying that his wife had the Uber business and he just occasionally drove her car to the petrol station or car wash. He also initially denied picking up the WAN manager, but in a classic case of #absolutelysprung, quickly reneged from this position when shown the receipt identifying him by name and picture as the Uber driver.

It was clear from the employee’s employment contract that he was required to seek WAN’s permission before working a second job. It was also clear from WAN’s codes and procedures, as well as discussion at toolbox meetings (which the employee attended), that WAN had a duty of care to manage the safety risk of fatigue arising from night shift work.

When WAN investigated the matter, the employee refused to answer its questions or produce documents and conducted himself in an obstructive manner causing the employment relationship to become untenable. The employee was subsequently dismissed and claimed unfair dismissal on the basis he was confused as to the meaning of having a ‘second job’ (#goodtry)

Amid the cobweb of lies (including that his wife must have completed his Uber registration without his knowledge), it was revealed that the employee had driven as an Uber driver on at least 15 occasions. The Fair Work Commission upheld the dismissal stating that the employee deliberately provided misleading information to WAN and ultimately, was the “architect of his own demise” (#nowafulltimeUberdriver)

ARTICLE BY Emily J. Tan of Squire Patton Boggs (US) LLP

Upcoming European Chemical Restrictions in Apparel Raise Concerns

The European Commission intends to ban the use in apparel of hundreds of Cat. 1A and 1B carcinogenic, mutagenic and toxic for reproduction substances (“CMRs”) within the next year. To do so, the Commission expects to use the so-called “fast-track” procedure to ban CMRs under Regulation 1907/2006 (“REACH Regulation”), instead of the standard procedure for prohibiting substances. Historically, the fast-track procedure has been reserved for mixtures that contain CMRs and are intended for the general public. The Commission has indicated that its proposal to ban the use of CMRs in apparel is a “test-case” of its intention to also ban Cat. 1A and 1B CMRs in articles (i.e., objects) intended for consumers on a regular basis in the near future. This fast-track procedure allows less scientific input from the European Chemicals Agency (“ECHA”) and industry, and the related restrictions would create significant barriers to international trade.

“Standard” vs. “Fast-Track” Procedure

Title VIII of the REACH Regulation empowers the European Commission to restrict the use in mixtures (e.g., inks, paints) and articles (e.g., apparel) of substances that pose an unacceptable risk to human health or the environment. Restricted substances are listed in Annex XVII of the Regulation, which is regularly updated.

There are two different procedures for adding new restrictions: the “regular” and the “fast-track” procedure. In both cases, the Commission proposes the restrictions, and its final proposal is then adopted through “comitology” (i.e., a process involving the input of Member States). The road towards the final Commission proposal, however, is very different for each procedure:

Standard procedure: The standard procedure is generally highly regarded for the sound scientific input it gathers. Articles 69 – 73 of the REACH Regulation include important steps, such as ECHA’s or a Member State’s preparation of an Annex XV dossier analyzing the restrictions, assessments by the Agency’s Risk Assessment Committee (“RAC”) and Socio-Economic Assessment Committee (“SEAC”), and consultation of the Forum for Exchange of Information on Enforcement (“Forum”).
Fast-Track Procedure: Article 68(2) of the REACH Regulation, however, empowers the Commission to ban the use of substances that are classified as Cat. 1A or 1B CMRs in mixtures and articles that could be used by consumers without the preparation of a dossier, the opinions of the RAC and SEAC or the consultation of the Forum. As the Commission recognized in its Article 68(2) Paper of 2014, the legislation provides little to no guidance on the use of this procedure.

Indeed, the fast-track procedure was originally intended, and until now has been used solely, to restrict the use of mixtures intended for consumers that contain Cat. 1A or 1B CMRs in concentrations above specific thresholds. Entries 28 to 30 of Annex XVII contain the general ban for mixtures containing Cat. 1A and 1B CMRs, and the Commission has regularly updated them by amending their Appendixes.

The procedure was historically intended for mixtures due to the potential high exposure of consumers using them. In contrast, there is scientific uncertainty on the risk of exposure of consumers to CMRs contained in articles. As the Commission recognizes in its Article 68(2) Paper, the “main difference between articles and substances and mixtures is that there might be cases where there is no or very limited possibility of exposure of consumers to a CMR substance contained in an article.”

The Proposed CMR Restrictions

The Commission’s long term strategy is to use the REACH fast-track procedure to restrict the use of Cat. 1A and 1B CMRs in a broad range of consumer products. The upcoming ban in apparel is intended as a “test-case”.

Following concerns raised by the industry, the Commission recently announced that it intends to restrict the use of Cat. 1A and 1B CMRs in textiles in two phases. First, it will restrict CMRs in textiles that are in direct contact with the skin. This concerns primarily apparel, but also products such as footwear and bed linen. We understand that these restrictions could be adopted by spring or summer of 2017.

