DOL Overtime Rule Appeal Faces Uncertainty

DOL Overtime Rule

Efforts to fast track the appeal of a nationwide preliminary injunction that prevents the U.S. Department of Labor (DOL) from implementing drastic proposed revisions to federal overtime regulations just got “Trumped.”

After obtaining an order in December 2016 to expedite the appeal while President Obama was still in office, attorneys for the federal government filed a short, unopposed motion on January 25, 2017, asking the U.S. Court of Appeals for the Fifth Circuit for a 30-day extension of time to file their reply brief, stating: “The requested extension is necessary to allow incoming leadership personnel adequate time to consider the issues. Plaintiffs’ counsel has authorized us to state that they consent to this extension motion.”

The preliminary injunction that is the focus of the appeal was issued on November 22, 2016, by a federal district court judge in Texas. The injunction halted the implementation of regulatory revisions that were scheduled to go into effect on December 1, 2016, and which would have more than doubled the minimum salary requirements for the major white collar overtime exemptions under the Fair Labor Standards Act (FLSA) from $455 per week to $913 per week.

The DOL already has filed its opening brief on appeal, and the plaintiffs in the case have filed their response. Amicus briefs in support of both sides also have been filed. Absent the requested extension, the DOL’s reply brief is due on January 31. If the extension is granted as requested, the DOL’s reply brief will be due on March 2. However, it also is possible that, after considering the issues, incoming leadership will abandon the appeal.

ARTICLE BY Steven F. Pockrass of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

© 2017, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.

CFIUS and the New Trump Administration: Your Top Ten Questions Answered

One of the themes of the Trump campaign was the need for enhanced national security. Although the Committee of Foreign Investment in the United States (CFIUS) is not mentioned in Mr. Trump’s 100-day plan, it is highly likely that CFIUS reviews will become more stringent under the new administration. CFIUS reviews are the mechanism by which the U.S. government can vet merger and acquisition (M&A) activity involving the potential transfer of ownership or control of companies or assets to foreign interests.

CFIUS reviews have always been something of a black box. The information submitted to the committee is proprietary and not subject to release to anyone outside of Congress; the deliberations are confidential; and the reasons supporting any approval or disapproval are not released. The decisions are entrusted to the committee with little in the way of judicial oversight, giving the president a great deal of discretion to reshape the process.

This combination of secrecy and discretion in the CFIUS process has led to a great deal of uncertainty regarding potential sales of companies or assets to foreign interests, such as:

  • What types of deals will receive heightened scrutiny?

  • Will it become more difficult to get clearance for acquisitions that raise national security concerns?

  • Will the review process become a tool to halt Chinese acquisitions?

  • Will the Trump administration use the CFIUS process as leverage to ensure reciprocal access by U.S. investors to foreign countries?

  • Will the committee give a more prominent role to economic security issues instead of only focusing on national security, as is the current case?

To help deal with questions such as these, this client alert presents the “Top Ten” questions that every company engaged in M&A activity with a foreign dimension should be thinking about. This client alert is part of a series of “Top Ten” articles on the future of key international trade and regulatory issues expected to change under the Trump administration. Previously issued client alerts discuss the future of NAFTA and international trade litigation (including antidumping and countervailing duty actions) under the Trump administration. Future client alerts will deal comprehensively with all international trade and regulatory areas, where significant change could occur under the new administration.

The Top Ten CFIUS and Foreign Investment Questions Answered (or Is This the Dawning of the Age of the CFIUS?)

1. So what exactly is CFIUS, and what role does it play in protecting U.S. national security?

Although post-WWII U.S. policy has been to maintain an open posture for foreign investment, the Exon-Florio amendment in 1988 created CFIUS, which provided a mechanism to scrutinize foreign investments and acquisitions to determine if they have national security implications.1 After a controversy regarding the proposed acquisition of the commercial operations of six ports by Dubai Ports World, the Foreign Investment and National Security Act of 2007 (FINSA) increased the scope of transactions subject to potential CFIUS review by adding critical infrastructure investments.2

The Exon-Florio provision, as amended, gives the committee the right to review proposed foreign “mergers, acquisitions, or takeovers” and to present recommendations regarding whether they should be approved by the president, who has the authority to block proposed foreign transactions that threaten to impair the U.S. national security. CFIUS functions as an interagency committee to review the national security implications of foreign investments in U.S. companies or assets.

As per Executive Order 13,456, the committee consists of nine members, including the secretaries of commerce, defense, energy, homeland security, state, and treasury; the attorney general; the U.S. trade representative (USTR); and the director of the Office of Science and Technology Policy.3 The secretary of labor and the director of national intelligence also serve as ex officio members. The committee completes its review based upon jointly provided information regarding the proposed transaction, with the information provided in response to a lengthy set of questions as outlined in section 800.402 and other parts of the CFIUS regulations.4

CFIUS filings are voluntary in nature. Parties go to the time and expense of seeking committee review because, if a voluntary filing is made, and the committee approves it, then the U.S. government loses the ability to challenge a transaction, unwind it, or require mitigating actions. By contrast, any acquisition not reviewed is subject to divestment or other actions designed to address any national security threat inherent in the transaction. Through this carrot and avoidance of a potential stick strategy, parties to M&A activity are encouraged to self-evaluate transactions involving the potential transfer of ownership or control to a foreign person, and to seek a voluntary review where national security concerns potentially arise.

2. What has President Trump promised?

The CFIUS review evaluates the impact of sales to foreign entities, with the Defense Security Service separately reviewing foreign ownership, control, and influence where the National Industrial Security Program is involved. In the campaign, Mr. Trump frequently stated his view that foreign direct investment should be viewed through a national security prism, and was critical of Chinese acquisitions in particular, such as the purchase of the Chicago Stock Exchange. These views are consistent with those of key Republicans in Congress, who have sought to strengthen U.S. government review of transactions with a potential national security impact.

Mr. Trump’s transition team reportedly has determined that the CFIUS process will play an enhanced role in the new administration. The planned nomination of Mr. Lighthizer as the USTR is also potentially significant, as the USTR is one of the nine standing members of the committee. Mr. Lighthizer, who has worked for three decades as a prominent lawyer representing U.S. steel interests in antidumping and countervailing duty actions, and who has prior experience under the Reagan administration as a negotiator of voluntary restraint agreements to protect troubled U.S. companies, is expected to be an active supporter of the international trade themes espoused by Mr. Trump during his campaign for president.

There also have been indications that the new administration will favor an informal “reciprocity” test for foreign investment — i.e., that countries that do not allow a comparable investment in the same sector would not see CFIUS approvals. This is a mindset that could have special resonance for China, which often restricts foreign investment by other countries, including the United States.

3. What are the current trends in CFIUS enforcement? Will Mr. Trump’s pronouncements on national security work within, or potentially change, these trends?

The vast bulk of CFIUS filings occur in four sectors:

  1. Manufacturing

  2. Finance, information, and services

  3. Mining, utilities, and construction

  4. Wholesale and retail trade

Although reviews can arise for any country, in recent years they generally involve China, the United Kingdom, Canada, Japan, France, Germany, Switzerland, The Netherlands, Singapore, Israel, and South Korea.5

The Obama administration generally had a hands-off CFIUS approach. Despite the increasing number of filings over the last eight years, including those involving China (which is viewed as a problematic purchasing country), the Obama White House let most matters be resolved at the CFIUS level, without overt action by the White House. As a result, only two transactions were halted or required significant divestments by President Obama (for Aixtron, a semiconductor company, and for Ralls Corp., which was required to divest windfarm assets located near a defense facility). The transactions cleared included controversial transactions, such as the Smithfield Foods acquisition by China’s Shuanghui International Holdings Ltd., which raised concerns about a Chinese company taking over 26 percent of the U.S. hog market and food-processing facilities in more than a dozen states, key U.S. food-processing technology, and Smithfield intellectual property.6 Certain other transactions were abandoned by the parties due to opposition at the committee level.

The biggest change in CFIUS reviews over the Obama administration was the increasing prevalence of Chinese acquisitions. In the most recent three-year period for which data is available (2012 – 2014), the committee reviewed 68 potential acquisitions involving China, whereas in the three years right before the FINSA enactment there were only four. When Congress requested that the Government Accountability Office (GAO), an independent agency that conducts audits and investigations on behalf of Congress, prepare a report regarding the CFIUS process, the request specifically noted that Chinese transactions may pose “a strategic rather than overt national security threat.”7

An additional trend is the increasing use of mitigation measures, which can include such conditions as restricting which persons can access certain technologies/information, establishing procedures regarding U.S. government contracting, establishing corporate security committees to oversee classified or export-controlled products or technical data, requiring divestments of critical business units, providing periodic monitoring reports to the U.S. government regarding national security issues, or giving the U.S. government the right to review future business decisions that implicate national security.8 The increasing prevalence of such measures, as well as the increased staff time required to monitor the implementation of mitigating measures, is one of the key reasons why increased staffing and resources for the committee process are likely under the new administration.

