News & Perspectives | Arnold & Porterhttps://www.arnoldporter.com/en/rss/perspectivesNews & Perspectives | Arnold & Porteren{2DAAC21E-FB8B-4110-BBE0-3C22EFDDD90E}https://www.arnoldporter.com/en/perspectives/events/2024/03/legislative-briefing-for-counsel-and-advocatesEugenia E. Piersonhttps://www.arnoldporter.com/en/people/p/pierson-eugenia-eEugenia.Pierson@arnoldporter.comRon Kindhttps://www.arnoldporter.com/en/people/k/kind-ronron.kind@arnoldporter.comSonja Nesbithttps://www.arnoldporter.com/en/people/n/nesbit-sonjasonja.nesbit@arnoldporter.comBobby McMillinhttps://www.arnoldporter.com/en/people/m/mcmillin-bobbybobby.mcmillin@arnoldporter.comLegislative Briefing for Counsel and AdvocatesArnold &amp; Porter will host an interactive client webinar designed to provide valuable insights for counsel, government affairs professionals and advocates in the life sciences and healthcare industry.Tue, 19 Mar 2024 00:00:00 -0500<p>Arnold &amp; Porter will host an interactive client webinar designed to provide valuable insights for counsel, government affairs professionals and advocates in the life sciences and healthcare industry. Our distinguished panel of experts includes Eugenia Pierson, Rep. Ron Kind, Sonja Nesbit, and Bobby McMillin, all of whom bring a wealth of experience in legislative affairs and advocacy. We believe that this webinar will be instrumental in enhancing your understanding of legislative processes and empowering you with effective advocacy tools. Don't miss this opportunity to stay informed and contribute to positive legislative outcomes.</p>{C72A93E9-DB57-4B22-980F-FA9DFFDC5043}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/03/schmidt-talks-new-changes-to-uks-media-merger-regimeSchmidt Talks New Changes to UK’s Media Merger RegimePartner John Schmidt, who leads the firm&rsquo;s UK Competition team in London, was quoted in the <em>Law360</em> article, &ldquo;UK Law Change Threatens PE Firm's Newspaper Group Bid.&rdquo;&nbsp;Mon, 18 Mar 2024 00:00:00 -0500<p>Partner John Schmidt, who leads the firm&rsquo;s UK Competition team in London, was quoted in the <em>Law360</em> article, &ldquo;UK Law Change Threatens PE Firm's Newspaper Group Bid.&rdquo; The article discusses the UK government&rsquo;s recent amendment to the UK&rsquo;s existing media merger regime, which would prevent foreign states from owning British newspapers and other print media. The Enterprise Act and the National Security and Investment Act 2021 currently allow ministers to block media mergers, but the new regime would explicitly eliminate newspaper and periodical news magazine mergers involving ownership, influence, or control by foreign states.</p> <p>The amendment would also allow the current Secretary of State for Culture, Media, and Sport to refer media mergers to the UK Competition and Markets Authority (CMA). If the CMA concludes that the deal involves foreign state ownership, the Secretary of State is authorized to create an order blocking the merger. Schmidt told <em>Law360</em> that &ldquo;the biggest drawback of the current regime is that the deal would require a lengthy second phase review, also covering the public interest ground, before the secretary of state could decide, which wouldn't be necessary under the proposed regime.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://www.law360.com/articles/1813480/uk-law-change-threatens-pe-firm-s-newspaper-group-bid" target="_blank">Read the full article</a> (subscription required).</p>{962A5022-B742-457D-9F92-6FBF48F04CB4}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/03/hawke-and-holton-summarize-key-takeaways-from-secs-recent-enforcement-actionHawke and Holton Summarize Key Takeaways from SEC’s Recent Enforcement ActionSecurities Enforcement Litigation partner Daniel Hawke and Corporate &amp; Finance senior counsel Robert Holton were quoted in the <em>Private Equity Law Report</em> article, &ldquo;SEC Enforcement Action Targets Non Violative Use of MNPI Through Policy and Procedure Failures.&rdquo;&nbsp;Mon, 18 Mar 2024 00:00:00 -0500<p>Securities Enforcement Litigation partner Daniel Hawke and Corporate &amp; Finance senior counsel Robert Holton were quoted in the <em>Private Equity Law Report</em> article, &ldquo;SEC Enforcement Action Targets Non Violative Use of MNPI Through Policy and Procedure Failures.&rdquo; Both Hawke and Holton summarize key takeaways from a recent settlement order issued by the U.S. Securities and Exchange Commission (SEC) that follows the agency&rsquo;s current approach to escalating enforcement actions around inadequate compliance policies and procedures, even in the absence of wrongful activity or improper trading. </p> <p>According to the SEC, the order issues settled charges, which include a $4 million penalty, against SEC-registered investment adviser OEP Capital Advisors LP for &ldquo;failing to maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information (MNPI) and to implement written policies and procedures reasonably designed to prevent misleading communications to current and prospective investors in the privately-offered, private-equity funds that OEP advises.&rdquo; The policies and procedures violations related to not only MNPI but also the use of valuations of portfolio companies that had not been approved by OEP&rsquo;s valuations committee when marketing funds.</p> <p>Hawke noted that the SEC&rsquo;s order is a &ldquo;message case,&rdquo; yet it is questionable what the SEC wants the private funds industry to understand. Holton added that the order &ldquo;is clearer about the conduct it wishes to deter in connection with valuations, but it is curious that the SEC put the murkier issues relating to MNPI first and foremost.&rdquo; Hawke concluded by stating that there are &ldquo;significant weaknesses in the case and it seems likely that as compliance personnel and industry observers react to it, there will be more questions raised than can be answered from the details provided in the Order.&rdquo; </p> <p><a rel="noopener noreferrer" href="https://www.pelawreport.com/20526691/sec-enforcement-action-targets-nonandx2011violative-use-of-mnpi-through-policy-and-procedure-failures.thtml" target="_blank">Read the full article</a> (subscription required).</p>{BE29A22E-A3A1-4B9A-96A2-A6771E5C4537}https://www.arnoldporter.com/en/perspectives/news/2024/03/arnold-and-porter-achieves-unanimous-us-supreme-court-win-on-use-of-social-media-by-public-officialsArnold & Porter Achieves Unanimous U.S. Supreme Court Win on Use of Social Media by Public OfficialsArnold &amp; Porter recently won a unanimous victory in the U.S. Supreme Court in an important case about the use of social media by public officials.&nbsp;Mon, 18 Mar 2024 00:00:00 -0500<p>Arnold &amp; Porter recently won a unanimous victory in the U.S. Supreme Court in an important case about the use of social media by public officials. The case involved the personal Facebook page of the city manager of Port Huron, Michigan, who used the page to announce town policies and interact with his constituents. </p> <p>Arnold &amp; Porter client Kevin Lindke was blocked from the page after he criticized the city manager&rsquo;s handling of the COVID-19 pandemic. Lindke&rsquo;s First Amendment challenge was thrown out on the grounds that personal social media use is immune from constitutional scrutiny. The Supreme Court unanimously reversed, ruling that public officials can be held liable for posting public information on their personal accounts when they have authority to speak on the government&rsquo;s behalf and purport to exercise that authority. </p> <p>"We are delighted that the Supreme Court has vindicated the right of citizens like Kevin Lindke to hold their public officials accountable when they use personal social media accounts to do their jobs," said Arnold &amp; Porter Appellate &amp; Supreme Court partner Allon Kedem, who argued the case in front of the Supreme Court in October 2023. </p> <p>The Arnold &amp; Porter team was led by Kedem and also included associates Dana Or, Charlie Birkel, Matthew Farley, Nicole Masiello, Caleb Thompson, and Volodymyr Ponomarov. </p>{3AB85309-A243-442A-9C50-FCD7FF92CB53}https://www.lawgazette.co.uk/commentary-and-opinion/access-to-justice-for-the-few-but-not-for-you/5119081.articlekathleen.harris@arnoldporter.comAccess to justice: for the few but not for youFri, 15 Mar 2024 00:00:00 -0500{B05C33B7-EB13-4E7C-9F90-FC6A73F1DED9}https://www.arnoldporter.com/en/perspectives/news/2024/03/chambers-europe-2024-recognizes-arnold-and-porter-practices-lawyersChambers Europe 2024 Recognizes Arnold & Porter Practices, LawyersThe 2024 edition of <em>Chambers Europe</em> highlighted Arnold &amp; Porter as a &ldquo;Leading Firm&rdquo; in five practices and recognized ten lawyers as &ldquo;Leading Individuals.&rdquo;&nbsp;Thu, 14 Mar 2024 00:00:00 -0500<p>The 2024 edition of <em>Chambers Europe </em>highlighted Arnold &amp; Porter as a &ldquo;Leading Firm&rdquo; in five practices and recognized ten lawyers as &ldquo;Leading Individuals.&rdquo; <em>Chambers Europe</em> ranks the top lawyers and law firms across Europe, providing in-depth analysis and market intelligence for law firm clients and legal professionals.</p> <p><em>Chambers Europe</em> recognized the firm&rsquo;s Competition: EU practice in Belgium for its &ldquo;strong reputation among major life sciences sector companies,&rdquo; and for its &ldquo;ability to provide top advice and great insights.&rdquo; The guide also highlighted the firm&rsquo;s Commercial and Corporate Litigation practice in the UK for its &ldquo;notable expertise in cross-border litigation, bolstered by its strong presence in the U.S.&rdquo; and for regularly acting on behalf of individuals and corporations on a variety of commercial and corporate disputes. The firm&rsquo;s Life Sciences practice in Europe, particularly in Belgium and in the Netherlands, were praised by clients for having the &ldquo;technical expertise to analyze complex matters,&rdquo; as well as for possessing &ldquo;an excellent understanding of the pharmaceuticals industry, which enables them to pick apart complex issues.&rdquo;</p> <p>The below practices were recognized by<em> Chambers Europe</em>:</p> <ul> <li>Competition: EU (Belgium)</li> <li>Commercial and Corporate Litigation (UK)</li> <li>Life Sciences (Europe-wide)</li> <li>Life Sciences (Netherlands)</li> <li>Life Sciences: EU (Belgium)</li> </ul> <p>The below lawyers were recognized by <em>Chambers Europe</em>:</p> <ul> <li>Niels Ersb&oslash;ll&mdash;Competition: EU (Belgium)</li> <li>Axel Gutermuth&mdash;Competition: EU (Belgium)</li> <li>Luc Gyselen&mdash;Competition: EU (Belgium)</li> <li>Bart Jong&mdash;Life Sciences (Netherlands)</li> <li>Charlotte Mallorie&mdash;Corporate and Commercial Litigation (UK)</li> <li>Hilton Mervis&mdash;Corporate and Commercial Litigation (UK)</li> <li>Alexander Roussanov&mdash;Life Sciences: EU (Belgium)</li> <li>John Schmidt&mdash;Competition Law (UK)</li> <li>Carla Schoonderbeek&mdash;Life Sciences (Netherlands)</li> <li>Jane Wessel&mdash;Competition Law: Private Enforcement: Claimant (UK)</li> </ul>{465B6A95-EA2F-42C4-AEDD-859E81CF9799}https://www.arnoldporter.com/en/perspectives/news/2024/03/the-legal-500-ma-powerlist-united-states-2024-recognizes-ron-levine-and-steven-kaplanThe Legal 500 M&A Powerlist: United States 2024 Recognizes Ron Levine and Steven KaplanPartner Ron Levine and senior counsel Steven Kaplan were recently named to <em>The Legal 500 M&amp;A Powerlist: United States 2024</em>, which recognizes leading M&amp;A practitioners across the U.S.Wed, 13 Mar 2024 00:00:00 -0500<p>Partner Ron Levine and senior counsel Steven Kaplan were recently named to <em><a rel="noopener noreferrer" href="https://indd.adobe.com/view/f61f519a-f367-45a7-bdb3-c1f1eb5b6e91" target="_blank">The Legal 500 M&amp;A Powerlist: United States 2024</a></em>, which recognizes leading M&amp;A practitioners across the U.S. <em>The Legal 500</em> notes that &ldquo;M&amp;A practitioners in this publication highlighted the importance of a multidisciplinary approach in a successful practice, given the intricate nature of the process&rdquo; and reflects their view that &ldquo;the listing reflects those practitioners that are deemed the gold standard by businesses.&rdquo;</p> <p>Levine, co-chair of the firm&rsquo;s Corporate &amp; Finance Group and head of the Denver office, brings 36 years of experience in corporate finance and private equity, with notable experience representing clients in high-value M&amp;A transactions. Kaplan, who has over 45 years of experience and led the firm&rsquo;s corporate and securities practice for some twenty years, has served as corporate and securities counsel to a wide range of corporations with an emphasis on mergers, acquisitions and divestitures, public and private securities offerings, joint ventures, corporate governance, and U.S. Securities and Exchange Commission compliance matters.</p> <p>The Corporate &amp; Finance group, comprised of over 150 attorneys firmwide, is also recognized in <em>The Legal 500 US</em> for M&amp;A Middle-Market, M&amp;A Corporate, Commercial: Private Equity Buyouts, and Commercial: Corporate Governance.</p>{C688BB10-6C19-49BB-AA8E-D00D8CBD8DDB}https://www.arnoldporter.com/en/perspectives/advisories/2024/03/pfas-in-food-packaging-grease-proofing-agentsLawrence E. Culleenhttps://www.arnoldporter.com/en/people/c/culleen-lawrence-elawrence.culleen@arnoldporter.comBrandon W. Neuschaferhttps://www.arnoldporter.com/en/people/n/neuschafer-brandon-wbrandon.neuschafer@arnoldporter.comJudah Prerohttps://www.arnoldporter.com/en/people/p/prero-judahjudah.prero@arnoldporter.comTyler M. Scandalioshttps://www.arnoldporter.com/en/people/s/scandalios-tylertyler.scandalios@arnoldporter.comFDA Announces That Manufacturers Are No Longer Selling Food Packaging Grease-Proofing Agents That Contain PFASThe U.S. Food and Drug Administration (FDA or the Agency) recently announced that substances containing certain Per- and Polyfluoroalkyl Substances (PFAS) for use as grease-proofing agents on paper food packaging are no longer being sold in the U.S. by their manufacturers.&nbsp;Wed, 13 Mar 2024 00:00:00 -0500<p>The U.S. Food and Drug Administration (FDA or the Agency) <a rel="noopener noreferrer" href="https://www.fda.gov/food/process-contaminants-food/market-phase-out-grease-proofing-substances-containing-pfas" target="_blank">recently announced</a> that substances containing certain Per- and Polyfluoroalkyl Substances (PFAS) for use as grease-proofing agents on paper food packaging are no longer being sold in the U.S. by their manufacturers. This new development is primarily the result of the fulfillment of voluntary market phase-out commitments made by the manufacturers of specific short-chain[[N: &ldquo;Short-chain&rdquo; PFAS substances refer to types of PFAS that contain seven or less carbon atoms in length.]] 6:2 fluorotelomer alcohol (6:2 FTOH) PFAS substances for use as grease-proofing agents on paper food packaging. And although FDA had not raised concerns with other types of FDA-authorized short-chain PFAS substances, FDA also recently received confirmation that the manufacturers of the remaining FDA-authorized grease-proofing short-chain PFAS substances had also voluntarily ceased to sell such substances for food contact use in the U.S. Of note, food contact substances containing <em>long-chain</em>[[N: &ldquo;Long-chain&rdquo; PFAS substances refer to types of PFAS that contain eight or more carbon atoms in length.]] PFAS have not been sold in the U.S. since around 2016, as a result of similar voluntary market phase-out commitments by manufacturers, as well as FDA&rsquo;s revocation of certain regulations that had authorized long-chain PFAS in food packaging. <br /> <br /> Importantly, although the manufacturers of these short-chain PFAS food contact substances have voluntarily agreed with FDA to stop selling them for these uses in the U.S., distributors and other businesses may still have existing stocks on hand of food contact material (e.g., food wrapping) containing these short-chain PFAS food contact substances. For now, such distributors and businesses generally may continue to distribute and use such products, as the Food Contact Notifications (FCNs) for these short-chain PFAS food contact substances remain effective and have not been withdrawn. FDA acknowledges in its announcement that it may take until June 2025 to exhaust existing market inventory. <br /> <br /> As manufacturers wound down their production of these short-chain PFAS food contact substances under their voluntary market phase-out commitments, efforts have been made to try to ensure that comparable, alternative food contact materials will be available on the market. For example, in a recent letter from a manufacture to FDA regarding the manufacturer&rsquo;s voluntary market phase-out commitments, the manufacturer noted that the company had secured an FCN for an alternative grease-proofing agent and that the company would continue to work on further replacement chemistries to allow industry to successfully transition to alternative grease-proofing products.<br /> <br /> It is also important to note that short-chain PFAS food contact substances with effective FCNs for uses other than as grease-proofing agents on paper food packaging are beyond the scope of FDA&rsquo;s announcement. For example, FCNs authorizing certain PFAS substances as manufacturing aids in the production of other food contact polymers are unaffected. Other unaffected FCN-authorized uses of PFAS include uses in non-stick applications on pots and pans and in the manufacture of rubber o-rings and gaskets used in food processing equipment. In an email to media, FDA noted that &ldquo;<a rel="noopener noreferrer" href="https://www.cnn.com/2024/02/28/health/fda-pfas-food-packaging/index.html" target="_blank">Current research demonstrates that the potential exposure to PFAS through the remaining limited authorized uses is exceedingly low</a>.&rdquo;<br /> <br /> Nevertheless, FDA will continue to monitor the food supply for PFAS content, including any PFAS content present as an unintended impurity or contaminant. For example, since 2019 FDA has included testing for PFAS as part of the Agency&rsquo;s periodic &ldquo;Total Diet Study&rdquo; (in which FDA samples and tests different foods on the market for nutrient elements, toxic elements, pesticide residues, and other chemicals). FDA also recently announced that the Agency is working towards a validated analytical method that would allow FDA to monitor the market for PFAS specifically in food packaging.<br /> <br /> If you have any questions about the content discussed here or would like more information, please reach out to one of the authors of this Advisory or to your existing Arnold &amp; Porter contact.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{4435953A-14CF-49DF-A463-C577657A923B}https://www.arnoldporter.com/en/perspectives/advisories/2024/03/delaware-faults-microsoft-activision-merger-processAndrew Varnerhttps://www.arnoldporter.com/en/people/v/varner-andrewandrew.varner@arnoldporter.comJoel I. Greenberghttps://www.arnoldporter.com/en/people/g/greenberg-joel-ijoel.greenberg@arnoldporter.comSteven Kaplanhttps://www.arnoldporter.com/en/people/k/kaplan-stevensteven.kaplan@arnoldporter.comAlice Linhttps://www.arnoldporter.com/en/people/l/lin-alicealice.lin@arnoldporter.comDelaware Chancery Court Faults Merger Agreement Approval Process in Microsoft’s US$69 Billion Acquisition of Activision BlizzardOn February 29, the Delaware Chancery Court declined to dismiss claims that the process followed in obtaining board and stockholder approval of the merger of Activision Blizzard, Inc. with a subsidiary of Microsoft failed to comply with the requirements of the Delaware General Corporation Law (DGCL).&nbsp;Wed, 13 Mar 2024 00:00:00 -0500<p>On February 29, the Delaware Chancery Court declined to dismiss claims that the process followed in obtaining board and stockholder approval of the merger of Activision Blizzard, Inc. with a subsidiary of Microsoft failed to comply with the requirements of the Delaware General Corporation Law (DGCL). Parties to Delaware mergers should always adhere strictly to the statutory requirements. But in light of the <em>Activision</em> opinion, participants in Delaware mergers would be well-advised to review carefully the materials provided for board approval and the notice of the stockholder meeting.</p> <h2>Background</h2> <p>On January 18, 2022, Microsoft Corporation, a merger subsidiary of Microsoft Corporation and Activision Blizzard, Inc., a gaming and entertainment company, signed a merger agreement providing for the US$69 billion acquisition of Activision by Microsoft. One day prior, the Activision Board of Directors met to approve the then-current draft of the merger agreement, which did not include (1) the Activision disclosure letter, (2) the Activision disclosure schedules, (3) the certificate of incorporation for the post-merger corporation, (4) the purchase price, (5) the target company name, or (6) the finally agreed terms governing Activision&rsquo;s ability to declare dividends while the merger was pending. At the meeting, the Activision Board delegated the authority to negotiate and finalize the dividend payment terms to an <em>ad hoc</em> board committee. The final merger agreement reflected the completion of these omitted items, but Activision&rsquo;s Board did not review and approve the final execution version of the merger agreement.<br /> <br /> Although Activision&rsquo;s stockholders approved the merger with more than 98% of stockholders voting in favor, a stockholder sued the parties and their boards, claiming that Activision&rsquo;s approval process violated Sections 251 and 141 of the DGCL. Specifically, the plaintiff alleged violations of Section 251(b), Section 251(c), Section 251(d), and Section 141 of the DGCL, and the defendants moved to dismiss these claims.</p> <h2>The Court&rsquo;s Analysis</h2> <p><em>Section 251(b).</em> Plaintiff alleged that defendants violated Section 251(b) because the draft merger agreement approved by the Activision Board of Directors did not include terms required by Section 251(b), while the defendants argued that Section 251(b) does not require that the form of merger agreement approved by the board contain all information required under Section 251(b). The Chancery Court discussed plaintiff&rsquo;s contention that Section 251(b) should be interpreted to require approval of the execution version of the merger agreement, as well as concerns of defendants that such a standard would disrupt market practices. The court held that, &ldquo;at a bare minimum,&rdquo; the board must approve an &ldquo;essentially complete&rdquo; merger agreement, which it described as a form of merger agreement that includes all &ldquo;essential&rdquo; elements. While not needing to make a specific determination as to what is essential, and suggesting that reasonable minds may disagree on whether disclosure schedules are essential, the Chancery Court nevertheless determined that, based on the facts alleged by plaintiffs, the form approved by the Activision Board of Directors did not include all essential items, as it omitted party names, the purchase price, resolution of a material commercial point, and the statutorily required form of post-merger certificate of incorporation for the surviving corporation.<br /> <br /> <em>Section 251(c). </em>Plaintiff alleged a violation of Section 251(c), which requires that a notice of the stockholder meeting called for purposes of acting on a merger agreement include either the merger agreement required by Section 251(b) or a brief summary thereof. The Chancery Court determined that defendants had not included a summary of the merger in the notice, but instead referenced an attached merger agreement, which the court determined did not satisfy the requirements of Section 251(b) because it did not include the surviving corporation&rsquo;s charter. The court further rejected defendants&rsquo; argument that the merger agreement summary in the proxy statement satisfied the requirement of Section 251(c) because, as the court explained, Section 251(c) requires that such a summary (or an appropriate merger agreement) be included in the notice itself.<br /> <br /> <em>Section 251(d).</em> Plaintiff alleged a violation of Section 251(d), which prohibits any amendment of any term or condition of a merger agreement without stockholder approval if that amendment has an adverse effect on a class of stockholders. This claim was based on plaintiff&rsquo;s conjecture that Activision&rsquo;s Board of Directors had determined to amend the merger agreement to extend the termination date beyond the date set forth in the original agreement. Subsequently, Activision entered into a letter agreement to waive enforcement of the termination date for three months, authorized an increase in the permitted dividend, and increased the termination fee. This claim was dismissed on procedural grounds and the court did not reach the merits.<br /> <br /> <em>Section 141. </em>Plaintiff alleged that Activision&rsquo;s Board of Directors violated Section 141(c) by delegating approval of the dividend provision to an <em>ad hoc </em>board committee. Under Section 251(b), the board has a statutory duty to approve the terms of a merger agreement and, where a board has a statutory duty, it may not delegate that duty to a committee unless Section 141(c) permits it to do so. Under Section 141(c)(2), a committee does not have any power with respect to approving an agreement of merger or its terms. The Chancery Court determined that the dividend provision is a term of the merger agreement, which cannot be delegated to a committee, and therefore the court determined that plaintiff had adequately alleged a delegation of authority in violation of Section 141(c).</p> <h2>Procedural Posture and Remedies</h2> <p>The court directed the parties to meet and confer with respect to curing the deficiencies. It is not obvious how they can do that with the merger having closed and the stockholders having been paid. The next phase of this litigation may provide an interesting analysis of the remedial power of DGCL Sections 204 and 205.</p> <h2>Takeaways</h2> <p>The Chancery Court&rsquo;s strict interpretation of statutory requirements means that parties to a merger agreement involving a Delaware target corporation should consider carefully the contents of materials provided to the parties&rsquo; boards and the notice of stockholder meeting to approve the merger. In particular, the issues with the board approval process described in the <em>Activision</em> opinion could have been avoided by holding a brief, final telephonic meeting of the board immediately prior to execution of the merger agreement (the board having been provided with and asked to approve the merger agreement and disclosure schedules in final execution form, including copies marked to show changes from the most recent drafts approved by the board). And given the lack of clarity in the <em>Activision</em> opinion as to whether a disclosure letter is an essential part of the merger agreement, merger parties may wish to consider including a summary of the merger agreement in the notice of meeting itself in addition to the proxy statement.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{7BCE5529-1151-45D3-BC1B-E53F70183CE4}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/03/schreck-discusses-challenges-to-seal-extensions-in-false-claims-act-casesSchreck Discusses Challenges to Seal Extensions in False Claims Act CasesWhite Collar Defense &amp; Investigations partner Debra Schreck was quoted in the <em>Bloomberg Law</em> article, &ldquo;Extending Secrecy in Whistleblower Probes Divides DOJ, Judges.&rdquo;Tue, 12 Mar 2024 00:00:00 -0500<p>White Collar Defense &amp; Investigations partner Debra Schreck was quoted in the<em> Bloomberg Law</em> article, &ldquo;Extending Secrecy in Whistleblower Probes Divides DOJ, Judges.&rdquo; The article discusses conflicting views on the practice of the U.S. Department of Justice (DOJ) to seek repeated extensions of the seal applicable to False Claims Act (FCA) cases.</p> <p>The FCA itself provides that complaints filed under the act are to remain under seal for 60 days while the government investigates. The government may, for good cause shown, ask the court for an extension of the time during which the complaint remains under seal. Those requests by the government for extensions are quite common, often prolonging investigations for months, if not years. Recent decisions have challenged the government practice of seeking multiple seal extensions, highlighting the often competing interests of parties (and courts) on the matter. Schreck told <em>Bloomberg Law</em> that she expects to see &ldquo;more challenges to government requests for seemingly indefinite seal extensions&mdash;likely more in connection with summary judgment decisions or decisions challenging trial verdicts,&rdquo; along the lines of a recent Fifth Circuit decision which reduced a company&rsquo;s fraud penalty by more than half on the grounds that DOJ took too long before joining the lawsuit.</p> <p><a rel="noopener noreferrer" href="https://www.bloomberglaw.com/product/blaw/bloombergterminalnews/bloomberg-terminal-news/S9THTPDWX2PS?criteria_id=eff4fcd1237dab9917539c02d4dc3c5a" target="_blank">Read the full article</a> (subscription required).</p>{745A02ED-05C2-4569-A900-12D6575543EE}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/03/johnson-and-hawke-discuss-secs-final-climate-related-disclosure-ruleJohnson and Hawke Discuss SEC’s Final Climate-Related Disclosure RuleCorporate &amp; Finance partner and co-head of the firm&rsquo;s Capital Markets practice Teresa Johnson and Securities Enforcement Litigation partner Daniel Hawke were quoted in recent articles discussing the U.S. Securities and Exchange Commission&rsquo;s (SEC) climate-related disclosure rule.Tue, 12 Mar 2024 00:00:00 -0500<p>Corporate &amp; Finance partner and co-head of the firm&rsquo;s Capital Markets practice Teresa Johnson and Securities Enforcement Litigation partner Daniel Hawke were quoted in recent articles discussing the U.S. Securities and Exchange Commission&rsquo;s (SEC) climate-related disclosure rule. The rule, which was recently approved by the SEC, will require large public companies to provide climate-related information in their registration statements and annual reports, as well as to authorize the disclosure of climate-related risks that have a material impact on their business strategy, operations, or financial condition.</p> <p>The final approved rule ultimately omitted its original requirement for U.S.-listed companies to track and report Scope 3 emissions &mdash; which include greenhouse gases released in the atmosphere from a company's suppliers and customers, making up a significant portion of their carbon footprint &mdash; because of opposition from officials and groups such as the U.S. Chamber of Commerce. Hawke, a former senior officer in the SEC&rsquo;s Division of Enforcement, told <em>POLITICO Pro</em> that Scope 3 was &ldquo;highly debated inside the agency and it was just not going to work because of the controversy.&rdquo; </p> <p>Addressing concerns from environmental activists and progressive lawmakers regarding the rule&rsquo;s final form, Johnson told <em>Compliance Week</em> that although the rule &ldquo;has been significantly watered down from the original proposal, make no mistake: this is a Shakespearean sea change in climate-related disclosure for public companies.&rdquo; She added that &ldquo;issuers will need to materially bolster existing internal reporting processes to check and validate the climate-related information that now must be reported.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://subscriber.politicopro.com/article/2024/03/progressives-left-to-pick-up-the-pieces-after-sec-waters-down-climate-rule-00145751" target="_blank">Read the full <em>POLITICO Pro</em> article: &ldquo;Progressives left to pick up the pieces after SEC waters down climate rule&rdquo;</a> (subscription required).</p> <p><a rel="noopener noreferrer" href="https://www.complianceweek.com/regulatory-policy/concessions-cant-save-cursed-sec-climate-disclosure-rule-from-scrutiny/34455.article" target="_blank">Read the full <em>Compliance Week</em> article: &ldquo;Concessions can&rsquo;t save &lsquo;cursed&rsquo; SEC climate disclosure rule from scrutiny&rdquo;</a> (subscription required).</p>{F8BD5519-FFEF-4FD1-8524-B36BBA740A77}https://www.arnoldporter.com/en/perspectives/publications/2024/03/uk-economic-crime-group-enforcement-updateKathleen Harrishttps://www.arnoldporter.com/en/people/h/harris-kathleenkathleen.harris@arnoldporter.comSean Curranhttps://www.arnoldporter.com/en/people/c/curran-seansean.curran@arnoldporter.comMelissa Dameshttps://www.arnoldporter.com/en/people/d/dames-melissamelissa.dames@arnoldporter.comMaya Paunranahttps://www.arnoldporter.com/en/people/p/paunrana-mayamaya.paunrana@arnoldporter.comStephanie Allenhttps://www.arnoldporter.com/en/people/a/allen-stephaniestephanie.allen@arnoldporter.comUK Economic Crime Group: Enforcement UpdateIn this edition of the UK Enforcement newsletter, we provide an update on recent economic crime matters in the UK. We consider anticipated legislative and regulatory updates, as well as recent actions from the Serious Fraud Office (SFO), the Financial Conduct Authority (FCA), and the Financial Reporting Council (FRC).Tue, 12 Mar 2024 00:00:00 -0500<h2>Executive Summary</h2> <p>In this edition of the UK Enforcement newsletter, we provide an update on recent economic crime matters in the UK. We consider anticipated legislative and regulatory updates, as well as recent actions from the Serious Fraud Office (SFO), the Financial Conduct Authority (FCA), and the Financial Reporting Council (FRC).</p> <p>With respect to legislative and regulatory reform and enforcement actions, we consider the following:</p> <ul> <li>An update on the evolving SFO under new Director Nick Ephgrave</li> <li>The FCA adding Metro Bank to its financial crime watchlist over online account concerns</li> <li>The first year of the Public Sector Fraud Authority (PSFA)</li> <li>Continuing uncertainty over the future of the FRC</li> <li>Recent regulatory developments within the UK sanctions regime</li> <li>The ownership and control test under UK sanctions&rsquo; legislation</li> </ul> <p>As part of our social commentary, we consider a recent report from the charity Appeal on the darker subtext to the introduction of &ldquo;<em>majority verdicts</em>&rdquo; in UK criminal cases in 1967.</p> <h2>Update on the Evolving SFO Under New Director Nick Ephgrave</h2> <p>In his speech on February 13, recently appointed SFO Director, Nick Ephgrave, indicated that the SFO will be taking a bolder, more ambitious and pragmatic approach to enforcement. Throughout his speech, Ephgrave used emotive language to emphasize his &ldquo;<em>visceral reaction</em>&rdquo; to the &ldquo;<em>misdeeds of large corporations</em>&rdquo; and his determination to bring justice &ldquo;<em>securely and quickly</em>.&rdquo; This reoccurring theme of speed was at the heart of his speech, along with a drive to reset the SFO&rsquo;s reputation and change the critical narrative which has surrounded the SFO in recent years. </p> <p>Ephgrave made clear that he intends to focus on justice for ordinary hardworking UK people, not just &ldquo;<em>high-rolling</em>&rdquo; investors and blue chip companies. He also considers the UK itself as a victim of financial crime, with the SFO working to protect the UK&rsquo;s economy and reputation.</p> <p>This focus on the UK was echoed throughout Ephgrave&rsquo;s speech and raised questions regarding whether the SFO will be prioritizing UK-based victims. For example, Ephgrave highlighted predominantly UK-centric success cases in his speech, such as the charges with respect to Patisserie Valerie, the prosecution of Glencore, and the Airbus deferred prosecution agreement.</p> <p>While emphasizing the successes of the SFO, Ephgrave acknowledged there are also serious challenges, including the slowness of SFO investigations, &ldquo;<em>defendants with big pockets</em>,&rdquo; tracing of money moved all around the globe, and extracting data from &ldquo;<em>far-flung jurisdictions</em>.&rdquo; In particular, Ephgrave flagged the disclosure burden and how it &ldquo;<em>gobbles up around 25%</em>&rdquo; of the SFO operational budget. In this regard, Ephgrave has been advocating for greater investment in the SFO, highlighting that over the last five years the SFO generated &pound;1.1 billion for HM Treasury, equating to a 317% return on investment. </p> <p>In his speech, Ephgrave also reflected on the fact that time spent sifting through large amounts of disclosure data increases the time between investigation and prosecutions, resulting in evidence degrading, memories weakening, a reduction in willingness of individuals to cooperate and, ultimately, fewer successful prosecutions. While Ephgrave did note that the SFO is already piloting new disclosure AI to reduce these costs and speed-up data review, he is nevertheless striving for broader reform to the SFO&rsquo;s practices in order to achieve timely prosecutions. </p> <p>In practical terms, Ephgrave plans to overhaul the SFO&rsquo;s shortcomings and repair its reputation by conducting more dawn raids and swifter action, with prosecutions under the new Economic Crime and Corporate Transparency Act and greater collaboration and resource sharing between the SFO and other agencies such as the National Crime Agency (NCA), the National Economic Crime Centre (NECC), and the police. </p> <p>We are already seeing that Ephgrave&rsquo;s rhetoric may have some substance behind it, with the SFO having carried out three dawn raids on February 21, 2024 alone. The SFO&rsquo;s joint head of fraud, bribery, and corruption, Sara Chouraqui, explained that Ephgrave&rsquo;s determination to rapidly pursue more cases has already led the agency to begin recruiting over 100-150 new investigators and prosecutors, as well as analysts, accountants, and other staff, which would increase its full-time staff by a third. </p> <p>However, Ephgrave&rsquo;s ambitions do not end there. Ephgrave is pushing for the UK to follow in the footsteps of the U.S., proposing key legislative developments, such as the incentivization of whistle blowing in order to facilitate prosecutions. Likewise, Ephgrave has suggested cultural changes to enforcement practices, including greater use of the Serious Organized Crime and Police Act, theorizing that if a reasonable reduction in a defendant&rsquo;s sentence is offered in exchange for evidence, there will be greater witness cooperation, more key evidence obtained, and, consequently, faster prosecutions. </p> <p>Whether Ephgrave will be successful in his attempt to usher in a new era for the SFO is yet to be seen, but without a doubt, Ephgrave&rsquo;s tenure marks a strong desire to depart from the status quo of predecessor Lisa Osofsky. That said, while Ephgrave&rsquo;s goals may be noble, unless there is significant legislative development, particularly in relation to prosecuting senior executives at large institutions, it seems unlikely that there will be any game-changing developments in the SFO&rsquo;s ability to battle serious fraud and bribery in the short term, especially given the increasingly complex scenarios in which these offences occur.</p> <h2> Metro Bank Added to the FCA Watchlist </h2> <p> Metro Bank PLC has been added to the FCA&rsquo;s financial crime watchlist (Watchlist) of regulated financial institutions, which pose the greatest risk to the FCA&rsquo;s statutory objective of ensuring that the UK financial markets function well and with integrity in the interests of consumers. </p> <p>The FCA&rsquo;s Watchlist is not publicly available; Metro Bank&rsquo;s inclusion was reported by the bank itself as part of a prospectus for a refinancing transaction in November 2023. Metro Bank explained that its inclusion on the Watchlist is in relation to financial crime compliance, with the FCA reviewing the ongoing management of financial crime risk at the bank, as well as specific concerns about the effectiveness of financial crime controls in relation to online accounts. The bank noted in the disclosure that some aspects of its anti-money laundering, anti-bribery and corruption, and sanctions policies did not fully eliminate the risks posed by third parties. </p> <p>Being on the Watchlist will mean enhanced supervision from the FCA and reporting requirements, with the bank being required to address any specific concerns from the FCA. We can expect that this will mean review and strengthening of financial crime controls within Metro Bank. </p> <p>This also serves as a timely reminder to other financial institutions of the necessity of keeping policies and procedures, as well as their implementation, under review and ensuring that evolving risks are identified, with systems and controls being enhanced as necessary. The FCA&rsquo;s continued focus on policies and procedures intended to combat financial crime is unsurprising in light of the cost of such crime to consumers and to the integrity of the financial sector more widely.</p> <h2> The Results of the PSFA&rsquo;s First Year in Operation</h2> <p> The Public Sector Fraud Authority has been in operation for over a year and a half, having been formed in August 2022 to manage and reduce fraud against the public sector, primarily against the context of the pandemic. The PSFA Annual Report for 2022-2023 (the Report) recorded that the PSFA prevented and recovered &pound;311 million of taxpayer funds from fraud, significantly exceeding its target of &pound;180 million, and can therefore claim to have successfully delivered on its objective. Notwithstanding its achievements in its first year, fraud remains an epidemic in the UK, and the PSFA will surely be aiming to continue with this momentum, in the hopes of achieving long-lasting and effective results. </p> <p>The PSFA&rsquo;s savings to the taxpayer, derived in part from its Covid-19 Loan Schemes Fraud Analytics Programme, along with the detection, prevention, and recovery of fraud within the Bounce Back Loan Scheme, alone saved taxpayers over &pound;99 million. The Report highlighted that the &ldquo;<em>dissolution objections</em>&rdquo; process, which allowed the PSFA to prevent companies with outstanding Covid-19 debt from being removed or struck off the Companies House Register, saved taxpayers &pound;40.5 million. The PSFA also attributed the taxpayer savings to the National Fraud Initiative, a data-based project which carries out data-matching exercises in collaboration with over 1,100 public bodies to identify potential fraud. </p> <p>With a core component of the agency&rsquo;s mission being the modernization of the public sector&rsquo;s fraud and error response through the use of cutting-edge technology and data, earlier this year the PSFA formed a &pound;4 million partnership with Quantexa Ltd, a British technology unicorn, to deliver the Single Network Analytics Platform (SNAP). SNAP will aim to reduce fraud involving UK-registered companies by consolidating and reviewing public sector data for suspicious activity. The PSFA announced that Companies House is SNAP&rsquo;s first user, although the PSFA&rsquo;s 2023-2024 Delivery Plan highlights that this year it intends to &ldquo;<em>create and deploy</em>&rdquo; SNAP, as well as &ldquo;<em>onboard three public bodies and create five test models</em>.&rdquo;</p> <p>The Delivery Plan sets out 27 objectives for the coming year, many of which point toward data-led initiatives for the purposes of gathering and sharing intelligence between public bodies to counter fraud. Interestingly, the 2023-2024 Delivery Plan commits only to a slightly increased taxpayer savings target of &pound;185 million, despite the PSFA&rsquo;s substantially exceeded target in 2022-2023 and its own estimate that at least &pound;33.2 billion of taxpayer funds are subject to fraud and error each year. Given the PSFA&rsquo;s intended deployment of enhanced technological tools to modernize its approach to tackling fraud, it perhaps requires the time to develop its capabilities and ensure its measures are adequately sophisticated and responsive to the ever-evolving risks of fraud.</p> <h2> Continuing Uncertainty Over the Future of the FRC</h2> <p> We have written previously about potential delays with respect to the Financial Reporting Council&rsquo;s proposed transition to becoming the Auditing, Reporting and Governance Authority (ARGA), and these delays have indeed made their way into 2024. As it stands, the timing of the proposed transition of the auditing body is entirely uncertain, as it relies upon the passing of new legislation that is yet to be announced. However, despite these delays, the FRC has continued to enhance and build upon its strategy to set high standards of corporate governance, reporting, and auditing in the UK, and to hold to account those responsible for delivering them. </p> <p>In December 2023, the FRC announced areas of supervisory focus for 2024-2025. The FRC details priority sectors for selection of company accounts and audits, which include construction, food production, gas, metals, and mining. With respect to these priority areas, the FRC stated its intention to gear its reviews and quality inspections towards, among other areas, climate and environmental risks. It will be interesting to see the outcome of this focus, particularly regarding how and whether the FRC takes enforcement action against climate and environmental failings, and whether it works alongside other regulatory bodies to do so. </p> <p>In January 2024, the FRC published its Corporate Governance Code 2024 on which it originally consulted in May 2023. The response to the consultation was varied, with many concerned that initial proposals for a more robust governance framework would be overly burdensome for companies, such as widely drafted proposals with respect to a company&rsquo;s internal controls. In November 2023, following various significant enforcement actions that we discussed in our previous <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/10/uk-economic-crime-group-enforcement-update">newsletter</a>, the UK&rsquo;s Secretary of State for Business and Trade published a new remit letter for the FRC setting out its core responsibility to enhance public trust and confidence in the quality of auditing, corporate reporting, and governance while supporting the UK&rsquo;s economic growth and international competitiveness.</p> <p>The FRC embraced these views and has outlined targeted objectives in its code, with principles designed (among others) to promote greater individual responsibility for board members. While the FRC currently has no power to enforce against individuals, there is a clear shift in its approach to ensuring individuals continue to remain accountable, and this topic is due to be considered as part of ongoing discussions related to the direction in which the FRC continues to evolve and transition into ARGA. </p> <p>Finally, the FRC has continued with enforcement actions, including the most recent with respect to the statutory audit of M&amp;C Saatchi plc, for which KPMG was fined &pound;1.5 million, along with a smaller fine for one of its audit partners. As has been a theme with recent fines, this investigation found that there was a failure to audit with sufficient professional skepticism.</p> <p>It is clear that the FRC is continuing to focus on corporate governance, reporting, and auditing in the UK. Regardless of the uncertainty of its transition into ARGA, it seems that the FRC is striving forward.</p> <h2> Regulatory Developments Relating to the UK Sanctions Regime</h2> <p> In recent months, the UK has continued to push forward in collaboration with its allies, including the U.S. and EU, with the introduction of further sanctions by way of amendments to the Russia (Sanctions) (EU Exit) Regulations 2019. With no end to hostilities in sight and the recent two-year anniversary of the Ukraine invasion, it can only be expected that the evolution of the UK sanctions regime will continue in order to target other sectors and industries that are key to the Russian war effort.</p> <p>We have seen further trade and financial sanctions, with amendments to the list of designated persons, as well as bans on the import of diamonds and certain metals and strengthening of other measures that were already in place. Further legislative amendments have also imposed additional reporting requirements on designated persons in the UK or who are UK nationals, requiring them to disclose details of their assets.</p> <p>In order to enforce trade sanctions more effectively, the government has created the Office of Trade Sanctions Implementation (OTSI). This new regulator is already working alongside OFSI, conducting investigations into trade sanctions violations and issuing civil fines, with more serious, criminal matters still being referred to HM Revenue and Customs for prosecution. It is hoped that with a regulator purely focused on trade sanctions, OTSI can mirror the success of OFSI in enforcing the sanctions, as well as engaging with industry and providing guidance on trade sanctions.</p> <p>We have also seen increased cooperation between regulators within the UK. The FCA and OFSI have published a revised Memorandum of Understanding, setting out their arrangements for cooperation and exchange of information in order to ensure effective enforcement, particularly with respect to financial sanctions that impact FCA-regulated financial institutions.</p> <p>In December 2023, the NCA and NECC published a Red Alert on exporting high risk goods, in conjunction with the Joint Money Laundering Intelligence Taskforce and OFSI. The Red Alert highlights to UK businesses the common techniques that are being used to evade or circumvent sanctions, and details red flags that everyone should be vigilant for. This serves as a reminder of the broader elements of the sanctions regulations, covering circumvention and facilitation, which can be more difficult to detect than straightforward breaches of the prohibitions. This is an area of interest for enforcement and something that all companies need to be cognizant of preventing.</p> <h2> The Ownership and Control Test Under UK Sanctions&rsquo; Legislation</h2> <p> As we reported in our <a href="https://www.arnoldporter.com/en/perspectives/blogs/enforcement-edge/2023/10/russian-companies-designated-persons">article</a> in October 2023, in <em>Mints and others v. PJSC National Bank Trust and another </em>[2023] EWCA Civ. 1132, the Court of Appeal opined that Vladimir Putin, as President of Russia and the &ldquo;<em>apex of a command economy</em>,&rdquo; could be deemed to control everything in Russia. Adoption of this broad definition of ownership and control would significantly expand the scope of the UK&rsquo;s Russia sanctions, making potentially every company in Russia a designated person under the UK regime as a result of Mr. Putin&rsquo;s personal designation in the UK.<br /> Since that time, we have had a binding court judgment and guidance from OFSI, which have negated this broad reading of the legislation and returned us to a narrower definition. Mr. Mints and his two sons have also now been granted leave to appeal the decision to the Supreme Court. </p> <p>First, the judgment in <em>Litasco SA v. Der Mond Oil and another</em> [2023] EWHC 2866 (Comm) considered the judicial commentary in <em>Mints</em>. An issue in this case related to whether Der Mond Oil was prohibited under the sanctions regulations from paying Litasco. Litasco (a Swiss company) is not on the designated persons list, and neither is its parent company, Lukoil PJSC (a Russian oil company). However, the founder and former CEO of Lukoil, Mr. Alekperov, is a designated person, although he resigned from Lukoil PJSC shortly after his designation. Der Mond Oil also sought to rely upon the judicial commentary in <em>Mints</em> and identified Mr. Putin&rsquo;s designation as a further reason for Litasco to be designated by virtue of being owned or controlled by a designated person.</p> <p>Mr. Justice Foxton found that Litasco is not a designated person by virtue of the ownership or control asserted by either Mr. Alekperov or Mr. Putin. With respect to Mr. Alexperov, the fact that he had resigned from the board shortly after being designated and only held an 8.5% shareholding in Lukoil meant that he did not own or control the business within the sanctions regulations. With respect to Mr. Putin, Mr. Justice Foxton was able to distinguish the judicial commentary in <em>Mints</em>, considering the particular circumstances of each relevant entity. Because Lukoil is not a state-owned body and there was no evidence to suggest that it functioned as such, the judge was able to conclude that there was no arguable case that Mr. Putin controlled Litasco.</p> <p>This is the first binding decision of a UK court on the issue of ownership and control under the UK sanctions regulations (as the points raised in <em>Mints</em> were merely judicial commentary). The decision emphasizes that the question of ownership and control should be considered by way of a fact-specific approach.</p> <p>Several days after the issuance of this judgment, OFSI and the Foreign, Commonwealth &amp; Development Office (FCDO) issued joint guidance looking at the same issue of ownership and control under the sanctions legislation. OFSI and the FCDO similarly emphasized that ownership and control needed a fact-specific consideration. They also emphasized that there needed to be further evidence of control, over and above a company merely being incorporated in a jurisdiction where a designated person is a public official who has &ldquo;<em>a leading role in economic policy or decision making</em>.&rdquo;</p> <p>While the judgment in <em>Litasco </em>and the guidance from OFSI and the FCDO provide some comfort to companies seeking to identify whether counterparties are designated persons, this has not resolved many of the points raised in <em>Mints</em>. We will wait to see whether the government decides to amend the sanctions legislation itself to provide further clarity on the ownership and control test.</p> <h2> Social Commentary</h2> <h3> The Darker Subtext to the Introduction of &ldquo;<em>Majority Verdicts</em>&rdquo; in UK Criminal Cases in 1967</h3> <p> In January 2024, the charity Appeal published a report into the motivations behind the introduction of majority jury verdicts in the UK by the Criminal Justice Act 1967. The abolishment of the requirement for a unanimous jury verdict in criminal cases was a radical departure from a long-standing tenet of the justice system, and the report is the first to assess the reasons for this shift. The report concluded that the shift, in part, was motivated by a desire to dilute the influence of minority ethnic people and laboring classes serving on a jury. </p> <p>At the time of its introduction, it was widely perceived that the &ldquo;<em>majority verdict</em>&rdquo; direction would help to eliminate potential individual jury bias and subsequent &ldquo;<em>nobbling</em>&rdquo; (corruption). However, a review of governmental files and other archival materials contextualized the decision against the socio-political climate of the time, revealing public anxieties about immigration and white disenfranchisement. As such, there was a widely held perception that an enlarged pool of eligible jurors would lead to a decline in the &ldquo;<em>caliber</em>&rdquo; of jurors. </p> <p>Today, approximately 15% of all convictions are the result of a majority verdict, which means that at least one, and up to two, individuals on the jury maintained reasonable doubt as to the defendant&rsquo;s guilt. This differs from the U.S., where majority verdicts were only permitted in two states (Louisiana and Oregon) until the U.S. Supreme Court decision of <em>Ramas v. Louisiana</em> (2020) which outlawed majority verdicts for serious crimes amid evidence of their racist origins. Although the UK introduced the safeguard of minimum deliberation times against swift majority verdicts being reached, no research has been carried out to explore whether a hung jury is more likely to be racially mixed, and whether racially diverse juries have in fact made reaching majority verdicts more difficult.</p> <p>The study is hopeful that the questions it has raised will instigate better data gathering and analysis with respect to majority verdicts in England and Wales. However, it is clear that there is currently a deep lack of understanding as to the reasons behind the abolishment of a law that was deeply entrenched in the justice system for centuries, and there remains much room for further research, critical analysis, and scrutiny of the system.</p> <p><span style="font-size: small;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Newsletter is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{8A5C3ECF-3146-4164-BC8F-7B0C18C749A0}https://www.arnoldporter.com/en/perspectives/advisories/2024/03/white-house-strike-force-on-unfair-and-illegal-pricingAndre Geverolahttps://www.arnoldporter.com/en/people/g/geverola-andreandre.geverola@arnoldporter.comAnora Wanghttps://www.arnoldporter.com/en/people/w/wang-anoraanora.wang@arnoldporter.comPrice Police: White House Announces Strike Force on Unfair and Illegal Pricing<p>On March 5, U.S. President Joe Biden announced a &ldquo;Strike Force on Unfair and Illegal Pricing,&rdquo; a new multi-agency effort led by the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice (DOJ). According to the White House, the Strike Force will &ldquo;root out and stop illegal corporate behavior that hikes prices on American families through anti-competitive, unfair, deceptive, or fraudulent business practices.&rdquo; </p>Mon, 11 Mar 2024 00:00:00 -0500<p>On March 5, U.S. President Joe Biden announced a &ldquo;Strike Force on Unfair and Illegal Pricing,&rdquo; a new multi-agency effort led by the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice (DOJ). According to the White House, the Strike Force will &ldquo;root out and stop illegal corporate behavior that hikes prices on American families through anti-competitive, unfair, deceptive, or fraudulent business practices.&rdquo;[[N:Press Release, The White House, <a rel="noopener noreferrer" href="https://www.whitehouse.gov/briefing-room/statements-releases/2024/03/06/readout-of-the-sixth-meeting-of-the-white-house-competition-council/" target="_blank">Readout of the Sixth Meeting of the White House Competition Council</a> (Mar. 6, 2024).]]</p> <p>Importantly, the announcement calls out specific industries that will be under Strike Force scrutiny:</p> <ul> <li>Prescription drugs and health care</li> <li>Food and grocery</li> <li>Housing</li> <li>Financial services</li> </ul> <p>This announcement comes on the heels of aggressive FTC and DOJ antitrust enforcement efforts, including the FTC&rsquo;s expanded interpretation of unfair methods of competition under Section 5 of the FTC Act and DOJ&rsquo;s revival of the long-dormant practice of criminally prosecuting certain monopolization violations under Section 2 of the Sherman Act.</p> <p>Notably, DOJ has already scrutinized the identified industries. For example, as part of a deferred prosecution agreement with a generic pharmaceutical company in 2023, DOJ imposed a penalty of US$225 million and required the company to divest a product line to address allegations of collusion in drug pricing.[[N:Press Release No. 23-894, U.S. Dep&rsquo;t of Just., <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/major-generic-drug-companies-pay-over-quarter-billion-dollars-resolve-price-fixing-charges" target="_blank">Major Generic Drug Companies to Pay Over Quarter of a Billion Dollars to Resolve Price-Fixing Charges and Divest Key Drug at the Center of Their Conspiracy</a> (Aug. 21, 2023).]] Similarly, DOJ has brought multiple civil and criminal cases involving the agricultural industry &mdash; one of those cases resulted in a criminal guilty plea with a fine exceeding US$100 million.[[N:Press Release No. 21-172, U.S. Dep&rsquo;t of Just., <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/one-nation-s-largest-chicken-producers-pleads-guilty-price-fixing-and-sentenced-107-million#:~:text=Pilgrim's%20Pride%20Corporation%20(Pilgrim's)%2C,products%2C%20the%20Department%20of%20Justice" target="_blank">One of the Nation&rsquo;s Largest Chicken Producers Pleads Guilty to Price Fixing and is Sentenced to a $107 Million Criminal Fine</a> (Feb. 23, 2021).]]</p> <p>More recently, DOJ has submitted statements of interest in private litigation involving the apartment rental and real estate brokerage industries.[[N:<a rel="noopener noreferrer" href="https://www.justice.gov/d9/2024-03/420301.pdf" target="_blank">Statement of Interest of The United States</a>, <em>McKenna Duffy v. Yardi Systems, Inc., et al.</em>, No. 2:23-cv-01391-RSL (W.D. Wash. Mar. 1, 2024); <a rel="noopener noreferrer" href="https://www.justice.gov/d9/2024-02/420087.pdf" target="_blank">Statement of Interest of The United States</a>, <em>Jennifer Nosalek, et al. v. MLS Property Information Network, Inc., et al.</em>, No. 1:20-cv-12244-PBS (D. Mass. Feb. 15, 2024).]] As President Biden emphasized in his State of the Union Address on March 7, &ldquo;[f]or millions of renters, we&rsquo;re cracking down on big landlords &hellip; who break antitrust laws by price-fixing and driving up rents.&rdquo;[[N:<a rel="noopener noreferrer" href="https://www.nytimes.com/2024/03/08/us/politics/state-of-the-union-transcript-biden.html" target="_blank">Full Transcript of Biden&rsquo;s State of the Union Speech</a>, N.Y. Times (Mar. 8, 2024).]]</p> <p>For its part, in February 2024, the FTC signaled further scrutiny of health-care markets, requesting public comment on &ldquo;[w]hether and to what extent [drug] manufacturers, GPOs, and drug wholesalers are complying with their legal obligations under Section 3 of the Clayton Act and the Robinson-Patman Act.&rdquo;[[N:Press Release, Fed. Trade Comm&rsquo;n, <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2024/02/ftc-hhs-seek-public-comment-generic-drug-shortages-competition-amongst-powerful-middlemen" target="_blank">FTC, HHS Seek Public Comment on Generic Drug Shortages and Competition Amongst Powerful Middlemen</a> (Feb. 14, 2024).]] This follows a June 2022 FTC policy statement declaring that &ldquo;paying or accepting rebates or fees in exchange for excluding lower cost drugs may constitute commercial bribery under Section 2(c) of the Robinson-Patman Act.&rdquo;[[N:Fed. Trade Comm&rsquo;n, <a rel="noopener noreferrer" href="https://www.ftc.gov/legal-library/browse/policy-statement-federal-trade-commission-rebates-fees-exchange-excluding-lower-cost-drug-products" target="_blank">Policy Statement of the Federal Trade Commission on Rebates and Fees in Exchange for Excluding Lower-Cost Drug Products</a>, 5 (June 16, 2021).]]</p> <p>Under the Biden administration&rsquo;s whole-of-government approach, scrutiny of pricing practices will not be limited to the FTC and DOJ.[[N:Exec. Order No. 14036, 86 FR 36987 (2021), <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2021/07/14/2021-15069/promoting-competition-in-the-american-economy" target="_blank">Executive Order on Promoting Competition in the American Economy</a>.]] The Strike Force will supplement the FTC&rsquo;s and DOJ&rsquo;s preexisting enforcement efforts with an expanding group of federal regulatory agencies &mdash; including the Departments of Agriculture, Health and Human Services, and Transportation, along with the Securities and Exchange Commission, the Federal Communication Commission, and the Consumer Financial Protection Bureau &mdash; further increasing regulatory and enforcement risk for companies.</p> <p>For example, on the same day as the Strike Force announcement, USDA announced that it had finalized a rule under the Packers and Stockyards Act of 1921 that, among other things, prohibits certain contracting practices. According to USDA, the new rule is designed to &ldquo;help producers and growers that have suffered from increasingly consolidated markets over the last 30 years by enhancing market integrity and ensuring fair access to economic opportunities.&rdquo;[[N:Press Release No. 0042.24, U.S. Dep&rsquo;t of Agric., <a rel="noopener noreferrer" href="https://www.usda.gov/media/press-releases/2024/03/05/usda-announces-next-major-step-promoting-competition-agriculture" target="_blank">USDA Announces Next Major Step in Promoting Competition in Agriculture and Advancing Economic Opportunity and Fairness for Growers</a> (Mar. 5, 2024).]]</p> <p>The Biden administration likewise has focused its attention on prices for financial services. On the same day as the Strike Force announcement, the Consumer Financial Protection Bureau announced that it had finalized a rule to reduce credit card late fees from the current average of $32 down to $8 in order to &ldquo;cut excessive credit card late fees by closing a loophole exploited by large card issuers.&rdquo;[[N:Press Release, Consumer Fin. Prot. Bureau, <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-bans-excessive-credit-card-late-fees-lowers-typical-fee-from-32-to-8/" target="_blank">CFPB Bans Excessive Credit Card Late Fees, Lowers Typical Fee from $32 to $8</a> (Mar. 5, 2024); Press Release, The White House, <a rel="noopener noreferrer" href="https://www.whitehouse.gov/briefing-room/statements-releases/2024/03/05/fact-sheet-president-biden-announces-new-actions-to-lower-costs-for-americans-by-fighting-corporate-rip-offs/" target="_blank">FACT SHEET: President Biden Announces New Actions to Lower Costs for Americans by Fighting Corporate Rip-Offs</a> (Mar. 5, 2024).]]</p> <p>Although the White House announcement is short on details regarding the structure and operations of the Strike Force, this multi-agency model echoes DOJ&rsquo;s highly successful Procurement Collusion Strike Force (PCSF), an interagency effort led by the Antitrust Division to combat collusion and fraud in government procurement. Since its inception in November 2019, the PCSF has continued to grow in agency membership, and has opened more than 100 criminal investigations and trained more than 31,000 government personnel to detect antitrust offenses in government contracting. And in that time, the PCSF has investigated and prosecuted over 65 companies and individuals involving over US$500 million worth of government contracts.[[N:U.S. Dep&rsquo;t of Just.: Antitrust Div., <a rel="noopener noreferrer" href="https://www.justice.gov/atr/procurement-collusion-strike-force" target="_blank">Procurement Collusion Strike Force</a> (last visited Mar. 8, 2024).]]</p> <p>While there has been criticism from business groups that this announcement is &ldquo;an attempt to return to the failed policy of government price controls which President Nixon tried fifty years ago,&rdquo;[[N:Press Release, U.S. Chamber of Commerce, <a rel="noopener noreferrer" href="https://www.uschamber.com/finance/antitrust/u-s-chamber-white-house-strike-force-an-attempt-to-return-to-government-price-controls" target="_blank">U.S Chamber: White House Strike Force an Attempt to Return to Government Price Controls</a> (Mar. 5, 2024).]] businesses must nevertheless manage legal risk arising from the Strike Force. History has shown that agency action often follows presidential announcements. Therefore, companies &mdash; especially those in the identified industries &mdash; should review their business practices for compliance with antitrust and competition laws, as well as consumer protection and competition rules and regulations issued by relevant government agencies.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{F56019D5-693D-4208-86A0-E962DD7F36C2}https://www.arnoldporter.com/en/perspectives/advisories/2024/03/sec-adopts-climate-risk-disclosure-rulesSara Adlerhttps://www.arnoldporter.com/en/people/a/adler-sarasara.adler@arnoldporter.comRobert C. Azarowhttps://www.arnoldporter.com/en/people/a/azarow-robert-crobert.azarow@arnoldporter.comJoel I. Greenberghttps://www.arnoldporter.com/en/people/g/greenberg-joel-ijoel.greenberg@arnoldporter.comTeresa (Terry) L. Johnsonhttps://www.arnoldporter.com/en/people/j/johnson-teresa-lteresa.johnson@arnoldporter.comErik Walshhttps://www.arnoldporter.com/en/people/w/walsh-erikerik.walsh@arnoldporter.comPaul Nabhanhttps://www.arnoldporter.com/en/people/n/nabhan-paulpaul.nabhan@arnoldporter.comYuvaraj Sivalingamhttps://www.arnoldporter.com/en/people/s/sivalingam-yuvarajyuvaraj.sivalingam@arnoldporter.comSEC Adopts Climate Risk Disclosure RulesOn March 6, the SEC adopted long-awaited&nbsp;<a rel="noopener noreferrer" href="https://www.sec.gov/files/rules/final/2024/33-11275.pdf" target="_blank">rules</a>&nbsp;requiring registrants to provide certain climate-related information in their registration statements and annual reports.Mon, 11 Mar 2024 00:00:00 -0500<p>On March 6, the SEC adopted long-awaited <a rel="noopener noreferrer" href="https://www.sec.gov/files/rules/final/2024/33-11275.pdf" target="_blank">rules</a> requiring registrants to provide certain climate-related information in their registration statements and annual reports.[[N: The rules amend Regulation S-X, Regulation S-K, Regulation S-T, Securities Act Rule 436, and Forms S-1, S-3, S-11, S-4, F-1, F-3, and F-4, and Exchange Act Forms 10, 20-F, 10-K, and 10-Q.&nbsp;The list of affected forms does not include Schedule B or Form 18, the forms used by foreign sovereign governments with respect to debt securities.]] Although the final rules include more relaxed disclosure requirements than originally proposed, they still require extensive disclosure of (1) information about a registrant&rsquo;s material climate-related risks; (2) the governance and management of such risks; (3) disclosure, when material, of a registrant&rsquo;s greenhouse gas (GHG) emissions for accelerated filers (AF) and large accelerated filers (LAFs); and (4) specified disclosures related to severe weather events and other natural conditions in a note to a registrant&rsquo;s audited financial statements. The adopting release notes that the new requirements will provide &ldquo;more complete and decision-useful information about the impacts of climate-related risks on registrants, improving the consistency, comparability, and reliability of climate-related information for investors.&rdquo; The new rules are meant to augment the SEC&rsquo;s 2010 <a rel="noopener noreferrer" href="https://www.sec.gov/files/rules/interp/2010/33-9106.pdf" target="_blank">interpretative guidance</a> on climate-related disclosures, which directs registrants to consider whether climate-related risks must be disclosed in the Description of Business, Risk Factors, Legal Proceedings, and/or MD&amp;A portions of their filings. The rules are modeled in part on the Task Force on Climate Related Financial Disclosures framework and the GHG Protocol&rsquo;s concepts of scopes and related methodology, and are summarized below.</p> <h2>Applicability</h2> <p>The rules, which create new subpart 1500 of Regulation S-K and Article 14 of Regulation S-X, apply to registrants with Exchange Act Section 13(a) or Section 15(d) reporting obligations (including foreign private issuers using Form 20-F), and companies filing a Securities Act or Exchange Act registration statement. However, the rules do not apply to Canadian 40-F filers under the Multijurisdictional Disclosure System or asset-backed issuers, and the section of the rules on emissions disclosures described below do not apply to smaller reporting companies (SRCs) or emerging growth companies (EGCs). The new disclosures will be treated as &ldquo;filed,&rdquo; and are therefore subject to potential liability under Exchange Act Section 18 (other than disclosures furnished on Form 6-K), as well as potential Securities Act Section 11 liability if included in, or incorporated by reference into, a Securities Act registration statement.</p> <h2> Key Modifications From the Proposal</h2> <p> The final rules reflect a number of significant modifications from the original proposal, including the following:</p> <ul> <li>Generally adopting a less prescriptive approach to certain of the mandated disclosures</li> <li>Including materiality qualifiers for certain climate-related disclosures, including disclosures regarding the impacts of climate-related risks, use of scenario analysis, and maintained internal carbon price</li> <li>Eliminating the proposed requirement to describe board members&rsquo; climate expertise</li> <li>Eliminating the proposed requirement to provide Scope 3 emissions disclosure</li> <li>Requiring Scope 1 and Scope 2 emissions disclosure only for LAFs and AFs, and only when those emissions are material, permitting such disclosure on a delayed basis, and exempting SRCs and EGCs from these disclosure requirements</li> <li>Modifying the proposed assurance requirement for AFs and LAFs by extending the reasonable assurance phase-in period for LAFs and requiring only limited assurance for AFs</li> <li>Removing the proposed requirement to disclose the impact of severe weather events and other natural conditions and transition activities on each line item of a registrant&rsquo;s consolidated financial statements</li> <li>Narrowing the required financial statement note disclosure</li> <li>Extending a safe harbor from private liability for forward-looking disclosures pertaining to a registrant&rsquo;s transition plan, scenario analysis, internal carbon pricing, and targets and goals</li> <li>Eliminating the proposal to require a private company that is a party to a business combination transaction registered on Forms S-4 or F-4 to provide the subpart 1500 and Article 14 disclosures</li> <li>Eliminating the proposed requirement to disclose any material change to the climate-related disclosures provided in a registration statement or annual report in a Form 10-Q (or, in certain circumstances, Form 6-K for foreign private issuers)</li> <li>Extending certain phase in periods</li> </ul> <h2>Climate-Related Disclosure</h2> <h3><em>Definitions</em></h3> <p><strong>Climate-related risks</strong> are the actual or potential negative impacts of climate-related conditions and events on a registrant&rsquo;s business, results of operations, or financial condition. Climate-related risks include physical risks, acute risks, chronic risks, and transition risks. <strong>Physical risks </strong>include both acute risks and chronic risks to the registrant&rsquo;s business operations. <strong>Acute risks</strong> are event-driven and may relate to shorter-term severe weather events, such as hurricanes, floods, tornadoes, and wildfires, among other events. <strong>Chronic risks</strong> relate to longer-term weather patterns, such as sustained higher temperatures, sea level rise, and drought, as well as related effects such as decreased arability of farmland, decreased habitability of land, and decreased availability of fresh water. <strong>Transition risks</strong> are the actual or potential negative impacts on a registrant&rsquo;s business, results of operations, or financial condition attributable to regulatory, technological, and market changes to address the mitigation of, or adaptation to, climate-related risks, including such nonexclusive examples as increased costs attributable to changes in law or policy, reduced market demand for carbon-intensive products leading to decreased prices or profits for such products, the devaluation or abandonment of assets, risk of legal liability and litigation defense costs, competitive pressures associated with the adoption of new technologies, and reputational impacts (including those stemming from a registrant&rsquo;s customers or business counterparties) that might trigger changes to market behavior, consumer preferences or behavior, and registrant behavior. <br /> <br /> <strong>GHG emissions</strong> are direct and indirect emissions of greenhouse gases expressed in metric tons of carbon dioxide equivalent (CO<sub>2</sub>e). Direct emissions are GHG emissions from sources that are owned or controlled by a registrant. Indirect emissions are GHG emissions that result from the activities of the registrant but occur at sources not owned or controlled by the registrant.<br /> <br /> <strong>Greenhouse gases</strong> are carbon dioxide (CO<sub>2</sub>); methane (CH<sub>4</sub>); nitrous oxide (N<sub>2</sub>O); nitrogen trifluoride (NF<sub>3</sub>); hydrofluorocarbons (HFCs); perfluorocarbons (PFCs); and sulfur hexafluoride (SF<sub>6</sub>).<br /> <br /> <strong>RECs</strong> are renewable energy credits or certificates representing each megawatt-hour (1 MWh or 1,000 kilowatt-hours) of renewable electricity generated and delivered to a power grid.</p> <p><strong>Scope 1</strong> emissions are direct GHG emissions from operations owned or controlled by a registrant; <strong>Scope 2</strong> emissions are indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant. <br /> <br /> <strong>Transition plan </strong>is a registrant&rsquo;s strategy and implementation plan to reduce climate-related risks, which may include a plan to reduce its GHG emissions in line with its own commitments or commitments of jurisdictions within which it has significant operations.</p> <h3> <em>Governance</em> &mdash; S-K Item 1501 requires descriptions of:</h3> <ul> <li>(1) The board&rsquo;s oversight of climate-related risks; (2) any applicable board committee/subcommittee responsible for such oversight; (3) the processes by which the board or such committee/subcommittee is informed about such risks; and (4) if there is a disclosed climate-related target, goal, or transition plan, whether and how the board oversees progress against the target, goal, or transition plan</li> <li>Management&rsquo;s role in assessing and managing the registrant&rsquo;s material climate-related risks (including responsible positions or committees and relevant expertise, and assessment and management processes)</li> </ul> <p> </p> <h3><em>Strategy</em> &mdash; S-K Item 1502 requires descriptions of:</h3> <ul> <li>Any climate-related risks that have materially impacted or are reasonably likely to have a material impact on the registrant, including on its strategy, results of operations, or financial condition,[[N: A matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote, or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available. The materiality determination is fact-specific and one that requires both quantitative and qualitative considerations.]] and whether such risks are reasonably likely to manifest in the short term (12 months) and separately in the long term (beyond 12 months) <ul style="margin-left: 40px;"> <br /> <li>Disclosure must include whether the identified risk is a physical (acute or chronic) or transition risk.