Tag: Trump administration

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).

You’re Hired: Labor Policy Under Trump Administration and 115th Congress

labor policy trump administrationIf personnel reflect policy, President-elect Donald Trump’s selection of Andrew Puzder as the next Secretary of Labor signals a turning point for labor and employment policy.  The Chief Executive Officer of CKE Restaurants, Mr. Puzder has been critical of many of the Obama administration’s labor initiatives.  His efforts to carry out Mr. Trump’s job creation agenda will likely intersect with action in Congress and in the courts, where several pivotal labor-related cases are currently being heard on appeal.  These dynamics mean that the early days of the Trump administration and the 115th Congress will be a time of flux for employers, with changes to existing regulations and new legislative and regulatory initiatives.  This article details several of the most important policy areas that are likely to undergo change.  Employers should consider engaging in the policymaking process now to help shape legislation and regulations.

New Players, New Priorities

As the leader of a major fast-food company, Mr. Puzder brings a “real-world” perspective on how policy decisions affect employers and employees.  He has been a vocal critic of several Obama-era labor initiatives, especially its activities with respect to the joint employer standard, expanded eligibility for overtime pay and paid leave, among others.

Mr. Puzder’s views on these topics are largely in alignment with the Republican leadership of the Congressional committees with jurisdiction over labor and employment issues.  On the House Education and Workforce Committee, Representative Virginia Foxx (R-NC) is expected to become the new Chair following the retirement of current Chair John Kline (R-MN).  Representative Foxx has promised “to do whatever [Republicans] can to stop the rules coming out of the [Obama] Labor Department – either block them or repeal them.”  She has named the repeal of the Department’s overtime and persuader rules as top priorities, in addition to the National Labor Relations Board’s (NLRB) broadened joint employer standard and rules related to the union election process.  Representative Bobby Scott (D-VA) will remain the Ranking Member on Education and Workforce.

In the Senate, Senator Lamar Alexander (R-TN) will remain the Chairman of the Senate Health, Education, Labor, and Pensions Committee (HELP), while Senator Patty Murray (D-WA) will continue to serve as the top Democratic or ranking member.

Overtime Rule

One of the key labor policies that Mr. Puzder, Rep. Foxx, and their Republican colleagues may consider for reform are the Obama administration’s initiatives with respect to overtime pay.  The overtime rule, which was published in the Federal Register on May 23, 2016, revises income thresholds for determining overtime pay for executive, administrative, professional, outside sales, and white collar employees exempt from regular minimum wage and overtime pay requirements, and raises the cut-off salary of employees eligible for overtime pay from $23,660 to $47,476 per year.  The rule was due to become effective on December 1, 2016.

However, a U.S. District Court Judge in Texas on November 22 issued a nationwide preliminary injunction blocking implementation of the overtime rule, just a few days before its December 1 effective date.[1] This preliminary injunction has given businesses that had not yet moved to comply with the new rules a respite from updating their systems and notifying employees.  In turn, knowing that some businesses have not yet had to comply, Congress has now prioritized repeal of the overtime rule as an early order of business in 2017.

Under complex procedural rules, repeal of the overtime rule could possibly be accomplished through use of the Congressional Review Act (CRA).  CRA is a 1996 law that allows Congress to repeal new “major rules” through an expedited resolution of disapproval as long as those regulations were issued within sixty legislative days in the House or session days in the Senate of the start of the new administration.  With the House and Senate still holding occasional pro forma sessions into mid-December, the Overtime Rule is in a grey area of the CRA window, and the final determination will be made by the Office of the Clerk.  Notably, the Senate Republican Policy Committee has identified the Overtime Rule as a potential candidate for review under the CRA.[2]

Paid Leave

Another key issue is the Department of Labor’s (DOL’s) final September 2016 rule implementing President Obama’s Executive Order 13706 to require federal contractors and subcontractors to provide certain employees with up to seven days of paid sick leave annually.  President-elect Trump has not made any statements regarding his position on mandated paid sick leave for federal contractors.  Delivering on a broad campaign promise to rescind executive orders issued by President Obama, it is possible that President-elect Trump may repeal the executive order, along with other Obama executive orders, during his first weeks in office.

On the other hand, the Trump administration and 115th Congress also could address issues surrounding paid leave.  During the campaign, the President-elect proposed six weeks of mandatory paid maternity leave, as well as tax incentives to support child and elder care.  Although the details of the plan, including what percentage of their salaries mothers will receive, have yet to be clarified, it could offer an opportunity for Democrats and Republicans to find common ground.

