It’s a Privilege, Not a Right: Best Practices for the In-House Lawyer

In-house lawyers know that an email is not automatically cloaked in privilege just because a lawyer is copied on the communication. But when exactly are communications and information privileged, and when are they not? Are there risks for inadvertent waivers that an in-house lawyer might not be thinking about? And could working remotely affect privilege? This article outlines what in-house lawyers should know about the attorney-client privilege and work-product doctrine and the top four things that in-house lawyers should communicate to clients about protecting privilege.

The Basics

  • Although each jurisdiction has its own privilege definitions and rules, generally, the attorney-client privilege protects confidential communications between an attorney and client, including a client representative, made for the purpose of rendering professional legal services.

Practice Tip: Even if you believe a written communication is privileged, write it thinking that someone else will see it — indeed, that someone may be a judge or jury.

  • Whether privilege protects an in-house lawyer’s communications depends on the predominant purpose of the communication. If the objective is legal advice, then the communication is privileged, so long as it is confidential and between lawyer and client. Alternatively, if the lawyer is acting as a business negotiator or advisor, then the communication probably is not privileged.
  • An in-house lawyer fulfills multiple roles, sometimes even within the same communication. Just because part of a document is privileged doesn’t mean that the entire document is; assume that, in later litigation, the document would be produced with only the privileged parts redacted.

Practice Tip: Remember the telephone — some things are better said than written.

  • The work-product doctrine protects material, mental impressions, conclusions, opinions, or legal theories developed in anticipation of litigation. It is both broader and narrower than the attorney-client privilege. It is broader in that it does not require that the communication be confidential and therefore is less at risk of waiver. It is narrower in that it only applies once litigation is anticipated.

Practice Tip: To best protect attorney work-product, implement a litigation hold as soon as litigation is reasonably anticipated.

Who Owns the Privilege?

Both the attorney-client privilege and attorney work-product belong to the client, which is the company, not its employees. It does not belong to the attorney, so an attorney can neither invoke nor waive the privilege if the client desires the contrary. As such, decisions about waiver of the privilege should be made by the company’s management in consultation with its counsel.

Practice Tip: When appropriate — for example, in interviews during an internal investigation — counsel should caution an employee that information he or she tells counsel may be disclosed by the company at its discretion. Additionally, training employees about privilege and common ways that privilege can be inadvertently waived will help keep privileged information privileged.

Privilege: Third Parties and Common Interests

The attorney-client privilege extends to clients, clients’ agents or proxies, lawyers, and lawyers’ agents or proxies. A voluntary disclosure to persons outside of that group typically waives the privilege. However, not all communications with third parties will waive privilege, so it is important to understand when privileged information can be shared with third parties and when it cannot.

Practice Tip: Even if someone is on your team, such as your accountant or insurer, disclosing confidential information to them may waive the privilege.

Accountants – Many jurisdictions do not recognize an accountant-client privilege, including federal courts, the District of Columbia, and states such as California, Texas, New York, and Virginia. Nonetheless, communications between in-house counsel and an accountant may be privileged if the accounting services enable the rendition of legal services. However, in this context, the line between legal services and business purposes is often hard to draw.

Auditors – The general rule is that disclosure of attorney-client communications to an auditor waives the privilege.

Insurers – Communications between an insured and its insurer are not automatically privileged. Nevertheless, most states recognize that, under certain circumstances, those communications may be shielded from discovery by the attorney-client privilege if they concern a potential suit and are predominantly intended to be transmitted to insurance-appointed defense counsel.

Investment Bankers – Communications between lawyers and investment bankers may be privileged if the purpose is to obtain legal advice for the client, especially if counsel engages the banker. In limited circumstances, if the investment banker improves the comprehension of the communications between the attorney and client by translating or interpreting information given to the attorney by the client, then the communication may be afforded protection. In other instances, communications may not be privileged.

Practice Tip: As a general rule, it is safer for counsel, whether in-house or outside counsel, to engage third parties if privileged information is to be shared.

Consultants – In jurisdictions following the “subject matter” test, which allows disclosure of privileged information to employees who need to know the information, privilege may extend to outside consultants who are the functional equivalent of an employee.

Counterparties – Disclosing privileged materials to another company during due diligence, even under a non-disclosure agreement, likely waives the privilege. To avoid waiver, keep privileged materials out of data rooms.

Common Interests – During litigation, counsel for parties with aligned interests may engage in confidential communications regarding matters of common interest. The existence of this “common interest” can expand the privilege to insulate communications from disclosure. Likewise, in business transactions, some courts recognize a common interest privilege that would protect communications between counsel for corporate parties if the purpose of the communication is to further a nearly identical legal interest shared by the parties, but other courts do not. Appropriate documentation can bolster an assertion of a common interest privilege if it is later challenged.

Practice Tip: Don’t rely on corresponding parties to label drafts and correspondence as subject to a “common interest” privilege. Labeling tends to be inconsistent and can create a false sense of security. Instead, parties should enter into a formal common interest agreement and educate their agents and employees about what is covered.

Don’t Waive the Privilege Inadvertently

A client may waive its privilege either expressly or implicitly by conduct that extinguishes one of the necessary elements of the privilege. Waiver of privilege can have disastrous implications for a waiving party’s case and possibly its reputation, especially when done inadvertently. Being aware of potential pitfalls for inadvertent waiver can avoid these negative consequences.

Working from Home – People are working from home now more than ever, and working remotely may be here to stay. As such, it is crucial to recognize the bounds of the attorney-client privilege when working outside the walls of your office. First, beware of using personal devices that may not have secure data storage or internet connection, such as public Wi-Fi networks. Second, make sure that you are working away from roommates, family, spouses, and neighbors to avoid them overhearing confidential communications. Third, make sure computers are not left unlocked and physical files and notes are adequately secured when not in use. Lastly, be mindful of artificial intelligence assistants like Amazon Echo and Google Home. A persuasive opposing counsel may make the argument that any communication made in the presence of such a device waives the attorney-client privilege. Because this is a novel issue, the best practice is to make sure artificial intelligence assistants are unplugged near your work area.

Special Committees – If a special committee of the board of directors retains counsel, the client is the special committee and not the full board. Consequently, disclosure of privileged information to the full board may constitute a waiver.

Parents and Subsidiaries – If a parent and subsidiary are represented by the same counsel, then they are generally considered joint clients, and the privilege extends to both. This means (1) one cannot shield privileged communications from the other, and (2) neither can unilaterally waive the privilege. To avoid this result, consider (1) employing separate counsel for subsidiaries; (2) limiting the scope of the joint representations; and (3) retaining separate counsel when interests may diverge.

