GC Agenda: October/November 2021 | Practical Law

GC Agenda: October/November 2021 | Practical Law

A round-up of major horizon issues for General Counsel.

GC Agenda: October/November 2021

Practical Law Article w-032-8450 (Approx. 10 pages)

GC Agenda: October/November 2021

by Practical Law The Journal
Published on 05 Oct 2021 • USA (National/Federal)
A round-up of major horizon issues for General Counsel.

Antitrust

HSR and Antitrust Compliance

Companies should ensure that their Hart-Scott-Rodino (HSR) Act and other antitrust compliance programs are up to date and their employees understand the risks of non-compliance in light of recent changes to longstanding policies and enforcement actions by the FTC and DOJ.
While much of the recent focus on antitrust surrounds big tech, these developments impact all companies involved in M&A. In the last few months:
  • The FTC published a blog post warning companies that, due to limited resources to fully investigate transactions, the FTC may keep its investigations open even after the expiration of the HSR waiting period. Parties that close do so at their own risk.
  • The FTC announced that it is reviewing and may reverse some of its informal interpretations of how the HSR Act applies to specific factual scenarios, which are published analyses that are relied on by companies to determine filing obligations. The FTC also reversed a longstanding policy of not including the retirement of a target’s debt as part of the consideration when determining whether a transaction meets the reporting thresholds.
  • The DOJ, on behalf of the FTC, fined the CEO of Capital One over $630,000 for his acquisition of Capital One voting stock without filing under the HSR Act.
  • The FTC withdrew its approval of the 2020 Vertical Merger Guidelines and its accompanying commentary. The guidelines remain in place at the DOJ.
For resources to assist counsel with HSR Act compliance, see Hart-Scott-Rodino Act Toolkit.
For more information on the FTC’s and DOJ’s analysis of vertical mergers, see Practice Note, Vertical Mergers.

Arbitration

Arbitration Provision Carveouts

A recent federal district court decision highlights the significance of drafting narrowly tailored carveouts to arbitration provisions.
In Lavvan, Inc. v. Amyris, Inc., the plaintiff filed a lawsuit alleging trade secret misappropriation and patent infringement. The defendant moved to compel arbitration pursuant to the parties’ agreement. The Southern District of New York denied the motion to compel arbitration because the parties’ agreement contained an arbitration provision that excluded intellectual property claims from arbitration. The court held that the asserted claims fell under the carveout in the provision and therefore should be litigated in court.
Counsel drafting arbitration provisions that exclude certain claims, such as patent or other intellectual property claims, from arbitration should clearly identify the intended scope of the carveout to reduce the risk of litigating claims under an expansive reading of the carveout.
For more information on drafting arbitration provisions in patent license agreements, see Practice Note, Arbitration Clauses in Patent License Agreements.

Capital Markets & Corporate Governance

Changes to Rule 10b5-1 Plans

Companies should review their Rule 10b5-1 plan policies and practices in preparation for a possible rule change this year.
The SEC Investor Advisory Committee (IAC) recently recommended Rule 10b5-1 amendments, including:
  • Requiring a cooling off period of at least four months between the adoption or modification of a Rule 10b5-1 plan and the execution of the first trade.
  • Limiting each person or entity to one Rule 10b5-1 plan at a time.
  • Requiring electronic submission of Form 144.
  • Requiring enhanced disclosures, including:
    • proxy statement disclosure of the number of shares under each named executive officer’s Rule 10b5-1 plan and any corporate Rule 10b5-1 trading plan;
    • disclosure on Form 8-K of the adoption, modification, or cancellation of Rule 10b5-1 plans, and the number of shares covered, on a timely basis (essentially, changes to Rule 10b5-1 plans by affiliates would be material non-public information for Form 8-K purposes); and
    • disclosure on Form 4 of whether a trade was made pursuant to a Rule 10b5-1 plan and the date of the plan’s adoption or modification.
  • Ensuring that all companies with any securities listed on US exchanges, including American depository receipts and American depository shares filing Form 20-Fs, are subject to Form 4 reporting requirements.
The IAC did not intend these recommendations to impact anything relating to share buybacks.
The IAC’s recommendations come two months after SEC Chairman Gary Gensler spoke publicly about amending Rule 10b5-1, particularly reducing the risk of insiders manipulating trading under their Rule 10b5-1 plans.
For more information on improving controls related to insider trading, see Practice Note, Rule 10b5-1 Trading Plans.

