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GC Agenda: April/May 2021
Practical Law Article w-030-2646 (Approx. 10 pages)
GC Agenda: April/May 2021
by Practical Law The Journal
| Published on 24 Mar 2021 • USA (National/Federal) |
A round-up of major horizon issues for General Counsel.
Antitrust
Private Merger Challenges
A recent Fourth Circuit decision highlights for companies that private plaintiffs, including customers and competitors, can successfully challenge and even unwind mergers and acquisitions under Section 7 of the Clayton Act. Section 7 prohibits mergers and acquisitions that may substantially lessen competition or tend to create a monopoly.
In Steves and Sons, Inc. v. JELD-WEN, Inc., the Fourth Circuit affirmed the district court’s ruling that JELD-WEN’s merger with a competitor violated Section 7. The Fourth Circuit agreed that:
- Steves, both a customer and a competitor of the merging parties, suffered antitrust injury and had standing to challenge the merger.
- Divestiture was an appropriate equitable remedy in private merger challenges.
The Fourth Circuit’s decision to unwind the merger comes nearly nine years after the parties agreed to merge and five years after Steves filed its complaint. Notably, the Antitrust Division of the DOJ previously investigated the transaction twice without taking action, once when notified under the Hart-Scott-Rodino Act and once at Steves’s request.
While this decision is perhaps an outlier, counsel should note that private plaintiffs that have been harmed by an anticompetitive transaction may challenge them after:
- The antitrust agencies have concluded their investigations, although litigating a merger challenge can be extremely costly and time consuming.
- They have closed, causing the transaction to be unwound if the challenge succeeds.
For more information on private merger challenges, see Practice Note, Raising Antitrust Merger Challenges: Third-Party Strategies.
For more information on challenges to consummated mergers, see Practice Note, Consummated Mergers Antitrust Enforcement.
Arbitration
JAMS Arbitrator Bias
Parties seeking to disqualify an arbitral body or an individual arbitrator due to potential bias should be aware of a recent federal district court decision holding that JAMS’s amicus briefing did not negate its ability to neutrally administer an arbitration.
In Monster Energy Co. v. City Beverages, LLC, the district court confirmed an arbitration award against Olympic Eagle Distributing in favor of Monster Energy Company. On appeal, the Ninth Circuit vacated the award, concluding that there was a reasonable impression of arbitrator bias because:
- The JAMS arbitrator failed to disclose his ownership interest in JAMS.
- JAMS had previously administered arbitrations for Monster.
Monster moved for rehearing en banc and certiorari review before the US Supreme Court. JAMS filed amicus briefs in support of both motions, which were denied. On remand, Olympic moved to compel arbitration in a neutral forum, arguing that JAMS’s amicus briefing did not allow it to remain impartial.
The district court disagreed because the amicus briefs, rather than siding with one party, objected to the Ninth Circuit’s interpretation of the evidentiary partiality standard for setting aside arbitration awards and the retroactive effect of new arbitrator disclosure requirements. The court deemed it “highly speculative” that JAMS’s amicus briefing would affect an individual JAMS arbitrator’s ability to remain neutral. It also stated that Olympic could select an arbitrator with no ownership interest in JAMS.
For more information on the grounds for claiming arbitrator bias, see Practice Note, Challenges Based on Arbitrator Bias in US Arbitration.
Capital Markets & Corporate Governance
Climate and ESG Disclosure
Companies should monitor SEC actions related to climate and ESG (environmental, social, and governance) disclosure.
The SEC’s Acting Chair, Allison Herren Lee, recently directed the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. Specifically, the Division will:
- Review the extent to which public companies address the topics identified in the SEC’s 2010 guidance regarding disclosure related to climate change.
- Assess compliance with disclosure obligations under the federal securities laws.
- Engage with companies on climate-related issues.
- Evaluate how the market is currently managing climate-related risks.
The SEC also announced the creation of a Climate and ESG Task Force in the Division of Enforcement to develop initiatives to proactively identify ESG-related misconduct. The task force’s initial focus will be on:
- Identifying material gaps or misstatements in climate risk disclosure under existing rules.
- Analyzing disclosure and compliance issues related to the ESG strategies of investment advisers and funds.
Companies that have not yet filed a Form 10-K report in 2021 should review the 2010 guidance and consider expanding their climate- and ESG-related disclosure, including disclosure of business trends and risks. Calendar year-end companies that have already filed their Form 10-K reports should consider expanding disclosure in the Risk Factors and Management Discussion and Analysis sections, as applicable, of their upcoming Form 10-Q reports and should also prepare for the increased likelihood of SEC comments.
For more information on these developments, see Legal Updates, SEC Publishes Interpretive Release Providing Guidance on Climate Change Disclosure and SEC Provides Guidance on Climate Change Disclosure.