Second, the Commission will restrict Cat. 1A and 1B CMRs in textiles that are not in direct contact with the skin, such as accessories (e.g., buttons), floor coverings, and carpets. The Commission will not start this second phase until it presents its final proposal for textiles that are in direct contact with the skin.

It is still unclear which Cat. 1A and 1B CMRs the Commission will target. Initially, it had proposed to restrict 286 CMRs. The Commission should only restrict those substances for which there are validated detection and measurement methods.

Analysis of the Planned Restrictions

The Commission’s initial proposal to restrict no less than 286 CMRs in a wide category of textile products raises significant concerns. These include:

Duplication: Of the CMRs that the Commission intends to restrict under the fast-track procedure, several are already subject to other restrictions in the REACH Regulation. The resulting double bans or restrictions might create confusion and duplication. The Commission indicated last June that it is aware of this issue and that it “is committed to avoid double regulation for the same substance and use.”

Trade implications: Extensive restrictions could create unnecessary barriers to trade and violate the EU’s commitments under the Agreements of the World Trade Organization. The apparel industry is a global industry; a rapidly-imposed ban on CMRs in apparel may lead operators in this sector to temporarily or permanently stop marketing certain products in the EU.
Socio-economic impact: It is questionable whether the Commission has sufficiently considered the cost of compliance with the upcoming restrictions. Widespread and simultaneous restrictions may represent a significant burden for industry, including numerous small and medium-sized enterprises (“SMEs”), and increase the price of apparel for consumers.

Next Steps

What lies ahead? The Commission has agreed to gather additional expert input over the next few months. This will include input from the Forum, ECHA, and a group of experts, including industry representatives. Subsequently, the Commission will open its proposal for a public consultation, likely by the end of 2016 or early 2017. Once this public consultation is closed, the Commission will adopt its final proposal.

Although much remains to be decided, it is clear that a ban of hundreds of CMRs in all skin contact textiles will significantly affect apparel and footwear companies that market their goods in the EU and EEA. In the mid-long term, the Commission’s plans will likely also have a significant impact on the wider global textile and consumer goods industry.

ARTICLE BY Charlotte Ryckman of Covington & Burling LLP
Roberto Yunquera Sehwani, a Stagiaire at Covington & Burling LLP and attends the Universidad Autónoma de Madrid, also contributed to this post.

As Europe divides, Africa Unites with Common African Union E-passport

In 2015, African Union (AU) Commissioner for Political Affairs, Dr. Aisha Abdullahi, indicated that a plan was underway to implement a single African passport. After recent announcements that the AU passport would be unveiled at the AU Summit in Kigali this month, the long-awaited continental e-passport has finally been revealed. The first recipients of the pan-African passport were Rwandan President Paul Kagame, whose country hosted the summit, and Chadian President Idriss Deby, the chairperson of the AU. Others to receive some of the first pilot passports will include heads of state, foreign ministers and permanent representatives of the member states to the AU’s Addis Ababa headquarters. The timeline for the common passport roll-out to citizens of member countries is uncertain, although AU officials hope that citizens will have access by 2018.

This long-awaited passport is targeted to address the perennial problem of border openness in sub-Saharan Africa; closed borders are cited as a substantial impediment to both intra-African trade and economic growth.

Out of the 54 countries in Africa, to date, only thirteen allow citizens from any other African country to travel without advance visas. These significant barriers to intra-African travel are believed to be a leading cause of the low levels of trade between nations on the continent. Whereas intra-European trade accounts for approximately 60% of all European trade and intra-North American trade accounts for 40% of all trade on the North American continent, intra-African trade only counts for about 13% of African trade. While a small portion of this difference may be explained by unrecorded informal trade across porous borders, the difference is nevertheless notable.

There is evidence that opening borders can lead to economic growth globally, and experiences on the African continent support this contention. For example, in 2013, Rwanda announced that travelers from any African country could receive a visa on arrival. After improving visa openness, Rwanda’s GDP growth increased to 7% in 2014, tourism revenues rose by 4%, and the number of African travelers to Rwanda increased 22%.

Rwanda has led the charge for the creation of an AU passport. Now, the Rwandan Minister of Foreign Affairs, Louise Mushikiwabo, has indicated that Rwanda is fully prepared to begin issuing the common passport to all of its citizens. In contrast, other African nations would need to enact legislation that would allow them to begin issuing the African Union passports to citizens. Based on the general response to the common passport—the AU has been “overwhelmed” by requests for the passport—it is likely that AU member countries will feel pressure from their own citizens to do so quickly.