</li> <li>For physical risks, registrants must disclose the geographic location and nature of the properties, processes, or operations subject to the risk.</li> <li>For transition risks, registrants must disclose whether they relate to regulatory, technological, market, or other transition-related factors, and how those factors impact the registrant.[[N: A registrant that has significant operations in a jurisdiction that has made a GHG emissions reduction commitment should consider whether it may be exposed to a material transition risk related to the implementation of the commitment.]]</li> </ul> </li> <li>The actual and potential material impacts of any identified climate-related risk on the registrant&rsquo;s strategy, business model, and outlook, including any material impacts on the following non-exclusive list of items: business operations; products and services; contract counterparties; activities to mitigate or adapt to climate-related risks; research and development expenditures; and any other significant changes or impacts <ul style="margin-left: 40px;"> <br /> <li>Disclosure must include whether and how the registrant considers any such impacts as part of its strategy, financial planning, and capital allocation.</li> <li>Disclosure must include how any identified climate-related risks have materially impacted or are reasonably likely to materially impact the registrant&rsquo;s business, results of operations, or financial condition.</li> <li>Quantitative and qualitative material expenditures incurred and material impacts on financial estimates and assumptions that, in management&rsquo;s assessment, directly result from disclosed activities to mitigate or adapt to climate-related risks are required to be disclosed <strong>(Item 1502(d)(2))</strong>.[[N: A registrant will not be required to comply with the material expenditures and material impacts disclosures until the fiscal year immediately following the fiscal year of its initial compliance date for subpart 1500 disclosures based on its filer status.]]</li> </ul> </li> <li>Any transition plan adopted to manage a material transition risk <ul style="margin-left: 40px;"> <br /> <li>Registrants must update their annual report disclosure each fiscal year by describing any actions taken during the year under the plan, including how such actions have impacted the registrant&rsquo;s business, results of operations, or financial condition.</li> <li>Registrants must include quantitative and qualitative disclosure of material expenditures incurred and material impacts on financial estimates and assumptions as a direct result of the transition plan <strong>(1502(e)(2))</strong>.[[N: A registrant will not be required to comply with these disclosures until the fiscal year immediately following the fiscal year of its initial compliance date for subpart 1500 disclosures based on its filer status.]]</li> </ul> </li> <li>If a scenario analysis is used, and based on the results the registrant determines that a climate-related risk is reasonably likely to have a material impact on its business, results of operations, or financial condition, the registrant must provide specified details with respect to each such scenario (including parameters, assumptions, and analytical choices used).</li> <li>If a registrant&rsquo;s use of an internal carbon price is material to how it evaluates and manages an identified climate-related risk, specified details must be provided (including price information).</li> </ul> <h3> <em>Risk Management </em>&mdash; S-K Item 1503 requires descriptions of:</h3> <ul> <li>The registrant&rsquo;s processes for identifying, assessing, and managing material climate-related risks and whether any such processes are integrated into its overall risk management system or processes</li> <li>How the registrant decides whether to mitigate, accept, or adapt to the particular risk, and how it prioritizes whether to address the climate-related risk</li> </ul> <h3> <em>Targets and Goals</em> &mdash; S-K Item 1504</h3> <ul> <li>This item requires disclosure of any climate-related target or goal if such target or goal has materially affected or is reasonably likely to materially affect the registrant&rsquo;s business, results of operations, or financial condition, including (1) the scope of activities included; (2) the unit of measurement; (3) the defined time horizon for intended achievement of the target, and whether the time horizon is consistent with one or more goals established by a climate-related treaty, law, regulation, policy, or organization; (4) the defined baseline time period (if established) and how progress will be tracked; and (5) how the registrant intends to meet its climate-related targets or goals. This is intended to help investors understand the costs associated with pursuing these objectives as well as the benefits associated with achieving them. <ul style="margin-left: 40px;"> <br /> <li>Registrants must disclose any progress made toward meeting the target or goal and how any such progress has been achieved.</li> <li>Registrants must describe any material impacts to their business, results of operations, or financial condition as a direct result of the target or goal or the actions taken to make progress toward achievement.</li> <li>Registrants must include quantitative and qualitative disclosure of material expenditures and impacts on financial estimates and assumptions as a direct result of the target or goal, or the actions taken to make progress toward achievement <strong>(1504(c)(2))</strong>.[[N: A registrant will not be required to comply with these disclosures until the fiscal year immediately following the fiscal year of its initial compliance date for subpart 1500 disclosures based on its filer status.]]</li> </ul> </li> <li>If carbon offsets or RECs are a material component of a registrant&rsquo;s plan to achieve climate-related targets or goals, specified disclosure is required, including the amount of carbon avoidance, reduction or removal represented by the offsets or the amount of generated renewable energy represented by the RECs, the nature and source of the offsets or RECs, a description and location of the underlying projects, any registries or other authentication of the offsets or RECs, and their cost.</li> </ul> <h3> <em>GHG Emissions Metrics&nbsp;</em>&mdash; S-K Item 1505 requires:</h3> [[N: This section does not apply to SRCs or EGCs.]] <ul> <li>For LAFs and AFs, separate disclosure of Scope 1 and Scope 2 GHG emissions, if such emissions are material, for their most recently-completed fiscal year, and to the extent previously disclosed in an SEC filing, for the historical fiscal year(s) included in their consolidated financial statements in the applicable filing, expressed (1) in the aggregate, in terms of CO<sub>2</sub>e; (2) if any constituent gas is individually material, disaggregated from the other gases; and (3) in gross terms by excluding the impact of any purchased or generated offsets <ul style="margin-left: 40px;"> <br /> <li>Registrants must include the methodology, significant inputs, and significant assumptions (including organizational and operational boundaries, and the protocol or standard used).</li> <li>Reasonable estimates may be used as long as underlying assumptions and rationale are disclosed.</li> <li>GHG emissions metrics required to be disclosed in a registrant&rsquo;s annual report on Form 10-K may instead be included in, and incorporated by reference from, the registrant&rsquo;s Form 10-Q for the second fiscal quarter in the fiscal year immediately following the year to which the GHG emissions metrics disclosure relates, or may be included in an amended Form 10-K no later than the due date for such Form 10-Q (for foreign private issuers, such information may be disclosed in an amendment to its annual report on Form 20-F due no later than 225 days after the end of the fiscal year to which the GHG emissions metrics disclosure relates). In the case of registration statements, any GHG emissions metrics required to be disclosed must be provided as of the most recently completed fiscal year that is at least 225 days prior to the date of effectiveness of the registration statement.</li> </ul> </li> </ul> <h3> <em>Attestation for Scope 1 and Scope 2 Emissions Disclosure</em> &mdash; S-K Item 1506</h3> [[N: This requirement does not apply to SRCs or EGCs.]] <ul> <li>Registrants that are required to provide Scope 1 and/or Scope 2 emissions disclosure must include, in the relevant filing, an independent third-party attestation report. <br /> For filings made by LAFs and AFs beginning the third fiscal year after the relevant compliance date for disclosure of GHG emissions (described below), the attestation engagement must, at a minimum, be at a limited assurance level.</li> <li>For filings made by an LAF beginning the seventh fiscal year after the compliance date for disclosure of GHG emissions, the attestation engagement must be at a reasonable assurance level.[[N: The final rules do not include definitions of &ldquo;limited assurance&rdquo; and &ldquo;reasonable assurance&rdquo; because the SEC agreed with commenters that stated that this terminology is generally well understood and should be defined by assurance standard setters and not by the SEC.]]</li> <li>The rules provide minimum attestation report requirements, minimum standards for acceptable attestation frameworks, and that the attestation service provider meet certain minimum qualifications.</li> <li>The attestation service provider is not required to be a registered public accounting firm.</li> <li>A letter from the attestation provider that acknowledges its awareness of the use in certain registration statements of any of its reports which are not subject to the consent requirement of Securities Act Section 7.1 is required.[[N: GHG emissions attestation providers that perform limited assurance engagements will be exempt from Securities Act Section 11 liability and the consent requirements associated with expertized reports, with consent with corresponding Securities Act Section 11 liability applicable only when the heightened level of review associated with reasonable assurance makes it appropriate for the report to be expertized.]]</li> <li>LAFs and AFs must include additional specified disclosures, based on relevant information obtained from any GHG emissions attestation provider, including: (1) whether such provider is subject to any oversight inspection program; (2) whether a provider that was previously engaged to provide attestation over the registrant&rsquo;s GHG emissions disclosure for the fiscal year period covered by the attestation report resigned (or indicated that it declined to stand for re-appointment after the completion of the attestation engagement) or was dismissed; and (3) whether there were (and if so, a description of) any disagreements with the former provider.</li> <li>The attestation report and related disclosure must be included in the filing that contains the GHG emissions disclosure to which the report and disclosure relate. However, if a registrant elects to incorporate by reference its GHG emissions disclosure from its Form 10-Q for the second fiscal quarter in the fiscal year immediately following the year to which the GHG emissions disclosure relates or to provide this information in an amended Form 10-K or Form 20-F, then the registrant must include an express statement to such effect.</li> </ul> <h3> <em>Safe Harbor for Certain Climate-Related Disclosures</em> &mdash;&nbsp; &nbsp;S-K Item 1507</h3> <p> The rules provide a safe harbor for specified forward-looking information required by the rules (pertaining to forward-looking statements with respect to a registrant&rsquo;s transition plan, scenario analysis, internal carbon pricing, and targets and goals).</p> <h2> Financial Statement Requirements (S-X Article 14)</h2> <p> Article 14 of Regulation S-X requires the disclosures described below in any filing that is required to include Regulation S-K 1500 disclosure which also includes audited financial statements; disclosure must be provided for the registrant&rsquo;s most recently completed fiscal year, and to the extent previously disclosed or required to be disclosed, for the historical fiscal years for which audited consolidated financial statements are included in the filing. These disclosures will be required to be included in a note to the financial statements, and therefore will be (1) included in the scope of any required audit, (2) subject to audit by an independent registered public accounting firm, and (3) within the scope of the registrant&rsquo;s internal control over financial reporting.</p> <ul> <li>The aggregate amount of expenditures expensed as incurred and losses, excluding recoveries, incurred during the fiscal year as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise (separately identifying where the expenditures expensed as incurred and losses are presented in the income statement) <ul style="margin-left: 40px;"> <br /> <li>Disclosure is required if the aggregate amount of expenditures expensed as incurred and losses equals or exceeds 1% of the absolute value of income or loss before income tax expense or benefit for the relevant fiscal year (unless such amount is less than $100,000).</li> </ul> </li> <li>The aggregate amount of capitalized costs and charges, excluding recoveries, incurred during the fiscal year as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise (separately identifying where the capitalized costs and charges are presented in the balance sheet) <ul style="margin-left: 40px;"> <br /> <li>Disclosure is required if the aggregate amount of the absolute value of capitalized costs and charges equals or exceeds 1% of the absolute value of stockholders&rsquo; equity or deficit at the end of the relevant fiscal year (unless such amount is less than $500,000).</li> </ul> </li> <li>If carbon offsets or RECs have been used as a material component of a registrant&rsquo;s plans to achieve its disclosed climate-related targets or goals, registrants must disclose specified information relating thereto.</li> <li>If an event or condition is a significant contributing factor in incurring a cost, expenditure, charge, loss, or recovery, then the entire amount must be included in the disclosure. </li> <li>The disclosure must include contextual information, describing how each specified financial statement effect disclosed was derived, including significant inputs, assumptions and judgments, other information that is important to understand the financial statement effect, and, if applicable, policy decisions made to calculate the specified disclosures.</li> <li>Registrants must state separately the aggregate amount of any recoveries recognized during the fiscal year as a result of severe weather events and other natural conditions for which capitalized costs, expenditures expensed, charges, or losses are disclosed.</li> <li>Registrants must disclose whether the estimates and assumptions used to produce the consolidated financial statements were materially impacted by exposures to risks and uncertainties associated with, or known impacts from, severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, or any climate-related targets or transition plans disclosed by the registrant.</li> </ul> <h2> Presentation of the Required Disclosures</h2> <ul> <li>The climate-related disclosures (except for emissions disclosures which are described above) must be presented in the body of the registration statement or annual report, in a separately captioned &ldquo;Climate-Related Disclosure&rdquo; section.</li> <li>Registrants are permitted to incorporate the required disclosures by reference from other parts of the registration statement or annual report, or other filed documents (subject to applicable incorporation by reference requirements).</li> <li>Registrants are not required to include the attestation report in the separately captioned &ldquo;Climate-Related Disclosure&rdquo; section, but may do so.</li> <li>Disclosures must be tagged in Inline XBRL.</li> </ul> <h2> Phase-In Periods</h2> <p> The rules become effective 60 days after publication in the Federal Register, and include a phase-in for all registrants, with the compliance date dependent on the registrant&rsquo;s filer status.<br /> <br /> The following table summarizes the phased in compliance dates of the final rules, both for subpart 1500 of Regulation S-K and Article 14 of Regulation S-X. The compliance dates in the table apply to both annual reports and registration statements; in the case of registration statements, compliance would be required beginning in any registration statement that is required to include financial information for the full fiscal year indicated in the table below. </p> <table style="width: 837px; height: 243px;"> <tbody> <tr> <td colspan="7" style="background-color: #244061; text-align: center;"><strong><span style="color: #ffffff;">&nbsp;Compliance Dates under the Final Rules<sup>1</sup></span></strong></td> </tr> <tr> <td style="background-color: #f2f2f2;"><strong>Registrant Type</strong></td> <td colspan="2" style="background-color: #f2f2f2;"><strong>Disclosure and Financial Statement Effects Audit</strong></td> <td colspan="3" style="background-color: #f2f2f2;"><strong>GHG Emissions/Assurance&nbsp;</strong></td> <td style="background-color: #f2f2f2;"><strong>Electronic Tagging</strong></td> </tr> <tr> <td>&nbsp;</td> <td><em>All Reg. S-K and S-X disclosures, other than noted in this table</em></td> <td><em>Item 1502(d)(2), Item 1502(e)(2), and Item 1504(c)(2)</em></td> <td><em>Item 1505 (Scopes 1 and 2 GHG emissions)</em></td> <td><em>Item 1506 - Limited Assurance&nbsp;</em></td> <td><em>Item 1506 - Reasonable Assurance</em></td> <td><em>Item 1508 - Inline XBRL tagging for subpart 1500<sup>2</sup></em></td> </tr> <tr> <td>LAFs</td> <td>FYB 2025</td> <td>FYB 2026</td> <td>FYB 2026</td> <td>FYB 2029</td> <td>FYB 2033</td> <td>FYB 2026</td> </tr> <tr> <td>AFs (other than SRCs and EGCs)</td> <td>FYB 2026</td> <td>FYB 2027</td> <td>FYB 2028</td> <td>FYB 2031</td> <td>N/A</td> <td>FYB 2026</td> </tr> <tr> <td>SRCs, EGCs, and NAFs</td> <td>FYB 2027</td> <td>FYB 2028</td> <td>N/A</td> <td>N/A</td> <td>N/A</td> <td>&nbsp;FYB 2027</td> </tr> <tr> <td>&nbsp;</td> <td colspan="6" style="text-align: center;"> <p style="text-align: left;">&nbsp;<sup>1</sup> As used in this chart, "FYB" refers to any fiscal year beginning in the calendar year listed.</p> <p style="text-align: left;"><sup>&nbsp;2 </sup>Financial statement disclosures under Article 14 will be required to be tagged in accordance with existing rules pertaining to the tagging of financial statements. See Rule 405(b)(1)(i) of Regulation S-T.</p> </td> </tr> </tbody> </table> &nbsp; <p> For example, an LAF with a January 1 fiscal-year start and a December 31 fiscal year-end date will not be required to comply with the climate disclosure rules (other than those pertaining to GHG emissions and those related to Item 1502(d)(2), Item 1502(e)(2), and Item 1504(c)(2), if applicable) until its Form 10-K for fiscal year ended December 31, 2025, due in March 2026. If required to disclose its Scope 1 and/or Scope 2 emissions, such a filer will not be required to disclose those emissions until its Form 10-K for fiscal year ended December 31, 2026, due in March 2027, or in a registration statement that is required to include financial information for fiscal year 2026. Such emissions disclosures would not be subject to the requirement to obtain limited assurance until its Form 10-K for fiscal year ended December 31, 2029, due in March 2030, or in a registration statement that is required to include financial information for fiscal year 2029. The registrant would be required to obtain reasonable assurance over such emissions disclosure beginning with its Form 10-K for fiscal year ended December 31, 2033, due in March 2034, or in a registration statement that is required to include financial information for fiscal year 2033. If required to make disclosures pursuant to Item 1502(d)(2), Item 1502(e)(2), or Item 1504(c)(2), such a filer will not be required to make such disclosures until its Form 10-K for fiscal year ended December 31, 2026, due in March 2027, or in a registration statement that is required to include financial information for fiscal year 2026.</p> <h2> Internal Control Over Financial Reporting and Disclosure Controls and Procedures</h2> <p> As a result of these mandated climate-related disclosures, both within and outside of the financial statements, registrants will need to ascertain whether their internal controls and disclosure controls and procedures need to be updated (or new controls developed) to comply with the new rules. Companies should coordinate with their internal audit personnel to ensure the implementation of robust controls that govern the collection and verification of required data related to the governance of climate-related risks, risk management and strategy, targets and goals, emissions metrics, and financial statement note requirements.</p> <h2> Dissents</h2> <p> SEC Commissioners <a rel="noopener noreferrer" href="https://www.sec.gov/news/statement/peirce-statement-mandatory-climate-risk-disclosures-030624" target="_blank">Hester M. Peirce</a> and <a rel="noopener noreferrer" href="https://www.sec.gov/news/statement/uyeda-statement-mandatory-climate-risk-disclosures-030624" target="_blank">Mark T. Uyeda</a> each issued strongly-worded dissenting statements on the final rule. Commissioner Peirce objected to a rule that &ldquo;replaces our current principles-based regime with dozens of pages of prescriptive climate-related regulations.&rdquo; Ms. Peirce further stated that the new rules will prove costly to public companies, and that the &ldquo;resulting flood of climate-related disclosures will overwhelm investors, not inform them.&rdquo; Commissioner Uyeda expressed similar concerns regarding the expense and unnecessary focus of the new rules, stating that &ldquo;by forcing companies to spend more time and resources on climate discussions, the Commission creates the risk that companies may ignore or not pay enough attention to other matters that could have greater and more immediate impacts.&rdquo; In a pointed criticism of the final rules, he noted that &ldquo;&hellip; not one dime of money spent on compliance will be used for actual reductions in GHG emissions, and that shareholders will be footing this bill.&rdquo; Both Commissioner Peirce and Uyeda also noted concerns over whether the SEC had the authority to adopt the rules, and stated that they should have been re-proposed due to the consequential differences from the original proposal.</p> <h2> Challenges</h2> <p> Notwithstanding that the final rule is less onerous than the proposal, it is already facing legal and legislative challenges, and in an extraordinary twist, the challenges may come from both sides. Ten states are suing the SEC alleging that &ldquo;the final rule exceeds the agency&rsquo;s statutory authority and otherwise is arbitrary, capricious, an abuse of discretion, and not in accordance with law.&rdquo; In addition, certain congressional Republicans are preparing to challenge the rule under the Congressional Review Act, which, under specified circumstances, enables Congress to disapprove a final rule issued by a federal agency. On the other side, climate groups such as the Sierra Club and Earthjustice are reportedly considering bringing actions against the SEC alleging that the final rule inadequately protects investors.</p> <h2> Interface With California&rsquo;s Climate Disclosure Law and EU Climate Reporting Requirements</h2> <p> Last fall, Governor Gavin Newsom signed the Climate Corporate Data Accountability Act, which requires public and private entities doing business in California with more than US$1 billion in revenue to report Scope 1, Scope 2, and Scope 3 emissions. (For more detail, see our Advisories <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/10/new-ca-ghg-legislation">on the legislation</a> and the Governor&rsquo;s <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/10/governor-newsom-signs-sweeping-climate">signing messages</a>.) The SEC&rsquo;s adoption of rules, weaker by comparison to the California law, has spurred conversation and activity in California regarding the state&rsquo;s implementation of the law. Many expect the law could be amended in light of the <a rel="noopener noreferrer" href="https://www.gov.ca.gov/wp-content/uploads/2023/10/SB-253-Signing.pdf" target="_blank">Governor&rsquo;s signing message</a>, which expressed concerns about implementation deadlines and the specified reporting protocol. Proponents of the California law, including State Senator Scott Wiener, Chair of the State Senate Budget Committee and author of the bill, now see timely implementation of the California law as currently written &mdash; to include Scope 3 emissions reporting &mdash; as even more critical in light of the SEC&rsquo;s adopted rule. <br /> <br /> Notably, the Governor&rsquo;s proposed budget for 2024-2025 does not include funding to implement the Climate Corporate Data Accountability Act. Should the final budget package not include funding to implement the California law, the California Air Resources Board is unlikely to meet the January 1, 2025 deadline to adopt implementing regulations. Until the law is amended, however, companies will still be required by law to begin reporting Scope 1 and Scope 2 emissions beginning in 2026, and Scope 3 emissions beginning in 2027. Those disclosures, including the Scope 3 emissions disclosures that are not required by the SEC rule, could expose public companies doing business in California to liability under the federal securities laws if they contain material misstatements or omissions.<br /> <br /> Similarly, public companies that are subject to regulation in the EU may be subject to more burdensome climate-related disclosure requirements under EU law, including the Corporate Sustainability Reporting Directive. It will be an ongoing exercise for public companies doing business in California and/or in the EU to navigate the differences in climate-related reporting requirements &mdash; more onerous standards in other jurisdictions may put issuers in the tough position of having to disclose more information than would be required under the SEC rules.</p> <p>If you have questions regarding the material discussed in this client advisory, please contact any author of this Advisory or your regular Arnold &amp; Porter contact.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{B23C2B4C-915B-4E2C-81ED-E8F80AC73BA8}https://www.arnoldporter.com/en/perspectives/advisories/2024/03/capital-snapshot-marchEugenia E. Piersonhttps://www.arnoldporter.com/en/people/p/pierson-eugenia-eEugenia.Pierson@arnoldporter.comKevin O'Neillhttps://www.arnoldporter.com/en/people/o/oneill-kevinkevin.oneill@arnoldporter.comDavid J.M. Skillmanhttps://www.arnoldporter.com/en/people/s/skillman-daviddavid.skillman@arnoldporter.comPeter E. Duysharthttps://www.arnoldporter.com/en/people/d/duyshart-peterpeter.duyshart@arnoldporter.comLucas Gorakhttps://www.arnoldporter.com/en/people/g/gorak-lucaslucas.gorak@arnoldporter.comCapital Snapshot: A Monthly Overview of the Issues, Events, Timelines, and Polling Data Driving Federal Policy Decisions<span style="color: #494949; background-color: #fefefe;">Our Legislative &amp; Public Policy team is pleased to provide the March 2024 edition of &ldquo;Capital Snapshot,&rdquo; a monthly summary of the issues, events, and timelines driving federal policy and political decisions.</span>Mon, 11 Mar 2024 00:00:00 -0500<p>Our Legislative &amp; Public Policy team is pleased to provide the March 2024 edition of &ldquo;Capital Snapshot,&rdquo; a monthly summary of the issues, events, and timelines driving federal policy and political decisions. This month, we provide updates on recent significant developments in Congress, including the impeachment of U.S. Secretary of Homeland Security Alejandro Mayorkas, FY24 government funding, Senate Minority Leader Mitch McConnell&rsquo;s (R-KY) decision to step down as Senate Republican Leader, Rep. Tom Suozzi&rsquo;s (D-NY-3) special election victory and subsequent swearing in, and President Biden&rsquo;s State of the Union address to a joint session of Congress. Additionally, we share updates on developments, outlook, and priorities across a variety of public policy and legislative areas, including (1) the status of FY24 supplemental aid and border security provisions; (2) the National Defense Authorization Act and Department of Defense; (3) tax; (4) financial services; (5) artificial intelligence; (6) energy and environment; (7) education; (8) health care; and (9) California politics and policy. We also provide an overview of the state of play for the 2024 general election, both presidential and congressional. Furthermore, we assess what trends, current events, and factors could impact the upcoming political and legislative landscape.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{B794105F-8BCC-4DB0-84D2-C26C73DB6CF1}https://www.dailyjournal.com/article/377564-fifth-circuit-renews-controversy-over-nasdaq-board-diversity-initiative#:~:text=Fifth%20Circuit%20renews%20controversy%20over,%E2%80%9Cdiversify%20or%20disclose%E2%80%9D%20approach.Teresa (Terry) L. Johnsonhttps://www.arnoldporter.com/en/people/j/johnson-teresa-lteresa.johnson@arnoldporter.comNina Levitenhttps://www.arnoldporter.com/en/people/l/leviten-ninanina.leviten@arnoldporter.comLiam E. O'Connorhttps://www.arnoldporter.com/en/people/o/oconnor-liam-eliam.e.oconnor@arnoldporter.comSean M. SeLeguehttps://www.arnoldporter.com/en/people/s/selegue-sean-msean.selegue@arnoldporter.comFifth Circuit renews controversy over Nasdaq board diversity initiativeMon, 11 Mar 2024 00:00:00 -0500{86D1D615-C7C8-4846-8F13-3A9FB6AD64F7}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/03/ai-developers-must-pay-attention-to-eus-proposed-ai-act-says-schildkrautAI Developers Must Pay Attention to EU’s Proposed AI Act, Says SchildkrautPeter Schildkraut, co-leader of the firm&rsquo;s Technology, Media &amp; Telecommunications industry group, was quoted in the <em>Bloomberg Law </em>article, &ldquo;EU Poised to Enact Sweeping AI Rules With US, Global Impact.&rdquo;&nbsp;Fri, 08 Mar 2024 00:00:00 -0600<p>Peter Schildkraut, co-leader of the firm&rsquo;s Technology, Media &amp; Telecommunications industry group, was quoted in the <em>Bloomberg Law</em> article, &ldquo;EU Poised to Enact Sweeping AI Rules With US, Global Impact.&rdquo; The article discusses the European Union (EU)&rsquo;s proposed AI Act, its soon-to-be-adopted risk-based regulation of artificial intelligence. The European Parliament is scheduled to vote on the legislation on March 13, 2024. </p> <p>U.S. companies need to pay attention to the AI Act, which applies not only to European companies but also to non-EU companies that sell AI systems or the output of AI systems into the EU. Given the size of the European market, the AI Act will have a significant effect on how companies worldwide develop and deploy AI systems. Schildkraut told<em> Bloomberg Law</em> that if AI developers &ldquo;don&rsquo;t pay attention to [the Act&rsquo;s] requirements now, the systems they are developing may not be allowed into the EU market and they may have to redevelop the systems in compliance, potentially even from scratch.&rdquo; Likewise, U.S. (and other non-EU) companies that may wish to send output from the AI systems they use into the EU may run into trouble if their systems or operations are noncompliant.</p> <p><a rel="noopener noreferrer" href="https://news.bloomberglaw.com/artificial-intelligence/eu-poised-to-enact-sweeping-ai-rules-with-us-global-impact" target="_blank">Read the full article.</a></p>{4A773031-707A-4C1D-9181-DA66E83C748D}https://www.wlf.org/wp-content/uploads/2024/03/030824Hussain_CA.pdfMurad Hussainhttps://www.arnoldporter.com/en/people/h/hussain-muradmurad.hussain@arnoldporter.comAlex Potcovaruhttps://www.arnoldporter.com/en/people/p/potcovaru-alexalex.potcovaru@arnoldporter.comFederal Court Finds False Claims Act Damages and Penalties Unconstitutionally ExcessiveFri, 08 Mar 2024 00:00:00 -0600{ADA226FD-3AD9-46E7-9707-506DB3D0BA9B}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/03/magnani-discusses-nyt-copyright-suitMagnani Discusses NYT Copyright SuitTom Magnani, head of the firm&rsquo;s Technology Transactions practice and co-chair of the Technology, Media, &amp; Telecommunications industry group, was featured in the<em> Legaltech News</em> article, &ldquo;OpenAI Swings Wide in Its Motion to Dismiss NYT Copyright Suit.&rdquo;&nbsp;Thu, 07 Mar 2024 00:00:00 -0600<p>Tom Magnani, head of the firm&rsquo;s Technology Transactions practice and co-chair of the Technology, Media, &amp; Telecommunications industry group, was featured in the <em>Legaltech News</em> article, &ldquo;OpenAI Swings Wide in Its Motion to Dismiss NYT Copyright Suit.&rdquo; The article discusses <em>The New York Times</em>&rsquo; lawsuit against OpenAI, where it accused the AI startup for infringing on its copyrights by using millions of its articles to train AI technologies. OpenAI recently filed a motion to dismiss four of <em>The Times</em>&rsquo;s seven claims, including claims for direct infringement and unfair competition. The AI startup argued that the direct infringement claim is time-barred because it relates to training datasets that are more than three years old, and the unfair competition claim by misappropriation is preempted by the U.S. Copyright Act. </p> <p>Magnani told <em>Legaltech News</em> that the misappropriation argument is one of OpenAI&rsquo;s stronger ones in its motion to dismiss, because <em>The Times</em> &ldquo;is relying on a very narrowly construed exception to the copyright preemption rule.&rdquo; However, he added that OpenAI does not produce enough evidence to prove that <em>The Times</em> &ldquo;should have known that they started training their model databases more than three years ago.&rdquo; He noted that both OpenAI and <em>The Times</em>&rsquo; suits are well-researched, emphasizing that &ldquo;this is the best argued case we have right now&hellip; in which parties are tackling the heart of the matter&rdquo; of copyright and AI. </p> <p>Magnani added that OpenAI likely is trying to achieve multiple goals with this motion to dismiss, including to begin to paint a picture of <em>The Times</em> in the mind of the court and the public, noting &ldquo;I think the other purpose this motion serves is really to educate the judge &hellip; the community at large, on OpenAI&rsquo;s positions on these other issues [of copyright].&rdquo; OpenAI&rsquo;s use of non-legal terms like &ldquo;hacking&rdquo; in its motion ultimately work to &ldquo;color the public&rsquo;s and the courts&rsquo; perception of <em>The New York Times</em>,&rdquo; he continued. </p> <p><a rel="noopener noreferrer" href="https://www.law.com/legaltechnews/2024/03/01/openai-swings-wide-in-its-motion-to-dismiss-nyt-copyright-suit/" target="_blank">Read the full article</a> (subscription required).</p>{5950B771-D831-48D8-B5A6-4162FDF2885C}https://www.arnoldporter.com/en/perspectives/advisories/2024/03/california-multibillion-dollar-deficitKatie (Katherine) Pettibonehttps://www.arnoldporter.com/en/people/p/pettibone-katie-katherinekatie.pettibone@arnoldporter.comYuvaraj Sivalingamhttps://www.arnoldporter.com/en/people/s/sivalingam-yuvarajyuvaraj.sivalingam@arnoldporter.comAlexander Walker-Griffinhttps://www.arnoldporter.com/en/people/w/walker-griffin-alexanderalexander.walker-griffin@arnoldporter.comCalifornia Faces Second Straight Year With a Multibillion-Dollar Deficit<span style="line-height: 107%;">On January 10, for the second straight year, Governor Newsom released a budget proposal that seeks to close a multibillion-dollar deficit.</span>Wed, 06 Mar 2024 00:00:00 -0600<p>On January 10, for the second straight year, Governor Newsom released a budget proposal that seeks to close a multibillion-dollar deficit. The projected size of that deficit depends on the source of the analysis &mdash; the governor&rsquo;s proposed budget for 2024-2025 offers a more optimistic view than California&rsquo;s Legislative Analyst Office (LAO). As described by the head of the California Department of Finance, Joe Stephenshaw, the difference largely lies in the governor&rsquo;s budget having a more optimistic view of the short term. Additionally, the administration adjusted the 2023 baseline spending with a US$15 billion reduction to school and community college spending. As a result, the governor&rsquo;s budget predicts a US$37.9 billion deficit &mdash; in sharp contrast to the LAO&rsquo;s US$68 billion deficit projection from December 2023, although the LAO has since revised that figure to US$73 billion in light of recent revenue figures (namely, personal income taxes) that came in below expectations.</p> <p> It is worth noting that two straight years of historically large deficits come after similarly historic surpluses &mdash; California had a nearly US$100 billion surplus as recently as 2022. The swing is at least in part due to higher than expected tax receipts following the COVID-19 recession, which drove the surplus projection, and, by contrast, a decline in revenues due to the stock market decline since the middle of 2022 and IRS tax deadline delays in 2023 for nearly all California counties to accommodate recovery from last year&rsquo;s floods. The collection delays were particularly impactful because last year&rsquo;s May revision of the budget could not be informed by April tax collections &mdash; state revenue data did not arrive until the end of 2023. As a result, the January proposed budget includes &ldquo;baseline changes&rdquo; to make the corrections, typically done in May following April tax collections, which, as pointed out by the LAO, results in a lower deficit projection.<br /> <br /> The budget deficit projected this year &mdash; not to mention administration and LAO projections of significant budget deficits for the next three years &mdash; will have a great impact on state business, including the legislature&rsquo;s consideration of more than 2,000 pieces of proposed legislation, implementation of new laws, and the progress of a variety of state-funded programs. </p> <p>In that context, the governor&rsquo;s US$209 billion General Fund budget proposal released in January intends to close this year&rsquo;s budget gap with spending controls including a combination of cuts, delays, fund shifts, and a withdrawal from reserves &mdash; the last of which requires the governor to declare a fiscal emergency. The governor has stated he does not intend to raise income taxes and specifically reiterated he would not support a &ldquo;wealth tax.&rdquo;</p> <h2>The Mechanics</h2> <p>In closing the Department of Finance-projected US$37.9 billion-dollar deficit, the governor&rsquo;s proposed budget includes approximately <strong>US$13.1 billion in withdrawals from reserves</strong>. That includes US$10.4 billion withdrawn from the Mandatory Budget Stabilization Account; US$1.8 billion withdrawn from the Discretionary Budget Stabilization Account; and US$900 million withdrawn from the Safety Net Reserve. Even after all of these proposed withdrawals, the state&rsquo;s reserves remain robust with US$18.4 billion remaining in the coffers. <br /> <br /> The other mechanics can be categorized into four types:<strong> reductions, delays, fund shifts, and reversions</strong>. Nearly all of the governor&rsquo;s spending‑related solutions are one‑time. The <strong>US$8.5 billion in reductions </strong>include US$2.9 billion from climate programs, US$1.2 billion to housing programs, a US$800 million reduction to state departments&rsquo; operating budgets, about US$500 million in savings to continue an existing two‑week delay in Medi‑Cal payments, a US$500 million reduction to the school facilities aid program, and a reversion of legislative requests in the amount of US$350 million. Other programs impacted include the School Facilities Aid program, Student Housing Revolving Loan Fund program, and the Middle Class Scholarship program, as well as the UCLA Institute of Immunology and Immunotherapy. <br /> <br /> Several budget items, worth <strong>US$5.1 billion</strong> and spread across a three-year period, are being delayed beginning in 2025-2026. This includes the Transit and Intercity Rail Capital Program; full implementation of the Department of Departmental Services (DDS) Service Provider Rate Reform; Clean Energy Reliability Investment Plan; Vulnerable Community Toxic Clean Up; Behavioral Health Bridge Housing Program; and Preschool, Transitional Kindergarten and Full-Day Kindergarten Facilities Grant Program. <br /> <br /> The budget also proposes<strong> US$5.5 billion</strong> <strong>in fund shifts</strong> (borrowing) and deferrals. The fund shifts move certain expenditures from the General Fund to other funds &mdash; including the Greenhouse Gas Reduction Fund. The deferrals defer specific obligations to the 2025-2026 fiscal year &mdash; the most notable of which is the funding increase for the University of California and California State University systems. <br /> <br /> While not including income tax increases, the budget does <strong>propose revenue of US$5.7 billion</strong> through increasing the Managed Care Organization Tax Support for Medi-Cal for an estimated US$3.8 billion, as well as borrowing internally from special funds. The governor proposes narrowing businesses&rsquo; ability to reduce their tax bill by counting previous losses against their current income. This would generate about US$300 million in additional revenue in 2024‑2025.</p> <h2>Climate Change</h2> <p>Although California has long seen itself as a climate leader &mdash; and the governor himself as a climate champion &mdash; the deficit will impact the state&rsquo;s climate programs. The governor&rsquo;s proposed budget includes about US$2.9 billion in reductions, US$1.9 billion in delays of expenditures to future years, and US$1.8 billion in fund shifts related to climate programs. The administration intends to instead pursue federal climate funding, including from the Inflation Reduction Act and Infrastructure Investment and Jobs Act, to backfill some of this funding. <br /> <br /> The reductions to California&rsquo;s climate programs are not significantly deep in any singular category, but they are broad and impact nearly all climate programs. Zero-emission vehicle, transportation, nature-based solutions, extreme heat, community resilience, coastal resilience, and sustainable agriculture programs all see reductions, shifts, and/or delays as well. Of all of the climate-related programs, water programs and energy investments see the biggest reductions &mdash; each seeing more than US$1 billion in previously committed funds reduced or delayed in the proposed budget (based on the 2022 Budget Act commitments). Impacted water programs include watershed climate resilience, water recycling, PFAS-related support, dam safety, and state water efficiency. A notable exception among the water programs, robust funding for flood protection, remains. Affected energy programs include CPUC capacity building grants, carbon removal innovation, residential solar and storage, incentives for long-duration storage, equitable building decarbonization, and hydrogen grants. <br /> <br /> Of the climate related programs, wildfire and forest resilience programming sees the most limited reductions: US$2.7 billion out of previously committed US$2.8 billion in funding is maintained. This is not surprising as the state is experiencing insurance coverage problems due to the wildfire risk. The governor&rsquo;s proposed budget also seeks to bolster fire protection in natural resources and environmental protection funding areas, as discussed in the next section.</p> <h2> Natural Resources and Environmental Protection</h2> <p> The governor&rsquo;s proposed budget includes increases in certain natural resources and environmental protection programs (non-climate related) and reductions in others. The Department of Forestry and Fire Protection includes funding increases to support the new CalFire 66-hour workweek, a new training center, and resources for air bases and fire stations to combat wildfires. Water quality and habitat programs do see reductions and delays. The proposed budget includes a funding delay for the Cleanup in Vulnerable Communities Initiative, funding returns for various urban waterfront projects, and a loan from the California Beverage Container Recycling Fund to the General Fund.</p> <h2> Health and Human Services</h2> <p> The California Health and Human Services Agency (CHHSA) oversees 12 departments in charge of the state&rsquo;s health and social services programs, with the largest being the Department of Health Care Services (DHCS), Department of Public Health, Department of Healthcare Access and Information (HCAI), Department of State Hospitals, Department of Developmental Services, and Department of Social Services (DSS). The governor&rsquo;s budget maintains the same funding as last year, with US$253.4 billion (US$73.9 billion General Fund) for all health and human services programs in 2024-2025. There have been a number of investments over the last couple of years, including California Advancing and Innovating Medi-Cal (CalAIM) which moved Medi-Cal to a more whole-person care model, developing a Master Plan in Aging, improving the behavioral health continuum, providing additional assistance for subsidized childcare slots, and improving the public health infrastructure. Despite the forecasted budget deficit, the governor has maintained the investment of providing Medi-Cal for all, irrespective of immigration status, which includes US$3.4 billion (US$2.9 billion General Fund) in 2024-2025 and approximately US$3.7 billion (US$3.2 billion General Fund) ongoing, inclusive of In-Home Supportive Services costs. This program, which began last year, has been pointed to as one of the avenues to deliver &ldquo;healthcare for all&rdquo; without going to a full single-payer system. <br /> <br /> DHCS oversees Medi-Cal, the state&rsquo;s Medicaid program, county-operated community mental health and substance use disorder programs, California Children&rsquo;s Services, and the Primary and Rural Health programs. It occupies the largest share of CHHS&rsquo; budget. As noted above, the budget maintains the expansion of eligibility for Medi-Cal benefits. The overall Medi-Cal budget includes US$157.5 billion in 2023-2024 and US$156.6 billion in 2024-2025. The budget provides funding to cover approximately 14.8 million Californians in 2023-2024 and 13.8 million in 2024-2025, which is more than one-third of the state&rsquo;s population.<br /> <br /> CalAIM is slated to maintain approximately US$2.4 billion (US$811.1 million General Fund) in 2024-2025 to continue the changes designed to provide a more comprehensive and preventative health care, which includes mental health, substance abuse, and social factors that impact health (like housing). The budget also maintains US$24.7 million in 2025-2026 increasing to US$197.9 million to allow up to six months of rent or temporary housing to eligible individuals experiencing homelessness or at risk of homelessness transitioning out of institutional care, a correctional facility, the child welfare system, or other transitional housing settings.<br /> <br /> The most significant budget solution is an early increase in the California&rsquo;s Managed Care Organization Provider Tax (MCO Tax), which, after being approved by the federal government, was effective April 1, 2023. The budget would have the legislature request the federal government to approve an amendment increasing this tax to provide US$20.9 billion in funding to the state, an increase of US$1.5 billion compared to the rate previously approved. The budget proposes US$12.9 billion to support the Medi-Cal program and maintain a balanced budget, and US$8 billion for targeted rate increases and investments from the MCO Tax. This funding shores up and supports safety net programs including increased childcare slots and rate increases for Medi-Cal providers. As mentioned above, there was a baseline adjustment from last year&rsquo;s budget on Medi-Cal readjustment which showed an increase in costs from last year, however there is a forecast of less enrollment after 2024. There is US$323 million in funding delays across several programs, including HCAI workforce infrastructure development, Behavioral Health Infrastructure Program and Bridge Housing, rate increases to providers in DDS, and housing supports in DSS. Additionally, there are fund shifts from a variety of programs.<br /> <br /> One additional notable item is the governor may be seeking delays and potential changes in legislation he signed in October, Senate Bill 525 by Senator Durazo, which increased the minimum wage for a broadly defined class of &ldquo;health care workers.&rdquo;</p> <h2> Safety: Criminal Justice, Courts, CalOES</h2> <p> Criminal justice remains a top priority for voters, the legislature, and the administration. The budget relies on net General Fund savings of US$87.8 million from Proposition 47, which requires misdemeanor rather than felony sentencing for certain property and drug crimes and permits incarcerated persons previously sentenced for these reclassified crimes to petition for resentencing. This provision has been under attack in relation to the onslaught of retail thefts, and there will be a number of legislative measures on this point. <br /> <br /> There is a proposed total funding of approximately US$1.3 billion, including US$487 million General Fund, to support the California Department of Justice, which provides litigation services on behalf of the people of California; acts as legal counsel to state agencies; provides oversight, enforcement, and regulation of firearms laws; provides evaluation and analysis of physical evidence; and supports the criminal statistics and data, including the Controlled Substance Utilization Review and Evaluation System. There is a proposed increase from $9 to $15 on licensees, private clinics, or providers prescribing controlled substances annually as of April 1, 2015.<br /> <br /> The California Judicial Branch maintains its funding of current initiatives with a total funding of US$5.2 billion in 2024-2025, of which US$3 billion is provided to support trial court operations. This includes supporting technology innovations to modernize court operations, including technology enhancements to support remote access to courtroom proceedings by providing a publicly accessible audio stream in California trial courts.<br /> <br /> Notably, there is a proposed increase of US$30 million General Fund (US$15 million in 2024-2025 and US$15 million in 2025-2026) to expand the California Military Department&rsquo;s existing drug interdiction efforts to prevent drug trafficking by criminal organizations, with a particular focus on assisting federal, state, local, and tribal law enforcement agencies in combatting fentanyl. On the other side, due to the deficit, there is a number of delays or reductions in grants for several programs.<br /> <br /> The prison population continues to decline, and the administration has ended its reliance on contract prison capacity. California Department of Corrections and Rehabilitation (CDCR) estimates savings of US$156 million General Fund annually beginning in 2024-2025. CDCR also announced in December 2022 the planned closure of Chuckawalla Valley State Prison by March 2025. This closure is estimated to generate savings of US$148 million General Fund annually beginning in 2025-2026 with additional administrative savings predicted. The budget includes US$11.4 million General Fund in 2024-2025 and growing to increase community correctional reentry center contract rates corresponding with recent inflationary trends for contracts expiring in 2024-2025. Budget solutions include reversion of monies from COVID-19-related activities and related work compensation savings, reversion from parolee county of release workload, delays in technology for surveillance, other baseline adjustments, and a budgetary loan of US$100 million from the Cannabis Tax Fund to the General Fund.<br /> <br /> California Office of Emergency Services is allocated US$3 billion (US$530.3 million General Fund) and 1,909 positions for Cal OES to oversee and coordinate emergency preparedness, response, recovery, and homeland security activities. To address budget shortfalls, the budget proposes a delay in funding for Flexible Cash Assistance for Survivors of Crime and reversion of money from community hardening and seismic retrofitting for soft-story multifamily housing.</p> <h2> Labor and Workforce Development Agency</h2> <p> The agency is in charge of safe and fair workplaces, helping to deliver critical worker benefits, and promoting good jobs for all. The agency oversees seven departments, boards, and panels that serve California employers and workers, which include the Agricultural Labor Relations Board, Department of Industrial Relations, Employment Development Department (EDD), Worker&rsquo;s Compensation Appeals Board, Public Employment Relations Board, Unemployment Insurance Appeals Board, and Workforce Development Board. Notably, there will be a one-time US$331 million payment for the annual interest payment on the state&rsquo;s Unemployment Insurance loan, half of which will come from the Employment Training Fund. This is notable because Senate Bill 1116, which would provide unemployment insurance benefits to striking workers, was reintroduced this year, despite being vetoed last year.<br /> <br /> EDD is designated to receive one-time funding of US$362.8 million to continue to upgrade and modernize systems, US$12 million for additional 71 positions to be phased in to address workload, US$2.8 million from the Worker&rsquo;s Compensation Administration Revolving Fund for 13 positions to be phased in and clarify time periods; additional resources will be directed to other department modernization projects.</p> <h2> K-12 and Higher Education </h2> <p> Taxpayers decided long ago to ensure that funding for schools was somewhat protected. Funding for K-12 schools and community college was guaranteed in a formula commencing in 1988-1989 under Proposition 98. Multiple factors are included, such as the level of funding in 1986-1987, General Fund revenues, per capita personal income, and school attendance growth or decline. This year&rsquo;s budget calls for maintaining and covering all current levels of funding and existing commitments for new and expanded programs, with an additional less than 1% cost-of-living increase for the year.<br /> <br /> Revised estimates of the General Fund since 2023 have significant impact, with a downward revision of a US$15.2 billion reduction in required funding. This is offset by an increase in local property tax, but overall, Governor Newsom wants to maintain current programs, including funding for community schools, universal school meals, expanded learning opportunities, education workforce, and continued implementation of universal transitional kindergarten. Instead, within the school and community college spending plan budget is an undefined reduction of US$8 billion in 2022‑2023 funding. The January 10 proposal includes total funding of US$126.8 billion (US$76.4 billion General Fund and US$50.4 billion other funds) for all K-12 education programs. K-12 per-pupil funding totals $17,653 from the Proposition 98 General Fund and $23,519 per pupil when accounting for all funding sources. The budget also includes US$53.7 million from the General Fund to help fund the state&rsquo;s Universal Prekindergarten initiative.<br /> <br /> Governor Newsom is proposing to delay the promised 5% increases in revenue to the University of California and California State University systems. Both would borrow funding this year to cover the cost and will be reimbursed the following year.</p> <p>Community colleges and schools will be protected by drawing US$7 billion from the US$10.8 billion Transitional Kindergarten 2014 rainy-day fund to cover this year&rsquo;s shortcomings. The state won&rsquo;t seek reimbursement for what turned out to be funding above the minimum Proposition 98 obligation for the prior two years.<br /> <br /> In collaboration with the California Legislative Black Caucus, Governor Newsom is preserving an additional US$300 million for the state&rsquo;s poorest schools. Other areas of funding include US$6 million to research hybrid and remote learning methods to produce new models. US$20 million will be included for a new math framework adopted by the State Board of Education last July, US$5 million to increase support for the California Cradle-to-Career Data System, and US$122 million to increase funding for universal school meals. The state has launched a goal to add 146,000 new slots for subsidized childcare with US$2 billion to support the effort.</p> <h2> Homelessness and Housing</h2> <p> The governor&rsquo;s budget maintains US$3.4 billion General Fund dollars to tackle homelessness and includes US$400 million for a third round of grants to address encampments that have become a prominent sight throughout the state. An additional US$1 billion will be available for a fifth round of Homeless Housing, Assistance and Prevention grants. <br /> <br /> To address the deficit, US$1.2 billion is expected to be cut from housing programs. The cuts include US$300 million from the regional planning grants, US$250 million less for building and preserving multifamily homes, and an additional US$250 million from a program to acquire and rehabilitate properties that are at risk for potential foreclosures. There also will be a delay of the US$260 million General Fund Homeless Housing, Assistance and Prevention Program.</p> <h2> Transportation and Infrastructure</h2> <p> The governor intends to put a US$180 billion investment over the next 10 years in infrastructure. With the current budget deficit, this year&rsquo;s allocation will be on immediate critical projects in the state&rsquo;s core functions. A five-year plan on infrastructure required under the law proposes US$53.3 billion in a combination of the General Fund, a special fund, and federal funding.<br /> <br /> The proposed budget offsets most of the reduction in General Fund dollars (US$1.1 billion) for transportation programs with Greenhouse Gas Reduction Fund money (US$791 million). As a result, significant funding for high priority transit and rail infrastructure, Active Transportation Program projects, port terminal improvements, and the Zero Emission Transit Capital Program is maintained. <br /> <br /> Additionally, the governor&rsquo;s proposed budget maintains nearly all of the funding for transportation programs (US$13.6 billion out of US$13.8 billion) associated with California&rsquo;s climate goals.</p> <h2> Work in Progress</h2> <p> As mentioned in the beginning, the January budget proposal is just the first step of what will eventually become California&rsquo;s budget for 2024-2025. The legislature is beginning budget hearings, with input from the Legislative Analyst&rsquo;s Office, stakeholders, and the administration&rsquo;s various agencies and departments. There will be another proposal released in May &mdash; the May Revise &mdash; which will take into account tax collections due in April, and the final budget will be voted upon on June 15, as required by state law. Adjustments will continue to be made in the details of the budget through the legislative session in the form of trailer bills until August 31, when the legislature adjourns the end of the two-year session.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{330B0ED9-26D0-47D6-BA20-A8DCD12FEF97}https://www.vitallaw.com/news/expert-insights-fda-started-a-process-to-downclassify-most-high-risk-ivd-types-here-is-why/hld013a59aba65b9542ec98e99848e5383c11?refURL=https%3A%2F%2Fwww.bloomberglaw.com%2F#.Mahnu V. Davarhttps://www.arnoldporter.com/en/people/d/davar-mahnu-vmahnu.davar@arnoldporter.comPhilip R. Desjardinshttps://www.arnoldporter.com/en/people/d/desjardins-philip-rphilip.desjardins@arnoldporter.comAbeba Habtemariamhttps://www.arnoldporter.com/en/people/h/habtemariam-abebaAbeba.Habtemariam@arnoldporter.comPhillip V. DeFedelehttps://www.arnoldporter.com/en/people/d/defedele-phillip-vphillip.defedele@arnoldporter.comFDA started a process to ‘downclassify’ most high-risk IVD types: Here is whyTue, 05 Mar 2024 00:00:00 -0600{F1872E6D-4B71-47BB-87DF-379C84093AB4}https://www.arnoldporter.com/en/perspectives/advisories/2024/03/ca-legislature-new-pfas-legislation-this-yearYuvaraj Sivalingamhttps://www.arnoldporter.com/en/people/s/sivalingam-yuvarajyuvaraj.sivalingam@arnoldporter.comBrandon W. Neuschaferhttps://www.arnoldporter.com/en/people/n/neuschafer-brandon-wbrandon.neuschafer@arnoldporter.comLawrence E. Culleenhttps://www.arnoldporter.com/en/people/c/culleen-lawrence-elawrence.culleen@arnoldporter.comJudah Prerohttps://www.arnoldporter.com/en/people/p/prero-judahjudah.prero@arnoldporter.comThe California Legislature Will Consider Sweeping New PFAS Legislation This Year<span>In recent years, the California legislature has considered several bills seeking to regulate or prohibit intentionally added perfluoroalkyl and polyfluoroalkyl substances (PFAS) in specific product categories, such as cosmetics, textile articles, and juvenile products.</span>Mon, 04 Mar 2024 00:00:00 -0600<p>In recent years, the California legislature has considered several bills seeking to regulate or prohibit intentionally added perfluoroalkyl and polyfluoroalkyl substances (PFAS) in specific product categories, such as cosmetics, textile articles, and juvenile products. This year, the state legislature will consider a significantly more expansive proposal, <a rel="noopener noreferrer" href="https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB903" target="_blank">Senate Bill (SB) 903</a>. The legislation, introduced by State Senator Nancy Skinner (D-Berkeley), seeks to prohibit the sale or distribution of all products containing intentionally added PFAS regardless of category, beginning in 2030. If enacted, California will join the states of Maine and Minnesota which are already implementing similar laws.</p> <p>As written currently, Senator Skinner&rsquo;s bill defines &ldquo;product&rdquo; in such a broad manner that the legislation will impact numerous important California commercial sectors. SB 903 defines &ldquo;product&rdquo; to include virtually any product intended for &ldquo;personal, residential, commercial, or industrial use&rdquo; or for use &ldquo;in making other products.&rdquo; As such, PFAS would be prohibited in materials used in many key sectors such as agricultural equipment, automotive components, medical devices, solar and wind energy harvesting, office equipment, and electronic products. </p> <p>The legislation does provide a few, specified exemptions. Those exemptions are for (1) products for which the use of PFAS is determined, by the Department of Toxic Substances Control (DTSC), to be a currently unavoidable use; (2) products that are governed by federal law as it pertains to the presence of PFAS in the product; and (3) used products. </p> <p>Senate Bill 903 outlines specific requirements for manufacturers to follow if they wish to seek a currently unavoidable use determination from DTSC. Manufacturers must provide information in a petition to DTSC requesting the department to determine that the use of PFAS in a product category is an unavoidable use. Based on the petition, DTSC must find that no safer alternatives to PFAS are reasonably available, that the function provided by PFAS is necessary for the product to work, and that the use &ldquo;is critical for health, safety, or the functioning of society.&rdquo; The bill limits such a determination to five years, at which point the determination will expire unless the manufacturer submits a petition to renew the determination no later than six months prior to expiration. </p> <p>It is worth noting that SB 903 allows the department to require a prohibition on the sale or distribution of products containing intentionally added PFAS in a particular product category to go into effect earlier than 2030, &ldquo;if it is feasible to do so.&rdquo; If the department determines that any of the following conditions are met, an earlier effective date is to be deemed feasible: (1) if a safer alternative exists, (2) if an applicable, publicly-available study includes findings that shows safer alternatives to PFAS are viable in the product or product category, or (3) if another state in the United States already bans the sale or use of PFAS in the product or product category. The public is authorized to petition DTSC to consider earlier effective dates. </p> <p>Senate Bill 903 also provides that civil penalties may be assessed for failure to comply. The civil penalty is capped at $1,000 for each day during which the violation continues; a second violation is capped at $2,500 for each day during which the violation continues.</p> <p>Should the legislation pass, and Governor Newsom signs it into law, DTSC will have until January 1, 2027 to develop regulations to administer the requirements of the bill. The governor&rsquo;s signature is not guaranteed as he has a mixed record on signing PFAS legislation. Since 2021, Governor Newsom has signed bills that ban the sale of PFAS-containing <a rel="noopener noreferrer" href="https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220AB2771&amp;search_keywords=PFAS" target="_blank">cosmetics</a>, <a rel="noopener noreferrer" href="https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220AB1817&amp;search_keywords=PFAS" target="_blank">textiles</a> (with exceptions), and <a rel="noopener noreferrer" href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fleginfo.legislature.ca.gov%2Ffaces%2FbillTextClient.xhtml%3Fbill_id%3D202120220AB652%26search_keywords%3DPFAS&amp;data=05%7C02%7CTheresa.Denson%40arnoldporter.com%7C2770754a665d4aad14db08dc3c7990b5%7Cd22d141fae37447facfa2e1d0e5b4969%7C0%7C0%7C638451740029956272%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C0%7C%7C%7C&amp;sdata=piojePFQnfVrw1Bukw%2B2IhShzl3qvIz7yWAak4kozWg%3D&amp;reserved=0" target="_blank">juvenile products</a>, but he has also vetoed bills that would have phased out PFAS in <a rel="noopener noreferrer" href="https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240AB727" target="_blank">cleaning products</a>, <a rel="noopener noreferrer" href="https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240AB1423&amp;search_keywords=PFAS" target="_blank">artificial turf</a>, and <a rel="noopener noreferrer" href="https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240AB246&amp;search_keywords=PFAS" target="_blank">menstrual products</a>.</p> <p>SB 903 has already garnered significant attention in Sacramento. We will continue to monitor relevant developments and provide updates. For questions or additional information, please reach out to the authors of this Advisory or your Arnold &amp; Porter contact.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{A8842E85-529D-4999-8F7A-580F507C631E}https://www.arnoldporter.com/en/perspectives/advisories/2024/03/us-imposes-sanctions-targeting-russias-military-industrial-baseJohn P. Barkerhttps://www.arnoldporter.com/en/people/b/barker-john-pjohn.barker@arnoldporter.comSoo-Mi Rheehttps://www.arnoldporter.com/en/people/r/rhee-soomisoo-mi.rhee@arnoldporter.comNicholas L. Townsendhttps://www.arnoldporter.com/en/people/t/townsend-nicholas-lnicholas.townsend@arnoldporter.comTal R. Machneshttps://www.arnoldporter.com/en/people/m/machnes-tal-rTal.Machnes@arnoldporter.comTrevor G. Schmitthttps://www.arnoldporter.com/en/people/s/schmitt-trevor-gtrevor.schmitt@arnoldporter.comJunghyun Baekhttps://www.arnoldporter.com/en/people/b/baek-junghyunjunghyun.baek@arnoldporter.comBell Johnsonhttps://www.arnoldporter.com/en/people/j/johnson-bellbell.johnson@arnoldporter.comCate Baskinhttps://www.arnoldporter.com/en/people/b/baskin-catecate.baskin@arnoldporter.comNew U.S. Sanctions on Russia Pack a Punch: U.S. Departments of State, Treasury, and Commerce Impose Expansive Sanctions Targeting Russia’s Military-Industrial Base<span>On February 25, the Biden administration unveiled a new tranche of sanctions against Russia in response to the ongoing war with Ukraine and the death of opposition politician Aleksey Navalny.</span>Mon, 04 Mar 2024 00:00:00 -0600<p>On February 25, the Biden administration <a rel="noopener noreferrer" href="https://www.whitehouse.gov/briefing-room/statements-releases/2024/02/23/statement-from-president-joe-biden-ahead-of-the-two-year-anniversary-of-russias-brutal-assault-against-ukraine/" target="_blank">unveiled</a> a new tranche of sanctions against Russia in response to the ongoing war with Ukraine and the death of opposition politician Aleksey Navalny. The new measures target more than 500 entities and individuals involved in Russia&rsquo;s financial, energy, and defense industries, as well as those involved in sanctions and export control evasion and circumvention. The latest restrictions mark the largest and most comprehensive sanctions package the U.S. has imposed on Russia since its invasion of Ukraine in February 2022. <br /> <br /> The new measures, undertaken in parallel by each of the departments of Treasury, State, and Commerce &mdash; as well as a corresponding business advisory released by these agencies in partnership with the Department of Labor &mdash; are described in the sections below.</p> <h2>Treasury Department</h2> <p>The Treasury Department&rsquo;s Office of Foreign Assets Control (OFAC), acting pursuant to Executive Order (EO) 14024, <a rel="noopener noreferrer" href="https://home.treasury.gov/news/press-releases/jy2117" target="_blank">implemented</a> sanctions targeting entities supporting Russia&rsquo;s military-industrial base; targets and individuals outside of Russia that are associated with helping Russia evade sanctions; and economic sanctions against Russian banks, investment firms, and financial technology companies. The latter group of entities were added to OFAC&rsquo;s Specially Designated Nationals (SDN) List for their involvement in evading financial sanctions, underwriting Russia&rsquo;s development in advanced technology, facilitating foreign and domestic investment in Russia, and providing IT support and software to Russian financial institutions. Included in these designations was the National Payment Card System Joint Stock Company, the state-owned operator of Russia&rsquo;s Mir National Payment System.<br /> <br /> OFAC also designated several individuals and entities deemed to be supporting Russia&rsquo;s military-industrial base, including those involved in weapons production, additive manufacturing, manufacturing and metalworking equipment, lubricants, coolants and industrial chemicals, semiconductor and electronics manufacturing, components and research, industrial automation, optics, navigational instruments, information technology and software, energy storage and power supply, aerospace, logistics and cargo transportation, and precious minerals. <br /> <br /> In addition, the U.S. continues to <a rel="noopener noreferrer" href="https://ofac.treasury.gov/recent-actions/20240223" target="_blank">target individuals and entities outside of Russia</a> (including those located or based in U.S. allied and partner countries) deemed to be engaging in activities that facilitate sanction evasion and circumvention, including exporters and shippers of restricted equipment and technology to Russia and money laundering networks facilitating Russian-origin precious metal movements. The entities targeted are located in China, Serbia, the United Arab Emirates (UAE), Estonia, Germany, Ireland, Kyrgyzstan, Finland, Azerbaijan, and Liechtenstein.<br /> <br /> These latest measures highlight OFAC&rsquo;s focus on &ldquo;advanced manufacturing and technology such as machine tools, including computer numerically controlled (CNC) machines &hellip; ; additive manufacturing (also known as 3D printing), &hellip; including creating special-purpose 3D printers for the production of [unmanned aerial vehicles (UAVs)], aircraft parts, and other military-related items; bearings, which are an integral component of Russia&rsquo;s military hardware, including its main battle tanks; and other fields such as robotics, industrial automation and software, specialized lubricants, and lasers.&rdquo;</p> <h2>State Department</h2> <p>Pursuant to EO 14024, the State Department also imposed similar sanctions,<a rel="noopener noreferrer" href="https://www.state.gov/imposing-measures-in-response-to-navalnys-death-and-two-years-of-russias-full-scale-war-against-ukraine/" target="_blank"> targeting more than 250 individuals and entities</a>, including engineering and energy entities, as well as individuals associated with Navalny&rsquo;s death. <br /> <br /> The State Department also added entities involved in Russia&rsquo;s energy production to the SDN list, including entities involved in the Arctic LNG 2 Project. Specifically, the new restrictions target entities focused on financing and constructing highly specialized liquefied natural gas (LNG) tankers for the operation of the Limited Liability Company Arctic LNG 2, the operator of the Artic LNG 2 project, and others involved in energy-related developments and projects in Russia such as State Atomic Energy Corporation Rosatom subsidiaries. <br /> <br /> In parallel with the Treasury Department, the State Department also targeted producers and exporters of items identified by the Commerce Department&rsquo;s Bureau of Industry and Security (BIS) as <a rel="noopener noreferrer" href="https://www.bis.doc.gov/index.php/2011-09-14-14-10-06/russia-export-controls" target="_blank">common high-priority items</a>, such as U.S.-origin aviation parts, industrial machinery and equipment, and electrical components. These items are deemed crucial to sustaining and fueling Russia&rsquo;s war efforts, and the U.S., in concert with the European Union, Japan, and the United Kingdom, have identified 50 items as high priority. The State Department also imposed sanctions on entities involved in Russia&rsquo;s metals and mining, financial, defense, technology, marine sectors, and other state-owned enterprises, as well as individuals with ties to the Russian government. Further, the State Department imposed sanctions on several individuals involved in the unlawful transfer and/or deportation of Ukrainian children to camps in Russia, Belarus, and Russia-occupied Crimea.<br /> <br /> Finally, the State Department sanctioned three individuals associated with Navalny&rsquo;s death, namely, the prison warden, Vadim Konstantinovich Kalinin, and regional prison head, Igor Borisovich Rakitin, at Russian Penal Colony IK-3 &mdash; the Arctic Circle facility where Navalny was found dead &mdash; as well as the deputy director of the Federal Penitentiary Service of Russia, Valeriy Gennadevich Boyarinev, all of whom were added to the SDN List.</p> <h2> Commerce Department</h2> <p>Meanwhile, BIS announced the <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2024/02/27/2024-03969/additions-of-entities-to-the-entity-list" target="_blank">addition of 93 entities</a> to its Entity List under the Export Administration Regulations (EAR) due to their continued support of Russia&rsquo;s ongoing aggression against Ukraine. Sixty-three of these entities are located in Russia, eight are in China, 16 are in Turkey, four are in the UAE, two are in Kyrgyzstan, and one each is in India and South Korea. All items subject to the EAR require a license to be exported, re-exported, or transferred (in-country) to a designated entity.<br /> <br /> In addition, more than 50 of these entities have been identified as Russia/Belarus-Military End Users (MEU) with the requisite Footnote 3 designation. Pursuant to Sections 744.21 and 734.9 of the EAR, Footnote 3 entities are restricted from receiving foreign-produced items that are the direct products of U.S.-origin technology or that are a direct product of a plant or equipment that itself is a direct product of U.S.-origin technology. A license is required for all items subject to the EAR for Russian and Belarusian MEUs and will be reviewed under a policy of denial, except for food or medicine designated as EAR99, which is reviewed on a case-by-case basis.<br /> <br /> The latest additions bring the total number of added entities since March 2, 2022 to more than 900. Under Secretary of Commerce for Industry and Security Alan Estevez <a rel="noopener noreferrer" href="https://www.bis.doc.gov/index.php/documents/about-bis/newsroom/press-releases/3452-2024-02-23-bis-press-release-russia-two-year-actions/file" target="_blank">said</a> BIS &ldquo;will continue to limit Putin&rsquo;s military options by imposing substantial costs on his ability to repair, replenish, and rearm with high-tech, high-quality equipment.&rdquo; <br /> <br /> BIS also added five new Harmonized Tariff Schedules (HTS) Codes to its common high priority list to &ldquo;highlight for industry that certain machine tools pose a heightened risk of being diverted illegally to Russia because of their importance to Russia&rsquo;s war efforts.