GC Agenda: December 2020/January 2021

Practical Law Article w-028-4349 (Approx. 8 pages)

GC Agenda: December 2020/January 2021

by Practical Law The Journal

Antitrust

Third-Party CIDs and Subpoenas

Companies receiving civil investigative demands (CIDs) or subpoenas from the DOJ and FTC should be aware of a recent petition the DOJ filed in the District of Massachusetts to compel Bain & Company’s compliance with a CID.

The DOJ issued a CID to Bain regarding Bain’s work as a consultant for Visa Inc., in connection with the DOJ’s investigation into Visa’s $5.3 billion proposed acquisition of Plaid Inc., a nascent fintech competitor in the online payments market. Bain claimed its work related to litigation in the UK and was protected by the attorney-client privilege. The DOJ’s petition challenged the privilege claim, arguing the documents were:

Prepared to provide business, not legal, advice.
Not protected work product.
Not protected by the attorney-client privilege.

The DOJ voluntarily dismissed its petition after it filed a lawsuit in the Northern District of California to block Visa’s acquisition of Plaid. However, whether the DOJ considers the issue moot or will seek discovery as part of the merger litigation is unclear. The antitrust agencies use CIDs and subpoenas to gather information and evidence from third parties in connection with their investigations, and typically expect to work with third parties to modify the scope and deadlines of CIDs and subpoenas, mindful of the burden they impose. However, counsel should be aware that the antitrust agencies expect companies to comply fully and expeditiously with CIDs and subpoenas, and will take action in the face of non-compliance.

For more information on DOJ and FTC antitrust investigations, see Practice Note, DOJ and FTC Antitrust Investigations.

For more information on third-party involvement in government merger investigations and litigation, see Third Parties in Merger Investigations and Litigation Checklist.

Arbitration

Nonsignatories to an Arbitration Clause

Parties involved in arbitration should take note of a recent Ninth Circuit decision holding that there is no valid agreement to arbitrate between a plaintiff and a corporate defendant that was not a signatory to the original contract.

In Revitch v. DIRECTV, LLC, the plaintiff entered into a mobile phone wireless services agreement with AT&T Mobility LLC in 2011, which contained an arbitration clause encompassing all disputes between the plaintiff, AT&T Mobility, and AT&T Mobility’s affiliates. In 2015, AT&T Mobility’s parent company acquired DIRECTV, LLC, making AT&T Mobility and DIRECTV affiliates. The plaintiff later brought a putative class action lawsuit against DIRECTV, alleging that DIRECTV engaged in unsolicited telemarketing in violation of the Telephone Consumer Protection Act (TCPA).

DIRECTV moved to compel arbitration of the plaintiff’s complaint under the Federal Arbitration Act, arguing that because AT&T Mobility and DIRECTV are affiliates, DIRECTV has the right to invoke the agreement’s arbitration clause.

The Ninth Circuit affirmed the district court’s decision, holding that DIRECTV could not invoke the arbitration clause contained in the agreement because it was not, and was never, a party to the agreement. Though the court agreed that DIRECTV and AT&T Mobility are currently affiliated and have been since 2015 when they came under common corporate ownership, they were not affiliates in 2011 when the agreement was executed.

This decision creates a circuit split with the Fourth Circuit, which recently reached the opposite conclusion in a case involving the same AT&T Mobility arbitration clause and similar TCPA allegations.

For more information on the circumstances under which a nonsignatory to an arbitration clause may participate in an arbitration proceeding, see Practice Note, Joining Nonsignatories to an Arbitration in the US.

Capital Markets & Corporate Governance

Risk-Based Data Analytics

The SEC recently settled three enforcement actions involving the use of risk-based data analytics.

These settlements include actions against:

Hilton Worldwide Holdings Inc., settled for $600,000, for incorrectly using the business purpose standard as the sole standard to exclude items from the categories of perquisites or personal benefits. Hilton therefore understated the perks disclosed under “All Other Compensation” in its proxy statement.
Interface Inc. and Fulton Financial Corporation, settled for $5 million and $1.5 million, respectively, for making unsupported adjustments to their earnings per share to match analysts’ expectations (see Litigation: SEC Settlements Under the EPS Initiative).