Interestingly, Morocco—the only African country that is not currently a member of the AU—has asked to rejointhe organization after a decades-long absence during the same summit in which the AU passports were unveiled. The timing of Morocco’s request could allow the county to take advantage of the new common passport and the expanding perks of AU membership.

The unified passport will undoubtedly present challenges for countries with less advanced border-security technology and fewer resources to devote to border control. Currently, only nine African countries offer eVisas. The AU passport is biometric and considered secure, but the issuance and acceptance of these e-passports at entry points of countries currently without e-passports may present a problem.

Relaxed immigration restrictions may also lead to larger inflows of migrant workers to the more economically stable countries on the continent, which may stoke the sort of anti-immigrant sentiment that led to violence in South Africa last year.

Travelers who are not citizens of AU member countries will not be able to benefit from the common passport, and will still face the relatively restrictive entry requirements on the continent. However, the enhanced labor mobility resulting from the AU’s e-passport program could have a catalytic effect on trans-African investments and commerce.

ARTICLE BY Khadijah A. Robinson of Covington & Burling LLP

The Effect of “Brexit” on Tax-Qualified Plans

The decision by British voters in a June 23, 2016 referendum to leave the European Union has significantly affected both the equity and debt segments of international financial markets. As with other market dislocations, the decision has also affected US tax-qualified plans, since they invest in those markets as a source of funding and use corporate bond rates for a variety of derivative purposes. The effects differ, however, between defined benefit (DB) and defined contribution (DC) plans.

Potential Effects of Brexit on DB Plans

In the case of DB plans, Brexit potentially has implications for funding levels, lump sum payments, Pension Benefit Guaranty Corporation (PBGC) premiums, and financial accounting results—all of which are the responsibility of the plan sponsor (rather than participants).

Specifically, the vote has triggered a decline in interest rates—including corporate bond rates—that may have at least a short-term adverse effect on the funded status of many DB plans, since (i) corporate bond rates are the proxy used to determine the present value of liabilities for minimum funding purposes, and (ii) a decrease in rates triggers an increase in liabilities (present value inversely goes up as interest rates go down).

This effect will be mitigated somewhat, however, since DB plans generally can use a 25-year average of interest rates (with a 90% floor) for funding purposes, which tends to “smooth out” periodic spikes like Brexit. Still, if interest rates (which are already at historically low levels) decline further or continue to be depressed by the aftershocks of Brexit, more headwinds for DB plans seeking to improve their funded status will be created.

By contrast, DB plans must use a market rate of interest—that is, without “smoothing”—for lump sum, PBGC variable premium, and financial accounting purposes. As a result, any downward trajectory of interest rates triggered by Brexit will more directly affect DB plans for these three purposes. Thus, for example, the dollar amount of lump sums paid to employees will increase as rates fall (that is, lump sum present values grow inversely to interest rates).

This effect on the calculation of lump sum payments may be delayed somewhat, since most plans use a “look back” date for the related interest rates (such as the rate in effect two months before the start of the plan year in which the lump sum was paid). Nevertheless, if interest rates stay low or decline, these lower rates ultimately will roll into effect for lump sum calculation purposes. Plan sponsors that are otherwise so inclined may view this as an impetus to offer lump sum windows or annuity buyouts—sooner rather than later (and before any lower interest rates roll into effect). This is especially true of annuity buyouts, since insurance companies tend to use rates for premium calculations that are even more conservative (i.e., lower) than the corporate bond rates used under ERISA.

Similarly, the PBGC variable rate premium is essentially determined using the same rate as is used for lump sums, but without a lag. This will increase the liabilities that form the basis for determining the amount of the variable premium.

Finally, the use of spot fixed income rates for financial accounting purposes will have an adverse effect on a company’s balance sheet to the extent they trigger an increase in reportable plan liabilities. The impact will be much more pronounced than is the case with minimum funding considerations, since the use of spot rates does not allow the impact of currently falling rates to be offset by the prior year increases used in a “smoothing” approach.

Potential Effects of Brexit on DC Plans

In the case of DC plans, participants generally bear the primary risk (and reward) of their investment choices, as allowed by ERISA Section 404(c). Thus, they will bear the risk of both declining bond prices and more volatile financial markets generally. Plan fiduciaries may want to consider alerting participants to the issues raised by Brexit, the possible impact on plan investments, the advisability of staying the course in turbulent markets, diversification considerations, and any other Brexit-related issues relevant to participation in the DC plan, but should be careful to avoid providing specific investment recommendations or advice that may be subject to ERISA’s fiduciary obligations.