&rdquo;</p> <table style="width: 410px; height: 385px;"> <tbody> <tr> <td style="background-color: #17365d; text-align: center; vertical-align: middle;"><span style="color: #ffffff;"><strong>HTS Code</strong></span></td> <td style="background-color: #17365d; text-align: center; vertical-align: middle;"><strong><span style="color: #ffffff;">Description</span></strong></td> </tr> <tr> <td style="text-align: left; vertical-align: middle;">&nbsp;8457.10</td> <td style="text-align: left; vertical-align: middle;">Machining centers for working metal</td> </tr> <tr> <td style="text-align: left; vertical-align: middle;">&nbsp;8458.11</td> <td style="text-align: left; vertical-align: middle;">Horizontal lathes for removing metal, numerically controlled</td> </tr> <tr> <td style="text-align: left; vertical-align: middle;">&nbsp;8458.91</td> <td style="text-align: left; vertical-align: middle;">Lathes, excluding horizontal, for removing metal, numerically controlled</td> </tr> <tr> <td style="text-align: left; vertical-align: middle;">&nbsp;8459.61</td> <td style="text-align: left; vertical-align: middle;">Milling machines, not knee type, for removing metal, numerically controlled</td> </tr> <tr> <td style="text-align: left; vertical-align: middle;">&nbsp;8466.93</td> <td style="text-align: left; vertical-align: middle;">Parts and accessories for machine tools, for laser operation, metalworking machining centers, lathes and drilling machines, etc., not specified or included elsewhere</td> </tr> </tbody> </table> <br /> <h2>Intra-Agency Business Advisory</h2> <p>In connection with the recent restrictions, the Departments of State, Treasury, Commerce, and Labor released <a rel="noopener noreferrer" href="https://www.state.gov/russia-business-advisory/" target="_blank">a business advisory</a> to help guide businesses in complying with these new restrictions by making informed decisions regarding the effects of conducting business in or with Russia. The advisory highlights specific categories of risk businesses and individuals may encounter:</p> <ul> <li>Risk of businesses and individuals becoming exposed to sanctions, export controls, import prohibitions, money laundering vulnerabilities, and corruption</li> <li>Risk of businesses and individuals being implicated in the Russian government&rsquo;s violations of international law, including war crimes and crimes against humanity, and human rights abuses</li> <li>Risk to businesses and individuals due to the proliferation and implementation of repressive laws in the Russian Federation and the areas of Ukraine it occupies, including measures authorizing expropriation in certain instances or detentions based on spurious grounds</li> </ul> <h2>Conclusion</h2> <p>Companies and individuals should take stock of these recent actions and the increasing and continued use of sanctions and export control restrictions. Conducting business with or related to Russia presents increasing legal and financial consequences, but also may give rise to reputation and business risks. Heightened due diligence efforts are essential and should include in-depth and robust compliance mechanisms, such as investigations and audits, as well as a focus on human rights-related due diligence.<br /> <br /> We will continue to monitor the sanctions and export control restrictions as they emerge.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{225395EB-FC31-4621-B686-E281737F1ADA}https://www.arnoldporter.com/en/perspectives/events/2024/02/willful-patent-infringement-enhanced-damages-and-opinions-of-counselWallace.Wu@arnoldporter.comWillful Patent Infringement, Enhanced Damages, and Opinions of CounselIn this one-hour program, we&rsquo;ll explore recent case law on willful patent infringement, enhanced damages, and opinions of counsel as a defense.Thu, 29 Feb 2024 00:00:00 -0600<p>In this one-hour program, we&rsquo;ll explore recent case law on willful patent infringement, enhanced damages, and opinions of counsel as a defense. We&rsquo;ll also offer some practical tips on how to avoid willful infringement and when and how to prepare opinions of counsel.</p> <p>To attend, please contact Sarah Alcock, <a href="mailto:sarah.alcock@arnoldporter.com">sarah.alcock@arnoldporter.com</a>, by Thursday, February 22.</p>{7886CFB8-373C-4126-A558-5B288728EBEF}https://www.arnoldporter.com/en/perspectives/events/2024/02/consumer-health-what-to-know-about-recent-trendsRaqiyyah Pippinshttps://www.arnoldporter.com/en/people/p/pippins-raqiyyahraqiyyah.pippins@arnoldporter.comPhilip R. Desjardinshttps://www.arnoldporter.com/en/people/d/desjardins-philip-rphilip.desjardins@arnoldporter.comJami Vibberthttps://www.arnoldporter.com/en/people/v/vibbert-jamijami.vibbert@arnoldporter.comConsumer Health: What to Know About Recent Trends in Digital HealthArnold &amp; Porter hosted an interactive webinar on regulatory oversight of digital health and medical technology as it relates to consumer health.Thu, 29 Feb 2024 00:00:00 -0600<p>Arnold &amp; Porter hosted an interactive webinar on regulatory oversight of digital health and medical technology as it relates to consumer health. Arnold &amp; Porter partners Raqiyyah Pippins, Philip Desjardins, and Jami Mills Vibbert discussed the impact of FDA and FTC regulation on product development decision-making, lifecycle management, privacy and cyber concerns, and other relevant issues facing consumer health companies exploring digital health opportunities.</p>{51397BC1-A70A-4575-B3E1-F115CE4FEDEA}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/irs-planned-crackdown-on-private-jet-ownersJames P. Josephhttps://www.arnoldporter.com/en/people/j/joseph-james-pjames.joseph@arnoldporter.comRebecca L. D. Gordonhttps://www.arnoldporter.com/en/people/g/gordon-rebecca-l-dRebecca.Gordon@arnoldporter.comRyan F. Benderhttps://www.arnoldporter.com/en/people/b/bender-ryanryan.bender@arnoldporter.comPari Sitaulahttps://www.arnoldporter.com/en/people/s/sitaula-pariPari.Sitaula@arnoldporter.comNo Longer Flying Under the Radar: What You Should Know about the IRS’s Planned Crackdown on Private Jet OwnersOn February 21, the IRS announced a new campaign to increase audits of private jet usage by high-income taxpayers, large corporations, and large partnerships to ensure that business deductions for such usage have been properly made.Thu, 29 Feb 2024 00:00:00 -0600<p>On February 21, the IRS announced a new campaign to increase audits of private jet usage by high-income taxpayers, large corporations, and large partnerships to ensure that business deductions for such usage have been properly made. The announcement is consistent with an ongoing IRS publicity campaign urging increased scrutiny of high-net-worth taxpayers in the wake of media criticism of increasing wealth inequality in the U.S. and follows in the footsteps of IRS announcements in September 2023 that Inflation Reduction Act funding would be used to target the top 1% of taxpayers. The IRS has focused on high-net-worth taxpayers through prioritization of high-income audit cases, use of artificial intelligence to target large partnership returns, expanded efforts to curb digital currency and foreign bank account non-compliance, and the creation of a special IRS unit focused on auditing pass-throughs owned by the ultra-wealthy. At the announcement for this newest campaign, IRS Commissioner Danny Werfel commented, &ldquo;These aircraft audits will help ensure high-income groups aren&rsquo;t flying under the radar with their tax responsibilities.&rdquo;<br /> <br /> While this latest campaign is in its infancy, now is the time for private jet owners &mdash; whether individuals, corporations, or partnerships &mdash; to work with their tax advisors to ensure proper compliance and reporting.</p> <h2>Background</h2> <p>Business use of private jets has long been a fixture of the corporate executive world and remains a point of fascination for the public. The premise of deductions for business use of private jets is relatively straightforward. Under I.R.C. &sect; 162(a), taxpayers can deduct ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, meaning that private jet costs associated with business activities can be deducted. However, muddying the waters are highly complicated legal requirements that business users of private jets allocate expenses between business use and personal use. Not only is tracking difficult and costly, but the rules and regulations defining use of jets and how to allocate time are murky and broad. <br /> <br /> For example, under Treas. Reg. &sect; 1.162-2(b), if a taxpayer travels to a destination and, while at the destination, engages in both business and personal activities, travel expenses to and from such destination are deductible only if the trip is related primarily to the taxpayer's trade or business. If the trip is primarily personal in nature, the travel expenses to and from the destination are not deductible even though the taxpayer engages in business activities while at such destination. However, expenses while at the destination which are properly allocable to the taxpayer's trade or business are deductible even though the traveling expenses to and from the destination are not deductible. This &ldquo;primary purpose test&rdquo; is a facts and circumstances test that is tough for taxpayers to apply and often even more difficult for accountants to track. So, hypothetically, while Taylor Swift&rsquo;s private flight from the AFC Championship Game to perform in Japan would be deductible as a business expense, her private flight from Japan to Las Vegas to attend the Super Bowl, as a personal activity, would not be so deductible. <br /> <br /> Perhaps surprising in light of the new IRS audit campaign, recent IRS publications have actually given some reprieve to private jet owners looking to maximize business use deductions. In particular, the IRS has offered sole proprietor businesses an easier route to determining deductibility of expenses for use of their private jet. In IRC Memorandum 202117012 (April 2021), the IRC Chief Counsel&rsquo;s office concluded that a sole proprietor that owns an aircraft (either directly or indirectly through a disregarded entity) may use the primary purpose test in Treas. Reg. &sect; 1.162-2(b)(1) to determine whether expenses for use of the aircraft by the sole proprietor are deductible, rather than the more arduous method of tracking and allocation of seat hours or miles flown as provided in Treas. Reg. &sect; 1.274-10(e).<br /> <br /> Apart from scrutinizing deductions for business use of private jets, it is anticipated that IRS audits will focus on other tax-efficient strategies owners use for generating deductions from their private jets. One such creative tool is the donation of a private jet, or use of a private jet, to a nonprofit organization. Under I.R.C. &sect; 170, a deduction is allowed for the fair market value of charitable contributions. If a charitable contribution is made in property other than money, the amount of the contribution is generally the fair market value of the donated property at the time of the contribution, reduced by certain exclusions. Jet owners and fractional jet owners can get creative with charitable contributions surrounding their jets. For example, private jet owners and fractional private jet owners may donate flight hours to a medical nonprofit organization for the transportation of patients in need. Similarly, private jet owners looking for an alternative to selling their jet may look to donation of the jet itself to a charitable organization. There are additional compliance risks and reporting obligations when jet owners donate (or attempt to be reimbursed for) the use of their private jet by the jet owner&rsquo;s private foundation. With its new campaign, the IRS may be on the lookout for noncompliance in charitable giving within the private jet market.</p> <h2>Impact and Response</h2> <p>The IRS campaign to increase private jet audits has immediate implications for private jet owners. In the near term, owners of private jets should assume that they are at high risk of audit by the IRS. Owners that have not adequately prepared documentation to defend their deductions for business use of private jets will need to act quickly to work with their tax advisors to ensure proper records can be located and supported in the event of an IRS audit. Similarly, owners who have made charitable donations related to private jets should work with their tax advisors to be prepared to defend any donation to a nonprofit organization. This includes working with their tax advisors to ensure the proper documentation is in place, such as a deed of gift, a qualified appraisal, a Form 1098-C from the recipient organization, and a contemporaneous written acknowledgment of the contribution from the donee to the donor, in addition to any situation-specific documentation. Finally, in the near term, owners will want to work with their tax advisors to ensure that the ownership of their private jet is structured properly to allow deductions to be taken by the intended entity or individual. <br /> <br /> In the long run, current owners will need to focus on closely complying with IRS statutory guidelines, Treasury regulations, and case law surrounding ownership, operation, and charitable donation of their private jets. Similarly, new owners will want to ensure tax efficient structuring for any new jet purchase, as well as maintenance of accurate tracking and tax reporting systems for business use of their private jet or charitable contributions.<br /> <br /> The professionals in Arnold &amp; Porter&rsquo;s <a href="https://www.arnoldporter.com/en/services/capabilities/practices/private-client-services/tax">Tax</a> and <a href="https://www.arnoldporter.com/en/services/capabilities/practices/private-client-services">Private Client Services</a> practice groups have extensive knowledge and experience with jet purchases and leasing, tax compliance and tax controversy related to private jet audits, and charitable giving related to private jets and fractional ownership of private jets. Should you have any questions or need assistance with your private jet purchase or lease, tax compliance, or charitable giving, please reach out to one of the Key Contacts listed on this Advisory.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{3EB87E48-1178-45FC-91CB-38B3D7859C62}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/preserving-collaboration-tools-and-ephemeral-messagesMelissa Webermanhttps://www.arnoldporter.com/en/people/w/weberman-melissamelissa.weberman@arnoldporter.comAngela M. Pelletierhttps://www.arnoldporter.com/en/people/p/pelletier-angela-mangela.pelletier@arnoldporter.comSimon Nagelhttps://www.arnoldporter.com/en/people/n/nagel-simonsimon.nagel@arnoldporter.comTess Sapersteinhttps://www.arnoldporter.com/en/people/s/saperstein-tesstess.saperstein@arnoldporter.comFederal Authorities Continue to Focus on Preserving Collaboration Tools and Ephemeral Messages<span>Federal authorities have once again emphasized the importance of preserving chats, data from collaboration tools, and so-called &ldquo;ephemeral&rdquo; messages relevant to investigations or litigation.&nbsp;</span>Thu, 29 Feb 2024 00:00:00 -0600<p>Federal authorities have once again emphasized the importance of preserving chats, data from collaboration tools, and so-called &ldquo;ephemeral&rdquo; messages relevant to investigations or litigation. On January 26, the Federal Trade Commission and the Antitrust Division of the Department of Justice announced that they are updating language in their standard preservation letters, subpoenas, and second requests to explicitly clarify that a party&rsquo;s legal responsibility to preserve evidence &ldquo;applies to new methods of collaboration and information sharing tools, even including tools that allow for messages to disappear via ephemeral messaging capabilities.&rdquo; </p> <p>&ldquo;The Antitrust Division and the Federal Trade Commission expect that opposing counsel will preserve and produce any and all responsive documents, including data from ephemeral messaging applications designed to hide evidence. Failure to produce such documents may result in obstruction of justice charges,&rdquo; said Manish Kumar, Deputy Assistant Attorney General of the Justice Department&rsquo;s Antitrust Division.</p> <p>This recent announcement is the latest in a series of agency statements that the obligation to preserve and produce evidence extends beyond traditional emails and electronic documents. Agencies &mdash; and increasingly, courts &mdash; have explained that the duty to preserve, once triggered, extends to <em>all communications</em>, including those on non-traditional messaging platforms like Slack, Microsoft Teams, Google Chat, Zoom, Snapchat, Signal, Telegram, WhatsApp, WeChat, Clubhouse, Wickr, etc.</p> <p>This agency interest is not new. As early as 2017, the Department of Justice required cooperating parties to maintain controls over employees&rsquo; ephemeral messaging to receive cooperation credit. The DOJ Criminal Division&rsquo;s current policy on Evaluating Corporate Compliance Programs instructs prosecutors to consider whether a corporation has effective policies and procedures governing the use of personal devices and messaging applications, ensuring that data is accessible and preservable to the company. In 2023, Assistant Attorney General Kenneth Polite explained that the department expects production of chat and ephemeral messaging data and will not take its absence &ldquo;at face value.&rdquo; A company&rsquo;s ability to account for chat and personal device data &ldquo;may very well affect the offer it receives to resolve criminal liability.&rdquo;</p> <p>The Securities and Exchange Commission has also increased its scrutiny. In an October 2021 speech, the SEC&rsquo;s Division of Enforcement Director Gurbir Grewal advised companies: &ldquo;You need to be actively thinking about and addressing the many compliance issues raised by the increased use of personal devices, new communications channels, and other technological developments like ephemeral apps.&rdquo; In later remarks at SEC Speaks 2021, Director Grewal again focused on ephemeral messaging, stating that the SEC would consider &ldquo;all of [its] options when&rdquo; violation of record-keeping obligations and obfuscation of evidence &ldquo;occurs prior to or during [its] investigations.&rdquo; Indeed, the SEC and Commodity Futures Trading Commission have fined corporations over US$2 billion for failure to preserve so-called &ldquo;off-channel communications.&rdquo;</p> <h2>New Technologies</h2> <p>These agencies recognize the reality of how business is conducted today. Important communications are increasingly sent via modern messaging and collaboration tools rather than email. Due to generational shifts, technological innovation, and remote work, today&rsquo;s business communications often occur outside the traditional Office 365 environment. Accordingly, authorities expect these important communications to be preserved and produced when relevant to an investigation or legal claim.</p> <p>The DOJ and SEC have been particularly focused on &ldquo;ephemeral&rdquo; messaging applications, reflecting their concern that these applications are used to hide evidence. Ephemeral messaging platforms provide secure written communications that are dynamic and short-lived. Typically, these messaging platforms automatically delete or dispose of messages on both the sender&rsquo;s and recipient&rsquo;s devices after a short time. For example, the messaging platform Signal does not store any data. Texts sent via Signal exist on Signal&rsquo;s servers only while in transit and they are end-to-end encrypted. The only way to access Signal messages on any device is for individual users to enable chat backups.</p> <p>The use of Signal and other ephemeral platforms presents a challenge for a company obligated to &ldquo;take reasonable steps&rdquo; to preserve evidence once legal proceedings are anticipated. The good news is that some of these platforms have settings allowing them to be &ldquo;semi-ephemeral,&rdquo; providing the ability to backup chats and suspend autodelete functions. Once a duty to preserve is triggered, time is of the essence in locating any relevant ephemeral messaging applications in use, suspending deletions, and enabling backups. Courts are increasingly likely to find that failure to turn off an auto-delete function is sufficient to establish that preservation efforts were not reasonable.[[N:<em>See</em>, <em>e.g.</em>, <em>In re Google Play Store Antitrust Litig.</em>, 21-md-02981-JD (N.D. Cal. March 28, 2023) (chat data); <em>DR Distributors LLC v. 21 Century Smoking Inc.</em>, 513 F. Supp. 3d 839, 931-33 (N.D. Ill. 2021) (email); <em>Paisley Park Enterprises</em>, 330 F.R.D. 226, 233 (D. Minn. 2019) (texts).]]</p> <h2>How Can Companies Respond?</h2> <p>Because communications via chat may contain potentially discoverable information, agencies are requiring companies to evaluate this data in the same way they analyze email and other documents in the context of preservation &mdash; and preferably long before any litigation. The agencies have not announced a new preservation obligation, but rather clarified an already existing duty to preserve potentially discoverable information, which simply exists in a different &mdash; albeit more challenging &mdash; form. If company counsel determines that chats (including ephemeral messaging) or collaboration tool data contain potentially discoverable information, the agencies expect that data to be preserved when faced with a government investigation or litigation.</p> <p>To the extent they have not already done so, companies should consider taking the following practical steps in line with the recent agency announcement:</p> <ul> <li><em>Evaluate whether, and how, the business uses chat (including ephemeral) and collaboration tool data</em>.<br /> <br /> Companies should consider analyzing, and periodically re-evaluating, how company employees communicate in their day-to-day work, with a particular focus on the chat and collaboration data platforms they use. Counsel would be well-advised to work with in-house IT resources to thoroughly catalog and understand all chat platforms and any other sources, along with the volume of such data.<br /> During their evaluation, company counsel may learn that some employees circumvented formal IT processes and procedures to install or use unapproved chat platforms. The authorities are looking for companies to review and revise their IT policies and procedures to specifically address permitted chat and other platforms, educate employees on proper use of permitted platforms, and periodically evaluate or audit compliance. Companies may also consider disciplinary actions for use of unauthorized platforms to steer employees away from unauthorized usage. And companies may want to proactively evaluate their BYOD policies considering the unique problems of potentially discoverable ephemeral and other data on personal devices. Finally, if necessary, IT may need to remove unpermitted chat and collaboration platforms from company-owned computer resources.</li> </ul> <ul> <li><em>Review licenses of platforms</em>.<br /> <br /> Companies should consider reviewing the licenses they have with providers of chat and collaboration tools used in the business to ensure they can be preserved. If data cannot be preserved, then licenses can be renegotiated to provide for a preservation feature if one exists before litigation or a government investigation commences. If ephemeral data cannot be preserved, then a company should consider restricting the use of the chat platform in the face of threatened litigation or government investigation.</li> </ul> <ul> <li><em>Update legal holds and related preservation procedures</em>.<br /> <br /> Given the ubiquity of chat usage for everyday company activities, companies should consider updating their litigation holds to specifically address chat, collaboration, and ephemeral messaging platforms. As with email and all other potentially discoverable data, company counsel should ensure that in-house IT personnel are well-versed in changing preservation settings on all chat platforms such that the company can disable auto-delete functions and enable backup functions when a legal hold issues. Further, it is prudent to ensure that the processes and procedures for preserving chat, collaboration, and ephemeral data are well-documented along with the company&rsquo;s existing preservation procedures.</li> </ul> <ul> <li><em>Consider changing custodian questionnaires and interviews</em>.<br /> <br /> Companies should also consider including questions in their custodian questionnaires and interviews about the usage of chat, collaboration, and ephemeral message platforms on both company-owned and personal devices to ensure they affirmatively inquire about such potentially discoverable data. This would present an opportunity for custodians to identify any previously unknown sources of potentially discoverable data and may give counsel a final opportunity to address such a data source.</li> </ul> <ul> <li><em>Pay particular attention to the issues surrounding employees&rsquo; use of personal cell phones for work</em>.<br /> <br /> It is common for employees to use their personal cell phones and other electronic devices for work. Both companies and employees enjoy the flexibility and freedom that BYOD permits, but the use of personal devices for work has blurred the line between business and personal communication. The informality of communicating by personal device, especially via chat (ephemeral or otherwise), creates the impression that data from personal devices is not discoverable. But if potentially relevant, this data is indeed discoverable, and the agencies expect that a company will produce the relevant mobile data to government agencies. Further, if a company does not produce that data (because, for example, it does not have control of the device), then the agency could issue a civil investigative demand directly to the employee to obtain the device data. It is thus advisable for companies to structure their BYOD policies to ensure that business communications on personal devices are subject to the same retention rules as those on company-owned devices, inclusive of chat. They may also wish to take steps to educate employees on how BYOD policies work and why they are so crucial.</li> </ul> <h2>Information Governance Considerations</h2> <p>Considering the ever-increasing amount of data companies are creating, companies should be thoughtful in their information governance policies to ensure the retention of information necessary for the business or required by law, while also permitting disposal of unnecessary data. The recent announcement does <em>not</em> mean that a company must always preserve all chat, collaboration, and ephemeral data across its organization. Communications via ephemeral message are attractive to businesses for well-founded reasons, including increasing efficiencies and minimizing data, thus reducing breach exposure, addressing privacy concerns, and decreasing data available for retention and the associated burdens. Still, government agencies are aware that, more frequently than ever, potentially discoverable business information exists in ephemeral and other modern forms. Information governance policies that balance these competing interests should satisfy the authorities.</p> <p><span style="font-size: small;"></span></p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{6BA770D5-0F08-489E-AD7A-16604DF199FB}https://www.arnoldporter.com/en/perspectives/events/2024/02/life-sciences-hot-topics-data-protection-and-competitionAlexander Roussanovhttps://www.arnoldporter.com/en/people/r/roussanov-alexanderalexander.roussanov@arnoldporter.comJames Castro-Edwardshttps://www.arnoldporter.com/en/people/c/castro-edwards-jamesjames.castro-edwards@arnoldporter.comJohn Schmidthttps://www.arnoldporter.com/en/people/s/schmidt-johnjohn.schmidt@arnoldporter.comLudovica Pizzettihttps://www.arnoldporter.com/en/people/p/pizzetti-ludovicaludovica.pizzetti@arnoldporter.comEleri F. Williamshttps://www.arnoldporter.com/en/people/w/williams-eleri-feleri.williams@arnoldporter.comLife Sciences Hot Topics Data Protection and Competition LawJoin us on Wednesday, 28 February 2024, for a half-day of hot topics on recent updates relating to Data Protection in the UK and the EU and Competition Law!Wed, 28 Feb 2024 00:00:00 -0600<p>Join us on Wednesday, 28 February 2024, for a half-day of hot topics on recent updates relating to Data Protection in the UK and the EU and Competition Law!</p> <h2>Topics will include:</h2> <h3>Data protection:</h3> <ul> <li>GDPR and AI in healthcare </li> <li>Legal basis for primary and secondary research</li> <li>Real world evidence, European Health Data Space, and the GDPR</li> <li>Data Protection and Digital Information Bill</li> </ul> <h3>Competition:</h3> <ul> <li>Unlawful exclusionary abuses</li> <li>Parallel trade and impact of supply chains</li> <li>Dawn raids and trends in antitrust investigations</li> <li>Digital Markets, Competition and Consumers Bill</li> </ul> <h3>Participation:</h3> <p>The Arnold &amp; Porter Life Sciences Future Forum is a group established to provide training and networking opportunities for in-house junior and mid-level lawyers in the life sciences industry. However, all seniorities are welcome. There are no formal entry or membership requirements&mdash;please feel free to pass this to colleagues who might be interested in attending.</p> <p>We look forward to seeing you!</p>{55312A67-0AA8-4777-9740-54413F4DAB1F}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/updated-critical-and-emerging-technologies-listJohn P. Barkerhttps://www.arnoldporter.com/en/people/b/barker-john-pjohn.barker@arnoldporter.comRonald D. Leehttps://www.arnoldporter.com/en/people/l/lee-ronald-dRonald.Lee@arnoldporter.comSoo-Mi Rheehttps://www.arnoldporter.com/en/people/r/rhee-soomisoo-mi.rhee@arnoldporter.comNicholas L. Townsendhttps://www.arnoldporter.com/en/people/t/townsend-nicholas-lnicholas.townsend@arnoldporter.comJunghyun Baekhttps://www.arnoldporter.com/en/people/b/baek-junghyunjunghyun.baek@arnoldporter.comTrevor G. Schmitthttps://www.arnoldporter.com/en/people/s/schmitt-trevor-gtrevor.schmitt@arnoldporter.comBell Johnsonhttps://www.arnoldporter.com/en/people/j/johnson-bellbell.johnson@arnoldporter.comSarah Belmonthttps://www.arnoldporter.com/en/people/b/belmont-sarahsarah.belmont@arnoldporter.comWhite House Releases Updated Critical and Emerging Technologies List<span>On February 12, the White House Office of Science and Technology Policy (OSTP) released an updated list of critical and emerging technologies (CETs), refining and building upon the previous version issued in 2022.</span>Wed, 28 Feb 2024 00:00:00 -0600<p>On February 12, the White House Office of Science and Technology Policy (OSTP) <a rel="noopener noreferrer" href="https://www.whitehouse.gov/ostp/news-updates/2024/02/12/white-house-office-of-science-and-technology-policy-releases-updated-critical-and-emerging-technologies-list/" target="_blank">released</a> an <a rel="noopener noreferrer" href="https://www.whitehouse.gov/wp-content/uploads/2024/02/Critical-and-Emerging-Technologies-List-2024-Update.pdf" target="_blank">updated list</a> of critical and emerging technologies (CETs), refining and building upon the previous <a href="https://www.arnoldporter.com/en/perspectives/advisories/2022/02/biden-updates-list-of-critical-technologies">version</a> issued in 2022. This update outlines the Biden administration&rsquo;s focus on technologies that could &ldquo;strengthen the nation&rsquo;s security&rdquo; and &ldquo;chart a new pathway in American innovation&rdquo; such as generative AI systems and micro- and nano-electromechanical systems. Companies in CET fields should expect the updated list to help guide development of U.S. export controls, including multilateral controls, areas of focus of the Committee on Foreign Investment in the U.S. (CFIUS), U.S. domestic investment policies, and encouragement of research and study in Science, Technology, Engineering and Mathematics (STEM).</p> <p>The most notable revisions from the 2022 list include adding Positioning, Navigation, and Timing (PNT) Technologies and Data Privacy, Data Security, and Cybersecurity Technologies, which were previously addressed as separate subtopics. In addition, the 2024 list consolidated and identified new subfields for each CET focusing, where possible, on core technologies that continue to emerge and modernize. CETs are defined as subsets of advanced technologies that may significantly impact U.S. national security.</p> <p>The critical and emerging technology areas in the 2024 update are:</p> <ul> <li>Advanced Computing</li> <li>Advanced Engineering Materials</li> <li>Advanced Gas Turbine Engine Technologies</li> <li>Advanced and Networked Sensing and Signature Management</li> <li>Advanced Manufacturing</li> <li>Artificial Intelligence</li> <li>Biotechnologies</li> <li>Clean Energy Generation and Storage</li> <li>Data Privacy, Data Security, and Cybersecurity Technologies</li> <li>Directed Energy</li> <li>Highly Automated, Autonomous, and Uncrewed Systems, and Robotics</li> <li>Human-Machine Interfaces</li> <li>Hypersonics</li> <li>Integrated Communication and Networking Technologies</li> <li>Positioning, Navigation, and Timing Technologies</li> <li>Quantum Information and Enabling Technologies</li> <li>Semiconductors and Microelectronics</li> <li>Space Technologies and Systems</li> </ul> <p>(All CETs and their respective subfields are listed below.)</p> <p>The 2024 list does not significantly differ from the 2022 list, with many of the same CETs listed. However, certain technologies previously covered within subcategories have now been highlighted as one of the 18 main CET topic areas: (1) Clean Energy Generation and Storage; (2) Data Privacy, Data Security, and Cyber Technologies; (3) Integrated Communication and Network Technologies; and (4) PNT technologies.</p> <p>Like the 2022 list, the 2024 list also identifies refined subcategories for each of the CETs listed above. For example, the PNT CET includes diversified PNT-enabling technologies for users and systems in airborne, space-based, terrestrial, subterranean, and underwater settings; interference, jamming, and spoofing detection technologies, algorithms, analytics, and networked monitoring systems; and disruption/denial-resisting and hardening technologies. Notably, the 2024 list also includes several new subcategories such as generative AI systems and micro- and nano-electromechanical systems.</p> <p>While not a &ldquo;priority list for either policy development or funding,&rdquo; the updated CET list may help inform government-wide and agency-specific efforts concerning U.S. technological competitiveness and national security. For example, the Export Control Reform Act of 2018 charges the Bureau of Industry and Security (BIS) with implementing a robust process to identify &ldquo;emerging&rdquo; and other types of &ldquo;critical&rdquo; technologies. This latest update aligns with the <a rel="noopener noreferrer" href="https://www.whitehouse.gov/wp-content/uploads/2022/10/Biden-Harris-Administrations-National-Security-Strategy-10.2022.pdf" target="_blank">National Security Strategy</a> issued in October 2022, highlighting the U.S. government&rsquo;s focus on technology that is central to geopolitical competition and to the future of U.S. national security.</p> <p>Given the continued scrutiny regarding the importance of these technologies as they relate to U.S. national security interests, interested parties should keep a close eye on any future regulations regarding CETs. It is important to note that identification on the list does not automatically impose export control regulations on the listed technologies, which under CFIUS may trigger a mandatory filing. However, parties in these industries involving one or more CET should assess the likely level of government interest, consult legal counsel as needed, and formulate a strategy accordingly.</p> <table style="border: 1px solid #595959; top: 911px; width: 670px; height: 2948px;"> <tbody> <tr> <td style="border: 1px solid #7f7f7f; background-color: #1f497d; text-align: center;" colspan="3"><strong><span style="color: #ffffff;">Critical and Emerging Technologies List With Subfields</span></strong></td> </tr> <tr> <td style="background-color: #d8d8d8; text-align: center;"><strong>CET</strong></td> <td style="background-color: #d8d8d8; text-align: center;" colspan="2"><span><strong>Technology Subfield</strong></span></td> </tr> <tr> <td style="text-align: center;">&nbsp;<span><strong>Advanced Computing</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Advanced supercomputing, including for AI applications</li> <li>Edge computing and devices</li> <li>Advanced cloud services</li> <li>High-performance data storage and data centers</li> <li>Advanced computing architectures</li> <li>Advanced modeling and simulation</li> <li>Data processing and analysis techniques</li> <li>Spatial computing</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Advanced Engineering Materials</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Materials by design and material genomics</li> <li>Materials with novel properties to include substantial improvements to existing properties</li> <li>Novel and emerging techniques for material property characterization and lifecycle assessment</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Advanced Gas Turbine <br /> Engine Technologies</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Aerospace, maritime, and industrial development and production technologies</li> <li>Full-authority digital engine control, hot-section manufacturing, and associated technologies</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Advanced and Networked Sensing <br /> and Signature Management</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Payloads, sensors, and instruments</li> <li>Sensor processing and data fusion</li> <li>Adaptive optics</li> <li>Remote sensing of the Earth</li> <li>Geophysical sensing</li> <li>Signature management</li> <li>Detection and characterization of pathogens and of chemical, biological, radiological and nuclear weapons, and materials</li> <li>Transportation-sector sensing</li> <li>Security-sector sensing</li> <li>Health-sector sensing</li> <li>Energy-sector sensing</li> <li>Manufacturing-sector sensing</li> <li>Building-sector sensing</li> <li>Environmental-sector sensing</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Advanced Manufacturing</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Advanced additive manufacturing</li> <li>Advanced manufacturing technologies and techniques including those supporting clean, sustainable, and smart manufacturing, nanomanufacturing, lightweight metal manufacturing, and product and material recovery</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Artificial Intelligence (AI)</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Machine learning</li> <li>Deep learning</li> <li>Reinforcement learning</li> <li>Sensory perception and recognition</li> <li>AI assurance and assessment techniques</li> <li>Foundation models</li> <li>Generative AI systems and multimodal and large language models</li> <li>Synthetic data approaches for training, tuning, and testing</li> <li>Planning, reasoning, and decision making</li> <li>Technologies for improving AI safety, trust, security, and responsible use</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Biotechnologies</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Novel synthetic biology including nucleic acid, genome, epigenome, and protein synthesis and engineering, including design tools</li> <li>Multi-omics and other biometrology, bioinformatics, computational biology, predictive modeling, and analytical tools for functional phenotypes</li> <li>Engineering of sub-cellular, multicellular, and multi-scale systems</li> <li>Cell-free systems and technologies</li> <li>Engineering of viral and viral delivery systems</li> <li>Biotic/abiotic interfaces</li> <li>Biomanufacturing and bioprocessing technologies</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Clean Energy Generation <br /> and Storage</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Renewable generation</li> <li>Renewable and sustainable chemistries, fuels, and feedstocks</li> <li>Nuclear energy systems</li> <li>Fusion energy</li> <li>Energy storage</li> <li>Electric and hybrid engines</li> <li>Batteries</li> <li>Grid integration technologies</li> <li>Energy-efficiency technologies</li> <li>Carbon management technologies</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Data Privacy, Data Security, and <br /> Cybersecurity Technologies</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Distributed ledger technologies</li> <li>Digital assets</li> <li>Digital payment technologies</li> <li>Digital identity technologies, biometrics, and associated infrastructure</li> <li>Communications and network security</li> <li>Privacy-enhancing technologies</li> <li>Technologies for data fusion and improving data interoperability, privacy, and security</li> <li>Distributed confidential computing</li> <li>Computing supply chain security</li> <li>Security and privacy technologies in augmented reality/virtual reality</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Directed Energy</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Lasers</li> <li>High-power microwaves</li> <li>Particle beams</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Highly Automated, Autonomous, <br /> and&nbsp;Uncrewed Systems (UxS), <br /> and Robotics</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Surface</li> <li>Air</li> <li>Maritime</li> <li>Space</li> <li>Supporting digital infrastructure, including High Definition (HD) maps</li> <li>Autonomous command and control</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Human-Machine Interfaces</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Augmented reality</li> <li>Virtual reality</li> <li>Human-machine teaming</li> <li>Neurotechnologies</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Hypersonics</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Propulsion</li> <li>Aerodynamics and control</li> <li>Materials, structures, and manufacturing</li> <li>Detection, tracking, characterization, and defense</li> <li>Testing</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Integrated Communication and Networking Technologies</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Radio-frequency (RF) and mixed-signal circuits, antennas, filters, and components</li> <li>Spectrum management and sensing technologies</li> <li>Future generation wireless networks</li> <li>Optical links and fiber technologies</li> <li>Terrestrial/undersea cables</li> <li>Satellite-based and stratospheric communications</li> <li>Delay-tolerant networking</li> <li>Mesh networks/infrastructure independent communication technologies</li> <li>Software-defined networking and radios</li> <li>Modern data exchange techniques</li> <li>Adaptive network controls</li> <li>Resilient and adaptive waveforms</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Positioning, Navigation, and <br /> Timing (PNT) Technologies</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Diversified PNT-enabling technologies for users and systems in airborne, space-based, terrestrial, subterranean, and underwater settings</li> <li>Interference, jamming, and spoofing detection technologies, algorithms, analytics, and networked monitoring systems</li> <li>Disruption/denial-resisting and hardening technologies</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Quantum Information and <br /> Enabling Technologies</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Quantum computing</li> <li>Materials, isotopes, and fabrication techniques for quantum devices</li> <li>Quantum sensing</li> <li>Quantum communications and networking</li> <li>Supporting systems</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Semiconductors and Microelectronics</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Design and electronic design automation tools</li> <li>Manufacturing process technologies and manufacturing equipment</li> <li>Beyond complementary metal-oxide-semiconductor (CMOS) technology</li> <li>Heterogeneous integration and advanced packaging</li> <li>Specialized/tailored hardware components for artificial intelligence, natural and hostile radiation environments, RF and optical components, high-power devices, and other critical applications</li> <li>Novel materials for advanced microelectronics</li> <li>Microelectromechanical systems (MEMS) and Nanoelectromechanical systems (NEMS)</li> <li>Novel architectures for non-Von Neumann computing</li> </ul> </td> </tr> <tr> <td style="text-align: center;"><span><strong>Space Technologies and Systems</strong></span></td> <td style="text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>In-space servicing, assembly, and manufacturing, as well as enabling technologies</li> <li>Technology enablers for cost-effective on-demand and reusable space launch systems</li> <li>Technologies that enable access to and use of cislunar space and/or novel orbits</li> <li>Sensors and data analysis tools for space-based observations</li> <li>Space propulsion</li> <li>Advanced space vehicle power generation</li> <li>Novel space vehicle thermal management</li> <li>Crewed spaceflight enablers</li> <li>Resilient and path-diverse space communication systems, networks, and ground stations</li> <li>Space launch, range, and safety technologies</li> </ul> </td> </tr> </tbody> </table> <br /> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{3E01D0CF-453F-43E3-BF3F-3790766A9F93}https://www.biosliceblog.com/2024/02/virtual-and-digital-health-digest-february/Jacqueline Mulrynehttps://www.arnoldporter.com/en/people/m/mulryne-jacquelinejacqueline.mulryne@arnoldporter.comDr. Beatriz San Martinhttps://www.arnoldporter.com/en/people/s/san-martinbeatriz.sanmartin@arnoldporter.comEmma Elliston, Ph.D.https://www.arnoldporter.com/en/people/e/elliston-emmaemma.elliston@arnoldporter.comShama Aktarhttps://www.arnoldporter.com/en/people/a/aktar-shamashama.aktar@arnoldporter.comAna González-Lamuñohttps://www.arnoldporter.com/en/people/g/gonzalez-lamuno-anaana.lamuno@arnoldporter.comVirtual and Digital Health Digest: FebruaryWed, 28 Feb 2024 00:00:00 -0600{E41C3069-EB7A-42E2-A72F-8E7AEE8CB2C5}https://mylawcle.com/products/wage-hour-compliance-legal-and-hr-best-practices/Joshua F. Alloyhttps://www.arnoldporter.com/en/people/a/alloy-joshua-fjoshua.alloy@arnoldporter.comMatthew R. Ditonhttps://www.arnoldporter.com/en/people/d/diton-matthew-rmatthew.diton@arnoldporter.comWage and Hour Compliance Legal and HR best practicesWed, 28 Feb 2024 00:00:00 -0600{961C7DCF-CA2A-4EBC-B682-3B3CC8E43DE7}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/02/proposed-bill-seeks-to-increase-transparency-of-cfius-deliberationsProposed Bill Seeks to Increase Transparency of CFIUS DeliberationsGovernment Contracts and National Security partner Ronald Lee was quoted in the<em> Foreign Investment Watch </em>article, &ldquo;Bill would give governors power to question CFIUS about transactions,&rdquo; which discusses a recent bill introduced by U.S. Senator Kevin Cramer (R-North Dakota).&nbsp;Mon, 26 Feb 2024 00:00:00 -0600<p>Government Contracts and National Security partner Ronald Lee was quoted in the<em> Foreign Investment Watch</em> article, &ldquo;Bill would give governors power to question CFIUS about transactions,&rdquo; which discusses a recent bill introduced by U.S. Senator Kevin Cramer (R-North Dakota). The bill would require the Committee on Foreign Investment in the United States (CFIUS) to respond to inquiries from governors about transactions within state borders. Although CFIUS deliberations are currently confidential, a governor who is aware of a potential acquisition or sale would be able to ask CFIUS whether the transaction would warrant a review.</p> <p>Lee told <em>Foreign Investment Watch</em> that the bill is not limited to real estate transactions and would &ldquo;authorize the governor of a state to ask CFIUS whether a transaction is a covered transaction.&rdquo; CFIUS would then be required &ldquo;to determine if the transaction is a covered transaction and inform the governor of the determination&rdquo; within 30 days of the request. Lee added that a governor could ask CFIUS about any transaction, &ldquo;not only those that had been the subject of a declaration or notice to CFIUS,&rdquo; meaning that a governor&rsquo;s inquiry could relate to a non-notified transaction.</p> <p>Lee noted that the proposed bill raises questions about confidentiality and could potentially create a heavy communication burden for CFIUS. &ldquo;CFIUS operates as a closed box, and this is a legislative effort to lift the lid and look in,&rdquo; he said. Additionally, &ldquo;if CFIUS is not reviewing the transaction, or has not yet formed a view on whether the transaction is a covered transaction, CFIUS would find it difficult or impossible to respond to the request.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://foreigninvestmentwatch.com/senator-wants-to-give-state-governors-the-right-to-ask-cfius-about-deals/" target="_blank">Read the full article</a> (subscription required).</p>{94C20D97-9517-4960-94F2-FA380BC4A8B8}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/02/cma-treading-carefully-in-market-study-into-infant-formula-schmidt-saysCMA “Treading Carefully” in Market Study into Infant Formula, Schmidt SaysPartner John Schmidt, who leads the firm&rsquo;s UK Competition team in London, was quoted in the<em> ICLG </em>article, &ldquo;UK watchdog launches probe into baby formula market.&rdquo;&nbsp;Mon, 26 Feb 2024 00:00:00 -0600<p>Partner John Schmidt, who leads the firm&rsquo;s UK Competition team in London, was quoted in the<em> ICLG</em> article, &ldquo;UK watchdog launches probe into baby formula market.&rdquo; The article discusses the UK Competition and Markets Authority&rsquo;s (CMA) recent announcement that it would conduct a market study into the supply of infant formula in the UK, in which the CMA noted that the price of formula has risen by a quarter in just two years. The CMA aims to investigate the factors affecting the infant formula market, such as consumer behavior, the regulatory framework, and barriers to entry and expansion for new entrants. </p> <p>Placing the CMA&rsquo;s study in the context of its past investigations into the pricing of essential products, Schmidt told <em>ICLG</em> that the CMA has &ldquo;renewed its focus on pricing issues&rdquo; over the past few years by looking at &ldquo;excessive price rises in pharmaceuticals&rdquo; and at Covid-related price rises. The CMA is &ldquo;keeping its eye more generally on groceries prices in view of the cost of living crisis,&rdquo; Schmidt added, but its track record on concluding cases has been mixed. &ldquo;In the pharma space it has won some cases and lost some significant others. The Covid cases were quietly concluded without enforcement action,&rdquo; he said.</p> <p>&ldquo;With infant formula, the CMA is treading carefully. It has opened a market study, not a direct enforcement case,&rdquo; Schmidt continued. Warning of the potential of future collective proceedings, Schmidt said that CMA cases &ldquo;increasingly trigger consumer class actions against the companies involved&rdquo; and that this &ldquo;is a possibility here too and could happen in parallel to the CMA&rsquo;s market study.&rdquo; The legal test for any claimant &ldquo;would be the same as for the CMA and they would also need to be able to establish and evidence the amount of any loss,&rdquo; he concluded. Interestingly, only today the CMA announced a follow up investigation into information sharing amongst UK housebuilders a clear reminder that market studies can lead to enforcement actions.</p> <p><a rel="noopener noreferrer" href="https://iclg.com/news/20194-uk-watchdog-launches-probe-into-baby-formula-market?fromsearch=defaulturl" target="_blank">Read the full article.</a> </p>{73D68AD7-7ADF-448A-B6D2-868E8B435B28}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/the-delaware-bankruptcy-court-dividedBenjamin Mintzhttps://www.arnoldporter.com/en/people/m/mintz-benjaminbenjamin.mintz@arnoldporter.comJustin Imperatohttps://www.arnoldporter.com/en/people/i/imperato-justinjustin.imperato@arnoldporter.comThe Delaware Bankruptcy Court Divided: Whether Creditors’ Committees of Bankrupt Delaware Limited Liability Companies May Bring Derivative ClaimsThe Delaware Limited Liability Company Act (the LLC Act) authorizes state-law derivative actions for Delaware limited liability companies (LLCs), but also expressly limits such actions to members of the LLC or an assignee of the LLC&rsquo;s interest.&nbsp;Mon, 26 Feb 2024 00:00:00 -0600<p>The Delaware Limited Liability Company Act (the LLC Act) authorizes state-law derivative actions for Delaware limited liability companies (LLCs), but also expressly limits such actions to members of the LLC or an assignee of the LLC&rsquo;s interest. Other parties in interest, such as creditors of the LLC, are not vested with authority to bring such actions.[[N: <em>CML V LLC v. Bax</em>, 28 A.3d 1037 (Del. 2011) (Bax) (interpreting the LLC Act and holding that a creditor of an insolvent Delaware LLC does not have standing to bring a derivative action).]] This stands in contrast to Delaware corporations that do not have a similar standing limitation for derivative actions.</p> <p>On five separate occasions, the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court) has either held or suggested that the LLC Act precludes a bankruptcy court from granting an official committee of unsecured creditors standing to pursue an estate cause of action on behalf of the bankrupt LLC.[[N: The three published decisions are <em>In re HH Liquidation LLC</em>, 590 B.R. 211 (Bankr. D. Del. 2018) (Gross, J. (ret.)); <em>In re PennySaver USA Publishing LLC</em>, 587 B.R. 445 (Bankr. D. Del. 2018) (Sontchi, J. (ret.)); and <em>In re Citadel Watford City Disposal Partners L.P.</em>, 603 B.R. 897 (Bankr. D. Del. 2019) (Carey, J. (ret.)). The two unpublished decisions are <em>In re Dura Automotive Systems</em>, Bankr. D. Del. No. 19-12378 (Owens, J.), June 9, 2020 Hr&rsquo;g Tr. at 45-48 and <em>In re Ector County Energy Center LLC</em>, Bankr. D. Del. No. 22-10320 (Dorsey, J.), Aug. 17, 2022 Hr&rsquo;g Tr. at 59-61 (<em>Ector County</em>). It bears noting, however, that Judge Dorsey&rsquo;s ruling in <em>Ector County</em> emphasized that the standing motion was brought by an individual creditor rather than an official committee of unsecured creditors.]]</p> <p>In <em>In re Pack Liquidating LLC</em>,[[N: Case No. 22-10797, ECF No. 1231 (Bankr. D. Del. Feb. 2, 2024) (<em>Pack Liquidating</em>).]] however, the Bankruptcy Court approved the official committee of unsecured creditors&rsquo; request to bring derivative breach of fiduciary duty claims against the founders of Packable Holdings LLC, a Delaware LLC, in its Chapter 11 cases. Breaking with prior Delaware bankruptcy court precedent, the Bankruptcy Court held that the LLC Act does not preclude it from granting the committee standing to pursue an estate cause of action against an LLC&rsquo;s members or managers for breach of fiduciary duty, reasoning the restrictions on derivative actions under the LLC Act have no bearing on the Bankruptcy Court&rsquo;s power to authorize the committee to bring an estate cause of action.</p> <h2><em>Hartford</em> and <em>Cybergenics</em></h2> <p>The Bankruptcy Court based its decision, in substantial part, on the Third Circuit&rsquo;s <em>Cybergenics</em>[[N: <em>Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery</em>, 330 F.3d 548 (3d Cir. 2003) (<em>en banc</em>) (<em>Cybergenics</em>).]] decision, which starts where the Supreme Court left off in <em>Hartford Underwriters Ins. Co. v. Union Planters Bank N.A.</em>[[N: 530 U.S. 1 (2000) (<em>Hartford</em>).]]<br /> <br /> In <em>Hartford</em>, the Supreme Court decided whether an administrative claimant of a Chapter 7 bankruptcy estate has standing to bring suit under Bankruptcy Code section 506(c), which allows the trustee to recover costs and expenses of preserving collateral from the secured creditor. The Supreme Court, noting that section 506(c) states that only &ldquo;the trustee may recover,&rdquo; considered whether it was a proper inference that the trustee is the only party that is entitled to invoke that statutory provision and held that the phrase &ldquo;the trustee may recover&rdquo; means here that only the trustee can use the recovery power granted in section 506(c).[[N: <em>Id.</em> at 6.]] The Supreme Court declined to decide whether its rationale extended to Bankruptcy Code avoidance provisions, which also contain the same phrase, &ldquo;the trustee may [avoid/recover],&rdquo; and left open the validity of the practice under which courts grant creditors or creditors&rsquo; committees derivative standing to bring avoidance actions. <br /> <br /> The Third Circuit addressed this open issue in <em>Cybergenics</em> and authorized a creditors&rsquo; committee to bring fraudulent transfer suits on behalf of the bankruptcy estate. Notwithstanding the Supreme Court&rsquo;s <em>Hartford</em> decision and the language contained in the avoidance provisions of the Bankruptcy Code, all of which provide that &ldquo;the trustee may avoid[/recover] &hellip; &rdquo; certain transfers,[[N: 11 U.S.C. &sect;&sect; 544(b)(1), 545, 547(b), 548(a)(1), 549, 550 (providing &ldquo;trustee may recover&rdquo; any transfers avoided pursuant to, among other sections, sections 544, 545, 547, 548, and 549).]] the Third Circuit held that the Bankruptcy Code <em>implicitly </em>authorizes the bankruptcy court to grant the committee derivative standing to bring avoidance actions, provided the creditors&rsquo; committee demonstrates that &ldquo;(i) the debtor-in-possession has unjustifiably refused to pursue the claim or refused to consent to the moving party&rsquo;s pursuit of the claim on behalf of the debtor-in-possession; [and] (ii) the moving party has alleged colorable claims.&rdquo;[[N: <em>Pack Liquidating </em>at 44 (quoting <em>In re Optim Energy LLC</em>, No. 14-10262-BLS, 2014 WL 1924908, at *6 (Bankr. D. Del. May 13, 2014).&nbsp;]] Some, but not all, circuit courts have agreed.[[N: <em>Term Loan Holder Comm. v. Ozer Group LLC (In re Caldor Corp.)</em>, 303 F.3d 161, 166 (2d Cir. 2002) (holding, after the Supreme Court issued the<em> Hartford</em> decision, that sections 1103(c)(5) and 1109(b) &ldquo;impl&amp;#91;y&amp;#93; a qualified right for creditors&rsquo; committees to initiate adversary proceedings where the trustee or debtor in possession unjustifiably failed to bring suit&rdquo;); <em>In re The Gibson Group Inc.</em>, 66 F.3d 1436, 1446 (6th Cir. 1995) (&ldquo;a creditor or creditors&rsquo; committee may have derivative standing to initiate an avoidance action where: 1) a demand has been made upon the statutorily authorized party to take action; 2) the demand is declined; 3) a colorable claim that would benefit the estate if successful exists, based on a cost-benefit analysis performed by the court; and 4) the inaction is an abuse of discretion (&ldquo;unjustified&rdquo;) in light of the debtor-in-possession&rsquo;s duties in a Chapter 11 case&rdquo;). Other circuits have precluded creditor derivative standing in bankruptcy because there is no explicit authority in the Bankruptcy Code to allow for such a practice. <em>See In re Fox</em>, 305 B.R. 912, 914 (B.A.P. 10th Cir. 2004) (considering the issue of creditor derivative standing and holding that &ldquo;the Bankruptcy Code does not allow such suits&rdquo;); <em>see also Surf N Sun Apartments Inc. v. Dempsey</em>, 253 B.R. 490, 491-95 (M.D. Fla. 1999) (holding that the Bankruptcy &ldquo;Code does not vest bankruptcy courts with the power to grant standing to individual creditors to prosecute such actions,&rdquo; that the bankruptcy courts cannot unilaterally confer standing upon the creditor to pursue the claim itself, and that &ldquo;&amp;#91;i&amp;#93;f such authority is to be granted it must come from Congress and not the courts&rdquo;). The Fourth Circuit refused to decide the issue of whether creditors&rsquo; committees could gain standing to sue in bankruptcy cases when faced with the issue in 2005, but the court noted that &ldquo;&amp;#91;w&amp;#93;e have never decided whether creditor derivative suits are permitted in the bankruptcy courts of this circuit&rdquo; and that &ldquo;&amp;#91;i&amp;#93;t is far from self-evident that the Bankruptcy Code permits creditor derivative standing.&rdquo; <em>In re Balt. Emergency Servs. II Corp</em>., 432 F.3d 557, 560-61 (4th Cir. 2005).]]<br /> <br /> In reaching its conclusion, the <em>Cybergenics</em> court neither cited to nor referenced any state law authorizing derivative standing to bring avoidance actions.[[N: &ldquo;The painstaking <em>Cybergenics</em> opinion &hellip; did not rely in any way on the existence of state-law authority for a shareholder or creditor to assert a derivative action.&rdquo; <em>Pack Liquidating</em> at 15.]] Instead, the<em> Cybergenics </em>court gave three reasons for arriving at its holding: (1) the modest power to grant a committee standing can be implied from more drastic tools at the court&rsquo;s disposal to ensure that the debtor is fulfilling its fiduciary duties, e.g., the court&rsquo;s power under section 1104 of the Bankruptcy Code to appoint a Chapter 11 trustee to dispossess the debtor from possession of its estate;[[N: <em>Cybergenics</em>, 330 F.3d at 572-74.]] (2) the power may be implied from sections 1109(b), 1103(c)(5), and 503(b)(3)(B) of the Bankruptcy Code;[[N:<em> Id. </em>at 560-66.]] and (3) the power to confer standing was a traditional pre-Bankruptcy Code practice that has been implicitly carried forward.[[N: <em>Id.</em> at 569-572.]]</p> <h2>Judge Goldblatt&rsquo;s <em>Pack Liquidating</em> Decision</h2> <p>Applying the <em>Cybergenics</em> court&rsquo;s reasoning, <em>Pack Liquidating</em> extended derivative standing to the committee to bring breach of fiduciary duty claims, holding that &ldquo;[a] federal bankruptcy court&rsquo;s ability to authorize a <em>Cybergenics</em> action [is a federal remedy] &hellip; [that] is not affected by the Delaware Limited Liability Company Act.&rdquo;[[N: <em>Pack Liquidating</em> at 15, 41.]] Indeed,<em> Pack Liquidating </em>interpreted <em>Cybergenics</em> to confer broad authority on bankruptcy courts to grant creditors&rsquo; committees with derivative standing to pursue avoidance actions, state-law breach of fiduciary duty claims, or any other claims for the benefit of the estate.[[N:<em> Id.</em> at 19-20 (holding the power to grant derivative standing is implied from sections 1109(b), 1103(c)(5), and 503(b)(3)(B) of the Bankruptcy Code and is broad enough to include any claims for the benefit of the estate).]] Alternatively, the Bankruptcy Court held that even if the LLC Act purported to preclude it from conferring standing on the committee to pursue estate causes of action, it would be preempted by and give way to the federal Bankruptcy Code.[[N: <em>Id.</em> at 27-30.&nbsp;]]<br /> <br /> The &ldquo;strongest argument&rdquo; in favor of the application of the LLC Act, according to the Bankruptcy Court, was that &ldquo;even though the authority to grant committee standing is federal in nature, being derived from the Bankruptcy Code, the Bankruptcy Code should be understood to incorporate applicable state law,&rdquo; such as the LLC Act.[[N:<em> Id.</em> at 34.]] However, the Bankruptcy Court rejected this argument and ultimately held that the breach of fiduciary duty claims the committee seeks to assert should be viewed as a &ldquo;direct (though implicit) federal remedy that [does] not involve &lsquo;borrowing&rsquo; of any law &hellip; [and] to the extent one views the question as a choice between &lsquo;borrowing&rsquo; a state law rule or &lsquo;devising&rsquo; a federal common law of derivative actions, the type of derivative action contemplated by <em>Cybergenics</em> would not &lsquo;borrow&rsquo; the provisions of the Delaware Limited Liability Company Act that would operate to defeat the very cause of action it contemplated.&rdquo;[[N: <em>Id. </em>at 38, 39.]]<br /> <br /> In reaching its decision, <em>Pack Liquidating</em> hesitantly departed from prior Delaware Bankruptcy Court precedent, despite acknowledging the &ldquo;imperative to adhere to this Court&rsquo;s precedent,&rdquo;[[N: <em>Id.</em> at 39.]] citing its obligation to apply <em>Cybergenics</em>.</p> <h2> Implications</h2> <p> In view of the emerging split in Delaware, it will be worth watching whether the issue is squarely addressed by the Third Circuit Court of Appeals (or the Supreme Court). For now, there will be uncertainty in the practice which may depend on the judge handling the case. In those situations where the company is refusing to bring a material, colorable action against the members and the court is unwilling to grant derivative standing to the committee, the court may instead appoint a trustee to bring the actions. That of course has broader ramifications as it will displace the debtor-in-possession from all control and decision-making. In contrast, the granting of derivative standing to a committee allows the action to be pursued and the debtor-in-possession to remain in place. <br /> <br /> <em>Pack Liquidating</em> does not hold that the Bankruptcy Court has an unqualified right to confer standing on creditors&rsquo; committees to bring causes of action on behalf of the estate. Committees must, among other things, allege colorable claims. The LLC Act authorizes LLCs, through their operating agreements, to restrict or eliminate the fiduciary duties owed by, among others, &ldquo;a member, manager or other person to a limited liability company or to another member or manager or to another person that is a party to, or otherwise bound by, a limited liability company agreement; provided, that a limited liability company agreement may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.&rdquo;[[N: 6 Del. Code &sect; 18-1101(e).]] LLCs should consider reviewing the exculpation provisions in their governing operating agreements to ensure the provisions provide for exculpation in an appropriate scope. Making any necessary changes to broaden the scope of the exculpation provisions may render claims against the LLC&rsquo;s managers, members, and other persons for breach of their fiduciary duties not colorable, thwarting a committee&rsquo;s attempt to gain standing to pursue such claims. <br /> <br /> Finally, we note that debtor-in-possession financing and cash collateral orders often contain, at the insistence of the creditors&rsquo; committee, an agreement by the Delaware LLC debtor and the applicable lender to waive any challenge to the ability of the creditors&rsquo; committee to file derivative actions notwithstanding the LLC Act. We would expect that this practice would continue until this issue is further settled.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{5E4DF048-6067-494A-A908-96CE79592C87}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/dol-issues-updated-rule-on-the-nondisplacement-of-qualified-workersMichael McGillhttps://www.arnoldporter.com/en/people/m/mcgill-michaelmike.mcgill@arnoldporter.com Joshua F. Alloyhttps://www.arnoldporter.com/en/people/a/alloy-joshua-fjoshua.alloy@arnoldporter.comBryan R. Williamsonhttps://www.arnoldporter.com/en/people/w/williamson-bryan-rbryan.williamson@arnoldporter.comKyung Liu-Katzhttps://www.arnoldporter.com/en/people/l/liu-katz-kyungkyung.liu-katz@arnoldporter.comAnother Toss of the Political Football: DOL Issues Updated Rule on the Nondisplacement of Qualified Workers Under Service ContractsLate last year, the Department of Labor issued a final rule implementing Executive Order 14055 entitled &ldquo;Nondisplacement of Qualified Workers under Service Contracts."Thu, 22 Feb 2024 00:00:00 -0600<p>Late last year, the Department of Labor (DOL) issued a <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2023/12/14/2023-27072/nondisplacement-of-qualified-workers-under-service-contracts" target="_blank">final rule</a> implementing Executive Order (EO) 14055 entitled &ldquo;Nondisplacement of Qualified Workers under Service Contracts&rdquo; (the Final Rule).[[N:Department of Labor Final Rule, &ldquo;Nondisplacement of Qualified Workers Under Services Contracts,&rdquo; 88 Fed. Reg. 86,736 (Dec. 14, 2023).]] The Final Rule, which took effect February 12, reintroduces the requirement that contractors and subcontractors performing on covered federal service contracts, with limited exceptions, offer in good faith the right of first refusal of employment to service employees working under the predecessor contract. This Advisory reviews the history of the service-employee nondisplacement requirements, explains contractors&rsquo; obligations under the new DOL regulations, and discusses the impacts on federal contractors. </p> <h2>Brief History of the Nondisplacement Rule </h2> <p>The Final Rule, consistent with President Biden&rsquo;s EO, aims to protect service employees who might otherwise be replaced or displaced in a transition between contractors. DOL claims the Final Rule seeks to minimize disruption during contract transition, help ensure physical and information security, and retain the advantages of an experienced workforce. If this sounds familiar, that is because it is. The nondisplacement requirements for federal contractors have been a political football of sorts dating back nearly three decades, repeatedly instituted and revoked with successive presidential administrations. </p> <p>The origins of the requirements can be traced back to at least 1994, when President Clinton issued an EO creating a nondisplacement requirement applicable to contracts for maintenance of public buildings. President George W. Bush revoked that EO in 2001, eliminating the requirement during his administration. In 2009, President Obama issued EO 13495, reviving and extending the nondisplacement requirement to workers under federal service contracts. Although it took some time, President Trump ultimately revoked the requirements in 2019. In November 2021, President Biden issued EO 14055, predictably resuscitating the nondisplacement requirements for service contracts. While President Biden&rsquo;s EO aligns closely with President Obama&rsquo;s EO, the more recent EO includes the most expansive iteration of the nondisplacement requirements to date. As discussed below, it adds new requirements and narrows previous exceptions. </p> <p>The Final Rule, published on December 14, 2023, implements EO 14055 by adding Part 9 to Title 29 of the Code of Federal Regulations (CFR). EO 14055 mandated the Federal Acquisition Regulatory Council (FAR Council) to amend the Federal Acquisition Regulation (FAR) to incorporate the requirements within 60 days of DOL publishing this Final Rule. The FAR Council did not issue its rule by the EO&rsquo;s deadline of February 12, 2024. In the Federal Register notice, DOL states that the Final Rule &ldquo;will apply to solicitations issued on or after the effective date of the final regulations issued by the [FAR Council].&rdquo;[[N:Final Rule, 88 Fed. Reg. at 86,736.]] Notably, the DOL requirements are not limited to FAR-covered contracts; the Final Rule includes a contract clause that is prescribed for non-FAR contracts covered by the Service Contract Act of 1965 (SCA).[[N:Final Rule, 88 Fed. Reg. at 86,795 (regulation to be codified at 29 C.F.R. &sect; 9.11). For example, the requirements would apply to SCA-covered contracts issued by federal agencies that are not required to comply with the FAR.]] It is not perfectly clear whether DOL intends to require the clause for covered non-FAR contracts as of the effective date of the Final Rule, February 12, 2024, even though the FAR rulemaking is delayed. Further, it is possible that agencies could implement the requirements for FAR contracts before a FAR rule is effective.[[N:As of the date of this Advisory's publication, the FAR Council has not yet issued a FAR rule. EO 14055 "strongly encourage&amp;#91s&amp;#93" agencies to use the nondisplacement contract clause in case of delay in issuance of an effective rule by the FAR Council.]]</p> <h2>A Comparison of the New Nondisplacement Requirements to Prior Requirements</h2> <p>The DOL regulations implemented through the Final Rule are similar in many respects to the regulations adopted during President Obama&rsquo;s administration. Like the prior rules, the new rules include the following:</p> <ul> <li>The nondisplacement requirements apply to service contracts and subcontracts covered by the SCA. The SCA generally applies when the prime contract&rsquo;s primary purpose is furnishing services to the federal government with service employees.[[N:Final Rule, 88 Fed. Reg. at 86,794 (regulation to be codified at 29 C.F.R. &sect; 9.3(a).]] </li> <li>The requirements generally apply to service contracts with values equaling or exceeding the simplified acquisition threshold.[[N:Final Rule, 88 Fed. Reg. at 86,794 (regulation to be codified at 29 C.F.R. &sect; 9.4).]] The current, general threshold is $250,000.[[N:FAR 2.101.]] </li> <li>The Final Rule will require a covered successor contractor to offer a right of first refusal of employment to the predecessor contractor&rsquo;s service employees unless an exception applies.[[N:Final Rule, 88 Fed. Reg. at 86,797 (regulation to be codified at 29 C.F.R. &sect; 9.12).]] A successor contractor generally must grant a right of first refusal to the predecessor contractor&rsquo;s employees currently performing the contract. </li> <li>The predecessor contractor must provide the contracting officer a certified list of all service employees working on the contract and subcontracts, not less than 30 calendar days before contract completion.[[N:Final Rule, 88 Fed. Reg. at 86,799 (regulation to be codified at 29 C.F.R. &sect; 9.12(e)).]] </li> <li>In case of a violation, the offending contractor or subcontractor may need to pay back wages to and hire the affected employee in a position for which the employee is qualified. The violating contractor or subcontractor may be subject to debarment or other adverse actions.[[N:Final Rule, 88 Fed. Reg. at 86,801 (regulation to be codified at 29 C.F.R. &sect; 9.23).]] </li> </ul> <p>The Final Rule, however, adds several important nuances that were not present in the prior iteration of DOL&rsquo;s nondisplacement regulations, including the following:</p> <ul> <li>The nondisplacement requirements will apply to follow-on service contracts for &ldquo;same or similar work,&rdquo; regardless of whether they are performed in the same location as the predecessor contract.[[N:Final Rule, 88 Fed. Reg. at 86,795 (regulation to be codified at 29 C.F.R. &sect; 9.11).]]</li> <li>The Final Rule requires successor contractors to offer the right of first refusal only in writing, unlike the Obama-era nondisplacement rule that allowed both oral and written offers.[[N:Final Rule, 88 Fed. Reg. at 86,797 (regulation to be codified at 29 C.F.R. &sect; 9.12(b)(3)).]] The Final Rule creates a higher procedural bar for an agency to exempt a contractor from the nondisplacement requirements, requiring a written explanation citing one of the grounds enumerated in the regulations, as discussed below.[[N:Final Rule, 88 Fed. Reg. at 86,794 (regulation to be codified at 29 C.F.R. &sect; 9.5).]] </li> <li>The Final Rule dictates that solicitations for covered contracts will need to include a requirement or preference for the follow-on contract to be performed in the same locality or localities, if the agency determines doing so is &ldquo;reasonably necessary to ensure economical and efficient provision of services.&rdquo;[[N:Final Rule, 88 Fed. Reg. at 86,795-96 (regulation to be codified at 29 C.F.R. &sect; 9.11(c)).]] </li> <li>The Final Rule limits the circumstances in which the successor contractor is excused from the obligation to offer employment to a covered employee of the predecessor contractor based on a perceived lack of fitness. The successor contractor must reasonably believe based on &ldquo;reliable evidence &hellip; that there would be a just cause to discharge the employee(s) if employed by the contractor or any subcontractors.&rdquo;[[N:Final Rule, 88 Fed. Reg. at 86,796 (regulation to be codified at 29 C.F.R. &sect; 9.12(c)(3)(i)-(ii)).]] </li> </ul> <p>Under the Final Rule, contractors competing for or transitioning into a follow-on contract should stay alert to the nondisplacement requirements, which will likely add costs and a layer of complexity to proposal development and contract administration. The rule requires agencies to maintain the same performance location if necessary for efficiency, which may provide additional grounds for unsuccessful incumbent contractors to protest follow-on contract awards. Additionally, successor contractors now must support, with &ldquo;reliable evidence,&rdquo; their decision not to extend an employment offer to a predecessor employee. Complying with such requirements will require contractors to maintain careful records or such decisions, which likely increases contractors&rsquo; already-substantial compliance obligations.</p> <p>The balance of the Advisory summarizes both the old and new aspects of the Final Rule in greater detail. </p> <h2>Applicability of Nondisplacement Requirements and Exceptions</h2> <p>Under the Final Rule, the nondisplacement requirements will apply to service contracts and subcontracts covered by the SCA. The prime contract must be for the same or similar work as the predecessor contract, and its amount must equal to or exceed the current simplified acquisition threshold of $250,000. The Final Rule covers only service employees whose employment would be terminated as a result of the award of the successor contract or expiration of the predecessor contract. Also, the rule does not extend to a predecessor employee whose duties include work that is not under a covered contract. For example, the successor contractor will not be required to extend the right of first refusal for employment if a predecessor employee (1) would continue to be hired by the outgoing contractor or (2) had a job providing services under both a federal contract and a commercial contract.</p> <p>The Final Rule empowers contracting agencies to except specific solicitations from the nondisplacement requirements. To do so, the senior procurement executive must publish a written determination citing one of the enumerated reasons that justify an exception, which are: (1) applying some or all of the requirements will not advance the Federal Government&rsquo;s interest in economy and efficiency; (2) market analysis shows applying some or all of the requirements would substantially reduce the number of potential bidders; or (3) applying some or all of the requirements is otherwise inconsistent with the applicable statutes, regulations, EOs, or presidential memoranda.</p> <h2>Summary of Contractor Requirements</h2> <p>The Final Rule, like the regulations implemented during President Obama&rsquo;s administration, imposes requirements on both the predecessor contractor transitioning off the agency&rsquo;s requirements and the successor contractor transitioning into those requirements. Covered successor contractors must take affirmative steps to attempt to retain eligible employees from the predecessor contractor. The contractors&rsquo; obligations are extensive and require going beyond simply offering covered employees the right of first refusal. The Final Rule describes how successor contractors must offer employment to covered workers, in addition to imposing notice and recordkeeping requirements.