GC Agenda: February 2019

Practical Law Article w-018-6964 (Approx. 9 pages)

GC Agenda: February 2019

by Practical Law The Journal

Antitrust

Merger Enforcement Trends

Companies considering mergers in 2019 should be aware of recent trends in merger enforcement.

Merger enforcement by the federal antitrust agencies declined significantly in 2018. The FTC and DOJ brought 21 enforcement actions in 2018, over 34% fewer than in 2017. The FTC was nearly twice as active as the DOJ. In addition, in 2018:

The average length of merger investigations fell to 9.2 months, compared to 9.9 months in 2017. This is the shortest average length since 2014.
As in recent years, the majority of enforcement actions focused on mergers that reduced the number of competitors from three to two or two to one.
The agencies continued to favor structural remedies over behavioral remedies to resolve competitive concerns.
The agencies did not initiate any new actions against consummated mergers. However, the agencies can still review transactions that have closed, and have done so frequently over the past decade.

With one notable exception, the agencies’ success in litigation largely continued. All three litigated cases initiated by the agencies in 2018 resulted in the parties abandoning their respective deals. Of the three litigated cases initiated in 2017 that continued into 2018:

AT&T/Time Warner prevailed in court in June 2018, and the merger was completed two days later. The DOJ’s appeal is pending.
Otto Bock HealthCare/FIH Group Holdings is ongoing.
The FTC obtained an injunction preventing the proposed Tronox/Cristal merger.

Looking ahead, FTC Chairman Joseph J. Simons has stated that the agency will focus on firms with market power, such as significant high-tech platforms, and on mergers between high-tech platforms and new or emerging (nascent) competitors. The DOJ has announced improvements to the merger review process, including a goal of completing most merger investigations within six months. The length of merger investigations is expected to continue trending downward in 2019 in the wake of the increased focus on efficiency.

For more information on trends in federal merger enforcement, see Practice Note, Federal Merger Enforcement Year in Review: 2018.

Government Shutdown

A US government shutdown significantly affects the federal antitrust agencies’ ability to perform merger review and enforcement functions. Companies appearing before these agencies should be aware that during a government shutdown they typically:

Continue to accept Hart-Scott-Rodino (HSR) filings, but do not grant early termination of the HSR waiting period.
Maintain essential staff for reviewing deals within the initial 30-day HSR waiting period.
Do not staff any matters without a statutory deadline or obligation, meaning that deals in Second Requests and all non-merger investigations are placed on hold.

Commercial Transactions

Blockchain and the Produce Safety Rule

Produce retailers should consider using innovative technologies, such as blockchain, to more efficiently comply with the Food Safety Modernization Act’s Produce Safety Rule.

For example, following a widespread recall of romaine lettuce in the spring of 2018, Walmart is requiring that its spinach and lettuce suppliers input detailed information into a blockchain database to facilitate faster identification of the source of any future contamination along the spinach and lettuce supply chain.

By storing the information digitally, the suppliers can identify which farms are infected and quickly stop the supply of contaminated food to consumers. Blockchain therefore offers a potential solution to issues relating to food safety and traceability, and reduces the risk of lost profits associated with destroying large amounts of uncontaminated produce.

Walmart suppliers of spinach and lettuce have until September 30, 2019 to comply with the new blockchain database requirements.

For more information on the use of blockchain and smart contracts in supply chain management, see Practice Note, Blockchain and Supply Chain Management.

Employee Benefits & Executive Compensation

Affordable Care Act Litigation

Employers that sponsor health plans, health insurers, and their advisors should monitor ongoing litigation addressing the constitutionality of the Affordable Care Act (ACA).

In Texas v. Azar, a Texas federal district court held that:

The ACA’s individual mandate is unconstitutional.
The remainder of the ACA is not severable from the individual mandate and is therefore invalid.

The litigation arose from a Tax Cuts and Jobs Act (TCJA) provision that reduced the payment for violating the ACA’s individual mandate to zero. In 2012, the US Supreme Court upheld the individual mandate as a valid exercise of Congress’s taxing power. But the plaintiffs in the Texas v. Azar litigation argued that the TCJA amendment meant that the individual mandate could no longer be upheld as a tax. The district court agreed, reasoning that because the government will no longer receive tax revenue under the individual mandate (because of the TCJA) the mandate itself was no longer a valid exercise of Congress’s taxing power. The district court also found that Congress expressed a plain intent, as reflected in the ACA’s unambiguous text, that the individual mandate should not be severed from the ACA.