The implication of these developments is that while the number of transactions definitively killed by presidential action may not increase (as it is rare for companies to pursue transactions where the committee indicates strong concerns), it is likely that an increasingly stringent review process will result in more companies backing off of transactions that encounter resistance from the committee. National and economic security concerns will also likely lead to U.S. companies increasingly selling to safe buyers, as sales to U.S. purchasers or those in NATO countries are less likely to run into CFIUS opposition (or may not need CFIUS filings at all.

4. What does the committee currently consider in its reviews?

The current list of factors considered by the committee is established by statute, and consists of the following:

  • Whether the transaction impacts the domestic production needed for national defense requirements

  • Whether the transaction impacts the capability and capacity of domestic industries to meet national defense requirements

  • Whether the transaction relates to the control of domestic industries and commercial activity by non-U.S. citizens as it relates to national security

  • The potential effect on sales of military goods, equipment, or technology to a country that supports terrorism, proliferates missile technology or chemical/biological weapons, or where there is an identification by the secretary of defense that the transaction poses “a regional military threat” to U.S. interests

  • Whether the transaction could impact U.S. technological leadership in areas affecting U.S. national security

  • Whether the transaction has a security-related impact on critical U.S. infrastructure

  • The potential effects on U.S. critical infrastructure, including major energy assets

  • The potential effects on U.S. critical technologies

  • Whether the transaction is a foreign government-controlled transaction

  • In cases involving a government-controlled transaction, additional review of the adherence of the country to nonproliferation control regimes, the foreign country’s record on cooperating in counter-terrorism efforts, the potential for transshipment or diversion of technologies with military applications, and future U.S. requirements for sources of energy and other critical resources

  • Such other factors as the president or the committee determine to be appropriate.9

The manner in which these factors are applied in any specific transaction is entirely within the discretion of the committee. In particular, the view of what constitutes a national security issue is amorphous, allowing for the expansion of review to areas of concern not traditionally covered in prior reviewed transactions.

5. How might CFIUS reviews change at the Executive level?

There are a number of ways in which CFIUS reviews could change at the Executive level, even absent any changes to the statutory basis for the reviews:

  • Appointing new members with heightened national security concerns. As noted above, the committee is an inter-agency committee composed of key secretaries and other actors, such as the attorney general, that bring expertise and institutional knowledge regarding national security issues. The appointment of new actors to these positions will have a major impact on the type of review that occurs, as new committee members replace the more accommodating Obama appointees.

  • Tightening discretionary review. Because the CFIUS process is subject to a high degree of discretion and confidentiality, there is considerable leeway to change the way in which transactions are reviewed. Expansion could occur through informal influence, as noted, or through formal expansion of the parameters of review, such as occurred with Executive Order 13,456 (issued by President George W. Bush), which altered the scope of CFIUS review in the aftermath of the FINSA passage.10

  • Direction and control from President Trump. The CFIUS statute, as amended, lays out a concrete role for the president only at the end of the process. Nonetheless, given the high degree of confidentiality of the process and the likely interest of the president in national security matters, Mr. Trump will be in a position to exert influence on high-profile matters as they arise. Since CFIUS actions are generally not reviewed by courts, the new administration will have great leeway to change the scope of review even without any statutory changes.

  • Increasing use of mitigating measures. Although the statute does not contemplate the use of mitigating measures, the practice by now is well-established. Such measures are often agreed to by the parties because the alternatives of abandoning the deal or the risk of proceeding while ignoring such requests are unpalatable. It would not be surprising to see the increased use of such measures for companies that produce goods that are controlled under the International Traffic in Arms Regulations (ITAR) or the Export Administration Regulations (EAR), where the U.S. company is a major supplier to the federal or state governments, or for companies that possess key high-tech patents that could be used to help jump-start foreign competition in a strategic sector.

  • Increasing scrutiny of China and other countries viewed as problematic. The CFIUS review process increasingly is the mechanism through which Chinese M&A activity is vetted, with Chinese companies having overtaken UK companies several years ago as the largest source of CFIUS requests. Republicans in Congress have requested that the GAO determine whether CFIUS reviews “have effectively kept pace with the growing scope of foreign acquisitions in strategically important sectors in the U.S.,” while specifically singling out Chinese and Russian state-owned enterprise investments as causes of concern.11 Given the large international trade deficit with China, as well as concerns that China discriminates against U.S. investment, while seeking open access to the U.S. market, the scrutiny of transactions involving Chinese companies is likely to increase. The same could be true of other countries that lie outside the trusted realm of NATO-plus countries (i.e., while NATO countries like France, Germany, the UK, and Australia/Japan/South Korea may still see relatively relaxed reviews, countries like Russia could see increased scrutiny).

  • Increasing scrutiny of state actors. For the last few years, there have been concerns that state-owned entities may be using their foreign commercial enterprises to advance the home country’s political agenda. This issue arises not only with regard to Chinese companies, but also with other countries where there are company ties to the government (including for countries where the ties may not be known publicly). The committee already requires the submission of extensive information regarding shareholders and owners, but sometimes is satisfied with the provision of information that only addresses immediate owners. The committee may require the submission of more complete information regarding ownership and control, both for indirect owners and for other avenues through which a foreign government might exert control or indirect influence (board members, etc.). This information could be used to support a more probing review of the role that the foreign government would have if the acquisition were to be completed.

  • Increasing scrutiny of sectors of concern. Certain sectors are viewed as presenting opportunities for foreign governments to treat U.S. acquisitions as supporting foreign policy initiatives or other activities inimical to U.S. interests. For example, acquisitions by Chinese telecom companies have been viewed as problematic due to the risk of potential electronic eavesdropping. Since such concerns fall squarely within the rubric of national security, increased inquiry into such ties easily could occur without any changes to the CFIUS legislation or regulations.

  • Expanding the definition of what constitutes a “national security” issue. FINSA added “critical industries” and “homeland security” as categories of economic security subject to a CFIUS review. “Critical infrastructure” is a concept that allows for ready expansion of the scope of review. Although not directly part of the CFIUS authorization, the USA PATRIOT Act of 2001 (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism)12 provides that the term “critical infrastructure” includes “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and assets would have a debilitating impact on security, national economic security, national public health or safety, or any combination of those matters.” Sectors identified as potentially meeting this definition include telecommunications, energy, financial services, water, transportation sectors,13 and the “cyber and physical infrastructure services critical to maintaining the national defense, continuity of government, economic prosperity, and quality of life in the United States.”14 Expanding the CFIUS review process to cover similar concerns could occur without any changes to the existing legislation.

6. How might CFIUS reviews change at the congressional level?

Congress is not likely to be a passive bystander in the process. Republicans in Congress have been trying for years to alter the scope of the CFIUS review process and likely will view the election of Mr. Trump as an opportunity to enact this agenda. The advantage of action through legislation is that it can overhaul the CFIUS review process in one fell swoop, while implementing long-standing congressional concerns. Items in legislative play include the following:

  • Expanding the definition of national security to include economic security. Republicans in recent years have introduced legislation (but not secured passage) that would expand CFIUS reviews to cover economic security issues. Republicans will be emboldened to reintroduce these measures in the new Congress. If such legislation is passed, it is highly likely the number of submitted CFIUS filings will sharply increase.

  • Increasing committee staffing. There have been Republican proposals to expand committee staffing. Increased staffing will allow for more careful vetting of transactions and monitoring of mitigation measures, expanding the role of the committee in overseeing foreign direct investment on an ongoing basis.

  • Adding oversight of greenfield investments. In 2013, the Russian space agency Roscosmos proposed building Global Positioning System monitor stations in the United States. Although the proposal was blocked by CFIUS (due to concerns raised by the Central Intelligence Agency and the U.S. Department of Defense),15 the proposal raised the issue of whether the CFIUS process should be expanded to cover greenfield investments or new start-up ventures explicitly. Because the CFIUS provisions are designed to address M&A activity rather than new investments, there arguably is a gap in coverage that Congress could seek to fill by amending the statute.

  • Adding oversight of passive investments. Under the current law, transactions “solely for the purpose of investment,” or where the foreign investor has “no intention of determining or directing the basic business decisions of the issuer,” are exempt from review.16 Given the many ways in which owners can guide investment decisions behind the scenes, these provisions could be viewed as loopholes that should be eliminated.