Mergers and Acquisitions – In a merger or acquisition, absent an agreement to the contrary, privilege passes to the surviving or acquiring company. To avoid awkward disclosure of privileged information—including about the negotiation of the acquisition—address privilege in transaction documents by (1) defining the scope of the deal lawyers’ representation; (2) disclaiming the duty to disclose privileged information to the buyer; and (3) agreeing that the seller’s privilege does not transfer to the buyer.

Shareholder Litigation – A company generally can assert the attorney-client privilege against its shareholders. However, some courts, including the Fifth Circuit and Delaware Supreme Court, have adopted a fiduciary exception to the attorney-client privilege when the company is in a lawsuit against its shareholders. In such cases, the privilege may be invaded if shareholders show good cause. The Second Circuit has suggested that it would also apply the exception under the right facts.

Voluntary Disclosure to Lower Level Employees – Disclosure of privileged information to a “control group” — higher-level employees in a position to control or even take a substantial part in a decision about any action which the company may take upon the advice of the attorney — does not waive the privilege. In most states, even disclosure of privileged information to non-“control group” employees does not waive the privilege as long as those lower-level employees “need to know” the information – the so-called “subject matter” test. However, be aware that some jurisdictions — notably Illinois — still use the “control group” test, which considers disclosure of privileged information to any lower-level employee as a waiver.

Practice Tip: To protect the privilege, be sure to exclude lower-level employees from privileged communications as soon as they no longer need to know the information being discussed.

“At Issue” Waiver – If a party places its privileged information “at issue” in a lawsuit, the attorney-client privilege is generally waived. Waiver occurs if the party places the privileged information “at issue” through some affirmative action for its benefit and maintaining the privilege would be manifestly unfair to the opposing party. Examples of an “at issue” waiver include: (1) when the client testifies or offers evidence of otherwise privileged communications; (2) when the client places the attorney-client relationship directly at issue; and (3) when the client asserts reliance on its counsel’s advice as an element of a claim or defense. “At issue” waivers likely extend to the entire subject matter. Plan accordingly if reliance on legal advice may be needed to support a claim or defense, thereby waiving the privilege.

Privilege: What to Tell Your In-House Client

Part of your job as in-house counsel is educating your client about privilege. Here are the four most important things to communicate to your client:

  • A communication is not privileged just because an in-house lawyer is copied on it. Be careful what you say, no matter who the audience is.
  • Pick up the phone when you are uncertain. While privilege issues are certainly still in play in oral communications, using the phone instead of writing information may save you trouble down the road in litigation.
  • Disclosure of privileged information to a third party waives the attorney-client privilege — and there are no exceptions for spouses, family, roommates, or neighbors. This is particularly important when discussing privileged information while working remotely.
  • There are limited instances in which privileged material can be disclosed to third parties without waiving the privilege, but such disclosure should never be done haphazardly. Always ask in-house or outside counsel before sharing or disclosing privileged information with an accountant, consultant, insurer, or other third party.
Copyright © 2020, Hunton Andrews Kurth LLP. All Rights Reserved.
For more articles on the legal industry, visit the National Law Review Law Office Management section.

Objecting During Closing Arguments

We’ve all been there. Opening statements are over, the evidence is closed and you just killed it with your closing argument. Nothing left to do but relax, let your guard down a bit and listen to your opponent’s closing argument.  Right?  Wrong!!!

While you may be tempted to zone out while your opponent sums up his case, you must remain on high alert for inappropriate statements or colloquy during closing arguments and be prepared to object. In civil litigation, it can be a million-dollar mistake.

The Supreme Judicial Court is set to consider whether such a mistake will cost Wendy’s and one of its suppliers an opportunity to set aside a $150,000 verdict rendered against it based on improper “reptile-based” remarks made by plaintiff’s counsel during closing arguments.  This morning, the Court will hear oral arguments in Fitzpatrick v. Wendy’s Old Fashioned Hamburgers of New York and decide whether a trial judge applied the correct legal standard in declaring a mistrial after the jury rendered its verdict.  A Suffolk Superior Court jury previously found Wendy’s liable for severe dental injuries suffered by Meaghan Fitzpatrick when she bit into a hamburger that contained a bone fragment.

Before jury deliberations began, the defendants moved for a mistrial based on inappropriate statements made by plaintiff’s counsel. Defendants argued that Plaintiff’s counsel violated the “golden rule” by calling upon the jury to place themselves in the plaintiff’s position and to “be the voice of the community,” and send the defendants a message. Judge Heidi Brieger deferred ruling on the motion until after the jury returned a verdict for $150,000. Judge Brieger subsequently declared a mistrial, the case was retried, and a new jury returned a verdict for $10,000.

While the motion for a mistrial was an alert decision, as “reptile based” comments during closing arguments are almost universally prohibited everywhere, the failure to assert an objection immediately after they were made could prove to be a costly mistake for the defense. The Appeals Court appeared to focus on that very fact when it reversed Judge Brieger’s decision in 2019, holding that the defendants’ renewed motion for a mistrial should have been treated under the standard for granting a motion for a new trial.

The timeliness of an objection during summation is crucial to your case, and waiting until your opponent has finished, or after the judge has charged the jury is generally viewed as too late.  Some of us had mentors who taught us that nothing that is said during closing argument constitutes evidence. And our mentors were right.  Accordingly, many trial attorneys suddenly become potted plants during their opponents’ summations and choose politeness over their obligations to their clients.  They say nothing, even in the face of clear violations of some of the most basic rules of closing arguments: i.e., engaging in character assassinations of the plaintiff or other trial witnesses, arguing facts not in evidence, injecting personal opinions on credibility, appealing to the conscience of the jurors to send a message to the community, etc.  Objecting during your opponent’s closing argument when it is warranted is not rude or unprofessional – but it’s borderline malpractice if you don’t.  These are cardinal rules that cannot be forgotten about during summation and objections must be raised as soon as they are violated.

The Supreme Judicial Court will likely focus on the defendants’ failure to object in a timely fashion when it decides whether Judge Brieger applied the proper legal standard in granting a mistrial following the jury’s verdict.  Stay tuned.

©2020 CMBG3 Law, LLC. All rights reserved.
For more articles on corporate law, visit the National Law Review Corporate & Business Organizations section.

What Happens to an Employee’s Seniority after an Asset Sale?

In the recent decision of Manthadi v Asco Manufacturing, 2020 ONCA 485 (“Manthadi”), the Ontario Court of Appeal has clarified that an employee’s past service with their former employer does not automatically transfer to a successor employer for the purposes of calculating their common law reasonable notice entitlements. Instead, in order to fashion an appropriate notice period, the courts will consider the employee’s prior service broadly as a form of “experience” that was to the benefit of the purchaser/successor employer.