The district court’s ruling has been appealed to the Fifth Circuit. Although the litigation raises renewed concerns regarding the ACA’s future, the ACA currently is good law. It is possible that the district court’s ruling on severability will be reversed.

In other ACA litigation, two federal district courts issued injunctions, one of them nationwide, blocking implementation of final regulations issued by the Trump administration in November 2018 under the ACA’s contraceptives mandate. The two rulings have been appealed to the Third and Ninth Circuits.

For more information on Texas v. Azar, see Legal Update, Texas Ruling Invalidating ACA Is Appealed to the Fifth Circuit; US House Moves to Intervene.

Finance

Green Loan Principles

Green project developers should be aware of the recently extended Green Loan Principles (GLP) published by The Loan Syndications and Trading Association, together with the Loan Market Association and the Asia Pacific Loan Market Association, and representatives from leading financial institutions active in the green loan market. The GLP are intended to support environmentally sustainable economic activity by producing a globally acceptable approach to green loans.

A green loan is defined in the GLP as any type of instrument made exclusively available to finance or refinance a new or existing eligible green project, such as a project that focuses on renewable energy, pollution prevention, clean transportation, or sustainable water management. An eligible green project must also align with the following GLP core components:

Use of proceeds.
Process for project evaluation and selection.
Management of proceeds.
Reporting.

The GLP were designed to build on the Green Bond Principles of the International Capital Market Association to promote consistency across financial markets. However, the GLP are voluntary guidelines, and are intended to be applied by market participants on a deal-by-deal basis.

For more information on the extended GLP, see Legal Update, LSTA Publishes Green Loan Principles.

Intellectual Property & Technology

Biometric Data Privacy Laws

With more states considering the adoption of biometric data privacy laws, companies that collect biometric data should remain informed about current legislative proposals and seek opportunities to influence policy development.

Currently, three states have enacted laws imposing unique requirements on biometric data:

Illinois (Biometric Information Privacy Act (BIPA)).
Texas (Capture or Use of Biometric Identifier Act).
Washington (Biometric Identifiers Act).

Illinois has been considered the trendsetter in biometric data privacy law. Other states have looked to the BIPA as a potential legislative model. While the specifics of each law vary, before companies collect or store biometric data, biometric data privacy laws all generally require them to:

Provide notice of their biometric data collection practices.
Secure an individual’s informed consent.

Though compliance is often straightforward, unwary companies may expose themselves to liability if they fail to properly disclose all uses for the biometric data, including secondary uses such as advertising.

Class action lawsuits also represent an increasing risk for companies that collect biometric data. While only the BIPA provides a private right of action, plaintiffs have filed more than 100 BIPA-related class actions. Many of these cases are proceeding in state, rather than federal, courts to avoid the federal Article III standing requirement that some courts have used to dismiss BIPA claims premised on alleged notice failures without an individualized injury-in-fact. The Illinois Supreme Court is currently deciding whether a plaintiff must allege more than a technical violation of the BIPA to proceed.

For more information on biometric data privacy laws, see Practice Note, Biometrics in the Workplace.

UPDATE: The Illinois Supreme Court issued its decision shortly after the print version of this GC Agenda went to press. For more on the decision, see Legal Update, Illinois Supreme Court Rules Biometric Information Privacy Act Lawsuits Do Not Require Actual Injury.

Labor & Employment

Artificial Intelligence in the Workplace

Employers that use artificial intelligence (AI) tools and intelligent robots for recruitment and hiring tasks should balance the benefits of increased efficiency and productivity against the compliance risks created by AI.

AI may unintentionally perpetuate past discriminatory practices or disproportionately impact protected classes of individuals. Discriminatory outcomes may result from bias in the algorithm design or the quantity or quality of the data itself. Employers may be liable for discrimination claims caused by unexplainable or unknowable AI tool actions (known as the “black box” of AI).

Employers can minimize the legal risks of using AI for recruiting by:

Engaging a diverse working group of technical, legal, HR, and business representatives when creating or evaluating AI tools.
Understanding the data set that the AI tool is evaluating.
Evaluating results before making any employment decisions.
Monitoring and periodically auditing results.
Abandoning or reprogramming the tool if results are problematic.
Protecting personal data to comply with applicable laws.