</p> <h3>Good Faith Offer of Employment</h3> <p>Before filling positions for a follow-on service contract, successor contractors must extend &ldquo;good faith offers of employment,&rdquo; which means the successor contractor may not design an offer to discourage the employee from accepting it.[[N:Final Rule, 88 Fed. Reg. at 86,797 (regulation to be codified at 29 C.F.R. &sect; 9.12(a)).]] The contractor need not offer the employee the same position as the employee held under the predecessor contract, but it must be a position for which the employee is qualified. The offer must be in writing, and expressly give the predecessor employee 10 or more business days to consider and accept the offer.</p> <h3>Burden To Demonstrate the Inapplicability of Right of First Refusal</h3> <p>Under the Final Rule, a predecessor employee is not entitled to the right of first refusal of employment from the successor employee if (1) the predecessor contractor will retain the employee after the contract transition (i.e., there is no displacement); (2) the predecessor employee would have just cause to terminate the employee; or (3) the employee had worked, in whole or in part, on nonfederal contracts (i.e., the employee was not staffed exclusively on federal contracts). When determining whether to extend a job offer to a predecessor employee, the successor contractor must presume that the employee is entitled to the right of first refusal. For the successor contractor not to offer employment, it must &ldquo;demonstrate a reasonable belief&rdquo; that the employee is excluded by reason of (1) nondisplacement, (2) allocation to non-federal work, or (3) just cause for termination, based on &ldquo;reliable information provided by a knowledgeable source&rdquo; including the predecessor contractor, the employees themselves, or the contracting agency. This standard is higher than the standard that applied under DOL&rsquo;s last iteration of the nondisplacement requirements. </p> <h3>Differing Positions and Terms and Conditions</h3> <p>The successor contractor need not offer identical job positions or employment terms and conditions as those under the predecessor contract. The position offered may be different as long as the predecessor employee is qualified to perform the new position based on &ldquo;credible information&rdquo; available to the successor contractor.[[N:Final Rule, 88 Fed. Reg. at 86,797 (regulation to be codified at 29 C.F.R. &sect; 9.12(b)(4).]] Similarly, the successor contractor may change the terms of employment by modifying pay, benefits, or working conditions, as long as the change is not intended to discourage the employee from accepting an offer.[[N:Final Rule, 88 Fed. Reg. at 86,797-98 (regulation to be codified at 29 C.F.R. &sect; 9.12(b)(5)).]] It remains to be seen how difficult it will be to rebut a complaint that an offer was not made in good faith. </p> <h3>Reduced Staffing and Extended Duration of Right of First Refusal</h3> <p>The Final Rule also does not require the successor contractor to employ as many service employees to perform the successor contract as the predecessor contractor employed to perform the predecessor contract.[[N:Final Rule, 88 Fed. Reg. at 86,798-99 (regulation to be codified at 29 C.F.R. &sect; 9.12(d)(1)).]] Thus, if the successor contract utilizes fewer employees, the successor contractor is not expected to offer the right of first refusal to all the predecessor&rsquo;s employees who are or had been performing the contract. Notably, however, the predecessor employees&rsquo; right of first refusal extends for 90 calendar days after contract performance begins. As a result, if the successor contractor terminates or loses an employee during the 90-day window, it generally must first offer the vacant job to a qualified predecessor employee who was not originally offered a position on the successor contract due to reduced staffing.</p> <h3>Relocation Costs</h3> <p>The successor contractor is not required to pay relocation costs to predecessor employees who accept the successor contractor&rsquo;s job offer.[[N:Final Rule, 88 Fed. Reg. at 86,796 (regulation to be codified at 29 C.F.R. &sect; 9.11(c)(5)).]] As noted above, the contracting agency is required to assess whether performing the follow-on contract in the same locality as the prior contract is &ldquo;reasonably necessary to ensure economical and efficient provision of services.&rdquo;[[N:Final Rule, 88 Fed. Reg. at 86,795-96 (regulation to be codified at 29 C.F.R. &sect; 9.11(c)(1)).]] If the agency determines that retaining the same performance locality is necessary, the contracting officer will add a requirement or stated preference for performance in the same locality. When performance is in the same location, relocation costs should not be implicated. When performance is in a new location, because the contract does not mandate the successor contractor maintain the same performance location, the contractor is expected to offer the right of first refusal to qualified employees but need not cover relocation costs for the offer to be considered made in good faith. </p> <h3>Successor Contractor Recordkeeping</h3> <p>Contractors are required to keep relevant employment records, which could be subject to production to DOL.[[N:Final Rule, 88 Fed. Reg. at 86,800 (regulation to be codified at 29 C.F.R. &sect; 9.12(f)).]] A successor contractor must maintain written records of (1) its employment offers (which, again, must be written); (2) justifications for excluding certain predecessor employees from job offers; (3) employee lists received from, or provided to, the contracting agency; (4) back wage payments where required due to violations; and (5) relevant notices given to workers to satisfy the requirements.</p> <h3>Predecessor Obligation To Provide Notice to Employees and Certified List of Service Employees To Contracting Agency </h3> <p>The Final Rule obligates the outgoing contractor to send the contracting officer a certified list of all service employees under the contract at least 30 days before the completion of its covered contract.[[N:Final Rule,88 Fed. Reg. at 86,799-800 (regulation to be codified at 29 C.F.R. &sect; 9.12(e)).]] The list must include the following information for each employee: (1) name, (2) mailing address, (3) the location of employment, (4) phone number and email address, if available, and (5) anniversary date of employment on the current service contract and its predecessor contracts. Before the last day of contract performance, the outgoing contractor must provide notice to all service employees that they may have a right of first refusal to employment with the successor contractor. The successor contractor, in turn, will use a certified list of workers submitted by the predecessor contractor to determine which employees must receive an offer of first refusal.[[N:Final Rule, 88 Fed. Reg. at 86,797 (regulation to be codified at 29 C.F.R. &sect; 9.12(a)(3)).]]</p> <p>The outgoing contractor may also be subject to the Worker Adjustment and Retraining Notification (WARN) Act of 1988, which requires most employers with 100 or more employees to provide notice 60 calendar days before closing a worksite or conducting a &ldquo;mass layoff&rdquo; to employees who are affected.[[N:23 U.S.C. &sect;&sect; 2101-09.]] While the exact interplay between the predecessor contractor&rsquo;s WARN Act notice obligations and the nondisplacement requirements may be unsettled in some respects, outgoing contractors would benefit from providing broad WARN notices even to service employees who <em>might</em> lose jobs due to the contractor transition.</p> <h2>Enforcement</h2> <p>Covered contractors may be subject to civil remedies and administrative penalties for violating the Rule.[[N:Final Rule, 88 Fed. Reg. at 86,801 (regulation to be codified at 29 C.F.R. &sect; 9.23).]] DOL&rsquo;s Wage and Hour Division may investigate a covered contractor on its own initiative or upon a complaint by a current or former employee of the covered contractor or the predecessor contractor. An investigation could entail workplace interviews with employees, as well as inspection of contractor records. The contractor may be required to produce documents or evidence relating to the alleged violation. </p> <p>If found to have violated an obligation owed to an employee, the contractor must take corrective action, which may include hiring the affected predecessor employee and/or paying back wages plus interest. Further, the contracting agency may withhold payment of contract funds until the contractor remedies the violation. Lastly, if a contractor willfully violates the requirements, the Secretary of Labor may debar (for up to three years) the contractor, its responsible officers, and any firm that has a &ldquo;substantial interest&rdquo; in the violation. However, the contracting agency must offer a hearing to those facing debarment.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{16CA77ED-047C-4AE8-82E6-2C4F46ACCA3A}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/fda-started-process-to-downclassify--most-ivd-typesMahnu V. Davarhttps://www.arnoldporter.com/en/people/d/davar-mahnu-vmahnu.davar@arnoldporter.comPhilip R. Desjardinshttps://www.arnoldporter.com/en/people/d/desjardins-philip-rphilip.desjardins@arnoldporter.comAbeba Habtemariamhttps://www.arnoldporter.com/en/people/h/habtemariam-abebaAbeba.Habtemariam@arnoldporter.comPhillip V. DeFedelehttps://www.arnoldporter.com/en/people/d/defedele-phillip-vphillip.defedele@arnoldporter.comFDA Started a Process to “Downclassify” Most High-Risk IVD Types: Here Is WhyOn January 31, the U.S. Food and Drug Administration (FDA or the Agency) announced that the Center for Devices and Radiological Health (CDRH) intends to begin the reclassification process for most in vitro diagnostics (IVDs) that are Class III (high-risk devices) into Class II (moderate-risk devices).Thu, 22 Feb 2024 00:00:00 -0600<p>On January 31, the U.S. Food and Drug Administration (FDA or the Agency) <a rel="noopener noreferrer" href="https://www.fda.gov/medical-devices/medical-devices-news-and-events/cdrh-announces-intent-initiate-reclassification-process-most-high-risk-ivds" target="_blank">announced</a> that the Center for Devices and Radiological Health (CDRH) intends to begin the reclassification process for most in vitro diagnostics (IVDs) that are Class III (high-risk devices) into Class II (moderate-risk devices). Most of these are infectious disease and companion diagnostic IVDs, and their reclassification would enable manufacturers of these tests to seek marketing authorization through the 510(k) clearance pathway rather than the more rigorous pre-market approval (PMA) pathway. The Agency explained that reclassification may &ldquo;support the potential for more manufacturers to develop these tests, which can increase competition and increase access to these important tests.&rdquo; Though the proposal does not explicitly reference FDA&rsquo;s proposals to regulate laboratory-developed tests (LDTs), we believe this reclassification proposal is another readiness step in the direction of LDT regulation for the reasons discussed below.</p> <h2> What Is FDA Doing?</h2> <p> CDRH will propose reclassifying IVDs for which it believes there is sufficient information to establish special controls that will provide reasonable assurances of safety and effectiveness for these tests when taken together with general controls. FDA explained that CDRH has begun this process, citing to a September 2023 <a rel="noopener noreferrer" href="https://www.fda.gov/advisory-committees/advisory-committee-calendar/september-7-8-2023-microbiology-devices-panel-medical-devices-advisory-committee-meeting" target="_blank">meeting of the Microbiology Devices Panel</a> of the Medical Devices Advisory Committee during which the panel made recommendations concerning potential reclassification from Class III to Class II with special controls for three types of infectious disease IVDs.<br /> <br /> In addition, CDRH will continue employing a risk-based approach when initially classifying IVDs to determine the appropriate level of regulatory controls. This includes determining whether a new IVD can be Class II with special controls through the De Novo Classification pathway as opposed to being Class III. Notably, FDA stated that it believed &ldquo;special controls could be developed, along with general controls, that could provide a reasonable assurance of safety and effectiveness for most future companion diagnostic and infectious disease IVDs&rdquo; and, as such, these tests would be regulated as Class II devices.</p> <h2> Why Now?</h2> <p> While CDRH periodically conducts classification reviews to ensure devices are being regulated in the appropriate class and subject to appropriate regulatory controls, we believe that the timing of this action may relate to the anticipated final rule to regulate LDTs as IVDs, which would require high-risk tests to undergo the PMA pathway and moderate-risk tests to undergo the 510(k) clearance pathway as described in our <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/10/fda-proposes-to-actively-regulate-laboratory-developed-tests">Advisory</a> on this subject. CDRH&rsquo;s proposed reclassification would shift most types of IVDs that are currently subject to the PMA pathway to the 510(k) pathway. This could result in significantly less LDTs being subject to the PMA pathway and, thus, potentially lessen both laboratories&rsquo; and FDA&rsquo;s burden in preparing and reviewing, respectively, premarket submissions for LDTs once those requirements are effective. It would also have the effect of lowering the burden and uncertainty facing personalized medicine developers whose biomarker-specific therapeutic development and commercialization strategy has hereto been subject to the challenge and additional uncertainty of managing their New Drug Application/Biologics License Application submission with a synchronous diagnostic company&rsquo;s CDRH submission, a delay in which could delay commercial availability of the therapeutic. More generally, FDA could use the reclassification step to later argue that the economic burden of the final rule is not as substantial on industry and the Agency as rule critics anticipated.<br /> <br /> It is unclear how quickly FDA intends to, or is capable of, reclassifying these IVDs. In 2009 CDRH initiated a <a rel="noopener noreferrer" href="https://www.fda.gov/about-fda/cdrh-transparency/515-program-initiative" target="_blank">formal process</a> to evaluate and potentially reclassify 32 pre-amendment Class III devices for which regulations requiring submission of PMAs had not yet been issued. This reclassification effort took 10 years, largely due to competing public perspectives on the risk level and appropriate classification of each device. Separately, in recent years, FDA has reclassified a number of post-amendment IVDs from Class III to Class II, including certain <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/FR-2021-11-22/pdf/2021-25379.pdf" target="_blank">hepatitis C virus ribonucleic acid tests</a>, <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/FR-2021-11-22/pdf/2021-25374.pdf" target="_blank">hepatitis C virus antibody tests</a>, and <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/FR-2022-11-04/pdf/2022-23868.pdf" target="_blank">human immunodeficiency virus viral load monitoring tests</a>.[[N: In addition, although not reclassification orders, FDA has identified certain Class I and Class II devices that it determined no longer require 510(k) clearance pursuant to Section 3054 of the 21st Century Cures Act.]] Given the anticipated timeline for implementation of the LDT final rule and Agency learnings from the 2009 reclassification initiative, we anticipate FDA plans to complete this reclassification process in advance of current high-risk LDTs being subject to FDA premarket review (the proposed rule indicated three and one-half years after publication of the final rule). <br /> <br /> We also note that, in June 2023, FDA launched a <a rel="noopener noreferrer" href="https://www.fda.gov/news-events/press-announcements/fda-launches-pilot-program-help-reduce-risks-associated-using-laboratory-developed-tests-identify" target="_blank">voluntary pilot program</a> to help reduce the risks associated with using LDTs to identify cancer biomarkers. The program is intended to address situations where FDA approves an oncology drug that requires use of a companion diagnostic IVD to identify whether a patient has certain biomarkers, although the companion diagnostic IVD has not yet been approved or cleared, and, thus, clinicians rely on LDTs to make treatment decisions. Through the pilot program, FDA will publish minimum performance standards to support better and consistent performance of LDTs to detect biomarkers for drugs in the program. Because companion diagnostic IVDs are typically subject to the PMA pathway, FDA&rsquo;s reclassification of most types of companion diagnostic IVDs could help these tests reach the market faster in the future via the 510(k) pathway and, thus, limit or eliminate periods of time where clinicians need to rely on LDTs to make drug-related treatment decisions.</p> <h2> Next Steps</h2> <p> As noted, CDRH will begin proposing Class III IVDs for which it believes special controls, together with general controls, provide reasonable assurance of safety and effectiveness for reclassification to Class II devices. The Agency will publicly communicate any new information as it becomes available.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{E408A360-5F0A-421C-B5C5-9579E3B8344E}https://www.arnoldporter.com/en/perspectives/publications/2024/02/virtual-and-digital-health-digestAllison W. Shurenhttps://www.arnoldporter.com/en/people/s/shuren-allison-wallison.shuren@arnoldporter.comJacqueline Mulrynehttps://www.arnoldporter.com/en/people/m/mulryne-jacquelinejacqueline.mulryne@arnoldporter.comChristopher Andersonhttps://www.arnoldporter.com/en/people/a/anderson-christopherchristopher.anderson@arnoldporter.comAbeba Habtemariamhttps://www.arnoldporter.com/en/people/h/habtemariam-abebaAbeba.Habtemariam@arnoldporter.comEugenia E. Piersonhttps://www.arnoldporter.com/en/people/p/pierson-eugenia-eEugenia.Pierson@arnoldporter.comDr. Beatriz San Martinhttps://www.arnoldporter.com/en/people/s/san-martinbeatriz.sanmartin@arnoldporter.comAmanda Cassidy, M.P.P.https://www.arnoldporter.com/en/people/c/cassidy-amandaamanda.cassidy@arnoldporter.comBobby McMillinhttps://www.arnoldporter.com/en/people/m/mcmillin-bobbybobby.mcmillin@arnoldporter.comMonique Nolanhttps://www.arnoldporter.com/en/people/n/nolan-moniquemonique.nolan@arnoldporter.comNancy L. Perkinshttps://www.arnoldporter.com/en/people/p/perkins-nancy-lnancy.perkins@arnoldporter.comShama Aktarhttps://www.arnoldporter.com/en/people/a/aktar-shamashama.aktar@arnoldporter.comEmma Elliston, Ph.D.https://www.arnoldporter.com/en/people/e/elliston-emmaemma.elliston@arnoldporter.comAna González-Lamuñohttps://www.arnoldporter.com/en/people/g/gonzalez-lamuno-anaana.lamuno@arnoldporter.comRachel Mowerhttps://www.arnoldporter.com/en/people/m/mower-rachelrachel.mower@arnoldporter.comSonja Nesbithttps://www.arnoldporter.com/en/people/n/nesbit-sonjasonja.nesbit@arnoldporter.comAlison H. Petershttps://www.arnoldporter.com/en/people/p/peters-alison-halison.peters@arnoldporter.comKatie Brownhttps://www.arnoldporter.com/en/people/b/brown-katiekatie.brown@arnoldporter.comMickayla A. Stogsdillhttps://www.arnoldporter.com/en/people/s/stogsdill-mickaylamickayla.stogsdill@arnoldporter.comVirtual and Digital Health DigestThis digest covers key virtual and digital health regulatory and public policy developments during January 2024 from the United States, United Kingdom, and European Union.Thu, 22 Feb 2024 00:00:00 -0600<p>This digest covers key virtual and digital health regulatory and public policy developments during January 2024 from the United States, United Kingdom, and European Union.</p> <h2>In this issue, you will find the following:</h2> <h3>U.S. News</h3> <ul> <li><a href="#US FDA Regulatory Updates">FDA Regulatory Updates</a></li> <li><a href="#US Healthcare Fraud and Abuse Updates">Healthcare Fraud and Abuse Updates</a></li> <li><a href="#US Corporate Transactions Updates">Corporate Transactions Updates</a></li> <li><a href="#US Provider Reimbursement Updates">Provider Reimbursement Updates</a></li> <li><a href="#US Policy Updates">Policy Updates</a></li> <li><a href="#US Privacy and AI Updates">Privacy and AI Updates</a></li> </ul> <h3>EU and UK News</h3> <ul> <a name="US FDA Regulatory Updates"></a> <li><a href="#EU Regulatory Updates">Regulatory Updates</a></li> <li><a href="#EU Privacy Updates">Privacy Updates</a></li> <li><a href="#EU Intellectual Property Updates">Intellectual Property Updates</a></li> </ul> <h2>U.S. News</h2> <h3>FDA Regulatory Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://www.gao.gov/assets/d24106122.pdf" target="_blank">GAO Report Addresses Needs for Additional FDA AI Authorities</a>.&nbsp;</strong>On January 25, the Government Accountability Office (GAO) issued a report titled &ldquo;Selected Emerging Technologies Highlight the Need for Legislative Analysis and Enhanced Coordination&rdquo; (GAO Report). GAO was tasked with reviewing how federal agencies regulate emerging technologies, including challenges and opportunities they report facing in regulating emerging technologies, their collaboration and cooperation activities, and lessons they can learn from other governments&rsquo; experiences. GAO reports that Food and Drug Administration (FDA) officials stated updated authorities would help FDA regulate medical devices enabled with artificial intelligence (AI). While Congress is considering enhancing AI oversight, according to GAO, &ldquo;FDA has not clearly identified, documented, and communicated to Congress the specific legislative changes that would help it address these challenges.&rdquo; As a result, GAO warns that Congress may not be able to appropriately update FDA&rsquo;s authorities, and FDA may miss opportunities to fully realize the public health benefits of such technology. The GAO Report recommends FDA identify and document the specific changes to its statutory authorities that would enable FDA to take the actions it determines best to oversee devices that employ AI and machine learning (ML), and then communicate those potential legislative changes to Congress. <br /> <br /> <strong><a rel="noopener noreferrer" href="https://www.nature.com/articles/s41746-023-00992-8.pdf" target="_blank">FDA Officials Author Article on AI/ML-Enabled Medical Devices</a>.&nbsp;</strong>Officials from FDA&rsquo;s Center for Devices and Radiological Health (CDRH) recently authored an article in <em>npj Digital Medicine</em> (a <em>Nature</em> partner journal) on the transparency of AI/ML-enabled devices. The article presents key takeaways from a public workshop CDRH held on the topic in October 2021. As further detailed in the article, workshop participants agreed on the need for transparency of AI/ML devices to more clearly communicate how a device works for an intended population, the presence and management of potential bias, and the role of a device in the clinical workflow. One interesting perspective addressed in the article is that of payors who participated in the workshop. As further detailed in the article, given the potential for AI/ML devices to evolve, payors expressed concern with the coverage of &ldquo;unlocked&rdquo; or learning algorithms.</p> <p><strong><a rel="noopener noreferrer" href="https://insidehealthpolicy.com/daily-news/third-party-partners-needed-assess-health-tech-algorithms-califf-says" target="_blank">FDA Commissioner Comments on Regulation of Medical Device Algorithms</a>.&nbsp;</strong>On January 10, FDA Commissioner Robert Califf discussed digital health technologies during an interview at the Consumer Technology Association&rsquo;s CES Conference. As reported by <em>InsideHealthPolicy</em>, Califf emphasized that the FDA will likely need to work with third parties to assist with evaluating algorithms because the agency, on its own, does not have the capacity to continuously evaluate algorithms. Califf also stated that technological development should not be inhibited by requirements for algorithms to remain static. &nbsp;</p> <p><strong><a rel="noopener noreferrer" href="https://www.grants.gov/search-results-detail/351805" target="_blank">FDA Issues AI-Related Grant Notice</a>.</strong>&nbsp;On January 15, FDA issued a grant notice<a name="US Healthcare Fraud and Abuse Updates"></a> for &ldquo;Utilizing Real-World Data and Algorithmic Analyses to Assess Post-Market Clinical Outcomes in Patients Switching Amongst Therapeutically Equivalent Complex Generic Drug Products and Reference Listed Drugs.&rdquo; The purpose of the funding opportunity is to develop and test an AI- or ML-based algorithmic real world data model for post-market surveillance of complex generic drug products. The closing date for applications is March 31, 2024.</p> <h3>Healthcare Fraud and Abuse Updates</h3> <p><strong>DOJ Enforcement of Telemedicine/Telehealth Cases Persists. </strong>There seems to be no end to the U.S. Department of Justice&rsquo;s (DOJ&rsquo;s) laser focus on alleged telehealth and telemedicine schemes resulting in medically unnecessary services tainted by kickbacks being billed to federal health care programs. On December 14, 2023, Robert Leon Smith III &mdash; owner and operator of a network of durable medical equipment (DME) companies in Florida, Texas, and Maryland &mdash; <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/man-charged-60m-health-care-fraud-and-kickback-scheme" target="_blank">was charged for his alleged role</a> in a US$60 million health care fraud, wire fraud, and kickback scheme. Smith allegedly submitted false and fraudulent claims to Medicare for genetic tests, DME, and foot bath medication; paid kickbacks and bribes to offshore call centers operated by his co-conspirators to obtain Medicare beneficiary information; and falsified doctors&rsquo; orders obtained by telemedicine companies, which were signed by practitioners who did not examine or treat the beneficiary. In separate matters, Elizabeth Hernandez was sentenced on December 21, 2023, <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/nurse-practitioner-sentenced-192m-medicare-fraud-scheme" target="_blank">for her role in a fraud to scam Medicare</a> by submitting over US$192 million in claims for genetic tests and DME that patients did not need and telemedicine visits that never occurred. Hernandez was sentenced to 20 years in prison for her participation in the scheme. See further coverage of the Hernandez case in the <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/10/virtual-and-digital-health-digest">October 2023 Digest</a>. Jeffrey Brooks was <a rel="noopener noreferrer" href="https://www.justice.gov/usao-sc/pr/new-york-man-sentenced-federal-prison-and-pays-850000-civil-fines-and-restitution" target="_blank">sentenced on January 18 to more than seven years in federal prison</a> due to his involvement in a scheme to defraud Medicare and CHAMPVA. Brooks operated at least eight DME companies around May 2019 and was charged with plotting to submit or causing the submission of<a name="US Corporate Transactions Updates"></a> US$29 million in false and fraudulent claims to Medicare and CHAMPVA for medically unnecessary braces, which were eligible for reimbursement and/or obtained through the payment of kickbacks and bribes. And, Dr. Daniel Case agreed to <a rel="noopener noreferrer" href="https://www.justice.gov/usao-edwa/pr/doctor-agrees-pay-95000-settle-allegations-health-care-fraud" target="_blank">pay US$95,000 to resolve allegations</a> that he engaged in a kickback scheme and ordered medically unnecessary durable medical equipment that was billed to Medicare, Medicaid, and other federal health care programs.</p> <h3>Corporate Transactions Updates</h3> <p><strong>GE HealthCare Strengthens Its Digital-Health Capabilities With AI-Imaging Analysis and At-Home Pregnancy Monitoring Device.</strong> On January 11, Chicago-based GE HealthCare announced an agreement to acquire <a rel="noopener noreferrer" href="https://www.mimsoftware.com/" target="_blank">MIM Software</a>, a Cleveland-based artificial intelligence imaging analysis and software company. MIM Software provides AI-based software for radiation oncology, molecular radiotherapy, diagnostic imaging, and urology practices to imaging centers, hospitals, specialty clinics, and research organizations. The merger will enhance GE Healthcare&rsquo;s imaging products&rsquo; ability to detect and treat diseases using AI-based software and imaging analysis. GE Healthcare says it plans to finance the acquisition with cash on hand.</p> <p>GE HealthCare also announced on February 1 that it received 510(k) clearance from the FDA for Novii&trade;+ Wireless Patch Solution, a wearable and wireless sensor enabling the noninvasive measurement of fetal heart rate, maternal heart rate, and uterine activity for pregnant patients at or beyond 34 weeks. Novii&trade;+ Wireless Patch Solution, which is expected to be available in the U.S. later this year, will enable at-home monitoring for patients with high-risk pregnancies.</p> <p><strong>Digital Healthcare Companies May Choose To Remain in Pre-Initial Public Offering (IPO) Purgatory After Underwhelming IPO From BrightSpring Health. </strong>Louisville, Kentucky-based and KKR &amp; Co.-backed BrightSpring Health Services Inc., which advertises itself as a &ldquo;leader in innovation with electronic health record solutions, signature programs, data analytics, and reporting,&rdquo; went public on January 26. A little over a week before its initial public offering, BrightSpring Health announced it planned to sell 53.3 million shares of its common stock at a price of $15-$18 each, hoping to raise a total of US$800 million to US$960 million, which will be used to retire debt.</p> <p>When BrightSpring Health went public on January 26, its shares initially sold for a price of $13, below the company&rsquo;s $15 to $18 target. At the end of its first day of trading, the price per share slumped to $11. The public offering is largely <a name="US Provider Reimbursement Updates"></a>considered to have underperformed, with the worst drop for a US$250 million-plus U.S. listing since 2021, <a rel="noopener noreferrer" href="https://www.bloomberg.com/quote/1933614D:US" target="_blank">according to data compiled by Bloomberg</a>. BrightSpring Health&rsquo;s lackluster offering will certainly be noticed by other pre-IPO digital health companies and will likely impact the digital health IPO market this year. For example, Waystar previously indicated that it plans to go public this year, but may be more timid after seeing BrightSpring Health&rsquo;s results.</p> <h3> Provider Reimbursement Updates</h3> <p> <strong><a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/FR-2024-02-02/pdf/2024-01693.pdf" target="_blank">Biden Administration Expands Telehealth Use by Opioid Treatment Programs</a>.&nbsp;</strong>On February 2, the Substance Abuse and Mental Health Services Administration (SAMHSA) issued a <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/FR-2024-02-02/pdf/2024-01693.pdf" target="_blank">final rule</a> that adopts greater flexibilities for the use of telehealth for treatment of opioid use disorders (OUD) in opioid treatment programs (OTPs). 89 Fed. Reg. 7528. The rule marks the latest example of the expanding role of telehealth in federal programs. <br /> <br /> OTPs provide medication-assisted treatment for people diagnosed with OUD. The treatment programs, which must be certified by SAMHSA and registered with the Drug Enforcement Administration (DEA), are authorized to administer and dispense narcotic maintenance and detoxification medications, such as methadone and buprenorphine, to patients with OUD. 21 U.S.C. &sect; 823(h)(1).<br /> <br /> During the COVID-19 public health emergency (PHE), SAMHSA temporarily <a rel="noopener noreferrer" href="https://www.samhsa.gov/sites/default/files/faqs-for-oud-prescribing-and-dispensing.pdf" target="_blank">exempted</a> OTPs from the requirement to perform an in-person evaluation prior to beginning buprenorphine treatment, provided that an adequate evaluation could be accomplished via telehealth. However, the in-person evaluation requirement remained in force for the initiation of methadone treatment. On May 9, 2023, noting the &ldquo;overwhelmingly positive&rdquo; response to the change, SAMHSA issued <a rel="noopener noreferrer" href="https://www.samhsa.gov/medications-substance-use-disorders/statutes-regulations-guidelines/buprenorphine-at-opioid-treatment-programs" target="_blank">guidance</a> extending the buprenorphine telehealth flexibility for one year past the end of the PHE (i.e., May 11, 2024) or until the agency issued this final rule.<br /> <br /> The final rule now permanently authorizes use of telehealth evaluations in OTPs &mdash; including audio-only or audio-visual interactions &mdash; prior to the initiation of buprenorphine treatment. 89 Fed. Reg. at 7533. The rule also newly enables the use of telehealth evaluations prior to beginning methadone treatment in OTPs, but requires such evaluations to be accomplished via an audio-visual telehealth platform and that the program physician (or an authorized healthcare provider under the physician&rsquo;s supervision) determine that adequate evaluation can be accomplished via such a platform. According to SAMHSA, methadone holds a higher risk profile than buprenorphine, making audio-visual telehealth a more suitable platform for identifying risks in certain patients. Therefore, the agency declined to permit audio-only interactions for methadone treatment evaluations. <em>Id.<br /> </em> <br /> The final rule only applies to the dispensing of OUD medications by OTPs and does not authorize the telehealth prescription of methadone. As we covered in the <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/12/virtual-and-digital-health-digest#US%20Provider%20Reimbursement%20Updates">December 2023 Digest</a>, the DEA is expected to issue new rules governing the prescription of controlled substances via telehealth in 2024.<br /> <br /> <strong><a rel="noopener noreferrer" href="https://www.schatz.senate.gov/imo/media/doc/letter_to_hhs_secbecerraonpermanenttelehealthpolicy.pdf" target="_blank">Lawmakers Call for Permanent Access to Telehealth for Medicare Beneficiaries</a>.&nbsp;</strong>On January 19, a group of bipartisan lawmakers sent a <a rel="noopener noreferrer" href="https://www.schatz.senate.gov/imo/media/doc/letter_to_hhs_secbecerraonpermanenttelehealthpolicy.pdf" target="_blank">letter </a>to the U.S. Department of Health and Human Services (HHS) urging the agency to work with Congress to ensure Medicare beneficiaries have permanent access to telehealth services. <br /> <br /> As we covered in our <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/11/virtual-and-digital-health-digest#Provider%20Reimbursement%20Updates%20US">November 2023 Digest</a>, many flexibilities established during the PHE that expanded telehealth access for Medicare beneficiaries will expire at the end of 2024. These flexibilities include waiving in-person visit requirements for mental health telehealth services and allowing beneficiaries to use telehealth without geographic restrictions. Noting the upcoming expiration of these flexibilities, a<a name="US Policy Updates"></a> bipartisan group of lawmakers <a rel="noopener noreferrer" href="https://www.schatz.senate.gov/imo/media/doc/letter_to_hhs_secbecerraonpermanenttelehealthpolicy.pdf" target="_blank">described </a>2024 as a &ldquo;pivotal year for telehealth policy&rdquo; and encouraged HHS to collaborate in their effort to enact permanent telehealth legislation. The letter signatories are cosponsors of the <a rel="noopener noreferrer" href="https://www.congress.gov/118/bills/s2016/BILLS-118s2016is.pdf" target="_blank">CONNECT for Health Act</a>, legislation that would expand Medicare coverage of telehealth services and make flexibilities established during the PHE permanent.</p> <h3>Policy Updates</h3> <p><strong>House Member Urges FDA Commissioner To Prepare for AI Uptake.</strong> On January 3, Rep. Greg Murphy (R-NC) sent a <a rel="noopener noreferrer" href="https://murphy.house.gov/sites/evo-subsites/murphy.house.gov/files/evo-media-document/20240103145548837.pdf" target="_blank">letter</a> to FDA Commissioner Robert Califf suggesting &ldquo;unclear liability guidance and overlapping regulatory governance responsibility&rdquo; is limiting innovation among AI-enabled medical devices. Rep. Murphy urged the FDA to prepare for a rapid increase in premarket approval requests for AI devices and requested information on the FDA&rsquo;s ongoing efforts to evaluate AI-enabled medical devices. <br /> <br /> <strong>HHS&rsquo; ONC Regulations Face Delay After Procedural Mistake. </strong>On January 9, HHS&rsquo; Office of the National Coordinator for Health Information Technology (ONC) published a <a rel="noopener noreferrer" href="https://www.healthit.gov/sites/default/files/page/2023-12/hti-1-final-rule.pdf" target="_blank">final rule</a> outlining sweeping regulations for physicians using HHS-certified decision support software, including stricter requirements around the use of AI-enabled technologies. While the final rule was set to become effective by the end of 2024, the U.S. Government Accountability Office <a rel="noopener noreferrer" href="https://www.gao.gov/assets/870/865235.pdf?source=email" target="_blank">reported</a> that ONC violated federal law requiring agencies to allow Congress a period of 60 days to review a final rule before publishing. ONC finalized the rule about a month too soon, so the rule was sent back to the Office of Management and Budget, and it&rsquo;s unclear whether the procedural delays will affect timing of implementation. <br /> <br /> <strong>Members Introduce Bicameral Legislation To Curb Medicare Fraud and Abuse Using AI. </strong>On January 24, Senate HELP Committee Ranking Member Bill Cassidy (R-LA), Sen. Mike Braun (R-IN), and Rep. David Schweikert (R-AZ) introduced the &ldquo;Medicare Transaction Fraud Prevention Act&rdquo; (<a rel="noopener noreferrer" href="https://www.congress.gov/bill/118th-congress/house-bill/7147?q=%7B%22search%22%3A%22schweikert%22%7D&amp;s=5&amp;r=1" target="_blank">H.R. 7147</a>/<a rel="noopener noreferrer" href="https://www.congress.gov/bill/118th-congress/senate-bill/3630/cosponsors?s=1&amp;r=7" target="_blank">S. 3630</a>), which would create a Centers for Medicare &amp; Medicaid Services (CMS) pilot program utilizing an AI-based algorithm targeting &ldquo;irregular billing activity&rdquo; related to Medicare-covered purchasing of DME and other diagnostic testing related products. In a <a rel="noopener noreferrer" href="https://www.cassidy.senate.gov/newsroom/press-releases/cassidy-braun-introduce-bill-to-target-medicare-fraud/" target="_blank">press release</a>, Sen. Braun commented that, &ldquo;An annual loss of $60 billion is unacceptable. It&rsquo;s time for CMS to strengthen their fraud detection process in order to stop the hemorrhaging of the Medicare trust fund.&rdquo;<br /> <br /> <strong>House Members Launch Congressional Digital Health Caucus.</strong> On February 1, Reps. Robin Kelly (D-IL) and Troy Balderson (R-OH) <a rel="noopener noreferrer" href="https://robinkelly.house.gov/media-center/press-releases/representatives-robin-kelly-and-troy-balderson-announce-congressional" target="_blank">announced</a> the creation of a Congressional Digital Health Caucus, which will raise awareness on the advancements in digital health innovation, examine potential impacts on patients and health providers, and work together toward bipartisan proposals to improve access to new digital technologies.<a name="US Privacy and AI Updates"><br /> <br /> <strong></strong></a><strong>Senate Committee Examines AI in Healthcare. </strong>On February 8, the Senate Finance Committee held a <a rel="noopener noreferrer" href="https://www.finance.senate.gov/hearings/artificial-intelligence-and-health-care-promise-and-pitfalls" target="_blank">hearing</a> on &ldquo;Artificial Intelligence and Health Care: Promise and Pitfalls.&rdquo; Witnesses included professors from Stanford, the University of Chicago, and the University of California-Berkeley, in addition to the co-lead of the Health AI Partnership and Head of Digital and Automation at Siemens Healthineers.</p> <h3>Privacy and AI Updates</h3> <p><strong>DOJ Reportedly Probing AI Use in Medical Records.</strong> The promising options for using artificial intelligence to improve and facilitate the delivery of health care are not without risk. Compromises to patient privacy and bias in relation to particular patient populations are just two of the potential risks AI tools can present when used in the health care context. Reportedly, the <a rel="noopener noreferrer" href="https://news.bloomberglaw.com/us-law-week/dojs-healthcare-probes-of-ai-tools-rooted-in-purdue-pharma-case" target="_blank">DOJ is investigating</a> potential legal violations in the use of AI algorithms to analyze patient electronic medical records (EMRs) for signs of conditions that might suggest the need for medical screenings or certain treatments. The algorithms can allegedly trigger alerts to treating physicians or others with access to a patient&rsquo;s EMR that would prompt them to order tests or prescribe certain therapies and/or medications for the patient.<br /> <br /> The DOJ&rsquo;s apparent concern is that there may be incentives behind the use of these tools that lead to excessive screenings and unnecessary treatments, raising potential False Claims Act and Anti-Kickback Statute (AKS) concerns, among other fraud and abuse issues. The DOJ is probing the possibility that diagnostic technology companies, pharmaceutical companies, and medical device companies may be promoting the use of AI algorithms in order to identify patients that could benefit from screenings and/or treatments with these companies&rsquo; products. <br /> <br /> The DOJ&rsquo;s reported investigation bears similarities to the <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/justice-department-announces-global-resolution-criminal-and-civil-investigations-opioid" target="_blank">DOJ&rsquo;s inquiry</a> into Purdue Pharma&rsquo;s payments to Practice Fusion, an EMR vendor, for designing algorithms that prompted automated pop-up alerts for physicians indicating that patients would benefit if they were prescribed certain opioid painkillers. The AKS, which prohibits the exchange (or offer to exchange) of anything of value to induce (or reward) the referral of business reimbursable by federal health care programs, was the legal underpinning of the DOJ&rsquo;s investigation. In that matter, in relevant part, the DOJ alleged that Practice Fusion allegedly solicited and received improper remuneration to implement the alerts intended to increase sales of manufacturer products, in violation of the AKS.<br /> <br /> <a name="EU Regulatory Updates"></a>As discussed in our <a href="https://www.arnoldporter.com/en/perspectives/publications/2024/01/virtual-and-digital-health-digest">January 2024 Digest</a>, the new regulations promulgated by the ONC on &ldquo;Health Data, Technology, and Interoperability: Certification Program Updates, Algorithm Transparency, and Information Sharing&rdquo; (the Final Rule), include provisions designed to prevent bias, inaccuracy, and other flaws in the use of predictive decision support interventions, which include AI tools such as the types of EMR prompts reportedly under scrutiny by the DOJ.</p> <h2>EU and UK News</h2> <h3>Regulatory Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://www.gov.uk/government/publications/implementation-of-the-future-regulation-of-medical-devices/implementation-of-the-future-regulations" target="_blank">Publication of a Roadmap for the Future Regulation of Medical Devices in the UK</a>.</strong> On January 9, the Medicines and Healthcare products Regulatory Agency (MHRA) published its roadmap for the future regulation of medical devices, which includes the regulation of new technologies with software and AI components. The new regulations are intended to prioritize patient safety and provide faster access of innovative technologies to patients. They will be delivered through four statutory instruments (SIs), with post-market surveillance (PMS) measures put in place early in 2024 and will be applicable towards the end of 2024, followed by core elements of the new framework in 2025. <br /> <br /> The draft PMS SI includes requirements for what a PMS system should include and enhanced obligations on the reporting of serious incidents and periodic review of PMS data. The SIs on the core regulations will be developed over 2024 through several key stakeholder discussions. The core provisions are expected to include new requirements on clinical investigations and claims made about devices, clarification on conformity assessments and approved bodies, and introduce the international recognition framework, as well as much more. <br /> <br /> In addition, the roadmap sets out where we can expect new guidance. Over 2024, the MHRA aims to publish guidance on (1) good machine learning practice for medical device development mapping; (2) AI as a Medical Device development and deployment best practice; and (3) data-driven Software as a Medical Device research, development, and governance. Finally, the roadmap states that the AI Airlock regulatory sandbox, for innovators to test their technologies within a safe environment, will launch towards the middle of 2024.</p> <p><strong><a rel="noopener noreferrer" href="https://ec.europa.eu/commission/presscorner/detail/en/ip_24_383" target="_blank">Commission Adopts Measures To Support the Development of AI in Europe</a>. </strong>On January 24, the European Commission (EC) launched a package of measures to support European start-ups and small and medium-size enterprises in the development of artificial intelligence compliant with EU legislation. The package includes:</p> <ul> <li>A <a rel="noopener noreferrer" href="https://digital-strategy.ec.europa.eu/en/library/proposal-regulation-amending-regulation-eu-20211173-regards-eurohpc-initiative-start-ups-boost" target="_blank">proposal</a> for amendments to Regulation (EU) 2021/1173 regarding a European High-Performance Computing (EuroHPC) initiative for start-ups to boost European leadership in trustworthy artificial intelligence (EuroHPC Regulation) to set up AI factories in the EU in order to support the development and adoption of AI solutions</li> <li>Establishing a <a rel="noopener noreferrer" href="https://digital-strategy.ec.europa.eu/en/library/commission-decision-establishing-european-ai-office" target="_blank">European AI Office</a> within the EC to ensure coordination of AI policy at the EU level, support the accelerated development, roll-out and use of trustworthy AI systems and applications, and supervise the implementation and enforcement of the AI Act</li> <li>An <a rel="noopener noreferrer" href="https://digital-strategy.ec.europa.eu/en/library/communication-boosting-startups-and-innovation-trustworthy-artificial-intelligence#:~:text=This%20Communication%20sets%20out%20a,closely%20with%20industrial%20users%2C%20attract" target="_blank">EU AI Start-Up and Innovation Communication</a>, setting up a strategic investment framework in trustworthy AI to foster an innovative EU AI ecosystem. Among the actions it introduces are accelerating the development of Common European data spaces and launching &ldquo;GenAI4EU,&rdquo; which aims to support the development of novel use cases and emerging applications in sectors like health or biotech</li> </ul> <p><strong><a rel="noopener noreferrer" href="https://ec.europa.eu/commission/presscorner/detail/en/ip_24_346" target="_blank">Commission Proposes Extension to IVDR Transition Periods and Accelerated Launch of Eudamed</a>.</strong> On January 23, the European Commission announced proposals to amend the Medical Device Regulations (EU) 2017/745 (MDR) and the In Vitro Diagnostic Medical Device Regulations (EU) 2017/746 (IVDR), as applicable, to:</p> <ul> <li>Extend the transition provisions for certain in vitro diagnostic medical devices (IVDs) under the IVDR</li> <li>Allow for a gradual roll-out of Eudamed so that certain modules will be mandatory beginning in late 2025</li> <li>Include a notification obligation in case of interruption of supply</li> </ul> <p>Under the proposal, the transition period in the IVDR for certain IVDs will be extended to:</p> <ul> <li>December 2027 for Class D high individual and public health risk devices (e.g., HIV or hepatitis tests)</li> <li>December 2028 for Class C high individual and/or moderate public health risk devices (e.g., cancer tests)</li> <li>December 2029 for Class B lower risk devices (e.g., sterile devices such as blood collection tubes)</li> </ul> <p>The above extensions apply to IVDs for which a conformity assessment procedure pursuant to the IVDD did not require the involvement of a notified body, but where a conformity assessment procedure pursuant to the IVDR requires the involvement of a notified body. There is also an extension to December 31, 2027 where certificates have been<a name="EU Privacy Updates"></a> issued by a notified body, including where these have expired, if certain criteria are met.</p> <p>The proposal will now need to be adopted by the European Parliament and Council before it enters into force. However, as the proposal follows a similar structure to the recent amendments to the MDR, we do not anticipate significant changes during the legislative process. You can read more in our <a href="https://www.biosliceblog.com/2024/02/commission-proposes-extension-to-ivdr-transition-periods-and-accelerated-launch-of-eudamed/">blog post</a>.</p> <h3>Privacy Updates</h3> <p><strong>ICO Consultation Series on Generative AI and Data Protection.</strong> On January 15, the Information Commissioner&rsquo;s Office (ICO) launched a <a rel="noopener noreferrer" href="https://ico.org.uk/about-the-ico/ico-and-stakeholder-consultations/ico-consultation-series-on-generative-ai-and-data-protection/" target="_blank">consultation series</a> on how UK data protection laws should apply to the development and use of generative AI models. While not directly relevant to the life sciences sector, the consultations may be important where AI is used to analyze and generate output from health data. The <a rel="noopener noreferrer" href="https://www.smartsurvey.co.uk/s/GenAILawfulBasis/" target="_blank">first chapter</a> has been published and seeks to gather the views of stakeholders on the lawful basis for web-scraping to train generative AI models. The ICO believes that the only available lawful basis for the collection of personal data in the context of training will be legitimate interests. To establish legitimate interests, a developer must demonstrate that (1) the purpose of the processing is legitimate; (2) the processing is necessary for that purpose; and (3) the individual&rsquo;s interests do not override the interest being pursued. The ICO identifies several ways to mitigate potential risks and meet the third element of the test. The deadline to submit views on the first chapter is March 1, 2024, with publication of the further chapters over the coming months. Read our <a href="https://www.arnoldporter.com/en/perspectives/advisories/2024/02/ico-launches-consultation-series">Advisory</a> for more information. <br /> <br /> <strong><a rel="noopener noreferrer" href="https://www.efpia.eu/news-events/the-efpia-view/statements-press-releases/european-health-data-space-key-aspects-to-be-considered-in-the-trilogue-discussions/" target="_blank">EFPIA Calls for Legal Certainty and Harmonization in the EHDS</a>. </strong>On January 31, the European Federation of Pharmaceutical Industries and Associations (EFPIA) called for the European Parliament and the Council to make certain changes in the regulation on the European Health Data Space (EHDS) to truly foster EU competitiveness and innovation and to achieve the harmonization and representativeness of data. See our <a href="https://www.arnoldporter.com/en/perspectives/publications/2024/01/virtual-and-digital-health-digest">January 2024 Digest</a> for more information on the EHDS.<br /> <br /> The EHDS regulation is currently under negotiation by the EU legislators, and as we set out in our previous <a href="https://www.arnoldporter.com/en/perspectives/publications/2024/01/virtual-and-digital-health-digest">Digest</a>, in December, the <a rel="noopener noreferrer" href="https://www.consilium.europa.eu/en/press/press-releases/2023/12/06/european-health-data-space-council-agrees-its-position/" target="_blank">Council</a> of the European Union and European <a rel="noopener noreferrer" href="https://www.europarl.europa.eu/news/en/press-room/20231208IPR15783/ep-supports-creating-eu-health-data-space-to-boost-access-to-data-and-research" target="_blank">Parliament</a> adopted their positions on the text of the regulation. With this call, EFPIA hopes the institutions consider the following when finalizing the text of the regulation:</p> <ul> <li><strong>Truly fostering EU competitiveness and innovation:</strong> narrowing the scope of secondary data and balancing the protection of incentives to undertake exploratory research, thereby allowing data holders to be involved in all steps of the protection of their intellectual property and to have the final right to refuse data sharing when there is the risk of serious economic damage through the disclosure of trade secrets</li> <li><strong>Harmonization and representativeness of data:</strong> limiting the possibility to include an opt-out mechanism to the minimum categories for secondary<a name="EU Intellectual Property Updates"></a> use (e.g., health-related administrative data, including claims and reimbursement data, human genetic data, or personally generated electronic health data, including medical devices or digital health applications)</li> <li><strong>Creating a global ecosystem for research: </strong>clarifying the requirement of localization for all health data generated in the EU and the related cross-border restrictions</li> </ul> <h3> Intellectual Property Updates</h3> <p><strong>Patents for Glucose Monitoring Devices Invalidated by UK High Court. </strong>On January 15, the UK High Court invalidated four patents relating to Continuous Glucose Monitoring (CGM) devices, though the judge noted that the patents would have been infringed if they had been found to be valid. Abbott and Dexcom each held two patents relating to features and options on smartphone user interfaces for their CGM devices. This included a two-stage notification system that does not interrupt a mobile phone user&rsquo;s actions and installation checks to ensure the monitoring app is not affected by the phone&rsquo;s malfunctions. <br /> <br /> The High Court Judge (James Mellor) noted the importance of preventing hindsight from infiltrating the problem which the skilled addressee is deemed to be dealing with when they consider the prior art, explaining that a &ldquo;signal&rdquo; becomes easy to extract from &ldquo;noise&rdquo; when the circumstances which led up to the event are viewed with hindsight. Justice Mellor further explained that if the invention involved a significant departure from the prior art, and if hindsight has to be used to get to the invention, that is determinative of the invention not being obvious. <br /> <br /> The dispute between Abbott and Dexcom is far from over with further trials in the UK in November 2024 and January 2025 relating to other Abbott and Dexcom patents, as well as related proceedings in Spain and Germany and hearings before the European Patent Organisation and the Unified Patent Court. <br /> <br /> Patentability of AI-Related Inventions To Be Considered by the UK Court of Appeal. In our <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/12/virtual-and-digital-health-digest#EU%20Intellectual%20Property%20Updates">December 2023 Digest</a>, we reported on the landmark UK High Court decision in <em><a rel="noopener noreferrer" href="https://caselaw.nationalarchives.gov.uk/ewhc/ch/2023/2948" target="_blank">Emotional Perception</a></em>, which concluded that emulated artificial neural networks (ANNs) did not operate as a computer program and therefore Emotional Perception&rsquo;s patent application could not be rejected on the grounds that the invention relates to a &ldquo;computer program as such.&rdquo; This was promptly followed by an update to the UK Intellectual Property Office (UKIPO) Manual of Patent Practice (MPP) to ensure that examiners do not reject ANNs under the &ldquo;program for a computer&rdquo; exclusion to patentability. The UKIPO has now filed an appeal on the following grounds:</p> <ul> <li>The judge&rsquo;s decision that the computer program exception to patentability had not been engaged was wrong</li> <li>The judge should not have relied on the UKIPO&rsquo;s &ldquo;concession&rdquo; that hardware ANN did not operate as a computer program to conclude that software implemented ANN also did not operate as a computer program</li> <li>The judge was wrong to exclude from consideration the mathematical exclusion model</li> <li>The judge was wrong in deciding that the claimed invention involves a substantive technical contribution.</li> </ul> <p>This appeal will be a good opportunity for the Court of Appeal to provide updated guidance on patentability of computer-generated inventions and inventions involving algorithms or mathematical models, and to confirm the extent to which the UK is aligned with the approach at the European Patent Office. Any developer of digital health products utilizing ANNs should be wary of relying on the updated UKIPO MPP guidance on ANNs when filing and prosecuting patents as the change in practice may be short-lived.</p> <p><span style="font-size: small;"><em>*The following individuals contributed to this Newsletter:</em></span></p> <p><span style="font-size: small;"><em><em>Amanda Cassidy is employed as a&nbsp;</em>Senior Health Policy Advisor at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Amanda is not admitted to the practice of law.<br /> Eugenia Pierson is employed as a Senior Health Policy Advisor at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Eugenia is not admitted to the practice of law.<br /> Sonja Nesbit is employed as a Senior Policy Advisor at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Sonja is not admitted to the practice of law.<br /> Mickayla <em>Stogsdill&nbsp;</em>is employed as a Senior Policy Specialist at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Mickayla is not admitted to the practice of law.<br /> Katie Brown is employed as a Policy Advisor at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Katie is not admitted to the practice of law.<br /> Heba Jalil is employed as a Trainee Solicitor at Arnold &amp; Porter's London office. Heba is not admitted to the practice of law.</em></span></p> <p><span style="font-size: small;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{30A4BA9B-7F40-4205-9E87-BCEFD8E8EBF9}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/02/schildkraut-talks-ftcs-deepfakes-proposal-in-bloomberg-lawSchildkraut Talks FTC’s Deepfakes Proposal in Bloomberg LawPeter Schildkraut, co-leader of the Technology, Media &amp; Telecommunications industry team, was quoted in the<em> Bloomberg Law </em>article, &ldquo;AI Providers Face Broad Liability Under FTC&rsquo;s Deepfakes Proposal.&rdquo;&nbsp;Wed, 21 Feb 2024 00:00:00 -0600<p>Peter Schildkraut, co-leader of the Technology, Media &amp; Telecommunications industry team, was quoted in the <em>Bloomberg Law</em> article, &ldquo;AI Providers Face Broad Liability Under FTC&rsquo;s Deepfakes Proposal.&rdquo; The article discusses the Federal Trade Commission&rsquo;s (FTC) recent request for public comment on its proposed rule against fraudulent impersonation of individuals. The FTC proposal would hold the AI platforms enabling creation of deepfakes &mdash; false but highly realistic portrayals of people &mdash; liable when they are used to harm consumers through deceptive content. Liability would turn on whether the provider had &ldquo;knowledge or reason to know that [its] goods or services will be used&rdquo; for such impersonation.</p> <p>Schildkraut told <em>Bloomberg Law </em>that if the FTC&rsquo;s proposed rule goes forward, many AI models could find themselves implicated. Some companies might respond by imposing stricter controls on who uses the product, by raising prices to offset potential liabilities, or by shutting down entirely, he said. AI platforms might also consider invoking Section 230 of the Communications Decency Act, which has historically offered legal immunity to online platforms over certain content posted on their sites. However, Schildkraut added that it is unclear how the law would apply in this circumstance.</p> <p><a rel="noopener noreferrer" href="https://news.bloomberglaw.com/artificial-intelligence/ai-providers-face-broad-liability-under-ftcs-deepfakes-proposal" target="_blank">Read the full article</a>. </p>{D1030117-B77E-438E-B7A5-8C248CC748B5}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/02/shannon-discusses-rising-tensions-in-the-middle-eastShannon Discusses Rising Tensions in the Middle EastSenior International Policy Advisor and former U.S. Ambassador Thomas A. Shannon, Jr., was featured in the <em>NBC News</em> article, &ldquo;The U.S. and Iran say they don't want a war, but the risks are mounting as Biden readies retaliation.&rdquo;&nbsp;Tue, 20 Feb 2024 00:00:00 -0600<p>Senior International Policy Advisor and former U.S. Ambassador Thomas A. Shannon, Jr., was featured in the <em>NBC News</em> article, &ldquo;The U.S. and Iran say they don't want a war, but the risks are mounting as Biden readies retaliation.&rdquo; The article discusses the recent killing of three American soldiers in a drone strike by Iranian militants, which marked the first time American personnel have been killed in strikes from Iran&rsquo;s proxies since the start of Israel&rsquo;s war in Gaza.</p> <p>&ldquo;The U.S. is in danger of slow-walking itself into a war with Iran,&rdquo; Shannon told <em>NBC News</em>. Iran has been able to use its militias to challenge American and Western interests in the region, but the extent of its control over these forces is unclear. The risk of miscalculation and escalation is huge partly due to this ambiguity, Shannon said. &ldquo;We&rsquo;re engaging with people who have every reason to escalate with us because our attacks against them elevate them in their world,&rdquo; he expressed. These Iran proxies can cast themselves as &ldquo;the leading edge of resistance to U.S. presence in the region, to Israel and leading the effort on behalf of Palestinians.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://www.nbcnews.com/news/world/us-iran-war-biden-retaliation-hezbollah-houthis-iraq-syria-rcna136313" target="_blank">Read the full article</a>. </p>{E9D81919-23A3-4398-B8ED-F16FE3D87C35}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/02/shannon-shares-thoughts-on-unravelling-of-us-venezuela-agreementShannon Shares Thoughts on Unravelling of U.S.-Venezuela AgreementSenior International Policy Advisor and former U.S. Ambassador Thomas A. Shannon, Jr., was quoted in the <em>Financial Times</em> article, &ldquo;How the Biden administration&rsquo;s plan to engage with Venezuela unraveled.&rdquo;Tue, 20 Feb 2024 00:00:00 -0600<p>Senior International Policy Advisor and former U.S. Ambassador Thomas A. Shannon, Jr., was quoted in the <em>Financial Times</em> article, &ldquo;How the Biden administration&rsquo;s plan to engage with Venezuela unraveled.&rdquo; The article discusses the recent unravelling of the Biden Administration&rsquo;s agreement with the Venezuelan government, which was signed between the Venezuelan opposition and Venezuelan President Nicol&aacute;s Maduro last October. The formal agreement, which resulted in the Biden Administration&rsquo;s lifting of U.S. sanctions on Venezuelan oil, gas, mining exports, and secondary market trading in Venezuelan debt, reflected the Administration&rsquo;s eagerness to steer away from the Trump Administration&rsquo;s &ldquo;maximum pressure&rdquo; financial penalties which aimed to unseat Maduro. </p> <p>However, Maduro&rsquo;s crackdown on opposition activists, as well as his other authoritarian actions surrounding Venezuela&rsquo;s elections, recently led the Biden Administration to reimpose its sanctions on Venezuela&rsquo;s mining sector. Shannon told <em>Financial Times</em> that &ldquo;the Biden Administration will end up owning a failed Trump policy and will make it theirs.&rdquo; Maduro &ldquo;will argue that foreign powers are attempting to define how Venezuelan electoral institutions work and who is a candidate and who isn&rsquo;t,&rdquo; Shannon predicted. &ldquo;It&lsquo;s a weak argument but it&rsquo;s one that resonates in Latin America.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://www.ft.com/content/cd6895a6-e685-4db4-811c-9edb90203d74" target="_blank">Read the full article</a> (subscription required). </p>{15BED728-8AA1-4F56-B3C3-689C27F54EF4}https://www.lifesciencesipreview.com/europe/what-does-the-uks-pro-innovation-approach-to-ai-mean-for-life-sciences-companiesJacqueline Mulrynehttps://www.arnoldporter.com/en/people/m/mulryne-jacquelinejacqueline.mulryne@arnoldporter.comDr. Beatriz San Martinhttps://www.arnoldporter.com/en/people/s/san-martinbeatriz.sanmartin@arnoldporter.comWhat does the UK’s pro-innovation approach to AI mean for life sciences companies?Tue, 20 Feb 2024 00:00:00 -0600{A9C46705-250F-4D66-91A4-D25CDFF2659F}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/navigating-the-pending-biosecure-actBobby McMillinhttps://www.arnoldporter.com/en/people/m/mcmillin-bobbybobby.mcmillin@arnoldporter.comCharles A. Blanchardhttps://www.arnoldporter.com/en/people/b/blanchard-charles-aCharles.Blanchard@arnoldporter.comDaniel A. Kracovhttps://www.arnoldporter.com/en/people/k/kracov-daniel-adaniel.kracov@arnoldporter.comRonald D. Leehttps://www.arnoldporter.com/en/people/l/lee-ronald-dRonald.Lee@arnoldporter.comMarne Marottahttps://www.arnoldporter.com/en/people/m/marotta-marnemarne.marotta@arnoldporter.comSonja Nesbithttps://www.arnoldporter.com/en/people/n/nesbit-sonjasonja.nesbit@arnoldporter.comMahnu V. Davarhttps://www.arnoldporter.com/en/people/d/davar-mahnu-vmahnu.davar@arnoldporter.comKristin M. Hickshttps://www.arnoldporter.com/en/people/h/hicks-kristin-mkristin.hicks@arnoldporter.comNavigating the Pending BIOSECURE Act: Implications for U.S.-China Biopharmaceutical Collaboration and National Security<span>The BIOSECURE Act (H.R. 7085), which has the potential to severely restrict the ability of U.S. biopharmaceutical companies to collaborate with certain Chinese entities without losing the ability to contract with the U.S. government, has made headlines in recent weeks.</span>Fri, 16 Feb 2024 00:00:00 -0600<p>The BIOSECURE Act (<a rel="noopener noreferrer" href="https://www.congress.gov/118/bills/hr7085/BILLS-118hr7085ih.pdf" target="_blank">H.R. 7085</a>), which has the potential to severely restrict the ability of U.S. biopharmaceutical companies to collaborate with certain Chinese entities without losing the ability to contract with the U.S. government, has made headlines in recent weeks. <br /> <br /> As we have seen previously in the telecommunications field, congressional scrutiny of Chinese companies such as BGI Genomics, MGI, Complete Genomics, and WuXi AppTec has been building over the past several years as federal policymakers have become increasingly critical of China&rsquo;s biopharmaceutical industry, with a focus on their alleged ties to the Chinese Communist Party and handling of Americans&rsquo; personal data, including genetic information. Introduced by the House Select Committee on the Chinese Communist Party (China Select Committee) Chairman Mike Gallagher (R-WI) and Ranking Member Raja Krishnamoorthi (D-IL) on January 25, the BIOSECURE Act would:</p> <ul> <li>Prohibit federal agencies from: <ul><br /> <li>Procuring or obtaining a &ldquo;biotechnology equipment or service&rdquo; from a &ldquo;biotechnology company of concern&rdquo;</li> <li>Entering into, or renewing, a contract with an entity that either (1) uses biotechnology equipment or service from a biotechnology company of concern in performing the contract or (2) enters into a contract (with a third party) that will require the direct use of biotechnology equipment or service from a &ldquo;biotechnology company of concern&rdquo;</li> <li>Using grant or loan funds to any entity covered by the contract ban</li> </ul> </li> <li>Direct the Office of Management and Budget (OMB) in consultation with certain other agency heads, to develop a list of &ldquo;biotechnology companies of concern&rdquo; and to issue implementing guidance within 120 days of the enactment of the BIOSECURE Act. <ul><br /> <li>The list of &ldquo;biotechnology companies of concern&rdquo; must include BGI Genomics, MGI, Complete Genomics, WuXi AppTec, and any subsidiary, parent affiliate, or successor of such entities.</li> <li>The list also should include any entity that (1) is subject to the jurisdiction, direction control, or operates on behalf of a foreign adversary; (2) is involved in the manufacturing, distribution, provision, or procurement of a biotechnology equipment or service; <em>and</em> (3) poses a risk to U.S. national security based on joint research with a foreign adversary, providing &ldquo;multiomic&rdquo;[[N: The term &ldquo;multiomic&rdquo; means data types that include genomics, epigenomics, transcriptomics, proteomics, and metabolomics.]] data to a foreign adversary, or obtaining human multiomic data without express and informed consent.</li> </ul> </li> </ul> <p>For BGI Genomics, MGI, Complete Genomics, and WuXi AppTec, the bill&rsquo;s restrictions would take effect 60 days after the Office of Management and Budget (OMB) issues the implementing guidance or 120 days after enactment of the legislation, whichever is earlier. However, the restrictions would also apply to any other entities added to the list 180 days after the OMB guidance is issued. In addition, the bill directs the Federal Acquisition Regulatory Council to update the Federal Acquisition Regulations to reflect the bill&rsquo;s restrictions within one year after the OMB guidance is issued. <br /> <br /> The bill defines &ldquo;biotechnology equipment or services&rdquo; as &ldquo;equipment designed for the research, development, production, or analysis of biological materials as well as any software, firmware, or other digital components,&rdquo; in addition to advising or consulting services related to the use of equipment, disease detection, or genealogical information, or any other services defined by OMB.</p> <h2>Background</h2> <p>The House version of the FY24 National Defense Authorization Act (NDAA) included a prior version of the BIOSECURE Act. Despite efforts to include the bill in the Senate version of the FY24 NDAA, the legislation was not included in the final FY24 NDAA. Instead, the FY24 NDAA directed the Department of Defense to determine whether biotechnology companies headquartered in China should be identified as Chinese military companies operating in the United States. On January 31, the Department of Defense published an updated Chinese military list, but it did not include WuXi-affiliated entities. <br /> <br /> On February 12, Reps. Gallagher and Krishnamoorthi, along with Sens. Gary Peters (D-MI) and Bill Hagerty (R-TN), sent a letter to Commerce Secretary Gina Raimondo, Defense Secretary Lloyd Austin, and Treasury Secretary Janet Yellen asking the agencies to consider adding WuXi AppTec and WuXi Biologics to the Department of Defense&rsquo;s Chinese Military Companies List (1260H list), the Department of Commerce&rsquo;s Bureau of Industry and Security Entity List, and the Department of Treasury&rsquo;s Non-SDN Chinese Military-Industrial Complex Companies List.</p> <h2>Status and Outlook</h2> <p>There are two paths for a version of the BIOSECURE Act to progress through Congress: (1) as part of the FY25 NDAA or (2) attached to a larger legislative package this year. Notably, this legislative effort follows the same model that was used to target Chinese telecommunications companies in the late 2010s. Given the pace of movement, for stakeholders wishing to influence or amend the legislation, we recommend initiating outreach as soon as possible.<br /> <br /> H.R. 7085 has been referred to the House Oversight and Accountability Committee and further action has not yet been announced. Although the China Select Committee does not have the ability to advance legislation, the Select Committee can build momentum for the bill. In addition, Rep. Gallagher also serves on the House Armed Services Committee, which allows him to include provisions in defense-related bills. We expect Rep. Gallagher to push for the inclusion of a potentially expanded version of the BIOSECURE Act in the FY25 National Defense Authorization Act as early as mid-April. Congressman Gallagher is not seeking reelection and may view this legislative effort as a legacy item.<br /> <br /> In the Senate, Sens. Peters, the Chairman of the Senate Homeland Security and Government Affairs Committee (HSGAC), and Hagerty introduced (<a rel="noopener noreferrer" href="https://www.congress.gov/118/bills/s3558/BILLS-118s3558is.pdf" target="_blank">S.3558</a>), which is substantially similar to the BIOSECURE Act, on December 20, 2023. Sen. Peters listed the bill to be considered during a January 31 HSGAC business meeting, but the bill was held over to the next business meeting. We expect the bill to be considered by the committee in the coming months. <br /> <br /> In addition to this congressional activity, we also understand the Biden administration is considering executive actions to limit the distribution of certain &ldquo;highly sensitive&rdquo; personal data, including genetic information, to China and other countries of national security concern.<br /> <br /> <em>*Dorothy Chen contributed to this Advisory. Ms. Chen is admitted only in North Carolina; practicing law in Washington, D.C. during the pendency of her application for admission to the D.C. Bar and under the supervision of lawyers of the firm who are members in good standing of the D.C. Bar.</em></p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{4B46BCDE-40D5-4B0E-B2EC-F34B88E29DE0}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/cpsc-notification-requirementsEric A. Rubelhttps://www.arnoldporter.com/en/people/r/rubel-eric-aEric.Rubel@arnoldporter.comMichelle F. Gillicehttps://www.arnoldporter.com/en/people/g/gillice-michellemichelle.gillice@arnoldporter.comS. Michael Gentinehttps://www.arnoldporter.com/en/people/g/gentine-s-michaelmike.gentine@arnoldporter.comJessica L. Wanghttps://www.arnoldporter.com/en/people/w/wang-jessica-ljessica.wang@arnoldporter.comKelsie Sicinskihttps://www.arnoldporter.com/en/people/s/sicinski-kelsiekelsie.sicinski@arnoldporter.comCPSC Notification Requirements, Recalls and Recent Enforcement Actions: Desk Reference for Section 15 of the Consumer Product Safety ActThe U.S. Consumer Product Safety Commission (CPSC or the Commission) is a small federal agency with a big job: protecting consumers from unreasonable risks of injury associated with the use of thousands of types of consumer products.Fri, 16 Feb 2024 00:00:00 -0600<p>The U.S. Consumer Product Safety Commission (CPSC or the Commission) is a small federal agency with a big job: protecting consumers from unreasonable risks of injury associated with the use of thousands of types of consumer products. With an appropriation for fiscal year 2023 of $152.5 million and about 550 employees &mdash; tiny by federal government standards &mdash; CPSC uses safety data submitted by companies pursuant to the notification requirements under Section 15 of the Consumer Product Safety Act (CPSA) to help carry out the agency&rsquo;s mandate. The Consumer Product Safety Improvement Act of 2008 (CPSIA) dramatically increased the maximum penalties for noncompliance, and both CPSC and the U.S. Department of Justice (DOJ) have used that authority to impose multimillion-dollar penalties against a number of companies for alleged late reporting under Section 15 and other violations.</p> <p>Congress created CPSC as an independent commission, which means that it does not report to the President either directly or through any department or agency of the federal government. CPSC can have up to five Commissioners, one of whom serves as Chair, and only three of whom can be from the same political party. CPSC&rsquo;s Chair and Commissioners are appointed by the President for seven-year terms with the advice and consent of the Senate.</p> <p>Currently, the Commission includes three Democratic Commissioners and one Republican:</p> <ul> <li>Chair Alexander Hoehn-Saric (term through October 2027) (Democrat)</li> <li>Richard Trumka, Jr. (term through October 2028) (Democrat)</li> <li>Mary Boyle (term through October 2025) (Democrat)</li> <li>Peter Feldman (term through October 2026) (Republican)</li> </ul> <p>In March 2023, President Biden nominated Douglas Dziak (currently a staffer for Commissioner Feldman) to fill the vacant seat. The Senate Commerce, Science, and Transportation Committee advanced Dziak&rsquo;s nomination following an October hearing, but he never received a vote on the floor in the first session of the 118th Congress. Dziak&rsquo;s nomination remains pending in the second session. Notwithstanding the vacancy of the second Republican seat, the Commission has continued its trend of aggressive enforcement of the Section 15 reporting requirements.</p> <p>This Desk Reference first explains the Section 15 reporting requirements, including the broad scope of CPSC&rsquo;s jurisdiction, and then discusses routes to a product safety recall, reporting and recall trends, and penalties for late reporting.