GC Agenda: Summer 2022

Practical Law Article w-036-1364 (Approx. 9 pages)

GC Agenda: Summer 2022

by Practical Law The Journal

Antitrust

Interlocking Directorates

Counsel should ensure that their clients comply with Section 8 of the Clayton Act, which prohibits interlocking directorates and is expected to be a focus of broader DOJ enforcement activity.

If the jurisdictional thresholds are met, Section 8 prohibits:

A company's officers and directors from serving as officers or directors of a competing company if an agreement between the companies eliminating competition would violate antitrust laws.
A single company from appointing two different individuals as its agents to serve as officers or on the boards of competing companies.

Section 8 violations are per se unlawful, meaning that there can be no justification. The remedy is typically to remove the interlock, but damages are theoretically available.

While Section 8 challenges by the federal antitrust agencies are rare, the DOJ in particular is expected to focus on interlocks going forward. US Assistant Attorney General Jonathan Kanter recently announced the DOJ's intention to enforce Section 8 more broadly beyond interlocks arising in the merger context.

Potential interlocking directorate issues can arise in a variety of contexts. Compliance training should alert officers and directors to Section 8 issues and require them to clear potential roles before accepting positions as officers or directors of another company. Counsel should also monitor Section 8 compliance after:

A merger or an acquisition.
A company or private equity firm acquires a minority stake in a competitor.
A company enters a new product area that places it in competition with another company.
Changes in sales, which may trigger the jurisdictional thresholds.

For more information on Section 8 of the Clayton Act, see Practice Note, Interlocking Directorates.

For more information on creating and maintaining an effective antitrust compliance program, see Practice Note, Antitrust Compliance Programs.

Arbitration

US-Based Evidence for Foreign Arbitrations

Parties that may participate in private arbitrations outside the US should take note of a recent, unanimous US Supreme Court decision that limits the ability to obtain evidence located in the US under 28 U.S.C. § 1782.

In ZF Automotive US, Inc. v. Luxshare, Ltd., the Court resolved a longstanding circuit split and held that 28 U.S.C. § 1782 does not apply to foreign arbitral tribunals. Counsel have often used the statute to obtain evidence located in the US for arbitrations (and other types of legal proceedings) conducted abroad. Due to this decision, counsel involved in private arbitrations outside the US may no longer rely on federal courts to assist in acquiring evidence for that type of foreign proceeding.

In Luxshare, the Court held that 28 U.S.C. § 1782's language referencing a "foreign tribunal" pertains only to a governmental body granted official adjudicative powers by one or more foreign nations, such as a court, and not a private arbitral tribunal, regardless of the type of dispute.

Counsel at US-based companies should consider how they will respond to other types of attempts at seeking documents or testimony from their employees located in the US, such as compelling discovery through diplomatic channels.

For more information on the different ways to obtain evidence located in the US for a foreign proceeding, see Practice Note, International Litigation: Discovery in the US in Aid of Proceedings Held Abroad.

For more information on 28 U.S.C. § 1782, see Expert Q&A on the Ambiguities of 28 U.S.C. § 1782.

Capital Markets & Corporate Governance

Climate-Related Financial Statement Footnote

Companies should prepare for the SEC's new climate change disclosure rules, which the agency is expected to finalize later this year, by coordinating with their internal accounting teams and external auditors.

If the SEC's proposed rules from March 2022 are finalized without modification, large accelerated filers with December 31 year ends will need to collect information for a new climate-related audited financial statement footnote beginning on January 1, 2023 for fiscal year 2023 (accelerated and non-accelerated filers have one additional year, and smaller reporting companies have two additional years).

This climate-related financial statement footnote does not use a materiality standard. Disclosure is required if 1% or more of a financial statement line item is due to the positive or negative impacts from severe weather events, other natural conditions, transition activities, or identified climate-related risks. The absolute value of the positive or negative effects are summed when assessing whether the 1% threshold is reached.

For more information on this development, see Legal Update, SEC Proposes Mandatory Climate Disclosure Rules and Key Developments in ESG and Climate Disclosure Tracker.

MD&A

Counsel should be aware of the importance of explaining line item drivers in the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section required in a public company's Form 10-K, Form 10-Q, or registration statement and ensuring that Form 10-Qs include updated explanations.

NVIDIA Corp. recently settled SEC charges alleging that it failed to timely disclose key revenue drivers in two Form 10-Qs in 2018. The SEC alleged that NVIDIA disclosed the revenue from its computer processors designed for and marketed to gamers without explaining that a key driver of that revenue was cryptominers, not gamers. NVIDIA waited until the Form 10-K to explain this and the risks of that revenue being exposed to the volatile crypto market.