AI-powered intelligent robots that work alongside employees also present challenges. For example, employers generally cannot explain why a robot did what it did, and therefore may be unable to assure the Occupational Safety and Health Administration or other regulatory agencies that they have taken sufficient steps to prevent a recurrence of a workplace injury or safety violation.

Before introducing intelligent robots into the workplace, employers should:

Seek buy-in from employees through thoughtful training and clear communications, including messaging about how the use of robots can increase employees’ opportunities for higher level work.
Retrain employees displaced by automation.
Determine whether workplace changes are a mandatory subject of bargaining under a collective bargaining agreement.
Establish policies and procedures for employee-robot interactions.
Re-evaluate exempt and nonexempt job classifications under the Fair Labor Standards Act if employees’ duties or supervisory responsibilities change.

The existing legal and regulatory framework is ill-equipped to address the complex issues raised by workplace AI. Counsel and business executives are well positioned to take an active public leadership role to ensure that the regulatory environment keeps pace with these technological developments.

Litigation & ADR

False Claims Act Statute of Limitations

Companies that conduct business with the US government may soon have more clarity on how the False Claims Act’s (FCA’s) statute of limitations applies in qui tam actions in which the government declines to intervene.

In Cochise Consultancy, Inc. v. United States ex rel. Hunt, the US Supreme Court granted certiorari to resolve a circuit split over the applicability of the FCA’s tolling provision. That provision authorizes suit up to ten years after an alleged FCA violation, as long as the complaint is filed within three years of when the responsible US official knew or should have known of the alleged fraud. Absent tolling, a relator must commence suit within six years after the alleged violation.

The relator in Cochise Consultancy filed a qui tam action alleging that the defendants submitted false claims in connection with a security subcontract. The relator conceded that his action was time-barred under the FCA’s six-year statute of limitations, but argued that his action was timely under the statute’s tolling provision, because he filed it within three years of when the government learned of the alleged fraud and less than ten years after the alleged violation. The district court dismissed the case as time-barred, holding that tolling applies only if the government intervenes.

The Eleventh Circuit reversed. It departed from the Fourth, Fifth, and Tenth Circuits, holding that relators can rely on the tolling provision even if the government does not intervene. The court also departed from the Third and Ninth Circuits, holding that the three-year limitations period is triggered by the government’s knowledge of the alleged fraud, not the relator’s. Therefore, the relator’s fraud claim was timely, even though it would have been untimely if brought in any of five other circuits.

The Supreme Court’s decision in Cochise Consultancy may eliminate confusion and uncertainty for companies that do business with the government by:

Clarifying how long a relator may wait to bring a qui tam action in which the government declines to intervene.
Reducing forum shopping, by establishing a consistent, nationwide rule for when qui tam relators must bring suit.

For more information on the statute of limitations for FCA claims, see Practice Note, Understanding the False Claims Act.

For more information on the Eleventh Circuit’s decision, see Legal Update, FCA Statute of Limitations Still Applies When US Declines to Intervene: Eleventh Circuit.

Flexibility in Arbitration Agreements

Companies that include arbitration provisions in their agreements, but seek to retain the right to change the terms of (or even avoid) arbitration should carefully consider whether granting themselves this flexibility may invalidate the arbitration agreement altogether under applicable state law.

In McNamara v. S.I. Logistics, Inc., an e-cigarette company required all marketers of its e-cigarettes to join the company’s affiliates program and agree to the program’s terms and conditions, including an arbitration provision in which the company reserved for itself the right to alter the terms at any time in its sole discretion and without notice. When an e-cigarette marketer left the affiliates program and sued the company in Massachusetts state court, the company removed the action to federal court and moved to compel arbitration of the claims under the Federal Arbitration Act. The US District Court for the District of Massachusetts refused to compel arbitration, holding that the arbitration agreement was illusory under Massachusetts law because it permitted the company to:

Require the marketer to arbitrate.
Avoid arbitration if it wished by modifying or even terminating the agreement without notice to the marketer.

In light of McNamara, counsel drafting an arbitration provision should research state law on illusory agreements to avoid granting the company too much flexibility, which might defeat the company’s right to arbitration.

For resources to assist companies in seeking to compel arbitration, see Compelling and Staying Arbitration in the US Toolkit.