ESG Developments

Companies should be aware of recent SEC developments concerning environmental, social, and governance (ESG) issues.
SEC Chairman Gary Gensler recently spoke about mandating climate change disclosure and asked the SEC staff to propose new rules by the end of 2021 addressing:
  • Qualitative and quantitative disclosures.
  • Disclosure of Scope 1, Scope 2, and possibly Scope 3 emissions.
  • Whether there should be industry-specific metrics.
  • The data or metrics that companies might use to disclose how they are meeting jurisdiction-specific requirements.
Gensler did not discuss a different liability framework for climate change disclosure.
Additionally, the SEC recently approved Nasdaq’s proposed board diversity rules that will, subject to certain exceptions, require listed companies to:
  • Have, or explain why they do not have, at least two diverse directors, including:
    • one that self-identifies as female (regardless of designated sex at birth); and
    • one that self-identifies as an “underrepresented minority” or LGBTQ+.
  • Annually disclose board diversity statistical information.
Nasdaq-listed companies must:
  • Comply with the disclosure rules beginning on August 8, 2022, or later in 2022 in some cases.
  • Have one diverse director by August 7, 2023, or later in 2023 in some cases.
  • Have two diverse directors by August 6, 2025, or later in 2025 in some cases, though Nasdaq Capital Market companies must comply on the same date one year later (2026).
Some flexibility is available for companies with five or fewer directors, foreign issuers, and smaller reporting companies. Also, certain companies are exempt, such as special purpose acquisition companies. Newly listed companies and companies that lose an exempt status have a phase-in period.
Listed companies that do not have sufficient diverse directors are eligible for one year of complimentary board recruiting services.
For more information on these developments, see Practice Note, Key Developments in ESG and Climate Disclosure: 2021 Tracker and Legal Update, SEC Approves Nasdaq’s Board Diversity Rules and Standard Document, Nasdaq Board Diversity Matrix.

Commercial Transactions

Electronic Signatures in Illinois

Companies doing business in Illinois should be aware that the state recently enacted the Uniform Electronic Transactions Act (UETA).
The UETA serves as a framework that states can use to determine the legal status of electronic signatures. The UETA identifies when parties have agreed to the terms outlined by the document and addresses when an electronic record has been sent and received. Under the UETA, an electronic signature must meet four major requirements:
  • All parties involved must have intended to sign the documentation.
  • All parties involved must consent to do business electronically.
  • The parties must use a system that captures electronic signatures and creates a form of a record of the transaction.
  • The parties must retain records, which should be accessible to all parties that have signed the electronic document.
The Illinois UETA applies to any electronic record or electronic signature created, generated, sent, communicated, received, or stored on or after June 25, 2021. Additionally, the Illinois UETA:
  • Eliminates the federal ESIGN Act’s preemption of Illinois’ former non-UETA electronic signature and records law.
  • Makes changes to all existing Illinois laws to reference the UETA’s adoption.
Illinois is the 49th state to adopt the UETA, leaving New York as the only state that has not enacted a version of the law.
For more information on the validity of electronic signatures generally, see Practice Note, Signature Requirements for an Enforceable Contract.

Employee Benefits & Executive Compensation

Surprise Medical Billing

Health plans and health insurers should prepare to comply with temporary reporting rules for air ambulance services, as required under the No Surprises Act (part of the Consolidated Appropriations Act, 2021).
The air ambulance services requirements were addressed in proposed regulations issued by the Departments of Labor and Health and Human Services (HHS) and the Treasury (collectively, Departments) in September 2021. The proposed regulations are the second major set of regulations to implement the No Surprises Act’s surprise medical billing rules.
The No Surprises Act requires plans and insurers to report claims data and related information to HHS concerning providers of air ambulance services. Under the proposed regulations, claims data about air ambulance services would include:
  • Whether the services were provided on an emergent or a non-emergent basis.
  • Whether the provider of the services is part of a hospital-owned or sponsored program (or certain other program types).
  • Whether the transport originated in a rural or an urban area.
  • The type of aircraft used for the transport (fixed-wing or rotary-wing air ambulance).
  • Whether the air ambulance service provider has a contract with the plan or insurer to furnish air ambulance services.
  • Other information regarding providers of air ambulance services as specified by the Departments.
Claims-level data also would include:
  • Claims adjudication information (for example, whether a claim was paid, partially paid, denied, or appealed).
  • Claims-related payment information (for example, submitted charges, amounts paid by a payor, and cost-sharing amounts).
The air ambulance data reporting rules apply for two years. As proposed, the required data would need to be reported for calendar year 2022 by March 31, 2023, and for calendar year 2023 by March 30, 2024.
For resources to assist employer-sponsored group health plans in complying with relevant requirements, see Group Health Plans Toolkit.