Regulation FD Enforcement
Companies should review their Regulation FD policies and training materials in light of a recent SEC enforcement action against AT&T, Inc.
The SEC charged AT&T and three of its investor relations executives with repeatedly violating Regulation FD by selectively disclosing material nonpublic information to research analysts. The SEC’s complaint alleges that AT&T learned in March 2016 that its revenues would fall short of analyst estimates due to smartphone sales declining more than expected in the first quarter.
In response, AT&T investor relations executives made one-on-one calls to analysts at approximately 20 firms, during which the executives allegedly disclosed internal data and its impact on revenue metrics. The information disclosed was generally considered to be material and the executives’ actions were in violation of AT&T’s Regulation FD policy. The analysts subsequently adjusted their revenue forecasts for AT&T, leading to an overall consensus revenue estimate falling to just below the level that AT&T ultimately reported publicly in April 2016. In response to the charges, AT&T released a statement disputing the SEC’s allegations.
Notably, this action is proceeding against AT&T despite the fact that the executives’ actions were in contravention of the company’s Regulation FD policy. As a result, companies should consider training their employees more frequently regarding what is and is not permissible under their Regulation FD policies.
For a model policy that prohibits selective disclosure of material nonpublic information in violation of Regulation FD, with explanatory notes and drafting tips, see Standard Document, Regulation FD Policy.
For a PowerPoint presentation that counsel can use to train a US reporting company’s executives and other employees on their obligations under Regulation FD, see Standard Document, Regulation FD Training for Public Companies: Presentation Materials.
Commercial Transactions
Incentivized Consumer Reviews
As the influence of consumer reviews on purchasing decisions grows, companies that offer consumers incentives to post online reviews of their products and services should keep in mind that incentivized reviews are sponsored endorsements subject to FTC oversight.
According to the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising (Endorsement Guides), incentivized reviews create a material connection between the company and consumers, requiring that:
- Consumers posting incentivized reviews disclose that material connection clearly and conspicuously in the reviews.
- The company take measures to ensure the incentivized reviews include the required disclosures.
Companies should review the Endorsement Guides and other FTC guidance, such as its FAQs, The FTC’s Endorsement Guides: What People Are Asking. The FAQs address:
- What incentives create a material connection. Incentives may take the form of sweepstakes entries, coupons, free products, or other similar benefits.
- How to make clear and conspicuous disclosures on different social media platforms.
Additional best practices for companies include:
- Encouraging consumers to post their honest opinions, beliefs, and experiences.
- Offering incentives for all posted reviews, not just positive ones.
- Avoiding removing negative or less favorable reviews.
- Requiring incentivized reviewers to post their material connection to the company clearly and conspicuously, in compliance with the Endorsement Guides.
- Monitoring incentivized reviews to ensure they include clear and conspicuous disclosures, and modifying the reviews accordingly if they do not.
For more information on incentivized reviews, see Practice Note, Consumer Reviews in the Era of Social Media.
Employee Benefits & Executive Compensation
Health Plan Legislation and Regulations
Plan sponsors of group health plans should develop a strategy for implementing significant legislation, recent regulatory requirements, and other changes likely to occur throughout 2021 under the Biden administration.
Recent legislation includes:
- The Consolidated Appropriations Act, 2021 (CAA-21), which, among other provisions, includes:
- surprise medical billing requirements for out-of-network emergency (and related) services and independent dispute resolution procedures; and
- advance explanation of benefit disclosures to be furnished by health plans and health providers.
- The American Rescue Plan Act of 2021, which includes temporary COBRA premium assistance relief and a plan enrollment option for involuntarily terminated employees.
Regulatory developments include:
- The issuance in November 2020 of final regulations that contain expansive cost transparency rules that require:
- health plans and insurers to timely disclose certain cost-sharing information to participants and beneficiaries, in most cases using an internet-based self-service tool; and
- public disclosure of negotiated rates for covered items and services between a health plan or an insurer and in-network health providers.
- Regulatory and subregulatory changes as the Biden administration reviews health plan initiatives under the Trump administration, including those involving:
- short-term limited duration insurance;
- association health plans;
- the Affordable Care Act’s (ACA’s) Section 1332 waiver program;
- nondiscrimination in health programs under ACA Section 1557; and
- regulations under the ACA’s contraceptives mandate.
Additionally, litigation involving the ACA’s individual mandate and constitutionality is pending before the US Supreme Court and raises potentially significant implications for health plan compliance.
Finance
Self-Assessment Tool for Libor Transition
The Office of the Comptroller of the Currency (OCC) recently issued Bulletin 2021-7, which provides a self-assessment tool for banks to evaluate their preparedness for the cessation of LIBOR.