Background

In 1981, Ms. Manthadi was hired as a welder for an Ontario company. Her employment remained secure until the end of 2017, when the company was purchased in an asset sale by ASCO Manufacturing Limited (“ASCO”). After the sale, Ms. Manthadi continued to work similar hours at a similar rate of pay for ASCO until December 13, 2017, when she was laid off and never recalled.

Following the termination of her employment, Ms. Manthadi brought a successful summary judgment motion alleging wrongful dismissal. The motion judge found the common law and ESA to mirror one another with respect to how they treat an employee’s continuous employment. As such, the motion judge found that for the purposes of calculating her common law reasonable notice entitlements, Ms. Manthadi was deemed to be continuously employed by ASCO since 1981. On this basis, the motion judge found that the common law reasonable notice period for Ms. Manthadi was 20 months.

Court of Appeal

On appeal, the Ontario Court of Appeal overruled the summary judgment motion on a few grounds, including the improper use of a summary judgment motion for determining the matter. However, the Court of Appeal also took the opportunity to review and restate the law in terms of an employee’s right to reasonable notice from a purchaser of an ongoing business.

The Court of Appeal began by stating that “a sharp distinction must be drawn between termination of employment by a successor employer under the ESA and under the common law” (at para 48). Whereas notice under the ESA provided that Ms. Manthadi would be continuously employed, the common law was “equally clear that such employees are terminated (by constructive dismissal) when their employer sells the business and there is a change in the identity of the employer” (at para 48).

This distinction between the ESA and common law raises problems for long-term employees. Specifically, the duty to mitigate requires wrongfully dismissed employees to minimize their damages by taking up new work. In the context of a sale of a business, long-term employees are usually offered identical employment with the purchasing company. Failure to accept this employment will likely be considered a failure to mitigate, potentially ending any claim. Accepting the employment, however, means that any claim of wrongful or constructive dismissal will likely be mitigated out of existence.

The Court of Appeal recognized this problem for long-term employees, noting at paragraph 53:

“Thus, long-term employees, who are employed by the purchaser of their employer’s business, have little prospect of obtaining damages for the termination of their employment. Damages aside, people need jobs. Employees terminated by the sale of a business often have no realistic option other than to accept the offer of a new contract of employment with the purchaser if such is offered. If they are subsequently terminated by the purchaser, the new start date of their term of service weighs in favour of a shorter notice period than had the business not been sold.”

The resolution, says the Court of Appeal, involves reliance on the factors pronounced in the time-tested case of Bardal v The Globe & Mail Ltd. (1960), 1960 CanLII 294 (ON SC). Better known as the Bardal factors, the Court relies on such factors to determine reasonable notice at common law. In considering the Bardal factors, the Court accepted that the “experience” of an employee (and the benefit that such experience had for the purchaser) was a relevant factor that the Court could rely upon in fashioning the appropriate reasonable notice period where there had been a sale of a business and successive employment.

Implications from Manthadi

Prior to this decision, long-term employees seeking common law notice were usually given the benefit of having prior years of service recognized despite any sale of the business. This is no longer to be presumed. Rather, for calculating reasonable notice at common law, prior years of service with a former employer are translated into “experience.” While the Court of Appeal in Manthadi considered this to provide greater flexibility, it will almost certainly raise areas of contention for similar wrongful dismissal disputes going forward.

It remains to be seen whether trading off “years of service” for “experience” will decrease (or in certain cases increase) the notice entitlements for long-term employees being terminated after an asset sale. If notice entitlements do decrease, then purchasers inheriting a workforce may be exposed to less liability in the event of a wrongful dismissal claim.

© 2020 Miller, Canfield, Paddock and Stone PLC
For more articles on employee asset sales, visit the National Law Review Labor & Employment section.

Key Environmental Law and Policy Issues to Watch in the Biden Administration

On November 7, Joe Biden was projected to become President-elect. This news alert provides a high-level review of issues to watch and changes to expect in a Biden administration. Although the makeup of the Senate is not yet entirely clear, it seems that there will not be a change in Senate leadership and that the House will remain under Democratic control. The ultimate fate of the Senate majority will be decided on January 5, 2021 with the runoff of the two Georgia Senate Seats. For the Democrats to become the majority, they would need to prevail in both Senate races.

The next few years will see significant shifts in U.S. environmental and natural resource law and policy, as well as changes in political and perhaps some career personnel at the U.S. Environmental Protection Agency (EPA) and other federal agencies that establish and implement U.S. environmental regulation. The next six months look to be especially consequential, as the Trump administration seeks to finalize certain ongoing efforts while the new Biden administration identifies and implements early priorities. Although some form of the stimulus bill may get bipartisan support, and Congress must yet fund the government through the appropriations process, we do not expect any major environmental legislation during the remainder of the Trump administration. The Trump administration, however, still has complete Executive Branch authority and can still issue new rules, pursue enforcement actions, and promulgate significant rules. Similarly, without control of the Senate, a Biden Administration will be unlikely to pass significant environmental legislation, particularly a climate bill, but will be able to direct policy through the Executive Branch.

As events unfold, we will provide updates. Please contact the authors, your usual B&D attorney, or any member of our Election Analysis Task Force (including several former senior EPA and U.S. Department of Justice (DOJ) officials) for more information.

Key Takeaways

The Regulated Community should consider taking the following actions in the short term:

  1. Administrative litigation and rulemakings. Know where you stand with respect to ongoing litigation (which may be stayed in the early days of a new administration) and pending rulemakings, as well as recently-promulgated rulemakings or Executive Orders that may be subject to full or partial reversal.
  2. Climate, environmental justice, clean energy, and vehicles. Anticipate aggressive action by the Biden administration on climate change, environmental justice, and clean energy and vehicle technologies. If Congress remains divided, legislation is unlikely to occur, but much can be done through Executive Order and other executive branch action. The administration will also promote infrastructure reform which could be significant and will require legislation that may be able to get bi-partisan support.
  3. Federal-state coordination. Anticipate renewed state-federal coordination, with exceptions and some “patchwork quilt” effects, as the Biden administration EPA, the U.S. Department of the Interior, and DOJ join forces with progressive states on enforcement and implementation of policy priorities. Many of the environmental statutes are designed to be implemented cooperatively between the state and federal governments. This “cooperative federalism” is a balance that in many but not all cases, Trump officials favored with a more limited federal government role and a narrow interpretation of the scope of federal statutory authority. Expect Biden’s EPA and DOJ to increase federal enforcement, directing the agencies to pursue appropriate cases to the fullest extent permitted by law.
  4. Criminal enforcement. Expect criminal enforcement to be more vigorously pursued.
  5. International engagement. Prepare for renewed engagement on international environmental and waste treaties, as the Biden administration reengages in many of these issues.
  6. New key administration officials. Pay attention to new key officials in the new administration, some of whom will probably be announced in December. Generally speaking, cabinet-level officers are announced first. Below is a list of the cabinet-level officials in the areas of energy, environment, project development, and worker safety and the Senate committee that would review their nomination.