  • Enhancing reporting to Congress. As originally drafted, the CFIUS process left Congress as a bystander. The amendments contained in FINSA added significantly increased reporting obligations (among other changes). Given Congressional interest in the area, additions to the current statutory reporting, including the possibility of extensive real-time reporting on pending transactions, is a possibility. Giving congressional actors’ access to ongoing filing information, even on a confidential basis, could make the CFIUS process a great deal messier.

  • Expanding areas of scrutiny. Due to prior controversies, food and agricultural acquisitions are likely targets for enhanced scrutiny under an amended statute, as are pharmaceutical, biotechnology, biologics, and high-tech products. For example, the Republican letter to the GAO mentioned food safety as a potential security issue, using the security concerns regarding the committee’s clearance of the $43 billion acquisition of Syngenta (an agricultural seed and chemical provider) by ChemChina.17 Legislation could detail areas of special concern, which would greatly increase the number of filings in areas considered sensitive.

  • Adding consideration of a “net benefit” test. Some congressional leaders believe that the CFIUS review should include a “net economic benefit test.”18 Such a test would allow the committee to examine the impact of transactions on economic security, labor and employment effects, and whether the country at issue allows for reciprocal investment. Support for such an expansion can be found in China’s own national security review, which is broad and arguably includes such a test, extending special scrutiny in the areas of agriculture, assembly manufacturing, and transportation.

  • Adding the authority to consider whether a transaction would “hollow out” U.S. manufacturing. The 2016 annual report to Congress from the U.S.-China Economic Security Review Commission raised concerns about whether the “large-scale out-sourcing of manufacturing activities to China is leading to the hollowing out of the U.S. defense industrial base.” Statutory amendments could make consideration of such issues a requirement of any CFIUS clearance.

  • Implementing recommendations of the GAO review. The GAO is conducting a review of the CFIUS process at the request of 16 members of Congress. The review will result in a report sometime in 2017 that will highlight perceived shortfalls or gaps in the process. Any issue identified will likely spur legislative efforts to address the identified shortcomings.

  • Implementing provisions targeted at Chinese state-owned entities. Due to concerns about the influence of state-owned entities in general, and Chinese state-owned entities in particular, the Exon-Florio/FINSA statute could be amended either to mandate increased scrutiny of state-owned entity purchases or to bar such sales entirely.

  • Increasing the role for national security agencies. The nine members of the CFIUS process do not draw from the national security agencies, such as the U.S. Department of Defense. Although these actors can be consulted on a case-by-case basis, the statute could be amended to make these agencies permanent parts of the CFIUS review process

7. Are there other potential ways in which the CFIUS process may be impacted by the change in administration?

If filings increase, this could increase the length of time for CFIUS review. Although the regulations provide for a strict 30-day review process (with additional time if a full investigation is needed), the committee has developed ways to stretch out this time period, including by taking a week or more to “log in” filings, requesting that parties provide “pre-filing” (draft) review requests to allow extra time for consideration, and requesting additional information from the parties (which stretches out the time for final decision). Prudent parties leave 90 to 120 days for completion of the process. An increased number of reviews could stretch this time period further.

Additionally, the change of administration could lead to turnover in career CFIUS staff (which is where most of the hard work of analysis occurs). The loss of this institutional knowledge could lead to increased delay, confusion regarding information to be submitted and what information is considered most relevant, additional supplemental questions, and less predictability in results

8. Can the Trump administration potentially undo or alter prior CFIUS approvals?

Although it is possible the new administration might try to undo previously approved transactions, it is unlikely. The statute provides for undoing previous approvals only if information submitted turns out to be false, misleading, or to have had material omissions. The chance of such misstatements being uncovered is low, given that most participants are careful to provide vetted and accurate information. Further, the ability to check the accuracy of information submitted is difficult because the information is confidential and exempt from Freedom of Information Act requests.19

While an argument could be made that the president has the authority to reopen a transaction under the International Emergency Economic Powers Act,20 the entire basis of encouraging CFIUS filings on a voluntary basis would be undermined if the carrot of no review were put into question. Further, parties who worked through the process likely would mount challenges in federal courts arguing that the rescission of a lawfully granted clearance amounted to a violation of due process or a taking.21 Although one could argue that actions taken pursuant to the International Emergency Economic Powers Act (which an unwinding of a cleared transaction would be) are not subject to judicial review, rather than court this kind of trouble, it is more likely the Trump administration will focus on tightening the standards for new transactions rather than seeking to unwind previously approved ones.

9. Sounds scary. What can I do to cope?

CFIUS practitioners have long benefited from developing a sense as to what types of transactions are potentially problematic, allowing for accurate triaging of the types of deals that should consider filing for CFIUS review. Unfortunately, these finely honed instincts will no longer be of much use. It will take years to establish the operation of the new CFIUS ground rules.

In the meantime, transactions that involve the transfer of ownership or control to a foreign party (including transactions where one foreign company is selling U.S. interests to another foreign company) should be looking carefully at national and economic security interests in every deal and considering whether a CFIUS filing is prudent. Parties to transactions should plan for potentially wide-ranging CFIUS reviews (and the accompanying delay) from the outset for any deal that raises potential national or economic security considerations. Merger contracts for such deals should include contingencies as to what will happen if CFIUS reviews are negative or involve unanticipated conditions, require divestments of key technology or assets, or restrict what purchaser personnel can have access to key technology.

With the range of potential mitigating measures including conditions on ownership and governance, the establishment of security committees to oversee controlled technical data, goods, patents, or intellectual property, potentially intrusive monitoring requirements, and other mitigating measures, the possibility that the committee could impose conditions that significantly impair the rationale for the transaction needs to be taken into account from the outset. Incorporating such considerations into the contract, the value assigned to the U.S. business, and into the timing of the deal can avoid unanticipated commercial issues that could kill an otherwise mutually acceptable deal.

Most CFIUS reviews have been relatively non-political. This may change in the new administration. Companies should accordingly consider the public and government relations aspects of transactions from the outset. The CFIUS process may play out in a new and more public/political fashion, especially if proposals to give Congress more of a role in the process are realized. Having sophisticated government and public relations teams at the ready to coordinate with the CFIUS legal and transactions team may turn out to be important in future reviews. Having a coordinated strategy to deal with various contingencies from the start offer the best chances for a favorable outcome.

10. What types of M&A activity should be most seriously considering CFIUS requests?

The type of transactions that will merit consideration of filing for a CFIUS review are in flux, for all the reasons noted above. Nonetheless, there are certain recurring situations that likely will merit serious consideration of a CFIUS filing. These include sales with the following attributes:

  • U.S. interests that produce, sell, or broker goods or technical data controlled under the ITAR (U.S. Munitions List products or goods modified to meet military specifications or for military use)

  • U.S. interests that produce, sell, or broker goods or technical data controlled under the EAR, especially if 600-series (commercial military goods) are involved

  • U.S. interests that produce, sell, or broker goods or technical data controlled under the nuclear-related export controls

  • U.S. entities that possess a classified facility or some form of top-secret clearance

  • U.S. interests that have significant sales to federal or state governments

  • U.S. interests in sectors of key concern, such as telecommunications, agriculture, food, high-technology, bio-technology, energy, critical infrastructure, or pharmaceutical products

  • U.S. interests that possess key intellectual property that is not generally available worldwide

  • U.S. interests that manufacture products where there are few competitors in either the United States or abroad, such that the sale would arguably move control of a limited-supply product to sole foreign control

  • U.S. interests that have property close to U.S. military assets;

  • U.S. interests that are part of the defense or police supply sectors

  • Sales to problematic countries, especially China

Conclusion

The entire international regulatory scheme is potentially in play under the new administration, especially so in the area of CFIUS reviews. While the contours of how the reviews will change is as yet unknown, in some ways, the prospect of change is a self-fulfilling prophecy. Because CFIUS reviews are voluntarily requested when the parties believe there is a chance the deal could come under post-transaction inquiry, rumors of increasingly close scrutiny by the U.S. government, in and of itself, will increase the number of voluntary filings made by risk-averse investors. This will result in the committee having increased clout as the number of transactions where review is sought increases.
U.S. companies looking to sell to foreign interests, or foreign interests looking to purchase U.S. companies or assets, should closely consider the potential national or economic security aspects of their transactions, with the level of concern and likelihood of seeking a CFIUS review rising as the country of acquisition moves away from the relative safe haven of NATO and similar-level countries. One thing is clear: the CFIUS process is likely to change, and potentially to a large degree. Prudent companies will not want to be on the wrong side of the evolving standards for CFIUS clearance.