For more information on drafting an MD&A section, see MD&A Checklist: What Every Lawyer Needs to Ask (Amended Rules).

Commercial Transactions

Food Regulatory Initiatives

Counsel for companies in the food industry should monitor developments regarding federal and state regulation of food and food labeling.

The FDA is testing a symbol that would be a graphic representation of the nutrient content claim "healthy," which companies could voluntarily include on the labels of qualifying foods. The FDA intends to conduct two quantitative research studies on draft "healthy" symbols to gauge how consumers respond to them. The studies on the use of symbols are part of a plan to give consumers the information they need to make informed dietary choices. In conjunction with the studies, the FDA intends to publish a proposed rule on when manufacturers may use the nutrient content claim "healthy," along with an updated definition of "healthy."

Additionally, the FDA recently:

Issued warning letters regarding the unlawful marketing of foods and dietary supplements, including products containing delta-8 tetrahydrocannabinol (delta-8 THC) and cannabidiol (CBD), in violation of the Federal Food, Drug, and Cosmetic Act.
Amended the food additive regulations to disallow using most phthalates in food contact applications.

Food labeling is also receiving attention at the state level. For example, Kansas recently enacted new labeling legislation, also known as the "Fake Meat Labeling Bill," that requires the labels of alternative meat products to include a disclaimer under certain conditions, effective July 1, 2022.

For more information on food labeling, see Practice Notes, FDA Food Labeling: Overview and FDA Food and Dietary Supplement Regulations.

Employee Benefits & Executive Compensation

Post-Dobbs Coverage for Abortion and Travel Expenses

Some employers, as plan sponsors of workplace health plans, are considering their plan design options because of the US Supreme Court's official ruling in Dobbs v. Jackson Women's Health Organization, which overturned the Court's 1973 Roe v. Wade ruling conferring a right to obtain abortions ( (U.S. June 24, 2022)). (A leaked draft of the Court's ruling in Dobbs was obtained by the media in early May 2022.) In particular, some employers are reviewing their plans' existing coverage of elective abortions and considering whether to reimburse travel expenses for abortions received in other states (if a forum state imposes restrictive abortion rules).

In Dobbs, the Court addressed the constitutionality of a Mississippi law that generally prohibits abortion after the fifteenth week of pregnancy. By overturning Roe (and a 1992 ruling on abortion), the Court returned the regulation of abortion to the individual states, some of which have enacted trigger laws that will restrict or prohibit abortion, subject to exceptions. For employer-sponsored health plans, however, some of the state laws regulating abortion may be preempted by ERISA. Whether these laws are ERISA-preempted may depend in part on how an employer's plan is funded (that is, insured or self-funded).

How to structure travel-related expenses for abortion (for example, mileage, airfare, travel, and lodging) also may present challenging plan design questions. Among other issues, some employers are considering whether:

Abortion-related benefits should be included as part of an ERISA major medical plan.
Existing guidance allows these benefits to be part of an employee assistance program (EAP).
To offer broad-based or abortion-specific travel benefits.

For more information on how ERISA's preemption rules apply to insured and self-funded health plans, see Article, ERISA Preemption and Post-Dobbs Abortion Coverage for Employer-Sponsored Health Plans and Abortion and Contraceptives Services for Group Health Plans Toolkit.

Finance

Cryptocurrency Developments

Market participants should be aware of several important developments related to cryptocurrency, blockchain, and virtual currency regulation.

Senator Patrick Toomey, the ranking member of the US Senate Banking Committee, recently introduced a bill to create a regulatory framework for stablecoin issuers in the US. The key components of the bill would:

Authorize three options for the issuance of payment stablecoins:
- a new federal license created by the Office of the Comptroller of the Currency (OCC) specifically for stablecoin issuers, which would designate recipients as "national limited payment stablecoin issuers";
- a state-based money transmitter or similar license under state law; and
- insured depository institutions.
Subject all payment stablecoin issuers, including those operating as state money transmitters and those receiving a new federal license, to standardized requirements.
Distinguish stablecoins from securities by indicating that, at a minimum, stablecoins that do not offer interest are not securities.
Apply privacy protections to transactions involving stablecoins and other virtual currency.

The OCC would be responsible for implementing the bill's tailored regulatory framework. Payment stablecoin issuers granted an OCC license would be:

Subject to certain requirements in addition to those applicable to all payment stablecoin issuers.
Granted Federal Reserve master accounts and services.