Immediate (Pre-Inauguration) Considerations

Transition Process

President-elect Biden has an established transition team with five co-chairs and a 15-person advisory board. The leaders are as follows:

  • Former U.S. Sen. Ted Kaufman
    Appointed to the U.S. Senate from Delaware on Jan. 15, 2009 and served until Nov. 10, 2010.
  • Jeffrey Zients
    CEO of Cranemere, a private equity firm. Past Director of the National Economic Council and Assistant to the President for Economic Policy, at the White House Feb. 2014-Jan. 2017.
  • Gov. Michelle Lujan Grisham
    Elected Governor of New Mexico in Nov. 2018. Served three terms in the U.S. House.
  • U.S. Rep. Cedric Richmond
    Member of the U.S. House representing LA-2. First elected in Nov. 2010.
  • Anita Dunn
    Senior advisor on the Biden campaign.

President-elect Biden has also indicated that he intends to name the White House Chief of Staff very soon.

Other specific transition steps typically occur. In September, the Office of Management and Budget (OMB) sent a memorandum to all of the federal agencies titled “Guidance on Presidential Transition Preparation.” The memo required each agency to designate a senior career official as in charge of the transition, and outlined its purpose as follows:

“This memorandum provides guidance to agencies on transition preparation requirements and deadlines consistent with the statutory obligations in the Presidential Transition Act of 1963, as amended (3 U.S.C. § 102 note) (the Act) and best practices. In addition to the ongoing work required by the Act, this guidance is intended to ensure the seamless continuity of Federal government operations and services during a transition to a second term of an administration or to a new administration. It also increases the transparency of the transition process. As agencies implement the guidance outlined below, officials should approach the work in ways that are responsive to the ongoing needs of the current administration while balancing the preparations for a potential new administration.”

Biden’s transition team has already signed a memorandum of understanding with President Trump’s General Services Administration to begin planning for a potential handover of power. The document is required under the Presidential Transition Act and formalizes how the federal government will go about assisting Biden’s transition team ahead of Election Day. For the memorandum to be effective, the GSA Administrator Emily Murphy, must sign a letter acknowledging Biden as the President-elect.

In addition to the transition team, “landing teams” will meet with each federal agency to collect information and interview selected individuals to prepare for the new administration. Those landing teams are not agency officials and do not receive confidential or privileged information, but are extraordinarily valuable to the new administration. They report regularly to the incoming White House on the immediate issues facing the administration and provide an important conduit between the incoming President’s team and the executive agencies.

Personnel

While landing and transition teams have already begun work (or will soon increase the pace of their work), the Trump administration still has nearly three months with which to complete its work. Amidst the changeover in political appointed positions, career staff will continue to make decisions and move matters forward. Ensure that your relationships with career officials at headquarters and regional offices are sound, as you will need to rely on them over the next six months and beyond.

It is typical for virtually all of the outgoing administration political appointees to resign before the new administration starts. The exception is often the U.S. Attorneys, who are sometimes held over in their positions. At the beginning of a new administration, political positions are either temporarily filled by political appointees or often with senior career officials.

Ensure that your relationships with career officials at headquarters and regional offices are sound, as you will need to rely on them as appointed positions change over the next six months.

Post-Inauguration Administrative, Legislative, and Judicial Process

Expect the new administration, upon taking office, to immediately issue a directive withdrawing pending regulations that are not yet published in the federal register. This could include final rules that are awaiting publication. This is a standard approach by a new administration.

The new administration will also review executive orders and guidance documents and rescind those that conflict with Biden policy direction. There are over a dozen, maybe two dozen, different executive orders and many, many guidance documents relevant to environmental policy direction. These do not have the force of law but often direct agencies to take specific actions. The Environmental Law Institute and Harvard Law School’s Environmental and Energy Law Program have produced useful references on this subject. Note that rescinding an Executive Order, which can be done immediately, does not rescind implementing actions, such as new regulations finalized in response to the Executive Order.

Without democratic leadership in the Senate, significant environmental legislation is not expected, with the possible exception of a bi-partisan infrastructure bill. Without legislation, Biden will be particularly interested in moving policy forward using Executive Branch tools. A Biden administration will want to issue new executive orders to re-direct the federal government consistent with his policy initiatives, such as environmental justice. For example, he has already pledged to revise and reinvigorate the 1994 Executive Order 12898 (EO 12898) Federal actions to Address Environmental Justice in Minority Populations and Low-Income Populations. In addition, he has pledged that he would rejoin the Paris Accords on the first day of the administration, which can be done by Executive Order.

DOJ will likely seek to stay federal litigation, particularly litigation challenging rulemaking, to allow time to develop new administration positions. The administration would then have the option of supporting the regulation, rescinding it through the Administrative Procedure Act process, and/or replacing it with a new regulation. Currently, litigation is pending on several high profile rules, including the Navigable Waters Protection Rule that defines the scope of Clean Water Act jurisdiction, the National Environmental Policy Act revisions, and the Affordable Clean Energy Rule which regulates greenhouse gases from coal-fired electric generating units. In addition, there is active litigation on the California waiver, which determines whether California will be allowed to continue to set vehicle emission standards.

© 2020 Beveridge & Diamond PC
For more articles on environmental law, visit the National Law Review Environmental, Energy & Resources section.

NY’s Gendered Pricing Law: Will It Curb the Pink Tax

Women often pay more than men for similar goods and services.  A shampoo for men may be nearly identical in chemical makeup to a shampoo for women, but the woman will pay more.  This phenomenon is referred to as the “pink tax” – products marketed to women cost more than their counterparts marketed to men.  Recent data analyzing toys, clothing, personal care products and home health products shows that: (1) products targeted at women are higher-priced than those targeted at men 42% of the time; and (2) of those items more expensive for women, the prices are an average of 7% higher.[1] The pink tax thus places a direct cost on individuals who purchase products marketed to women.