ARTICLE BY Gregory Husisian of Foley & Lardner LLP

1 50 U.S.C. app. § 2170, transferred to 50 U.S.C.A. § 4565.
2 Id.
3 See Exec. Order No. 13,456, Further Amendment of Exec. Order No. 11,858 Concerning Foreign Inv. in the U.S., 73 Fed. Reg. 4677 (Jan. 23, 2008).
4 See Dep’t of the Treasury, Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons, 73 Fed. Reg. 70,702 (Nov. 21, 2008).
5 Id. at 27.
6 Id. at 12.
7 See Letter from Robert Pittenger et al., Member of Cong., to Hon. Gene L. Dodaro, Comptroller General, U.S. Gov’t Accountability Off. (Sept. 15, 2016).
8 See Cong. Research Serv., RL33388 (2016) at 27-28.
9 See 50 U.S.C. App. § 2170(f), transferred to 50 U.S.C.A. § 4565(f).
10 See Exec. Order No. 13456, Further Amendment of Exec. Order No. 11858 Concerning Foreign Inv. in the U.S., 73 Fed. Reg. 4677 (Jan. 25, 2008).
11 See Letter from Robert Pittenger to Hon. Gene L. Dodaro, supra note 3, at 1.
12 Pub. L. No. 107-56, Title X, § 1014, October 26, 2001; 42 U.S.C. § 5195c(e).
13 42 U.S.C. § 5195c(b)(2).
14 42 U.S.C. § 5195c(b)(3).
15 See Cong. Research Serv., RL33388 (2016) at 13.
16 Id. at 16.
17 See Letter from Robert Pittenger to Gene L. Dodaro, supra note 3, at 1.
18 Id. at 1-2.
19 See 50 U.S.C. App. § 2170(c), transferred to 50 U.S.C.A. § 4565(c).
20 50 U.S.C. §§ 1701-1707.
21 See Ralls Corp. v. CFIUS, 758 F.3d 296 (D.C. Cir. 2014).

Exiting from the EU: Bre(xit)aking News

EU brexit UK Supreme CourtThe Supreme Court of the United Kingdom by a majority of 8 to 3 has today confirmed that triggering the exit procedure from the European Union requires an Act of Parliament.

As such the Supreme Court disagreed with the current UK Government which had argued that Government ministers could rely on their prerogative powers to trigger Article 50 of the Treaty on the European Union without prior authorisation by Parliament. Scottish Parliament, Welsh and Northern Ireland assemblies had argued that they too should be consulted. The judges did not agree with that view.

This is a big blow for the current Government. The judges held that triggering Article 50 will bring fundamental change to the UK’s constitutional arrangements by cutting off the source of EU law and by removing existing domestic rights of UK residents. As to the Brexit referendum, the Supreme Court confirms its political significance, however, notes that the statute authorising the Referendum was mute as to the specific legal consequences resulting from it. Defining the legal consequences will remain in the power of Parliament which will have to enact legislation fleshing out the changes in the law required to implement the referendum. Whether this will upset Theresa May’s timetable of invoking Article 50 by the end of March will have to be seen, the Government certainly does not think so and is expected to introduce a bill into Parliament shortly.

In the end the Supreme Court’s judgment is unlikely to change all that much given in particular that the Scottish Parliament, and the Welsh and Northern Ireland assemblies are unable to exercise any veto. In addition, over the last days members of Parliament from other parties have indicated their support for the triggering of Article 50. For those hoping that Article 50 will not be triggered the question is whether the pro-EU members of Parliament are able to form a credible opposition in the time available and will vote as a matter of their conscience.

The uncertainty for companies will remain. The reaction amongst clients and companies exposed to the UK has been varied so far with some already moving jobs and operations while others are waiting or are committing to the UK despite Theresa May’s indication on future steps all supporting a hard Brexit. We are following legal and political developments in the UK closely and would be delighted to discuss concerns with you.

Full text of the judgment, transcripts from the hearings and parties’ submissions: here.

ARTICLE BY Oliver Heinisch of Sheppard, Mullin, Richter & Hampton LLP

Copyright © 2017, Sheppard Mullin Richter & Hampton LLP.

Massachusetts Commission Against Discrimination: Job Transfer Not Retaliation

Massachusetts Commission Against DiscriminationOn December 30, 2016, a Hearing Officer with the Massachusetts Commission Against Discrimination (MCAD) dismissed the Complainant’s retaliation case, finding that the Complainant had failed to establish a causal connection between his earlier discrimination complaint and a later adverse action. Most interesting was the Hearing Officer’s determination that the Complainant had failed to establish a prima facie case of retaliation as a result of his transfer from one facility to another.  There was no evidence that his transfer “caused Complainant to suffer any tangible economic loss or a change in any other job related benefits.” MCAD v. Mass. Dept. of Corrections, 11-BEM-02854, 2016 WL 7733656 (MCAD).

Underlying Discrimination Claim

Complainant Rigaubert Aime (“Aime”) had been a correction officer with the Massachusetts Department of Correction (“DOC”) for over twenty years. In March 2011, he filed a race discrimination claim with the MCAD and soon thereafter filed internal complaints of unfair treatment by his supervisors. While his internal complaints were all dismissed, the Hearing Officer cited established law in holding that Aime only needed to prove that he — reasonably and in good faith — believed that the DOC had discriminated against him — not that it actually had done so — in order to proceed with his retaliation complaint.

Adverse Action Demonstrated but Retaliation not Proven

 In the ensuing months, Aime claimed he was subjected to disciplinary treatment of several types, including a two-day suspension for performance reasons, which the Hearing Officer concluded were “adverse employment actions” giving rise to retaliation claims.  However, in each instance the Hearing Officer concluded that the DOC’s disciplinary actions were justified for legitimate, non-retaliatory reasons.

Job Transfer Did Not Involve A Material Change

In late July 2011, the DOC informed Aime that he was being transferred from a Pre-Release Center in Roslindale, MA to the Lemuel Shattuck Hospital Correctional Unit in Boston. The DOC Superintendent in Roslindale, the evidence showed, had requested that Aime be reassigned within a few weeks of the filing of Aime’s MCAD discrimination complaint back in March 2011 because of Aime’s repeated conflicts with his supervisors. Aime claimed that transfers in the past had often been viewed as negative or punitive and although his transfer did not involve any material change in his shift, days off, or any other terms or conditions of his employment, including his commuting time, he asserted that his transfer was in retaliation for filing his earlier MCAD complaint. The Hearing Officer did not agree, concluding that the transfer did not “materially disadvantage” him in tangible working conditions. Aime’s subjective feelings of mistreatment, without objective evidence of loss, could not sustain his claim. The Hearing Officer went on to find that, even if the transfer was to constitute an actionable adverse employment action, Aime failed to prove that the reason given for the transfer was a pretext for retaliation.

Take-aways

  1. Just because an employee has filed a claim of discrimination does not immunize the employee from disciplinary action, including discharge.

  2. Just because the employee’s discrimination complaint has been dismissed does not immunize the employer from a retaliation claim.

  3. If the employee’s discrimination claim was asserted in bad faith, it cannot support a retaliation claim. But “bad faith” is difficult to prove.

  4. The temporal proximity between the discrimination complaint and further disciplinary action is a factor in evaluating whether retaliation has occurred, but it is not dispositive.

  5. Employers should not avoid disciplining an employee who has recently filed a discrimination claim. Discipline should be issued as uniformly as possible where the circumstances support it.

  6. A persistent employee may claim retaliation, repeatedly, no matter how justified the employer’s actions may seem. This is no reason to give in.

  7. All disciplinary action should be reviewed to make sure it is well-supported. This is particularly true if a retaliation claim is likely.

  8. Job transfers to a lesser position can support a claim of retaliation. In addition, a longer commuting distance may constitute an adverse employment action.

  9. This case nonetheless illustrates that not every change relating to a job assignment is an adverse employment action. The employee has the burden of proving the adverse employment action and that it was retaliatory.

ARTICLE BY Barry J. Waters of Murtha Cullina

© Copyright 2017 Murtha Cullina

New Sheriff In Town As Rolls-Royce Pays Record Penalty For Foreign Bribery And Corruption

Rolls-RoyceOn 17 January 2017, the UK Serious Fraud Office (“SFO”),[1] the US Department of Justice (“DOJ”),[2] and the Brazilian Ministério Público Federal (“MPF”) announced an $800 million global settlement with Rolls-Royce plc and Rolls-Royce Energy Systems Inc., (together, “Rolls-Royce”) resolving allegations of a long-running scheme to bribe foreign officials in South America, the Middle East, Eastern Europe, and Asia in exchange for assistance in obtaining government contracts. In addition to the payment of disgorgements and fines – the largest ever imposed under the UK’s Bribery Act 2010 (“UK Bribery Act”) – Rolls-Royce has agreed to implement a number of compliance measures and reporting requirements pursuant to deferred prosecution agreements (“DPAs”) with UK, US, and Brazilian authorities. The joint settlement, which was spearheaded by the SFO, heralds a new era in global cooperation and coordination in the enforcement of bribery and corruption laws.