Conclusion

In the case of both DB and DC plans, the fiduciary responsible for selecting investments (such as an investment committee) should continue to monitor developments in the financial markets and react as appropriate, in light of the plan’s investment policy statement and the general fiduciary requirements of ERISA. Federal courts and the US Department of Labor have consistently stated that ERISA fiduciaries are not held to a standard of omniscience, but they are required to exercise “procedural prudence” in selecting and monitoring plan investments. This sort of prudence would include adhering to the processes and other mandates established in the fiduciary’s charter or other governing document.

Will Brexit Undermine U.K. Participation in the General Data Protection Regulation and the U.S./E.U. Privacy Shield?

The June 23, 2016 Brexit referendum outcome in the U.K. does create uncertainty about whether the U.K. will continue to follow EU data protection laws, including implementation of the E.U.’s new General Data Protection Regulation (“GDPR”), scheduled to become effective on May 25, 2018. Furthermore, the recently negotiated new U.S./E.U. Privacy Shield, intended to replace the E.U.-invalidated Safe Harbor, faces an uncertain future in the U.K. as well if it is not an available framework for multinational businesses to do business in the U.K. For example, Microsoft stated in an open letter in May, 2016 to its 5000 U.K. employees before the Brexit vote that the U.K.’s EU membership was one of the factors that attracted Microsoft to make investments in the U.K., including in a new data center. One important future signal will be whether the U.K. opts to join the European Economic Area, or otherwise maintains significant trade with the EU, in which case the U.K. would necessarily need to comply with EU privacy regulations. If not, the U.K. would still need to develop its own data protection network. However, because at least two years must elapse before the U.K. can formally exit the EU under Article 50 of the Treaty of Lisbon, and even that two year period does not commence until formal notice is given, both the GDPR (in May 2018) and the Privacy Shield are likely to be in place in the U.K. before any actual exit from the EU occurs. And many observers believe that any law that Britain adopts will likely be similar to the GDPR, since a non-member country’s data protection regime must be deemed “adequate” by the EU for businesses in that non-member country to exchange data and to do business within the EU. In short, nothing is going to change immediately, and because Brexit won’t likely be completed for years, the Privacy Shield could well be implemented in the U.K. for personal data transfers from the U.K. to the U.S. well before actual withdrawal is completed. It also may take years to negotiate and complete agreements, and enactment of alternative U.K. data privacy laws.

See our previous post regarding the text of the U.S./EU Privacy Shield…

Article by Douglas Bonner of Womble Carlyle Sandridge & Rice

Brexit: Keep Calm and Carry On

As the country recovers from the shock outcome of last Thursday’s Referendum, the question which Restructuring professionals must now consider is “what does Brexit mean for me?”. The truth is that nobody really knows. The Referendum decision is not legally binding on the UK Government and the process of the UK leaving the EU will only start once the UK has served formal notice on the EU pursuant to Article 50 of the Treaty on the European Union. This will start a two year negotiation period to effect Brexit. In the meantime, the UK remains a member of the EU and EU law continues to apply.

Brexit, EU Referendum

So, in some respects it is very much business as usual for now, but on the basis that David Cameron’s successor will give notice to leave the EU, we recommend that clients start considering the consequences of Brexit now. Preparation for those consequences may include looking at the following:

Contract Reviews – Many contracts refer to an array of EU laws, regulators and territories which should be reviewed to determine how Brexit may/will impact. Can the contract be varied to mitigate the impact of Brexit? What is the potential impact on the contract price being linked to Sterling, the Euro or the Dollar? Does the governing law clause need amending? Will Brexit result in a breach of contract? Whilst unlikely, can force majeure or material adverse effect clauses be relied upon? How can the contract be future-proofed?

Financing and security reviews – Brexit caused turmoil in the markets initially and led to a reduction in the UK’s credit score rating and a significant devaluing of sterling. Before the Referendum, warnings of a post Brexit recession were rife. Is your business/customer at risk of breaching its financial covenants as a consequence of Brexit? Do those facilities and security need to be reviewed and changes made to protect the position?

Vulnerability to Brexit – Brexit is going to impact some more than others. How much do you or your clients/customers trade with other EU countries? How will your supply chain be affected? Do you currently benefit from EU funding? Is the tax efficiency of your business based on EU law? Does your business benefit from EU emission allowances? Will you need a licence or other authorisation to trade in the EU?

Public Policy – The UK will have to review where domestic legislation may need to be amended to take account of Brexit. It will be important to businesses to understand what changes are likely to be coming down the line. Many of the legal changes will be driven by policy decisions made in London and/or Brussels in particular. Keeping on top of these Policy decisions may allow businesses to position themselves to benefit from or at least mitigate the effects of legislative change. Do you need to engage with public policy professionals to assist in lobbying for changes which will have a positive impact on your business?

International Trade Arrangements – To what extent does your business involve the supply of goods between the UK and other EU member states? How will your business be impacted by the potential imposition of tariffs and other trade barriers restricting the free movement of goods post-Brexit?