Some states are starting to enact laws aimed at curbing the pink tax.  On September 30, 2020, a New York ban on the pink tax took effect under a newly passed gendered pricing law, Section 391-U.[2]  The law prohibits sellers from charging different prices for any two goods or services that are “substantially similar” but are marketed to or intended for different genders.[3]  It applies to goods and services for personal, family, or household purposes.[4]

Where there is discriminatory pricing under the law, the NY attorney general may seek an injunction to enjoin and restrain the upcharges.[5]  The injunction can be issued without proof of injury in fact.[6]  The court may also tag on a civil penalty not to exceed two hundred fifty dollars for a first violation and five hundred dollars for a subsequent violation.[7]

Although the law is aimed at eliminating the pink tax, there are many loopholes and exclusions.

First, only the attorney general is granted a right of action – there is no private right of action.[8]  Individual consumers may, however, demand a complete written price list from service providers.[9]

Second, the law is limited to goods that are substantially similar.[10]  Substantially similar goods are only those that have no substantial differences in (1) the materials used in production, (2) the intended use, (3) the functional design and features and (4) the brand.[11]  This leaves open the possibility that one company, operating under two brands, can sell products to women at a higher price without violating the law.  For example, if a parent company operates under two gendered hair dye brands, could the brands sell similarly crafted dye for women at a higher price than for men, or would that constitute a violation by the company under Section 391-U?

Likewise, substantially similar services include only those that exhibit no substantial difference in (1) the amount of time needed to provide a service; (2) the difficulty in providing a service; and (3) the cost of providing a service.[12]  This creates further loopholes.  For example, a publisher of two magazines, one targeted at men, and the other targeted at women, could argue that providing subscription services and the content that accompanies those services is always more expensive for women readers.  Rebutting this argument could require extensive testimony from experts in the publishing field.

Third, even where substantially similar goods and services are at issue, the law permits price disparities in many situations.  The law specifically carves out an exemption for price disparities based on: “(a) the amount of time it took to manufacture such goods or provide such services; (b) the difficulty in manufacturing such goods or offering such services; (c) the cost incurred in manufacturing such goods or offering such services; (d) the labor used in manufacturing such goods or providing such services; (e) the materials used in manufacturing such goods or providing such services; or (f) any other gender-neutral reason for having increased the cost of such goods or services.”[13]

The personal care industry may rely on this broad list of exemptions to continue charging higher prices for products advertised to women.  Notably, the price disparity for gendered products in the personal care industry is higher than elsewhere – on average, up to 13% more for women.[14] One of the largest price discrepancies is in hair care – products cost women nearly 48% more, with an average difference of $2.71 per set of shampoo and conditioner.[15]

NY has paired this new law with a social media campaign centered around the hashtag #PinkTax to raise awareness, which at the time of this blog’s publish, has 10.8K posts.[16] With the buzzing publicity surrounding this legislation, the retail industry should be prepared for other states to pass similar laws.

FOOTNOTES

[1]https://www.governor.ny.gov/news/governor-cuomo-unveils-10th-proposal-20…, referencing https://www1.nyc.gov/assets/dca/downloads/pdf/partners/Study-of-Gender-P…

[2] 26 N.Y. GBS § 391-U.

[3] 26 N.Y. GBS § 391-U(2)-(3).

[4] Id., at (1)(b)-(c).

[5] Id., at (6).

[6] Id.

[7] Id.

[8] See id.

[9] Id., at (5).

[10] Id., at (1)(d)(i).

[11] Id.

[12] Id., at (1)(d)(ii).

[13] Id., at (4)(a)-(f).

[14] https://www1.nyc.gov/assets/dca/downloads/pdf/partners/Study-of-Gender-P…

[15] Id.

[16] https://www.governor.ny.gov/news/governor-cuomo-launches-campaign-elimin…

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.
For more articles on the pink tax, visit the National Law Review Tax section.

SEC Publishes New Whistleblower Rules; Deadlines Impact Thousands of Cases

The Federal Register published the Whistleblower Program Rule changes approved by the U.S. Securities and Exchange Commission (“SEC” or “Commission”) on September 23, 2020. The changes published today not only impact the requirements governing the whistleblower program, but they establish new deadlines relevant to thousands of current or future cases.

While the effective date of the rules changes is listed as December 7, 2020, each rule’s applicability date should be examined as many are retroactive.

In Section III of the published rules, the SEC carefully explains the applicability of each provision. Highlighted below are rules that can impact pending cases.

Among the new deadlines established by the SEC are:

  • Rule 21F-4(e) defining “monetary sanctions.” This rule change will be applied retroactively and has a significant impact on the amount of an award a whistleblower may be entitled to under pending cases and in cases related to non-prosecution agreements. The rule applies “calculating any outstanding payments to be made to meritorious whistleblowers.” This means the rule covers all pending cases. It also covers sanctions obtained in cases resolved by non-prosecution agreements where the SEC never published a Notice of Covered Action.
  • Rule 21F-6 concerns the SEC’s discretion in small cases where sanctions obtained by the SEC are $5 million or less that rewards should be paid at the highest amount (i.e., 30% of sanctions obtained), barring the existence of negative factors that would justify a reduction. This rule applies to “all award claims still pending” on December 7, 2020. Thus, the applicability of this rule is retroactive.
  • Rule 21F-9 requires whistleblowers to file complaints using the TCR form to qualify for a reward. Whistleblowers have 30-days from an initial contact with the SEC to file the TCR. The 30-day requirement is tolled until a whistleblower obtains actual or constructive knowledge of the TCR filing requirement. However, the thirty day requirement can be triggered when a whistleblower hires an attorney to file a reward claim. This provision applies “to all award claims still pending” as of December 7, 2020, and all future filings. All persons contacting the SEC with information on potential violations need to be aware of this 30-day filing deadline, along with all attorneys who represent whistleblowers in SEC proceedings.
  • Rule 21F-13 relates to the administrative record on appeal of Whistleblower Award Applications. Under this rule, any WB-APP award application filed with the SEC after December 7, 2020, may not be supplemented. Therefore, whistleblowers must be careful to include the entire basis for an award claim in their WB-APP application. This rule applies “only to covered-action and related-action award applications that are connected to a Notice of Covered Action” posted on or after December 7, 2020.
  • Rule 21F-18 established a new summary disposition process. This rule applies to “any whistleblower award application for which the Commission has not yet issued a Preliminary Determination” as of December 7, 2020, as well as to any future award applications that might be filed. Therefore, this rule impacts pending reward claims.
  • Interpretive guidance on the meaning and application of the term “independent analysis” in Rule 21F-4. The SEC intends to rely on the principles articulated in the guidance for “any whistleblower claims that are still pending at any stage.” Thus, any person who has already filed a TCR complaint or a WB-APP application based on the “independent analysis” rules should examine this new guidance and determine whether they need to amend or supplement their filings.