Unprecedented simultaneous tripartite global penalty

Under its DPA with the SFO, Rolls-Royce will pay a penalty of over £497 million (US $612 million), comprising disgorgement of profits of £258 million and a financial penalty of £239 million (US $294 million), plus interest. In addition, Rolls-Royce will pay approximately £13 million (US $16 million) to reimburse the SFO’s full investigation and litigation costs.

In the US, Rolls-Royce has agreed to pay a criminal penalty of nearly $170 million (UK £138 million) for conspiring to violate the Foreign Corrupt Practices Act (“FCPA”) by having paid bribes in excess of $35 million between 2000 and 2013. The penalty reflects a 25-percent reduction from the bottom of the US Sentencing Guidelines fine range and a credit of more than $25 million (UK £20 million) in recognition of the fine paid in Brazil. The settlement with the DOJ falls within the top fifteen largest FCPA settlements of all time.

In Brazil, Rolls-Royce has agreed to a fine of approximately $25 million, reflecting $12 million in profits received from contracts with Brazil’s state-run oil company, Petrobras, $6 million paid in kickbacks paid to intermediaries, and a fine equal to the amount of kickbacks.

DPAs – more than just a fine

In the UK, DPAs are voluntary agreements which result in the suspension of a prosecution in return for the offending company meeting certain obligations including that the company must account for its conduct before a criminal court. The terms of the DPA must be approved by a judge as fair, reasonable, proportionate, and in the interests of justice. A DPA is not available to individuals. Upon review, on 17 January 2017, Sir Brian Leveson, sitting as a judge in the Crown Court, approved the Rolls-Royce DPA noting that the financial penalty was “broadly comparable to a fine that a court would have imposed on conviction following a guilty plea.”[3]

In addition to payment of the fine, under the UK DPA, Rolls-Royce is required to continue the independent compliance review of its approach to anti-bribery and anti-corruption which commenced in January 2013 when Rolls Royce appointed independent lawyer, Lord Gold, to conduct the review. Lord Gold has already produced two interim reports and is due to produce a third report by the end of March 2017. Rolls-Royce has agreed to provide the SFO with Lord Gold’s third report and produce a written Implementation Plan setting out how it will give effect to the third report’s recommendations and any other outstanding recommendations not yet implemented in the first and second reports. Rolls-Royce must implement or have sustainment plans to execute the Implementation Plan to the satisfaction of Lord Gold within 2 years of its commencement. Once the Implementation Plan is complete, Rolls-Royce must obtain a final report from Lord Gold and provide it to the SFO.

In addition to these compliance measures, Rolls Royce has agreed to continue its cooperation with the SFO including the disclosure of all relevant information and material in its possession, custody or control, which is not protected by legal professional privilege, in respect of its activities and those of its present and former directors, employees, agents, consultants, contractors and sub-contractors. It must also use its best efforts to make available for interview, as requested by the SFO, present or former officers, directors, employees, agents and consultants of Rolls-Royce.

Much like in the UK, DPAs in the US set the terms by which prosecutors will decline to pursue a case against the offending company. The DOJ agreed that it will not pursue a criminal or civil case against Rolls-Royce, provided that, within three years, the company pays the $170 million penalty, cooperates fully with US and foreign authorities in all matters related to corrupt payments, implements a compliance program that meets the elements identified in the DPA, and annually reports to the DOJ regarding remediation and implementation of its compliance program. Among other requirements, Rolls-Royce must develop and maintain policies and procedures addressing particular risk areas (e.g., gifts, entertainment, travel, political contributions and charitable donations) through periodic risk-based review, assign one or more senior corporate executives for implementation and oversight of the policies and procedures, implement periodic training and compliance certifications, establish an effective system for internal reporting and investigation, and institute risk-based due diligence and compliance requirements for all agents and business partners. The DPA does not provide any protection against the prosecution of individuals.

Brazilian law empowers the relevant authorities to enter into agreements (“leniency agreements”) with entities that have cooperated with the authorities’ investigations. By satisfying the conditions of the agreements, companies may face lower fines or lesser sanctions. Rolls-Royce reportedly provided the MPF with the results of an internal investigation in early 2015 and agreed to cooperate with Brazilian authorities. The terms of its agreement with the MPF also impose measures designed to ensure that the company enhances its existing compliance programs.

Cooperation can be a mitigating factor

Rolls-Royce’s cooperation with and accountability to regulators appears to have factored into the global settlement. In the UK, the court acknowledged that, despite not initially self-reporting its conduct, Rolls-Royce cooperated extensively with the SFO since 2012, and “[c]ould not have done more to expose its own misconduct.”[4] This extensive cooperation was one of the primary reasons the court concluded that the DPA was in the interests of justice and a relevant factor in mitigation when assessing the value of the agreed penalty. However, the UK settlement does not conclude the matter in its entirety. As noted by the court, the SFO will continue to investigate the conduct of current and former Rolls-Royce employees. These individuals are afforded no protection from prosecution under the DPA and, given the wide-ranging allegations documented in the DPA’s statement of facts, more charges seem likely.

The US also acknowledged Rolls-Royce’s cooperation throughout the government investigation, including its thorough internal investigation, numerous factual presentations, and producing witnesses for interviews. Going forward, Rolls-Royce must continue to cooperate for three years under the terms of its settlement with the DOJ, and must promptly report any evidence or allegations of past or new FCPA violations, truthfully disclose all factual information, provide documents or evidence requested by the DOJ, and use its best efforts to make current and former officer, directors, employees and agents available for interviews or testimony.

SFO led investigation – A new trend?

To date, the US has irrefutably been the global leader in investigating and enforcing anti-bribery and anti-corruption offences. In 2016, twenty-seven companies paid approximately $2.48 billion to resolve criminal and civil FCPA enforcement matters with the DOJ and the Securities and Exchange Commission. In contrast, the SFO has been criticised for failing to undertake comprehensive investigations capable of securing high-profile convictions under the UK Bribery Act. This has led many commentators to conclude that the UK Bribery Act is less effective than the FCPA, despite the fact it is more extensive than the FCPA in terms of its jurisdictional reach and the conduct it prohibits.

Rolls-Royce’s DPA with the SFO is only the third of its kind endorsed by English courts. In each instance, courts have emphasized the importance of self-reporting. Indeed, Sir Brian Leveson noted in his judgment endorsing the Rolls-Royce settlement that a “DPA will likely incentivise the exposure and self-reporting of wrong doing by organisations in similar situations to Rolls-Royce. This is of vital importance in the context of the investigation and prosecution of complex corruption cases in bringing more information to the attention of law enforcement agencies so that crimes can be properly investigated, and prosecuted effectively. Furthermore, the effect of the DPA is to require the company concerned to become a flagship of good practice and an example to others demonstrating what can be done to ensure ethical good practice in the business world.”[5]

The Rolls-Royce settlement may also signal a new trend in global anti-bribery and anti-corruption enforcement. It is the single largest individual investigation the SFO has conducted to date, spanning a four year period, with over 30 million documents reviewed, and numerous arrests and interviews of current and former Rolls-Royce employees (taken both voluntarily and under compulsion). Additionally, the settlement follows in the footsteps of VimpleCom’s $795 million resolution with US and Dutch authorities in 2016, having been reached with the assistance of law enforcement officials in several jurisdictions, including Austria, Germany, the Netherlands, Singapore and Turkey. The scope of the SFO’s investigation and its cooperation with other global law enforcement agencies, together with the resulting penalty, should be a warning to businesses operating internationally that they may face scrutiny from several global regulators simultaneously and expect intense scrutiny of world-wide conduct.

Gone are the days of US authorities being the lone sheriff in town, policing foreign companies that have contacts in the US but consoling themselves to non-intervention by the home countries. Rather, companies must be aware that there are now consequences for non-compliance on their home turf as well. As the SFO and other foreign authorities demonstrate the will to pursue bribery and corruption cases, the US may allow the countries in which corrupt companies are domiciled to police those practices at home.

ARTICLE BY Jodi L. Avergun, Steven Baker, Bret A. Campbell, Joseph V. Moreno, Jenna Rennie & Janaki Tampi of Cadwalader, Wickersham & Taft LLP
© Copyright 2017 Cadwalader, Wickersham & Taft LLP

[1]   See SFO Case Information, Rolls-Royce PLC (17 January 2017), available athttps://www.sfo.gov.uk/cases/rolls-royce-plc/.

[2]   See Press Release, Rolls-Royce plc Agrees to Pay $170 Million Criminal Penalty to Resolve Foreign Corrupt Practices Act Case (17 January 2017), available athttps://www.justice.gov/opa/pr/rolls-royce-plc-agrees-pay-170-million-criminal-penalty-resolve-foreign-corrupt-practices-act.