Minimum Wage

President-elect Trump has not taken a strong position on the federal minimum wage and has indicated an openness to an increase in the minimum wage as recently as July 2016.

Federal minimum wage legislation was last considered by Congress in April 2014, but the Minimum Wage Fairness Act could not garner enough support in the Senate to proceed to a vote.  This act would have gradually raised the federal minimum wage from $7.25 to $10.10 per hour over a two-year period.  Notably, there were attempts at compromise, which although unsuccessful could serve as a foundation in the case the issue moves forward, perhaps prompted by state-by-state action.[3] For example, Senator Susan Collins (R-ME) proposed to increase the federal minimum wage to $9 per hour, a wage that the Congressional Budget Office had projected would greatly reduce the negative impact on jobs.[4]

A Trump administration may look favorably towards an increase in the minimum wage — indeed, in a television appearance Mr. Puzder said that he was “not opposed to raising the minimum wage rationally.”  However, Congressional Republicans have generally not voiced support for increasing the minimum wage, so prospects for action remain unclear.

Joint Employer Standard

Mr. Puzder and Rep. Foxx will likely prioritize the NLRB’s joint employer standard for repeal.  The NLRB ruling broadens the standard for who is considered an employer from the company that is currently exercising control, to any company with authority to exercise control over the employee.  The result is that when two or more companies are involved with a worker — such as a temporary employment agency and the current employer — they may be considered joint employers.  The implication of this change is that it creates stronger grounds for organizing unions that represent workers at both of the joint employers, thus giving employees more leverage.  The change also increases exposure to liability because a company can now be held liable for labor violations committed by sub-contractors, franchisees, and other companies to which it outsourced responsibilities.

The issue remains unsettled into the next administration because the underlying case that prompted the NLRB decision is currently on appeal in the D.C. Circuit.[5]  In Congress, HELP Committee Chairman Lamar Alexander (R-TN) and House Education and the Workforce Chairman Kline introduced a bill to repeal the changes to the joint employer standard created by the NLRB’s ruling in Browning-Ferris Industries.  The Protecting Local Business Opportunity Act provides potential models for the next Congress.  The legislation would reaffirm that multiple employers must have “actual, direct, and immediate” control over employees to be considered joint employers, rather than the “indirect” or even “potential” control over employment decisions permitted under the NLRB’s new joint employer standard. Because the broadened standard was established by an NLRB ruling, it would require either future litigation or legislative action to overturn.

Additionally, the Committee on Education and the Workforce has been focusing its attention on this issue in part by conducting a year-long investigation of the Occupational Safety and Health Administration (OSHA) joint employer standard, which, they claim, instructs OSHA’s inspectors to “delve into unrelated matters – financial and otherwise – far outside their expertise,” and drifts from the agency’s core mission of examining workplace health and safety in a way that benefits union leaders.  In October, the Committee wrote a letter to Labor Secretary Thomas Perez expressing these concerns.

Persuader Rule

In March of this year, the DOL finalized its much-anticipated “persuader rule,” which requires employers to report any third-party arrangement entered into with the goal of persuading employees, whether directly or indirectly, regarding their right to organize or bargain collectively.  Critics of the rule argue that it will have a chilling effect on employer speech and prevent employers from hiring legal counsel or speaking on labor issues.

Since its passage, the persuader rule has faced significant hurdles in the form of lawsuits challenging its enforcement as unconstitutional, unlawful, and exceeding DOL’s authority.  Although it was set to go into effect July 1, a U.S. District Court judge in Texas granted a nationwide preliminary and later permanent injunction against enforcement of the rule.[6] The DOL is appealing the injunctive relief to the U.S. Court of Appeals for the Fifth Circuit.[7] However, since the persuader rule is based on an administrative determination of the DOL, it is likely that Trump administration changes in DOL priorities or personnel would moot the appeal at some point.  Relying in part on the assumption that a Trump DOL would abandon the rule and the permanent nationwide injunction issued in Texas, a federal judge in Minnesota faced with a similar case recently stayed that litigation, despite his earlier decision not to grant injunctive relief.[8] The split suggests that the issue could ultimately make its way to a federal court of appeals or to the Supreme Court.