Finance

ARRC Formally Recommends SOFR

The Alternative Reference Rates Committee (ARRC) recently announced its formal recommendation of the Secured Overnight Financing Rate (SOFR) term rates, marking the final step in the ARRC’s Paced Transition Plan away from LIBOR.
The successful SOFR First convention change, along with the continued growth in SOFR cash and derivatives markets, has allowed the ARRC to recommend SOFR term rates consistent with established ARRC principles and indicators. SOFR First, which was unanimously recommended by the Commodity Futures Trading Commission’s Market Risk Advisory Committee, is a market best practice under which the linear interest rate swaps market would transition from LIBOR to SOFR for transactions entered into on July 26, 2021 and thereafter. The Loan Syndications and Trading Association also issued a statement in support of the ARRC’s formal SOFR recommendation following the successful launch of SOFR First.
The ARRC supports the use of SOFR term rates for business loan activity when adapting to an overnight rate could be more difficult. The ARRC does not support the use of SOFR term rates for derivatives markets, except for end users to hedge cash products that use the SOFR term rates.
With the issuance of the ARRC’s formal SOFR recommendation, the ARRC stated that market participants can now employ ARRC materials when using the SOFR term rates in legacy fallbacks and new contracts to prepare for LIBOR cessation.
For more information on this development, see Legal Update, ARRC Formally Recommends Forward-Looking SOFR Term Rate.
For resources to assist counsel with LIBOR replacement and benchmark fallbacks, see LIBOR Replacement Toolkit.

Health Care

Health Care Board Diversity

Counsel should work closely with the health care boards of hospitals and health care systems, and their nominating and governance committees, to develop recruitment and succession strategies to ensure health care board diversity.
Recent social unrest, economic turmoil, climate change, and health disparity issues related to the COVID-19 pandemic have emphasized the importance of health care board diversity in driving change and promoting diversity, equity, and inclusion (DEI) within their organizations. Diverse and inclusive health care boards govern more effectively and address the quality needs of their patient populations more efficiently. Therefore, health care board memberships should reflect the demographics of their communities.
Board education on DEI and cultural competency is a critical first step in achieving this goal. Counsel should recommend to the CEO and the board that the organization:
  • Hire a Chief Diversity, Equity, and Inclusion Officer (CDEIO).
  • Create a DEI board-level committee to inform efforts across the organization and advise the CDEIO and leadership on issues related to DEI.
  • Create a health equity strategy to address health disparities in the community.
  • Set explicit standards and launch initiatives to improve health equity, including social determinants of health, language access, and telehealth.
  • Seek community group and local business involvement to identify potential candidates for the board.
Nasdaq-listed health care organizations should be aware that the SEC recently approved a Nasdaq rule change requiring listed companies to diversify their boards or explain why they cannot comply. Nasdaq-listed boards must now include a certain number of directors who self-identify as female, an underrepresented minority, or LGBTQ+. (For more information, see Capital Markets & Corporate Governance: ESG Developments.) California has also enacted a similar board diversity mandate for all publicly held companies, including hospitals and health care systems, with several more states expected to follow.
For more information on health care board diversity, see Hospital Board Duties and Responsibilities in Times of Crisis Checklist.