[3]   See Serious Fraud Office v Rolls Royce PLC Rolls-Royce Energy Systems Inc [2017] at paragraph 63, available at https://www.judiciary.gov.uk/wp-content/uploads/2017/01/sfo-v-rolls-royce.pdf 

[4]   See Serious Fraud Office v Rolls Royce PLC Rolls-Royce Energy Systems Inc [2017] at paragraph  38, available at https://www.judiciary.gov.uk/wp-content/uploads/2017/01/sfo-v-rolls-royce.pdf. 

[5] See Serious Fraud Office v Rolls Royce PLC Rolls-Royce Energy Systems Inc [2017] at paragraph  60, available at https://www.judiciary.gov.uk/wp-content/uploads/2017/01/sfo-v-rolls-royce.pdf. 

The Department Of Homeland Security Proposes New Rules Affecting Federal Government Contractors

This week, the Department of Homeland Security (“DHS”) issued three proposed rules expanding data security and privacy requirements for contractors and subcontractors. The proposed rules build upon other recent efforts by various federal agencies to strengthen safeguarding requirements for sensitive government information.  Given the increasing emphasis on data security and privacy, contractors and subcontractors are well advised to familiarize themselves with these new requirements and undertake a careful review of their current data security and privacy procedures to ensure they comply.

  • Privacy Training

DHS contracts currently require contractor and subcontractor employees to complete privacy training before accessing a Government system of records; handling Personally Identifiable Information and/or Sensitive Personally Identifiable Information; or designing, developing, maintaining, or operating a Government system of records. DHS proposes including this training requirement in the Homeland Security Acquisition Regulation (“HSAR”) and to make the training more easily accessible by hosting it on a public website.  By including the rule in the HSAR, DHS would standardize the obligation across all DHS contracts.  The new rule would require the training to be completed within thirty days of the award of a contract and on an annual basis thereafter.

DHS invites comment on the proposed rule. In particular, DHS asks commenters to offer their views on the burden, if any associated with the requirement to complete DHS-developed privacy training.  DHS also asks whether the industry should be given the flexibility to develop its own privacy training.  Comments must be submitted on or before March 20, 2017.

  • Information Technology Security Awareness Training

DHS currently requires contractor and subcontractor employees to complete information technology security awareness training before accessing DHS information systems and information resources. DHS proposes to amend the HSAR to require IT security awareness training for all contractor and subcontractor employees who will access (1) DHS information systems and information resources or (2) contractor owned and/or operated information systems and information resources capable of collecting, processing, storing or transmitting controlled unclassified information (“CUI”) (defined below).  DHS will require employees to undergo training and to sign DHS’s Rules of Behavior (“RoB”) before they are granted access to those systems and resources.  DHS also proposes to make this training and the RoB more easily accessible by hosting them on a public website.  Thereafter, annual training will be required.  In addition, contractors will be required to submit training certification and signed copies of the RoB to the contracting officer and maintain copies in their own records.

Through this proposed rule, DHS intends to require contractors to identify employees who will require access, to ensure that those employees complete training before they are granted access and annually thereafter, to provide to the government and maintain evidence that training has been conducted. Comments on the proposed rule are due on or before March 20, 2017.

  • Safeguarding of Controlled Unclassified Information

DHS’s third proposed rule will implement new security and privacy measures, including handling and incident reporting requirements, in order to better safeguard CUI. According to DHS, “[r]ecent high-profile breaches of Federal information further demonstrate the need to ensure that information security protections are clearly, effectively, and consistently addressed in contracts.”  Accordingly, the proposed rule – which addresses specific safeguarding requirements outlined in an Office of Management and Budget document outlining policy on managing government data – is intended to “strengthen[] and expand[]” upon existing HSAR language.

DHS’s proposed rule broadly defines “CUI” as “any information the Government creates or possesses, or an entity creates or possesses for or on behalf of the Government (other than classified information) that a law, regulation, or Government-wide policy requires or permits an agency to handle using safeguarding or dissemination controls[,]” including any “such information which, if lost, misused, disclosed, or, without authorization is accessed, or modified, could adversely affect the national or homeland security interest, the conduct of Federal programs, or the privacy of individuals.” The new safeguarding requirements, which apply to both contractors and subcontractors, include mandatory contract clauses; collection, processing, storage, and transmittal guidelines (which incorporate by reference any existing DHS policies and procedures); incident reporting timelines; and inspection provisions. Comments on the proposed rule are due on or before March 20, 2017.

  • Other Recent Efforts To Safeguard Contract Information

DHS’s new rules follow a number of other recent efforts by the federal government to better control CUI and other sensitive government information.

Last fall, for example, the National Archives and Record Administration (“NARA”) issued a final rule standardizing marking and handling requirements for CUI. The final rule, which went into effect on November 14, 2016, clarifies and standardizes the treatment of CUI across the federal government.

NARA’s final rule defines “CUI” as an intermediate level of protected information between classified information and uncontrolled information.  As defined, it includes such broad categories of information as proprietary information, export-controlled information, and certain information relating to legal proceedings.  The final rule also makes an important distinction between two types of systems that process, store or transmit CUI:  (1) information systems “used or operated by an agency or by a contractor of an agency or other organization on behalf of an agency”; and (2) other systems that are not operated on behalf of an agency but that otherwise store, transmit, or process CUI.

Although the final rule directly applies only to federal agencies, it directs agencies to include CUI protection requirements in all federal agreements (including contracts, grants and licenses) that may involve such information.  As a result, its requirements indirectly extend to government contractors.  At the same time, however, it is likely that some government contractor systems will fall into the second category of systems and will not have to abide by the final rule’s restrictions.  A pending FAR case and anticipated forthcoming FAR regulation will further implement this directive for federal contractors.

Similarly, last year the Department of Defense (“DOD”), General Services Administration, and the National Aeronautics and Space Administration issued a new subpart and contract clause (52.204-21) to the FAR “for the basic safeguarding of contractor information systems that process, store, or transmit Federal contract information.”  The provision adds a number of new information security controls with which contractors must comply.

DOD’s final rule imposes a set of fifteen “basic” security controls for covered “contractor information systems” upon which “Federal contract information” transits or resides.  The new controls include: (1) limiting access to the information to authorized users; (2) limiting information system access to the types of transactions and functions that authorized users are permitted to execute; (3) verifying controls on connections to external information systems; (4) imposing controls on information that is posted or processed on publicly accessible information systems; (5) identifying information system users and processes acting on behalf of users or devices; (6) authenticating or verifying the identities of users, processes, and devices before allowing access to an information system; (7) sanitizing or destroying information system media containing Federal contract information before disposal, release, or reuse; (8) limiting physical access to information systems, equipment, and operating environments to authorized individuals; (9) escorting visitors and monitoring visitor activity, maintaining audit logs of physical access, and controlling and managing physical access devices; (10) monitoring, controlling, and protecting organizational communications at external boundaries and key internal boundaries of information systems; (11) implementing sub networks for publically accessible system components that are physically or logically separated from internal networks; (12) identifying, reporting, and correcting information and information system flaws in a timely manner; (13) providing protection from malicious code at appropriate locations within organizational information systems; (14) updating malicious code protection mechanisms when new releases are available; and (15) performing periodic scans of the information system and real-time scans of files from external sources as files are downloaded, opened, or executed.

“Federal contract information” is broadly defined to include any information provided by or generated for the federal government under a government contract.  It does not, however, include either:  (1) information provided by the Government to the public, such as on a website; or (2) simple transactional information, such as that needed to process payments.  A “covered contractor information system” is defined as one that is:  (1) owned or operated by a contractor; and (2) “possesses, stores, or transmits” Federal contract information.

ARTICLE BY Connie N Bertram, Amy Blackwood & Emilie Adams of Proskauer Rose LLP

© 2017 Proskauer Rose LLP.

Cyber-Attacks: A Problem In 2016, Still A Problem in 2017

cyber-attacks hacktivismA survey of nearly 600 organisations across a variety of industries globally has revealed 98% of these organisations experienced some form of cyber-attack in 2016. (We are left wondering if the other 2% just didn’t notice?)

The survey, conducted by cyber-security company Radware, also found that many organisations are still not prepared to face the threat landscape including that 40% of organisations do not have an incident response plan in place.

Respondents indicated that ransom was the top motivation behind cyber-attacks (41%), followed by insider threats (27%), political hacktivism (26%) and competition (26%).

Radware’s Vice President of Security Solutions, Carl Herberger, says that money is the top motivator in today’s threat landscape. He says “attackers employ an ever-increasing number of tactics to steal valuable information, from ransom attacks that can lock up a company’s data, to DDoS attacks that act as a smoke screen for information theft, to direct brute force or injection attacks that grant direct access to internal data”.