The SEC has not disclosed the processes behind risk-based data analytics or specified what details warranted investigation in these actions. Companies should continue to monitor the SEC’s use of risk-based data analytics to support enforcement and be aware that:

Data analysis can amplify patterns of enforcement, resulting in a rise in similar cases.
The SEC chooses which red flags to pursue based on its enforcement priorities, even as automation is incorporated into the screening process.
The focus has been on accounting-related form requirement violations or inadequate internal controls, which are violations that do not require scienter.

The SEC teams involved in risk-based data analytics include portions of the Division of Economic Risk Analysis and the Office of Market Intelligence, as well as the newly created Chief Data Officer.

For resources to assist counsel in accurately completing SEC filings, see SEC Form Check Toolkit.

Share Repurchases and Insider Trading Policies

Companies should review their insider trading policies and material non-public information (MNPI) assessment procedures in light of a recent SEC settlement.

The SEC’s enforcement action against Andeavor LLC stemmed from the company’s lack of adequate internal accounting controls to assess whether the company was aware of MNPI when it implemented a Rule 10b5-1 share repurchase plan. Andeavor’s CEO directed the CFO to begin a Rule 10b5-1 plan two days before the CEO had a meeting to discuss plans to sell the company. The legal department approved the Rule 10b5-1 plan the day before the meeting. Andeavor was later acquired and the shares repurchased under the Rule 10b5-1 plan increased in value.

The SEC found that Andeavor had inadequate controls to assess MNPI because:

The evaluation of MNPI was abbreviated and informal.
The process did not require consulting with executives who would have been aware of the status of the sale discussions, such as the CEO.

Rule 10b5-1 is an affirmative defense to insider trading claims, but Rule 10b5-1 plans must be entered into in good faith, when there is no MNPI, and with certain required terms.

Companies should consult with key personnel to monitor the likelihood of MNPI in the event that the company or its directors or officers seeks to enter into, amend, or terminate any share repurchase plan, such as pursuant to Rule 10b5-1 or 10b-18.

Additionally, as SEC Chairman Jay Clayton recently noted, companies should consider:

Preventing senior executives and directors from trading when the company has MNPI, even if they do not have MNPI.
Requiring a seasoning or waiting period before trades can occur after the adoption, amendment, or termination of a Rule 10b5-1 plan.
Not issuing stock options to executives while the company is in possession of MNPI.

Companies should expect continued interest in this area, given that the SEC is preparing a report at the direction of Congress on the growth of share repurchases and has been monitoring insider trading in light of market volatility during the COVID-19 pandemic.

For a model memorandum that counsel can use to train a company’s board, board committee, or senior management on insider trading issues and the key provisions of a corporate insider trading policy, with explanatory notes and drafting tips, see Standard Document, Summary Memorandum on Insider Trading.

Finance

Cryptocurrency Enforcement Framework

The recent release of a Cryptocurrency Enforcement Framework (CEF) by the US Attorney General’s Cyber-Digital Task Force provides market participants with insight into the DOJ’s efforts and strategies in combatting cryptocurrency-related crimes.

The CEF contains three parts:

Part I provides an overview of cryptocurrency and cryptocurrency-related crimes. It defines virtual currency (an umbrella term that includes cryptocurrency) as a digital representation of value that:
- functions as a medium of exchange;
- is separate and distinct from digital representations of traditional currencies, securities, and other traditional financial assets; and
- does not have legal tender status.
Part II highlights the DOJ’s partnership with other federal agencies to combat cryptocurrency-related crimes. According to the CEF, the DOJ has broad authority to investigate misconduct involving cryptocurrency and works with other federal agencies to identify and enforce regulations regarding the use of cryptocurrency for illicit purposes. Numerous federal charges can be brought in response to criminal activity involving cryptocurrency.
Part III discusses the ongoing challenges the DOJ faces, and efforts, strategies, and legal positions it employs to combat cryptocurrency-related crimes. According to the CEF, the DOJ aggressively investigates and prosecutes actors who use cryptocurrency to commit, facilitate, or conceal crimes. The DOJ also has authority to prosecute virtual asset service providers and other entities that are not physically located in the US for crimes that involve virtual asset transactions that touch financial, data storage, or other computer systems within the US.