Additionally, several states have issued guidance related to cryptocurrency. The New York Department of Financial Services recently issued guidance on the use of blockchain analytics, emphasizing its importance in creating effective policies, processes, and procedures concerning customer due diligence, transaction monitoring, and sanctions screening. California Governor Gavin Newsom issued an executive order that provides guidance and directives for establishing a framework of digital asset and financial technology regulation and enforcement in the state.

For more information on these developments, see Legal Updates, US Senator Proposes Framework for Stablecoin Regulation, NYDFS Issues Guidance Encouraging Use of Blockchain Analytics by Crypto Firms, and California Executive Order Establishes State Regulatory Framework for Blockchain and Crypto-Related Assets.

For more information on cryptocurrency and virtual currency regulation generally, see Cryptocurrency and Virtual Currency Regulatory Tracker.

Health Care

Revived Quality Metrics Reporting Program

The FDA recently revived a controversial program, called Quality Metrics, to collect quality data from all drug and biologic establishments.

The FDA first proposed the program in 2015 but chose to run a voluntary trial in response to industry criticism. The revived program is described in a March 8, 2022 Federal Register notice and would require reporting from manufacturers, laboratories, packagers, and others. The comment period to propose changes to the program closed on June 7, 2022.

The FDA has not yet determined how frequently it would collect the quality data. The required quality data will vary by the type of establishment. For example, manufacturers would be required to report the proportion of lots manufactured in specification on the first attempt, known as the "Right First Time" rate, among other metrics. Laboratories would be required to report their "Calibration Timeliness," that is, how often they calibrate their equipment to provide accurate measurements.

According to the FDA, over half of drug shortages in the US result from preventable quality problems. The agency intends to use the quality data that it collects to help prevent these shortages and schedule inspections based on the public health risks posed by each establishment.

Interested establishments should look for additional opportunities to comment when the FDA issues draft guidance or regulations, likely next year.

For more information on preparing for and managing routine inspections of drug or medical device companies by the FDA, see Practice Note, FDA Drug and Device Routine Facility Inspections: Overview.

For more information on evaluating a drug or medical device facility's procedural readiness for an inspection by the FDA, see FDA Inspection Preparedness Checklist.

Intellectual Property & Technology

Copyright Claims Board

Counsel should be aware that the US Copyright Office launched its new Copyright Claims Board (CCB), established by the Copyright Alternative in Small-Claims Enforcement Act of 2020 (CASE Act).

Copyright owners are expected to be emboldened by the CCB's efficiencies and lower costs and more inclined to enforce their copyrights. The CCB's streamlined proceedings:

Are limited to claims valued at $30,000 or less.
Do not require:
- legal counsel;
- registration of the claimant's work to file a claim; or
- in-person appearances.
Involve limited discovery and no formal motion practice.

The proceedings are voluntary, so a respondent may opt out within 60 days of service, which forces the claimant to sue in federal court. However, opting out may not always be advisable because:

The CCB's damages ceiling may be preferable to copyright litigation in federal court, where statutory damages may rise to $150,000 per infringed work.
Opting out and forcing an artist into federal litigation may subject a company to unwanted media criticism.

On the other hand, by electing to proceed, a respondent waives its right to a jury trial and subjects itself to an untested system and a CCB determination with few appeal options.

Companies should consider designating a service agent for CCB claims on the CCB's website. This ensures that a company will learn of a claim promptly and have sufficient time to make an informed opt-out determination.

For more information on the CCB, see Practice Note, Copyright Claims Board: Practice and Procedure.

Labor & Employment

Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021

Companies should review their arbitration agreements and be prepared to litigate the scope of the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (Act), which became effective on March 3, 2022. The Act amends the Federal Arbitration Act (FAA) and invalidates, at the claimant's option, pre-dispute arbitration agreements and joint-action waivers in any case relating to sexual assault or sexual harassment disputes.

In cases alleging both arbitrable claims (such as race or sex discrimination) and non-arbitrable sexual assault or harassment claims, employees' counsel will likely argue that the Act bars mandatory arbitration of the entire case, not just the non-arbitrable claims. Although the statute is arguably ambiguous, most employers' counsel do not believe that courts will interpret the Act that broadly. A broad interpretation may encourage an uptick in weaker "tag-on" sexual assault or harassment claims, leaving the courts to decide whether the allegations are sufficient or frivolous.