Immigration and employment– What nationality are your employees? How will your ability to recruit/second employees be affected and will any parts of your business have to be downsized?

Communication – To what extent do you need to make any public statements or disclosures in relation to the impact of Brexit on your business. What is your strategy for communicating the impact of Brexit with your staff?

Other issues will arise as the full impact of Brexit unravels over the coming weeks and months.

ARTICLE BY John Alderton & Caroline Castle of Squire Patton Boggs (US) LLP

“Brexit” Dominates, as Financial Markets Roil

Secretary Kerry Heads to Brussels and London; President Obama Heads to Canada for the North American Leaders’ Summit; While the House is in Recess, Senate Committees Will Focus on the State-Foreign Operations Appropriations Measure and the Full Chamber May Consider the Zika Compromise Measure

President Barack Obama acknowledged from San Francisco early Friday morning that the British had exercised their sovereign rights and chosen to exit the European Union. Washington awoke to the news and the corresponding negative reaction of the international financial markets soon after. Secretary of State John Kerry changed his travel schedule, adding a stop in Brussels and London to a trip that had him in Italy over the weekend. Meanwhile, President Obama travels to Canada this week to attend the annual North American Leaders’ Summit.

Democratic Members of the House staged a 24-hour sit-in on the floor of the chamber last week, protesting what they believed was the Republican leaders’ unwillingness to address gun control through legislation. On Thursday, Speaker Paul Ryan (R-Wisconsin) abruptly adjourned the House until after the July Fourth holiday.

Senate Majority Leader Mitch McConnell (R-Kentucky) cut off an effort to keep suspected terrorists from buying guns last Thursday after Republicans and Democrats failed to reach an agreement on the issue, effectively ending debate of gun control in that chamber ahead of the November elections. The Senate will be in session this week.

Brexit: British Vote to Exit the EU

Washington awoke to news Friday morning that the British had decided to exit the EU, a development that promptly caused international markets to slump. Many expect market uncertainty will eventually impact the anemic economic growth in the United States. After traveling to London in April and speaking in favor of Britain remaining in the EU, President Obama released a statement on Friday saying:

“The people of the United Kingdom have spoken, and we respect their decision. The special relationship between the United States and the United Kingdom is enduring, and the United Kingdom’s membership in NATO remains a vital cornerstone of U.S. foreign, security, and economic policy. So too is our relationship with the European Union, which has done so much to promote stability, stimulate economic growth, and foster the spread of democratic values and ideals across the continent and beyond. The United Kingdom and the European Union will remain indispensable partners of the United States even as they begin negotiating their ongoing relationship to ensure continued stability, security, and prosperity for Europe, Great Britain and Northern Ireland, and the world.”

Senate Foreign Relations Committee Chairman Bob Corker (R-Tennessee) also issued a statement on Friday recognizing the British decision, while emphasizing the “special relationship” and importance of trade between the two countries:

“[The] referendum will not change our special relationship with the United Kingdom. That close partnership will endure, and we will continue to work together to strengthen a robust trade relationship and to address our common security interests.”

Secretary of State Kerry said on Friday of the U.K. Referendum:

“I want to emphasize that although the U.K. will be leaving the European Union, the British are in no way departing from the principles and values that undergird the Transatlantic Partnership or from the important role the U.K. plays in promoting peace and stability in the world. The special relationship that has long existed between the United States and the U.K. endures. Our two countries remain strong and vigilant NATO Allies, permanent members of the UN Security Council, commercial partners, and close friends.”

He added:

“I also want to reaffirm the U.S. commitment to the European Union and the common agenda we share with Europe on such issues as Ukraine, nuclear nonproliferation, climate change, trade, and human rights.”

Secretary Kerry will be in Brussels and London today, meeting this morning with EU High Representative for Foreign Affairs and Security Policy Federica Mogherini, and later today with U.K. Foreign Secretary Philip Hammond. In speaking with reporters in Italy over the weekend, Secretary Kerry said,

“The most important thing is that all of us as leaders work together to provide as much continuity, as much stability, as much certainty as possible in order for the marketplace to understand that there are ways to minimize disruption, there are ways to smartly move ahead in order to protect the values and interests that we share in common.”

North American Leaders’ Summit This Week

President Barack Obama, Mexican President Enrique Pena Nieto, and Canadian Prime Minister Justin Trudeau will meet on Tuesday in Ottawa for the annual North American Leaders’ Summit. President Obama will also address a joint session of the Canadian Parliament.