</p>{68A387E1-4692-4897-8C84-F4D07EEDC9BD}https://www.arnoldporter.com/en/perspectives/events/2024/02/esg-part-iii-key-considerations-for-optimizing-governanceTeresa (Terry) L. Johnsonhttps://www.arnoldporter.com/en/people/j/johnson-teresa-lteresa.johnson@arnoldporter.comArthur Lukhttps://www.arnoldporter.com/en/people/l/luk-arthurArthur.Luk@arnoldporter.comErik Walshhttps://www.arnoldporter.com/en/people/w/walsh-erikerik.walsh@arnoldporter.comPaul Nabhanhttps://www.arnoldporter.com/en/people/n/nabhan-paulpaul.nabhan@arnoldporter.comESG Series: Part III: Key Considerations for Optimizing GovernanceHeightened scrutiny, increased regulations and lawsuits, and numerous business functions covering a wide range of ESG issues &mdash; it all amounts to considerable pressure on corporate boards and management to create long-term value while monitoring ESG-related risks.Thu, 15 Feb 2024 00:00:00 -0600<p>Heightened scrutiny, increased regulations and lawsuits, and numerous business functions covering a wide range of ESG issues &mdash; it all amounts to considerable pressure on corporate boards and management to create long-term value while monitoring ESG-related risks. This third program in our series, which expands on various sections of the ABA&rsquo;s book, will examine the role of boards and management in ensuring effective governance practices.</p> <p>The topics we will review include:</p> <ul> <li>ESG risk considerations ranging from litigation, regulatory, and disclosure to reputational and climate-related issues</li> <li>Added challenges due to ESG backlash when balancing the concerns of different stakeholders and the best interests of the company</li> <li>Directors and officers (D&amp;O) liability insurance as a potential tool for mitigating potential legal exposure</li> <li>Effective management systems for capturing ESG metrics and measuring progress toward strategic ESG goals</li> </ul>{717E2E71-62DC-4863-8E2E-CF0D8DF0A2F0}https://www.arnoldporter.com/en/perspectives/news/2024/02/chambers-global-2024-ranks-35-arnold-and-porter-lawyers-31-practice-areasChambers Global 2024 Ranks 35 Arnold & Porter Lawyers, 31 Practice AreasThe 2024 <em>Chambers Global</em> guide highlighted Arnold &amp; Porter as a &ldquo;Leading Firm&rdquo; in 31 practice areas and ranked 35 lawyers as &ldquo;Leading Individuals.&rdquo;&nbsp;Thu, 15 Feb 2024 00:00:00 -0600<p>The 2024 <em>Chambers Global</em> guide highlighted Arnold &amp; Porter as a &ldquo;Leading Firm&rdquo; in 31 practice areas and ranked 35 lawyers as &ldquo;Leading Individuals.&rdquo; Using in-depth research conducted by <em>Chambers</em> researchers, the guide ranks the top lawyers and law firms in over 200 jurisdictions across the world. </p> <p>The firm was recognized for its exceptional service and the attorneys for their &ldquo;strategic problem-solving, intellect, responsiveness, accessibility and real-world experience.&rdquo; Clients also highlighted the firm&rsquo;s ability to &ldquo;competently handle extremely complex domestic and international matters&rdquo; and noted that &ldquo;every member of the team was skilled and capable and contributed meaningfully to a successful effort.&rdquo;</p> <p>Arnold &amp; Porter&rsquo;s ranked practice areas in <em>Chambers Global 2024</em> include:</p> <ul> <li>Arbitration (International)&ndash;Global Market Leaders; Latin America - International Counsel</li> <li>Bankruptcy/Restructuring: Highly Regarded&ndash;USA</li> <li>Capital Markets&ndash;Latin America - International Counsel</li> <li>Capital Markets: Securitization: ABS&ndash;USA</li> <li>Commercial and Corporate Litigation&ndash;United Kingdom</li> <li>Competition/Antitrust&ndash;Global: Multi-Jurisdictional; USA</li> <li>Competition/Antitrust (International &amp; Cross-Border)&ndash;USA</li> <li>Competition: EU&ndash;Belgium</li> <li>Corporate Crime &amp; Investigations&ndash;USA</li> <li>Corporate Investigations&ndash;Latin America - International Counsel</li> <li>Corporate Investigations/Anti-Corruption&ndash;Global: Multi-Jurisdictional</li> <li>Disputes (International &amp; Cross-Border)&ndash;USA</li> <li>Dispute Resolution: International Firms&ndash;South Korea</li> <li>Intellectual Property: Patent&ndash;USA</li> <li>Intellectual Property: Trademark, Copyright &amp; Trade Secrets&ndash;USA</li> <li>International Arbitration&ndash;USA</li> <li>International Arbitration: The Elite&ndash;USA</li> <li>International Arbitration: Investor-State Arbitration&ndash;United Kingdom</li> <li>International Trade: Export Controls &amp; Economic Sanctions: The Elite&ndash;USA</li> <li>International Trade: Trade Remedies &amp; Trade Policy&ndash;USA</li> <li>International Trade/WTO&ndash;Asia-Pacific Region</li> <li>Investigations &amp; Enforcement (International &amp; Cross-Border)&ndash;USA</li> <li>Life Sciences&ndash;Global: Multi-Jurisdictional; Europe-wide</li> <li>Life Sciences &amp; Pharmaceutical Sector (International &amp; Cross-Border)&ndash;United Kingdom; USA</li> <li>Life Sciences: Regulatory/Compliance&ndash;USA</li> <li>Privacy &amp; Data Security: Highly Regarded&ndash;USA</li> <li>Public International Law&ndash;Global Market Leaders</li> </ul> <p>Arnold &amp; Porter&rsquo;s ranked lawyers in <em>Chambers Global 2024</em> include:</p> <ul> <li>Marcus Asner&ndash;Corporate Crime &amp; Investigations (Latin America - International Counsel)</li> <li>John Barker&ndash;International Trade: Export Controls &amp; Economic Sanctions (USA)</li> <li>John Bellinger&ndash;Public International Law (Global Market Leaders)</li> <li>Lawton Camp&ndash;Capital Markets: Securitization: ABS (USA)</li> <li>Maria Chedid&ndash;International Arbitration: Counsel (USA)</li> <li>Henry Clinton-Davis&ndash;Employment (United Kingdom)</li> <li>Whitney Debevoise&ndash;Capital Markets (Latin America - International Counsel); Capital Markets: Debt &amp; Equity (USA)</li> <li>Paolo Di Rosa&ndash;Arbitration (International) (Global Market Leaders; Latin America - International Counsel; USA); International Arbitration: Counsel (USA)</li> <li>Niels Ersb&oslash;ll&ndash;Competition: EU (Belgium)</li> <li>Patricio Gran&eacute; Labat&ndash;Arbitration (International) (Latin America - International Counsel)</li> <li>Axel Gutermuth&ndash;Competition: EU (Belgium)</li> <li>Luc Gyselen&ndash;Competition: EU (Belgium)</li> <li>Jeffrey Handwerker&ndash;Life Sciences: Regulatory/Compliance (USA)</li> <li>Gregory Harrington&ndash;Banking &amp; Finance (Latin America - International Counsel; USA); Capital Markets (Latin America - International Counsel)</li> <li>M&eacute;lida Hodgson&ndash;Arbitration (International) (Latin America - International Counsel); International Arbitration: Counsel (USA)</li> <li>Steven Kaplan&ndash;Corporate M&amp;A (International &amp; Cross-Border) (USA)</li> <li>Jun Hee Kim&ndash;Dispute Resolution: International Firms (South Korea)</li> <li>Daniel Kracov&ndash;Life Sciences: Regulatory/Compliance (USA)</li> <li>James Lee&ndash;Dispute Resolution: International Firms (South Korea)</li> <li>Ronald Lee&ndash;Privacy &amp; Data Security (USA)</li> <li>Charlotte Mallorie&ndash;Commercial and Corporate Litigation (United Kingdom)</li> <li>Jonathan Martel&ndash;Climate Change (Global Market Leaders)</li> <li>Hilton Mervis&ndash;Commercial and Corporate Litigation (United Kingdom)</li> <li>Henry Morriello&ndash;Capital Markets: Securitization: ABS (USA)</li> <li>J. David Park&ndash;International Trade (South Korea); International Trade/WTO (Asia-Pacific Region); International Trade: Trade Remedies &amp; Trade Policy (USA)</li> <li>Nancy Perkins&ndash;Privacy &amp; Data Security (USA)</li> <li>David Reed&ndash;Dispute Resolution: International Arbitration (United Kingdom)</li> <li>Sandra Rizzo&ndash;Energy: Electricity (Regulatory &amp; Litigation) (USA)</li> <li>John Schmidt&ndash;Competition Law (United Kingdom)</li> <li>John Tan&ndash;Corporate Investigations/Anti-Corruption (International Firms) (China)</li> <li>Monty Taylor&ndash;Dispute Resolution: International Arbitration (United Kingdom)</li> <li>Anton Ware&ndash;Dispute Resolution: Arbitration (International Firms) (China)</li> <li>Jane Wessel&ndash;Competition Law: Private Enforcement: Claimant (United Kingdom)</li> <li>Christopher Willott&ndash;Banking &amp; Finance (International Firms) (Brazil)</li> <li>Matthew Wolf&ndash;Intellectual Property: Patent (USA); Life Sciences: IP/Patent Litigation (USA)</li> </ul>{D5FEA1DF-1BF3-4503-B694-4799C7305A70}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/us-antitrust-criminal-enforcement-2023-yirAndre Geverolahttps://www.arnoldporter.com/en/people/g/geverola-andreandre.geverola@arnoldporter.comWilson D. Mudgehttps://www.arnoldporter.com/en/people/m/mudge-wilson-dWilson.Mudge@arnoldporter.comLeah J. Harrellhttps://www.arnoldporter.com/en/people/h/harrell-leah-jleah.harrell@arnoldporter.comMili Nadipallihttps://www.arnoldporter.com/en/people/n/nadipalli-milimili.nadipalli@arnoldporter.comDevelopments in U.S. Antitrust Criminal Enforcement — 2023 Year in Review<p style="text-align: justify;">This Advisory details major developments in U.S. criminal antitrust enforcement for 2023 and offers insights into what to expect in 2024.</p>Thu, 15 Feb 2024 00:00:00 -0600<h2>Introduction</h2> <p>Courts resolved several significant criminal enforcement actions over the last year, with the U.S. Department of Justice (DOJ) sustaining losses, particularly in labor market cases. Nonetheless, the DOJ Antitrust Division (the Division) reaffirmed its commitment to aggressive enforcement, with continued scrutiny of labor markets, government procurement, and Section 2 matters, and renewed focus on international cartel investigations. This Advisory details major developments in U.S. criminal antitrust enforcement for 2023 and offers insights into what to expect in 2024.</p> <h2>Significant Cases of 2023</h2> <p>Over the course of 2023, there were substantial developments in several significant antitrust criminal cases:</p> <p><strong><em>United States v. Brewbaker.</em></strong> In October 2020, an engineering firm (Contech Engineered Solutions LLC (Contech)) and its former executive, Brent Brewbaker, were indicted for conspiring to rig bids and for wire fraud involving aluminum structure transportation projects for a North Carolina state agency. While Contech pleaded guilty in June 2021,[[N: Press Release, U.S. Dep&rsquo;t of Just., <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/engineering-firm-pleads-guilty-decade-long-bid-rigging-and-fraud-scheme" target="_blank">Engineering Firm Pleads Guilty to Decade-Long Bid Rigging and Fraud Scheme</a> (June 7, 2021).]] Brewbaker proceeded to trial and was found guilty of antitrust and fraud charges in February 2022; he was sentenced to 18 months&rsquo; imprisonment.[[N: Press Release No. 22-87, U.S. Dep&rsquo;t of Just., <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/former-engineering-executive-convicted-rigging-bids-and-defrauding-north-carolina-department" target="_blank">Former Engineering Executive Convicted of Rigging Bids and Defrauding North Carolina Department of Transportation</a> (Feb. 1, 2022); Press Release No. 22-954, <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/former-engineering-executive-sentenced-rigging-bids-and-defrauding-north-carolina-department" target="_blank">U.S. Dep&rsquo;t of Just., Former Engineering Executive Sentenced for Rigging Bids and Defrauding North Carolina Department of Transportation</a> (Sept. 8, 2022).]] On December 1, 2023, the Fourth Circuit affirmed Brewbaker&rsquo;s mail and wire fraud convictions but overturned his antitrust conviction, reasoning that the allegation of a &ldquo;hybrid&rdquo; restraint involving two companies in a vertical as well as horizontal relationship failed to constitute a <em>per se</em> antitrust offense as charged in the indictment.[[N: <em>United States v. Brewbaker</em>, No. 22-4544 (4th Cir. Dec. 1, 2023).]] The government filed a petition for rehearing, arguing that the Fourth Circuit&rsquo;s &ldquo;purely horizontal&rdquo; test departs from Supreme Court and circuit court precedent that subjects horizontal agreements to <em>per se</em> treatment when they govern the way in which the parties will compete, even if the parties also have a vertical relationship.[[N: Petition of the United States for Panel Rehearing and Rehearing En Banc, <em>United States v. Brewbaker</em>, No. 22-4544 (4th Cir. Jan. 16, 2024).]] Brewbaker opposed the petition.[[N: Response to Petition for Panel Rehearing and Rehearing En Banc, <em>United States v. Brewbaker</em>, No. 22-4544 (4th Cir. Feb. 5, 2024).]] The Fourth Circuit&rsquo;s decision on rehearing was pending at the time of publication. The <em>Brewbaker</em> decision, assuming it stands, may perhaps be best understood as an example of courts&rsquo; caution about applying <em>per se</em> liability, and thus potential criminal penalties, to conduct that does not clearly appear to be a naked horizontal restraint on competition.</p> <p>As discussed further on Arnold &amp; Porter&rsquo;s Enforcement Edge blog,[[N: Esther Ha Yoon Sohn, Francesca M. Pisano &amp; Wilson D. Mudge, &ldquo;<a href="https://www.arnoldporter.com/en/perspectives/blogs/enforcement-edge/2023/12/fourth-circuit-overturns-antitrust-conviction">Fourth Circuit Overturns Antitrust Conviction for Bid Rigging in Dual Distribution Case</a>,&rdquo; Arnold &amp; Porter: Enforcement Edge (Dec. 12, 2023).]] companies that compete against their own suppliers or distributors should remain mindful of antitrust best practices to mitigate both civil and criminal enforcement risk. The <em>Brewbaker</em> case also underscores that, although certain coordination in government bidding might not constitute criminal antitrust violations, the same conduct may still give rise to criminal liability if bids were submitted with false or misleading certifications of independent pricing. Despite the Fourth Circuit&rsquo;s decision, we expect the aggressive efforts of the Procurement Collusion Strike Force (PCSF) to identify and prosecute procurement fraud and collusion in the government contracting space to continue, and companies active in public procurement should review and update their compliance programs to mitigate antitrust risks.<br /> <br /> <strong><em>United States v. Patel.</em></strong> DOJ alleged that an aerospace company executive, along with several suppliers of engineering services, had engaged in an eight-year antitrust conspiracy to restrict hiring and recruiting of engineers and other skilled workers.[[N: Press Release No. 21-1224, U.S. Dep&rsquo;t of Just., <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/former-aerospace-outsourcing-executive-charged-key-role-long-running-antitrust-conspiracy" target="_blank">Former Aerospace Outsourcing Executive Charged for Key Role in a Long-Running Antitrust Conspiracy</a> (Dec. 9, 2021).&nbsp;]] The district court declined to dismiss the case in December 2022. It held that no-poach conspiracies may be subject to <em>per se</em> treatment as a form of market allocation of employees, but whether <em>per se</em> treatment is appropriate in a given case is a fact-specific inquiry.[[N: Order Denying Defs.&rsquo; Mot. to Dismiss at 21, <em>United States v. Patel et al.</em>, No. 3:21-cr-220 at (Dec. 2, 2022).]] The court emphasized that, although there may have been vertical relationships, the alleged restraint was purely horizontal. The court found that, according to the indictment, the common customer simply served as a hub in a horizontal hub-and-spoke conspiracy.[[N: <em>Id. </em>at 33.]] After the government had presented its evidence and rested its case, the court acquitted all defendants, ruling that the government had failed to present sufficient evidence of market allocation under the <em>per se</em> rule.[[N: Order on Defendants&rsquo; Motions for Judgment of Acquittal, <em>United States v. Patel</em>, 3:21-cr-00220-VAB (D. Conn. Apr. 28, 2023).]] The court reasoned that the alleged agreement &ldquo;d[id] not allocate the [relevant labor] market &hellip; to any meaningful extent&rdquo; as there were &ldquo;so many exceptions,&rdquo; the hiring restrictions constantly shifted during the alleged conspiracy period and hiring among the companies was in fact commonplace.[[N: <em>Id. </em>at 9, 17, 18.]]<br /> <br /> <strong><em>United States v. Harwin. </em></strong>In September 2020, DOJ indicted Dr. William Harwin, former head of oncology group Florida Cancer Specialists &amp; Research Institute LLC (FCS), for alleged horizontal market allocation of oncology services in several Florida counties.[[N: <a rel="noopener noreferrer" href="https://www.law360.com/articles/1313420/attachments/0" target="_blank">Indictment</a>, <em>United States v. Harwin</em>, No. 20-cr-115-JLB-MRM (M.D. Fla. Sept. 23, 2020).]] FCS entered into a deferred prosecution agreement (DPA) for the same conduct almost six months before Dr. Harwin&rsquo;s indictment, agreeing to pay US$100 million in penalties.[[N: <a rel="noopener noreferrer" href="https://www.justice.gov/atr/case-document/file/1281681/download" target="_blank">Deferred Prosecution Agreement</a>, <em>United States v. Florida Cancer Specialists &amp; Research Institute LLC</em>, No. 20-cr-78-TPM-MRM (M.D. Fla. Apr. 30, 2020).]] After Hurricane Ian interrupted jury deliberations and resulted in a mistrial in September 2022, Dr. Harwin pleaded guilty ahead of his re-trial in September 2023.[[N: Plea Agreement, <em>United States v. Harwin</em>, No. 20-cr-115-VMC-KCD (M.D. Fla. Jan. 12, 2023).]] Dr. Harwin was sentenced to three years of probation, a $50,000 fine, and 250 hours of community service.[[N: Change of Plea Hearing, <em>United States v. Harwin</em>, No. 20-cr-115-VMC-KCD (M.D. Fla. Aug. 23, 2023); Sentencing, <em>United States v. Harwin</em>, No. 20-cr-115-VMC-KCD (M.D. Fla. Sept. 21, 2023).]] Dr. Harwin&rsquo;s plea was notable in that both parties agreed to recommend probation, and Dr. Harwin could have withdrawn the plea if the judge had rejected the recommendation.[[N: Plea Agreement, <em>United States v. Harwin</em>, No. 20-cr-115-VMC-KCD (M.D. Fla. Jan. 12, 2023).]] DOJ&rsquo;s agreement to recommend no jail time in a case of this magnitude is unusual and perhaps reflects DOJ&rsquo;s assessment of litigation risk in trying the case a second time. <br /> <br /> <strong><em>Generics Investigation.</em></strong> Since at least 2015, DOJ has been investigating alleged price fixing, bid rigging, and customer allocation in the generic pharmaceuticals industry. Four executives have been charged in the investigation; three have entered guilty pleas and DOJ dismissed the charges against one this November.[[N: Press Release No. 20-689, U.S. Dep&rsquo;t of Just., <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/sixth-pharmaceutical-company-charged-ongoing-criminal-antitrust-investigation" target="_blank">Sixth Pharmaceutical Company Charged In Ongoing Criminal Antitrust Investigation</a> (July 23, 2020); United States&rsquo; Unopposed Motion to Dismiss, <em>United States v. Aprahamian</em>, No. 20-cr-64-RBS (E.D. Pa. Nov. 16, 2023).]] DOJ has charged seven companies, and all seven corporate cases have been resolved by DPAs.[[N: Press Release No. 23-894, U.S. Dep&rsquo;t of Just., <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/major-generic-drug-companies-pay-over-quarter-billion-dollars-resolve-price-fixing-charges" target="_blank">Major Generic Drug Companies to Pay Over Quarter of a Billion Dollars to Resolve Price-Fixing Charges and Divest Key Drug at the Center of Their Conspiracy</a> (Aug. 21, 2023).]] The most recent companies to resolve the charges against them in this investigation are Teva and Glenmark, which entered into DPAs in August 2023.[[N: <em>Id.</em>]] Glenmark agreed to pay a US$30 million criminal penalty. Teva agreed to pay a US$225 million criminal penalty, the largest to date for a domestic antitrust cartel charge, and to make a donation of medical products worth US$50 million to charitable organizations.[[N:<em> Id.</em>]] The DPAs also included divestiture of the companies&rsquo; respective drug lines for pravastatin, a widely used cholesterol medicine. This is the first time DOJ has required divestitures as part of a criminal antitrust resolution.</p> <h2>Labor Markets</h2> <h3>Litigation Setbacks</h3> <p> Aside from <em>Patel</em>, DOJ&rsquo;s enforcement efforts in labor markets focused on the health care industry. But as in <em>Patel</em>, DOJ had notable losses in these cases. <br /> <br /> <strong><em>United States v. Manahe.</em></strong> In January 2022, DOJ indicted managers of home health care agencies in Maine, alleging a wage-fixing and no-poach conspiracy affecting health care workers during the pandemic.[[N: Indictment, <em>United States v. Manahe</em>, No. 2:22-cr-00013-JAW (D. Me. Jan. 27, 2022).]] At trial, the prosecution claimed that the defendants reached agreements over WhatsApp and Zoom and played excerpts of recorded meetings at trial. The defense argued that no agreement was ever finalized or signed and provided evidence that wages did not change following the alleged agreement.[[N: David A. Higbee, Djordje Petkoski &amp; Memmi Rasmussen, <a rel="noopener noreferrer" href="https://globalcompetitionreview.com/review/the-antitrust-review-of-the-americas/2024/article/us-doj-tests-new-approaches-boost-cartel-enforcement-revival-efforts#footnote-016-backlink" target="_blank">U.S. DOJ tests new approaches to boost cartel enforcement revival efforts</a>, Glob. Competition Rev. (Aug. 25, 2023).]] In March 2023, a jury acquitted the four defendants of conspiring to fix wages after a roughly two-week trial.[[N: Jury Verdict Form, <em>United States v. Manahe</em>, No. 2:22-cr-00013-JAW (D. Me. Mar. 22, 2023).]]<br /> <br /> <strong><em>United States v. Surgical Care Affiliates LLC.</em></strong> DOJ&rsquo;s first no-poach indictment in January 2021 alleged non-solicitation agreements among competing health care companies in Texas and Colorado.[[N: Indictment, <em>United States v. Surgical Care Affiliates LLC</em>, No. 3:21-cr-00011 (N.D. Tex. Jan. 5, 2021); Press Release No. 21-14, <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/health-care-company-indicted-labor-market-collusion" target="_blank">U.S. Dep&rsquo;t of Just., Health Care Company Indicted for Labor Market Collusion</a> (Jan. 7, 2021).]] DOJ alleged that Surgical Care Affiliates LLC (SCA) joined two conspiracies in which it agreed with competitors that the companies would not solicit each other&rsquo;s senior-level employees in the outpatient medical care sector. DaVita Inc. also was indicted for participation in the same conspiracy.[[N: Indictment, <em>United States v. DaVita Inc.</em>, No. 21-cr-00229-RBJ (D. Col. July 14, 2021).]] DaVita and former executive Kent Thiry were acquitted by a jury in April 2022.[[N: Verdict, <em>United States v. DaVita Inc.</em>, No. 21-cr-00229-RBJ (D. Col. Apr. 15, 2022).]]</p> <p> In May 2023, SCA cited the <em>Patel</em> ruling, arguing that prosecutors cannot make a <em>per se</em> violation if a no-poach deal &ldquo;merely constrains or restricts employee movement.&rdquo;[[N: Defendants&rsquo; Notice of Additional Authority at 1-2, <em>United States v. Surgical Care Affiliates LLC</em>, No. 21-cr-00011-L (N.D. Tex. May 9, 2023).]] DOJ responded by contending that the <em>Patel</em> findings went against Supreme Court and Fifth Circuit precedent.[[N: United States&rsquo; Response to Defendants&rsquo; Notice of Additional Authority at 1, <em>United States v. Surgical Care Affiliates LLC</em>, No. 21-cr-00011-L (N.D. Tex. May 16, 2023).]] But in November 2023, DOJ moved to dismiss the case without explanation.[[N: United States&rsquo; Motion to Dismiss, <em>United States v. Surgical Care Affiliates LLC</em>, No. 21-cr-00011-L (N.D. Tex. Nov. 13, 2023)]] DOJ may have reassessed the case in light of the result in <em>DaVita</em>, which involved some of the same companies, witnesses, and facts. And DOJ may not have wanted to risk adoption of the intent requirement articulated by the court in <em>DaVita</em> in another jurisdiction.</p> <h3>Reaffirmed Commitment to Labor Cases </h3> <p> The Division maintains that it has not been deterred by these losses. In September 2023, at the Georgetown Antitrust Law Symposium, Assistant Attorney General Jonathan Kanter reaffirmed in broad terms that the Division is &ldquo;committed to protecting workers from the harms that result when they face too little competition for their labor.&rdquo; He referenced emerging literature documenting how &ldquo;workers lose out from too little labor market competition&rdquo; and highlighted the &ldquo;revitaliz[ation]&rdquo; of the DOJ&rsquo;s &ldquo;labor market efforts.&rdquo;[[N: Jonathan Kanter, Assistant Att&rsquo;y Gen., U.S. Dep&rsquo;t of Just., <a rel="noopener noreferrer" href="https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-remarks-2023-georgetown-antitrust" target="_blank">Assistant Attorney General Jonathan Kanter Delivers Remarks at the 2023 Georgetown Antitrust Law Symposium</a> (Sept. 19, 2023).]] In December 2023, Principal Deputy Assistant Attorney General Doha Mekki also gave remarks specifically affirming DOJ&rsquo;s commitment to bringing criminal no-poach and wage-fixing cases.[[N: David Mamone, &ldquo;<a rel="noopener noreferrer" href="https://globalcompetitionreview.com/gcr-usa/article/mekki-doj-bringing-more-no-poach-and-wage-fixing-cases" target="_blank">Mekki: DOJ bringing more no-poach and wage-fixing cases</a>,&rdquo; Glob. Competition Rev. (Dec. 7, 2023).]] DOJ continues to pursue labor market enforcement, as exemplified by <em>United States v. Lopez</em>. <br /> <br /> <em><strong>United States v. Lopez.</strong></em> In March 2023, Eduardo Lopez was indicted on claims that he participated in a conspiracy to fix nurse compensation at home health agencies between March 2016 and May 2019.[[N: Indictment, <em>United States v. Lopez</em>, No. 23-cr-55-CDS-DJA (D. Nev. Mar. 15, 2023).]] In September 2023, a grand jury returned a superseding indictment against Lopez, adding wire fraud charges based on his December 2021 sale of his health care staffing company with allegedly false representations to the buyer regarding federal investigations.[[N: <a rel="noopener noreferrer" href="https://www.justice.gov/d9/2023-09/416469.pdf" target="_blank">Superseding Criminal Indictment</a>, <em>United States v. Lopez</em>, No. 23-cr-55-CDS-DJA (D. Nev. Nov. 6, 2023).]] Trial is scheduled for October 2024.[[N: Stipulation and &amp;#91;Proposed&amp;#93; Order To Continue Pretrial Motions, Calendar Call and Trial Date and Set Case Schedule (Second Request), <em>United States v. Lopez</em>, No. 23-cr-55-CDS-DJA (D. Nev. Sept. 6, 2023).]]</p> <h3>Non-Criminal Antitrust Developments in Labor Markets</h3> <p> <strong><em>Employee Non-Competes.</em></strong> In January 2023, the U.S. Federal Trade Commission (FTC or Commission) announced a Notice of Proposed Rulemaking that would prohibit employers from imposing non-competes on workers (including independent contracts and unpaid workers). The ban would extend to all contract provisions that create &ldquo;de facto&rdquo; non-compete clauses. This rule would apply retroactively.[[N: Press Release, Fed. Trade Comm&rsquo;n, <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition" target="_blank">FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition</a> (Jan. 5, 2023).]] According to reports, the Commission is expected to vote on the proposal in April 2024.[[N: <em>See</em> Dan Papscun, &ldquo;<a rel="noopener noreferrer" href="https://news.bloomberglaw.com/antitrust/ftc-expected-to-vote-in-2024-on-rule-to-ban-noncompete-clauses" target="_blank">FTC Expected to Vote in 2024 on Rule to Ban Noncompete Clauses</a>,&rdquo; Bloomberg L. (May 10, 2023).]] Although employee non-competes are primarily an FTC issue, DOJ has taken the position in the past that employee non-competes in the professional services space &mdash; where employees can directly compete with their employers &mdash; might possibly give rise to market allocation concerns, similar to the allegations in <em>Harwin</em>. <br /> <br /> <strong><em>Deslandes v. McDonald&rsquo;s. </em></strong>Former McDonald&rsquo;s workers filed suit alleging a violation of the Sherman Act based on a company policy prohibiting franchisees from poaching workers from one another or from corporate-owned stores.[[N: Class Action Complaint, <em>Deslandes v. McDonald&rsquo;s USA LLC</em>, No. 1:17-cv-4857 (N.D. Ill. June 28, 2017); Class Action Complaint, <em>Turner v. McDonald&rsquo;s USA LLC</em>, No. 1:19-cv-5524 (N.D. Ill. Aug. 15, 2019).]] In June 2022, the district court dismissed the worker&rsquo;s claims. The court first held that the agreement must be analyzed under the rule of reason because the no-poach provisions were ancillary to pro-competitive franchise agreements. Next, the court ruled that the case should be dismissed because plaintiffs failed to allege &mdash; as required in a rule of reason case &mdash; that McDonald&rsquo;s and its franchisees had market power in the market for their employees&rsquo; labor.[[N: Memorandum Opinion and Order, <em>Deslandes v. McDonald&rsquo;s USA LLC</em>, No. 1:17-cv-4857 (N.D. Ill. June 28, 2022).]] Plaintiffs appealed the decision. DOJ and FTC filed an amicus brief arguing that the <em>per se </em>rule applies to no-poach agreements unless the employer can successfully meet the legal requirements governing ancillary restraints as an affirmative defense.[[N: &nbsp; Brief for the United States of America and the Federal Trade Commission as Amici Curiae in Support of Neither Party, <em>Deslandes v. McDonald&rsquo;s USA LLC</em>, No. 22-2333 (7th Cir. Nov. 18, 2022).]] This position &mdash; if accepted &mdash; would have implications across no-poach cases, particularly criminal no-poach cases where the government carries the burden to prove every element beyond a reasonable doubt. <br /> <br /> In August 2023, the Seventh Circuit reversed the district court decision, holding that the district court had not sufficiently analyzed whether or not the <em>per se</em> rule should apply and that the allegations in this case did not warrant a finding that the clauses at issue were ancillary to a procompetitive arrangement based on the pleadings alone.[[N: <em>Deslandes v. McDonald&rsquo;s USA LLC</em>, No. 22-2333, 2023 WL 5496957 (7th Cir. Aug. 25, 2023).]] McDonald&rsquo;s plans to appeal the case to the Supreme Court.[[N: Joint Status Report, <em>Deslandes v. McDonald&rsquo;s USA LLC</em>, No. 1:17-cv-4857 (N.D. Ill. Oct. 27, 2023).]] No-hire and non-solicitation clauses continue to be subject to significant litigation &mdash; both civil <em>and</em> criminal. If a no-hire or non-solicitation clause is to be included in a contract, it is important to obtain legal counsel to ensure it is properly drafted to relate to the procompetitive purpose of the underlying agreement and is not overbroad. Companies should also evaluate any employee non-competes from an antitrust perspective, given the growing FTC and DOJ interest in this area.</p> <h2>Enforcement in Government Procurement</h2> <p> The PCSF is an interagency partnership that the Division leads to detect, investigate, and prosecute antitrust and related fraud offenses in government procurement. In November 2023, the PCSF held its first summit to convene law enforcement partners and discuss emerging threats and strategies to confront them.[[N: Press Release No. 23-1309, U.S. Dep&rsquo;t of Just., <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/justice-departments-procurement-collusion-strike-force-holds-its-first-summit-discuss" target="_blank">Justice Department's Procurement Collusion Strike Force Holds Its First Summit to Discuss Strategies to Combat Emerging Threats</a> (Nov. 17, 2022).]] Summit participants discussed the heightened areas of procurement collusion risk resulting from the Infrastructure Investment and Jobs Act, the Inflation Reduction Act of 2022, the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act of 2022, as well as supplemental funding in response to the invasion of Ukraine.<br /> <br /> Since its inception in November 2019, the PCSF has opened more than 100 criminal investigations and trained more than 31,000 government personnel. In that time, the PCSF has investigated and prosecuted over 65 companies and individuals involving over US$500 million worth of government contracts.[[N: &ldquo;<a rel="noopener noreferrer" href="https://www.justice.gov/atr/procurement-collusion-strike-force" target="_blank">Procurement Collusion Strike Force</a>,&rdquo; U.S. Dep&rsquo;t of Just.: Antitrust Div. (last visited Feb. 3, 2024).&nbsp;]] In the past year, the PCSF was active in continuing to bring cases. <br /> <br /> <strong><em>United States v. O&rsquo;Brien.</em></strong> In April 2022, DOJ indicted Lawrence O&rsquo;Brien, Bruce LaRoche, and Thomas Dailey on charges of rigged bids for customized promotional products sold to the U.S. Army over a five-year period starting in 2014.[[N: Indictment, <em>United States v. O&rsquo;Brien</em>, No. 8:22-cr-130-SCB-JSS (M.D. Fla. Apr. 5, 2022).]] In September 2023, all three defendants were acquitted of the charges.[[N: <a rel="noopener noreferrer" href="https://www.law360.com/articles/1722356/attachments/0" target="_blank">Clerk&rsquo;s Minutes Jury Trial</a>, <em>United States v. O&rsquo;Brien</em>, No. 8:22-cr-130-SCB-JSS (M.D. Fla. Sept. 14, 2023).]]<br /> <br /> <strong><em>United States v. Evans Concrete LLC.</em></strong> In September 2020, Evans Concrete LLC and four individuals, James Clayton Pedrick, Gregory Hall Melton, John &ldquo;David&rdquo; Melton, and Timothy &ldquo;Bo&rdquo; Strickland, were indicted on charges of participating in a conspiracy to fix prices, rig bids, and allocate markets for ready-mix concrete from 2010 to 2016 in the Savannah, Georgia area.[[N: <a rel="noopener noreferrer" href="https://www.justice.gov/atr/case-document/file/1313671/dl?inline" target="_blank">Indictment</a>, <em>United States v. Evans Concrete LLC</em>, No. 4:20-cr-81-RSB-CLR (S.D. Ga. Sept. 2, 2020).]] In August 2023, James Pedrick entered a plea agreement, which included a recommendation for probation on the condition that Pedrick provides &ldquo;full, complete, candid, and truthful cooperation&rdquo; in the case against his fellow defendants.[[N: <a rel="noopener noreferrer" href="https://www.law360.com/articles/1723569/attachments/0" target="_blank">Plea Agreement</a>, <em>United States v. Evans Concrete LLC</em>, No. 4:20-cr-81-RSB-CLR (S.D. Ga. Sept. 19, 2023).]]<br /> <br /> <em><strong>United States v. Tomlinson.</strong></em> In December 2023, Ike Tomlinson and Kris Bird were indicted over alleged antitrust violations, as well as wire fraud, involving sales to the U.S. Forest Service.[[N: Press Release No. 23-1434, U.S. Dep&rsquo;t of Just., <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/executives-charged-bid-rigging-territorial-allocation-and-defrauding-us-forest-service-after" target="_blank">Executives Charged with Bid Rigging, Territorial Allocation and Defrauding the U.S. Forest Service After a Wiretap Investigation</a> (Dec. 15, 2023).]] Notably, this PCSF investigation included a court-authorized wiretap. During calls and in text messages quoted in the indictment, Tomlinson and Bird allegedly agreed to rig bids, allocate territories, and target competitors.[[N: <a rel="noopener noreferrer" href="https://www.justice.gov/d9/2023-12/231212_idaho_fire_indictment_1-23-cr-00326-akb_dkt_2.pdf" target="_blank">Indictment</a>, <em>United States v. Tomlinson</em>, No. 1:23-cr-326-AKB (D. Idaho Dec. 12, 2023).]] This case is a good reminder of the range of investigative tools available to the government in antitrust cases. Not only may the government obtain the authority to wiretap phones and other means of communication, in the past the government has also used cooperators and undercover agents to participate in suspected cartels in order to collect evidence.</p> <h2>International Cartel Investigations </h2> <p> In the past few years, large international cartel investigations have been less common, with most large investigations concluding more than five years ago. However, in the last year, there have been a few new international cartel investigations launched that may signal the return of large-scale, multi-jurisdictional cartel investigations.<br /> <br /> <strong><em>Fragrance Industry Investigations.</em></strong> In March 2023, competition authorities in the European Union, Switzerland, and the United Kingdom (UK CMA) conducted coordinated raids of multiple leading fragrance manufacturers&rsquo; facilities across Europe, as well as a fragrance industry trade association.[[N: Competition and Markets Authority, &ldquo;<a rel="noopener noreferrer" href="https://www.gov.uk/government/news/cma-launches-investigation-into-fragrances-and-fragrance-ingredients" target="_blank">CMA launches investigation into fragrances and fragrance ingredients</a>,&rdquo; GOV.UK (Mar. 7, 2023).]] The UK CMA announced that it &ldquo;has been in contact with the Antitrust Division of the U.S. Department of Justice,&rdquo; and &ldquo;this investigation has been launched in consultation with them.&rdquo;[[N: <em>Id.</em>]] More recently, the UK CMA indicated that it was expanding its probe to look at the companies&rsquo; activities in the labor markets as well, highlighting how existing antitrust investigations may develop in new and unpredictable directions.[[N: Alex Bagley, &ldquo;<a rel="noopener noreferrer" href="https://globalcompetitionreview.com/article/cma-probes-no-poach-concerns-in-fragrance-cartel-investigation" target="_blank">CMA probes no-poach concerns in fragrance cartel investigation</a>,&rdquo; Glob. Competition Rev. (Jan. 17, 2024).]]<br /> <br /> <strong><em>Concrete Chemicals Industry Investigations.</em></strong> In October 2023, the European Commission carried out unannounced antitrust inspections in coordination with the UK CMA and the competition authority in the Republic of Turkey at the premises of companies active in the supply of chemicals for use in the construction industry, such as admixtures and additives for use in concrete, cement, mortars, and related construction products. In connection with these inspections, the European Commission announced that it &ldquo;has also been in contact with&rdquo; the Division, which presumably is also looking into the matter.[[N: Press Release, Eur. Comm&rsquo;n, <a rel="noopener noreferrer" href="https://ec.europa.eu/commission/presscorner/detail/en/ip_23_5061" target="_blank">Commission carries out unannounced antitrust inspections in the construction chemicals sector</a> (Oct. 17, 2023).]]<br /> <br /> In January 2024, senior officials at the DOJ and the European Commission issued a joint video message urging informants to come forward and pledging collaboration if any investigations ensue. The officials said the agencies had &ldquo;recently intensified&rdquo; cooperation outside of the usual formal avenues that see companies apply for immunity in return for revealing a cartel.[[N: The Justice Department, &ldquo;<a rel="noopener noreferrer" href="https://www.youtube.com/watch?v=yOJfN_Qa0vo" target="_blank">U.S. DOJ and the European Commission Issue Joint Message | Cartels and Informants</a>,&rdquo; YouTube (Jan. 16, 2024).]] Relatedly, in the same month, the head of the Cartel Directorate at the European Commission, Maria Jaspers, announced at a conference that the number of leniency applications seeking immunity from the European Union had increased for the third year in a row, reversing a downward trend from the last decade.[[N: Nicholas Hirst, <em>Cartel immunity applications to EU Commission increased in 2023, Jaspers says</em>, MLex (Jan. 18, 2024).]] While historically the U.S. led the charge on leniency, there has been a reversal of the dynamic in recent years, with the European Commission taking more of a leadership role in leniency-driven cases that nevertheless may result in increased cartel enforcement in the United States.</p> <h2>Section 2 Enforcement</h2> <p> Beginning in 2021, DOJ signaled its intention to renew long-dormant criminal enforcement of Section 2 of the Sherman Act, which prohibits monopolization, attempted monopolization, and conspiracies to monopolize. DOJ brought two Section 2 criminal cases in 2022, and these cases continued into 2023 and 2024.<br /> <br /> <strong><em>United States v. Martinez. </em></strong>In November 2022, 12 individuals were indicted for, among other things, a Section 1 violation for conspiring to fix prices and allocate markets for transmigrante forwarding services and a Section 2 violation for conspiring to monopolize transmigrante forwarding services.[[N: Indictment, <em>United States v. Martinez</em>, No. 4:22-cr-560 (S.D. Tex. Nov. 9, 2022).&nbsp;]] Transmigrante forwarding services are provided to individuals who transport used vehicles and other goods from the United States through Mexico for resale in Central America. These services include completing customs paperwork to transport those goods.[[N: Press Release No. 22-1253, U.S. Dep&rsquo;t of Just., <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/criminal-charges-unsealed-against-12-individuals-wide-ranging-scheme-monopolize-transmigran-0" target="_blank">Criminal Charges Unsealed Against 12 Individuals in Wide-Ranging Scheme to Monopolize Transmigrante Industry and Extort Competitors Near U.S.-Mexico Border</a> (Dec. 6, 2022).]] Trial is scheduled for August 12, 2024. If the case proceeds to trial, this will be the first criminal Section 2 trial since the 1970s.<br /> <br /> <strong><em>United States v. Zito. </em></strong>In September 2022, DOJ charged Nathan Nephi Zito, owner of a paving and asphalt company, with a standalone violation of Section 2 for attempting &ldquo;to monopolize the markets for highway crack-sealing services in Montana and Wyoming by proposing that his company and its competitor stop competing and allocate regional markets.&rdquo;[[N:<em> See</em> Andre Geverola, Sonia Kuester Pfaffenroth &amp; Matthew Tabas, &ldquo;<a href="https://www.arnoldporter.com/en/perspectives/advisories/2022/11/whats-old-is-new-again">Advisory: What&rsquo;s Old Is New Again: DOJ Prosecutes First Criminal Section 2 Case Since 1977</a>,&rdquo; Arnold &amp; Porter (Nov. 27, 2022).]] Section 1 does not outlaw mere &ldquo;attempts&rdquo; to reach an unlawful agreement, which made Section 2 an advantageous alternative for DOJ to charge in this case. Zito pleaded guilty and was sentenced in March 2023 to three years of probation, with six months of home detention, and fined $27,000.[[N: Press Release No. 23-104, U.S. Dep&rsquo;t of Just., <a rel="noopener noreferrer" href="https://www.justice.gov/usao-mt/pr/former-construction-company-president-sentenced-attempting-monopolize-highway" target="_blank">Former construction company president sentenced for attempting to monopolize highway construction, repair contracts</a> (Mar. 29, 2023).]]</p> <h2>New Policy Initiatives </h2> <p> Antitrust enforcement agencies also announced several new policy initiatives in 2023.</p> <p><strong><em>DOJ Safe Harbor Policy. </em></strong>In October 2023, Deputy Attorney General Lisa Monaco announced a new safe harbor policy for voluntary self-disclosures made in connection with mergers and acquisitions (Safe Harbor Policy), placing an &ldquo;enhanced premium on timely compliance-related due diligence and integration.&rdquo;[[N: Daniel Bernstein et al., &ldquo;<a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/10/takeaways-from-the-doj-new-safe-harbor">Advisory: Takeaways From the DOJ New Safe Harbor Policy For Mergers &amp; Acquisitions</a>,&rdquo; Arnold &amp; Porter (Nov. 20, 2023).]] &ldquo;Going forward, acquiring companies that promptly and voluntarily disclose criminal misconduct within the Safe Harbor period, and that cooperate with the ensuing investigation, and engage in requisite, timely, and appropriate remediation, restitution, and disgorgement &mdash; they will receive <em>the presumption of a declination</em>,&rdquo; Monaco said.[[N: <em>Id.</em>]] Conversely, acquirers that do not perform effective due diligence, self-disclose misconduct at an acquired entity, and remediate the misconduct may be subject to full successor liability. The Safe Harbor Policy does not replace the Division&rsquo;s leniency policy, so we expect further clarification on how the Safe Harbor Policy interacts with the leniency program. <br /> <br /> <strong><em>FTC Criminal Liaison Unit. </em></strong>In March 2023, the FTC announced a new Criminal Liaison Unit (CLU), led by two former Division prosecutors, which trains and coordinates with FTC staff to identify potential criminal conduct uncovered in the course of FTC investigations and litigations.[[N: Holly Vedova, <a rel="noopener noreferrer" href="https://www.ftc.gov/enforcement/competition-matters/2023/03/bcs-criminal-liaison-unit-races" target="_blank">BC&rsquo;s Criminal Liaison Unit is Off to the Races</a>, Fed. Trade Comm&rsquo;n: Competition Matters (Mar. 24, 2023).]]&nbsp; Potentially offending conduct will be referred to federal, state, or local prosecutors such as DOJ. The FTC noted that the CLU is &ldquo;particularly focused on deterring companies and their executives from obstructing FTC investigations and enforcement actions and referring those companies for criminal enforcement.&rdquo;[[N: <em>Id.</em>]]<br /> <br /> As discussed further on Arnold &amp; Porter&rsquo;s Enforcement Edge blog,[[N: Sam Sullivan, Andre Geverola &amp; Matthew Tabas, &ldquo;<a href="https://www.arnoldporter.com/en/perspectives/blogs/enforcement-edge/2023/04/ftc-bureau-announces-new-criminal-liaison-unit">FTC Bureau of Competition Announces New Criminal Liaison Unit</a>,&rdquo; Arnold &amp; Porter: Enforcement Edge (Apr. 4, 2023).]] the CLU increases the risk of criminal referrals stemming from documents and testimony provided in non-criminal matters. Document retention policies and practices will be closely scrutinized. Proactive identification and explanation of materials, and perhaps even a leniency application to the Division, may be appropriate depending on the particular circumstances of a given matter. Further, companies must be careful about outreach to potential witnesses in FTC merger reviews and investigations. While customer and market-participant outreach touting the benefits of a transaction is valid and legitimate, companies should take care not to cross the line into attempts to inappropriately influence market participants&rsquo; interactions with the FTC. As referrals can concern matters unrelated to the initial FTC matter, those reviewing materials for production to the FTC need to think beyond relevance to the existing investigation. These principles also apply to civil investigations and merger reviews conducted by the Division&rsquo;s civil units.</p> <h2>What to Expect in 2024 </h2> <p> As discussed above, international competition authorities are expected to increase their cooperation on criminal antitrust matters. As a further example, DOJ announced a joint initiative in September 2023 with Mexico&rsquo;s Federal Economic Competition Commission (COFECE) and Canada&rsquo;s Competition Bureau to &ldquo;deter, detect, and prosecute collusive schemes related to the provision of goods and services in connection with the 2026 FIFA World Cup,&rdquo; which will be hosted by all three nations.[[N: Press Release No. 23-1042, U.S. Dep&rsquo;t of Just., <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/united-states-mexico-and-canada-launch-joint-initiative-detect-collusive-schemes-seeking" target="_blank">United States, Mexico, and Canada Launch Joint Initiative to Detect Collusive Schemes Seeking to Exploit the 2026 FIFA World Cup</a> (Sept. 22, 2023).]]<br /> <br /> In addition, DOJ is expected to increasingly rely on affirmative investigation techniques and data mining, as suggested by reports that the Division has hired in-house investigators and data scientists to do more proactive investigations, including a focus on messaging apps, personal devices, and cloud-based data. DOJ may use these resources to increase their focus on allegations of &ldquo;algorithmic collusion,&rdquo; which may leave a digital trail for investigators to follow.<br /> <br /> In closing, despite setbacks, DOJ is expected to continue its commitment to aggressive enforcement of the antitrust laws, with a focus on labor markets, government procurement, and new (or renewed) legal theories such as monopolization and algorithmic collusion. </p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{86A40428-75C4-4AEC-9FEA-A26750C1C759}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/purchasers-participation-in-environmental-diligenceMatt S. Kirschhttps://www.arnoldporter.com/en/people/k/kirsch-matthew-smatt.kirsch@arnoldporter.comStacey Hallidayhttps://www.arnoldporter.com/en/people/h/halliday-staceystacey.halliday@arnoldporter.comRobert A. Conradhttps://www.arnoldporter.com/en/people/c/conrad-robertrobert.conrad@arnoldporter.comJohn B. Thomas, Jr.https://www.arnoldporter.com/en/people/t/thomas-johnjohn.thomas@arnoldporter.comPurchaser’s Participation in Environmental Diligence — Securing BFPP Defenses Against CERCLA LiabilityA new standard for Phase I Environmental Site Assessments (Phase I) went into effect this week. Beginning on February 13, if a Phase I is used to establish purchaser&rsquo;s performance of &ldquo;all appropriate inquiries&rdquo; during its environmental diligence in order to establish a Bona Fide Prospective Purchaser defense under CERCLA, the Phase I must be performed pursuant to the new ASTM E1527-21 standard (ASTM Standard).&nbsp;Thu, 15 Feb 2024 00:00:00 -0600<p>A new standard for Phase I Environmental Site Assessments (Phase I) went into effect this week. Beginning on February 13, if a Phase I is used to establish purchaser&rsquo;s performance of &ldquo;all appropriate inquiries&rdquo; during its environmental diligence in order to establish a Bona Fide Prospective Purchaser defense under CERCLA, the Phase I must be performed pursuant to the new ASTM E1527-21 standard (ASTM Standard). Importantly, the ASTM Standard imposes requirements upon the real estate <strong><em>purchaser</em></strong> to make several disclosures in connection with the preparation of the Phase I. This Advisory is intended to provide practical tips for satisfying this lesser-known aspect of the &ldquo;All Appropriate Inquiries&rdquo; safe harbor for a Bona Fide Prospective Purchaser defense under CERCLA.</p> <h2>Jump Directly to Key Practice Tips</h2> <ul> <li><a href="#ASTM Standards">ASTM Standards</a></li> <li><a href="#Best Practices for Phase I Reports">Best Practices for Phase I Reports</a></li> </ul> <h2>Bona Fide Prospective Purchaser</h2> <p>Generally, under the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA),[[N: 42 U.S.C. 9601 <em>et seq.</em>]] also known as Superfund, any owner of a property can be held liable for the presence of hazardous substances, regardless of whether the property owner caused the release. However, CERCLA includes several defenses that limit property owner liability despite pre-existing contamination, including where property owners qualify as a Bona Fide Prospective Purchaser (BFPP).[[N: <em>See</em> 42 U.S.C.A. &sect; 9607(r). In addition to the BFPP defense, CERCLA includes an innocent landowner defense and a contiguous property owner defense. These three defenses share several threshold criteria, including performance of AAI and recent updates to the AAI Rule&rsquo;s requirements.]]</p> <p>For a prospective purchaser to qualify as a BFPP, (1) any release of hazardous substances on the property must have occurred prior to acquisition;[[N: <span style="line-height: 107%;">The BFPP exemption only applies to properties acquired after January 11, 2002.</span>]] (2) the purchaser must not be affiliated with any potentially responsible party (PRP) for the property through a familial, commercial, or financial relationship; (3) the purchase must not impede the performance of a response action or natural resource restoration; and (4) the purchaser must meet all threshold criteria and ongoing obligations.[[N: Continuing obligations include exercising appropriate care with respect to hazardous substances found at the property by taking &ldquo;reasonable steps&rdquo; to stop any continuing release and to prevent any threatened future release. 42 U.S.C.A. &sect; 9607(q).]] Threshold criteria include conducting All Appropriate Inquiries (AAI) in accordance with the U.S. Environmental Protection Agency&rsquo;s All Appropriate Inquiries Rule (AAI Rule).[[N: <em>See</em> 42 U.S.C.A. &sect; 9601(40).]] Similar state-specific defenses to Superfund liability also include AAI requirements with limited variation, discussed in greater detail below. </p> <h2>All Appropriate Inquiries</h2> <p>Conducting AAI requires both the prospective purchaser and the environmental professional to participate in the preparation of a Phase I.[[N: AAI is required for (1) entities and individuals purchasing property for non-residential use who may, after purchasing a property, seek protection from CERCLA liability for releases or threatened releases of hazardous substances and (2) any party who receives a Brownfields grant awarded under CERCLA Section 104(k)(2)(B) and uses the grant to conduct site characterization or assessment activities.]] Beginning on February 13, if a Phase I is used to support AAI, it must be performed pursuant to the new ASTM E1527-21 standard.[[N: <em>See</em> Standards and Practices for All Appropriate Inquiries, 87 FR 76578-01. Note: ASTM International Standard E2247&ndash;16 entitled &ldquo;Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process for Forestland or Rural Property&rdquo; may also be used for AAI. February 13, 2024 marks the close of the one-year sunset period for use of ASTM&rsquo;s E1527-13 standard practice following the effective date of the amended AAI Rule, which was amended on December 15, 2022 and went into effect on February 13, 2023.]] Importantly, while the ASTM Standards require the environmental professional to make inquiries of the current and past property owners and occupants, the prospective purchaser must independently provide the following items:[[N: <em>See</em> 40 C.F.R. &sect; 312.22.]]</p> <ul> <li><strong><em>Environmental Liens/AULs.</em></strong> Within six months prior to the acquisition date, the prospective purchaser must perform a search for environmental liens and activity and use limitations (AULs) and provide any record thereof to the environmental professional.[[N: <em>See</em> 40 C.F.R. &sect; 312.25.]] In most jurisdictions, a title commitment or title report would be likely to satisfy this requirement. Note the ASTM Standards do not require an environmental professional to perform a title search in preparing a Phase I. Instead, it is best practice for the prospective purchaser to provide a title commitment to the environmental professional.</li> <li><strong><em>Commonly Known or Reasonably Ascertainable Information. </em></strong>The prospective purchase must provide any commonly known or reasonably ascertainable information from the local community, including, if known, past uses, past releases of hazardous substances, and past remediation efforts.[[N: <em>See </em>40 C.F.R. &sect; 312.30.]] This can include information derived from the owner or occupant of a property and neighboring properties, the local community, government officials, media sources, and local libraries and historical societies.[[N: <em>See</em> Standards and Practices for All Appropriate Inquiries, 70 FR 66070-01.]]</li> <li><strong><em>Specialized Knowledge or Experience. </em></strong>The prospective purchaser must also provide any relevant specialized knowledge regarding the likelihood of a release or threatened release of hazardous substances at the property, adjacent properties, or the surrounding area to the environmental professional.[[N: <em>See</em> 40 C.F.R. &sect; 312.28.]] For example, the prospective purchaser should disclose if it generally is in the business of purchasing and remediating contaminated properties[[N: <em>See</em> Standards and Practices for All Appropriate Inquiries, 70 FR 66070-01.]] or, through its operation of a similar business, has specialized knowledge of the chemicals and processes used by the owner or occupant.[[N: <em>See</em> Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process ASTM E1527-21 Appendix X3.]]</li> <li><strong><em>Deviation From Fair Market Value. </em></strong>The prospective purchaser must consider if the purchase price reasonably reflects the fair market value of an uncontaminated property, and if not, whether the price difference is due to the presence or threatened release of hazardous substances.[[N: <em>See </em>40 C.F.R. &sect; 312.29.]] An appraisal is not required. The determination may be made through a comparison of similar properties in the vicinity or by consulting a local real estate expert. In practice, the EPA&rsquo;s rulemaking requires the prospective purchaser to note &ldquo;significant differences in the purchaser price and fair market value of a property &hellip; and the reasons for any differences.<a name="ASTM Standards"></a>&rdquo;[[N: <em>See</em> Standards and Practices for All Appropriate Inquiries, 70 FR 66070-01.]]</li> <li><strong><em>Obvious Contamination. </em></strong>After considering all information available, the prospective purchaser must consider the degree of obviousness of potential contamination and the ability to detect contamination by appropriate investigation.[[N: <em>See</em> 40 C.F.R. &sect; 312.31.]] In practice, the prospective purchaser should identify to the environmental professional any indications of hazardous substances on, at, in, or to the property.[[N: <em>See</em> Standards and Practices for All Appropriate Inquiries, 70 FR 66070-01.]]</li> </ul> <p> To easily satisfy the prospective purchaser&rsquo;s requirement to make AAI, the revised ASTM Standards provide a simple questionnaire (<a href="#ASTM E1527-21 User Questionnaire*">included below</a>) that prospective purchasers should complete when engaging an environmental professional and that the environmental professional should attach to the Phase I with a note that the consultant reviewed and relied upon the questionnaire in making its report.</p> <h2>Existing Phase I</h2> <p>A prospective purchaser need not commission their own Phase I to take advantage of the BFPP safe harbor. A prospective purchaser can rely on an existing Phase I, dated within one year of the acquisition date.[[N: <em>See</em> 40 C.F.R. &sect; 312.20(d).]] <a name="Best Practices for Phase I Reports"></a>However, a prospective purchaser must still make the independent inquiries as outlined above. When utilizing an existing Phase I, the best practice is to attach the ASTM Questionnaire to the environmental professional&rsquo;s reliance letter with a note that the consultant reviewed and relied upon the questionnaire in affirming the report in the reliance letter.</p> <h2>Best Practices for Phase I Reports</h2> <p>Environmental professionals generally limit their liability under a Phase I to its cost or some other small amount. This limitation means that there is very limited recourse for a prospective purchaser if a Phase I contains inaccuracies or fails to follow ASTM guidelines. As such, prospective purchasers should take care in reviewing an environmental professional&rsquo;s Phase I, including confirming that (1) the ASTM Questionnaire has been included in the Phase I (or reliance letter, as applicable);[[N: The ASTM Standards require an environmental profession to report in the Phase I if a prospective purchaser did not provide this information. See Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process ASTM E1527-21 &sect;12.3.]] (2) the Phase I notes any environmental liens or AULs uncovered in a title report; and (3) the Phase I (or reliance letter) states that the report was prepared for the purpose of achieving BFPP status. The ASTM Standards require an environmental professional to assume that the purpose is to qualify for landowner liability protections, if no other reason is given, and to state as much in the Phase I.[[N: <em>See</em> Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process ASTM E1527-21 &sect;6.8.]]</p> <h2>Separate State and Local Requirements in the Washington, D.C. Metropolitan Area </h2> <p>The BFPP status outlined above operates as a safe harbor with respect to the federal Superfund law. The District of Columbia, Maryland, and Virginia incorporate and apply similar defenses from Superfund liability under state/local law.</p> <ul> <li><strong><em>District of Columbia. </em></strong>To qualify as a BFPP under Washington, D.C.&rsquo;s Brownfields Revitalization Act, a person (purchaser or tenant) must establish several threshold criteria that align with federal Superfund BFPP requirements, including that (1) the person must have acquired the facility after June 13, 2001; (2) the disposal of hazardous substances occurred prior to facility acquisition; (3) the person undertook at time of acquisition all appropriate inquiry[[N: The D.C. corollary to the federal Superfund law does not define AAI or explicitly reference the AAI Rule. However, <a rel="noopener noreferrer" href="https://doee.dc.gov/sites/default/files/dc/sites/ddoe/service_content/attachments/Brownfield%20FAQs.pdf" target="_blank">September 2022 Frequently Asked Question guidance</a>, issued by the D.C. Department of Energy and Environment, defines AAI through reference to the federal Superfund law and EPA&rsquo;s AAI Rule.]] into the previous ownership and use of the property; (4) the person must exercise appropriate care regarding identified hazardous substances by taking reasonable steps to stop any continuing release, prevent future releases, and prevent or limit exposure; and (5) the person is not potentially liable, or affiliated with any other person that is potentially liable, for response costs at the facility.[[N: <em>See</em> D.C. Code Ann. &sect; 8-631.02 (full list of threshold criteria from (1A)(A)-(J)).]]</li> <li><strong><em>Maryland. </em></strong>Maryland&rsquo;s corollary to CERCLA, the Brownfields Redevelopment Reform Act, incorporates CERCLA defenses through its definition of a &ldquo;responsible person,&rdquo; which states that &ldquo;any person claiming an exemption from liability &hellip; must establish that the person had no reason to know, in accordance with &sect;101(35)(B) of [CERCLA, which directly references AAI], and that the person satisfied the requirements of &sect;107(b)(3)(a) of [CERCLA].&rdquo;[[N: Md. Code, Environment &sect; 7-201; see 42 U.S.C. &sect; 9607(b)(3)(a) (defendant &ldquo;exercised due care with respect to the hazardous substance concerned, taking into consideration the characteristics of such hazardous substance, in light of all relevant facts and circumstances&rdquo;).]] The Maryland Department of the Environment&rsquo;s (MDE) August 2017 fact sheet on Inculpable and Responsible Person Status for the state&rsquo;s Voluntary Cleanup Program clarifies that Section 101(35)(B) of CERCLA pertains to AAI and states that &ldquo;[a]ny documentation submitted to MDE in support of the innocent purchaser defense must show that all points of AAI and the American Society of Testing and Materials (ASTM) were met.&rdquo;</li> <li><strong><em>Virginia. </em></strong>To satisfy the BFPP defense under Virginia&rsquo;s Brownfields Restoration and Land Renewal Act, the purchaser must (1) not have contributed to a release or threatened release of hazardous substances, (2) have any familial, contractual, or financial relationship with a potentially liable entity, (3) take reasonable steps to mitigate any existing release and prevent any threatened future release, and (4) not impede any remediation action.[[N: <em>See</em> Va. Code &sect; 10.1-1234(B).]] Virginia does not require a Phase I or any other purchaser inquiries to qualify as a BFPP. In addition, Virginia law requires that a person seeking to apply the innocent landowner defense demonstrate, among other requirements, that &ldquo;the person made all appropriate inquiries into the previous uses of the facility in accordance with generally accepted good commercial and customary standards and practices, including those established by federal law.&rdquo;[[N: <em>See</em> Va. Code &sect; 10.1-1234(C).]]</li> </ul> <h2>Conclusion</h2> <p>Ordering a Phase I is not enough for a purchaser to satisfy the All Appropriate Inquiries test to achieve Bona Fide Prospective Purchaser status. <a name="ASTM E1527-21 User Questionnaire*"></a>The prospective purchaser must ensure the Environmental Professional is executing the Phase I pursuant to the new ASTM E1527-21 standards and document its own disclosures in connection with the Phase I. For further information, please reach out to any author of this Advisory or to your normal Arnold &amp; Porter contact.</p> <h2>ASTM E1527-21 User Questionnaire*</h2> <p><strong>(1.) Environmental liens that are filed or recorded against the <em>subject property</em> (40 C.F.R. &sect; 312.25).</strong><br /> Did a search of <em>land title records</em> (or judicial records where appropriate)[[N: NOTE 1 &mdash; In certain jurisdictions, federal, tribal, state, or local statutes or regulations specify that <em>environmental liens</em> and<em> AULs</em> be filed in judicial records rather than in <em>land title records</em>. In such cases judicial records shall be searched for <em>environmental liens </em>and <em>AULs</em>.]] identify any <em>environmental liens</em> filed or recorded against the <em>subject property</em> under federal, tribal, state, or local law?<br /> <br /> <strong>(2.) <em>Activity and use limitations</em> that are in place on the<em> subject property </em>or that have been filed or recorded against the <em>subject property</em>.</strong><br /> Did a search of <em>land title records</em> (or judicial records where appropriate) identify any<em> AULs</em>, such as <em>engineering controls</em>, land use restrictions, or <em>institutional controls</em> that are in place at the <em>subject property</em> and/or have been filed or recorded against the <em>subject property</em> under federal, tribal, state, or local law?<br /> <br /> <strong>(3.) Specialized knowledge or experience of the person seeking to qualify for the <em>LLP </em>(40 C.F.R. &sect; 312.28).</strong><br /> Do you have any specialized knowledge or experience related to the <em>subject property</em> or nearby <em>properties</em>? For example, are you involved in the same line of business as the current or former<em> occupants</em> of the<em> subject property</em> or an <em>adjoining property</em> so that you would have specialized knowledge of the chemicals and processes used by this type of business?<br /> <br /> <strong>(4.) Relationship of the purchase price to the fair market value of the <em>subject property</em> if it were not contaminated (40 C.F.R. &sect; 312.29).</strong><br /> Does the purchase price being paid for this <em>subject property</em> reasonably reflect the fair market value of the <em>property</em>? If you conclude that there is a difference, have you considered whether the lower purchase price is because contamination is known or believed to be present at the <em>subject property</em>?<br /> <br /> <strong>(5.) Commonly known or <em>reasonably ascertainable</em> information about the <em>subject property</em> (40 C.F.R. &sect; 312.30).</strong><br /> Are you aware of commonly known or <em>reasonably ascertainable</em> information about the <em>subject property</em> that would help the <em>environmental professional </em>to identify conditions indicative of <em>releases </em>or threatened releases? For example:<br /> (a.) Do you know the past uses of the <em>subject property</em>?<br /> (b.) Do you know of specific chemicals that are present or once were present at the <em>subject property</em>?<br /> (c.) Do you know of spills or other chemical releases that have taken place at the <em>subject property</em>?<br /> (d.) Do you know of any environmental cleanups that have taken place at the <em>subject property</em>?<br /> <br /> <strong>(6.) The degree of obviousness of the presence or likely presence of contamination at the <em>subject property</em>, and the ability to detect the contamination by appropriate investigation (40 C.F.R. &sect; 312.31).</strong><br /> Based on your knowledge and experience related to the <em>subject property</em>, are there any <em>obvious</em> indicators that point to the presence or likely presence of <em>releases</em> at the <em>subject property</em>?</p> <p><em>*Reprinted, with permission, from ASTM E1527-21, Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process, copyright ASTM International. A copy of the complete standard may be obtained from <a rel="noopener noreferrer" href="https://www.astm.org/" target="_blank">www.astm.org</a>.&nbsp;</em></p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{081C0201-F4FF-4574-80B0-FD4AE095C1EC}https://www.law360.com/technology/articles/1796989?nl_pk=bc14e67c-6e59-4df2-a8b7-04736a693c2e&utm_source=newsletter&utm_medium=email&utm_campaign=technology&utm_content=2024-02-15&read_more=1&nlsidx=0&nlaidx=31Michael E. Kientzlehttps://www.arnoldporter.com/en/people/k/kientzle-michael-eMichael.Kientzle@arnoldporter.comRyan D. Whitehttps://www.arnoldporter.com/en/people/w/white-ryan-dryan.white@arnoldporter.comIs Compulsory Copyright Licensing Needed For AI Tech?Wed, 14 Feb 2024 00:00:00 -0600{FA929040-509A-42FD-B0C9-25E67DF2D1CF}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/dol-issues-final-rule-on-independent-contractor-classificationUri Horowitzhttps://www.arnoldporter.com/en/people/h/horowitz-uriUri.Horowitz@arnoldporter.comJoshua F. Alloyhttps://www.arnoldporter.com/en/people/a/alloy-joshua-fjoshua.alloy@arnoldporter.comDouglas S. Pelleyhttps://www.arnoldporter.com/en/people/p/pelley-douglas-sDouglas.Pelley@arnoldporter.comKathleen Wechterhttps://www.arnoldporter.com/en/people/w/wechter-kathleenkathleen.wechter@arnoldporter.comKathryn Geoffroyhttps://www.arnoldporter.com/en/people/g/geoffroy-kathrynkathryn.geoffroy@arnoldporter.comPari Sitaulahttps://www.arnoldporter.com/en/people/s/sitaula-pariPari.Sitaula@arnoldporter.comDOL Issues Final Rule on Independent Contractor Classification<span style="line-height: 107%;">On January 9, the U.S. Department of Labor (DOL) issued its final rule (the Final Rule) for determining whether a worker is an employee or independent contractor for purposes of the Fair Labor Standards Act (the FLSA), replacing a rule adopted by the previous administration in 2021 (the 2021 Rule).&nbsp;</span>Tue, 13 Feb 2024 00:00:00 -0600<p>On January 9, the U.S. Department of Labor (DOL) issued its <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2024/01/10/2024-00067/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act" target="_blank">final rule</a> (the Final Rule) for determining whether a worker is an employee or independent contractor for purposes of the Fair Labor Standards Act (the FLSA), replacing a rule adopted by the previous administration in 2021 (the 2021 Rule). The Final Rule is important to employers from both a cost and compliance perspective because it may result in more workers being classified as employees than under the 2021 Rule.[[N: We note that the Final Rule shares a great deal of similarities with what the Obama administration tried to implement through a less formal &ldquo;Administrator&rsquo;s Interpretation&rdquo; in 2015, which we wrote about in <a rel="noopener noreferrer" href="https://www.arnoldporter.com/-/media/files/perspectives/publications/2015/07/understanding-the-dols-expansive-view-of-an-empl__/files/publication/fileattachment/understandingthedolsexpansiveviewofanemployee.pdf" target="_blank">July 2015</a> and <a rel="noopener noreferrer" href="https://www.arnoldporter.com/-/media/files/perspectives/publications/2015/07/understanding-the-dols-expansive-view-of-an-empl__/files/publication/fileattachment/understandingthedolsexpansiveviewofanemployee.pdf" target="_blank">November 2015</a>.]] The Final Rule, which becomes effective March 11, sets forth a &ldquo;totality-of-the-circumstances&rdquo; test with six factors emphasizing economic dependence as key to the underlying determination, but with no one factor presumed to carry more weight than any other. The Final Rule&rsquo;s broader analysis is in contrast to the 2021 Rule, which set forth five &ldquo;economic realities&rdquo; factors with two &ldquo;core factors&rdquo; designated as having greater weight in the analysis. The factors set forth in the Final Rule are as follows:</p> <ul> <li><strong><em>Opportunity for Profit or Loss Based on Managerial Skills: </em></strong>This factor considers the extent to which a worker&rsquo;s managerial skills affect their economic success or failure. Relevant considerations include the worker&rsquo;s ability to negotiate payment terms, accept or decline work arrangements or manage job order and timing, engage in marketing efforts, and make decisions regarding hiring and purchasing materials, equipment, and/or rental space. If a worker has no opportunity for profit or loss, then this factor would suggest employee status.</li> <li><strong><em>Role of Investments: </em></strong>This factor considers whether a worker&rsquo;s investments are capital or entrepreneurial in nature. Investments that empower a worker to perform different types of work or more work, reduce costs, or expand their market presence suggest independent contractor status. This analysis focuses on a qualitative comparison as to whether a worker is making similar types of investments as a potential employer, and if so, that would suggest that the worker is operating independently.</li> <li><strong><em>Degree of Permanence of the Work Relationship: </em></strong>This factor considers the duration, continuous nature, and exclusivity of the work relationship. Indefinite, continuous, or exclusive work arrangements suggest employee status, while definite in duration, non-exclusive, project-based, or sporadic relationships suggest independent contractor status. If a lack of permanence is a business or industry-specific characteristic, this factor is not weighed in favor of independent contractor status unless the lack of permanence results from the worker exercising independent business initiative.</li> <li><strong><em>Nature and Degree of Control: </em></strong>This factor considers the level of control exerted by the potential employer over performance of the work and economic aspects of the work relationship. Key considerations include control over scheduling, supervision of work (including through technological supervision methods), limitations on the ability to work for other entities, control over rates for services, and marketing of the workers&rsquo; services. Compliance with internal safety, quality control, contractual, or customer standards that go beyond compliance with laws can also indicate economic dependence on the employer and weigh towards employee status. More indicia of control by the potential employer favors employee status; more indicia of control by the worker favors independent contractor status.</li> <li><strong><em>Extent to Which the Work Performed Is Integral to the Employer:</em></strong> This factor considers whether the function a worker performs is an integral part of the potential employer&rsquo;s business. When the work a worker is performing is critical, necessary, or central to the potential employer&rsquo;s principal business, this factor weighs in favor of employee status.</li> <li><strong><em>Skill and Initiative: </em></strong>This factor considers the use of specialized skills and whether those skills contribute to business-like initiative. When workers rely on employer-provided training or perform tasks that require no specialized training, this factor suggests employee status. Workers using specialized skills in connection with business-like initiative would indicate independent contractor status.</li> </ul> <p>In addition, the Final Rule permits considerations of additional factors relevant to the overall question of economic dependence. </p> <h2>Potential Implications and Next Steps</h2> <p>Employers should review both the substance of the relationship with their workers and any agreements with workers to determine whether the &ldquo;economic reality&rdquo; is that the worker is (or is not) independent from the employer under the broad scope of considerations set forth in the Final Rule, especially in the case of any worker previously examined under the 2021 Rule and classified as an independent contractor. As noted above, the Final Rule may result in more workers being classified as employees for purposes of the FLSA, thus increasing the costs and compliance burden of employers, by entitling them to minimum wage and certain other protections such as the overtime rules and the Family and Medical Leave Act. Further, while the Final Rule only applies to the DOL and the FLSA, if workers are reclassified as employees under the Final Rule, employers should be mindful of the effect that action may potentially have with respect to other federal and state laws that rely on a worker classification system (which may be stricter or more employee-friendly than the Final Rule), such as income and employment tax withholding, coverage under the Affordable Care Act, participation in employee benefit plans, employee benefit plan non-discrimination testing, and state-level wage/hour requirements. At present, it is unclear how much impact, if any, the Final Rule might have on such other federal and state laws. Prudent employers should continue to monitor changes to all federal and state laws relating to the classifications of workers; review and update internal processes and safeguards for hiring independent contractors; review and strengthen independent contractor agreements and internal policies; train managers on how to work with independent contractors; and work with legal counsel to conduct privileged preventive audits. </p> <p>If you have any questions about the Final Rule or worker classification, please reach out to a member of our team.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{69664AB2-7689-47FA-916C-14CA3FB76682}https://www.americanconference.com/aml-ofac-insurance/agenda/sanctions-evasion-and-circumvention-practical-guidance-for-companies-to-detect-and-prevent-the-circumvention-of-sanctions-and-being-prepared-for-the-newest-most-sophisticated-techniques/marcus.asner@arnoldporter.comPractical Guidance for Companies to Detect and Prevent the Circumvention of Sanctions and Being Prepared for the Newest, Most-Sophisticated TechniquesTue, 13 Feb 2024 00:00:00 -0600{8739DDF6-6B10-4398-B6FA-85A38DEB3C83}https://pubkgroup.com/pubk-government-contracts-annual-review-2024-registration/tirzah.lollar@arnoldporter.comFalse Claims ActTue, 13 Feb 2024 00:00:00 -0600{8B686757-3DB2-4253-81A8-1A0E243B9380}https://www.facultyfederaladvocates.org/event-5589407suneeta.hazra@arnoldporter.comFederal and State False Claims Acts: Recent Changes and Best PracticesTue, 13 Feb 2024 00:00:00 -0600{F8CD1AC6-ED00-4701-8B1C-AF5EAF499871}https://www.biosliceblog.com/2024/02/proposed-fine-against-danish-hospital-for-failure-to-supervise-data-processors/Alexander Roussanovhttps://www.arnoldporter.com/en/people/r/roussanov-alexanderalexander.roussanov@arnoldporter.comAna González-Lamuñohttps://www.arnoldporter.com/en/people/g/gonzalez-lamuno-anaana.lamuno@arnoldporter.comJami Vibberthttps://www.arnoldporter.com/en/people/v/vibbert-jamijami.vibbert@arnoldporter.comProposed Fine Against Danish Hospital for Failure to Supervise Data ProcessorsMon, 12 Feb 2024 00:00:00 -0600{7E6007B7-B3AA-45F9-8D90-3771C3565EF3}https://www.arnoldporter.com/en/perspectives/news/2024/02/wtr-1000-2024-recognizes-arnold-and-porters-trademark-capabilitiesWTR 1000 2024 Recognizes Arnold & Porter’s Trademark CapabilitiesEleven Arnold &amp; Porter attorneys across seven practices were recognized in the 2024 edition of <em>World Trademark Review 1000</em>.