The self-assessment tool can be used to evaluate a bank’s:
- LIBOR transition plan.
- Execution of its LIBOR transition plan.
- Oversight and reporting related to its LIBOR transition plan.
The self-assessment tool contains five separate objectives for exposure assessment and planning, with questions relating to each objective. The objectives are intended to determine whether:
- The transition plan is sufficiently detailed according to the size and complexity of a bank’s LIBOR exposures.
- A bank has appropriate processes in place to implement the LIBOR transition plan.
- A bank has planned for and identified replacement rates and spread adjustment methodologies. The OCC does not endorse a specific LIBOR replacement rate.
- A bank’s management has included fallback language in both existing and new contracts.
- A bank’s progress toward preparedness for LIBOR cessation is sufficient according to the size and complexity of the bank’s risk exposures.
According to the OCC, the LIBOR transition plans and preparedness assessments should be risk-based. Depending on a bank’s specific risks, certain suggestions provided in the bulletin or the self-assessment tool that might not apply.
For more information on the self-assessment tool and LIBOR transition, see Legal Update, OCC Issues Self-Assessment Tool for Banks to Evaluate Preparedness for LIBOR Cessation.
Health Care
Changes to Patent and Exclusivity Listings for Pharmaceuticals
New legislation changes how the FDA records patents and exclusivity for pharmaceuticals. Patent and exclusivity listings determine when the FDA can approve generic or biosimilar versions of innovator products.
The Orange Book Transparency Act (OBTA) codifies the FDA’s patent listing procedures for drugs. It limits listed patents to claims for drug substance, drug product, and methods approved in the patent holder’s new drug application (NDA). The OBTA requires the patent holder to:
- List relevant patents with the FDA within 30 days after its NDA is approved.
- Update the list within 30 days if a new patent is issued.
- Withdraw a canceled or invalidated patent within 14 days from a Patent Trial and Appeal Board or court decision that cancels or invalidates any claim of the listed patent.
The Purple Book Continuity Act (PBCA) creates a limited patent listing process for biologics. Beginning June 20, 2021, if a biologics manufacturer initiates the pre-litigation “patent dance” procedures against a biosimilar applicant, it must provide the FDA with a list of patents that reasonably could be asserted against the applicant. The FDA must publish that list in the Purple Book. The FDA must also publish reference product exclusivity and pediatric exclusivity end dates for all licensed biologics. The PBCA requires the FDA to update the Purple Book every 30 days.
The patent listing process for biologics in the PBCA is new. While the FDA began publishing the Purple Book in 2014, the FDA does not provide exclusivity end dates for over 99% of biologics. The PBCA now requires the FDA to report this information every month.
Intellectual Property & Technology
PTAB Patent Challenge Denials
Companies should consider recalibrating their patent litigation and portfolio valuation strategies in light of a recent surge in denials of patent challenges by the Patent Trial and Appeal Board (PTAB).
This growing trend stems from the PTAB’s May 2020 opinion in Apple Inc. v. Fintiv, Inc., in which the PTAB established the factors it weighs when exercising its statutory discretion to deny inter partes review (IPR) of patents due to parallel district court or International Trade Commission (ITC) proceedings. The PTAB is increasingly applying the Fintiv factors to deny IPR, effectively deferring patent validity adjudication to fast-moving district courts and the ITC. These factors include:
- The trial date, with an earlier date favoring denial.
- Whether the court or ITC will likely stay the litigation pending IPR.
Companies planning to enforce patents while avoiding IPR should consider filing lawsuits:
- In jurisdictions such as the Western or Eastern District of Texas, and the ITC, which are more likely to set an early trial date.
- More quickly, to preempt a suspected accused infringer’s declaratory judgment action in a slow-moving jurisdiction.
Companies facing potential or actual infringement litigation should consider:
- Preparing an IPR petition even before the relevant patent issues, as part of a freedom to operate analysis.
- Filing for IPR immediately after being sued for infringement.
Both companies that are enforcing and defending patents should be prepared for front-loaded costs associated with “rocket docket” patent litigation.
While the trend of IPR denials generally favors patent owners, companies valuing patents for a potential acquisition should not assume that a past IPR denial insulates a patent portfolio from future IPR challenges in all circumstances.
For resources to assist counsel on IPR and other issues concerning PTAB proceedings, see PTAB Proceedings Toolkit.
Labor & Employment
COVID-19 Employee Litigation Prevention
Given the recent increase in litigation claims related to COVID-19, employers should consider taking preventative measures.
Some employers have attempted to mitigate liability by using COVID-19 waivers. However, these waivers:
- Provide only limited protection from third-party claims.
- Are not recommended for employees because they are ineffective in waiving Occupational Safety and Health Administration (OSHA) health and safety standards and overriding COVID-19 presumptions.