Blacklisting Rule

Another DOL regulation following a path similar to that of the Persuader Rule is the DOL’s guidance for implementing E.O. 13673, Fair Pay and Safe Workplaces.  The DOL’s rule is popularly referred to as the “Blacklisting Rule,” and it was published on August 25, 2016.  E.O. 13673 requires that federal contracting officers consider a contractor’s compliance with certain federal and state labor laws as part of the determination of contractor responsibility in awarding federal contracts. The Blacklisting Rule requires that federal contractors bidding over $500,000 report violations of fourteen different labor laws, as well as similar state laws, to the federal government.  Contractors are obligated to report violations even if they are still being contested in court.

The rule was due to become effective on October 25, but just two days before that date, the U.S. District Court for the Eastern District of Texas granted a temporary injunction blocking parts of the rule from going into effect. Judge Marcia Crone ruled that the portion requiring disclosure of labor law violations — even if those violations are being challenged in court or have been settled without any actual violation of the law — was in violation of the First Amendment.[9]  While the injunction is temporary, it demonstrates that the court is likely to eventually rule in favor of the plaintiffs, Associated Builders and Contractors, and strike down the rule.  The ruling left intact the rule’s paycheck transparency provision, which requires employers to note on paychecks information such as whether the person is an independent contractor or an employee under the Fair Labor Standards Act.

In the event that the injunction is lifted, Congress may pursue repeal of the Blacklisting Rule through use of the CRA.  Since the rule was published on August 25, it falls within the CRA’s sixty-legislative or -session day window.  Similar to the Overtime Rule, the Senate Republican Policy Committee has identified the Blacklisting Rule as a potential candidate for review under the CRA.[10]

Predictive Scheduling

Proposed legislation to regulate work schedules has emerged at the state and local levels in the wake of San Francisco’s enactment of its “Retail Workers Bill of Rights” ordinance in November 2014.  A similar law, which applies to retail and food service establishments employing 500 or more workers, will take effect in Seattle on July 1, 2017.  The provisions of these scheduling laws vary, but most require employers to give good faith estimates of an employee’s work hours in advance and provide additional compensation to employees whose hours are changed on short notice, among other provisions.

Proposals similar to the San Francisco and Seattle laws are pending in state legislatures in California, Connecticut, Illinois, Indiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, Oregon, and Rhode Island, as well as in major cities like New York and at the federal level.

In the event state and local scheduling laws begin to gain momentum, the Republican majorities in the House and Senate could advance federal legislation to preempt such efforts. As a veteran of the fast-food industry, which has been a target of the push for restrictive scheduling, Mr. Puzder could be sympathetic to calls for a federal solution that balances the interests of employers and employees.

Conclusion

The Trump administration and leadership of the 115th Congress are charting a different course with respect to labor and employment policy than the outgoing Obama administration on the issues described above as well as many others.  The incoming administration and Congress will almost certainly advance efforts to repeal some of the Obama administration’s key labor and employment initiatives, and Congress will also position itself to react to state-based initiatives and legal challenges.  These developments promise a period of changing obligations for employers, as well as opportunities to shape the future of this important policy area.

Labor Regulation/Issue Status Options for Repeal/Change
Overtime Rule Under temporary injunction
  • Possibly CRA repeal
  • Congressional action
  • Final court ruling
Paid Leave for Federal Contractors Obama executive order and DOL implementing regulation passed
  • President-elect Trump can repeal with an executive order
Federal Paid Leave Legislation Currently none
  • Congressional action
Federal Minimum Wage Currently $7.25; no pending Congressional action
  • Congressional action
Joint Employer Standard NLRB ruling issued, currently on appeal in the D.C. Circuit
  • Congressional action
  • Final court ruling
Persuader Rule Under permanent injunction
  • Congressional action
  • Final court ruling
Blacklisting Rule Under temporary injunction
  • CRA repeal
  • Congressional action
  • Final court ruling
  • Reversal of underlying executive order
Predictive Scheduling This is currently being handled at the state and local level
  • Congressional action
ARTICLE BY Karishma Shah Page, Amy Carnevale & Peter V. Nelson of K & L Gates
Copyright 2016 K & L Gates

[1] State of Nevada v. U.S. Dep’t of Labor, No. 4:16-CV-00731 (E.D. Tex. Nov. 22, 2016).

[2] Reining in Obama Regulatory Overreach, SENATE REPUBLICAN POL’Y COMM. (Dec. 6, 2016).