&nbsp;Fri, 09 Feb 2024 00:00:00 -0600<p>Eleven Arnold &amp; Porter attorneys across seven practices were recognized in the 2024 edition of <em>World Trademark Review 1000</em>. The research directory annually compiles "the top trademark professionals in key jurisdictions around the globe."</p> <p><em>WTR 1000</em> recognized Arnold &amp; Porter's attorneys for their enforcement and litigation abilities as well as their prosecution and strategy experience. The guide recognized Arnold &amp; Porter nationally as well as its practices in California, Illinois, New York, and Washington, D.C. offices, and highlighted the firm for its &ldquo;strategic and savvy portfolio managers, tenacious disputers and well-rounded practitioners whose dexterity extends across the contentious/non-contentious divide&rdquo; and for having &ldquo;seamless cross-office and cross-practice collaboration.&rdquo;</p> <p>Practices</p> <ul> <li>National</li> <li>California: Enforcement and Litigation</li> <li>District of Columbia: Prosecution and Strategy</li> <li>Illinois: Enforcement and Litigation</li> <li>Illinois: Prosecution and Strategy</li> <li>New York: Enforcement and Litigation</li> <li>New York: Prosecution and Strategy</li> </ul> <p>Individual Attorneys</p> <ul> <li>Louis Ederer&mdash;New York: Enforcement and Litigation; Prosecution and Strategy</li> <li>Dori Hanswirth&mdash;New York: Enforcement and Litigation; Prosecution and Strategy</li> <li>Michael Harris&mdash;Illinois: Enforcement and Litigation</li> <li>Theresa House&mdash;New York: Prosecution and Strategy</li> <li>Helen Minsker&mdash;Illinois: Prosecution and Strategy</li> <li>Paul Llewellyn&mdash;New York: Enforcement and Litigation; Prosecution and Strategy</li> <li>Thomas Magnani&mdash;California: Prosecution and Strategy&nbsp;</li> <li>Christopher Renk&mdash;Illinois: Enforcement and Litigation</li> <li>John Rynkiewicz&mdash;District of Columbia: Prosecution and Strategy</li> <li>Matthew Salzmann&mdash;New York: Enforcement and Litigation</li> <li>Rhonda Trotter&mdash;California: Enforcement and Litigation</li> </ul>{39DB5BC6-DF74-4345-BE33-8AD1BB04AB70}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/02/sklamberg-discusses-fdas-parallel-scientific-advice-programSklamberg Discusses FDA’s Parallel Scientific Advice ProgramHoward Sklamberg, Life Sciences &amp; Healthcare Regulatory partner and former FDA Deputy Commissioner, was quoted in the recent<em> Law360</em> article, &ldquo;FDA Defends European Pilot Program, Seeks More Applicants.&rdquo;&nbsp;Fri, 09 Feb 2024 00:00:00 -0600<p>Howard Sklamberg, Life Sciences &amp; Healthcare Regulatory partner and former FDA Deputy Commissioner, was quoted in the recent <em>Law360</em> article, &ldquo;FDA Defends European Pilot Program, Seeks More Applicants.&rdquo; The articles discussed the U.S. Food and Drug Administration&rsquo;s (FDA) Parallel Scientific Advice pilot program and a recent request from the agency for applicants working on complex generic drugs consider using the program. </p> <p>Sklamberg told <em>Law360</em> that the FDA&rsquo;s recent call may cause some to reconsider the program, which was launched in 2021 with the aim of helping the FDA and the European Medicines Agency align their thinking on certain medicines. "The idea of coordinating the approval process with Europe has been a longstanding FDA goal," Sklamberg said. "The FDA itself does a lot of scientific exchanges with the European Medicines Agency and European regulators."</p> <p><a rel="noopener noreferrer" href="https://www.law360.com/healthcare-authority/articles/1795250" target="_blank">Read the full article</a> (subscription required).</p>{16DFDB43-79C8-4B5C-AA70-F530EFDC8698}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/sec-publishes-final-rule-for-spac-transactionsChristopher P. Petersonhttps://www.arnoldporter.com/en/people/p/peterson-christopher-pchristopher.peterson@arnoldporter.comTeresa (Terry) L. Johnsonhttps://www.arnoldporter.com/en/people/j/johnson-teresa-lteresa.johnson@arnoldporter.comCarlos Lobohttps://www.arnoldporter.com/en/people/l/lobo-carloscarlos.lobo@arnoldporter.comMichael Penneyhttps://www.arnoldporter.com/en/people/p/penney-michaelmichael.penney@arnoldporter.comPaul Nabhanhttps://www.arnoldporter.com/en/people/n/nabhan-paulpaul.nabhan@arnoldporter.comSEC Publishes Final Rule for SPAC Transactions, Bringing Much-Needed Clarity and Certainty to Rules for Capital RaisingOn January 24, the SEC adopted its final rule (the Final Rule) with respect to special-purpose acquisition companies (SPACs) and mergers of SPACs with private businesses that result in the private businesses becoming public companies (De-SPAC transactions).Fri, 09 Feb 2024 00:00:00 -0600<p>On January 24, the SEC adopted its final rule (the Final Rule) with respect to special-purpose acquisition companies (SPACs) and mergers of SPACs with private businesses that result in the private businesses becoming public companies (De-SPAC transactions). The Final Rule primarily seeks to improve the standard of disclosures for SPAC and De-SPAC transactions, as well as to enhance investor protections and realign disclosure requirements for De-SPAC transactions comparable to traditional initial public offerings (IPOs). In a <a rel="noopener noreferrer" href="https://www.sec.gov/news/statement/gensler-statement-final-rule-012424" target="_blank">statement</a> made by SEC Chair Gary Gensler concurrently with the release of the Final Rule, Chair Gensler reaffirmed, &ldquo;The federal securities laws provide a range of protections for investors in traditional IPOs &mdash; through disclosure, marketing standards, as well as gatekeeper and issuer obligations. This adoption will ensure that similar protections apply to investors in these non-traditional IPOs as much as they do for investors in traditional IPOs.&rdquo; The Final Rule comes in the wake of a surge of entities becoming public companies via SPAC and De-SPAC transactions from 2020-2022. During this time, SPAC IPOs constituted over half of all IPOs (as well as 43% in 2023), with corresponding De-SPAC transactions likewise increasing during this period.</p> <h2>Key Takeaways</h2> <p> The Final Rule provides a new, comprehensive disclosure regime for SPAC and De-SPAC transactions, as well as clarity for legal liability questions and governance matters. Ultimately, the Final Rule removes legal uncertainty from capital raising in many respects and addresses some of the critiques this type of transaction has received from market participants. Accordingly, entities considering raising capital through the SPAC door should consider the following:</p> <ul> <li>The overall outcome of the Final Rule is that traditional IPOs and De-SPAC transactions should now require levels of disclosure that are more similar to each other.</li> <li>There are still valid reasons to become a public company through a De-SPAC transaction as opposed to a traditional IPO, most notably having more control over the valuation of shares and avoiding the market risk in terms of the timing of a De-SPAC transaction.</li> <li>The Final Rule requires disclosure &mdash; both on the outside cover page of the prospectus and within the prospectus summary &mdash; of any actual or potential conflict of interest between unaffiliated security holders of a SPAC and (1) the SPAC sponsor or its affiliates; (2) the officers, directors, or promoters of the SPAC; or (3) the officers and directors of the target company (in the context of a De-SPAC transaction, the Target). These conflicts of interest should include any that may arise in determining whether to proceed with a De-SPAC transaction or from how the SPAC compensates its officers and directors and the SPAC sponsor (and its officers and directors).</li> <li>In many instances, the Final Rule attempted to codify disclosures that the SEC believed were already market practice for the purpose of creating more consistent and comparable disclosures amongst different issuers. As such, for these disclosures, there may not be a large gap to address to comply with the requirements of the Final Rule.</li> <li>The Final Rule readjusts the potential legal liability for misstatements in De-SPAC transactions to the same level as traditional IPOs &mdash; i.e., strict liability, now applicable to the Target as a co-registrant as well.</li> <li>The increased legal liability standards for all issuers under the Final Rule may also affect the level of directors and officers insurance required to become a public company under a De-SPAC transaction.</li> <li>The Final Rule also realigns the requirements for financial reporting and audits meeting the standards of the Public Company Accounting Oversight Board (PCAOB) to match that of traditional IPOs. Planning ahead to comply with this updated requirement, particularly in light of the new requirement to re-determine smaller reporting company (SRC) status within 45 days, is crucial to making sure a new public company does not inadvertently fall short in its financial reporting obligations shortly upon becoming a public company.</li> <li>With increased disclosure requirements and increased legal liability under the Final Rule, becoming a public company via a De-SPAC transaction may no longer appeal to those interested in short paths to becoming a public company.</li> <li>All in all, the Final Rule makes some key changes in the landscape of SPAC and De-SPAC transactions, and gives companies and investors evaluating a potential SPAC/De-SPAC transaction plenty to discuss with their legal and financial advisors.</li> </ul> <h2> Overview of the Final Rule</h2> <p> Below, we summarize highlights of the Final Rule with respect to (1) disclosure requirements for SPACs and De-SPAC transactions under a new Subpart 1600 to Regulation S-K (Reg. S-K 1600); (2) required disclosures and enhanced investor liability protection in De-SPAC transactions; (3) updated disclosures for business combinations involving shell companies; and (4) enhanced projections disclosures. The Final Rule becomes effective 125 days after publication in the Federal Register, and entities must comply with the Final Rule within 490 days after publication in the Federal Register.[[N: Entities will have an additional year to comply with XBRL requirements under new Reg. S-K 1600.]]</p> <h3> New Disclosure Requirements in New Reg. S-K 1600</h3> <p> The Final Rule adds a new Subpart 1600 to Regulation S-K that sets forth disclosure requirements applicable to SPACs regarding, among other things, the SPAC sponsor, potential conflicts of interest, dilution, and diligence by the board of directors.</p> <h4> SPAC Sponsors</h4> <p> In connection with SPAC offerings and De-SPAC transactions, Reg. S-K 1603 requires disclosure of the experience, material roles, and responsibilities of the SPAC sponsor, its affiliates and any promoters. Reg. S-K 1603 also requires disclosure of any agreement, arrangement, or understanding (1) between the SPAC sponsor and the SPAC, its executive officers, directors, or affiliates, with respect to determining whether to proceed with a De-SPAC transaction and (2) between the SPAC sponsor and unaffiliated security holders of the SPAC regarding the redemption of outstanding securities. SPACs will now have to disclose the controlling persons of the SPAC sponsor and any persons who have direct and indirect material interests in the SPAC sponsor and the nature and amount of their interests; provide tabular disclosure of the material terms of any lock-up agreements with the SPAC sponsor and its affiliates; and disclose nature and amounts of all compensation that has or will be awarded to, earned by, or paid to the SPAC sponsor, its affiliates, and any promoters for all services rendered in all capacities to the SPAC and its affiliates, as well as the nature and amounts of any reimbursements to be paid to the SPAC sponsor, its affiliates, and any promoters upon the completion of a De-SPAC transaction.</p> <h4> Conflicts of Interest</h4> <p> The Final Rule requires disclosure of certain conflicts of interest on both the prospectus front cover page and in the prospectus summary for both registered offerings and De-SPAC transactions. Reg. S-K 1603 requires disclosure of any actual or potential material conflict of interest between (1) any SPAC sponsor or its affiliates or the SPAC&rsquo;s officers, directors, or promoters and (2) unaffiliated security holders of the SPAC. This includes any conflict of interest with respect to determining whether to proceed with a De-SPAC transaction and any conflict of interest arising from the manner in which a SPAC compensates any SPAC sponsor or the SPAC&rsquo;s officers and directors or the manner in which any SPAC sponsor compensates its own officers and directors. Reg. S-K 1603 also requires disclosure regarding the fiduciary duties each officer and director of a SPAC may owe to other companies. <br /> <br /> For De-SPAC transactions, the Reg. S-K 1605 requires disclosure of any material interests in the De-SPAC transaction or any related financing transaction held by the SPAC sponsor or the SPAC&rsquo;s officers and directors, including fiduciary or contractual obligations to other entities, as well as any interest in, or affiliation with, the Target.</p> <h4> Dilution</h4> <p> The Final Rule requires additional information about SPAC dilution in connection with registered offerings by SPACs, including IPOs, and in connection with De-SPAC transactions. Reg. S-K 1602 requires disclosure on the prospectus outside cover page of whether compensation of the SPAC sponsor, its affiliates, and promoters may materially dilute purchasers&rsquo; equity interests, as well as tabular disclosure of the net tangible book value per share, as adjusted, at quartile intervals based on percentages of the maximum redemption threshold. In addition, Reg. S-K 1602 requires tabular disclosure in the summary prospectus of the extent to which compensation of the SPAC sponsor, its affiliates, and promotors may materially dilute purchasers&rsquo; equity interests. Further, Reg. S-K 1602 requires a description of material potential sources of future dilution after the registered offering by the SPAC, including tabular disclosure of future dilution (in the same quartile intervals) from the public offering price that will be absorbed by purchasers of the securities being offered, to the extent known and quantifiable.<br /> <br /> For De-SPAC transactions, Reg. S-K 1604 requires disclosure on the prospectus outside front cover page of whether compensation of the SPAC sponsor, its affiliates, and promoters may materially dilute the equity interests of non-redeeming shareholders who hold the securities until the consummation of the De-SPAC transaction, including cross-references (highlighted by prominent type or in another manner) to related disclosures in the prospectus. Within the prospectus summary, Reg. S-K 1604 requires (1) tabular disclosure of whether compensation of the SPAC sponsor and its affiliates has resulted or may result in a material dilution of the equity interests of non-redeeming shareholders of the SPAC; (2) disclosure of the dilutive impact of any financing transactions that have occurred or will occur in connection with the consummation of the De-SPAC transaction on non-redeeming shareholders; (3) disclosure of the rights of security holders to redeem the outstanding securities of the SPAC and the potential dilutive impact of redemptions on non-redeeming shareholders; and (4) tabular disclosure at each redemption level in the sensitivity analysis of the dilutive impact on non-redeeming shareholders of each source of dilution and a description of material potential sources of future dilution that non-redeeming shareholders may experience by electing not to tender their shares in connection with the De-SPAC transaction.</p> <h4>Prospectus Cover Page</h4> <p> For registered offerings (including IPOs) by SPACs other than De-SPAC transactions, Reg. S-K 1602 requires disclosure on the prospectus outside front cover page about, among other things (1) the time frame for the SPAC to consummate a De-SPAC transaction; (2) redemptions; (3) SPAC sponsor compensation and dilution, including simplified tabular disclosure (as discussed in further detail above); and (4) conflicts of interest.<br /> <br /> For De-SPAC transactions, Reg. S-K 1604 requires that SPACs include information on the prospectus outside front cover page about, among other things (1) the SPAC board of directors&rsquo; determination of whether it reasonably believes that a De-SPAC transaction is advisable and in the best interest of the SPAC and its security holders, if required under the law of the jurisdiction of the SPAC&rsquo;s organization, and whether it received a report, opinion, or appraisal as to the fairness of the De-SPAC transaction; (2) material financing transactions; (3) SPAC sponsor compensation and dilution, as discussed in further detail above; and (4) conflicts of interest.</p> <h4> Background and Reasons for De-SPAC Transactions</h4> <p> Reg. S-K 1605 requires disclosure of the background, material terms, and effects of a De-SPAC transaction, including (1) a summary of the background of the De-SPAC transaction, including, but not limited to, a description of any contacts, negotiations, or transactions that have occurred concerning the De-SPAC transaction; (2) a brief description of any related financing transaction, including any payments from the SPAC sponsor to investors in connection with the financing transaction; (3) the reasons of the SPAC and the Target for engaging in the particular De-SPAC transaction and for the structure and timing of the De-SPAC transaction and any related financing transaction; (4) an explanation of any material differences in the rights of the SPAC and the Target security holders of the post-business combination company as a result of the De-SPAC transaction; (5) the accounting treatment and the Federal income tax consequences of the De-SPAC transaction to the SPAC, the Target, and their respective security holders; (6) any material interests in the De-SPAC transaction or any related financing transaction held by the SPAC sponsor and the special purpose acquisition company&rsquo;s officers and directors, including fiduciary or contractual obligations to other entities as well as any interest in, or affiliation with, the Target; or held by the Target&rsquo;s officers or directors that consist of any interest in, or affiliation with, the SPAC sponsor or the SPAC; and (7) a statement as to whether or not security holders are entitled to any redemption or appraisal rights, a summary of such redemption or appraisal rights, and, if there are no redemption or appraisal rights available for security holders who object to the De-SPAC transaction, a brief outline of any other rights that may be available to security holders.</p> <h4> Board Determination of De-SPAC Transactions</h4> <p> Reg. S-K 1606 requires a statement from a SPAC as to, if the law of the jurisdiction of the SPAC&rsquo;s organization requires, whether the SPAC&rsquo;s board of directors reasonably believes that a De-SPAC transaction is advisable and in the best interest of the SPAC and its security holders, as well as whether any director voted against or abstained from voting on the approval of the De-SPAC transaction. The Final Rule does not require a SPAC to obtain a fairness opinion in connection with a De-SPAC transaction. Reg. S-K 1606 adds a discussion of a non-exclusive list of factors the board of directors (or similar governing body) considered in making such determination disclosed to the extent such factors were considered. These factors include, but are not limited to, the valuation of the Target; financial projections relied upon by the board of directors (or similar governing body); the terms of financing materially related to the De-SPAC transaction; dilution; and any report, opinion, or appraisal referred to in Reg. S-K 1607. Reg. S-K 1607 requires the disclosure and filing of any report, opinion (other than an opinion of counsel), or appraisal from an outside party or unaffiliated representative materially relating to the board of directors&rsquo; (or similar governing body) determination, if any was received by the SPAC or SPAC sponsor.</p> <h4> Disclosure Re Tender Offer Filings</h4> <p> Reg. S-K 1608 codifies an SEC Staff position that a Schedule TO filed in connection with a De-SPAC transaction should contain substantially the same information about a target private operating company that is required under the proxy rules and that a SPAC must comply with the procedural requirements of the tender offer rules when conducting the transaction for which the Schedule TO is filed, such as a redemption of the SPAC securities. Reg. S-K does not affect the SEC Staff&rsquo;s position for those SPACs that file a Schedule 14A or 14C for their De-SPAC transactions or extensions.</p> <h3> Disclosures and Liability in De-SPAC Transactions</h3> <p> The Final Rule also modifies existing rules to more closely align the treatment of De-SPAC transactions with traditional IPOs. In doing so, the SEC expressed the view that a private operating company&rsquo;s method of becoming a public company should not negatively impact investor protection.</p> <h4> Non-Financial Disclosures in De-SPAC Disclosure Documents</h4> <p> The Final Rule states that if the Target is not subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act, disclosure with respect to the Target would be required in the registration statement or schedule filed in connection with the De-SPAC transaction, each pursuant to Reg. S-K. These disclosures include (1) description of the business; (2) description of property; (3) legal proceedings; (4) changes in and disagreements with accountants on accounting and financial disclosure; (5) security ownership of certain beneficial owners and management, assuming the completion of the De-SPAC transaction and any related financing transaction; and (6) recent sales of unregistered securities. The Final Rule also amends Forms S-1 and F-1 to provide that, where they are used to register securities in connection with a De-SPAC transaction, they must include the information required in Forms S-4 and F-4, respectively. Further, the Final Rule amends Schedule TO and Schedule 14A to incorporate the disclosure provisions of Reg. S-K 1600 if such filing relates to a De-SPAC transaction.</p> <h4> Minimum Dissemination Period</h4> <p> The Final Rule requires that prospectuses and proxy and information statements filed in connection with De-SPAC transactions be distributed to security holders at least 20 calendar days in advance of a security holder meeting or the earliest date of action by consent, or the maximum period for disseminating such disclosure documents permitted under the applicable laws of the SPAC&rsquo;s jurisdiction of incorporation or organization if such period is less than 20 calendar days. Historically, there has been no requirement under SEC rules to provide security holders with a minimum amount of time to consider a proxy statement or other disclosure in connection with business combination transactions. </p> <h4>Private Operating Company as Co-Registrant</h4> <p> The Final Rule amends Forms S-4 and F-4 to require that both the SPAC and the Target are &ldquo;registrants&rdquo; for the purpose of the De-SPAC transaction and that both entities&rsquo; officers and directors sign the registration statement, taking the position that the &ldquo;issuer&rdquo; of securities in a De-SPAC transaction is the Target, in substance. As a result, the Target, and its officers and directors, will from now on be subject to liability under Section 11 of the Securities Act (i.e., strict liability), just as if the Target had undergone a traditional IPO on Form S-1 or F-1. As &ldquo;registrants&rdquo; and &ldquo;issuers,&rdquo; Targets must file periodic reports after the effectiveness of the De-SPAC registration statement and until the Target terminates and/or suspends its Exchange Act reporting obligations.</p> <h4> Re-Determination of SRC Status</h4> <p> If applicable, the Final Rule requires a re-determination of SRC status following the consummation of a De-SPAC transaction and prior to the time it makes its first SEC filing (other than a Form 8-K filed with Form 10 information). However, the Final Rule provides that the registrant does not need to reflect non-SRC status in any filing that is due in the 45-day period following the consummation of the De-SPAC transaction. The SEC notes in the Final Rule that it believes this provision will &ldquo;help level the playing field&rdquo; for when a company undergoes a De-SPAC transaction rather than a traditional IPO.</p> <h4> PSLRA Safe Harbor</h4> <p> The Final Rule makes the Private Securities Litigation Reform Act (PSLRA) safe harbor unavailable for SPACs and De-SPAC transactions, further aligning the liability exposure of De-SPAC transactions with traditional IPOs. The PSLRA provides a safe harbor for forward-looking statements, under which a company is protected from liability for forward-looking statements in any private right of action when, among other conditions, the forward-looking statement is identified and accompanied by meaningful cautionary language. However, the PSLRA safe harbor is not available for forward-looking statements made in connection with, among other things, an offering by a blank check company, an offering by an issuer of penny stock, or an IPO. Accordingly, the Final Rule accomplishes the foregoing by adopting a new definition of &ldquo;blank check company&rdquo; intended to make the PSLRA safe harbor unavailable for blank check companies, like SPACs.</p> <h3> Business Combinations Involving Shell Companies</h3> <p> In response to concerns regarding the use of shell companies as a means of accessing the U.S. capital markets, the SEC proposed new rules that would apply to business combination transactions involving shell companies, which include De-SPAC transactions. To that end, the Final Rule includes new Rule 145a under the Securities Act that would deem such business combination transactions to involve a sale of securities to a reporting shell company&rsquo;s shareholders and new Article 15 of Reg. S-X and related amendments to more closely align the required financial statements for De-SPAC transactions with those of a traditional IPO.</p> <h4> Rule 145a &mdash; Shell Company Business Combinations and the Securities Act</h4> <p> Rule 145a addresses the use of reporting shell companies (such as SPACs) as a means to enter the U.S. capital markets without Securities Act registration and the related disclosures. Accordingly, Rule 145a deems any direct or indirect business combination of a reporting shell company (that is not a business combination-related shell company) involving another entity that is not a shell company to involve a sale of securities to the reporting shell company&rsquo;s shareholders. That is, in the context of a De-SPAC transaction, Rule 145a would find that the Target sold its securities to the security holders of the SPAC entity. Accordingly, the exemption from registration under Section 3(a)(9) &mdash; for securities exchanged by an issuer with existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange &mdash; would not be available for De-SPAC transactions. However, Rule 145a does not otherwise prevent or prohibit the use of another valid exemption, if available, for the deemed sale of securities to a reporting shell company&rsquo;s shareholders.</p> <h4> Reg. S-X Art. 15 &mdash; Financial Statement Requirements in Business Combination Transactions Involving Shell Companies</h4> <p> Consistent with the SEC&rsquo;s position that the method of becoming a public company should not affect the standard of disclosures, the Final Rule also amends Reg. S-X so as to not result in substantially different financial statement disclosures to investors. Such amendments to Reg. S-X include:</p> <ul> <li><em>Audit Requirements. </em>The Final Rule adds Reg. S-X 15-01, which requires, for a business that is or will be a predecessor to a shell company, an examination of the financial statements by an independent accountant in accordance with the standards of the PCAOB for the purpose of expressing an opinion thereon. Accordingly, a predecessor to a shell company, such as the Target, is subject to the same financial statement audit requirements as if it were filing for a traditional IPO.</li> <li><em>Number of Years of Financial Statements. </em>Reg. S-X 15-01 aligns the number of fiscal years required to be included in the financial statements for a business that will be the predecessor in a shell company business combination with that required in a traditional IPO. That is, in a De-SPAC transaction, the Target (often the predecessor entity for accounting purposes) must determine its filer status and provide the same number of years of financial statements for the SPAC registrant to file in its Form S-4 or F-4, as applicable, as if the Target were filing its own registration statement in a traditional IPO. This change permits the SPAC registrant to file only two years of financial statements if the Target qualifies as a smaller reporting company or an emerging growth company.</li> <li><em>Staleness of Financial Statements. </em>Reg. S-X 15-01 provides that the financial statements of a business that will be the predecessor to the shell company must comply with Reg. S-X 3-12 and 8-08 in determining the staleness of the financial statements of the predecessor business in the registration statement or proxy statement of the registrant, consistent with the requirements in a traditional IPO.</li> <li><em>Financial Statements of a Shell Company Registrant After Combination With the Predecessor.</em> Reg. S-X 15-01 permits a shell company, including a SPAC, to exclude the financial statements of the shell company for periods prior to the business combination that resulted in the combined entity no longer being a shell company once the following conditions have been met (1) the financial statements of the predecessor, as that term is used in financial reporting, have been filed for all required periods through the acquisition date and (2) the financial statements of the combined entity registrant include the period in which the acquisition was consummated, which would also include the accounting for the business combination. The Final Rule adds that if a registrant is to acquire or has acquired a shell company, the financial statements of the shell company must be included in any filing requiring the registrant&rsquo;s financial statements as if the shell company were the registrant, unless the registrant&rsquo;s financial statements include the period in which the acquisition was consummated. The historical financial statements of the shell company must be included in all filings that require financial statements (including registration statements and the Form 8-K with Form 10 information filed following the De-SPAC transaction) filed prior to the first periodic report.</li> <li><em>Balance Sheets of Predecessors.</em> The Final Rule amends Reg. S-X 3-01, 8-02, and 10-01 to refer specifically to financial statements of predecessors, not only registrants.</li> </ul> <h3> Enhanced Projections Disclosures</h3> <p> Finally, the Final Rule amends Reg. S-K 10(b) and adds Reg. S-K 1609 to enhance the disclosures related to financial projections in SEC filings.</p> <h4> Reg. S-K 10(b)</h4> <p> Reg. S-K 10(b) provides guidance for the factors to be considered in formulating and disclosing management&rsquo;s projections of future economic performance in SEC filings. The Final Rule expands and updates this guidance and reiterates that projected financial information must have a reasonable basis. The Final Rule provides (1) any projected measures not based on historical financial results or operational history should be clearly distinguished from those that are; (2) it generally would be misleading to present projections that are based on historical financial results or operational history without presenting such historical measure or operational history with equal or greater prominence; and (3) the presentation of projections that include a non-GAAP financial measure should include a clear definition or explanation of the measure, a description of the GAAP financial measure to which it is most directly comparable, and an explanation of why the non-GAAP financial measure was used instead of a GAAP measure. The Final Rule further clarifies that this guidance also applies to the Target&rsquo;s projections when they are presented to investors through the registrant&rsquo;s SEC filings.</p> <h4> Reg. S-K 1609</h4> <p> For De-SPAC transactions, Reg. S-K 1609 requires registrants to disclose (1) the purpose for which any projections disclosed in an SEC filing were prepared and the party that prepared the projections; (2) all material bases of the disclosed projections, all material assumptions underlying the projections, and any material factors that may impact such assumptions (including a discussion of any material growth or reduction rates or discount rates used in preparing the projections, and the reasons for selecting them); and (3)(A) whether the disclosed projections reflect the view of the board or management of the SPAC or the Target, as applicable, as of the most recent practicable date prior to the date of the disclosure document required to be disseminated to security holders and (B) if the disclosed projections no longer reflect the view of the board or management of the SPAC or the Target, a statement regarding the purpose of disclosing the projections and the reasons for any continued reliance by management or the board on the projections.<br /> <br /> The Final Rule likewise amends the General Instructions to Form 8-K to require the information in clauses (1) and (2) above and include the projections relating to the performance of the SPAC or the Target.</p> <h3> Underwriter Status and Liability and Investment Company Issues &ndash; Not in Final Rule</h3> <p> While the SEC initially proposed to provide further guidance with respect to underwriter status and liability and the treatment of SPACs as investment companies, the Final Rule ultimately did not prescribe further guidance on these topics. The SEC stated that such determinations should continue to be analyzed based on individual facts and circumstances under current law, which the Final Rule said are customarily interpreted broadly.</p> <p style="text-align: center;">* <span style="white-space: pre;"> </span>*<span style="white-space: pre;"> </span> *</p> <p>Members of Arnold &amp; Porter&rsquo;s Capital Markets Transactions team continue to monitor the latest developments and best practices. If you are seeking advice on raising capital and/or becoming a public company, please contact any author of this Advisory or your regular Arnold &amp; Porter contact.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{EA1157A8-B581-40B5-BC3A-1D933F5E7C77}https://www.arnoldporter.com/en/perspectives/events/2024/02/regulatory-and-enforcement-trends-for-aml-and-sanctions-in-2024Regulatory and Enforcement Trends for AML and Sanctions in 2024Please join Arnold &amp; Porter for our annual discussion of regulatory and enforcement trends in the year ahead for anti-money laundering (AML) and sanctions.Thu, 08 Feb 2024 00:00:00 -0600<p>Please join Arnold &amp; Porter for our annual discussion of regulatory and enforcement trends in the year ahead for anti-money laundering (AML) and sanctions. Drawing on the experiences of our Financial Services, White Collar Defense &amp; Investigations, Anti-Corruption, and Securities Enforcement &amp; Litigation attorneys, we will provide insights on the steps that financial institutions can take both to address AML and sanctions risks and navigate examinations and internal and government investigations.</p> <h2>Panels</h2> <ul> <li>Sanctions Compliance Challenges and Enforcement Risk for 2024</li> <li>BSA/AML Compliance, Enforcement, and Investigations</li> </ul> <h2>Speakers</h2> <p> <a rel="noopener noreferrer" href="https://comms.arnoldporter.com/6/5249/landing-pages/speakers.asp" target="_blank">View the panelists.</a></p>{5E0BA5BA-464A-43B1-A2E5-5A8189A1005C}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/02/pippins-talks-influencer-account-ownership-dispute-in-bloomberg-lawPippins Talks Influencer Account-Ownership Dispute in Bloomberg LawRaqiyyah Pippins, co-lead of the firm&rsquo;s Consumer Products &amp; Retail Industry sector, was quoted in the <em>Bloomberg Law</em> article, &ldquo;Hayley Paige Account-Ownership Row Is a Warning to Influencers.&rdquo;&nbsp;Thu, 08 Feb 2024 00:00:00 -0600<p>Raqiyyah Pippins, co-lead of the firm&rsquo;s Consumer Products &amp; Retail Industry sector, was quoted in the <em>Bloomberg Law</em> article, &ldquo;Hayley Paige Account-Ownership Row Is a Warning to Influencers.&rdquo; The article discusses the ongoing trademark and contract dispute between an influencer and her ex-employer, a dressmaking brand who staked a claim to her personal social media accounts.</p> <p>Pippins told <em>Bloomberg Law </em>that the dispute illustrates the need for influencers to ensure their rights in their accounts are clear and understood by all parties. &ldquo;More thought has to be taken to whether there is a point where you could be transferring your rights in a way that was not anticipated,&rdquo; especially since &ldquo;influencers, in particular, start to commercialize what they may consider their personal accounts more in this time period,&rdquo; she said. </p> <p>In 2022, after creating a novel six-factor test to determine who rightfully owned the influencer&rsquo;s accounts, the U.S. District Court for the Southern District of New York ordered the influencer to relinquish control of her accounts. The U.S. Court of Appeals for the Second Circuit later rebuked the district court&rsquo;s creation of the test, arguing that the disputed accounts should be treated like any other form of property. &ldquo;The Second Circuit went out of its way to note that the law applies to novel technologies and issues all the time,&rdquo; Pippins said. &ldquo;You don&rsquo;t necessarily need a new test in order to establish some of these things.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://www.bloomberglaw.com/product/blaw/bloombergterminalnews/bloomberg-terminal-news/s7v5ymt1um0w" target="_blank">Read the full article</a> (subscription required). </p>{B7CF8560-A4F4-43E0-B956-ECFB1600E10B}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/02/halliday-shares-thoughts-on-recent-louisiana-civil-rights-rulingHalliday Shares Thoughts on Recent Louisiana Civil Rights RulingEnvironmental partner Stacey Halliday was featured in the <em>Inside EPA </em>article, &ldquo;Louisiana Ruling Will Drive States To Fight EPA Rights Probes, Lawyers Say.&rdquo;&nbsp;Thu, 08 Feb 2024 00:00:00 -0600<p>Environmental partner Stacey Halliday was featured in the <em>Inside EPA</em> article, &ldquo;Louisiana Ruling Will Drive States To Fight EPA Rights Probes, Lawyers Say.&rdquo; The article discusses a federal judge in Louisiana&rsquo;s recent decision to prevent the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Justice (DOJ) from enforcing disparate-impact-based requirements &mdash; which refer to unintentional discrimination &mdash; against the state or any state agency in civil rights cases under Title VI of the Civil Rights Act.</p> <p>Halliday, a former Special Counsel in the EPA&rsquo;s Office of General Counsel, told <em>Inside EPA</em> that the EPA and DOJ &ldquo;face the likelihood that other states will be empowered to act similarly, potentially making it much more difficult for EPA to advance environmental justice via Title VI in states that are likely to oppose voluntary agreements.&rdquo; She added that while the judge&rsquo;s ruling only grants a preliminary injunction barring the agencies from enforcing Title VI, it &ldquo;previews&rdquo; how the judge &ldquo;may rule on the merits.&rdquo;</p> <p>Halliday noted that it is &ldquo;worth flagging&rdquo; that Title VI is just one of the agencies&rsquo; &ldquo;options for advancing environmental justice at both the agency and administration level.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://insideepa.com/daily-news/louisiana-ruling-will-drive-states-fight-epa-rights-probes-lawyers-say?destination=node/244106" target="_blank">Read the full article</a> (subscription required).</p>{5713AB81-0A4F-41D7-BFF4-F3FB996CC69B}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/02/feinstein-and-gleklen-discuss-biden-administrations-new-antitrust-rhetoricFeinstein and Gleklen Discuss Biden Administration's New Antitrust RhetoricDebbie Feinstein, head of the firm&rsquo;s Global Antitrust group, and Jonathan Gleklen, chair of the firm&rsquo;s U.S. Antitrust/Competition practice, were featured in the<em> Yahoo! Finance</em> article, &ldquo;Mergers lose their shine as Biden racks up antitrust wins.&rdquo;&nbsp;Thu, 08 Feb 2024 00:00:00 -0600<p>Debbie Feinstein, head of the firm&rsquo;s Global Antitrust group, and Jonathan Gleklen, chair of the firm&rsquo;s U.S. Antitrust/Competition practice, were featured in the <em>Yahoo! Finance</em> article, &ldquo;Mergers lose their shine as Biden racks up antitrust wins.&rdquo; The article summarizes the Biden Administration&rsquo;s recent antitrust wins, which have prompted executives to reassess new acquisitions in 2024.</p> <p>Feinstein told <em>Yahoo! Finance</em> that the Administration&rsquo;s latest rhetoric is &ldquo;anti-merger,&rdquo; and as a result, corporate lawyers think some deals may be getting derailed. &ldquo;Even if they think they can get them through, they think it will take longer, they may have to litigate, and they may want to not have to do that,&rdquo; she said. Gleklen added that more companies are receiving &ldquo;second requests&rdquo; from federal officials which require additional information that may delay reviews. </p> <p>Gleklen discussed JetBlue Airways&rsquo; acquisition of Spirit Airlines, which was recently blocked by a judge on concerns the merger was anticompetitive and would result in higher prices for consumers. Federal officials argued that Spirit Airlines operated in a different market because it offered ultra low-cost fares. &ldquo;That&rsquo;s a more aggressive theory,&rdquo; Gleklen said, explaining that past airline merger challenges treated commercial air carriers as equals, regardless of the average fare prices.</p> <p><a rel="noopener noreferrer" href="https://finance.yahoo.com/news/mergers-lose-their-shine-as-biden-racks-up-antitrust-wins-090057974.html?src=rss&amp;ncid=twitter_yfsocialtw_l1gbd0noiom&amp;guce_referrer=aHR0cHM6Ly90LmNvLw&amp;guce_referrer_sig=AQAAAJUcUIaFhZiz9pZlypUB3jRAzj25Pq0_xZ73VgcYhBS8Cmt_e0uVTATJsAcOOpriJqvDva1GoYmteG6vsO1h_nBSdPq13M1bAVaW_1niShxZmV1GFYyoBreh4dK7ywPs6bcm4uvUJAfxcFHiVAtscH5uNWhRnnGlBwdeNRZK3Fl9&amp;guccounter=2" target="_blank">Read the full article.</a></p>{5632CDC6-0048-4EBA-90C5-94E3034F01DF}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/ico-launches-consultation-seriesJames Castro-Edwardshttps://www.arnoldporter.com/en/people/c/castro-edwards-jamesjames.castro-edwards@arnoldporter.comDr. Beatriz San Martinhttps://www.arnoldporter.com/en/people/s/san-martinbeatriz.sanmartin@arnoldporter.comICO Launches Consultation Series on Generative AI and Data ProtectionThe Information Commissioner&rsquo;s Office (ICO), the UK&rsquo;s data protection authority and enforcer of the UK General Data Protection Regulation (GDPR), has announced a series of consultations on how aspects of data protection law should apply to the development and use of generative AI modelsThu, 08 Feb 2024 00:00:00 -0600<p>The Information Commissioner&rsquo;s Office (ICO), the UK&rsquo;s data protection authority and enforcer of the UK General Data Protection Regulation (GDPR), has announced a series of consultations on how aspects of data protection law should apply to the development and use of generative AI models. The ICO is one of the key sectoral regulators the government has charged with ensuring, within their respective remits, that AI suppliers, deployers, and users adhere to the five principles outlined in the government&rsquo;s white paper. (See&nbsp;<a rel="noopener noreferrer" href="https://www.lawgazette.co.uk/practice-points/the-uk-a-light-touch-approach-to-regulation/5117309.article" target="_blank">our analysis of the white paper</a>.) <br /> <br /> This article explains the ICO guidance on establishing a lawful basis for collecting online personal data (or web scraping) for the purpose of training generative AI models, which will be of interest to developers and users of generative AI models, particularly those that wish to help shape the ICO guidance by responding to the consultation.<br /> <br /> According to the ICO guidance, published on January 15:</p> <p style="margin-left: 40px;"><em>&ldquo;Generative AI refers to AI models that can create new content e.g. text, computer code, audio, music, images, and videos. Typically these models are trained on extensive datasets, which allows them to exhibit a broad range of general-purpose capabilities.</em></p> <p style="margin-left: 40px;"><em>The impact of generative AI could be transformative for people and businesses if organisations develop and deploy it responsibly with the trust of the people whose data it is built on. We are moving fast to address any risks and enable organisations and the public to reap the benefits of generative AI.&rdquo;</em></p> <p>The ICO guidance responds to a number of requests for clarification, made by innovators in the AI field. These questions include the following:</p> <ul> <li>What is the appropriate lawful basis for training generative AI models?</li> <li>How does the purpose limitation principle play out in the context of generative AI development and deployment?</li> <li>What are the expectations around complying with the accuracy principle?</li> <li>What are the expectations in terms of complying with data subject rights?</li> </ul> <p>The ICO intends to share a series of proposed chapters interpreting the UK GDPR and Part 2 of the Data Protection Act 2018 in relation to these questions. The ICO is seeking the views of stakeholders with an interest in generative AI, to help inform its positions. <br /> <br /> The first chapter of the ICO consultation concerns the lawful basis for web scraping to train generative AI models. This chapter sets out the background and explains the collection of training data as part of the first stage of the generative AI lifecycle, which can be divided into five steps:</p> <ol> <li>Data collection (i.e., &ldquo;data scraping&rdquo; from publicly accessible sources)</li> <li>Data pre-processing</li> <li>Training and model improvement</li> <li>Fine tuning</li> <li>Deployment</li> </ol> <p>The consultation provides that training data may be collected from a variety of online sources, such as blogs, social media, forum discussions, product reviews, and personal websites, and may include images, video, text, and contact details. To the extent such training data includes personal data, it must be processed in accordance with applicable data protection laws. In order to collect personal data for generative AI model training purposes, developers must ensure their processing is not in breach of any laws (such as intellectual property laws) and that they have a lawful basis for processing. <br /> <br /> The first limb may be difficult to satisfy for developers of generative AI platforms that engage in web-based data scraping in the UK and where the AI is being developed for commercial purposes. This is because, in contrast to the EU, the UK has not implemented a general exception to copyright infringement for text and data mining; the exception being limited to non-commercial research. UK government proposals to create a broader exception to copyright infringement for data scraping activities in the UK were dropped in February 2023 following criticism from the creative industries. In March 2023, the UK Intellectual Property Office (UKIPO) was tasked to produce a code of practice that &ldquo;will provide guidance to support AI firms to access copyrighted work as an input to their models, whilst ensuring there are protections (e.g., labelling) on generated output to support right holders of copyrighted work.&rdquo; The government also tasked the UKIPO with taking forward the recommendations in relation to enforcement, in what it believes is an approach that will &ldquo;ensure the creation of a balanced and pragmatic code of practice that will enable both sectors to grow in partnership.&rdquo; Though the UK government set a deadline of summer 2023 for this code of practice, timelines have already slipped significantly. The government expects parties to enter into the final code of practice on a voluntary basis. If the code of practice is not adopted or agreement is not reached, legislation could be considered, something which has been advocated by a <a rel="noopener noreferrer" href="https://publications.parliament.uk/pa/cm5803/cmselect/cmsctech/1769/report.html" target="_blank">House of Commons interim report on the governance of AI</a> published at the end of August 2023. <br /> <br /> Under the UK GDPR, every processing activity must have a lawful basis &mdash; that is, a reason for processing that the data protection law provides as legal. In some contexts, users of data can rely on consent, compliance with law or contract, or other bases. The ICO is of the view that the only available lawful basis for collection of personal data in the context of training data will be legitimate interests. In order to establish legitimate interests as a lawful basis, developers must pass a &ldquo;three part test,&rdquo; demonstrating that:</p> <ol> <li>The purpose of the processing is legitimate.</li> <li>The processing is necessary for the designated purpose.</li> <li>The individual&rsquo;s interests do not override the interest being pursued.</li> </ol> <p>The consultation draws on <a rel="noopener noreferrer" href="https://ico.org.uk/for-organisations/uk-gdpr-guidance-and-resources/lawful-basis/legitimate-interests/what-is-the-legitimate-interests-basis/#three_part_test" target="_blank">existing ICO guidance</a> on the legitimate-interest basis for processing. Controllers must identify a specific interest, which may be a business interest or wider social interest. Within these two broad categories, there will be a broad range of more granular legitimate interests. The necessity test is a factual assessment to establish whether web scraping is necessary to achieve the interest stated in the legitimate purpose test. The ICO recognizes that generative AI training requires large data sets that can only be collected using large-scale data scraping. The data sets may contain data about large numbers of people. These individuals&rsquo; interests must be weighed against those of the entity using the data, which requires an assessment of the likely impact that the processing would have on the individuals. Collecting people&rsquo;s personal data through web scraping is &ldquo;invisible processing,&rdquo; of which affected individuals are unlikely to be aware. Invisible processing makes it more difficult for individuals to retain control over their data or exercise their rights (known as &ldquo;upstream risks and harms&rdquo;). Generative AI models can also be used to generate inaccurate information about people, resulting in distress or harm, or may be used by hackers as a social engineering tool to generate phishing communications tailored in more sophisticated ways to individuals to perpetrate fraud (known as &ldquo;downstream risks and harms&rdquo;).<br /> <br /> The ICO identifies a number of risk mitigations that may help generative AI developers pass the third part of the legitimate interests test (i.e., that the individual&rsquo;s interests are not overridden). Where a generative AI developer deploys the model on its own platform, if they have relied on the public interest of the wider society as their legitimate interest (i.e., part one of the three part test), they should be able to control and demonstrate whether the generative AI model is actually used for the stated wider benefit. The developer should also be able to assess risks to individuals in the development and post-deployment phases, and implement measures to address such risks. The development phase of a generative AI model includes the collection and pre-processing of the training data, training and improvement of the model, fine tuning of the training dataset, and fine training of the model. The model can then be deployed for its intended use. <br /> <br /> The ICO describes two different approaches that generative AI developers take in offering their models commercially. Some developers make their models available to a third party through an application programming interface (API). The third party does not have its own copy of the generative AI model on its servers or in its cloud. Instead, the developer continues to host the model, and the third party must query the model through the API. The ICO describes this as a &ldquo;closed source&rdquo; approach. Alternately, a developer may permit third parties to host their own copies of the model on their own servers or in their clouds. The ICO terms this as an &ldquo;open source&rdquo; approach.<br /> <br /> A closed source approach would enable the developer to take steps to ensure that the third party&rsquo;s use of the model aligns with the objective the developer has identified as the legitimate interest (i.e., part one of the three part test). For instance, the developer might limit queries that could result in a risk of harm to individuals and monitor the third party&rsquo;s use of the model. The developer could also add protective measures contractually. <br /> <br /> In contrast, in an open source approach, a generative AI model may be implemented in unlimited ways, such that it would be impossible for developers to restrict or monitor how the model is used, and hence its impact on individuals. The developer is unlikely to have any knowledge of whether the broad societal aims asserted as its legitimate interest for processing people&rsquo;s personal data have been achieved. <br /> <br /> The ICO concludes that training generative AI models using web-scraped data may be feasible if developers adhere to their legal responsibilities and can provide evidence that they have done so. The ICO&rsquo;s existing, detailed guidance on legitimate interests should be familiar to developers of generative AI models. The key compliance challenge will be identifying a specific legitimate interest and balancing this against individuals&rsquo; interests. <br /> <br /> The ICO invites comments on its consultation series, and the deadline for expressing views on the first proposed chapter is March 1. Developers concerned that the ICO&rsquo;s final position may affect their business model should give serious consideration to participating in the consultation.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{7F69676F-DC68-4999-A3C2-B1BBD12787E7}https://www.biosliceblog.com/2024/02/fda-issues-final-rule-to-more-closely-align-with-iso-13485/Mahnu V. Davarhttps://www.arnoldporter.com/en/people/d/davar-mahnu-vmahnu.davar@arnoldporter.comPhilip R. Desjardinshttps://www.arnoldporter.com/en/people/d/desjardins-philip-rphilip.desjardins@arnoldporter.comFDA Issues Final Rule to More Closely Align with ISO 13485Thu, 08 Feb 2024 00:00:00 -0600{E8B366E4-7F21-4CC1-9205-FA14318BEE80}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/capital-snapshot-februaryEugenia E. Piersonhttps://www.arnoldporter.com/en/people/p/pierson-eugenia-eEugenia.Pierson@arnoldporter.comKevin O'Neillhttps://www.arnoldporter.com/en/people/o/oneill-kevinkevin.oneill@arnoldporter.comDavid J.M. Skillmanhttps://www.arnoldporter.com/en/people/s/skillman-daviddavid.skillman@arnoldporter.comPeter E. Duysharthttps://www.arnoldporter.com/en/people/d/duyshart-peterpeter.duyshart@arnoldporter.comLucas Gorakhttps://www.arnoldporter.com/en/people/g/gorak-lucaslucas.gorak@arnoldporter.comCapital Snapshot: A Monthly Overview of the Issues, Events, Timelines, and Polling Data Driving Federal Policy Decisions<span style="color: #152347; background-color: #fefefe;">Our Legislative &amp; Public Policy team is pleased to provide the February 2024 edition of &ldquo;Capital Snapshot,&rdquo; a monthly summary of the issues, events, and timelines driving federal policy and political decisions.&nbsp;</span>Wed, 07 Feb 2024 00:00:00 -0600<p>Our Legislative &amp; Public Policy team is pleased to provide the February 2024 edition of &ldquo;Capital Snapshot,&rdquo; a monthly summary of the issues, events, and timelines driving federal policy and political decisions. This month, we provide updates on recent significant developments in Congress, including the status of FY24 appropriations, the recently released FY24 supplemental aid and border security package, and impeachment proceedings for Homeland Security Secretary Alejandro Mayorkas. Additionally, we share updates on developments, outlook, and priorities across a variety of public policy and legislative areas, including (1) the&nbsp;National Defense Authorization Act and Department of Defense; (2) energy and environment; (3) tax; (4) financial services; (5) education; (6) health care; and (7) California policy. We also provide an overview of the state of play for the 2024 general election. Furthermore, we assess what trends, current events, and factors could impact the upcoming political and legislative landscape.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{D7D59C9F-4B6D-40CC-B665-DC1843236636}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/fda-final-rule-medical-device-requirements-and-iso-13485Mahnu V. Davarhttps://www.arnoldporter.com/en/people/d/davar-mahnu-vmahnu.davar@arnoldporter.comPhilip R. Desjardinshttps://www.arnoldporter.com/en/people/d/desjardins-philip-rphilip.desjardins@arnoldporter.comAbeba Habtemariamhttps://www.arnoldporter.com/en/people/h/habtemariam-abebaAbeba.Habtemariam@arnoldporter.comHoward Sklamberghttps://www.arnoldporter.com/en/people/s/sklamberg-howardhoward.sklamberg@arnoldporter.comTyler M. Scandalioshttps://www.arnoldporter.com/en/people/s/scandalios-tylertyler.scandalios@arnoldporter.comFDA Issues Final Rule to More Closely Align FDA Medical Device Quality System Requirements With International Consensus Standard ISO 13485On February 2, the U.S. Food and Drug Administration (FDA or the Agency) published the Agency&rsquo;s much anticipated final rule amending the medical device Quality System Regulation (the QS Regulation) at 21 CFR Part 820.Wed, 07 Feb 2024 00:00:00 -0600<p>On February 2, the U.S. Food and Drug Administration (FDA or the Agency) published[[N: Medical Devices; Quality System Regulation Amendments, 89 Fed. Reg. 7496 (Feb. 2, 2024) (to be codified at 21 CFR Part 820 and Part 4)]] the Agency&rsquo;s much anticipated final rule amending the medical device Quality System Regulation (the QS Regulation) at 21 CFR Part 820, which sets forth FDA&rsquo;s current good manufacturing practice (cGMP) requirements for medical devices (also referred to as quality system or quality management system requirements), to align 21 CFR Part 820 more closely with International Standard Organization (ISO) standard 13485:2016, Medical Devices &mdash; Quality Management System Requirements for Regulatory Purposes (ISO 13485), which is the current version of the primary international consensus standard for medical device cGMP requirements. <br /> <br /> FDA goes about this change primarily by removing most of the current QS Regulation and, in its stead, incorporating ISO 13485 by reference into 21 CFR Part 820. The rule also incorporates by reference Clause 3 of ISO 9000:2015, Quality Management Systems &mdash; Fundamentals and Vocabulary (Clause 3 of ISO 9000), which contains definitions applicable to ISO 13485.[[N: The terms and definitions in <a rel="noopener noreferrer" href="https://www.iso.org/obp/ui#iso:std:iso:9000:ed-4:v1:en" target="_blank">Clause 3 of ISO 9000</a> and <a rel="noopener noreferrer" href="https://ibr.ansi.org/Standards/iso.aspx" target="_blank">ISO 13485</a> are available to view.]] The rule then adds certain definitions and requirements not present in ISO 13485 or Clause 3 of ISO 9000, which FDA determined are needed to fulfill FDA-specific requirements and expectations and to prevent inconsistencies with other FDA regulations. The rule will also change the name of 21 CFR Part 820 from the QS Regulation to the &ldquo;Quality Management System Regulation&rdquo; (QMSR) and make conforming edits to 21 CFR Part 4 (which governs combination products). <br /> <br /> Once the QMSR rule becomes effective on February 2, 2026 (barring any extensions or delays) the United States will join several other major countries and trading blocs, including Canada, the European Union, and Japan, in relying on ISO 13485 as the core basis for their cGMP requirements for medical devices. <br /> <br /> FDA&rsquo;s decision to align the U.S. quality system requirements to international standards is one of many efforts undertaken by the Agency to promote global regulatory harmonization. The publication of the final rule is well-timed, as FDA will be hosting many global device regulators in March 2024, as part of the International Medical Device Regulators Forum. When combined with FDA&rsquo;s overall successful utilization of the Medical Device Single Audit Program (MDSAP),[[N: The Medical Device Single Audit Program (MDSAP) is a program that allows the conduct of a single regulatory audit of a medical device manufacturer&rsquo;s quality management system to satisfy the requirements of multiple regulatory jurisdictions.]] these activities help demonstrate FDA leadership in the international medical device landscape. The increasingly global and complex nature of medical device design, manufacture, distribution, and use means that the United States must strive to continue to strengthen its long-standing work with other regulatory authorities to harmonize and converge medical device regulation policy and practices. <br /> <br /> Although the QS Regulation and ISO 13485 are structured differently, and in certain cases use different terms to describe the same or similar concepts, the QS Regulation and ISO 13485 are substantially similar in that both prioritize guiding principles such as risk management, design controls, and continual process improvement. Accordingly, the QMSR rule&rsquo;s incorporation of ISO 13485 does not represent a major shift in the substantive requirements for medical device cGMPs, even though it does arguably represent a major change in the structure, format, and to a certain degree, the language of 21 CFR Part 820.<br /> <br /> There are certain requirements in ISO 13485, however, that may be new to medical device companies that have not previously followed ISO 13485. In particular, FDA notes that ISO 13485 contains requirements for establishing and implementing certain risk management practices through the entire product life cycle, whereas the QS Regulation&rsquo;s risk management provisions applied only to design controls.[[N: 89 Fed. Reg. at 7504-7505.]] FDA further notes that these new requirements do not represent a shift in FDA&rsquo;s philosophy, and that FDA expects these new requirements to help industry develop more effective total product life-cycle risk management systems.[[N: <em>Id.</em>]] <br /> <br /> As we note above, the QMSR rule also contains certain provisions not present in ISO 13485 or ISO 9000. FDA acknowledges that ISO 13485 does not fully meet certain FDA requirements and expectations relating to medical device cGMPs for records of complaints and servicing activities, unique device identification records, confidentiality marking on records, and device labeling and packaging controls.[[N: 89 Fed. Reg. at 7513-7517.]] Accordingly, the QMSR rule contains certain provisions specifically relating to these cGMP areas. <br /> <br /> A significant change from the proposed rule to the final rule is the establishment of the February 2, 2026 effective date. FDA had originally proposed that the QMSR rule would become effective just one year after issuance of the final rule, but FDA ultimately agreed that medical device companies would need more time to become familiar with the QMSR rule and to make appropriate changes within their organizations to align their quality management systems, processes, and documents to the rule. Otherwise, although FDA made various additions and revisions to the final rule relative to the proposed rule,[[N: The preamble to the QMSR rule contains a list of what FDA indicates are the most significant differences between the proposed and final rules. This list can be found at 89 Fed. Reg. at 7500.]] there aren&rsquo;t any clearly major differences between the proposed and final rule. Notably, prior to the issuance of this new rule, FDA had not made major revisions to 21 CFR Part 820 since 1996.<br /> <br /> With the issuance of this rule, many medical device companies will, as noted above, need to make certain changes to their quality management systems, processes, and documents to prepare for, and align with, the QMSR rule. For some manufacturers, particularly those distributing products outside of the U.S. and already operating under ISO 13485, the changes may be administrative in nature. For manufacturers that have been primarily U.S.-focused and have built their quality system around the existing requirements of 21 CFR Part 820, the procedural updates to their existing quality systems may require more extensive revisions. In either case, to comply with the new QMSR rule, medical device manufacturers that intend to distribute their products in the United States will need to update their quality systems to meet the new QMSR requirements, as substantive compliance with ISO 13485 is not a substitute for QMSR procedural compliance. <br /> <br /> FDA acknowledges that the Agency itself also has a lot of implementation work to accomplish in the next two years, including updating the Agency&rsquo;s information technology systems, training personnel, finalizing the Agency&rsquo;s inspection approach, and assessing relevant FDA regulations and other documents impacted by the rule to determine whether changes to them are necessary.[[N: 89 Fed. Reg. at 7519.]]<br /> <br /> FDA further notes that the Agency would need to evaluate any future revisions to ISO 13485 and ISO 9000 to determine the impact of the revisions and whether it would be necessary and appropriate for FDA to incorporate them into 21 CFR Part 820.[[N: 89 Fed. Reg. at 7500.]]<br /> <br /> If you have any questions about the content discussed in this Advisory or would like more information, please reach out to one of the authors of this Advisory or to your existing Arnold &amp; Porter contact.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{42693EC5-9A50-4EE5-AD04-E1B4C4A71F6D}https://www.biosliceblog.com/2024/02/commission-proposes-extension-to-ivdr-transition-periods-and-accelerated-launch-of-eudamed/Jacqueline Mulrynehttps://www.arnoldporter.com/en/people/m/mulryne-jacquelinejacqueline.mulryne@arnoldporter.comEleri F. Williamshttps://www.arnoldporter.com/en/people/w/williams-eleri-feleri.williams@arnoldporter.comAna González-Lamuñohttps://www.arnoldporter.com/en/people/g/gonzalez-lamuno-anaana.lamuno@arnoldporter.comCommission Proposes Extension to IVDR Transition Periods and Accelerated Launch of EudamedWed, 07 Feb 2024 00:00:00 -0600{50513C4E-BD1E-4897-88CF-A6180067DAEE}https://www.arnoldporter.com/en/perspectives/events/2024/02/distressed-asset-acquisition-opportunities-for-biopharma-companiesBenjamin Mintzhttps://www.arnoldporter.com/en/people/m/mintz-benjaminbenjamin.mintz@arnoldporter.comRosa J. Evergreenhttps://www.arnoldporter.com/en/people/e/evergreen-rosa-jrosa.evergreen@arnoldporter.comEric Rothmanhttps://www.arnoldporter.com/en/people/r/rothman-ericeric.rothman@arnoldporter.comDistressed Asset Acquisition Opportunities for Biopharma CompaniesA significant number of biopharmaceutical companies have recently filed for bankruptcy, often seeking to sell assets through the bankruptcy process, including via section 363 sales.&nbsp;Tue, 06 Feb 2024 00:00:00 -0600A significant number of biopharmaceutical companies have recently filed for bankruptcy, often seeking to sell assets through the bankruptcy process, including via section 363 sales. Such bankruptcies can present significant opportunities for biopharma companies. Join Ben Mintz, Rosa Evergreen, and Eric Rothman, <a rel="noopener noreferrer" href="https://comms.arnoldporter.com/6/5337/landing-pages/bio-landing-page.asp?sid=b7fe2591-7005-42f3-ae5f-5ef83368e28b" target="_blank">partners at Arnold &amp; Porter</a>, as they discuss the key features, timeline, process, and pros and cons of asset acquisitions in bankruptcy cases.{BC0772BA-64AF-4E97-8F64-22A8C84D504D}https://www.arnoldporter.com/en/perspectives/events/2024/02/kick-off-the-new-year-with-qui-notes-false-claimsCraig D. Margolishttps://www.arnoldporter.com/en/people/m/margolis-craig-dcraig.margolis@arnoldporter.comPaula Ramerhttps://www.arnoldporter.com/en/people/r/ramer-paulapaula.ramer@arnoldporter.comMichael A. Rogoffhttps://www.arnoldporter.com/en/people/r/rogoff-michael-amichael.rogoff@arnoldporter.comChristian D. Sheehanhttps://www.arnoldporter.com/en/people/s/sheehan-christianchristian.sheehan@arnoldporter.comKick Off the New Year With Qui Notes False Claims Act FY23 Year in Review and an Early Look at FY24Join us for a year-in-review webinar that will cover a recap of FY23Mon, 05 Feb 2024 00:00:00 -0600<p>Join us for a year-in-review webinar that will cover: </p> <ul> <li>A recap of FY23 based on DOJ&rsquo;s official FCA statistics (if available) and our Qui Notes blog's FCA statistics</li> <li>A review of top FY23 cases and their implications</li> <li>FY24 predictions about trends, enforcement priorities, and key areas of developing law</li> </ul>{0AA72269-AEF9-4A18-878D-5ABF0E71DD91}https://www.arnoldporter.com/en/perspectives/news/2024/02/arnold-and-porter-adds-seven-lawyer-team-across-multiple-offices-and-practicesArnold & Porter Adds Seven-Lawyer Team Across Multiple Offices and Practices<strong>(CHICAGO, DENVER, and NEW YORK) February 5, 2024 </strong>&mdash; Arnold &amp; Porter announced today that a seven-lawyer team, including six partners and one counsel, has joined the firm in its Chicago, Denver, and New York offices.&nbsp;Mon, 05 Feb 2024 00:00:00 -0600<p><strong>(CHICAGO, DENVER, and NEW YORK) February 5, 2024</strong> &mdash; Arnold &amp; Porter announced today that a seven-lawyer team, including six partners and one counsel, has joined the firm in its Chicago, Denver, and New York offices. Led by partners Eric Prezant, Donal O&rsquo;Brien, and Randy Miller, the team&rsquo;s practice spans corporate transactions, real estate, finance, bankruptcy, litigation, regulatory, and environmental matters. The team also includes partners James Attonito, Karl Marschel, Brandon Neuschafer, and counsel Monica Carroll. Four new partners and one counsel will be joining the Chicago office, one new partner will be joining the Denver office, and one new partner will be joining the New York office. </p> <p>The group&rsquo;s arrival strengthens the firm&rsquo;s transactional capabilities across multiple offices, while adding M&amp;A capabilities and augmenting its restructuring, finance, and real estate practices. O&rsquo;Brien, Miller, Attonito, Neuschafer, and Carroll's experience in the food and agribusiness sector also greatly complements the firm&rsquo;s existing capabilities and reputation as a leading law firm for food, beverage, and dietary supplement clients, who routinely turn to Arnold &amp; Porter for consumer protection, advertising, FDA, intellectual property, product safety, and public policy capabilities, among other practices. </p> <p>Richard M. Alexander, Chairman of Arnold &amp; Porter, said: &ldquo;We are thrilled to welcome this team of talented lawyers to our Firm. We have been extraordinarily impressed with the sophistication of their practice and their deep ties to their diversified client base for whom they serve as key trusted advisors. Their arrival will further strengthen several key practice areas of the firm across a number of our offices.&rdquo;</p> <p>Additionally, the team&rsquo;s arrival expands the firm&rsquo;s core offerings in its Chicago and Denver offices. In Chicago, the office added 16 new partners and counsel in the last five years, including the promotion of three partners, and now consists of over 50 attorneys. Similarly, in Denver, the firm added 13 new partners and counsel in the last five years, including the promotion of four partners and three counsel, more than doubling its size since 2017. The team&rsquo;s arrival also follows recent additions throughout the firm&rsquo;s international platform, with 28 new partners joining Arnold &amp; Porter since 2023.</p> <p>Prezant, O&rsquo;Brien, and Miller commented: &ldquo;We are delighted to join Arnold &amp; Porter, a firm that is highly regarded for its regulatory, litigation, and transactional offerings. Our extensive network of clients and contacts will greatly value the firm&rsquo;s specialized knowledge and experience in key practice areas, including in the critical areas of real estate, corporate restructuring, environmental, and government investigations.&rdquo; </p> <p><strong>Eric Prezant </strong>joins the Chicago office as a partner in the Bankruptcy and Restructuring group. He draws upon his cross-discipline experience and utilizes a pragmatic client-focused approach to represent corporate, banking, real estate, and financial clients in corporate and real estate acquisitions and dispositions, brownfield redevelopment projects, mergers &amp; acquisitions, and corporate restructuring and workouts. He earned his J.D. from the University of Illinois Chicago School of Law, <em>cum laude</em>, Order of the Coif, received his MBA from Dominican University and his B.S. from Florida State University.</p> <p><strong>Donal O&rsquo;Brien</strong> joins the Chicago office as a partner in the Corporate &amp; Finance group. He has over 20 years of experience representing clients in mergers and acquisitions and corporate finance matters and works on behalf of buyers and sellers in acquisitions, leveraged buyouts, corporate restructurings, spin-offs, joint ventures, and other strategic alliances, including on behalf of key international clients. O&rsquo;Brien earned his J.D. from Loyola University Chicago School of Law and received his B.A. from University College in Dublin, with honors.</p> <p><strong>Randy Miller</strong> joins the Denver office as a partner in the Commercial Litigation group. He draws on real-life business and management experience to assist clients in the full range of business disputes, including M&amp;A litigation, contract and commercial trade disputes, and corporate governance and control issues. He earned his J.D. from Northwestern University School of Law, <em>cum laude</em>, and received his B.A. from Michigan State University. </p> <p><strong>James Attonito&nbsp;</strong>joins the New York office as a partner in the Corporate &amp; Finance group. He advises public and private company clients operating in the food and beverage, manufacturing, technology, healthcare, and real estate industries on corporate transactional matters, including mergers and acquisitions and general contractual matters. He earned his J.D. from Brooklyn Law School and received his B.A. from New York University.</p> <p><strong>Monica Carroll </strong>joins the Chicago office as counsel in the Corporate &amp; Finance group. She counsels companies across a number of different industries, including food and beverage, wholesale diamond distribution, and customer product development and manufacturing services, and her practice has a particular emphasis on assisting international clients with substantial U.S.-based operations.. She earned her J.D. from Harvard Law School, <em>cum laude</em>, and received her B.A. from the University of Illinois.</p> <p><strong>Karl Marschel&nbsp;</strong>joins the Chicago office as a partner in the Real Estate group. He represents public and private clients in all aspects of real estate, from acquisition, development, and disposition, to negotiating development financing and navigating various tax incentives. He earned his J.D. from Washington University School of Law and received his B.A. from University of Missouri-Columbia.&nbsp;</p> <p><strong>Brandon Neuschafer</strong> joins the Chicago office as a partner in the Life Sciences &amp; Healthcare Regulatory group. He advises clients across all industries on environmental, health, and safety issues to represent them before regulatory agencies with respect to food, agriculture, and environmental regulatory issues. He earned his J.D. from Washington University School of Law and received his B.A. from Washburn University, <em>summa cum laude</em>.</p> <h3><strong>About Arnold &amp; Porter</strong></h3> <p><em>Arnold &amp; Porter combines sophisticated regulatory, litigation, and transactional capabilities to resolve clients&rsquo; most complex issues. With over 1,000 lawyers practicing in 15 offices worldwide, we offer deep industry experience and an integrated approach that spans more than 40 practice areas. Through multidisciplinary collaboration and focused industry experience, we provide innovative and effective solutions to mitigate risks, address challenges, and achieve successful outcomes.