Radware predicts that in 2017, we will see an increase in the use of IoT botnets, cyber ransom, telephony DoS, permanent denial of service for data centre and IoT operations, and public transport being held hostage.

Not the most positive outlook for 2017, but it would be a brave person to suggest they are wrong with those predictions.

ARTICLE BY Cameron Abbott & Allison Wallace of K&L Gates
Copyright 2017 K & L Gates

Inauguration Day 2017: President Donald Trump

President Trump Inauguration DayOne year ago, few people outside of candidate Donald Trump and his closest and most loyal supporters imagined that January 20, 2017, would mark his inauguration as the 45th president of the United States. Regardless, today an estimated 800,000–900,000 people were on hand to witness his inauguration on the west front steps of the U.S. Capitol. As is the tradition, the new president was sworn in by the chief justice of the Supreme Court of the United States, with Donald Trump repeating the 37-word, constitutionally mandated oath of office administered by Chief Justice John G. Robert Jr. There then followed the traditional rendition of “Ruffles and Flourishes” and the first “Hail to the Chief” for President Trump, as well as the howitzers of the 3rd U.S. Infantry’s 21-round gun salute while the First Lady and other members of the Trump family looked on.

Meanwhile, many continue to refuse to accept the election results—in which Trump won a wide majority of votes cast in the Electoral College (301–237) but lost the popular vote by over three million votes. Their protests were reflected by hundreds of thousands of demonstrators in inauguration marches in Washington, D.C., and elsewhere around the country, including the Women’s March on Washington, which an estimated 200,000 individuals—brought to the nation’s capital by 1,400 buses—attended. In contrast to the calls for unity and peaceful transfer of power, a few of the protests turned violent resulting in property damage and police action, including the use of tear gas, pepper spray, and flash grenades, and numerous arrests.

Despite the protests, on January 20, Donald John Trump became the new president of the United States, along with Vice President Mike Pence, and the Trump era was launched.

His relatively brief inaugural address—20 minutes—written by his own hand, lacked the rhetorical flourishes of the most memorable lines from several of his predecessors.

For a president whose national popularity rating of 40 percent, according to a recent poll—the lowest rating of any new president on Inauguration Day over the past six most recent presidents—President Trump’s desire for national unity is an important message to deliver, especially in the face of impending change.

In this regard, President Trump used expressions in his inaugural speech such as “always pursue solidarity” and “We share one heart, one home, and one glorious destiny.” Yet essentially, it was a speech that mirrored his campaign speeches calling to “Make America great again.” Perhaps the most memorable line was,

From this day forward, a new vision will govern our land. From this day forward, it’s going to be only America first, America first.

The Trump White House

President Donald Trump and Vice President Mike Pence plan to advance a conservative domestic social and fiscal policy agenda from the White House, and to redefine global relationships with our trading partners, foreign governments, and international organizations. President Trump has promised to quickly overturn President Obama’s executive orders and regulations, as well as repeal and replace the Affordable Care Act, which was passed by a strictly partisan congressional vote with no Republicans voting in favor. President Trump also enjoys a Senate Republican majority to confirm his Cabinet nominees, although confirmation of some may face difficulty. However, Senate confirmation of his choice for the Supreme Court of the United States will be more difficult since, unlike lower federal circuit court judges and administration appointments that cannot be filibustered and only require a simple 51-vote majority to confirm, Supreme Court nominees require 60 votes to overcome a threatened Senate filibuster.

The Republican Congress—Critical to Trump’s Agenda

The Trump era will rely on a Republican-controlled Congress to advance its agenda. Republicans enjoy majorities in both Houses of Congress, albeit by slimmer margins than the 114th Congress. In the new 115th Congress (2017-2018), Senate Republicans hold 52 seats versus 46 Democrats and 2 Independents who caucus with the Democrats, which is 2 fewer Republicans than in the 114th Congress. The slim 52-vote majority makes Senate Republicans susceptible to a 60-vote super-majority vote necessary to invoke cloture to end a legislative filibuster blocking the Trump agenda. In the House the margin is 241 Republicans versus 194 Democrats, which includes 6 fewer Republicans than there were in the 114th Congress but more than sufficient to move the Trump agenda.

What is the Trump Agenda?

President Trump’s Inaugural Address echoed themes he had sounded over the course of his candidacy. Key excerpts from his speech reflect his priorities:

  • “We assembled here today are issuing a new decree to be heard in every city, in every foreign capital, and in every hall of power. From this day forward, a new vision will govern our land. From this day forward, it’s going to be only America first. America first.”

  • “What truly matters is not which party controls our government but whether our government is controlled by the people.”

  • “January 20th, 2017 will be remembered as the day the people became rulers of this nation again.”

  • “When you open your heart to patriotism, there is no room for prejudice.”

  • “A new national pride will stir our souls, lift our sights and heal our divisions.”

First 100 Days

On the first day, the Senate will confirm two of President Trump’s Cabinet nominees: retired United States Marine Corp general, James “Mad Dog” Mattis as Secretary of Defense and retired Marine General John Kelly as Secretary of Homeland Security.

Although President Trump will take executive actions on Inauguration Day following his swearing in, he has stated that he considers his “first day” to be Monday, January 23.

President Trump’s first 100 days in office are likely to include a laser-beam focus on:

  • confirming his Cabinet and sub-Cabinet nominees;

  • repealing the Affordable Care Act (or “Obamacare”) and replacing it with a slimmed-down version;

  • overturning most, if not all, of President Obama’s executive orders and instructing the Trump Executive Branch agency heads to undo Obama regulations by reverse rulemaking or by withdrawing their agencies’ legal defenses of such regulations before the federal appellate courts where they have been enjoined permanently (e.g., the persuader rule) or preliminarily (e.g., the government contractor “blacklisting” rule);

  • redesignating the chairs of the National Labor Relations Board (NLRB) and the U.S. Equal Employment Opportunity Commission (EEOC), and filling vacancies in those two agencies;

  • nominating a new Supreme Court justice and candidates for the lower federal circuit courts of appeals;

  • beginning work on immigration policy, infrastructure, tax reform, and trade policy; and

  • negotiating a spending bill to fund the federal government before the continuing resolution expires in April 2017.

How Might Labor and Employment Policy Change Under President Trump?

Under President Trump, expect a significant reversal of Obama labor and employment policies at the U.S. Department of Labor (DOL), NLRB, and the EEOC.

Traditional Labor. In terms of labor policy, for example, a recent study concluded that over 4,559 years of judicial precedent was overturned in eight years by the Obama Board in favor of pro-union policies. Expect gradual reversal of many of those decisions by a new Trump Board. Reversals will be slowed, however, by the need for a “live” case (the NLRB is not permitted to issue advisory opinions) and by incumbent pro-union Democratic General Counsel Richard Griffin, whose term expires in November of 2017.

Joint-Employer. Also, expect reversal of the Obama policy on “joint-employer” status, which saddles franchisors with the collective bargaining obligations and labor law violations of their franchisees. The ubiquitous Obama joint-employer standard has been developing government-wide by the NLRB (in its Browning-Ferris Industries decision) as well as by the DOL’s Wage and Hour Division and Occupational Safety and Health Administration, and by the EEOC. Business groups argue that the joint-employer standard would destroy the franchise model. We can likely expect the Trump administration to move quickly to reverse these joint-employer policies, especially if the chief executive officer of CKE Restaurants, Andy Puzder is confirmed as Secretary of Labor.

Wage and Hour Issues. On issues such as the “salary basis” for the Fair Labor Standards Act’s overtime exemption for white collar employees (executive, administrative, or professional employees), and the minimum wage, expect the Trump administration to propose significantly lower increases than those proposed by President Obama. Similarly, expect Trump to advance some version of a federal paid family leave law, although without some of the onerous provisions previously advocated.

Executive Orders. On issues like “government contractor blacklisting” (Executive Order 13673, “Fair Pay and Safe Workplaces” and its implementing regulations and DOL guidance), President Trump has promised to quickly rescind the executive order, perhaps on his first day in office. The same is true with Obama’s other labor and employment executive orders starting with those from the first days of the Obama presidency.

Persuader Rule. As for the “persuader” regulations, expect Trump to instruct his Justice Department and Department of Labor to withdraw their appeals in the Fifth Circuit of the permanent injunction granted by a federal district court in Texas. The same is true of the appeal of a preliminary injunction of the Labor Department’s overtime regulation entered by another federal district court in Texas. By withdrawing from the litigation, the Trump administration would effectively end those regulations without going through a burdensome and time-consuming reverse rule making.