[3] Alexander Bolton, Centrist Republicans Cool to Minimum Wage Hike Compromise, THE HILL (Apr. 4, 2014 6:00AM).

[4] Id.

[5] Browning-Ferris Indus. of California, Inc. d/b/a Newby Island Recyclery, 362 NLRB No. 186 (Aug. 27, 2015).

[6] Nat’l Fed’n of Indep. Bus. v. Perez, Case No. 5:16-cv-00066-C (N.D. Tex. June 27, 2016) (preliminary injunction); Nat’l Fed’n of Indep. Bus. v. Perez, Case No. 5:16-cv-00066 (N.D. Tex. Nov. 16, 2016) (permanent injunction).

[7] Lawrence E. Dubé, DOL Persuader Rule Blocked by Federal Judge, BLOOMBERG BNA (Nov. 17, 2016) https://www.bna.com/dol-persuader-rule-n57982082867/.

[8] Vin Gurrieri, Persuader Case Halted Pending Trump DOL Action, LAW 360 (Dec. 8, 2016, 6:27 PM), https://www.law360.com/articles/870551/persuader-case-halted-pending-trump-dol-action;  Labnet, Inc., d/b/a Worklaw Network v. U.S. Dep’t of Labor, Case No. 16-CV-0844 (PJS/KMM) (D. Minn. June 22, 2016) (stay of proceedings issued on Dec. 7).

[9] Assoc. Builders and Contractors of Southeast Texas v. Anne Rung, Administrator, Office of Fed. Procurement Policy, Office of Mgmt. and Budget, Case No. 1:16-CV-425 (E.D. Tex. Oct. 23, 2016).

[10] Reining in Obama Regulatory Overreach, SENATE REPUBLICAN POL’Y COMM. (Dec. 6, 2016) http://www.rpc.senate.gov/policy-papers/reining-in-obama-regulatory-overreach.

Forecasting the Trump Administration’s First 100 Days

Trump AdministrationWith the 2016 election in the rearview mirror, manufacturers must be mindful of the early initiatives you can expect from Congress and the new administration. With a return to one-party rule, the coming congressional term is likely to be among the most active in recent memory.

President-elect Trump’s appointment of Republican National Committee Chairman Reince Priebus as White House chief of staff signals that, rather than battling the Washington establishment, Trump has now embraced it to get results. Similarly, the decision to replace New Jersey Governor Chris Christie with Vice President-elect Mike Pence as transition team lead means the president-elect understands that, campaign rhetoric aside, his early success will depend on partnering with House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell.

Early Legislation

The Trump transition team was thinly staffed and produced few of the reams of position papers the Clinton team, and even the Romney team in 2012, produced leading up to Election Day. As a result, we believe the core of the term’s early legislation will be a series of bills previously passed, largely by the House, which President Obama refused to consider. The last four years’ deep legislative history offers insight into the likely legislative agenda, for example, the upcoming tax bill or financial services reform.

In the short run, we expect the first weeks of the Trump Administration will focus on quick action to nullify many of the Obama Administration’s executive orders. Priorities likely include approving the Keystone XL pipeline, reversing Clean Air Act rules, striking down the increased minimum wage for federal contractors, and freezing the recruiting of new, non-defense federal employees. Trump also spoke during the campaign about lifting restrictions on U.S. energy development and canceling billions in payments to U.N. climate programs.

On trade, expect the president-elect to order his new commerce secretary to “identify all foreign trading abuses that unfairly impact American workers and direct them to use every tool under American and international law to end those abuses immediately.” Also expect Canada, Mexico, and the United States to begin negotiations to revamp the North American Free Trade Agreement.

We anticipate that Republican leadership to combine a number of priorities into a major reconciliation bill, which will only require 51 Senate votes. (Other Senate bills require 60 votes to advance under current rules.) Key elements in this whopper of a bill will likely be tax reform, the repeal or rewrite of the Affordable Care Act, and financial services reform. Such reform will assuredly eviscerate the Consumer Financial Protection Bureau (“CFPB”), in addition to addressing a number of other issues.

Aside from fleshing out the Cabinet, President Trump will nominate a Supreme Court justice and two members of the Federal Reserve’s seven-member Board of Governors. It is worth noting that the Fed now has jurisdiction over the CFPB. Another interesting decision is whether to fill the open seats on the Export-Import Bank. Three of its five seats are open. While Congress has fought off challenges to kill the bank, Trump could effectively kill it by never filling the vacant seats.