The SEC whistleblower program has been extremely successful. As of today, the Commission has collected over $2 billion in sanctions from whistleblower cases, paid to harmed investors well over $750 million, and paid 112 whistleblowers over $719 million in rewards.

Copyright Kohn, Kohn & Colapinto, LLP 2020. All Rights Reserved.
For more articles on whistleblowers, visit the National Law Review Securities & SEC section.

Revisiting Force Majeure and Other Contractual Considerations Amid COVID-19

In addition to the tragic human toll that it has caused, the coronavirus pandemic has also wreaked havoc on businesses throughout world, leaving countless companies and individuals unable to perform their contractual obligations. While many businesses have reopened since our last client alert on this topic, others have experienced new interruptions amid new spikes in COVID cases. As a result, force majeure and its common law relatives—the doctrines of impossibility and frustration of purpose—remain poised to become a focus of business litigation for years to come.

Force Majeure

Once a party to a contract has made a promise to perform, it must fulfill its promise even where unforeseen circumstances, including an act of God, make performance burdensome, difficult, or more expensive. If the party fails to perform, it usually is responsible for damages to the other party.

However, if the contract contains a force majeure provision, unexpected events could provide a defense to a party’s failure to perform. While it is tempting to assume that the global catastrophic effects of COVID-19 would easily invoke force majeure, the validity of the defense, which courts will narrowly construe, relies upon the specific language of the applicable force majeure provision and the factual circumstances of the parties’ contract. Simply put, because force majeure is a matter of contract, the language in the parties’ agreement determines when and to what extent force majeure will excuse performance in that particular contract.

This is best illustrated by an examination of a typical provision that became the subject of a recent dispute involving a lease to operate a restaurant and catering facility at a state-owned park: It provides:

If either State Parks or Lessee shall be delayed or prevented from the performance of any act required by this Lease by reason of acts of God, weather, earth movement, lockout or labor trouble, unforeseen restrictive governmental laws, regulation, acts or omissions, or acts of war or terrorism which directly affects the Licensed Premises and/or facilities and services of Jones Beach State Park, riot or other similar causes, without fault and beyond the reasonable control of the party obligated, performance of such act, including payment of all License Fees and R & R deposits due, shall be permanently excused for the period of the delay and the period for the performance of such act shall be extended for a period equivalent to the period of such delay, at which time all payments due shall be resumed.

Like nearly every other force majeure clause, this example includes a list of triggering events that might excuse performance. Assuming a party claims that, during the peak of the coronavirus and the effects of government shutdown orders—or now with spikes in the virus potentially leading to new interruptions—it cannot perform its obligations, this clause might serve to excuse performance because it includes “unforeseen restrictive governmental laws” as a triggering event.

But had that language not been included, the application of this type of provision to COVID-19 becomes far less clear. While the pandemic may seem like an act of God, courts have historically defined that term narrowly. Texas courts, for example, have long defined it as “accidents produced by physical causes which are irresistible; as, for example, winds and storms, or a sudden gust of wind, by lightning, inundations, or earthquakes, sudden death or illness.”[1] Similarly, New York views an act of God as “an unusual, extraordinary and unprecedented event,” denoting “those losses and injuries occasioned exclusively by natural causes, such as could not be prevented by human care, skill and foresight.”[2] As pandemic-related litigation unfolds it remains to be seen whether an inability to perform based on COVID-19 would be considered an act of God. Even if the illness itself is deemed an act of God, performance-impeding issues like restrictions on business openings may be labeled a human reaction to the virus, not the act of God itself.

Other triggering events that may apply to COVID-related performance include the obvious—pandemics, epidemics and disease outbreaks—as well as events like labor shortages, where employees are not available to work due to stay-at-home orders or illness spread within a factory. The bottom line is that, in order to provide an effective defense, the force majeure provision must generally include a triggering event that applies to the COVID-related basis for nonperformance.

Many force majeure provisions also include “catch call” language such as “or other similar causes,” as in the example provided above. Catch-all provisions must be interpreted within the context of the provision as a whole, and the legal maxim of ejusdem generis may apply: the catch-all will be interpreted to include only items of the same kind as those listed. Thus, a force majeure provision listing storms, earthquakes, floods “and similar events” may not be interpreted to include events related to COVID-19. On the other hand, some contracts provide more expansive catch all language, capturing any event outside of the reasonable control of the parties.

Courts analyzing attempts to rely upon catch-all language, including in Texas and New York, may also consider the foreseeability of the triggering event.[3] Given prior epidemics and pandemics, including the 2009 H1N1 pandemic, it remains to be seen how courts will determine the foreseeability of COVID-19.

The presence of an applicable triggering event is only the first step in the process of determining whether a party has a valid defense to nonperformance. Unless the force majeure provision provides otherwise, courts generally require that performance be rendered impossible, and not merely more difficult or expensive. For example, a party obligated to manufacture a product may not be able to invoke force majeure where sourcing a component has been made more difficult, but not impossible, due to the pandemic. Issues of causation must also be considered, and language appearing in typical force majeure provisions stating that nonperformance must be “by reason of” or “caused by” requires a showing of direct causation.

These issues aside, parties seeking to invoke a force majeure provision must carefully consider what performance is actually excused. For example, force majeure language in commercial leases will typically exclude the payment of rent, meaning that even amidst the occurrence of a triggering event, rent must still be paid. Parties must also think about what happens when the force majeure event ends. By way of illustration, the example provided above makes clear that performance is excused only during the “period of the delay.”

Parties attempting to rely upon a force majeure provision must also follow any applicable notice provisions or risk losing the ability to invoke the defense. Depending upon the contractual language, force majeure provisions typically mandate that notice be provided within a certain period of time following the force majeure event, and some require that period updates on the force majeure condition be provided.

In litigation arising from the effects of COVID-19, courts have already begun to tackle issues related to force majeure and impossibility. For example, in Palm Springs Mile Associates, Ltd. v. Kirkland’s Stores, Inc., a federal court in Florida cast doubt on a tenant’s ability to claim that a COVID-related force majeure event prevented it from paying rent, observing that “Kirkland . . . has failed to point to factual allegations in the complaint that show the government regulations themselves actually prevented Kirkland from making rent payments.”[4] Similarly, in Future St. Ltd. v. Big Belly Solar, LLC, a Massachusetts court rejected an argument by a distributor of solar recycling bins that it could not perform its contractual obligations due to COVID-19.[5] These cases highlight the need to establish causation between the force majeure event and the performance at issue.