Employers facing a combination of arbitrable and non-arbitrable claims can either:

Move to sever non-arbitrable from arbitrable claims, and then move to compel arbitration and stay litigation of the non-arbitrable claims.
Litigate all claims in court to avoid the expense, time, and risks of litigating in multiple venues or for public relations reasons.

Employers need not amend existing arbitration agreements to expressly carve out sexual assault and harassment claims, though some practitioners recommend doing so. Most well-crafted arbitration agreements include catchall exclusions for claims that cannot be arbitrated as a matter of law and likely remain enforceable. The Act also does not per se invalidate arbitration agreements covering sexual assault and harassment claims, allowing for the possibility that some employees may opt for arbitration.

Given the lack of precedent interpreting the Act, prudent employers should:

Expressly provide that the FAA and the Act govern their arbitration agreements.
Include a severability clause.
Consider including a jury trial waiver, if enforceable under applicable state law.

For more information on employment arbitration and the Act, see Practice Note, Employment Arbitration Agreements (US).

For a model arbitration agreement, with explanatory notes and drafting tips, see Standard Document, Mutual Agreement to Arbitrate Employment-Related Disputes (US).

Litigation

Class Certification

Companies that face class actions should take note of a recent en banc decision by the Ninth Circuit that approved class certification even though one-third of the members may not have suffered an injury, possibly creating a circuit split over certifying a class with many uninjured members.

In Olean Wholesale Grocery Cooperative, Inc. v. Bumble Bee Foods LLC, the court affirmed the certification of three classes of members who alleged price-fixing. The majority rejected a per se rule precluding certification when uninjured class members are more than de minimis in number. The district courts may determine on a case-by-case basis whether individual questions about injury predominate over common questions and make certification inappropriate under Rule 23(b)(3) of the Federal Rules of Civil Procedure (FRCP).

The dissent echoed companies' concerns by arguing that certifying oversized classes with many uninjured members expands defendants' exposure and improperly increases the pressure to settle before trial. The dissent favored a per se rule imposing a de minimis limit on uninjured class members, citing decisions by the First and DC Circuits, which suggested limits of around 10% and 5% to 6%, respectively. However, the majority concluded that the other circuits did not implement a per se rule and rejected the notion of a circuit split.

The Ninth Circuit's decision regarding a de minimis limit presents an issue worth monitoring, and it is one that other courts are likely to consider.

For more information on class certification under the FRCP, see Practice Note, Class Actions: Certification.

Real Estate

Lease Negotiations

Tenants should consider negotiating or renegotiating their office leases because of the current slowdown in the office leasing market and the surge in availability of sublease space.

Trends show that landlords may be more willing to make concessions to avoid lengthy vacancies and find tenants quicker. These concessions are meant to entice potential tenants and encourage them to choose the landlord's property over competing buildings. Concessions can be in the form of monetary consideration or significant non-monetary advantages, such as:

Free rent periods.
Lower lease escalations.
Improvement allowances.
Building signage.
Abatement rights.
Expansion options.
Termination options.
Extension options.

For more information on the key provisions typically found in an office lease for a multi-tenant building, with tenant-favorable negotiating tips and guidance, see Practice Note, Office Lease Negotiations for Tenants.

GC Agenda Interviewees

GC Agenda is based on interviews with Advisory Board members and other leading experts. Practical Law would like to thank the following experts for participating in interviews for this issue:

Antitrust

Lee Van Voorhis

Jenner & Block LLP

Capital Markets & Corporate Governance

Richard Truesdell

Davis Polk & Wardwell LLP

Holly Gregory

Sidley Austin LLP

Robert Downes

Sullivan & Cromwell LLP

Employee Benefits & Executive Compensation

Benjamin Conley

Seyfarth Shaw LLP

Intellectual Property & Technology

Megan Bannigan

Debevoise & Plimpton LLP

Labor & Employment

Kimberly Franko Lower and Deborah Olaleye

Baker & McKenzie LLP

Christopher Murray

Ogletree Deakins

Evandro Gigante

Proskauer

Litigation

Thomas Koegel

Crowell & Moring LLP

Real Estate

Stuart Saft

Holland & Knight LLP

Todd Eisner

McDermott Will & Emery LLP

Peter Fisch

Paul, Weiss, Rifkind, Wharton & Garrison LLP

Bradley Kaufman

Pryor Cashman LLP

Jennifer Chavez

Sheppard, Mullin, Richter & Hampton LLP

Tax

Kim Blanchard

Weil, Gotshal & Manges LLP

GC Agenda: Summer 2022 | Practical Law