What’s Next?

In the next six months, the new administration and Congress will negotiate some of the largest changes to law in recent memory, substantially impacting manufacturers.

ARTICLE BY Dennis A. Cardoza & Scott L. Klug of Foley & Lardner LLP

© 2016 Foley & Lardner LLP

Privacy and Data Security in the Trump Administration

data breach, privacyPrivacy and data security issues were prominent in the campaign. Allegations were even made that Russia was behind the DNC hack.

Despite it being front and center in the campaign, cybersecurity did not generate specific policies from the Trump campaign. One thing Donald Trump did promise was a top to bottom review of US cyber defense and security led by government, law enforcement, and private sector experts.  He also committed to establishing a Justice Department task force to coordinate responses to cyber attacks and a cyber review team to audit existing government IT systems.

Another area on which the President-elect spoke was the need to clamp down on the theft of US intellectual property, especially by foreign nations and competitors. Tools already exist to do that, of course: Economic Espionage Act of 1996.  Congress, which earlier this year enacted the Defend Trade Secrets Act, is likely to respond favorably to any additional resources or authorities the new administration might seek for this purpose.

Related to cyber security were Mr. Trump’s comments on encryption during Apple’s dispute with the Justice Department in the wake of the San Bernardino terrorist attack. Trump sided strongly with law enforcement, and we can expect Congress to return to the subject of encryption in the coming session.  Whether anything happens legislatively is uncertain, and some in Congress want to await the pending report of the National Academy of Science on encryption, which will remain a highly contentious issue.  Still, Candidate Trump’s comments show where he stands.  One wildcard in the debate may be how weakened is FBI Director Jim Comey, who has been leading the charge on encryption issues for law enforcement.

Also due for legislative consideration in 2017 is the renewal of section 702 surveillance authority under the FISA Amendments Act, which is due to sunset at the end of the year. Trump is likely to take a much more pro-surveillance position than either the current administration or Secretary Clinton might have taken.  Privacy advocates in both parties are likely to press for changes in the law, but at this point the odds would be against them.

Either on its own or in conjunction with the section 702 debate, Congress is likely to return to consideration of ECPA reform. The House passed the E-mail Privacy Act unanimously this Congress, but it stalled in the Senate due to privacy groups’ opposition to an amendment sought by Senator Cornyn.  The must-pass section 702 legislation is likely to provide a vehicle for e-mail privacy and related ECPA reform legislation if it does not move on its own.

Also in the mix on these issues is consideration of legislation clarifying and modernizing how domestic law enforcement accesses data across national borders. Legislation addressing that issue enjoys prominent support in Congress and may well get taken up in conjunction with ECPA reform or get lumped in with that in the context of section 702 renewal.

And the House Judiciary Committee is already moving ahead with a hearing scheduled to consider protecting geolocation data, setting up another area of dispute between law enforcement and privacy advocates.

Also in the mix legislatively will be proposals on how firms deal with data breaches and theft of information. The recently disclosed hack of Yahoo and the DNC hack have again raised the profile of data breach issues.  While there is consensus that something should be done, disagreement remains on the details, including whether a federal law should preempt state data breach laws.  There is little reason to expect that the disagreements can be bridged or that legislation will in fact move forward.

Finally and briefly, among other issues that Congress is likely to look at, though on which a legislative solution is unlikely are:

1) how to address distributed denial of service attacks, and the inter-related topic of the growth of the Internet of Things, on which several committees have already scheduled hearings in the wake of the recent significant DDOS attack. At this stage, Congress is likely to seek to continue to build its level of understanding of the issues here rather than act on anything;

2) how to address the recruitment of terrorists and the spread of violent extremism through social media; and

3) the implementation of last year’s Cybersecurity Information Sharing Act by the Department of Homeland Security.

One final point: the key players on these issues are likely to remain the same. One possible change would have Senate Judiciary ranking member Pat Leahy, just reelected, move to become ranking member of the Appropriations Committee, which could open the door for Senator Feinstein to become ranking member of the Judiciary Committee.  She would be more sympathetic to law enforcement and less aligned with the privacy advocates than Senator Leahy has been.  However, her move might allow tech-friendly Senator Mark Warner to become vice chairman of the Intelligence Committee, of which Senator Richard Burr will remain as chairman after his reelection.

ARTICLE BY Richard A. Hertling of Covington & Burling LLP

© 2016 Covington & Burling LLP