Intellectual Property & Technology

Patent Assignment Best Practices

Companies should consider revisiting their patent assignment policies and diligence practices in light of a recent US Supreme Court decision making it easier for inventors to challenge the validity of patent rights they assigned if they are later sued for patent infringement.
In Minerva Surgical, Inc. v. Hologic, Inc., the Supreme Court upheld the longstanding doctrine of assignor estoppel, which bars a patent assignor or its privy from later challenging the patent’s validity in an infringement lawsuit, but narrowed the doctrine’s application to circumstances in which the invalidity defense contradicts an explicit or implicit representation made when assigning the patent. The Supreme Court identified scenarios in which there would be no contradiction in the assignor’s assertion of invalidity, including:
  • A blanket assignment of future inventions.
  • A post-assignment change of relevant law.
  • A post-assignment modification to the patent application claims making them materially broader than the claims as written at the time of assignment.
Following Minerva Surgical, companies obtaining patents from employees or others, or transferring patents to others, should carefully scrutinize inventor assignments and declarations, and arguments made by patent applicants during patent prosecution. A company in the position of:
  • An assignee should consider attempting to preserve assignor estoppel by:
    • procuring an initial declaration from the inventor when applying for the patent, a confirmatory declaration and assignment with explicit representations about patent validity when the patent issues, and, if purchasing patent rights, additional validity representations from the seller; and
    • including language in assignments that restricts later litigation, such as the no-challenge and forum selection provisions common to patent licenses.
  • An assignor should consider attempting to limit assignor estoppel by:
    • disclaiming any implicit validity warranty if selling or assigning a patent; and
    • challenging patent validity through a USPTO inter partes review proceeding, where assignor estoppel does not apply.
For more information on this decision, see Legal Update, Supreme Court: Assignor Estoppel Limited to Invalidity Defenses Contradicted at Time of Assignment.

Labor & Employment

Class Action Waivers in Employment Arbitration Agreements

Employers should take note of the dramatic increase in individual arbitration claims following the US Supreme Court’s decision in Epic Systems Corp. v. Lewis, which held that class and collective action waivers in employment arbitration agreements are enforceable.
Particularly in the gig economy, this trend is administratively burdensome and costly to employers, who generally bear the costs of arbitration. Therefore, employers considering (or reconsidering) including class action waivers in employment arbitration agreements should:
  • Evaluate the maximum number of individual arbitrations employees could file and assess the burden of serially arbitrating potentially hundreds of individual arbitration claims.
  • Consider whether the class action waiver serves the employer’s goal of reducing the likelihood, volume, and burden of litigating mass claims.
  • Consider including provisions in the employment arbitration agreement that encourage early resolution of potential claims, for example by:
    • requiring that employees submit a written grievance or notice of claims before filing an arbitration demand; or
    • establishing a formal mediation process that must occur before arbitration.
  • Consult with arbitral institutions about procedures to efficiently arbitrate similar individual claims. Depending on the forum rules, options may include:
    • consolidating claims into smaller groups assigned to the same arbitrator;
    • coordinating discovery to permit using the same documents or evidence across multiple similar claims;
    • arbitrating one group as a test case, which may aid settlement of the remaining claims, because the parties can better value their claims;
    • modifying or delaying payment of fees, such as paying lower fees per arbitration when the number of claims exceeds certain thresholds or making payment due on the arbitrator selection, rather than when the demand is filed; and
    • permitting the arbitrator to grant dispositive motions to reduce the claims that proceed to hearing.
For more information on employment arbitration agreements, see Practice Note, Employment Arbitration Agreements (US).

Preventing and Investigating Harassment Claims

The resignation of former New York Governor Andrew Cuomo in response to sexual harassment allegations serves as a reminder to employers of the importance of harassment prevention and investigation procedures.
To prevent harassment claims, employers should:
  • Convey the employer’s commitment to an inclusive and respectful workplace from leadership, such as the CEO or president.
  • Ensure that written policies clearly communicate that all complaints will be investigated immediately, and follow through on that promise.
  • Conduct regular trainings on recognizing harassment and creating an inclusive and respectful workplace for all employees.
  • Obtain written acknowledgment from employees that they attended the trainings and received the written policies.
  • Proactively ask employees during or after the trainings if there is anything they want to discuss.
  • Hire human resources or diversity and inclusion personnel to advocate for employees and assist in creating an inclusive and respectful corporate culture.
In response to harassment complaints against C-suite or high-profile individuals, employers should:
  • Consider referring the investigation to the board of directors or a board committee, instead of handling it through the general counsel’s office.
  • Consider engaging an external consultant or outside law firm (separate from the company’s usual outside counsel) to avoid the perception that the investigators are beholden to or otherwise biased in favor of the employer.
  • Engage investigators who have deep knowledge about employment law and significant experience interviewing employees on sensitive topics.
  • Affirmatively seek information from the alleged harasser’s direct reports and others who may have knowledge about the harassment, instead of waiting for complainants to come forward.
  • Give employees opportunities to have their voices heard and emphasize that they will be listened to.
For resources to assist counsel in minimizing the risk of, and responding to, workplace sexual harassment, see Sexual Harassment Toolkit and Conducting Internal Investigations: Addressing Employee Complaints and Compliance Issues Toolkit.