The CEF is the second report issued by the Cyber-Digital Task Force. The first report, published in July 2018, reviewed a wide spectrum of cyber threats and expressed the DOJ’s priorities in detecting, deterring, and disrupting cyber threats.

For more information on the CEF, see Legal Update, DOJ Releases Cryptocurrency Enforcement Framework.

Intellectual Property & Technology

Enactment of the CPRA

Companies should ensure they are prepared to comply with the California Privacy Rights Act of 2020 (CPRA), which was recently approved for enactment by California voters.

The CPRA will significantly amend and expand the current California Consumer Privacy Act of 2018 (CCPA). Key amendments include:

Creation of the California Privacy Protection Agency, which will implement and enforce California’s privacy laws.
Expansion of the right to know and right to delete.
New rights around sensitive personal information uses and disclosures, including geolocation.
New personal information correction and opt-out rights.
Purpose limitation requirements for collecting, using, retaining, and sharing personal information.
Additional protections for children’s personal information.
Extension of the CCPA’s partial exemptions for workforce-related personal information and business-to-business communications until January 1, 2023.

While most of the CPRA’s substantive amendments do not take effect until January 1, 2023, its provisions will apply to personal information collected on or after January 1, 2022. The CCPA remains in effect until the CPRA’s operative date, so companies should continue to follow the CCPA and CCPA regulations while they prepare for the CPRA’s new requirements.

Companies should assess their current state of compliance with the CCPA’s existing requirements and determine how and to what extent the CPRA will require additional or altered compliance efforts.

For more information on the CPRA, see Article, Expert Q&A: The California Privacy Rights Act of 2020 (CPRA).

For resources to assist counsel in understanding and complying with CCPA and CPRA requirements and obligations, see California Consumer Privacy Act (CCPA) Toolkit.

Labor & Employment

Customer-Facing Employee Safety

In light of the COVID-19 pandemic and approaching holiday season, employers with customer-facing employees, such as retail clerks and restaurant workers, should take steps to protect those employees from potentially hostile encounters with customers who challenge employers’ COVID-19 mask-wearing policies or other safety protocols.

To protect customer-facing employees, employers should:

Develop or revise policies on workplace violence, safety, and health to address COVID-19 issues.
Train employees regularly on employer safety policies, government-mandated COVID-19 masking requirements, and appropriate de-escalation techniques.
Post conspicuously all COVID-19-related policies, both physically in the business location and on employer websites.

When revising policies to address COVID-19, employers must be mindful of the Occupational Safety and Health Act’s General Duty Clause requiring employers to provide a workplace free from recognized harmful hazards, while balancing the employer’s obligation to reasonably accommodate customers with underlying health conditions. Employers should consider:

Determining which employees are responsible for dealing with customers who refuse to wear masks (for example, security personnel, supervisors, or front-line workers).
Ensuring that employees are trained on the employer’s relevant policies, state and local COVID-19 requirements, and workplace violence protocols.
Drafting and posting a policy addressing customer requests for medical accommodations related to mask wearing.
Offering alternatives to accessing the business, including curbside service or online shopping.

When developing employee training, employers should refer to guidance from:

The Centers for Disease Control and Prevention.
The Occupational Safety and Health Administration (OSHA) and state OSHA agencies.
State health authorities.
Industry-specific associations.

For model policies on workplace safety, with explanatory notes and drafting tips, see Standard Documents, Workplace Violence Policy and Health and Safety in the Workplace Policy.

Litigation

SEC Settlements Under the EPS Initiative

Reporting companies should be aware of two recent SEC settlements resulting from the Division of Enforcement’s Earnings Per Share (EPS) Initiative.