</em></p>{BDC492C5-99E4-49FE-9FE0-CC98F319C900}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/easier-to-patent-ai-related-inventions-that-utilize-annsDr. Beatriz San Martinhttps://www.arnoldporter.com/en/people/s/san-martinbeatriz.sanmartin@arnoldporter.comShama Aktarhttps://www.arnoldporter.com/en/people/a/aktar-shamashama.aktar@arnoldporter.comLandmark UK High Court Decision Makes It Easier to Patent AI-Related Inventions That Utilize ANNs<span style="line-height: 107%;">The end of 2023 featured two significant judgments concerning AI inventions: (1) a highly awaited decision from the Supreme Court in </span><span style="line-height: 107%;"><em><span>Thaler</span></em> </span><span style="line-height: 107%;">on the ability of AI systems to be named inventors of patents and (2) a decision from the United Kingdom High Court in </span><span style="line-height: 107%;"><em><span>Emotional Perception</span></em> </span><span style="line-height: 107%;">considering the application of the computer program exclusion in the UK, leading to prompt changes in patent examination practices by the United Kingdom Intellectual Property Office (UKIPO).&nbsp;</span>Fri, 02 Feb 2024 00:00:00 -0600<p>The end of 2023 featured two significant judgments concerning AI inventions: (1) a highly awaited decision from the Supreme Court in <em><a rel="noopener noreferrer" href="https://caselaw.nationalarchives.gov.uk/uksc/2023/49" target="_blank">Thaler</a></em> on the ability of AI systems to be named inventors of patents and (2) a decision from the United Kingdom High Court in <em><a rel="noopener noreferrer" href="https://caselaw.nationalarchives.gov.uk/ewhc/ch/2023/2948" target="_blank">Emotional Perception</a></em> considering the application of the computer program exclusion in the UK, leading to prompt changes in patent examination practices by the United Kingdom Intellectual Property Office (UKIPO). The <em>Thaler</em> decision was unsurprising and consistent with decisions in other jurisdictions. Consequently, this article focuses on the second of these judgments, especially as <em>Emotional Perception</em> could have ramifications for life sciences companies utilizing artificial neural networks (ANN); inventions using ANNs will no longer be excluded from patentability on the basis that it engages the computer program exclusion to patentability in the UK.</p> <h2>Background</h2> <p>ANNs consist of interconnected layers of nodes that resemble the structure of neurons in the human brain. Training data is fed at the input layer and passes through multiple layers of the network, with each node applying its associated weights and biases. The data is transformed as it travels through the network, eventually leading to a result that is reflected at the output level. An ANN can exist in both hardware and software form. In <em>Emotional Perception</em>, the judge referred to a hardware ANN as &ldquo;a<em> physical box with electronics in it</em>&rdquo; and software ANN as an emulated ANN &ldquo;<em>in which a conventional computer runs a piece of software which enables the computer to emulate the hardware ANN.</em>&rdquo;</p> <p>The High Court case was an appeal of the UKIPO&rsquo;s <a rel="noopener noreferrer" href="https://www.ipo.gov.uk/p-challenge-decision-results/p-challenge-decision-results-bl?BL_Number=O/542/22" target="_blank">refusal</a> to grant a patent for a trained ANN that could identify semantic similarity or dissimilarity between media files and recommend a specific file to end users (for example, a similar music track) that is semantically similar to the input media file. While the invention was applicable to various media files, including images, text, and videos, music was put forward by the parties as the most likely usage example, and was the focus of the decision. </p> <p>The process of training the ANN as described in the patent application involves comparing music files in the dataset by analyzing (1) semantic properties of the file, i.e., the listener&rsquo;s perceived emotional response to the music, and (2) measurable physical properties of the file, such as rhythm, tonality, timbre, and/or musical structure.</p> <p>The first ANN is given instructions to produce vectors in the &ldquo;semantic space&rdquo; via natural language processing. Semantically similar tracks produce vectors that are closer together; conversely, tracks which are semantically different create vectors that are more distant from each other. The second ANN analyzes the physical properties of the same tracks, producing vectors in a &ldquo;property space,&rdquo; again with the differences or similarities in the tracks corresponding to the proximity of the vectors. </p> <p>The second ANN is then trained to make the distances between pairs of the property coordinates converge or diverge in alignment with the distancing between them in the semantic space. For example, if two songs are very semantically similar, the property vectors will converge so that they are closer together. The training process that corrects such errors, known as back-propagation, is repeated until the distance between the property vectors reflect semantic similarity or dissimilarity. This trains the ANN to identify semantic similarity between a pair of music tracks based on an analysis of their physical properties and results in the ANN&rsquo;s ability to take a track provided by a user and recommend a semantically similar music track from an overall database.</p> <h2>The UKIPO&rsquo;s Decision</h2> <p>Holding that the invention was not patentable, the Hearing Officer was of the view that the application was a &ldquo;<em>computer program as such</em>,&rdquo; thus falling under the exclusion to patentability under s.1(2)(c) of the Patents Act 1977. In reaching this decision, the Hearing Officer applied the four stage test in <em><a rel="noopener noreferrer" href="https://caselaw.nationalarchives.gov.uk/ewca/civ/2006/1371" target="_blank">Aerotel</a></em>:</p> <ol> <li>Properly construe the claim.</li> <li>Identify the actual contribution.</li> <li>Ask whether it falls solely within the excluded subject matter.</li> <li>Check whether the actual or alleged contribution is actually "technical" in nature.</li> </ol> <p> <br /> The Hearing Officer also considered the five <em><a rel="noopener noreferrer" href="https://caselaw.nationalarchives.gov.uk/ewhc/pat/2009/343" target="_blank">AT&amp;T</a></em> signposts below to assess technical contribution of the invention in question before concluding that the actual contribution was &ldquo;<em>no more than a computer program</em>&rdquo; and that &ldquo;<em>the ANN-based system for providing semantically similar file recommendations is not technical in nature</em>&rdquo;:</p> <ol> <li>Whether the claimed technical effect has a technical effect on a process which is carried on outside the computer</li> <li>Whether the claimed technical effect operates at the level of the architecture of the computer, i.e., whether the effect is produced irrespective of the data being processed or the applications being run</li> <li>Whether the claimed technical effect results in the computer being made to operate in a new way</li> <li>Whether the program makes the computer a better computer in the sense of running more efficiently and effectively as a computer</li> <li>Whether the perceived problem is overcome by the claimed invention as opposed to merely being circumvented</li> </ol> <p> <br /> He further decided that there was no suggestion of any technical effect existing over and above the running of a program on a computer. </p> <p>Emotional Perception appealed the UKIPO&rsquo;s decision on the basis that:</p> <ul> <li>The computer program exclusion was not engaged at all.</li> <li>If there was a computer program, the exclusion did not apply because the claim revealed a technical contribution and was therefore not a &ldquo;<em>computer program as such.</em>&rdquo;</li> </ul> <h2>UK High Court Ruling</h2> <h3> Was the invention a computer program? </h3> <p>The High Court disagreed with the UKIPO, holding that the trained ANN was not a computer program. Justice Mann disagreed with the UKIPO&rsquo;s view that the trained ANN could not be &ldquo;decoupled&rdquo; from the underlying software platform that facilitated it. He acknowledged that, although the initial training stage of the ANN involved a computer program, the subsequent operation of the trained emulated ANN did not. His view was that there was a distinction between the underlying software, which created the emulated ANN, and the emulated ANN itself. No instructions were being provided by a human for the emulated ANN to carry out its function; it applied its own weights and biases to produce relevant vectors. Accordingly, the emulated ANN operated at a different level from the underlying software on the computer. </p> <p>When it came to hardware ANN, the UKIPO conceded that it did not operate as a computer program, something not disputed by Emotional Perception. Justice Mann decided that he was not inclined to consider the correctness of this concession on the part of the UKIPO noting that &ldquo;<em>presumably it is because the hardware is not implementing a series of instructions pre-ordained by a human. It is operating according to something that it has learned itself.</em>&rdquo; Justice Mann went on to rule that, similarly, the emulated ANN was not deemed to operate as a computer program as it operated in the same way as hardware ANN (as described by him in this judgment). </p> <h3>Was there a technical contribution?</h3> <p> After establishing that the invention did not involve a claim to a program for a computer, Justice Mann nonetheless went on to consider whether there was a technical contribution, in case the computer program exclusion was invoked. He concluded that the invention made a substantial technical contribution, and therefore could be patentable. </p> <p>The UKIPO Hearing Officer deemed that a subjective reaction from the end user after being sent a recommended song, meant a technical effect did not exist. Justice Mann disagreed with that analysis; the ANN&rsquo;s recommendation of a semantically similar track to the end user was based on technical criteria which the system had taught itself, and therefore the system did have technical effect which could not be disqualified because of the possible subjective effect on the mind of an end user.</p> <h2>Conclusion</h2> <p> Within days of the High Court&rsquo;s decision, the UKIPO published <a rel="noopener noreferrer" href="https://www.gov.uk/government/publications/examination-of-patent-applications-involving-artificial-neural-networks/examination-of-patent-applications-involving-artificial-neural-networks-ann" target="_blank">statutory guidance</a> which immediately changed examination practice such that inventions involving an ANN should not be rejected under the &ldquo;program for a computer&rdquo; exclusion. This statutory guidance was promptly followed by a related <a rel="noopener noreferrer" href="https://www.gov.uk/guidance/manual-of-patent-practice-mopp/section-1-patentability" target="_blank">update</a> to the UKIPO Manual of Patent Practice.</p> <p>The High Court&rsquo;s approach diverges from the European Patent Office&rsquo;s (EPO) current practice, which applies a more limited scope in which AI inventions can be patentable. The EPO&rsquo;s view is that AI and machine learning are based on computational models and algorithms, such as neural networks, and are considered to be of an abstract mathematical nature, irrespective of whether they can be &ldquo;trained&rdquo; based on training data. The EPO&rsquo;s stance is that claims of mathematical nature are excluded from patentability, and to fall outside of the exclusion, inventors must show that the features of the claim contribute to the technical character of the invention as a whole. Only then will the claim be considered in the assessment of inventive step. </p> <p>On the face of it, this is a favorable and significant outcome to AI developers using ANNs for any applications. In the digital health sector, for example, ANNs can assist in clinical diagnosis by analyzing medical images and reports to provide more accurate predictions. ANNs can also be useful for early stage drug discovery, from initial screening to predicted success rate of particular drug candidates. As ANNs are able to process large volumes of data quickly, they can help accelerate diagnosis and drug development. However, this judgment may be of limited commercial impact. Innovators typically follow a strategic path that results in patent protection in multiple jurisdictions, and not just in the UK. Consequently, the fact that it may now be easier to obtain patents for inventions concerning ANNs in the UK, may have limited impact on overall R&amp;D and patent prosecutions strategies.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{FCED7F40-3F93-4C59-96BB-DAE38523E0E9}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/far-council-proposes-updates-to-suspensionSonia Tabrizhttps://www.arnoldporter.com/en/people/t/tabriz-soniasonia.tabriz@arnoldporter.comKyung Liu-Katzhttps://www.arnoldporter.com/en/people/l/liu-katz-kyungkyung.liu-katz@arnoldporter.comFAR Council Proposes Updates to Suspension and Debarment Procedures for Procurement TransactionsLast month, the Federal Acquisition Regulatory (FAR) Council published a proposed rule that would update the FAR's suspension and debarment procedures.Fri, 02 Feb 2024 00:00:00 -0600<p>Last month, the Federal Acquisition Regulatory (FAR) Council published a proposed rule that would update the FAR's suspension and debarment procedures. <br /> <br /> The proposed rule seeks to more closely align two suspension and debarment regulatory systems &mdash; the FAR-based system that applies to procurement contracts and the Nonprocurement Common Rule (NCR) that applies to grants, cooperative agreements, and assistance contracts. The FAR Council recognized that the systems are "designed toward the same end, follow the same general principles, and use essentially the same basic action notice and decision-making process," and determined that addressing the differences between the rules would "enhance transparency and consistency within the Government's suspension and debarment procedures." To achieve this alignment, the FAR Council proposed definitional and procedural changes, as well as additional factors for debarment decisions and revisions to certain suspension provisions &mdash; all based on recommendations of the Interagency Suspension and Debarment Committee.<br /> <br /> Notably, the FAR Council opted against addressing one significant difference between the procurement and nonprocurement systems. Specifically, a notice of proposed debarment under the FAR will still have the effect of immediately excluding the contractor, even though it does not have that effect in the NCR.<br /> <br /> This Advisory explores the proposed revisions to the procurement-related suspension and debarment regulations in the FAR and discusses industry implications.</p> <h2>Definitional Changes</h2> <p>The FAR Council first sought to address certain definitional differences between the FAR and the NCR by introducing several new definitions and updating others. These changes recognize existing practices by suspension and debarment officials (SDOs) in addition to expanding the scope of evidence that agencies may use to consider suspension or debarment.<br /> <br /> <strong>Administrative Agreement. </strong>While the FAR references the use of administrative agreements, and SDOs commonly use administrative agreements as an alternative to formal exclusion, the FAR does not currently define the term. The proposed rule closes this gap by defining "administrative agreement" as "an agreement between an agency suspending and debarring official and the contractor used to resolve a suspension or debarment proceeding, or a potential suspension or debarment proceeding." In this context, the FAR Council explained that administrative agreements often require actions by the contractor to address responsibility concerns, such as enhanced internal corporate governance practices, independent third-party monitors, and voluntary exclusion from certain procurement or nonprocurement transactions for a period. <br /> <br /> <strong>Civil Judgment. </strong>The proposed rule also expands the existing FAR definition of "civil judgment," which can serve as the basis for a suspension or debarment, to align it with the NCR definition. The current definition only captures &ldquo;a <em>judgment or finding </em>of civil offense.&rdquo; The proposed rule defines civil judgment as &ldquo;<em>disposition</em> of a civil action ... whether by <em>verdict, decision, settlement, stipulation, or other disposition</em> that creates a civil liability.&rdquo; Thus, under the proposed rule, an agency may suspend or debar a contractor based on a civil settlement, regardless of whether the contractor admits guilt. <br /> <br /> At present, an agency can debar a contractor on that basis if the SDO deems it a "cause of so serious or compelling a nature that it affects the present responsibility of the contractor" &mdash; a catch-all provision that follows a more particularized set of potential grounds for debarment. But the FAR requires the SDO to establish a cause for debarment "by a preponderance of evidence," when not based on a conviction or civil judgment. In such instances, the FAR may also afford the contractor with additional procedural rights. The FAR Council's proposed expansion of the "civil judgment" definition would permit the SDO to bypass these safeguards in the event of a settlement, even in those instances where the contractor makes no admission of guilt. Settlements of this nature are often motivated by legitimate business considerations, not wrongdoing. Thus, industry should consider submitting comments to the FAR Council that advocate for leaving intact the existing safeguards in the event of a civil settlement, at least in those instances where the contractor denies liability therein.<br /> <br /> <strong>Conviction. </strong>The proposed rule contemplates two major changes to the FAR definition of conviction, which can prompt a suspension or debarment. First, the proposed definition broadens the coverage from simple judgment of guilt to &ldquo;any other resolution that is the <em>functional equivalent of a judgment</em>&rdquo; such as probation and deferred prosecution. The FAR Council clarified that disposition without court participation is the functional equivalent of a judgment "only if it includes an admission of guilt." The FAR Council also explained the rationale for this revised definition, as derived from the NCR &mdash; "fact-finding proceedings should not be necessary when there is sufficient evidentiary basis that the contractor was responsible for the misconduct for purposes of a proposed debarment." Second, the proposed rule would relocate the clause defining the term from FAR 2.101 to FAR 9.403, so the expanded definition of &ldquo;conviction&rdquo; would not apply to the entirety of the FAR, but cover only the suspension and debarment procedures.<br /> <br /> <strong>Pre-Notice Letter. </strong>Although the FAR does not presently recognize pre-notice letters as a suspension or debarment procedure, SDOs have widely used them in lieu of issuing a notice of proposed suspension or debarment in the first instance. Thus, the proposed rule defines "pre-notice letter" as "a written correspondence issued to a potential respondent in a suspension or debarment matter, which does not immediately result in an exclusion or ineligibility." By defining the procedure, the proposed rule acknowledges the pre-notice letter as a tool that affords SDOs flexibility with which to engage in preliminary discussions with contractors. The proposed rule, however, stresses that the pre-notice letter is not mandatory, and it exists only to empower SDOs to handle actions &ldquo;as informally as practicable [and] consistent with principles of fundamental fairness.&rdquo; <br /> <br /> <strong>Voluntary Exclusion. </strong>The proposed rule sets out a new FAR definition, derived from the NCR, for "voluntary exclusion" as "a contractor's written agreement to be excluded for a period under the terms of a settlement between the contractor and the suspending and debarring official of one or more agencies," noting that a voluntary exclusion "must have a Governmentwide effect." The FAR Council elaborates on why a voluntary exclusion may appeal to a contractor and its various constituencies as compared with involuntary exclusion through suspension or debarment, but makes clear that a contractor that is voluntarily excluded will be placed on the excluded parties list in the System for Award Management (SAM) just the same.</p> <h2>Updated Procedures</h2> <p>The FAR Council also proposed numerous revisions to the FAR suspension and debarment procedures. These revisions include facilitating communication between the government and contractors, contemplating available steps like the pre-notice letter and imposing government database registration requirements &mdash; all in furtherance of increased flexibility.<br /> <br /> <strong>Methods of Communication. </strong>To support informal engagement and account for emergency situations such as COVID-19, the proposed rule would allow contractors and their representatives to present matters to the SDO by phone or internet, rather than requiring in-person presentations. SDOs, in turn, would be permitted to issue a notice of proposed debarment or suspension by methods other than certified mail; the proposed rule allows the use of mail, fax, and email for notice.<br /> <br /> <strong>Notice Requirements.</strong> The proposed rule also specifies to whom the SDO must send the notice of proposed debarment. For purposes of administrative proceedings, the notice must be sent to the contractor or its identified counsel, and for service of process, the notice must be sent to the contractor or its agent. <br /> <br /> <strong>Deadline for Debarment Decision.</strong> The proposed rule modifies the deadline by which the SDO must make a debarment decision for actions based on a conviction or civil judgment, or in which there is no genuine dispute over material facts. The FAR currently requires a debarment decision to be made within 30 working days after the SDO receives information and argument from the contractor. The proposed rule changes that time to 45 calendar days after the official record is closed. This change reduces chance of confusion caused by varying definitions of working days in different countries, including in light of national or religious holidays.<br /> <br /> <strong>Pre-Notice Letters. </strong>As noted above, the FAR Council also proposed to confirm the SDO's ability to issue a pre-notice letter. Agencies have widely used requests for information and other pre-notice methods to better assess circumstances surrounding contractor actions that might result in exclusion via suspension or debarment. The proposed rule acknowledges the practice and expressly affords this optionality to SDOs in engaging with the contractors.<br /> <br /> <strong>Government Database Registration. </strong>The proposed rule revises the FAR to address the registration of administrative agreements and voluntary exclusions on federal acquisition databases. Under the proposed rule, the SDO must register on the Federal Awardee Performance Integrity Information System all administrative agreements entered into for the purpose of resolving a suspension or debarment action or as a preliminary procedure preceding a potential suspension or debarment. Likewise, the SDO must enter all voluntary exclusions into the SAM database. These government database registrations will establish a public record of previously informal and relatively discreet alternatives to suspension or debarment.</p> <h2>Additional Factors for Debarment</h2> <p> In addition to the broader definitional and procedural changes, the proposed rule addresses a key FAR provision regarding debarment decisions. The FAR currently lists 10 factors that the SDO should consider upon reaching a debarment decision. With the proposed rule, the FAR Council would add seven more for consideration by the SDO. Borrowing from the NCR, the proposed rule would also empower the SDO to consider "aggravating" factors. The additional aggravating or mitigating factors contemplated by the proposed rule include:</p> <ul> <li>The contractor&rsquo;s pattern or history of wrongdoing, including frequency, duration, harmful impact, or the wrongdoing</li> <li>The contractor&rsquo;s planning, initiation, or execution of the misconduct</li> <li>The pervasiveness of the wrongdoing in the contractor&rsquo;s organization</li> <li>Whether the contractor&rsquo;s principals tolerated the offense</li> <li>The contractor&rsquo;s exclusion from federal, state, or local government contracts or assistance</li> <li>The contractor&rsquo;s administrative agreement with a federal, state, or local government</li> <li>Other factors appropriate to the circumstances of a particular case</li> </ul> <p> According to the FAR Council, these new factors further improve consistency between the procurement and nonprocurement systems in addition to providing "more guidance and increased options for the [SDO] to consider when making present responsibility determinations." And as a practical matter, these factors further refine the roadmap for contractors &mdash; whether they are proactively protecting against responsibility concerns or responding to such concerns in the context of a potential suspension or debarment.</p> <h2> Revisions to Suspension Provisions</h2> <p> The FAR Council also proposed to revise certain aspects of the FAR suspension provisions. The proposed rule affords the SDO wide discretion to suspend a contractor when immediate action is necessary to protect government&rsquo;s interest. With this broader suspension power, the FAR Council would allow the SDO to consider an indictment or other official findings by federal, state, or local entities on factual or legal matters. <br /> <br /> The proposed rule also expands the list of parties that can provide advice to the agency on pending or contemplated legal proceedings. In addition to the Department of Justice, the proposed rule would allow a U.S. Attorney&rsquo;s Office, state attorney general&rsquo;s office, or a state or local prosecutor&rsquo;s office to also consult the agency in making suspension decisions. Further, the proposed rule would allow not only the U.S. Assistant Attorney General but also the U.S. Attorney General&rsquo;s Office, a U.S. attorney, or another responsible prosecuting official to request a six-month extension of suspension when legal proceedings have not been initiated within 12 months after the date of suspension notice.</p> <h2> Unchanged Exclusionary Effect of Proposed Debarment Notice</h2> <p> Although the proposed rule seeks to bring the FAR into alignment with many of the NCR&rsquo;s suspension and debarment procedures, the FAR Council opted to continue deviating from the NCR as it relates to the exclusionary effect of a notice of proposed debarment. Nonprocurement rules do not require the immediate exclusion of a grantee or beneficiary after the SDO issues a notice. Under the FAR, a notice of proposed debarment has the effect of immediately excluding the contractor. The proposed rule will not change this. <br /> <br /> On this point, the FAR Council explained that the immediate exclusionary effect is retained "in part in recognition of the necessity to continue to protect the Government's interests and taxpayer's money by minimizing business risk where procurements are involved." The FAR Council distinguished nonprocurement transactions, such as grants or cooperative agreements, which focus instead on overall program goals and objectives or public purposes and economic stimulation. Because "contracts are more likely than nonprocurement transactions &hellip; to require immediate exclusion when something goes wrong," the FAR Council reinforced the SDO's continued discretion to opt for immediate exclusion, but it also recognized the use of a pre-notice letter as a way for the SDO to raise responsibility concerns with a contractor without this effect.</p> <h2> Conclusion</h2> <p> The proposed rule, as issued by the FAR Council, streamlines the suspension and debarment procedures by aligning certain aspects of the FAR-based system for procurement with the NCR-based system for nonprocurement, in an effort to achieve enhanced transparency and consistency. The result would involve regulatory recognition of formerly informal practices, in addition to more flexibility in the way that the government and contractors engage. It remains to be seen which of the FAR Council's proposed changes are ultimately adopted. The FAR Council has requested comments on or before March 11.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{8599B0BD-0D6E-4A19-B1D1-C9C5E24173C0}https://www.arnoldporter.com/en/perspectives/publications/2024/02/what-to-expect-in-2024-merger-enforcementJonathan Gleklenhttps://www.arnoldporter.com/en/people/g/gleklen-jonathanjonathan.gleklen@arnoldporter.comMichael B. Bernsteinhttps://www.arnoldporter.com/en/people/b/bernstein-michael-bmichael.b.bernstein@arnoldporter.comFrancesca M. Pisanohttps://www.arnoldporter.com/en/people/p/pisano-francesca-mfrancesca.pisano@arnoldporter.comDylan S. Younghttps://www.arnoldporter.com/en/people/y/young-dylan-sdylan.young@arnoldporter.comKyle Angelottihttps://www.arnoldporter.com/en/people/a/angelotti-kylekyle.angelotti@arnoldporter.comWhat to Expect in 2024 Merger Enforcement: Trends and Developments from 2023During 2023, M&amp;A activity in the United States showed some signs of rebounding from the post-pandemic cooldown. Meanwhile merger enforcement remained the subject of intense public and political focus.Fri, 02 Feb 2024 00:00:00 -0600<p>During 2023, M&amp;A activity in the United States showed some signs of rebounding from the post-pandemic cooldown. Meanwhile merger enforcement remained the subject of intense public and political focus. The Federal Trade Commission and the Department of Justice continued to press an aggressive enforcement agenda, featuring envelope-pushing litigations and a decline in settlements. Yet, government enforcers continue to have an inconsistent record in front of the courts and appear willing to consider settlements to resolve already-filed litigations. </p> <p>Read our Newsletter to learn how these 2023 developments may impact parties considering strategic transactions in 2024.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Newsletter is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{6F1A219D-A3F5-496C-B2B3-F44890D40E5C}https://www.arnoldporter.com/en/perspectives/publications/2024/02/emerging-issues-on-the-february-legislative-agendaKevin O'Neillhttps://www.arnoldporter.com/en/people/o/oneill-kevinkevin.oneill@arnoldporter.comSonja Nesbithttps://www.arnoldporter.com/en/people/n/nesbit-sonjasonja.nesbit@arnoldporter.comMark Epleyhttps://www.arnoldporter.com/en/people/e/epley-markmark.epley@arnoldporter.comEmerging Issues on the February Legislative Agenda<p>As we prepare for a busy February on Capitol Hill, join us to discover what key legislative issues are emerging.<br /> <br /> The Arnold Porter Legislative &amp; Public Policy team talk through the fiscal year 2024 appropriations process, the fight over the border, the looming tax bill, and the agenda for health care this year. Hear the breakdown from experienced policy analysts: Kevin O'Neill, partner in the firm&rsquo;s Legislative &amp; Public policy team, Sonja Nesbit, senior policy advisor and former Obama-appointed Deputy Assistant Secretary for Legislation at the U.S. Department of Health and Human Services (HHS), and Mark Epley, partner with a wealth of Capitol Hill experience, including General Counsel to House Speaker Paul Ryan.</p>Fri, 02 Feb 2024 00:00:00 -0600{592300DE-86EA-42BE-89E2-B542BFBEDE16}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/regulators-discuss-liquidity-risk-managementJames P. Berginhttps://www.arnoldporter.com/en/people/b/bergin-jamesJames.Bergin@arnoldporter.comDavid F. Freeman, Jr.https://www.arnoldporter.com/en/people/f/freeman-david-fDavid.Freeman@arnoldporter.comKevin M. Toomeyhttps://www.arnoldporter.com/en/people/t/toomey-kevin-mkevin.toomey@arnoldporter.comMonique E. Holmeshttps://www.arnoldporter.com/en/people/h/holmes-monique-emonique.holmes@arnoldporter.comAnthony Raglanihttps://www.arnoldporter.com/en/people/r/raglani-anthonyanthony.raglani@arnoldporter.comTrevor Kirbyhttps://www.arnoldporter.com/en/people/k/kirby-trevortrevor.kirby@arnoldporter.comRegulators Discuss Liquidity Risk Management, Operational Readiness, and the Federal Reserve’s Discount Window<p>The discount window currently is in focus for the federal banking agencies. Reflecting on the turmoil relating to the failures of three large banking organizations in the spring of 2023, officials at the banking agencies have highlighted the importance of liquidity risk management and bank operational readiness for use of the Federal Reserve&rsquo;s discount window. </p>Thu, 01 Feb 2024 00:00:00 -0600<p>The discount window currently is in focus for the federal banking agencies. Reflecting on the turmoil relating to the failures of three large banking organizations in the spring of 2023, officials at the banking agencies have highlighted the importance of liquidity risk management and bank operational readiness for use of the Federal Reserve&rsquo;s discount window.</p> <p>This Advisory offers a short primer on the discount window and a discussion of recent policymaker remarks about it, while also summarizing the Federal Reserve&rsquo;s discontinuance of the Bank Term Funding Program (BTFP). As highlighted by Federal Reserve Vice Chair for Supervision, Michael S. Barr, and Acting Comptroller of the Currency, Michael J. Hsu, banks should consider their discount window readiness prior to acute stress events. Acting Comptroller Hsu also suggested the possibility of a new short-term liquidity requirement.</p> <h2>The Federal Reserve&rsquo;s Discount Window: A Primer</h2> <p>Under Section 10B of the Federal Reserve Act, the Federal Reserve may extend credit, generally on either an intraday or overnight basis, to depository institutions chartered in the United States, as well as U.S. branches of foreign banking organizations.[[N:<em>See</em> 12 U.S.C. &sect; 347b.]] Discount window lending occurs at each of the twelve Federal Reserve Banks through three main lending programs: primary credit, secondary credit, and seasonal credit.</p> <ul> <li><strong>Primary Credit</strong>. Primary credit is generally available to all sound depository institutions, as determined by the relevant Federal Reserve Bank, using information from their primary regulator, on a short-term basis, usually overnight, and as backup liquidity. According to the Federal Reserve, it is not intended as a regular source of funding. </li> <li><strong>Secondary Credit</strong>. For those depository institutions not eligible to access primary credit, secondary credit may be extended on a short-term basis, usually overnight. Subject to more restrictions than primary credit, these loans also come with higher rates and higher haircuts. </li> <li><strong>Seasonal Credit</strong>. Under the seasonal borrowing program, a depository institution with deposits of less than US$500 million and demonstrated liquidity pressures may qualify for funding for up to nine months of the calendar year.[[N:<em>See</em> <a rel="noopener noreferrer" href="https://www.federalreserve.gov/regreform/discount-window.htm" target="_blank">Discount Window Lending,</a> Bd. of Govs. of the Fed. Rsrv. Sys. (Dec. 29, 2023); <a rel="noopener noreferrer" href="https://www.newyorkfed.org/banking/discountwindow" target="_blank">Discount Window</a>, Fed. Rsrv. Bank of New York (last visited Feb. 1, 2024).]]</li> </ul> <p><a rel="noopener noreferrer" href="https://www.google.com/url?sa=t&amp;rct=j&amp;q=&amp;esrc=s&amp;source=web&amp;cd=&amp;ved=2ahUKEwjcqKm23vuDAxVeD1kFHUpdB1cQFnoECBYQAQ&amp;url=https%3A%2F%2Fwww.frbservices.org%2Fbinaries%2Fcontent%2Fassets%2Fcrsocms%2Fresources%2Frules-regulations%2F071613-operating-circular-10.pdf&amp;usg=AOvVaw2OAHYyrsYc7AQ5jthjBnik&amp;opi=89978449" target="_blank">Operating Circular No. 10</a> sets forth the terms and procedures under which Federal Reserve Banks extend credit through the discount window to depository institutions. It also forms the lending agreement for Federal Reserve Bank advances. Notably, all loans must be secured by collateral acceptable to the appropriate Federal Reserve Bank and all discount window loans must be fully secured. Borrowers may contact the discount window staff at their applicable Federal Reserve Bank with questions.[[N:<em>See id.</em>; <a rel="noopener noreferrer" href="https://www.federalreserve.gov/monetarypolicy/bst_lendingdepository.htm" target="_blank">Credit and Liquidity Programs and the Balance Sheet</a>, Bd. of Govs. of the Fed. Rsrv. Sys. (May 13, 2021).]]</p> <p>The Federal Reserve discloses discount window loans in the aggregate on a weekly basis and discloses individual borrowers on a one-year lag.[[N:<em>See</em> <a rel="noopener noreferrer" href="https://www.federalreserve.gov/releases/h41/" target="_blank">Federal Reserve Balance Sheet: Factors Affecting Reserve Balances - H.4.1</a>, Bd. of Govs. of the Fed. Rsrv. Sys. (Updated Jan. 25, 2024).]] Stigma has been a long-running issue for discount window usage.[[N:<em>See</em> Mark Carlson &amp; Jonathan D. Rose, <a rel="noopener noreferrer" href="https://www.federalreserve.gov/econres/notes/feds-notes/stigma-and-the-discount-window-20171219.html" target="_blank">Stigma and the Discount Window</a>, Bd. of Govs. of the Fed. Rsrv. Sys. (Dec. 19, 2017).]]</p> <h2>Winding Down the Bank Term Funding Program</h2> <p>On March 12, 2023, the Federal Reserve Board <a rel="noopener noreferrer" href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm" target="_blank">announced</a> the creation of the BTFP, offering loans to depository institutions that pledged U.S. treasuries, agency debt, and agency mortgage-backed securities as collateral. Unlike the regular discount window, pledged assets were valued at par and were offered for terms up to one year. Authorized under Section 13(3) of the Federal Reserve Act, the BTFP was designed to assure the public that banks would have sufficient liquidity to safeguard deposits.[[N:<em>See</em> 12 U.S.C. &sect; 343(3).]] As originally scheduled, the Federal Reserve Board has confirmed that the BTFP will cease making new loans to eligible depository institutions on March 11, 2024.[[N:<em>See</em> <a rel="noopener noreferrer" href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20240124a.htm#:~:text=The%20Federal%20Reserve%20Board%20on,of%20liquidity%20for%20eligible%20institutions" target="_blank">Federal Reserve Board Announces the Bank Term Funding Program (BTFP) Will Cease Making New Loans As Scheduled on March 11</a>, Bd. of Govs. of the Fed. Rsrv. Sys. (Jan. 24, 2024).]]</p> <h2>Remarks by Vice Chair for Supervision Michael S. Barr</h2> <p>In December, Federal Reserve Vice Chair for Supervision Michael S. Barr <a rel="noopener noreferrer" href="https://www.federalreserve.gov/newsevents/speech/barr20231201a.htm" target="_blank">advised</a> the banking sector that discount window access should figure prominently into <span>liquidity risk management plans</span>. Barr&rsquo;s remarks echo that of other Federal Reserve officials and recent interagency liquidity guidance.[[N:<em>See</em> Lorie K. Logan, <a rel="noopener noreferrer" href="https://www.dallasfed.org/news/speeches/logan/2023/lkl231110" target="_blank">Ample Reserves and the Friedman Rule</a>, Fed. Rsrv. Bank of Dallas (Nov. 10, 2023); Michelle W. Bowman, <a rel="noopener noreferrer" href="https://www.federalreserve.gov/newsevents/speech/bowman20230519a.htm" target="_blank">Considerations for Revisions to the Bank Regulatory Framework</a>, Bd. of Govs. of the Fed. Rsrv. Sys. (May 19, 2023); Bd. of Govs. of the Fed. Rsrv. Sys. et al., Addendum to the Interagency Policy Statement on Funding and Liquidity Risk Management: Importance of Contingency Funding Plans (2023).]]</p> <p>Barr suggested that there are two key aspects to discount window readiness. First, banks must be prepared to access the discount window by ensuring they have the appropriate legal agreements in place, of which most do. Moreover, banks should engage in discount window testing through actual transactions in regular intervals. Most have not, observed Barr.</p> <p>Second, banks should pre-position an adequate amount of collateral at the discount window. Noting that certain types of collateral may require additional time to pledge, Barr warned against bank expectations of immediate liquidity at the discount window, particularly for less liquid collateral.</p> <p>Barr stated that the events of the spring showed that banks could have had greater operational readiness to use the discount window, suggesting that there were operational challenges in quickly identifying and moving collateral to pledge. Barr advised that the lessons from the stress events of last spring could help other banks when facing less acute events.</p> <p>Barr also underlined that use of the discount window will not be viewed negatively. Rather, Barr identified the discount window as an important tool that banks should be ready and willing to use in both good and bad times. And given the speed of bank runs, Barr noted that &ldquo;it may be necessary to reexamine our requirements,&rdquo; including &ldquo;discount window preparedness.&rdquo;</p> <h2>Remarks by Acting Comptroller Michael J. Hsu</h2> <p>In January, Acting Comptroller of the Currency Michael J. Hsu gave a speech in which he sounded similar notes as Vice Chair Barr about the need for readiness to use the discount window, including identification and pre-positioning of collateral. In addition, he <a rel="noopener noreferrer" href="https://www.occ.gov/news-issuances/speeches/2024/pub-speech-2024-4.pdf" target="_blank">suggested</a> that a new liquidity measure, requiring midsize and large banks to have sufficient liquidity to cover outflows over a five-day period, warrants serious consideration. According to Hsu, the numerator of this measure "should consider" the liquidity value of pre-positioned discount window collateral, in addition to reserves, while the denominator "should consider" uninsured deposit outflows. He advised that this same rule should also clarify operational preparedness expectations by the prudential regulators and perhaps even include a requirement to conduct periodic test draws at the discount window.</p> <p>Hsu&rsquo;s proposal hopes to address two hurdles related to discount window access. First, Hsu suggested that there exists a discrepancy between the timing during which depositors can make withdrawals and banks can monetize assets. To account for the speed at which withdrawals can be made, Hsu suggested banks identify assets that can be pre-positioned and pledged at the discount window. Moreover, Hsu advised that banks periodically borrow from the discount window to ensure operational familiarity.</p> <p>Second, Hsu suggested that his proposal could help to combat the stigma surrounding discount window borrowing. Despite regulatory pushback, Hsu noted that banks continue to worry that news of discount window lending could be perceived as a sign of weakness, which in turn may exacerbate a bank run.</p> <p>Although Hsu emphasized the need to destigmatize use of the discount window, he also warned against inappropriate overreliance. For Hsu, a new regulatory rule could provide the space to balance appropriate discount window usage while maintaining &ldquo;anti-bailout conservatism.&rdquo;</p> <h2>Takeaways</h2> <p>Facilitating the flow of credit to the economy, the Federal Reserve&rsquo;s discount window will continue to serve as an important tool for banks as the speed of banking and finance accelerates. The speed of the events of the spring seem to have renewed regulatory interest in short-term liquidity risk management and operational readiness.</p> <p>Independently, the Group of Thirty (G30), a body comprised of eminent current and former economic and financial leaders, recently published a high-profile report on lender of last resort regimes as well.[[N:<em>See</em> Group of Thirty, Bank Failures and Contagion: Lender of Last Resort, Liquidity, and Risk Management (2024).]] The G30 made recommendations about how the discount window in the U.S. could be made more efficacious, including recommendations about pricing, stigma, and the mandatory pre-positioning of collateral sufficient to cover runnable liabilities. The G30 report is a demonstration that there may be continuing evolution in this space in the years ahead.</p> <p>Institutions interested in how liquidity risk management or operational readiness of the Federal Reserve&rsquo;s discount window may impact their businesses may contact any of the authors of this Advisory or their usual Arnold &amp; Porter contact. The firm&rsquo;s <a href="https://www.arnoldporter.com/en/services/capabilities/practices/financial-services" target="_self">Financial Services</a> team would be pleased to assist with any questions about the discount window, or financial regulation more broadly.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{B69EE799-E93A-4C99-A8B7-334EAA79D349}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/developments-in-us-antitrust-litigation-2023Daniel B. Asimowhttps://www.arnoldporter.com/en/people/a/asimow-daniel-bdaniel.asimow@arnoldporter.comC. Scott Lenthttps://www.arnoldporter.com/en/people/l/lent-c-scottscott.lent@arnoldporter.comSonia Kuester Pfaffenrothhttps://www.arnoldporter.com/en/people/p/pfaffenroth-soniasonia.pfaffenroth@arnoldporter.comLaura Shoreshttps://www.arnoldporter.com/en/people/s/shores-lauralaura.shores@arnoldporter.comMatthew Tabashttps://www.arnoldporter.com/en/people/t/tabas-matthewmatthew.tabas@arnoldporter.comPatrick Shawhttps://www.arnoldporter.com/en/people/s/shaw-patrickpatrick.shaw@arnoldporter.comDevelopments in U.S. Antitrust Litigation — 2023 Year in Review<p><span style="color: #494949; background-color: #fefefe;">2023 was an eventful year for antitrust litigation, with 250 new antitrust complaints filed. The U.S. District Court for the Northern District of California continued to be the most popular jurisdiction for antitrust plaintiffs, with 42 cases filed in 2023.&nbsp;</span></p>Thu, 01 Feb 2024 00:00:00 -0600<p>2023 was an eventful year for antitrust litigation, with 250 new antitrust complaints filed. The U.S. District Court for the Northern District of California continued to be the most popular jurisdiction for antitrust plaintiffs, with 42 cases filed in 2023. Northern California was followed by the District of New Jersey, with 30 cases; the Northern District of Illinois, with 19 cases; and the Southern District of New York, with 16 cases.</p> <p>Both the antitrust authorities and private plaintiffs were focused on aggressive enforcement and sought to apply the antitrust laws to new technologies and existing theories of harm in new ways. Indeed, plaintiffs targeted a wide range of industries with antitrust actions in 2023, from tech to real estate and from sports to pharmaceuticals. This trend is unlikely to slow down in 2024.</p> <h2>Continued Focus on Tech</h2> <p>The tech sector continued to be a target of antitrust litigation in 2023. The Federal Trade Commission&rsquo;s (FTC) lawsuit against Meta (formerly Facebook) and challenges by the states and Department of Justice, Antitrust Division (DOJ) to Google&rsquo;s conduct are ongoing. Two important developments, however, helped to shape antitrust litigation in the tech space: the FTC&rsquo;s lawsuit against Amazon and a focus on algorithms as a mechanism for allegedly unlawful coordination among competitors.</p> <p>On September 26, 2023, the FTC and 17 state Attorneys General sued Amazon in the U.S. District Court for the Western District of Washington for its alleged anticompetitive practices. The complaint focuses on two purportedly anticompetitive strategies by Amazon to monopolize the online retail market, alleging that Amazon&rsquo;s conduct violated Section 2 of the Sherman Act, Section 5(a) of the FTC Act, and several state antitrust statutes.[[N:Compl., <em>FTC v. Amazon</em>, 2:23-cv-01495-JHC (W.D. Wash. Nov. 2, 2023), ECF No. 1; Press Release, <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/09/ftc-sues-amazon-illegally-maintaining-monopoly-power" target="_blank">FTC Sues Amazon for Illegally Maintaining Monopoly Power</a>, FTC (Sept. 26, 2023).]] First, the FTC and Attorneys General allege that Amazon artificially inflated its prices by both punishing Amazon&rsquo;s own marketplace sellers for offering discounts and by deterring other online retailers from undercutting Amazon&rsquo;s prices. For example, the complaint asserts that Amazon disadvantages discount sellers in Amazon&rsquo;s search results such that they become functionally invisible. Second, the complaint alleges that Amazon conditions sellers&rsquo; ability to sell their products using Prime on their use of Amazon&rsquo;s fulfillment service. According to the plaintiffs, the cost of Amazon&rsquo;s fulfillment service renders it prohibitive for sellers to offer their products on other platforms. Amazon has responded to those allegations by arguing that the action will lead to higher prices and slower deliveries for customers. Amazon asserts that its &ldquo;tools and education&rdquo; help its retailers increase sales by trying to &ldquo;match other retailers&rsquo; low prices,&rdquo; and do not prevent its retailers from choosing to &ldquo;set prices that aren&rsquo;t competitive.&rdquo;[[N:Press Release, <a rel="noopener noreferrer" href="https://www.aboutamazon.com/news/company-news/amazon-ftc-antitrust-lawsuit-full-response" target="_blank">The FTC&rsquo;s lawsuit against Amazon would lead to higher prices and slower deliveries for consumers &mdash; and hurt businesses</a>, Amazon (Sept. 16, 2023).]]</p> <p>In addition, the complaint against Amazon also alleges that the company used a pricing algorithm, termed &ldquo;Project Nessie,&rdquo; to set prices so that competitors would follow.[[N:Redacted Amended Complaint at &para; 23, <em>FTC v. Amazon.com Inc.</em>, Case 2:23-cv-01495-JHC (W.D. Wash. Nov. 2, 2023), ECF No. 114.]] The FTC complaint alleges that &ldquo;Amazon created a secret algorithm &hellip; to identify specific products for which it predicts other online stores will follow Amazon&rsquo;s price increases&rdquo; which &ldquo;[w]hen activated, &hellip; raises prices for those products, and when other stores follow suit, keeps the now-higher price in place.&rdquo;[[N:<em>Id</em>.]]</p> <p>The FTC and states&rsquo; allegations related to &ldquo;Project Nessie&rdquo; are just one example of recent cases involving antitrust challenges to algorithmic pricing software. For example, on November 1, 2023, the Attorney General&rsquo;s Office for the District of Columbia filed a suit against RealPage Inc. and multiple residential property companies alleging violations of the District of Columbia&rsquo;s antitrust statute.[[N:Press Release, <a rel="noopener noreferrer" href="https://oag.dc.gov/release/attorney-general-schwalb-sues-realpage-residential" target="_blank">Attorney General Schwalb Sues RealPage &amp; Residential Landlords for Rental Price-Fixing, Illegally Raising Thousands of District Residents&rsquo; Rents</a>, Office of the Attorney General for the District of Columbia (Nov. 1, 2023).]] The complaint alleges that these companies entered into an illegal agreement to collectively raise rents on tenants in Washington, D.C. rental units by agreeing to delegate pricing decisions to RealPage&rsquo;s &ldquo;Revenue Management&rdquo; pricing software.[[N:Compl. at &para;&para; 1-3, <em>District of Columbia v. RealPage Inc. et. al.</em>, No. 2023-CAB-006762, (D.C. Super. Ct. Nov. 1, 2023), ECF No. 1.]] The complaint also alleges that defendant rental companies &ldquo;agreed, in writing, to share competitively sensitive data for RealPage to feed into its rent-setting [Revenue Management] Software.&rdquo;[[N:<em>Id</em>. at &para; 3.]] The Attorney General for the District of Columbia alleges that RealPage&rsquo;s Revenue Management software uses data to estimate supply and demand for housing specific to particular geographic areas and unit types and then generates a suggested rental price for a given rental unit.[[N:<em>See id</em>. at &para; 31.]]</p> <p>The District of Columbia case is only the most recent antitrust case brought against RealPage and residential property companies related to the Revenue Management software. An ongoing multi-district litigation against RealPage and multiple rental property companies pending in the Middle District of Tennessee involves allegations of an illegal price-fixing conspiracy impacting student housing and multifamily housing rentals. Following consolidation of the action, the defendants moved to dismiss both the student housing complaint and the multifamily housing complaint. On December 28, 2023, the court denied the defendants&rsquo; motion to dismiss the multifamily housing complaint and granted the motion to dismiss the student housing complaint.[[N:Mem. Op., <em>In re: RealPage Inc.</em>, Rental Software Antitrust Litigation (No. II), No. 3:23-md-03071, MDL No. 307 (M.D. Tenn. Dec. 28, 2023), ECF No. 690.]] The court dismissed the student complaint for failing to plausibly allege market power and having insufficient direct evidence of anticompetitive effects.[[N:<em>Id</em>. at 66-70.]] Despite denying defendants&rsquo; motion to dismiss the multifamily housing complaint, the court concluded that they had not alleged facts sufficient to state a claim under a <em>per se</em> standard.[[N:<em>Id</em>. at 45.]] The court, however, allowed the multifamily action to proceed as a rule of reason case.</p> <p>Private plaintiffs have also challenged the alleged use of pricing algorithms in the hotel industry. Four ongoing cases involve allegations that multiple hotel and casino operators in Las Vegas and Atlantic City used software from the Rainmaker Group purportedly to coordinate their hotel room pricing.[[N:<em>Gibson v. MGM Resorts International</em>, 2:23-cv-00140 (D. Nev. Jan. 25, 2023); <em>Cornish-Adebiyi et al. v. Caesars Entertainment Inc.</em>, 1:23-cv-02536 (D.N.J. May 9, 2023); <em>Blair-Smith v. Caesars Entertainment Inc.</em>, 1:23-cv-06506 (D.N.J. Aug. 21, 2023); <em>Fabel v. Boardwalk 1000 LLC et al.</em>, 1:23-cv-06576 (D.N.J. Aug. 21, 2023).]] In one case, <em>Gibson v. MGM Resorts International</em>, the U.S. District Court for the District of Nevada dismissed the plaintiffs&rsquo; complaint on October 24, 2023 for failure to plead sufficient details of the alleged conspiracy.[[N:<em>Gibson v. MGM Resorts International</em>, 2:23-cv-001402:23-cv-00140, 2023 WL 7025996 (D. Nev. Oct. 24, 2023) (Dismissing plaintiffs complaint without prejudice).]] The court found that plaintiffs failed to provide details as to the exact nature of the alleged agreement, which hotels were alleged to be involved, and when the agreement started.[[N:<em>Id</em>. at *2 (&ldquo;&amp;#91;T&amp;#93;here are numerous deficiencies in Plaintiffs&rsquo; Complaint under the Sherman Act pleading standards.&hellip; For example, Plaintiffs&rsquo; complaint does not answer the basic questions: who, did what, to whom (or with whom) ... and when?&rdquo;).]] Plaintiffs filed an amended complaint on November 27, 2023.[[N:First Am. Compl., <em>Gibson v. MGM Resorts</em>, 2:23-cv-00140 (D. Nev. Nov. 27, 2023), ECF No. 141.]]</p> <p>Outside of the real estate industry, the DOJ filed a complaint on September 28, 2023 in the U.S. District Court for the District of Minnesota against Agri Stats, a company that aggregates and disseminates information on the production, costs, and sales of processors of meats including chicken, turkey, and pork.[[N:Compl., <em>U.S. v. Agri Stats Inc.</em>, 0:23-cv-03009 (D. Minn. Sept. 28, 2023), ECF No. 1.]] The DOJ alleges that Agri Stats&rsquo; information exchange services leads to weakened competition and higher prices for purchasers by &ldquo;providing [meat] processors with unique insights about their competitors&rsquo; production, costs, and pricing &mdash; and refusing to sell the same information to processors&rsquo; customers, farmers, workers, or consumers.&rdquo;[[N:<em>Id</em>.]] The complaint asserts that Agri Stats&rsquo; reports allow processors to &ldquo;forecast what competitors will do&rdquo; without needing to communicate directly, and thus allow processors to &ldquo;confidently restrain production when it is profitable to do so.&rdquo;[[N:<em>Id</em>. at &para;&para; 5-6.]] The DOJ argues that Agri Stats&rsquo; facilitation of the improper exchange of information is in violation of Section 1 of the Sherman Act.[[N:<em>Id</em>. at &para;&para; 167-68.]] In response, Agri Stats has filed a motion to dismiss the DOJ&rsquo;s complaint in which it argues that the only live case or controversy concerns Agri Stats&rsquo; chicken reports, which a Northern District of Illinois court previously held,[[N:<em>See</em> <em>In Re Broiler Chicken Antitrust Litigation</em>, 1:16-cv-8637, 2023 WL 7220170 (N.D. Ill. June 30, 2023, amended Nov. 2, 2023).]] based on the same facts as alleged here, do not violate the antitrust laws.[[N:<em>See</em> Def.&rsquo;s Mot. to Dismiss, <em>U.S. v. Agri Stats Inc.</em>, 0:23-cv-03009 (D. Minn. Jan. 5, 2024), ECF No. 77.]] Therefore, Agri Stats asserts the DOJ&rsquo;s complaint should be dismissed under principles of <em>stare decisis</em>, since the same allegations were previously litigated.</p> <h2>PBMs Under Scrutiny</h2> <p>The pharmaceutical industry continues to be a priority area for antitrust enforcers. Recent litigation has focused on pharmacy benefit managers (PBMs), which act as intermediaries in the pharmaceutical supply chain between manufacturers, retail pharmacies, and end-payers for prescription drugs, often insurance companies or health plan sponsors.</p> <p>In March 2023, the Ohio Attorney General filed suit under the state&rsquo;s antitrust law against PBMs Express Scripts, Prime Therapeutics, and Humana Pharmacy Solutions, and related companies Ascent Health Services, Cigna Group, and Evernorth Health.[[N:Press Release, <a rel="noopener noreferrer" href="https://www.ohioattorneygeneral.gov/Media/News-Releases/March-2023/Yost-Sues-Express-Scripts-Prime-Therapeutics-and-5" target="_blank">Yost Sues Express Scripts, Prime Therapeutics and 5 others, Blaming Exorbitant Drug Prices on Their Collusion</a>, Office of the Ohio Attorney General (Mar. 27, 2023).]] The lawsuit alleges that the defendants&rsquo; actions forced manufacturers to increase prices while lowering reimbursement to retail pharmacies. The attorney general&rsquo;s lawsuit alleges violations of Ohio&rsquo;s Valentine Act, which, according to the attorney general, &ldquo;is broader than its federal corollary, the Sherman Act, in that the Ohio law prohibits market harms, in addition to consumer harms.&rdquo;[[N:<em>Id</em>.]] The case was originally filed in Ohio state court, and while defendants initially were able to remove the case to federal court, a U.S. District Court for the Southern District of Ohio remanded the case back to Ohio state court on January 2, 2024. The court rejected the removal from state court under federal officer removal, as the suit did not involve the operation or administration of federal health benefits programs and judicial economy, comity, and fairness support remand.[[N:<em>State of Ohio, ex. Rel. Dave Yost Attorney General of Ohio, Plaintiff v. Ascent Health Services et al.</em>, 2024 WL 23187, at *4 (S.D. Ohio Jan. 2, 2024).]]</p> <p>In October 2023, the Hawaii Attorney General filed its own litigation in Hawaii state court against PBMs Caremark, Express Scripts, and OptumRx alleging violations of the state&rsquo;s unfair competition and deceptive business practices statute based on similar conduct as alleged in Ohio&rsquo;s complaint.[[N:Compl., <em>Hawaii v. CaremarkPCS Health LLC; Express Scripts Inc.; and OptumRx Inc.</em>, 1ccv-23-0001281 (Haw. Ct. App. Oct. 4, 2023).]]</p> <p>Also, in October 2023, a group of pharmacies filed a purported class action in the U.S. District Court for the Eastern District of Wisconsin against PBMs alleging that ESI and Prime violated the antitrust laws through their 2020 agreement that allows Prime to take advantage of ESI&rsquo;s lower reimbursement rate and higher fees for pharmacies. The case, <em>Elk River Pharmacy et al. v. Express Scripts Inc.</em>,[[N:2:23-cv-01400 (E.D. Wis. Oct. 19, 2023).]] was voluntarily dismissed in early January 2024, but another group of plaintiffs filed a nearly identical complaint in the U.S. District Court for the Western District of Washington shortly thereafter.</p> <h2>Robinson-Patman Act Enforcement</h2> <p>While the last FTC enforcement action under the Robinson-Patman Act (RPA), which outlaws price discrimination in commodities markets, was in 2000,[[N:<em>See</em> Press Release, <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2000/03/worlds-largest-manufacturer-spice-seasoning-products-agrees-settle-price-discrimination-charges" target="_blank">World&rsquo;s Largest Manufacturer of Spice and Seasoning Products Agrees to Settle Price Discrimination Charges</a>, FTC (Mar. 8, 2000).]] there is renewed interest in RPA enforcement at the FTC. Normally, FTC conduct investigations are non-public, but the FTC&rsquo;s RPA investigation into Southern Glazer&rsquo;s Wine &amp; Spirits (Southern Glazer), an alcohol distributor, has already been the subject of litigation, with the FTC filing a petition in the U.S. District Court for the Eastern District of Virginia to enforce a civil investigative demand against Total Wine &amp; More, an alcohol retailer, in October 2023.[[N:Press Release, <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/10/ftc-takes-total-wine-federal-court-enforce-compliance-antitrust-civil-investigative-demand" target="_blank">FTC Takes Total Wine to Federal Court to Enforce Compliance with Antitrust Civil Investigative Demand</a>, FTC (Oct. 20, 2023).]] The FTC and Total Wine &amp; More resolved the enforcement action in December 2023, but the FTC&rsquo;s investigation into Southern Glazer appears to continue. Specifically, in its petition to enforce the CID against Total Wine &amp; More, the FTC describes its investigation as exploring whether Southern Glazer &ldquo;is violating Sections 2(a) and 2(e) of the Robinson-Patman Act by giving preferential pricing and services to certain favored, large chain retailers &mdash; such as Total Wine &mdash; that it does not provide to small independent retailers.&rdquo;[[N:<em>See</em> Pet. of the FTC at 2, <em>FTC v. Retail Services &amp; Systems Inc. d/b/a Total Wine &amp; More</em>, No. 1:23-mc-00028 (E.D. Va. Oct. 20, 2023).]]</p> <p>Despite the lack of recent government enforcement actions, private plaintiffs have continued to file RPA cases. In December 2023, the U.S. Court of Appeals for the Ninth Circuit issued a decision in <em>U.S. Wholesale Outlet and Distribution Inc. v. Innovation Ventures LLC</em>, in which wholesaler plaintiffs alleged that Innovation Ventures, maker of energy drink 5-Hour Energy, violated the RPA by allegedly offering Costco more favorable pricing than wholesalers, such as the plaintiff, were offered. Plaintiff alleged violations of both RPA Section 2(a), which prohibits price discrimination in certain instances, as well as Section 2(d), which prohibits discrimination in the provision of promotion services in certain instances. The Ninth Circuit reversed and remanded a district court decision that held in favor of defendants on the Section 2(d) claim after a jury found no competitive injury sufficient for a Section 2(a) claim.[[N:Order and Amend. Op., <em>U.S. Wholesale Outlet &amp; Distribution Inc. et. al. v. Innovations Ventures LLC et. al.</em>, No. 2:18-cv-01077 (9th Cir. Dec. 22, 2023).]] The Ninth Circuit concluded that the lack of competitive injury for a Section 2(a) claim was not sufficient for the district court to determine that there was no competition between the plaintiff and Costco and that they operated at different functional levels.</p> <h2>No Wins in No-Poach Enforcement</h2> <p>In recent years, a key area of focus for DOJ has been criminal antitrust enforcement to combat alleged no-poach agreements, where companies purportedly agree not to hire each other&rsquo;s workers. However, DOJ&rsquo;s attempts to prosecute these cases has led to few successes, and in 2023 the government lost or withdrew three no-poach enforcement cases.</p> <p>In March of 2023, after a two-week trial, a Maine federal jury in <em>United States v. Manahe</em> acquitted four home health agency defendants of conspiring to fix wages and of illegally entering into no-poach agreements.[[N:<em>United States v. Manahe</em>, No. 2:22-CR-00013-JAW, 2023 WL 2372934 (D. Me. Mar. 5, 2023).]] A month later, in April 2023, the U.S. District Court for the District of Connecticut in <em>U.S. v. Patel</em> dismissed charges against defendants accused of entering into illegal no-poach agreements. The <em>Patel</em> court found that because the defendants&rsquo; hiring and recruiting agreements &ldquo;had so many exceptions,&rdquo; the agreements did not qualify as a <em>per se</em> conspiracy to restrict competition.[[N:<em>United States v. Patel</em>, No. 3:21-CR-220 (VAB), 2023 WL 3143911, at *9 (D. Conn. Apr. 28, 2023).]] Finally, the DOJ moved in December 2023 to voluntarily dismiss with prejudice its 2021 indictment for alleged no-poach agreements with competitors against Surgical Care Affiliates LLC. DOJ did not provide any explanation for its decision.[[N:United States&rsquo; Unopposed Mot. to Dismiss, <em>U.S. v. Surgical Care Affiliates LLC</em>, No. 3:21-cv-00011-L (N.D. Tex. Nov. 13, 2023), ECF No. 203.]]</p> <p>Despite the government&rsquo;s failures in 2023, the Department of Justice does not appear to be planning on slowing down when it comes to no-poach enforcement actions. In a September 2023 speech at the Fordham Competition Law Institute&rsquo;s International Law and Policy Conference, Assistant Attorney General Jonathan Kanter warned of continued government investment in no-poach enforcement agreements.[[N:<a rel="noopener noreferrer" href="https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-remarks-fordham-competition-law" target="_blank">Remarks of Assistant Attorney General Johnathan Kanter</a>, Fordham Competition Law Institute&rsquo;s International Antitrust Law and Policy Conference (Sept. 22, 2023).]]</p> <h2>Juries Demonstrate Skepticism of Antitrust Claims</h2> <p>In two significant antitrust cases, juries returned defense verdicts. While the two cases, one involving the same allegations in the DOJ&rsquo;s complaint against Agri Stats and the other involving an alleged reverse-payment patent settlement agreement, relate to different antitrust theories, these decisions show the challenges private plaintiffs can face when they reach trial.</p> <p>First, in a case originally filed in 2016 in the Northern District of Illinois, direct and indirect purchasers of broiler chickens alleged that processing companies fixed prices. A number of large producers settled, but the case proceeded to trial against one defendant, Sanderson. Following a six-week trial, the jury rejected all claims and rendered a verdict in favor of Sanderson.[[N:Verdict, <em>In re Broiler Chicken Antitrust Lit.</em>&cedil; No. 16-cv-08637 (N.D. Ill. Nov. 1, 2023), ECF No. 7015.]]</p> <p>Second, a case in the Northern District of California alleging an unlawful reverse-payment patent settlement agreement between Gilead and Teva concerning generic versions of the HIV drugs Truvada and Atripla proceeded to trial in June 2023. Plaintiff indirect purchasers alleged that Teva agreed to delay the entry of generic versions of the drugs in exchange for a so-called &ldquo;acceleration clause,&rdquo; a commitment from Gilead that if it licensed any other generic to enter the market, it would advance Teva&rsquo;s entry date to 180 days before the other generic. The jury rejected the claim on two independent grounds: it found that Gilead lacked market power (presumably due to the many other HIV drugs on the market and the intensive innovation in the field) and that Gilead had not made a payment to Teva in exchange for delay.[[N:<em>See</em> <em>In re HIV Antirust Lit.</em>, No. 19-cv-02573 (N.D. Cal. June 30, 2023), ECF No. 2057.]] Notably, the verdict was the third consecutive defeat for plaintiffs in reverse-payment cases and means that plaintiffs have lost all federal reverse payment cases to go to trial since the Supreme Court&rsquo;s decision in <em>FTC v. Actavis</em>[[N:<em>FTC v. Actavis</em>, 570 U.S. 136 (2013).]] in 2013.[[N:<em>See</em> Notice of Verdict, <em>In Re: Opana ER Antitrust Litigation</em>, No. 1:14-cv-10150 (N.D. Ill. July 1, 2022), ECF No. 1002; Jury Verdict, <em>In Re: Nexium (Esomeprazole) Antitrust Litigation</em>, No. 1:12-md-02409-WGY (D. Mass. Dec. 5, 2014), ECF No. 1383.]]</p> <h2>Competition On and Off the Field</h2> <p>In 1922, the Supreme Court ruled that Major League Baseball (MLB) was not engaged in interstate commerce and was thus not subject to the federal antitrust laws.[[N:<em>Federal Baseball Club v. National League</em>, 259 U.S. 200 (1922).]] The Supreme Court recognized in 1972, in <em>Flood v. Kuhn</em>, that &ldquo;baseball is a business, and it is engaged in interstate commerce,&rdquo; and that while baseball&rsquo;s judicially-created exemption from the antitrust laws was an &ldquo;aberration&rdquo; not applied to other professional sports, principles of <em>stare decisis</em> required continuing to recognize the exemption.[[N:407 U.S. 258, 282 (1972).]] While there has been much debate about baseball&rsquo;s antitrust exemption in the last 50 years, the U.S. Court of Appeals for the Second Circuit recently upheld the exemption. In <em>Nostalgic Partners v. Office of the Commissioner of Baseball</em>, the plaintiff minor league baseball teams alleged that the MLB&rsquo;s decision to eliminate 40 minor league team affiliations with major-league teams violated the Sherman Act. The case attracted the attention of DOJ, which filed an amicus brief opposing the application of the exemption.[[N:Brief for the United States of America as Amicus Curiae in Support of Neither Party, <em>Nostalgic Partners LLC et al. v. The Office of the Commissioner of Baseball</em>, No. 22-2859 (2d Cir. Jan. 30, 2023) citing <em>Radovich v. National Football League</em>, 352 U.S. 445, 450 (1957).]] Despite DOJ&rsquo;s efforts, the Second Circuit preserved the exemption in its June 2023 decision, finding that the court &ldquo;must continue to apply Supreme Court precedent unless and until it is overruled by the Supreme Court.&rdquo;[[N:<em>Nostalgic Partners LLC v. The Office of the Commissioner of Baseball</em>, 2023 WL 4072836 (2d Cir. June 20, 2023).]]</p> <p>Amateur sports also saw antitrust litigation in 2023. In <em>Chuba Hubbard and Keira McCarrell v. NCAA</em>, a putative class of college athletes sued the National Collegiate Athletic Association (NCAA), along with several college athletic conferences. The plaintiffs seek to recover damages on behalf of Division I athletes whom they allege were prevented from receiving education-related compensation by the athletic association defendants.[[N:<em>Chuba Hubbard and Keira McCarrell v. National Collegiate Athletic Association</em>, 4:23-cv-01593 (N.D. Cal. April 4, 2023).]] The plaintiffs rely on <em>NCAA v. Alston</em>, the 2021 Supreme Court decision in which plaintiff athletes secured a victory based on the Supreme Court holding that athletic association policies that prohibited student athletes from receiving education-related compensation violated the Sherman Act.[[N:<em>Nat'l Collegiate Athletic Ass'n v. Alston</em>, 141 S. Ct. 2141, 210 L. Ed. 2d 314 (2021).]] The <em>McCarrell</em> plaintiffs argue that <em>Alston</em> &ldquo;did not rectify the harm suffered by thousands of Division I athletes who were unlawfully prevented from receiving education-related compensation before the injunction was issued,&rdquo;[[N:<em>Id</em>. at &para; 6.]] and so seek to recover hundreds of millions of dollars in damages dating back to 2016.</p> <p>In <em>Bewely et al. v. NCAA</em>, another student athlete compensation case brought in 2023, plaintiffs claim they were prevented from playing basketball at their school for violating their college&rsquo;s rules against student athlete compensation, in violation of the Sherman Act. The plaintiff students claim they lawfully received compensation &ldquo;in exchange for the use of their name, image, and likeness&rdquo; prior to enrolling at Chicago State University. Citing the <em>Alston</em> decision, plaintiffs allege that the NCAA and Chicago State University engaged in an unreasonable restraint of trade, a group boycott, and a refusal to deal. Though plaintiffs were denied a preliminary injunction, their lawsuit demonstrates that debate over compensation for student athletes is still ongoing.[[N:<em>Bewley et al. v. The National Collegiate Athletic Association</em>, No. 1:2023-cv-15570 (N.D. Ill. January 10, 2024).]]</p> <h2>Agency-Litigated Challenges to Mergers and Acquisitions Continue</h2> <p>Both the FTC and DOJ continued an aggressive merger enforcement agenda in 2023.[[N:For a discussion of the FTC and DOJ&rsquo;s aggressive enforcement agenda in 2022, <em>see</em> Asimow, Daniel et al., <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/01/developments-in-us-antitrust-litigation-2022" target="_self">Developments in US Antitrust Litigation &mdash; 2022 Year in Review</a>, Arnold &amp; Porter. ]] Three litigated merger challenges by the FTC were particularly notable.</p> <p>In <em>Federal Trade Commission v. Meta Platforms</em>, the FTC challenged Meta&rsquo;s acquisition of Within, a virtual reality app developer. In January 2023, the court denied the FTC&rsquo;s request to enjoin the transaction. While the court accepted the FTC&rsquo;s market definition and held that the FTC&rsquo;s theories of potential competition could be viable, the court found that the FTC had not met its burden. Instead, the court held that FTC did not adequately show there was a &ldquo;reasonable probability&rdquo; that Meta would have otherwise entered the market and competed against Within.[[N:Order Denying Plaintiff&rsquo;s Motion for Preliminary Injunction, <em>FTC v. Meta Platforms Inc.</em>, No. 5:22-cv-04325 (N.D. Cal. Jan. 31, 2023).]]</p> <p>In <em>Federal Trade Commission v. Microsoft</em>, the FTC lost another challenge to a tech merger. Here, the FTC alleged that Microsoft&rsquo;s proposed acquisition of Activision Blizzard would allow Microsoft to foreclose competition in certain video game markets. The court held that FTC failed to show the transaction would substantially lessen competition, noting commitments that Microsoft had made to ensure availability of certain Activision Blizzard gaming titles on competitor gaming consoles.[[N:Prelim. Inj. Op., <em>FTC v. Microsoft Corporation</em>, No. 23-cv-02880, at *52 (N.D. Cal. July 10, 2023).]] The FTC has appealed the decision to the Ninth Circuit while returning the matter to administrative adjudication, despite the parties closing their transaction.[[N:Order Returning Matter to Adjudication, <em>In the Matter of Microsoft Corp.</em>, No. 9412 (FTC Sept. 26, 2023); Activision Blizzard Inc., Form 8-K (Oct. 13, 2023).]]</p> <p>In <em>In the Matter of Illumina and Grail</em>, an FTC administrative decision received support from the Fifth Circuit Court of Appeals. The FTC originally brought suit in March of 2021 to block Illumina, a DNA sequencing company, from acquiring Grail, a biotechnology company that develops cancer screening tests using DNA sequencing. The FTC alleged that the merger would foreclose or disadvantage Grail&rsquo;s rival in creating multi-cancer early detection tests.[[N:Compl., <em>In Re Illumina and Grail</em>, No. 9401 (FTC March 30, 2021).]] FTC Chief Administrative Law Judge D. Michael Chappell dismissed the FTC&rsquo;s complaint in an initial decision, but in April 2023, the FTC reversed Judge Chappell&rsquo;s dismissal and ordered Illumina to divest Grail.[[N:Final Order, <em>In re Matter of Illumina and Grail</em>, No. 9401 (FTC April 3, 2023).]] On appeal, the Fifth Circuit vacated and remanded the order. The court held that the FTC did not adequately evaluate Illumina&rsquo;s promise to make its products available to Grail&rsquo;s competitors.[[N:<em>Illumina Inc. v. FTC</em>, 88 F. 4th 1036 (5th Cir. Dec. 15, 2023).]] However, the Fifth Circuit also found substantial evidence supporting FTC&rsquo;s market definition and factual finding that the merger was likely to lessen competition, and rejected the parties&rsquo; constitutional arguments.[[N:<em>Id</em>.]] The Fifth Circuit agreed with FTC&rsquo;s definition of a relevant market based on research and development efforts rather than existing commercialized products.[[N:<em>Id</em>. at 1049-51.]] With regard to the merger&rsquo;s impact on competition, the Fifth Circuit agreed that evidence supported that the merged entity would have the ability and incentive to foreclose rivals from competing in the relevant market. Illumina had argued that as it &ldquo;was already established as the monopoly supplier of a key input,&rdquo; the FTC could not &ldquo;show that the merger would increase Illumina&rsquo;s ability to foreclose.&rdquo; The Fifth Circuit concluded, however, that FTC did not need to find that the merger would <em>increase</em> the party&rsquo;s ability to foreclose in order to find anticompetitive effect.[[N:<em>Id</em>. at 1051-53.]] The Fifth Circuit also cited Illumina&rsquo;s internal documents as substantial evidence in support of its incentive to foreclose.[[N:<em>Id</em>. at 1053.]] Two days later, Illumina announced it would divest Grail.[[N:Press Release, <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/12/statement-regarding-illuminas-decision-divest-grail" target="_blank">Statement Regarding Illumina&rsquo;s Decision to Divest Grail</a>, FTC (Dec. 18, 2023).]]</p> <h2>Looking Ahead</h2> <p>While new antitrust litigations were down in 2023, it is not the case that plaintiffs and government enforcers are reducing their efforts to aggressively enforce the antitrust laws. Recent developments suggest that plaintiffs may face some challenges winning cases, but the trends in 2023 are likely to continue in 2024 as both plaintiffs and government enforcers seek out new ways to advance both novel and traditional antitrust theories of harm.