- May be illegal in certain jurisdictions and pose a risk of civil and criminal penalties.
Although precedent is limited, some employer best practices include:
- Requiring employees to enter into arbitration agreements with class action waivers. (Notably, California Private Attorneys General Act claims are not waivable.)
- Taking advantage of liability shield laws in states where certain industries are protected or damages may be limited.
- Making good faith efforts to comply with health and safety laws and guidance. Employers must also comply with any federal emergency OSHA standards.
- Avoiding discriminatory practices when rehiring employees from furlough or layoff, including based on age, disability, or gender.
Wage and hour compliance is particularly important, as many COVID-19-related claims are tacked on to wage and hour claims. Therefore, employers should:
- Carefully review their expense reimbursement policies for remote work arrangements, especially when internet use and mobile phones are required for work.
- Pay their workers for time spent answering health questions and obtaining COVID-19 vaccinations, even if they are not legally required to pay for this time.
Employers should also consider providing incentives for workers to obtain COVID-19 vaccinations, such as voluntarily providing paid time off, which may not have to be included in the Fair Labor Standards Act regular rate of pay, or paying for time off to get vaccinated.
These incentives may enhance employee goodwill and reduce the likelihood of employee claims.
For more information on litigation risks related to COVID-19, see Mitigating Employer Reopening Liability Checklist.
Litigation
Ascertainability at the Class Certification Stage
Companies defending against putative class actions should be aware of the federal circuit court split on whether administrative feasibility is part of the ascertainability inquiry at the class certification stage. Administrative feasibility requires the plaintiff to present evidence that class member identification will be manageable and will not require much individual factual inquiry.
In Cherry v. Dometic Corp., the Eleventh Circuit joined the majority view shared by the Second, Sixth, Seventh, Eighth, and Ninth Circuits by holding that ascertainability does not require proof that the identification of class members is administratively feasible. Instead, the majority view upholds the traditional approach that a plaintiff seeking class certification satisfies the ascertainability requirement by showing that the proposed class is adequately defined such that its membership is capable of determination.
Defendants opposing a class certification motion should consider:
- The forum circuit’s position on whether administrative feasibility is part of the ascertainability showing.
- That the Third Circuit is the only circuit court to expressly require administrative feasibility for class certification.
- That courts otherwise consider administrative feasibility in the class certification context, but only as one factor balanced against others to determine whether an FRCP 23(b)(3) class action is the superior method for adjudicating a controversy.
For more information on challenges to class actions based on ascertainability, see Practice Note, Non-Statutory Grounds for Challenging Class Actions: Standing and Ascertainability.
For resources to assist counsel with class certification issues, see Class Action Toolkit: Certification.
Real Estate
Force Majeure Provisions in Real Estate Contracts
Counsel should monitor evolving state law interpretations of force majeure provisions in leases and other real estate contracts. These provisions are being litigated in the wake of business closures and tenant defaults resulting from the COVID-19 pandemic.
Force majeure provisions are interpreted under state law, which can vary widely and continues to change. While some states have well-developed case law interpreting force majeure provisions, other states do not. Recent court decisions highlight that, in some states, courts narrowly interpret the language in the real estate contract even if that interpretation yields a seemingly inequitable result.
Counsel drafting force majeure provisions in leases and other real estate contracts should consult applicable state law and consider issues such as:
- The scope of qualifying events and excusable obligations. For example, whether to specify a finite list of force majeure events or include catch-all language that protects against all unforeseeable events and circumstances beyond a party’s reasonable control.
- The exclusion of certain:
- events from the force majeure provision, exercising caution not to exclude events the other party can control; and
- obligations from the force majeure provision, such as payment or indemnification obligations.
- Notice obligations for the party seeking to enforce the force majeure provision, including any notices required under applicable law. Notice requirements should specify:
- notice methods;
- deadlines; and
- the events purportedly excusing performance.
- Mitigation efforts or mitigating factors.
- Remedies and whether either party has termination rights if the force majeure event persists beyond a specified period.
For more on force majeure provisions under state law, see Force Majeure State Case Law Summary Chart: Overview.
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 issue: Antitrust Logan Breed Hogan Lovells US 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 Lisa Campbell Groom Law Group, Chartered Jamin Koslowe Simpson Thacher & Bartlett LLP Intellectual Property & Technology Joshua Goldberg Finnegan, Henderson, Farabow, Garrett & Dunner, LLP Labor & Employment Robin Samuel Baker McKenzie LLP Kaiser Chowdhry Morgan, Lewis & Bockius LLP Michael Eckard Ogletree Deakins James Swartz, Jr. Seyfarth Shaw LLP Thomas Wilson Vinson & Elkins LLP Tax Kim Blanchard Weil, Gotshal & Manges LLP |