Alternatives to Force Majeure

Parties to contracts without force majeure provisions are not without a remedy, as the common law doctrines of impossibility and frustration of purpose may provide a defense to nonperformance. Impossibility is exactly as it sounds, and excuses performance where it has become objectively impossible. In addition, the impossibility must be the result of an event that was unforeseen and could not have been addressed by the contract. Similar to force majeure provisions discussed above, mere economic difficulty or burden is not enough to invoke impossibility.

In some circumstances, applying these narrow standards to COVID-related nonperformance will be straightforward, as in the case of a vendor who was unable to provide event services on a specified date due to the government’s stay at home orders. But the analysis becomes murkier in other hypothetical scenarios, such as a purchasing party to a real estate contract who claims that shut down orders made a scheduled closing impossible. The seller may assert that the closing could have taken place virtually, or that the purchaser is now trying to escape a contract that has become an economic burden. Such factual issues are likely to be the subject of future litigations. It is worth noting that some courts also recognize the doctrine of impracticability, although there is little functional difference between impracticability and impossibility.

Short of impossibility, frustration of purpose may also provide an avenue to relief. This doctrine, also narrowly construed, provides a defense to nonperformance where a change in circumstances makes one party’s performance virtually worthless to the other, frustrating the purpose of making the contract. As explained by one court, “the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.”[6]

Practical Considerations

Based upon the nuances discussed above, parties seeking to invoke force majeure or common law doctrines to excuse performance should keep several practical considerations in mind:

  • Provide timely notice of the force majeure event, and consider doing so even if it is not required;
  • Communicate with the counterparty;
  • Maintain detailed records related to non-performance, including a timeline of events leading to the inability to perform, copies of relevant government orders and pronouncements, efforts to avoid the force majeure event or identify alternative means for nonperformance, and efforts to negotiate substituted performance.

Similar steps should be taken by the party who will be defending against the invocation of force majeure:

  • Provide a timely response to any notice, and be sure to keep responses realistic, professional and performance-oriented, keeping in mind that any response will likely be filed with the court should litigation occur;
  • Keep detailed records relating to the nonperformance, including a timeline of events that may provide a counter-narrative, the availability of alternative means for non-performance and, perhaps most importantly, evidence of damages.

Drafting Considerations Going Forward

Parties currently negotiating contracts should also be sure to address the implications of the ongoing pandemic. Drafting considerations amid COVID-19 include:

  • Defining the triggering events to include (or exclude) events such as “disease”, “pandemic”, “epidemic”, “public health crisis” and “state of emergency”;
  • Avoiding overreliance upon “act of God”;
  • Considering the effect of doctrines like ejusdem generis;
  • Crafting language making it clear what will happen at the end of the force majeure event, including whether the event permits termination versus a temporary suspension of performance; and
  • Considering whether to address disruptions to supply chains, labor force and/or access to financing.

[1] Morgan v. Dibble & Seeligson, 29 Tex. 107, 111 (1867).

[2] Prashant Enterprises Inc. v. State, 206 A.D.2d 729, 730 (3d Dep’t 1994).

[3] See, e.g, TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176, 182 (Tex. App. 2018); Goldstein v. Orensanz Events LLC, 146 A.D.3d 492, 44 N.Y.S.3d 437 (2017).

[4] Palm Springs Mile Associates, Ltd. v. Kirkland’s Stores, Inc., No 20-21724, 2020 WL 5411353 (S.D. Fla. Sept. 8, 2020).

[5] Future St. Ltd. v. Big Belly Solar, LLC, No. 20-CV-11020-DJC, 2020 WL 4431764, at *6 (D. Mass. July 31, 2020).

[6] Crown IT Servs., Inc. v. Koval-Olsen, 11 A.D.3d 263, 265 (1st Dep’t 2004).

© 2020 Bracewell LLP
For more articles on the pandemic, visit the National Law Review Coronavirus News section.

Anheuser-Busch Not Liable for False Advertising for Pointing Out to Consumers that Miller Lite and Coors Light Use “Corn Syrup”

Anheuser-Busch and Molson Coors produce some of the best-selling light beers in the United States — Bud Light, and Miller Lite and Coors Light, respectively — and regularly attack each other with witty ad campaigns. During Super Bowl LIII, Anheuser-Busch unveiled an advertisement campaign focused on the idea that Bud Light is made using rice as opposed to corn syrup. The Bud Light advertisements called attention to Miller Lite and Coors Light’s use of corn syrup as a source of sugar for the fermentation process. In response, Molson Coors advertised that its beer tastes better because of the corn syrup, which is not the same as high-fructose corn syrup used in other consumer products. Molson Coors also filed a lawsuit arguing that Anheuser-Busch violated Section 43 of the Lanham Act “by implying that a product made from corn syrup also contains corn syrup.”

Section 43 of the Lanham Act deals with false advertising and states that “[a]ny person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.” After Super Bowl LIII, Molson Coors filed a federal lawsuit claiming Anheuser Busch’s high-profile ads duped consumers into thinking that Miller Lite and Coors Light contained corn syrup, when in reality corn syrup is merely used as a “brewing fermentation aid” that does not end up in the final product.  Molson Coors Bev. Co. USA LLC v. Anheuser-Busch Cos., LLC, 957 F.3d 837 (7th Cir. 2020).

The district court found that Anheuser Busch’s did not violate the Lanham Act and Molson Coors appealed to the Seventh Circuit. The appellate court framed the issue as a simple one: whether the true statement made in Anheuser-Busch’s advertisements—“their beer is made using corn syrup and ours isn’t”—wrongly implies that “their beer contains corn syrup.”

Molson Coors acknowledged that both Miller Lite and Coors Light are made using corn syrup and that Bud Light is not. Molson also acknowledged that corn syrup is listed as an ingredient in both Miller Lite and Coors Light. Molson, however, insisted that the list of ingredients is not the same as what the finished product “contains.” The Seventh Circuit found that although it is possible for an ingredient list to be treated as “inputs” instead of a list of what is in the finished product, the common usage of an ingredients list equates to the constituents of the product. Additionally, Anheuser-Busch never advertised that the rival products “contain” corn syrup, but consumers could infer as much from the statements made. But the Seventh Circuit found that consumers could infer the same thing from Molson’s own ingredient list. The court could not hold that it was false or misleading for a rival to make a statement that a competitor makes about itself.

In rejecting the false advertising claims, the appeals court said Molson Coors “brought this problem on itself” by listing corn syrup in its ingredients. Whether the use of corn syrup is a bad thing is for “consumers rather than the judiciary to decide.” The Seventh Circuit ruled that Anheuser-Busch did not violate the Lanham Act’s ban on false advertising by running Bud Light ads that mocked Miller Lite and Coors Light for using corn syrup. The court noted that “[l]itigation should not be a substitute for competition in the market,” which is what Molson Coors was trying to do in this case. The court even seemed to suggest that “[i]f Molson Coors does not like the sneering tone of Anheuser-Busch’s ads, it can mock Bud Light in return.”