For more information on drafting arbitration agreements, see Practice Note, Drafting Arbitration Agreements Calling for Arbitration in the US.

Real Estate

Opportunity Zone Investments

Real estate investors should be aware of the significant tax benefits available for Opportunity Zone investments under the Tax Cuts and Jobs Act (TCJA).

An Opportunity Zone is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Under the TCJA, an Opportunity Zone investment provides a:

Short-term benefit of avoidance of capital gains tax on a prior investment.
Medium-term benefit of reduction of the original capital gains tax.
Long-term benefit of not being required to pay income taxes on appreciation of the Opportunity Zone investment.

Real estate investors who are considering an Opportunity Zone investment should ensure that the business or development project that is the subject of the investment is viable based on its location, timing, and projected use. If the investment is not successful, the capital gains tax that was originally rolled into the Opportunity Zone investment must be paid, even if the investment funds are lost. For this reason, investors should carefully choose their sponsors and promoters and ensure that these individuals have sufficient investment skill and experience.

Investors should determine from the outset of any joint venture who has control over the disposition of a successful investment. A fund manager may want to liquidate the investment to realize the return on the investment, while the investors may want to hold on to the investment to maximize their tax benefits.

For more information on Opportunity Zone investments under the TCJA, see Legal Update, Tax Opportunity Zone Program Aims to Boost Real Estate Development in Low Income Areas.

Tax

Business Interest Limitation

Businesses should take note of proposed Treasury regulations addressing the business interest expense limitation under Section 163(j) of the Internal Revenue Code. This provision, enacted as part of the Tax Cuts and Jobs Act, generally limits deductions for net business interest expense to 30% of adjusted taxable income. Electing real estate and farming businesses, and certain small businesses and regulated utilities, are not subject to the limitation.

Highlights of the proposed regulations include:

Defining interest broadly, to include not only items generally treated as interest on indebtedness for tax purposes, but also income and deductions for amounts not typically treated as interest (for example, commitment fees, debt issuance costs, and partnership guaranteed payments for capital).
Implementing the statutory requirement that the limitation apply at the partnership level.
Treating all interest expense and interest income of a C-corporation as business interest expense and business interest income under the business interest limitation rules.
Providing that controlled foreign corporations (CFCs) are subject to the business interest expense limitation, meaning that a CFC with business interest expense must apply the Section 163(j) rules when calculating Subpart F income, tested income or loss (for purposes of determining global intangible low-taxed income), and any income that is effectively connected with a US trade or business.
Applying the business interest expense limitation at the consolidated return level for groups filing US federal consolidated income tax returns.

The regulations are proposed to be effective for taxable years ending after the date final regulations are published. However, taxpayers and their related parties may apply the proposed regulations to taxable years beginning after December 31, 2017, as long as they apply all of the proposed regulations consistently.

GC Agenda Interviewees

GC Agenda is based on interviews with Advisory Board members and leading experts from Law Department Panel Firms. Practical Law would like to thank the following experts for participating in interviews for this month’s issue:

Antitrust

Logan Breed

Hogan Lovells US LLP

Lee Van Voorhis

Jenner & Block LLP

Adam Paris

Sullivan & Cromwell LLP

Laura Wilkinson

Weil, Gotshal & Manges LLP

Capital Markets & Corporate Governance

Adam Fleisher

Cleary Gottlieb Steen & Hamilton LLP

Karen Hsu Kelley

Simpson Thacher & Bartlett LLP

Robert Downes

Sullivan & Cromwell LLP

Employee Benefits & Executive Compensation

Jon Breyfogle

Groom Law Group, Chartered

Benjamin Conley

Seyfarth Shaw LLP

Jamin Koslowe and Alvin Brown (retired)

Simpson Thacher & Bartlett LLP

Neil Leff and Timothy Nelson

Skadden, Arps, Slate, Meagher & Flom LLP

Intellectual Property & Technology

Justin Kay

Drinker Biddle & Reath LLP

Labor & Employment

Matthew Linton

Ogletree Deakins

Annette Tyman

Seyfarth Shaw LLP

Litigation & ADR

James Parrinello

Nielsen Merksamer Parrinello Gross & Leoni LLP

Real Estate

Stuart Saft

Holland & Knight LLP

Tax

Kim Blanchard
Weil, Gotshal & Manges LLP

GC Agenda: February 2019 | Practical Law