Upcoming Presidential Trip – NATO, Poland and Spain

From 7-11 July, President Obama will travel to Poland and Spain. He will participate in the NATO Summit in Warsaw from 7-9 July. The summit is expected to underscore the Alliance’s solidarity and to advance efforts to bolster security along NATO’s eastern and southern fronts. While in Warsaw, President Obama will hold a bilateral meeting with Polish President Andrzej Duda. He will also meet with the Presidents of the European Council and the European Commission to discuss U.S.-EU cooperation across a range of shared priorities, including countering terrorism, fostering economic growth and prosperity, and addressing the global refugee crisis. The U.K. referendum will also likely be a topic of discussion, as well as ongoing free trade agreement negotiations between the United States and EU.

From 9-11 July, President Obama will visit Spain, where he will meet with King Felipe VI and Acting President Mariano Rajoy. This visit to another NATO member country will highlight security cooperation between the United States and Spain as well.

SelectUSA Investment Summit & GES

President Obama started last week out at the SelectUSA Investment Summit in Washington, which focused on attracting investments to the United States. In addressing the forum, President Obama spotlighted, “Over the last four years, no other country has been named by CEOs around the world more frequently as the best place to invest with confidence.”

President Obama ended the week in San Francisco, attending the annual Global Entrepreneurship Summit (GES), which focuses on innovation. The President signed an Executive Order on Friday to institutionalize key entrepreneurship programs of his Administration highlighting entrepreneurship is a hallmark of American leadership in the world. The White House released a fact sheet on the GES, available here.

North Korea – Censured Again

After a failed attempt early last week, North Korea claimed on Thursday to have conducted a successful test-firing of a ballistic missile, swiftly drawing the censure of the United Nations Security Council. In a press statement, the Security Council urged all countries “to redouble their efforts” to fully implement sanctions against North Korea, particularly those imposed in March, which were the toughest in two decades. U.S. Ambassador Samantha Power sharply criticized North Korea’s “inherently destabilizing behavior” on Wednesday.

Venezuela Dialogue – U.S. Participates

Secretary General of the Organization of American States (OAS) Luis Almagro cited the current Government in Caracas as responsible for the near-collapse of Venezuela’s economy and called for the recall of President Nicolás Maduro. Under Secretary of State for Political Affairs Tom Shannon joined the mediation efforts underway in Caracas last week, saying that a follow-on meeting date has yet to be determined.

Zika Funding Compromise Reached – Veto Threat Issued

Last week, House and Senate Republicans reached a compromise on funding a response to the Zika virus without Democrats’ input. Before adjourning, House Republicans advanced (239-171) a spending measure that includes a $1.1 billion plan for the Zika virus. The measure would provide $230 million for the National Institutes of Health to develop a vaccine and $476 million for the Centers for Disease Control and Prevention for mosquito control efforts.

Democratic Senator Bill Nelson (Florida) objected to the compromise, citing the $750 million in budget cuts to other health care programs. The bill would cut $543 million in unused funds for implementing the Affordable Care Act, $107 million from funds used to fight Ebola, and $100 million in administrative funds from the Health and Human Services Department. The $1.1 billion is also short of President Obama’s request for $1.9 billion to combat the virus. The Senate is expected to take up the bill before it leaves Washington this week for its July 4 recess, but its prospects are unclear at best.

TPP – Implementing Bill Reportedly Being Drafted

Despite the public backlash to trade in an election year, U.S. Trade Representative Michael Froman said last Monday that the Obama Administration has begun drafting an implementing bill for a potential lame-duck vote on the Trans-Pacific Partnership (TPP) under Trade Promotion Authority (TPA). Ambassador Froman acknowledged that Majority Leader McConnell “has made clear publicly that he doesn’t want to see a vote [on TPP] before the [November] election,” which leaves the lame-duck session as the best window of opportunity for trying to advance a TPP implementing bill.

Privacy Shield – Agreement Reached

The European Commission and U.S. negotiators wrapped up their discussions over the transatlantic data-flow “privacy shield” agreement late on Thursday. A Commission official reported the deal contains “additional clarifications regarding the Ombudsperson mechanism, onward transfers and data retention, as well as on an additional U.S. document on the bulk collection of data.” The Article 31 Committee will next vote on the text of the agreement.

NDAA – Pre-Conferencing Stage

Senate Armed Services Committee Chairman John McCain (R-Arizona) reported last week that the leaders of the House and Senate Armed Services Committees met on Thursday to begin the process of reconciling the differences in their versions of the National Defense Authorization Act (NDAA). A formal House-Senate conference does not begin until the two chambers appoint their conferees, which has yet to occur.