Immigration. In addition to reversing and replacing Obamacare and rescinding other Obama labor and employment executive orders and regulations, immigration reform is a high priority for the Trump administration. Under President Trump, immigration policy will focus on boarder security, restrictions on entry, and deportation of undocumented aliens.

Court Vacancies. Finally, the composition of federal courts, including the Supreme Court of the United States, is important to labor and employment policy. Filling the vacancy on the Supreme Court, and the 100 vacancies in the lower federal courts, will be a priority. Currently, for example, only the Fifth, Sixth, Seventh, and Eighth Circuits retain majorities appointed by Republican presidents. Now, after the “nuclear option” was rammed through the Senate by then-Majority Leader Harry Ried (D-NV), it is possible that the Senate confirmation of judicial appointments will not be filibustered and will only require a simple 51-vote majority. We can likely expect President Trump to move quickly to fill those vacancies.

Post- Inauguration Day 2017: The Trump Era Begins

The next four years potentially will bring dramatic changes in domestic and foreign policy. One of the most significant changes likely will be in labor and employment policy. As with all of his predecessors throughout U.S. history, President Trump enters the White House hoping to bring about change. Time will tell.

ARTICLE BY Harold P. Coxson of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
© 2017, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.

2017 Automotive Forecasts Unveiled During Detroit Auto Show Week

traffic on highway detroit auto showIt is “Auto Show” week in Detroit, as the city hosts the 2017 North American International Auto Show.  This week includes press unveils of new and updated models, the latest mobility technologies at the AutoMobili-D pavilion, the charity preview featuring 17,000 auto industry players in tuxedos and long dresses and, of course, predictions for where the automotive market in North America is going in 2017.

Some of those predictions were reviewed at the Association for Corporate Growth’s “Automotive Outlook” event held on January 10that the beautiful and buzzing Detroit Athletic Club.  The featured speakers included Michael Robinet, Managing Director, Automotive Advisory Solutions at IHS Markit (IHS), one of the most respected forecasters in the automotive industry, and Dave Andrea, Executive Vice President of Research for the Center for Automotive Research (CAR), one of the most respected researchers in the automotive industry.  As expected with speakers of this caliber, the content was excellent.

Several themes emerged from the forecasts.

The North American Automotive Industry Will Be Flat This Year.

In 2016, a total of 17.55 million cars and light trucks were sold in North America, a record.  For 2017, IHS forecasts 17.6 million units and CAR forecasts 17.5 million units.  These are great numbers by historical reference, but are further evidence of the “plateauing” of the industry that we have observed recently.

President Elect Trump Has Added Some Uncertainty to the Market.

This sounds like an understatement, but it is worth emphasizing.   There is increased uncertainty regarding trade policy, including potential renegotiation of the NAFTA  treaty and/or increased tariffs on cars imported from Mexico.  There is also increased uncertainty regarding energy policy, including whether the higher Corporate Average Fuel Economy (CAFE) standards, due to become fully effective in 2025, will be relaxed (although product plans are becoming less alterable as we get closer to that date and hybrids already play an increasing role in those plans), and the impact of energy policy and oil prices on car buying decisions.  Tax reform may also drive activity in unknown ways.

It is All About the Mix.

The overall automotive market in North America is strong, but not all segments are strong.  Light trucks and SUV’s/CUV’s continue to do well; passenger cars/sedans are much softer; and the adoption of electric cars continues to be relatively modest (although the new Chevrolet Bolt, a 238 mile range EV that received the Motor Trend Car of the Year Award for 2017 earlier this week, is expected to be well received – pictured above).  This mix impacts OEMs and automotive suppliers in different ways, and both IHS and CAR cautioned attendees to “look beneath the waves/look beneath the water line” (pick your metaphor) to see what is really going on in detail in the market.

Connected and Autonomous Vehicle Development is Accelerating.

The industry is in a modern “race to the moon” to achieve full vehicle autonomy, which is still a ways off, but within the planning horizon.  We are moving to Level 3 now – autonomy with driver intervention. While widely adopted, on road Level 5, full autonomy without intervention, is still far out there in the mid-2020’s at best.  In my mind, technology will continue to move faster than standards setting and harmonization, infrastructure improvements, and full consumer acceptance.  In the interim, automotive companies must operate in the current market, adjust to the emerging ridesharing and car sharing models as Vehicle Miles Traveled continue to be split in different ways, and develop and implement enhanced connectivity and safety features (ADAS) as the march to autonomy continues.

Risk is Rising/Disintermediation Will Occur.

With mobility models changing, nontraditional players coming into the market, political and regulatory uncertainties increasing, and vehicle price increases (with the enhanced content) beginning to challenge affordability for many consumers, the risks in the market are increasing overall.  Will OEMs and large Tier 1’s continue to be the technology integrators in the future, or will others increasingly play that role?  Players that adapt to these risks most nimbly and correctly will be rewarded, while others will be challenged.

In 2017 overall, it will be a pleasure and thrill to be part of one of the most interesting and watched industries: the mobility industry.

ARTICLE BY Steven H. Hilfinger of Foley & Lardner LLP

© 2017 Foley & Lardner LLP

Sanctions Imposed for Failure to Preserve Call Recordings

Call RecordingsSec. Alarm Fin. Enters., L.P. v. Alarm Protection Tech., LLC, No. 3:13-cv-00102-SLG, 2016 WL 7115911 (D. Alaska Dec. 6, 2016)

In this case, Plaintiff was sanctioned pursuant to Rule 37(e), as amended on December 1, 2015, for its failure to preserve relevant customer call recordings.

Plaintiff alleged that Defendant had “illegally ‘poached’” its customers and defamed the plaintiff. Defendant, in turn, alleged tortious interference with its contractual relationships and defamation by the plaintiff.  In the course of discovery, Plaintiff produced approximately 150 customer call recordings (out of “thousands”) that were “generally favorable” to it but, when asked, was unable to produce any others and claimed that the recordings were lost, apparently as the result of the “normal operation of a data retention policy.”  Defendant sought sanctions pursuant to amended Rule 37(e).

Taking up the motion, the Court first addressed whether the “newly revised or the former version of Federal Rule of Civil Procedure 37” applied.  Concluding that the revised version was appropriate, the Court reasoned that it was “clearly not impracticable to apply the new rule” and that while it would be “unjust to apply a new rule retroactively when that rule governs a party’s conduct,” Rule 37(e) “does not govern conduct” but rather limits the Court’s discretion to impose particular sanctions, without changing the parties’ duty to preserve as it existed prior to the amendments.

Turning to whether Plaintiff had a duty to preserve, the Court noted that the recordings were destroyed after litigation was ongoing and reasoned that Plaintiff should have known and in fact knew of the calls’ potential relevance, citing its memorandum to employees asking them not to use certain words on calls with Alaskan customers (circulated around the time of the complaint and close in time to being accused by Defendant of defamation during contact with Alaskan customers) and—more importantly—the fact that Plaintiff “flagged the existence of the recordings” in its initial disclosures.

Regarding the threshold question of whether Plaintiff took reasonable steps to preserve, the Court rejected Plaintiff’s argument that its “general litigation hold” was sufficient, despite not encompassing the recordings.  Moreover, the Court noted that “reasonable steps [to preserve] were available,” citing Plaintiff’s admission that the calls could have been extracted to avoid being overwritten and the fact that some recordings were saved.  Recognizing that sanctions are precluded when the information can be restored or replaced through additional discovery, the Court indicated that there was no suggestion that the calls were available elsewhere and thus turned to the question of appropriate sanctions.

First, the Court took up the question of whether the recordings were destroyed with the intent to deprive the other party of the information’s use in the litigation and indicated that based on the “relatively murky record before the Court” regarding the nature of the parties’ discussions surrounding the recordings and their treatment in discovery, it could not conclude that Plaintiff overwrote the recordings with the requisite intent to deprive.  Turning next to the question of prejudice, the Court considered whether the information was available through other means, but reasoned that the call notes and depositions of Plaintiff’s employees were “likely to be far inferior” compared to the calls themselves.  Thus, the Court concluded that Defendant was entitled to a remedy “no greater than necessary to cure the prejudice” as allowed by Rule 37(e)(1).

To address the prejudice suffered by Defendant, the Court ordered that Plaintiff pay Defendant’s reasonable attorneys fees incurred in bringing the motion, that neither party would be allowed to introduce recordings made to or from Plaintiff’s call center absent stipulation or a subsequent order, and that the parties may present evidence related to the lost recordings at trial (although Defendant was barred from arguing that the jury may or should presume that evidence would have been favorable to it). The Court also indicted that it would instruct the jury that Plaintiff was under a duty to preserve the calls, but failed to do so.

ARTICLE BY e-Discovery Analysis and Technology Group of K&L Gates

Copyright 2017 K & L Gates