COPYRIGHT © 2020, STARK & STARK
ARTICLE BY Gene Markin of Stark & Stark
For more articles on corn syrup litigation, visit the National Law Review Litigation / Trial Practice section.

Election Results: New Data Privacy and Security Laws

Although the Presidential race is unconfirmed at the time of this writing, there are several data privacy and security laws to put on your radar following the election this week.

Here is a brief list of laws that passed that we are aware of so far. We will provide more information as news breaks, but in this ever-changing area, we want to alert you to some important changes in the state law landscape following the election.

California’s Prop 24

 This proposition updates California’s CCPA, now referred to as California Privacy Rights Act (CPRA). In addition to other provisions (link Deb’s blogs from today and last week here), from a compliance perspective, it establishes a first-of-its-kind enforcement agency, the California Privacy Protection Agency, which will oversee enforcement of CPRA, and further establishes fines and penalties for violation of the law. The law goes into effect on January 1, 2023, for all data that are collected starting on January 1, 2022. Keep this one on your compliance radar and we will update you further.

Maine Approves Referendum on Limiting Use of Facial Recognition Technology 

Maine voters approved Referendum Question B, which strengthens the ban on the use of facial recognition surveillance technology by police and public officials. 

Massachusetts Votes in Favor of Ballot Question 1 

Massachusetts voted in favor of Ballot Question 1, which would require car manufacturers to equip vehicles using telematic systems with an open-access data platform starting with the model year 2022.

A detailed analysis of Ballot Question 1 is here.

Michigan Amends Constitution to Require Warrant for Access to Electronic Data

In Michigan, it appears that voters have approved an amendment to the state constitution to require search warrants for law enforcement to access electronic data and communications. The measure amends that part of the constitution that provides for the protection against unreasonable search and seizure.

Staying abreast of new state laws and regulations is a complex process for those charged with compliance adherence. We will continue to update you on the most significant changes to assist you in your compliance efforts.

Copyright © 2020 Robinson & Cole LLP. All rights reserved.
For more articles on privacy, visit the National Law Review Communications, Media & Internet section.

Q&A with Danish Hamid of DLA Piper on Recent Committee on Foreign Investment in the United States (CFIUS) Developments

Danish (DAA-n’sh) Hamid is a partner with DLA Piper’s Washington DC office. For the past 20 years, he has led an international practice that focuses on the intersection of corporate, compliance, and investigations matters. More recently, Hamid finds himself spending a significant amount of his time advising US and non-US clients on the national security implications of their foreign investment deals and whether those transactions could raise concerns with the Committee on Foreign Investment in the United States (CFIUS). CFIUS is an interagency committee chaired by US Treasury Secretary and is responsible for screening foreign investments in US businesses and certain real estate to determine whether such transactions can impair US national security. If CFIUS identifies material concerns, it can advise parties to restructure or withdraw from their deal or recommend that the US President block or unwind the transaction. Hamid has conducted numerous CFIUS due diligence reviews, advised clients on CFIUS risk-mitigation strategies, and has successfully represented parties with filings before CFIUS. He regularly speaks and writes on CFIUS matters with the goal of clarifying the regulatory complexities in this area for a non-lawyer audience. Hamid also brings a unique perspective with respect to CFIUS concerns given that he has led M&A deals in the past as a corporate lawyer and has now transitioned towards a more regulatory-focused practice. With this in mind, the NLR asked Hamid to provide the following insights regarding recent CFIUS developments:

CFIUS has been empowered by the Department of the Treasury with more staff and funding to monitor transactions not voluntarily reported. What does this mean for companies who are involved or accepting foreign investment?

The fact that CFIUS is devoting greater resources and budget towards monitoring non-notified transactions means that CFIUS may ask parties involved in those deals to explain why they did not submit a filing to CFIUS. If that explanation is not compelling, CFIUS may direct them to submit a filing and possibly apply a more rigorous review standard with respect to that filing. CFIUS may also impose a civil penalty on transaction parties (in some cases up to the value of the investment itself) if they did not file mandatory filing on their own initiative prior to closing if one was otherwise required. Relevant regulations permit CFIUS to impose that penalty on any transaction party that violates the mandatory filing requirement. Given these circumstances, transaction parties conduct CFIUS due diligence reviews to determine whether their deals will trigger a mandatory CFIUS filing or merit a voluntary submission to CFIUS.

CFIUS had an increased jurisdiction scope under Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) in January of 2020. What impact has this had on the landscape in the intervening months?

CFIUS’s expanded jurisdiction under FIRRMA has caused more transaction parties to consider whether their deals trigger a filing. We have also observed an increase in the number of filings with CFIUS.

CFIUS has set up a webpage to accept tips and other information from the public on transactions not reported to the agency–how does this change the landscape?  Is it important for companies to be aware of this formalizing of a previously informal process? 

The fact that CFIUS is now actively seeking public tips on non-notified transactions is a relevant factor that transaction parties will need to evaluate when deciding whether to submit a CFIUS filing. There is a risk that CFIUS may receive public tips from a variety of sources such as disgruntled employees of US target companies or competitors to foreign investors in or acquirers of US businesses.

On Friday, Aug. 14, 2020, the president signed an executive order (EO) demanding the unwinding of a Chinese company’s acquisition of what would become TikTok–in your opinion, is this a sign of things to come?  What does this indicate about the current landscape of CFIUS and transactions with companies with access to American’s personal data?

It may be early to conclude if this is a sign of things to come. However, it has certainly captured the attention of CFIUS practitioners. Of course, separate from the EO, FIRRMA and recent regulations already made it fairly clear that CFIUS is interested in foreign investments in certain US companies that maintain or access sensitive data regarding US citizens.

Do you anticipate any major changes with CFIUS in light of the 2020 election?

Yes, we anticipate further regulatory developments impacting CFIUS. Just recently, the Treasury Department issued new regulations that went into effect on October 15th and have the potential of expanding the circumstances that trigger mandatory CFIUS filings. Those new rules seek to better align the CFIUS regime with US export controls by requiring parties to submit a mandatory CFIUS filing with respect to certain foreign investments in or acquisitions of US businesses involved with critical technologies for which a US regulatory authorization would otherwise be required. In addition, US export controls are evolving, which will invariably impact the CFIUS regime.

Copyright ©2020 National Law Forum, LLC
For more articles on CFIUS, visit the National Law Review Antitrust & Trade Regulation section.

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