Congressional Hearings This Week

On Tuesday, 28 June, the Senate Armed Services Committee is scheduled to hold a hearing titled, “Improving Strategic Integration at the Department of Defense.”
On Tuesday, 28 June, the Senate Foreign Relations Committee is scheduled to hold a hearing titled, “Global Efforts to Defeat ISIS.”
On Tuesday, 28 June, the Senate Appropriations Subcommittee on State-Foreign Operations (SFOPs) is scheduled to hold a mark-up of the Fiscal Year (FY) 2017 SFOPs measure.
On Wednesday, 29 June, the Senate Commerce, Science, and Transportation Committee is scheduled to hold an executive session, where they will consider S. 3084, The American Innovation and Competitiveness Act, among other matters.
On Thursday, 30 June, the Senate Foreign Relations Committee is scheduled to hold a hearing titled, “Corruption: Violent Extremism, Kleptocracy, and the Dangers of Failing Governance.”
On Thursday, 30 June, the Senate Armed Services Committee is scheduled to hold a closed hearing titled, “National Security Cyber and Encryption Challenges.”
On Thursday, 30 June, the Senate Appropriations Committee is scheduled to markup the FY 2017 SFOPs measure.

Looking Ahead

Washington is expected to focus on the following upcoming events:

29 June: North American Leaders Summit in Ottawa, Canada.
7-11 July: President Obama travels to Poland and Spain
8-9 July: NATO Summit in Warsaw, Poland
18-21 July: Republican National Convention in Cleveland, Ohio
25-28 July: Democratic National Convention in Philadelphia, Pennsylvania
4-5 September: G-20 Leaders’ Summit in Hangzhou, China
13 September: 71st Session of the U.N. General Assembly (UNGA) Begins
20 September: UNGA General Debate Commences
19-20 November: Asia-Pacific Economic Cooperation (APEC) Leaders’ Summit in Peru

ARTICLE BY Stacy A. Swanson of Squire Patton Boggs (US) LLP

Brexit – What Next for the UK and EU?

So after all the shouting, the half-truths and the speculation, there it is, a vote to leave. What does this mean for your business? What will your Board need to know today?

Let us be clear – no one knows all the details of what happens next, and that includes all the people who said that they did. But there is still plenty of reassurance available for many months, potentially years, into the future. In immediate legal terms there is much less to this than meets the eye.

Remember that the vote is just a vote. By itself it does not alter our legal relationships with Europe at all. Even if Parliament follows the stated wish of the people and formally petitions to leave the EU, the constitutional procedures for an exit will potentially take years to run their course. There are unlikely to be material changes to UK law during that time.

But that does not mean that you should not now be proactive in reviewing how the vote may or may not affect your legal obligations and best practice. In this note we summarise by topic some of the more immediate considerations which may arise in your business.

Employment

Leaving the EU does not by itself change our domestic employment law, either from today or from when we do actually leave, even if that law is based on an EU decision or Directive. That means no immediate changes to TUPE, the Human Rights Act, Works Councils, collective information and consultation rules, the Agency Worker Regulations, the Working Time Regulations or any of our EU-derived health and safety rules.

Your existing EEA national workers will not automatically have to leave the country or stop working for you, though they may choose to do so. They will still be able to get back into the UK if they go abroad on holiday or business.

You can still recruit EEA nationals without work visas for the time being, but if your business relies heavily on relatively unskilled labour from the EEA, start to consider whether it will be practicable to source such workers from within the UK market.

The UK may feel itself no longer obliged to implement into domestic law the forthcoming EU Trade Secrets Directive or General Data Protection Regulations, but will probably do so anyway to minimise the damage to inward investment from EU countries.

Your existing UK workers based in Continental Europe will not have to come back home immediately. Longer-term (two years at least) their position will depend on what stance the EU adopts towards its own UK-facing immigration controls.

It will remain discriminatory to hire EU staff in place of UK nationals (or vice versa) on racial or needs-a-visa grounds.

Leaving the EU will potentially take the UK out of the area regarded by the rest of Europe as “safe” for the processing of employee data. Unless an English version of the former US Safe Harbor Agreement can be negotiated, you may ultimately expect difficulties using personal data concerning your EU employees in the UK, and so you should begin to consider adopting increased data protection safeguards in your arrangements with your EU data subjects and processors.

The vote will probably mean a weakening of Lock-type holiday pay claims, and of any other legal arguments or proposals which are based on EU law but not yet incorporated into domestic UK statute. Whether the UK Government feels it necessary to pass such statutes before the formal point of exit remains to be seen – our view is that this is unlikely.

Pensions

The immediate focus for pensions will inevitably be on investment, not legal issues. Optimists before the vote acknowledged the market shock that is already occurring to sterling and equity markets but suggested that if gilt yields rose on the back of Bank of England intervention, that would reduce defined benefit liabilities. If that scenario plays out,it would be a boon for UK corporates who are struggling to fund deficits but the truth will no doubt be more complex and falls in asset values may cancel out any rise in yields. The worst case is that yields don’t rise. Longer term the vote will mean institutional investors will be reconsidering their investment strategies.