The EPS Initiative employs risk-based data analytics to expose efforts by public companies to artificially adjust EPS through accounting and disclosure violations (see Capital Markets & Corporate Governance: Risk-Based Data Analytics). The settlements, which are the first under the EPS Initiative, involve violations that resulted in the improper reporting of quarterly EPS that met or exceeded analyst consensus estimates. The recent settlements involve orders against:

Interface Inc., finding that in multiple quarters, the company made unsupported, manual accounting adjustments that were not compliant with GAAP. These adjustments were often made when Interface’s internal forecasts indicated that the company would fall short of analyst consensus EPS estimates. The adjustments artificially boosted the company’s income, making it possible to consistently report earnings that met or exceeded consensus estimates.
Fulton Financial Corporation, finding that the company inaccurately presented its financial performance by including in its public filings a valuation allowance for its mortgage servicing rights that differed from the valuation methodology described in the same filings. By belatedly reversing the valuation allowance, the company increased its EPS in a quarter when it otherwise would have fallen short of consensus estimates.

For more information on settling SEC enforcement actions, see Practice Note, What’s Market: The SEC’s Settlement Process.

Real Estate

COVID-19 Property Insurance Claims

Businesses seeking to recoup losses resulting from the COVID-19 pandemic and related government closure orders, particularly those in the retail and hospitality industries, should take note of two recent decisions granting relief to insureds seeking coverage under their property insurance policies for business interruption losses.

Business interruption coverage in all-risk property insurance policies is designed to compensate insureds for:

Lost income from business interruptions, including slowdowns or complete shutdowns of operations.
Extra expenses for costs necessary to mitigate business interruption losses.

Subject to exclusions, these policies cover direct loss to property, often defined as accidental physical loss of, or damage to, property. Many policies contain an express virus exclusion, which some states have determined is sufficient to deny coverage.

However, in Studio 417, LLC v. The Cincinnati Insurance Company and North State Deli, LLC v. The Cincinnati Insurance Company, the Western District of Missouri and a North Carolina state court, respectively, held that insureds can suffer a physical loss without damage to property, thereby allowing recovery for COVID-19 business interruption losses.

As insurance carriers continue to deny these claims and insurance coverage litigation increases, courts are addressing whether the COVID-19 pandemic or the related government closure orders trigger coverage under these policies. Decisions turn on issues such as:

The dictionary definitions and plain meanings of policy terms.
Distinctions between “physical loss of” and “physical damage to” property and whether actual physical alteration is required.
Whether executive orders mandated business closures or limited operations to “essential services.”
Whether the business interruption was due to the presence of COVID-19, requiring closure and cleaning of the premises, or merely the fear of infection.

Businesses should review their property insurance policies and frame claims consistent with case holdings in their jurisdiction, as well as stay abreast of any appeals.

For more information on insurance coverage for COVID-19 losses, see Insurance Coverage for COVID-19 Losses Chart and Practice Note, Key COVID-19 Insurance Coverage Cases Tracker (US).

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

Capital Markets & Corporate Governance

Adam Fleisher

Cleary Gottlieb Steen & Hamilton LLP

Karen Hsu Kelley

Simpson Thacher & Bartlett LLP

Robert Downes

Sullivan & Cromwell LLP

Jean Weng

Voya Financial, Inc.

Employee Benefits & Executive Compensation

Jamin Koslowe and Alvin Brown

Simpson Thacher & Bartlett LLP

Michael Bergmann and Jeffrey Lieberman

Skadden, Arps, Slate, Meagher & Flom LLP

Intellectual Property & Technology

Purvi Patel and Mary Race

Morrison & Foerster LLP

Labor & Employment

Robin Samuel

Baker McKenzie LLP

Robert Conti and Peter Petesch

Littler Mendelson P.C.

Carrie Gonell

Morgan, Lewis & Bockius LLP

James Paul

Ogletree Deakins

Tax

Kim Blanchard
Weil, Gotshal & Manges LLP

GC Agenda: December 2020/January 2021 | Practical Law