Litigation

Statutory Class Action Claims

Companies facing federal class action lawsuits involving claims of statutory violations should scrutinize the class members’ alleged injury to assess whether early motion practice on standing grounds may help limit the class size, thereby reducing the company’s exposure and legal spend.
In TransUnion LLC v. Ramirez, the US Supreme Court recently held that all class members alleging a statutory violation must show a concrete injury-in-fact to satisfy Article III standing in federal court. Class members that allege merely a bare statutory violation (an injury-in-law) or a risk of potential future harm lack standing to sue in federal court. However, the Supreme Court left open when federal courts must address standing in class actions.
By forcing plaintiffs (and the court) to address each named plaintiff’s injury, and therefore standing, upfront using a motion to dismiss, counsel may be able to favorably shape or constrain the class from the outset. This may also narrow the scope of the issues for discovery, case management purposes, and class certification.
In-house counsel should continue to monitor federal district and circuit court opinions defining injury for standing purposes after TransUnion to determine whether specific jurisdictions may favorably view early motion practice about standing.
For more information on challenging class actions on standing grounds, see Practice Note, Non-Statutory Grounds for Challenging Class Actions: Standing and Ascertainability.
For more information on class actions generally, see Practice Note, Class Actions: Overview.

Real Estate

Property Insurance for Natural Disasters

Commercial property owners and tenants should review their property insurance policies to ensure that they are sufficiently protected in the aftermath of Hurricane Ida, the California wildfires, and other recent natural disasters.
A standard commercial property insurance policy typically covers events such as fire, theft, and vandalism, but may exclude hurricanes, tornadoes, and other natural disasters. Specific riders or endorsements may be needed to cover these perils.
Owners and tenants should review their policies to determine whether:
  • Coverage is provided for damage caused by wind or flooding.
  • Specific deductibles apply and when they may be triggered.
  • The policy distinguishes damage caused by rising water from wind or storm damage.
  • The policy provides for:
    • replacement value coverage, which equals the cost of replacing the property; or
    • actual cash value coverage, which is replacement value minus depreciation.
Owners and tenants should also consider obtaining business interruption coverage to help pay for ongoing expenses when a natural disaster prevents their business from operating.
Parties entering into purchase and sale or lease agreements for real property should pay particular attention to the language of the purchase and sale or lease agreement. For example:
  • In a purchase and sale agreement, the parties should carefully review the risk of loss clause, which determines which party bears the burden of risk for damage to the property occurring after the agreement is signed, but before closing.
  • In a lease agreement, the parties should carefully review the force majeure, casualty, insurance, and repairs and maintenance clauses for guidance on each party’s responsibility following a natural disaster.
For more information on insurance in real estate transactions, see Practice Note, Property and Liability Insurance in Real Estate Transactions.
For more information on preparing for, and responding to, a natural disaster, see Practice Note, Real Property Disaster Management Considerations.
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
Sherman Kahn
Mauriel Kapouytian Woods LLP
Capital Markets & Corporate Governance 
Craig Arcella 
Cravath, Swaine & Moore LLP
Robert Downes
Sullivan & Cromwell LLP
Intellectual Property & Technology
Eric Fues
Finnegan, Henderson, Farabow, Garrett & Dunner, LLP
Labor & Employment
Michael Brewer and Billie Wenter 
Baker McKenzie LLP
William Grob
Ogletree Deakins
Steven Pearlman
Proskauer
David Baffa
Seyfarth Shaw LLP
Thomas Wilson 
Vinson & Elkins LLP
Litigation
Joseph Fischetti 
Lowenstein Sandler LLP
Tax
Kim Blanchard
Weil, Gotshal & Manges LLP