These investment consequences will of course affect the values of millions of defined contribution savers too. Sharp falls in asset values there will do nothing for confidence.

For UK corporates who are heavily reliant on EU earnings, new covenant assessments may be required by trustees.

European-derived equality legislation that applies to pensions will, as with employment law, remain in place, even though speculation will no doubt continue about whether guaranteed minimum pensions still need to be equalised. In the longer run, arguments about the detail of the draft IORP II Directive may now be academic.

Commercial Contracts

Termination clauses in contracts are most unlikely to be triggered by the Brexit vote. Even if a contract allows for termination if the obligations under it become more difficult to perform, Brexit is unlikely to mean that goods cannot be delivered or services provided so it is unlikely that automatic termination will occur.

Force majeure clauses are equally unlikely to be triggered immediately – the leave vote is hardly an Act of God, even if it may have been beyond the reasonable control of the parties.

Governing law clauses are more tricky to predict in terms of their effect but again nothing will change immediately or automatically.

Commercial terms, especially where financial instruments are involved and currency hedging is provided for as an option within a contract, may come into play automatically but those provisions will be contract-specific. For longer-term contracts being signed now, consider protection against Brexit consequences such as trade tariffs, exchange rate swings, capital movements, tax changes.

Trade

In the likely event of a total break from the EU Single Market, the erection of trade barriers (whether by way of direct tariffs, re-establishment of customs processes, or non-membership of EU trade facilitation schemes) will be inevitable. However, for the time being, all current internal market rights will apply. Agreements as they affect trade may be concluded within the two years allowed for a negotiated withdrawal, so companies should begin adjusting to the new situation as soon as possible.

In terms of customs duty, and unless agreed otherwise with the EU before formal withdrawal, the UK will lose the benefit of the duty rates afforded by being an EU Member State under the existing EU trade agreements with third countries. This would be likely to result in an increase in the landed cost of many goods, which may also be affected by any volatility of exchange rates. From an exporter’s perspective, those considerations should be carefully catered for in advance at contractual negotiations stage, starting now.

Financial Services

Those non-EEA firms using the UK as the base for their offering of financial services into and around Europe will need to assess their options: potentially they will lose their cross-border or branch passports into other EEA countries. This may mean they need to seek licences/authorisation in the other member states in or into which they conduct activities. Whilst it is possible that the UK may seek to agree a replacement passport regime, financial services providers relying on passports may need to look at their contingency plans and relocate or establish new offices in other member states from which the passports are available.

Parties to contractual documentation referencing EU Directive regulatory status (e.g. “credit institution” and “financial counterparty”) as a representation, condition or requirement will need to check whether the consequence of the UK falling outside the jurisdiction of the relevant Directives causes an event of default with immediate termination or right to termination. Consequently, parties may need to agree amendments to that documentation to avoid the potentially material financial consequences of termination.

As market uncertainty is already upon us firms with market positions will need to have regard to margin and collateral held against trading activity. Firms seeking to exercise rights under trading and security documentation in the event of defaults by counterparties will need to be alive to due process to ensure their enforcement rights can be properly executed.

Taxation

Parties to commercial contracts with EU counterparties which straddle any EU withdrawal will need to consider carefully the VAT and the customs duties consequences of those contracts. Customs duties are particular points of concern. Depending on the nature of the EU withdrawal negotiated by the UK, imports into the EU may give rise to customs duty costs and there is likely to be negotiation between the supplier and the relevant counterparty as to who is to bear the economic burden of those costs.

Going forward, policy makers will need to consider the interaction of EU law on the UK’s tax system as many aspects of the UK’s tax system (such as transfer pricing) have been shaped by EU rules. Policy makers will need to consider the extent to which they wish to reshape (if at all) the UK’s tax landscape.

ARTICLE BY Jens Rinze of Squire Patton Boggs (US) LLP

Bioplastics Industry Responds To Revised European Parliament Report On Waste Legislation

On June 9, 2016, European Bioplastics (EUBP) announced the support of a European Parliament (EP) report emphasizing the role of bioplastics in the creation of a circular bioeconomy. The report, produced by Italian MEP Simona Bonafè¨, outlines legislation that is needed to use waste more efficiently to create bio-based materials. Increasing the value of waste by promoting its use to create other bioproducts will help shift the linear bioeconomy to a circular, more efficient, bioeconomy. The report suggested defining composting and anaerobic digestion of organic waste as recycling, and requiring the collection of biowaste by 2020 in order to increase organic recycling of biowaste to 65 percent by 2025. On June 15, 2016, the EP debated possible new definitions of litter, with the intent of reducing both land and marine based litter by 50 percent by 2030.

ARTICLE BY Kathleen M. Roberts of Bergeson & Campbell, P.C.

Category: Global

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