</p> <p><em>*Alejandra Uria contributed to this Advisory. Alejandra is a graduate of Yale Law School and is employed at Arnold &amp; Porter's Washington, D.C. office. Alejandra is not admitted to the practice of law.</em></p> <p><span style="font-size: small;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Newsletter is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{D3431223-8347-4AC3-9891-23C60486F431}https://www.biosliceblog.com/2024/02/landmark-uk-high-court-decision-makes-it-easier-to-patent-ai-related-inventions-that-utilise-anns/Dr. Beatriz San Martinhttps://www.arnoldporter.com/en/people/s/san-martinbeatriz.sanmartin@arnoldporter.comShama Aktarhttps://www.arnoldporter.com/en/people/a/aktar-shamashama.aktar@arnoldporter.comLandmark UK High Court Decision Makes it Easier to Patent AI-related Inventions that Utilise ANNsThu, 01 Feb 2024 00:00:00 -0600{3DB23158-7AD5-4104-83E5-CB2BAAEBEEC9}https://www.arnoldporter.com/en/perspectives/events/2024/01/what-the-pharmaceutical-biotech-and-deviceWhat the Pharmaceutical, Biotech, and Device Industries Should Expect In 2024<p>Prepare for the challenges of 2024 by attending our annual CLE program for pharmaceutical, biotech, medical device, and diagnostic company in-house counsel and compliance personnel!</p>Wed, 31 Jan 2024 00:00:00 -0600<p>Prepare for the challenges of 2024 by attending our annual CLE program for pharmaceutical, biotech, medical device, and diagnostic company in-house counsel and compliance personnel!</p> <p>In this full-day program, hear from members of Arnold &amp; Porter's renowned life sciences practice about what you can do to prepare for tomorrow's legal and policy challenges. The sessions will address life sciences transactions, regulatory, fraud and abuse, compliance, pricing, legislation, Supreme Court developments, intellectual property, white collar/compliance, and antitrust issues in 2024 and beyond.</p>{D11B538B-763F-4D32-A40C-1D0D4179E1A0}https://www.arnoldporter.com/en/perspectives/news/2024/01/arnold-and-porter-celebrates-maria-chedids-landmark-role-as-first-womanArnold & Porter Celebrates Maria Chedid's Landmark Role as First Woman President of a Middle East Arbitral CourtArnold &amp; Porter is proud to recognize the extraordinary achievement of Maria Chedid, the global chair of the firm&rsquo;s International Arbitration Practice Group, on her appointment as the President of the inaugural Court of Arbitration at the Abu Dhabi International Arbitration Centre (arbitrateAD) &mdash; the first time a woman will serve as the president of an arbitral court in the Middle East.Wed, 31 Jan 2024 00:00:00 -0600<p>Arnold &amp; Porter is proud to recognize the extraordinary achievement of Maria Chedid, the global chair of the firm&rsquo;s International Arbitration Practice Group, on her appointment as the President of the inaugural Court of Arbitration at the Abu Dhabi International Arbitration Centre (arbitrateAD) &mdash; the first time a woman will serve as the president of an arbitral court in the Middle East.</p> <p>This significant appointment is a milestone for advancing women in law and promoting gender diversity within the international legal community while enhancing arbitrateAD&rsquo;s vision of establishing Abu Dhabi as a premier hub for efficient and expeditious dispute resolution.</p> <p>The new Court of Arbitration, under Chedid's leadership, is composed of fifteen leading international arbitration practitioners &mdash; nearly half of whom are women &mdash; representing a broad geographic reach from eleven jurisdictions across the Middle East, Africa, Europe, Asia, and the Americas.</p> <p>"I am honored to lead such a distinguished group. Each of our members brings a rich array of diverse experiences and backgrounds in a wide range of roles and industries, which will allow us to maximize the Court of Arbitration&rsquo;s potential,&rdquo; said Chedid. &ldquo;Together, we are committed to establishing the Court as a leading dispute resolution provider in the region and beyond, dedicated to upholding values of excellence, fairness, and efficiency."</p> <p>Chedid has over thirty years of experience in international arbitration involving foreign investment, technology, energy, infrastructure, intellectual property, life sciences, cryptocurrency, government contracts, environmental disputes, political risk issues, and more.</p> <p>Her other roles include serving as one of two U.S. members on the International Court of Arbitration of the ICC (second term), co-chairing the AAA/ICDR Global Task Force on Technology and Life Sciences Arbitration, serving as a Vice-President of the LCIA North American Users&rsquo; Council, and membership in the SIAC Users Council.</p> <p>The Abu Dhabi Centre&rsquo;s inaugural Court of Arbitration convened for its first meeting in Abu Dhabi this week, immediately preceding the official launch of the Centre to take place on February 1, 2024, signifying the beginning of a new era in international arbitration in the Middle East.</p>{F4C67734-47EE-4368-9C4E-B8F7F017A283}https://www.arnoldporter.com/en/perspectives/news/2024/01/arnold-porter-secures-victory-for-sothebysArnold & Porter Secures Victory for Sotheby’s in Art Fraud Suit<p>Arnold &amp; Porter secured a major victory for Sotheby&rsquo;s on January 30, 2024, when a jury in the Southern District of New York decided in favor of the auction house, clearing Sotheby&rsquo;s of any liability related to an alleged multimillion-dollar fraud.</p>Wed, 31 Jan 2024 00:00:00 -0600<p>Arnold &amp; Porter secured a major victory for Sotheby's on January 30, 2024, when a jury in the Southern District of New York decided in favor of the auction house, clearing Sotheby's of any liability related to an alleged multimillion-dollar fraud.</p> <p>Sotheby's was accused in a civil trial of colluding with art dealer Yves Bouvier to sell works of art to a Russian oligarch at extremely inflated prices ranging in the tens of millions of dollars. The art at issue included masterpieces by Magritte, Modigliani, Klimt, and Leonardo Da Vinci. The alleged fraud had been considered one of the largest art frauds in history, valued at up to $1 billion. The Arnold &amp; Porter team has represented Sotheby's in this matter since 2015, which involved a complete and extensive investigation, working closely with prosecutors in their parallel investigations, and steering litigation in multiple countries around the world.</p> <p>The Arnold &amp; Porter team was led by Marcus Asner, co-chair of the firm's White Collar Defense &amp; Investigations practice, and partner Sara Shudofsky. The team also included senior associate Benjamin Wolverton and associates Sahrula Kubie, Renata Politanski, and Yiqing Shi.</p>{ACE9D1DB-830B-4E1D-B21F-016E455EE756}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/01/arnold-and-porter-lawyers-featured-in-law360s-2024-outlook-coverageArnold & Porter Lawyers Featured in Law360’s 2024 Outlook CoverageArnold &amp; Porter lawyers John Elwood, Theresa House, Ryan Nishimoto, Jane Norberg, Soo-Mi Rhee, Ethan Shenkman, Peter Schildkraut, and Christian Schultz were quoted in various <em>Law360</em> articles highlighting noteworthy developments to watch in 2024 in the areas of environment, compliance, artificial intelligence, securities enforcement, trademark, and the U.S. Supreme Court.&nbsp;Wed, 31 Jan 2024 00:00:00 -0600<p>Arnold &amp; Porter lawyers John Elwood, Theresa House, Ryan Nishimoto, Jane Norberg, Soo-Mi Rhee, Ethan Shenkman, Peter Schildkraut, and Christian Schultz were quoted in various <em>Law360</em> articles highlighting noteworthy developments to watch in 2024 in the areas of environment, compliance, artificial intelligence, securities enforcement, trademark, and the U.S. Supreme Court. These lawyers all provided crucial insights to help the legal community and decision-makers across a wide variety of industries prepare for the biggest challenges and opportunities in the coming year.</p> <p>Read the <em>Law360</em> articles (subscription required):</p> <ul> <li><a rel="noopener noreferrer" href="https://www.law360.com/articles/1779989/5-supreme-court-cases-to-watch-this-spring" target="_blank">5 Supreme Court Cases To Watch This Spring</a> (John Elwood).</li> <li><a rel="noopener noreferrer" href="https://www.law360.com/articles/1777968/trademark-cases-to-watch-in-2024" target="_blank">Trademark Cases To Watch In 2024</a> (Theresa House).</li> <li><a rel="noopener noreferrer" href="https://www.law360.com/articles/1774888/these-are-the-high-stakes-ai-legal-battles-to-watch-in-2024" target="_blank">These Are The High-Stakes AI Legal Battles To Watch In 2024</a> (Ryan Nishimoto and Peter Schildkraut).</li> <li><a rel="noopener noreferrer" href="https://www.law360.com/articles/1775253/sec-enforcement-cases-to-watch-in-2024" target="_blank">SEC Enforcement Cases To Watch In 2024</a> (Jane Norberg and Christian Schultz).</li> <li><a rel="noopener noreferrer" href="https://www.law360.com/articles/1775325/compliance-priorities-in-2024-include-climate-and-ai" target="_blank">Compliance Priorities In 2024 Include Climate And AI</a> (Soo-Mi Rhee).</li> <li><a rel="noopener noreferrer" href="https://www.law360.com/articles/1773930/biggest-environmental-cases-to-watch-in-2024" target="_blank">Biggest Environmental Cases To Watch In 2024</a> (Ethan Shenkman).</li> </ul>{966ABA6A-3E28-4E88-83B1-EFFA18142491}https://www.arnoldporter.com/en/perspectives/advisories/2024/02/expect-action-by-new-commerce-department-icts-czarDeborah A. Curtishttps://www.arnoldporter.com/en/people/c/curtis-deborahdeborah.curtis@arnoldporter.comHenry B. Morrishttps://www.arnoldporter.com/en/people/m/morris-henryhenry.morris@arnoldporter.comCate Baskinhttps://www.arnoldporter.com/en/people/b/baskin-catecate.baskin@arnoldporter.comBeyond TikTok and WeChat: Industry Should Expect Action by New Commerce Department ICTS Czar Businesses will need to keep a closer eye on their digital supply chains if they want to steer clear of looming government oversight and enforcement as part of a U.S. government push to secure the information and communications technology infrastructure from exploitation by foreign adversaries.Wed, 31 Jan 2024 00:00:00 -0600<p>Businesses will need to keep a closer eye on their digital supply chains if they want to steer clear of looming government oversight and enforcement as part of a U.S. government push to secure the information and communications technology infrastructure from exploitation by foreign adversaries. <br /> <br /> The Department of Commerce&rsquo;s (Commerce) Office of Information and Communications Technology and Services (OICTS), housed within the Bureau of Industry and Security, was created to implement the Information and Communications Technology and Services (ICTS) Program. Under the authority of the International Emergency Economic Powers Act &mdash; which grants the president broad authority to identify and address the existence of &ldquo;unusual and extraordinary threat[s] ... to the national security, foreign policy, or economy of the United States,&rdquo; and particularly those that originate &ldquo;in whole or substantial part outside the United States&rdquo; &mdash; the ICTS Program enacts and enforces the ICTS Supply Chain Rule (the Rule), <a rel="noopener noreferrer" href="https://www.ecfr.gov/current/title-15/subtitle-A/part-7" target="_blank">15 C.F.R. Part 7</a>. <br /> <br /> The final ICTS Supply Chain Rule &mdash; effective July 17, 2023 &mdash; implements a series of Executive Orders spanning the Trump and Biden administrations, including the Trump administration&rsquo;s famously <a rel="noopener noreferrer" href="https://www.commerce.gov/issues/ict-supply-chain" target="_blank">enjoined orders</a> against TikTok and WeChat transactions and culminating in <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2021/06/11/2021-12506/protecting-americans-sensitive-data-from-foreign-adversaries" target="_blank">EO 14034</a> issued by President Biden. The Executive Orders declare that the Department of Commerce may take action to mitigate the risk of transactions where:</p> <ul> <li>The transaction involves information and communications technology or services that were developed or supplied by persons controlled by or subject to the jurisdiction of a &ldquo;foreign adversary&rdquo;</li> <li>The transaction poses an &ldquo;undue&rdquo; or &ldquo;unacceptable&rdquo; risk to U.S. information and communications technology or services, digital infrastructure, or national security</li> </ul> <p>Acting upon threat information provided by law enforcement or the intelligence community, Commerce can now elect to review and block such transactions. This expanded power covers not only future transactions, but present and ongoing ICTS activities, and gives wide discretion to the Commerce Secretary in evaluating and addressing threats from the six enumerated &ldquo;foreign adversaries&rdquo;: China (including Hong Kong), Russia, Iran, North Korea, Cuba, and Venezuela. <br /> <br /> On January 22, OICTS announced that its first Executive Director would be Elizabeth &ldquo;Liz&rdquo; Cannon, suggesting that the office is approaching a time of rapid expansion since its inception in 2021. In particular, Cannon has been cited for extensive national security experience in both the government and corporate spaces, stating that she &ldquo;<a rel="noopener noreferrer" href="https://www.bis.doc.gov/index.php/documents/about-bis/newsroom/press-releases/3438-press-release-liz-cannon/file" target="_blank">look[s] forward to safeguarding our nation&rsquo;s information and communications systems from foreign adversaries through an open and collaborative process.</a>&rdquo; The office&rsquo;s buildup and rising profile, along with the announcement of an OICTS Executive Director and the recent finalization of the ICTS Supply Chain Rule last July, is setting off alarm bells that an increase in oversight and enforcement is around the bend.<br /> <br /> In preparation, U.S. businesses that operate on or utilize the ICTS supply chain will want to consider the following questions:</p> <h2>Does my business conduct transactions along the ICTS supply chain?</h2> <p>If you are operating a business in today&rsquo;s digital world, there is a good chance the answer to this question is &ldquo;yes.&rdquo; The ICTS Supply Chain Rule defines information and communications technology and services broadly, including any hardware, software, or other service &ldquo;primarily intended to fulfill or enable the function of information or data processing, storage, retrieval, or communication by electronic means.&rdquo; The rule specifically notes that &ldquo;apps&rdquo; are included, as well as cloud-computing services and &ldquo;connected software applications.&rdquo; Connected software applications encompass software, a software program, or a group of such programs, designed to be used on an &ldquo;end-point computing device&rdquo; and be able to collect, process, or transmit data via the internet. <br /> <br /> Further, the regulations take a broad view of what it means to &ldquo;transact&rdquo; on the ICTS supply chain. Transactions include not only acquisition or transfer of ICTS, but also &ldquo;installation&rdquo; and &ldquo;use&rdquo; of ICTS. Notably, Commerce refused to carve out transactions involving sporadic access to software to include security patches and updates. In Commerce&rsquo;s view, this would &ldquo;create a loophole that would allow exactly the types of malicious cyber acts the rule is meant to prevent.&rdquo; Moreover, Commerce is not just looking at prospective transactions; ongoing activities, uses, and relationships can and will be investigated and could draw enforcement action.<br /> <br /> As a final note, when considering whether your transactions on the ICTS supply chain are in violation of the Rule, it is important to understand the sweeping standard applied: the technology or service need only be &ldquo;designed, developed, manufactured, or supplied, by persons <em>owned by, controlled by, or subject to</em> the jurisdiction or direction of a foreign adversary.&rdquo; A simple consideration of ownership alone will be insufficient to determine risk.</p> <h2>Will I know if my business is under investigation?</h2> <p>In short, not necessarily. In fact, you may not know your transactions are in question until Commerce has completed its initial review and reached a preliminary determination. Commerce&rsquo;s initial review &mdash; which may be taken up at the Commerce Secretary&rsquo;s discretion or prompted by an outside referral provided to the agency &mdash; does not require notice to the party or parties under investigation. Only upon reaching an initial determination that the ICTS transaction in question <em>does meet </em>the criteria of a prohibited transaction is Commerce required by the regulations to provide notice of its determination to the party.</p> <h2>Can I challenge the agency&rsquo;s determination?</h2> <p>Yes, but only to an extent. If Commerce makes an initial determination that you are party to a prohibited ICTS transaction, there is a brief 30-day response period. A response may include arguments and evidence that the initial determination did not have a sufficient basis, or could include a remediation plan to negate the need for the basis for the initial determination. You would also have the opportunity to request a meeting with Commerce regarding the determination; however, the regulations explicitly permit the agency to decline such a meeting at its discretion.<br /> <br /> Significantly, you would <em>not</em> have a right to review the information considered by Commerce in reaching its decision. In other words, a responding party is flying blind. The party may put forth its own argument and evidence, but will not necessarily have the opportunity to see and respond to Commerce&rsquo;s own evidence.<br /> <br /> Alternatively, you could assert to Commerce that circumstances have changed such that the initial determination of a prohibited ICTS transaction no longer apply. This could potentially allow a party to self-enforce and remove the offending piece of its business/supply chain. However, the regulations state that such a response could rescind <em>or mitigate</em> the agency&rsquo;s determination, meaning that Commerce may not be inclined to drop the enforcement action entirely.</p> <h2>What will enforcement look like?</h2> <p>A final determination issued by Commerce will direct the timing and manner for a prohibited transaction to be terminated. This can manifest in a variety of ways, depending on what activity on the ICTS supply chain Commerce has identified. For instance, the direction by Commerce could be as simple as ceasing to transact with a third-party vendor. However, it might also involve removing infrastructure &mdash; even hardware, like servers &mdash; from your supply chain if that infrastructure is, for instance, deemed to be under the control or jurisdiction of a foreign adversary and prohibited. <br /> <br /> Alternatively, you might be able to reach a &ldquo;mitigation agreement&rdquo; with Commerce that would include the terms of ceasing or mitigating the prohibited transaction. In most instances, this will be a preferred route for a party because it will give the party some input on the ultimate solution.<br /> <br /> Importantly, the final determination will also state the potential penalties if the party does not abide by the final determination and/or mitigation agreement. The government may pursue criminal and civil penalties against anyone that violates &mdash; or even attempts to or conspires to violate &mdash; Commerce&rsquo;s final determination and related directions, including the terms of any mitigation agreement reached with the party. These penalties can be quite serious. Criminal penalties have a fine of up to US$1,000,000, imprisonment of up to 20 years, or both, while a civil penalty may result in a fine of up to $307,922 or twice the value of the transaction that is the basis of the violation, whichever is greater.</p> <h2>What can I do to limit my ICTS risk?</h2> <p>As we have noted, investigation and enforcement of the ICTS Supply Chain Rule may occur quietly, behind a veil of administrative confidentiality, yet can carry hefty implications for your supply chain and equally hefty penalties if you do not comply. Therefore, as the Office of Information and Communication Technology and Services ramps up its work, it will be imperative for businesses to take steps to limit their risk of becoming a target. <br /> <br /> Beyond understanding the Rule itself, businesses should proactively investigate their own ICTS supply chain to ensure it is compliant. Due diligence cannot stop at their own infrastructure but rather businesses must conduct a holistic review, extending their visibility into third-party vendor information and technology ecosystems. As part of this review, businesses must stay closely attuned to its own and its customers&rsquo; sales patterns, immediately investigating abnormal patterns such as extreme or sudden upticks in sales. Additionally, conducting a consistent comparison between new and ongoing transactions and the U.S. sanctions list is essential. <br /> <br /> Arnold &amp; Porter&rsquo;s team of experienced attorneys, including ex-government officials with direct knowledge of how Commerce and its interagency partners will carry out the goals of the administration, are able to help businesses reach creative solutions to this significant new area of agency enforcement.</p> <p><em>About the authors:<br /> <br /> Deborah A. Curtis &mdash; Deb is a partner in Arnold &amp; Porter&rsquo;s White Collar Defense &amp; Investigations group. She has held a number of high-level government enforcement positions, including Deputy Chief for Export Control and Sanctions at the U.S. Department of Justice and Chief Counsel for Industry and Security at the U.S. Department of Commerce, where she advised executive leadership on legal enforcement and policy decisions, including initial implementation of the ICTS Supply Chain executive orders.<br /> <br /> Henry B. Morris &mdash; Henry is a litigation associate, focusing on white collar defense and investigations.<br /> </em><br /> <em>Cate Baskin &mdash; Cate is an associate, focusing on government contracts and national security matters, including export controls.</em></p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{5BC8717D-1A5E-4A6B-ACC0-46737613F132}https://www.fdli.org/2023/06/2024-digital-health-conference-agenda/#22ae5f6607cf0ecbfmahnu.davar@arnoldporter.comEnforcement and Litigation Trends in Digital HealthWed, 31 Jan 2024 00:00:00 -0600{FD4D0CF1-2C8F-42C8-8E1C-F95C2B64B004}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/01/mcmillin-talks-fda-ldt-rule-in-inside-health-policyMcMillin Talks FDA LDT Rule in Inside Health PolicyBobby McMillin, managing director of the firm&rsquo;s Legislative &amp; Public Policy practice, was recently quoted in the Inside <em>Health Policy</em> article, &ldquo;Joint FDA, CMS Statement Signals Critics Of FDA LDT Rule Won&rsquo;t Find Ally In CMS.&rdquo;&nbsp;Tue, 30 Jan 2024 00:00:00 -0600<p>Bobby McMillin, managing director of the firm&rsquo;s Legislative &amp; Public Policy practice, was recently quoted in the<em> Inside Health Policy</em> article, &ldquo;Joint FDA, CMS Statement Signals Critics Of FDA LDT Rule Won&rsquo;t Find Ally In CMS.&rdquo; The article highlights the U.S. Centers for Medicare &amp; Medicaid Services&rsquo; (CMS) alignment with the U.S. Food and Drug Administration&rsquo;s (FDA) proposed rule that would strengthen FDA oversight over laboratory developed tests (LDTs). </p> <p>According to the article, the FDA is pushing to finalize the rule by April 2024 in an effort to avoid it being subject to a &ldquo;lookback period&rdquo; if there is a change in administration next year. There remains a great deal of Congressional interest in the issue, and McMillin told <em>Inside Health Policy</em> that the House Energy and Commerce Committee &ldquo;is likely to hold a hearing on the proposed rule before its finalized.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://insidehealthpolicy.com/daily-news/joint-fda-cms-statement-signals-critics-fda-ldt-rule-won-t-find-ally-cms#:~:text=By%20putting%20out%20a%20joint,in%20CMS%2C%20industry%20lawyers%20say." target="_blank">Read the full article.</a></p>{EA4FC4D3-DECA-4739-9B87-E88923EB6198}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/ftc-raises-both-hart-scott-rodino-premergerPeter G. Daniashttps://www.arnoldporter.com/en/people/d/danias-peterpeter.danias@arnoldporter.comJay Ewarthttps://www.arnoldporter.com/en/people/e/ewart-jason-jayJason.Ewart@arnoldporter.comJustin P. Hedgehttps://www.arnoldporter.com/en/people/h/hedge-justin-pjustin.hedge@arnoldporter.comBarbara H. Woottonhttps://www.arnoldporter.com/en/people/w/wootton-barbara-hBarbara.Wootton@arnoldporter.comFTC Raises Both Hart-Scott-Rodino Premerger Filing and Interlocking Directorate Thresholds and Introduces a New Filing Fee Structure<span>On January 22, the Federal Trade Commission (FTC) announced its annual revision of the filing thresholds under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act), increasing the minimum reportable transaction from US$111.4 million to US$119.5 million.</span>Tue, 30 Jan 2024 00:00:00 -0600<p>On January 22, the Federal Trade Commission (FTC) announced its annual revision of the filing thresholds under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act), increasing the minimum reportable transaction from US$111.4 million to US$119.5 million. The FTC also announced revisions to thresholds relating to prohibitions on interlocking directorates under Section 8 of the Clayton Act.</p> <h2>HSR Reporting Threshold</h2> <p>Under the HSR Act, parties may be required to file notification for various acquisitions of voting securities, assets, and noncorporate interests with the FTC and Department of Justice (DOJ) and observe a waiting period before closing. The thresholds for filing are revised annually to adjust for inflation. The size of transaction and size of person thresholds were also increased.</p> <table style="width: 459px; height: 180px;"> <tbody> <tr> <td style="text-align: left; vertical-align: top; background-color: #1f497d;"><span style="color: #ffffff;"><strong>Size of the Transaction Thresholds</strong></span></td> <td style="text-align: left; vertical-align: top; background-color: #1f497d;"><span style="color: #ffffff;"><strong>Size of the Person Thresholds and<br /> Reporting Obligation</strong></span></td> </tr> <tr> <td style="text-align: left; vertical-align: top; background-color: #c6d9f0;">&nbsp;More than US$119.5 million, but less than US$478 million<br /> </td> <td style="text-align: left; vertical-align: top; background-color: #c6d9f0;">Filing may be required if one party&rsquo;s sales or assets exceed US$239 million and the other party&rsquo;s sales or assets exceed US$23.9 million.</td> </tr> <tr> <td style="text-align: left; vertical-align: top; background-color: #dbe5f1;"><span>More than US$478 million</span></td> <td style="text-align: left; vertical-align: top; background-color: #dbe5f1;"><span>Filing may be required irrespective of the parties&rsquo; size.</span></td> </tr> </tbody> </table> <br /> <h2>Filing Fees</h2> <p>The FTC also announced revised filing fee amounts:</p> <table style="width: 449px; height: 256px;"> <tbody> <tr> <td style="text-align: left; vertical-align: top; background-color: #1f497d;"><strong><span style="color: #ffffff;">Size of the Transaction</span></strong></td> <td style="text-align: left; vertical-align: top; background-color: #1f497d;"><strong><span style="color: #ffffff;">Filing Fee</span></strong></td> </tr> <tr> <td style="text-align: left; vertical-align: top; background-color: #c6d9f0;"><span>Greater than US$119.5 million,<br /> but less than US$173.3 million</span></td> <td style="text-align: left; vertical-align: top; background-color: #c6d9f0;">$30,000</td> </tr> <tr> <td style="text-align: left; vertical-align: top; background-color: #dbe5f1;"><span>At least US$173.3 million,<br /> but less than US$536.5 million</span></td> <td style="text-align: left; vertical-align: top; background-color: #dbe5f1;">$105,000</td> </tr> <tr> <td style="text-align: left; vertical-align: top; background-color: #c6d9f0;"><span>At least US$536.5 million,<br /> but less than US$1.073 billion</span><br /> </td> <td style="text-align: left; vertical-align: top; background-color: #c6d9f0;">$260,000</td> </tr> <tr> <td style="text-align: left; vertical-align: top; background-color: #dbe5f1;"><span>At least US$1.073 billion,<br /> but less than US$2 billion</span></td> <td style="text-align: left; vertical-align: top; background-color: #dbe5f1;">$415,000</td> </tr> <tr> <td style="text-align: left; vertical-align: top; background-color: #c6d9f0;"><span>At least US$2 billion,<br /> but less than US$5 billion</span></td> <td style="text-align: left; vertical-align: top; background-color: #c6d9f0;">$830,000</td> </tr> <tr> <td style="text-align: left; vertical-align: top; background-color: #dbe5f1;"><span>US$5 billion or more</span></td> <td style="text-align: left; vertical-align: top; background-color: #dbe5f1;">US$2,335,000</td> </tr> </tbody> </table> <br /> <h2>Clayton Act Section 8 Thresholds</h2> <p>New thresholds for the Clayton Act's prohibition on interlocking directorates were also announced. Section 8 of the Clayton Act makes it illegal, subject to certain exceptions, for a person to serve as a director or officer for two competing companies when the companies' profits or competitive sales exceed threshold limits.</p> <p>Under the new thresholds, it is illegal for an individual to serve in these capacities for competing corporations if each company has capital, surplus, and undivided profits aggregating more than US$48,559,000 (&sect; 8(a)(1)), unless one of the companies' competitive sales against the other are less than US$4,855,900 (&sect; 8(a)(2)(A)) or other <em>de minimis</em> exemptions apply (&sect; 8(a)(2)(B) and (C)).</p> <h2>Effective Date</h2> <p>The revised HSR Act thresholds and adjusted filing fees will become effective on March 6, 2024. The revisions regarding interlocking directorates became effective immediately.</p> <h2>FTC Proposed Substantial Revisions to HSR Form</h2> <p><a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/07/ftc-substantial-revisions-to-hsr-form">As we reported on July 5, 2023</a>, the FTC, with the concurrence of the DOJ&rsquo;s Assistant Attorney General of the Antitrust Division, proposed rules that would substantially increase the information required as part of the initial filings that companies have to make under the HSR Act. The comment period ended on September 27, 2023, and 721 comment letters were received, the majority of such letters being in opposition to the proposed changes. The proposed changes include an aggressive list of new required information concerning the transaction and its effects on both competition and labor. The proposed rules would substantially increase the burden and time it will take to prepare the initial HSR form and potentially subject more filed transactions to further review. We will continue to monitor the status of these proposed changes.</p> <h2>Increase of the Civil Penalty for Violations of the HSR Act</h2> <p>The FTC also separately announced that the maximum civil penalty for violations of the HSR Act will increase from $50,120 per day to $51,744 per day. The increased civil penalty became effective on January 10, 2024. The new penalty level will apply to civil penalties assessed after the effective date, including civil penalties for which the associated violation predated the effective date.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{6D995CA9-2E65-4CC5-983A-63B5643259DD}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/dept-of-commerce-proposes-rule-on-iaas-product-relatedJohn P. Barkerhttps://www.arnoldporter.com/en/people/b/barker-john-pjohn.barker@arnoldporter.comRonald D. Leehttps://www.arnoldporter.com/en/people/l/lee-ronald-dRonald.Lee@arnoldporter.comSoo-Mi Rheehttps://www.arnoldporter.com/en/people/r/rhee-soomisoo-mi.rhee@arnoldporter.comNicholas L. Townsendhttps://www.arnoldporter.com/en/people/t/townsend-nicholas-lnicholas.townsend@arnoldporter.comMarne Marottahttps://www.arnoldporter.com/en/people/m/marotta-marnemarne.marotta@arnoldporter.comJunghyun Baekhttps://www.arnoldporter.com/en/people/b/baek-junghyunjunghyun.baek@arnoldporter.comTrevor G. Schmitthttps://www.arnoldporter.com/en/people/s/schmitt-trevor-gtrevor.schmitt@arnoldporter.comKyung Liu-Katzhttps://www.arnoldporter.com/en/people/l/liu-katz-kyungkyung.liu-katz@arnoldporter.comDepartment of Commerce Proposes Rule on IaaS Product-Related Customer Identification and AI-Related Reporting Requirements On January 29, the Department of Commerce (Commerce) proposed a&nbsp;<a href="https://www.federalregister.gov/documents/2024/01/29/2024-01580/taking-additional-steps-to-address-the-national-emergency-with-respect-to-significant-malicious">rule</a>&nbsp;that will generally require U.S. Infrastructure as a Service (IaaS) providers and their foreign resellers to verify the identity of their foreign customers and report on the use of their products for large artificial intelligence (AI) training (the Proposed Rule).&nbsp;Tue, 30 Jan 2024 00:00:00 -0600<h2>Introduction</h2> <p>On January 29, 2024, the Department of Commerce (Commerce) proposed a <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2024/01/29/2024-01580/taking-additional-steps-to-address-the-national-emergency-with-respect-to-significant-malicious" target="_blank">rule</a> that will generally require U.S. Infrastructure as a Service (IaaS) providers and their foreign resellers to verify the identity of their foreign customers and report on the use of their products for large artificial intelligence (AI) training (the Proposed Rule or NPRM). The Secretary of Commerce (Secretary) will have the power to grant exemptions and place specific prohibitions and conditions on customers from certain foreign jurisdictions. The new rule is in addition to current export control and trade sanctions requirements under which the U.S. expects persons subject to U.S. jurisdiction to know their customers, including both end-use and end-users.<br /> <br /> On January 19, 2021, President Trump issued Executive Order (EO) 13984 directing the Secretary to issue regulations that would require U.S. IaaS providers to verify the identity of a foreign person obtaining an IaaS account. Then, on October 30, 2023, President Biden issued EO 14410 to broaden this reporting requirement to foreign resellers of U.S. IaaS products. EO 14410 also directs the Secretary to issue regulations that would impose expansive reporting requirements relating to AI, including U.S IaaS providers that engage in transactions with foreign persons for training a large AI model. The Proposed Rule would implement the provision of EOs 13984 and 14410, as detailed below.</p> <h2>Proposed Rule</h2> <p>The Proposed Rule requires U.S. IaaS providers to identify information about foreign customers through a Customer Identification Program (CIP) and report the implementation of the CIP to Commerce. U.S. IaaS providers are also required to ensure that their foreign resellers comply with the CIP and reporting requirements. Furthermore, the Proposed Rule would require reports on transactions involving the training of large AI models that could result in malicious cyber-enabled activities. Also, the Secretary would be empowered to prohibit U.S. IaaS product transactions with a foreign jurisdiction or person.</p> <h3>Customer Identification Programs</h3> <h4>Overview of Customer Identification Program Requirements</h4> <p>The Proposed Rule requires each U.S. IaaS provider to maintain and implement a written CIP. A U.S. reseller may adopt its direct provider&rsquo;s CIP to comply with the Proposed Rule. Also, a U.S. IaaS provider must (1) ensure that foreign resellers of U.S. IaaS product(s) maintain and implement a written CIP and (2) transmit foreign reseller CIPs to Commerce within 10 calendar days of a request.<br /> <br /> The CIP must describe procedures used to ascertain the identity of a potential customer and its beneficial owners.[[N: The NPRM defines beneficial owner as an individual who (1) exercises substantial control over a customer or (2) owns or controls at least 25% of the ownership interests of a customer. The Proposed Rule does not define &ldquo;substantial control,&rdquo; and Commerce invited comments regarding the scope of the term.]] If the procedures reveal that the potential customer and any beneficial owners are a U.S. person, no further tracking is required. However, for potential foreign customers or beneficial owners, the CIP must require the collection of their name, address, means and source of payment, email address, telephone number, and internet protocol (IP) addresses. The collected data must be then verified through documentary and/or non-documentary methods. <br /> <br /> For situations in which verification does not allow the IaaS provider to form a reasonable belief as to the true identity of a customer or beneficial owner, the CIP must dictate when the provider (1) should not open an account; (2) grant an interim, restricted account while attempting further verification; (3) close or impose additional monitoring on the relevant account; or (4) take corrective measures for customers who could not be verified or whose information may have been compromised.<br /> <br /> The CIP must also document recordkeeping procedures for foreign customers or beneficial owners&rsquo; identifying information, verification materials, and verification-discrepancy resolution results. The records must be kept for at least two years after the closure or last access of the relevant account. Third-party access to the verification records must be prohibited except for lawful purposes. Lastly, the CIP must require customers to notify additions of beneficial owners and periodically verify the accuracy of other provided information.</p> <h4>Those Subject to the Requirements</h4> <p>CIP requirements apply to U.S. IaaS providers, which is defined as any U.S. person who is a direct provider or reseller offering any IaaS product. A U.S. person is a U.S. citizen, lawful permanent resident, entity organized under the laws of any jurisdiction in the United States, or any person located in the United States. An IaaS product provides processing, storage, networks, or other fundamental computing resources for running software. Typically, the consumer of an IaaS product only accesses the software, with the provider managing and controlling the hardware.<br /> <br /> The Proposed Rule does not directly regulate foreign resellers of U.S. IaaS products. However, the Proposed Rule would indirectly impose the CIP requirements to foreign resellers of U.S. IaaS products by mandating that a U.S. IaaS provider working with a foreign reseller must ensure that the foreign entity maintains and implements a written CIP as specified by the Proposed Rule and submit foreign resellers&rsquo; CIP to the Commerce within 10 calendar days of a request. U.S. providers must also collect all information required for annual and irregular reports regarding their foreign resellers&rsquo; CIP implementation. In addition, the Proposed Rule requires a U.S. IaaS provider to take steps to close the foreign reseller account if the U.S. provider obtains evidence that its foreign reseller failed to maintain or implement a CIP or otherwise lacked good-faith efforts to prevent the use of the IaaS products for malicious cyber-enabled activities. The U.S. provider must also report suspected or actual malicious cyber-enabled activity to relevant authorities. The U.S. provider has 30 calendar days to terminate the relationship with the reseller if the reseller is known to have ignored identified issues or if continuing the relationship could increase the risk that the U.S. IaaS product is used for malicious cyber-enabled activity.</p> <h4>Exemptions</h4> <p>With limited restrictions, the Secretary may exempt a U.S. IaaS provider, specific type of account or lessee of a U.S. IaaS product, or specific foreign reseller of a U.S. IaaS product from the CIP-maintenance and CIP-reporting requirements of the Proposed Rule. <br /> <br /> To obtain an exemption, the U.S. IaaS provider must make a written, electronic submission to the Secretary. A foreign reseller must apply for an exemption through its U.S. provider who applies on behalf of the foreign reseller. The Secretary, in consultation with other agencies, may grant an exemption based on whether the provider maintains an effective Abuse of IaaS Products Deterrence Program to identify and respond to potential malicious cyber-enabled activities, cooperation with investigations of malicious cyber-enabled activities, and participation in public-private collaborative efforts on privacy-preserving data sharing and analytics. <br /> <br /> CIP exemptions are subject to annual notification requirements and may be revoked at any time.</p> <h4>CIP Certification and Reporting</h4> <p>U.S. IaaS providers must submit to Commerce annual CIP certification and irregular reports. The U.S. provider is also responsible for collecting and reporting all information required for annual certifications regarding its foreign reseller&rsquo;s CIP implementation. <br /> <br /> The certification must attest that the IaaS provider maintains an adequate written CIP and report the following information:</p> <ul> <li>Mechanisms, services, software, system, or tools used to verify the identity of the foreign customer or beneficial owner</li> <li>Procedures for requiring the customer to notify ownership changes</li> <li>Process for ongoing verification of the customer identification information</li> <li>Mechanisms, services, software, systems, or tools used to detect malicious cyber activity</li> <li>Procedures for requiring foreign reseller to maintain a CIP</li> <li>Procedures for identifying a foreign customer using the IaaS to train a large AI model capable enough to be used in a malicious cyber-enabled activity</li> <li>Contact information for the person responsible for managing the CIP</li> </ul> <p>In addition, the IaaS provider must furnish information about the operation of its IaaS product service, including the range of service offerings, customer base in foreign jurisdictions, employee structure, detection of malicious cyber-enabled activities and large AI training runs, and reporting processes.<br /> <br /> U.S. IaaS providers must annually update the certification forms and attest to their accuracy for itself and any foreign reseller. A U.S. IaaS provider must also submit irregular updates in case of a significant change related to its business operations, corporate structure, or CIP implementation, or a simple change in the contact information for personnel managing its own or foreign reseller&rsquo;s CIP.</p> <h4>Government Compliance Assessments</h4> <p> The Proposed Rule requires U.S. IaaS providers to provide their own or foreign reseller&rsquo;s CIP to Commerce upon 10 calendar days of the request. If Commerce notes deficiencies in the CIP, the U.S. provider must resolve identified issues within a reasonable time period and resubmit the relevant CIP for further inspection. <br /> <br /> Commerce may also conduct discretionary compliance assessments based on its risk assessment of a CIP, U.S. IaaS provider, or any of its foreign resellers. Commerce will assess whether a U.S. IaaS product is used or likely to be used by foreign malicious cyber actors or foreign persons training a large AI model with potential capabilities that could be used in malicious cyber-enabled activities. Commerce will also analyze whether a U.S. IaaS provider has failed to submit a CIP certification or implement Commerce recommendations from a compliance assessment. <br /> <br /> Commerce may conduct compliance assessments annually or as necessary. The assessments may result in follow-up assessments or an audit of the CIP processes and procedures. Also, Commerce may review transactions of the U.S. IaaS provider and recommend that the U.S. provider take remediation measures including mitigating risks and restricting engagement with jurisdictions or persons that the Secretary determines to be potentially harmful.</p> <h3>Reporting of Large AI Model Training</h3> <p> The Proposed Rule requires U.S. IaaS providers to report transactions by, for, or on behalf of a foreign person involving the training of a large AI model that could be used in malicious cyber-enabled activities. <br /> <br /> A U.S. IaaS provider must file the report within 15 calendar days of a covered transaction or when the provider reseller gains knowledge that a covered transaction took place. The filing must contain the contact and payment information of the foreign person, as well as details of the AI model training run including the number of computational operations, period of operations, AI model name, and cybersecurity practices. <br /> <br /> Also, a U.S. IaaS provider must require its foreign reseller to provide the U.S. provider with the report within 15 calendar days of the covered transaction or when the foreign reseller gained knowledge of the covered transaction. The U.S. provider must then file the foreign reseller&rsquo;s report within 30 calendar days of the covered transaction.</p> <h3>Special Measures on Foreign Jurisdictions or Foreign Persons Involved in Malicious Cyber-Enabled Activities</h3> <p> The Proposed Rule authorizes the Secretary, in consultation with heads of other agencies, to make a finding that (1) a foreign jurisdiction has a significant number of foreign persons offering or obtaining U.S. IaaS products for use in malicious cyber-enabled activity or (2) a foreign person has a pattern of offering or obtaining U.S. IaaS products for use in malicious cyber-enabled activities. <br /> <br /> A special measure is imposed as soon as the Secretary issues a determination regarding a particular foreign jurisdiction or foreign person pursuant to the above authority. Such a measure would prohibit or place conditions on the opening of an account or a reseller account with any U.S. IaaS provider by (1) a foreign person located in the designated foreign jurisdiction or (2) a designated foreign person.<br /> <br /> A special measure by the Secretary may remain effective for up to 365 calendar days, or longer if Commerce publishes a notice of extension in the Federal Register. U.S. IaaS providers need not implement a special measure until after 180 calendar days following its issuance.</p> <h2>Conclusion</h2> <p> The Proposed Rule requires not only U.S. providers and resellers of IaaS, but also their foreign resellers, to develop and maintain a CIP, submit certifications regarding the CIP, and notify Commerce about certain transactions involving large AI model training. Of note, the Proposed Rule specifically requires that U.S. IaaS providers ensure that any foreign reseller of its U.S. IaaS products maintain and implement a written CIP and submit reports on the foreign reseller&rsquo;s CIP. Thus, if the Proposed Rule is promulgated in its current form, U.S. IaaS providers will need to put in place procedures to hold their foreign resellers accountable for CIP-maintenance and CIP-reporting rules, as well as reporting requirements for large AI model transactions. Industry stakeholders are invited to submit comments on various aspects of the Proposed Rule, to be submitted within 90 days after the date of the NPRM.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{F74B92BF-6BA2-4883-A593-EA0F258BBEAE}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/irs-issues-guidance-for-retirement-plan-sponsorsUri Horowitzhttps://www.arnoldporter.com/en/people/h/horowitz-uriUri.Horowitz@arnoldporter.comMary Cassidyhttps://www.arnoldporter.com/en/people/c/cassidy-marymary.cassidy@arnoldporter.comDouglas S. Pelleyhttps://www.arnoldporter.com/en/people/p/pelley-douglas-sDouglas.Pelley@arnoldporter.comKathleen Wechterhttps://www.arnoldporter.com/en/people/w/wechter-kathleenkathleen.wechter@arnoldporter.comKathryn Geoffroyhttps://www.arnoldporter.com/en/people/g/geoffroy-kathrynkathryn.geoffroy@arnoldporter.comPari Sitaulahttps://www.arnoldporter.com/en/people/s/sitaula-pariPari.Sitaula@arnoldporter.comIRS Issues Guidance for Retirement Plan Sponsors Under SECURE 2.0On December 20, 2023, the IRS released Notice 2024-02 (the Notice), providing clarifications on certain provisions of the SECURE 2.0 Act of 2022 (SECURE 2.0) affecting qualified plans (especially 401(k) and 403(b) plans).Mon, 29 Jan 2024 00:00:00 -0600<p>On December 20, 2023, the IRS released Notice 2024-02 (the Notice), providing clarifications on certain provisions of the SECURE 2.0 Act of 2022 (SECURE 2.0) affecting qualified plans (especially 401(k) and 403(b) plans). This Advisory serves as an update to our <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/02/secure-2_0-brings-significant-changes">previous Advisory outlining key provisions of SECURE 2.0</a>. The following is a summary of some of the key issues discussed in the Notice.</p> <h2>Expanding Automatic Enrollment</h2> <p><strong></strong>Generally, SECURE 2.0 mandates an automatic enrollment feature for new 401(k) plans established on or after December 29, 2022. However, certain plans established before that date (pre-enactment plans) are exempt from the mandate.</p> <ul> <li><em>Establishment Date:</em> The establishment date of a plan is the date when plan terms for 401(k) deferrals are initially adopted, even if the effective date of such 401(k) is later than such adoption date.</li> <li><em>Merging Pre-Enactment Plans: </em>When two single employer pre-enactment 401(k) plans merge, the merged plan retains its exemption from the automatic enrollment mandate.</li> <li><em>Merging Pre-Enactment Plan With a Post-Enactment Plan: </em>When a single employer pre-enactment plan merges with a single employer plan established on or after December 29, 2022, the merged plan will not be treated as a pre-enactment plan, except under certain conditions such as post-corporate transaction mergers in which the pre-enactment plan is designated as the ongoing plan.</li> <li><em>Spun-Off Plans:</em> If a single employer pre-enactment plan undergoes a spin-off, the spun-off plan will continue to be treated as a pre-enactment 401(k) plan.</li> <li><em>Application to 403(b) Plans:</em> 403(b) plans are subject to the same automatic enrollment mandate, except for those established before December 29, 2022, regardless of when the deferral feature is added.</li> <li><em>Starter 401(k) Plans: </em>The automatic enrollment mandate generally applies to &ldquo;starter 401(k) plans&rdquo; for plan years beginning after December 31, 2024.</li> </ul> <h2>Self-Correction for Automatic Enrollment</h2> <p><strong></strong>The IRS Employee Plans Compliance Resolution System (EPCRS) set forth in Revenue Procedure 2021-30 provided a safe harbor method for correcting reasonable errors in implementing automatic enrollment features (e.g., failure to enroll an employee under an automatic contribution or escalation feature). An employer could correct an implementation error by beginning to withhold correct deferrals generally by nine and one-half months after the end of the plan year in which the implementation error occurred, making a corrective allocation of matching contributions on employee missed deferrals and satisfying certain notice requirements. This safe harbor correction method was scheduled to expire on December 31, 2023, but SECURE 2.0 codified the safe harbor correction method. The Notice specifies that corrections may generally be made for both active and terminated employees and that the SECURE 2.0 safe harbor correction method for missed deferrals is generally effective for implementation errors with correction deadlines after December 31, 2023. </p> <p>If an affected individual would have been entitled to additional matching contributions had the implementation error not occurred, a corrective allocation of the additional matching contributions (adjusted for earnings) must be made within a &ldquo;reasonable period&rdquo; which generally means that the contributions are made by the last day of the sixth month following the month in which correct elective deferrals begin (or would have begun for terminated employees). However, in the case of a corrective allocation of matching contributions made with respect to an implementation error occurring before 2024, corrective allocations made by the end of the third plan year following the year in which the error occurred will be treated as having been made within a &ldquo;reasonable period.&rdquo;</p> <h2>Roth Contributions</h2> <p><strong></strong>Under SECURE 2.0, plan sponsors are allowed to permit participants to designate employer matching or nonelective contributions as Roth contributions. The Notice provides answers to some of the questions on this provision, including timing of participant elections, income inclusion, and Form 1099-R reporting. The Notice states that employer contributions may only be designated as Roth contributions if a participant is fully vested in that type of contribution at the time it is allocated to the participant&rsquo;s account.<br /> <em></em></p> <h2><em>De Minimis </em>Incentives</h2> <p><strong></strong>&nbsp;SECURE 2.0 allows employers to offer "<em>de minimis</em>" financial incentives (not paid for with plan assets) to encourage plan participation. According to the Notice, incentives cannot exceed $250 in value. These incentives can only be offered to employees without a deferral election in place, except for <em>de minimis</em> financial incentives made in installments and paid contingent on continued deferral. Matching contributions do not qualify as <em>de minimis</em> financial incentives. <em>De minimis</em> financial incentives are generally taxable and subject to withholding and reporting requirements. </p> <h2>SIMPLE and SEP Plans</h2> <ul> <li><em>Contribution Limits for SIMPLE Plans.</em> SECURE 2.0 increased salary deferral and employer contribution limits for certain SIMPLE IRAs and SIMPLE 401(k) plans. The Notice provides that the increased deferral limits apply to an employer that did not establish or maintain a 401(a) plan, 403(a) annuity plan, or 403(b) plan covering substantially the same employees in the three-year taxable period before the first year the employer maintained the SIMPLE plan. The increased deferral limits apply automatically to an eligible employer with not more than 25 employees who received at least $5,000 of compensation for the preceding calendar year, and by employer election in the case of any other eligible employer. The Notice clarifies how the employee count is calculated and provides a two-year grace period when the employee count is exceeded. Employers who make an election to apply the increased deferral limits also must make increased matching contributions or increased nonelective contributions. Employers who make the election for a year must do so before providing the annual employee notice regarding salary reduction agreements for the year and must notify employees of the increased deferral and employer contribution limits.</li> <li><em>SIMPLE IRA Plan Termination.</em> Prior to SECURE 2.0, employers could not terminate their SIMPLE IRA plans mid-year, and rollovers from terminated IRA plans were severely limited for participants with less than two years of participation. SECURE 2.0 allows an employer to terminate a SIMPLE IRA plan mid-year and replace it with a safe harbor 401(k) plan for the plan year beginning after December 31, 2023. The Notice provides that an employer can terminate a SIMPLE IRA by taking formal action specifying a termination date. Employees must receive a 30-day notice before termination which must include a statement that no salary reduction contributions may be made with respect to compensation paid after the termination date. Distributions from a terminated SIMPLE IRA plan within the first two years of an individual&rsquo;s participation can be rolled over to certain 401(k) and 403(b) plans. The Notice also includes guidance for modified salary deferral limits and notice requirements for the year in which a SIMPLE IRA is replaced by a safe harbor 401(k) plan mid-year.</li> <li><em>SIMPLE and SEP Roth IRAs. </em>SECURE 2.0 permits an employee who participates in a SIMPLE IRA plan or simplified employee pension arrangement (SEP) to designate a Roth IRA to which contributions under the SIMPLE IRA plan or SEP are made. The Notice clarifies that employers are not required to offer a Roth contribution option under their SIMPLE IRA plans and SEPs and provides details regarding when an employee may make the Roth contribution election and whether contributions are subject to income and employment tax withholding.</li> </ul> <h2>Additional Provisions</h2> <ul> <li><em>Terminal Illness Distribution.</em> SECURE 2.0 permits terminally ill individuals to withdraw amounts early from their retirement accounts without facing the 10% tax penalty. The Notice confirms that while SECURE 2.0 created an exception to the early withdrawal penalty, it did not create a new in-service distribution option. Therefore, a distribution for terminal illness may only be made if the individual has separated from employment or is otherwise eligible for an in-service distribution, such as a hardship or disability distribution. The Notice defines a &ldquo;terminally ill individual&rdquo; and includes details regarding a required physician certification of terminal illness. Qualified plans, including 401(a) plans, 403(a) annuity plans, 403(b) annuity contracts, and IRAs, may permit terminally ill distributions.</li> <li><em>Military Spouse Credit for Small Employers.</em> The Notice provides guidance on a new tax credit for small employers providing retirement benefits to military spouses through an eligible defined contribution plan, with eligibility to claim the tax credit extending up to a three-year credit period.</li> <li><em>Cash Balance Plan Accrual Rule.</em> The Notice provides guidance on SECURE 2.0 changes to defined benefit accrual requirements for cash balance plans with variable interest crediting rates.</li> <li><em>Plan Amendment Deadline. </em>The IRS has clarified the deadlines for retirement plan amendments: Qualified plans have until December 31, 2026, with exceptions for governmental and collectively bargained plans, which must be amended by December 31, 2029 and December 31, 2028, respectively; 403(b) plans must be amended by December 31, 2026, with exceptions for public school and collectively bargained 403(b) plans, which must be amended by December 31, 2029 and December 31, 2028, respectively; and IRA trust agreements or annuity contracts must be amended by December 31, 2026, unless the IRS issues guidance setting a later date.</li> </ul> <h2>Further Considerations</h2> <p>The Notice states that the IRS anticipates issuing further SECURE 2.0 guidance. We will continue to monitor the status of the guidance.</p> <p><span style="font-size: small;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{8B4086F4-16F0-4E47-A5FC-1B55C0415331}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/us-implements-additional-sanctions-against-russia-and-belarusJohn P. Barkerhttps://www.arnoldporter.com/en/people/b/barker-john-pjohn.barker@arnoldporter.comSoo-Mi Rheehttps://www.arnoldporter.com/en/people/r/rhee-soomisoo-mi.rhee@arnoldporter.comNicholas L. Townsendhttps://www.arnoldporter.com/en/people/t/townsend-nicholas-lnicholas.townsend@arnoldporter.comJunghyun Baekhttps://www.arnoldporter.com/en/people/b/baek-junghyunjunghyun.baek@arnoldporter.comTrevor G. Schmitthttps://www.arnoldporter.com/en/people/s/schmitt-trevor-gtrevor.schmitt@arnoldporter.comBell Johnsonhttps://www.arnoldporter.com/en/people/j/johnson-bellbell.johnson@arnoldporter.comSarah Belmonthttps://www.arnoldporter.com/en/people/b/belmont-sarahsarah.belmont@arnoldporter.comU.S. Department of Commerce Bureau of Industry and Security Implements Additional Sanctions Against Russia, Belarus, and IranOn January 23, the United States&nbsp;implemented&nbsp;additional sanctions measures and trade restrictions on Russia and Belarus in response to Russia&rsquo;s ongoing war in Ukraine.Fri, 26 Jan 2024 00:00:00 -0600<p>On January 23, the United States <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2024/01/25/2024-01408/implementation-of-additional-sanctions-against-russia-and-belarus-under-the-export-administration" target="_blank">implemented</a> additional sanctions measures and trade restrictions on Russia and Belarus in response to Russia&rsquo;s ongoing war in Ukraine. The U.S. Department of Commerce&rsquo;s Bureau of Industry and Security (BIS) bolstered its existing restrictions under the Export Administration Regulations (EAR) against Russia, Belarus, and Iran by (1) expanding the scope of the EAR&rsquo;s Russian and Belarusian Industry Sector Sanctions; (2) modifying the licensing requirements that apply to the occupied Crimea region of Ukraine; (3) revising recent restrictions targeting Iran&rsquo;s supply of Unmanned Aerial Vehicles (UAV) to Russia; and (4) refining certain existing export controls on Russia and Belarus.</p> <h2>Overview of New Export Controls</h2> <p>This new rule strengthens and enhances current export control measures targeting Russia, Belarus, the occupied Crimea region of Ukraine, and Iran&rsquo;s supply of UAV to Russia. The new export control measures include:</p> <ul> <li><em>Expansion of Russian and Belarusian Industry Sector Sanctions: </em>BIS added 94 additional Harmonized Tariff Schedule (HTS)-6 Code entries to Supplement No. 4 to Part 746 (Russian and Belarussian Industry Sector Sanctions). As a result, these items now require a license for export, reexport, or transfer to or within Russia or Belarus. These newly added items include a variety of industrial materials, items needed for manufacturing, and certain aircraft-related items. Several examples include spanners and wrenches, hand operated, non-adjustable, and parts thereof, of base metal (820411), hand tools not elsewhere specified or indicated, and parts thereof, of base metal (820559), parachutes (including dirigible parachutes and paragliders) (880400), ground flying trainers and parts thereof (880529), parts of airplanes or helicopters, not elsewhere specified or indicated (880730).</li> <li><em>Expansion of Items That Require a License When Destined to Iran, Russia, or Belarus: </em>BIS expanded the list of items requiring a license by adding one additional HTS-6 Code entry (852910) to Supplement No. 7 to Part 746, which is aimed at curbing Iran&rsquo;s ongoing support of Russia&rsquo;s military capabilities. The items within this entry include a variety of antennas, antenna reflectors, and related parts.</li> <li><em>Prohibiting the Use of De Minimis for .y "600 Series" and 9x515 Items for Belarus and Russia: </em>This rule expands the scope of the paragraph (a)(6)(ii) of the <em>de minimis</em> rule to specifically include Belarus and Russia. As a result, foreign-made items that incorporate U.S.-origin "600 series" .y items or 9x515 items are subject to the EAR and trigger a license requirement when destined to Russia or Belarus.</li> </ul> <h2>Overview of Corrections and Clarifications to Existing Export Controls</h2> <p>Additionally, this rule makes corrections and clarifications with respect to certain Russia and Belarus-related provisions of the EAR. These corrections and clarifications include:</p> <ul> <li><em>Addition of Exclusion From License Requirements for Deployments by the Armed Forces of Ukraine to or Within the Temporarily Occupied Crimea Region of Ukraine and Covered Regions of Ukraine:</em> This rule added an exclusion to the license requirements under Section 746.6 for exports, reexports, and transfers (in-country) to or within the temporarily occupied Crimea region of Ukraine and covered regions of Ukraine (currently Donetsk and Luhansk) related to deployments made by the Ukrainian Armed Forces to allow more efficient and effective operations of the Ukrainian Armed Forces (AFU or ZSU) in the region.</li> <li><em>Clarification That De Minimis Exclusion for Exports/Reexports From Certain Partner Countries Also Apply to Luxury Goods Sanctions:</em> BIS clarified the exclusion to the <em>de minimis</em> rule available to certain partner countries that have committed to imposing similar export control measures is also available for the Luxury Goods Sanctions under &sect; 746.10 of the EAR.</li> <li><em>Clarification Regarding Order of Precedence for Items Identified in Russian and Belarusian Industry Sector Sanctions or Luxury Goods Sanctions and Classified Under Commerce Control List:</em> The rule revises the introductory texts of Sections 746.5 (Russian and Belarussian Industry Sector Sanctions), 746.8 (Sanctions Against Russia and Belarus), and 746.10 (Luxury Goods Sanctions) to clarify how exporters should treat controlled items destined to Belarus or Russia across multiple sections of the EAR.</li> <li><em>Clarification Regarding the Exclusion of Fasteners From the Scope of Supplement Nos. 2, 4, 5, and 7: </em>BIS clarified that, although fasteners (e.g., screws, bolts, nuts, nut plates, studs, inserts, clips, rivets, pins, washers, spacers, insulators, grommets, bushing, springs, wires, and solders) are excluded from the scope of Supplement Nos. 2, 4, and 5, an exporter, reexporter, or transferor must review Part 744 for the license requirements for Russia and Belarus that extend to all items subject to the EAR.</li> <li><em>Harmonization of License Exceptions:</em> BIS revised Sections 746.5 (Russian and Belarussian Industry Sector Sanctions), 746.8 (Sanctions Against Russia and Belarus), and 746.10 (Luxury Goods Sanctions) to harmonize the license exceptions available for these Russia/Belarus-related export controls. Prior to the amendment, different sets of license exceptions applied to each of the three sections, causing some confusion. (See below for the License Exceptions table for &sect;&sect; 746.5, 746.8, 746.10.)</li> <li><em>Clarification That &ldquo;Medicines&rdquo; Are Excluded From the Scope of Supplement No. 6 to Part 746: </em>BIS clarified that Supplement No. 6 to Part 746 (Russian and Belarussian Industry Sector Sanctions) does not include any item meeting the definition of "medicine." According to the EAR, &ldquo;medicines&rdquo; means a &ldquo;drug&rdquo; as defined in section 201 of the Federal Food, Drug and Cosmetic Act (21 U.S.C. 321). For purposes of the EAR, this includes EAR99 prescription and over-the-counter medicines for humans and animals. Certain medicines, such as immunotoxins and vaccines on the CCL, are not affected by this change.</li> <li><em>Adopting Case-by-Case License Review Policy for Applications Related to Safety of Flight Under &sect;&sect; 746.5 and 746.10 to Conform With &sect; 746.8: </em>BIS revised its case-by-case license review policy in &sect;&sect; 746.5 and 746.10 to include applications related to safety of flight because certain EAR99 items related to safety of flight are identified in Supplement Nos. 4 and 5. License applications for these items should be reviewed consistently with the policy outlined in &sect; 746.8. BIS stated both BIS and other license reviewing agencies use a narrow and restrictive interpretation of what items qualify as "related to safety of flight." These items pertain to items without which an aircraft would be unable to safely operate. BIS does not intend this category to apply to aircraft in "production," but rather only those aircraft that require safety-critical items in an emergency.</li> <li><em>Modification to Restrictions on the Temporary Import of Firearms From Ukraine:</em> U.S.-origin firearms originally provided to Ukraine pursuant to a BIS license may be temporarily imported pursuant to the EAR for repair or replacement under License Exception RPL (15 CFR 740.10(b)(4)(i)) for return to Ukraine for use in its defense against Russia since such activity is consistent with U.S. foreign policy and the EAR. BIS will update its &ldquo;Exports of Firearms and Related Items FAQs&rdquo; on its website in connection with this policy.</li> </ul> <h2>Conclusion</h2> <p>These newly implemented sanctions against Russia and Belarus seek to further hamper Russia's war of aggression against Ukraine. Additionally, these expanded controls seek to target Belarus&rsquo; complicity and Iran&rsquo;s continued support of Russia. We will continue to monitor the sanctions and export control restrictions as they emerge.</p> <h2>License Exceptions Table</h2> <table style="color: #000000; background-color: #dbe5f1; height: 896px; width: 705px; border-color: #bfbfbf #d8d8d8 #d8d8d8; border-style: solid; top: 361.449px;"> <tbody> <tr> <td style="background-color: #1f497d; text-align: center; vertical-align: top;"><span style="color: #ffffff;"></span><strong><span style="color: #ffffff;">License Exception</span></strong></td> <td style="background-color: #1f497d; text-align: center;"><span style="color: #ffffff;"><strong><strong><span><strong>&sect;</strong> 746.5</span></strong></strong></span></td> <td style="background-color: #1f497d; text-align: center;"><span style="color: #ffffff;">&nbsp;<strong><span>&sect; 746.8</span></strong>&nbsp;</span></td> <td style="background-color: #1f497d; text-align: center;"><strong><span style="color: #ffffff;"><strong><span>&sect; 746.10</span></strong></span></strong></td> </tr> <tr> <td style="background-color: #dbe5f1; text-align: left; vertical-align: top;">License Exception temporary exports and reexports (TMP) for items for use by the news media as set forth in &sect; 740.9(a)(9) of the EAR</td> <td style="background-color: #dbe5f1; text-align: center; vertical-align: top;">&nbsp;Eligibility added</td> <td style="background-color: #dbe5f1; text-align: center; vertical-align: top;">&nbsp;Available </td> <td style="background-color: #dbe5f1; text-align: center; vertical-align: top;">&nbsp;Eligibility added</td> </tr> <tr> <td style="background-color: #c6d9f0; text-align: left; vertical-align: top;">License Exception governments and international organizations (GOV) (&sect; 740.11(b))</td> <td style="background-color: #c6d9f0; text-align: center; vertical-align: top;">&nbsp;Available</td> <td style="background-color: #c6d9f0; text-align: center; vertical-align: top;">&nbsp;Available</td> <td style="background-color: #c6d9f0; text-align: center; vertical-align: top;">&nbsp;Eligibility added</td> </tr> <tr> <td style="background-color: #dbe5f1; text-align: left; vertical-align: top;">License Exception software updates (TSU) for software updates for civil end-users that are wholly-owned U.S. subsidiaries, branches, or sales offices, foreign subsidiaries, branches, or sales offices of U.S. companies that are joint ventures with other U.S. and companies, joint ventures of U.S. companies with companies headquartered in countries from Country Group A:5 and A:6 in supplement no. 1 to part 740 of the EAR countries, the wholly-owned subsidiaries, branches, or sales offices of companies headquartered in countries from Country Group A:5 and A:6 in supplement no. 1 to part 740, or joint ventures of companies headquartered in Country Group A:5 and A:6 with other companies headquartered in Country Groups A:5 and A:6 (&sect; 740.13(c) of the EAR)</td> <td style="background-color: #dbe5f1; text-align: center; vertical-align: top;">&nbsp;Eligibility added</td> <td style="background-color: #dbe5f1; text-align: center; vertical-align: top;">&nbsp;Available</td> <td style="background-color: #dbe5f1; text-align: center; vertical-align: top;">&nbsp;<span>Eligibility added</span></td> </tr> <tr> <td style="background-color: #c6d9f0; text-align: left;">License Exception baggage (BAG), excluding firearms and ammunition (&sect; 740.14, excluding paragraph (e), of the EAR)</td> <td style="background-color: #c6d9f0; text-align: center; vertical-align: top;">&nbsp;Eligibility added</td> <td style="background-color: #c6d9f0; text-align: center; vertical-align: top;">&nbsp;Available</td> <td style="background-color: #c6d9f0; text-align: center; vertical-align: top;">&nbsp;Available</td> </tr> <tr> <td style="text-align: left; vertical-align: top;">License Exception aircraft, vessels, and spacecraft (AVS), excluding any aircraft registered in, owned or controlled by, or under charter or lease by Russia or Belarus or a national of Russia or Belarus (&sect; 740.15(a) and (b) of the EAR)&nbsp;</td> <td style="text-align: center; vertical-align: top;">&nbsp;Available</td> <td style="text-align: center; vertical-align: top;">&nbsp;Available</td> <td style="text-align: center; vertical-align: top;"> <p style="text-align: left;">Eligibility added. </p> <p style="text-align: left;"><strong>Note: </strong>A narrower subset of License Exception AVS was previously referenced, but for conformity with the other two sections this rule adopts the same License Exception AVS eligibility.</p> </td> </tr> <tr> <td style="background-color: #c6d9f0; text-align: left; vertical-align: top;">License Exception encryption commodities, software, and technology (ENC) for civil end users that are wholly-owned U.S. subsidiaries, branches, or sales offices, foreign subsidiaries, branches, or sales offices of U.S. companies that are joint ventures with other U.S. companies, joint ventures of U.S. companies with companies headquartered in countries from Country Group A:5 and A:6 in supplement no. 1 to part 740 of the EAR countries, the wholly-owned subsidiaries, branches, or sales offices of companies headquartered in countries from Country Group A:5 and A:6 in supplement no. 1 to part 740, or joint ventures of companies headquartered in Country Group A:5 and A:6 with other companies headquartered in Country Groups A:5 and A:6 (&sect;&sect; 740.13(c) and 740.17 of the EAR)&nbsp;</td> <td style="background-color: #c6d9f0; text-align: center; vertical-align: top;">Eligibility added</td> <td style="background-color: #c6d9f0; text-align: center; vertical-align: top;">&nbsp;Available</td> <td style="background-color: #c6d9f0; text-align: center; vertical-align: top;">&nbsp;Eligibility added</td> </tr> <tr> <td style="background-color: #dbe5f1; text-align: left; vertical-align: top;">&nbsp;License Exception commodities and software authorized under License Exception consumer communications devices (CCD) (&sect; 740.19 of the EAR)</td> <td style="background-color: #dbe5f1; text-align: center; vertical-align: top;">&nbsp;Available</td> <td style="background-color: #dbe5f1; text-align: center; vertical-align: top;">&nbsp;Available</td> <td style="background-color: #dbe5f1; text-align: center; vertical-align: top;">&nbsp;Available</td> </tr> </tbody> </table> <p>&nbsp;</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{79DF4138-7EF1-45A9-9B2C-489D56E821E6}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/cfpb-issues-guidance-on-fcra-requirementsAmber A. Hayhttps://www.arnoldporter.com/en/people/h/hay-amber-aamber.hay@arnoldporter.comMichael A. Mancusihttps://www.arnoldporter.com/en/people/m/mancusi-michael-amichael.mancusi@arnoldporter.comKevin M. Toomeyhttps://www.arnoldporter.com/en/people/t/toomey-kevin-mkevin.toomey@arnoldporter.comChristopher L. Allenhttps://www.arnoldporter.com/en/people/a/allen-christopher-lChristopher.Allen@arnoldporter.comAnthony Raglanihttps://www.arnoldporter.com/en/people/r/raglani-anthonyanthony.raglani@arnoldporter.comTrevor Kirbyhttps://www.arnoldporter.com/en/people/k/kirby-trevortrevor.kirby@arnoldporter.comCFPB Issues Guidance on Fair Credit Reporting Act Disclosure and Reporting RequirementsOn January 11, the Bureau of Consumer Financial Protection (CFPB) published two pieces of guidance related to disclosure and reporting requirements by consumer reporting agencies under the Fair Credit Reporting Act (FCRA).&nbsp;Thu, 25 Jan 2024 00:00:00 -0600<p>On January 11, the Bureau of Consumer Financial Protection (CFPB) published two pieces of guidance related to disclosure and reporting requirements by consumer reporting agencies under the Fair Credit Reporting Act (FCRA). First, the CFPB <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/rules-policy/final-rules/fair-credit-reporting-file-disclosure/" target="_blank">issued</a> an advisory opinion clarifying a consumer reporting agency&rsquo;s disclosure requirements under Section 609(a) of FCRA. Second, the CFPB <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/rules-policy/final-rules/fair-credit-reporting-background-screening-2024/" target="_blank">issued</a> an advisory opinion highlighting obligations under Section 607(b) of FCRA that require consumer reporting agencies to &ldquo;follow reasonable procedures to assure maximum possible accuracy,&rdquo; in addition to clarifying the reporting period for adverse items under Section 605(a)(5) of FCRA.<br /> <br /> These advisory opinions apply to all consumer reporting agencies, as defined under Section 603(f) of FRCA,[[N: 12 U.S.C. &sect; 1681a(f).]] including check and bank account screening companies that collect and report data on check screening services and account applications, openings, and closures.</p> <h2>Advisory Opinion on File Disclosure Requirements</h2> <p>Under Section 609(a) of FCRA, all consumer reporting agencies must clearly and accurately disclose to a consumer, upon request, &ldquo;[a]ll information in the consumer&rsquo;s file at the time of request&rdquo; and &ldquo;[t]he sources of the information.&rdquo; Moreover, FCRA defines a consumer&rsquo;s file as &ldquo;all of the information on that consumer that is recorded and retained by a consumer reporting agency, regardless of how the information is stored.&rdquo;[[N: 15 U.S.C. &sect; 1681a(g).]]<br /> <br /> Interpreting file disclosure requirements under Section 609(a) of FCRA, the CFPB has issued an <a rel="noopener noreferrer" href="https://files.consumerfinance.gov/f/documents/cfpb_fair-credit-reporting-file-disclosure_2024-01.pdf" target="_blank">advisory opinion</a> to (1) underscore that consumers need not use specific language to trigger a consumer reporting agency&rsquo;s file-disclosure requirements; (2) highlight certain requirements regarding information to be disclosed upon consumer request; and (3) affirm the need to disclose both the original source and any intermediary or vendor source related to an item of information in a consumer&rsquo;s file.<br /> <br /> <strong>Requests Under FCRA Section 609(a)</strong>: The CFPB has interpreted FCRA as requiring consumer reporting agencies, upon receipt of a consumer request that provides proper identification, to provide a file disclosure, even if the consumer does not use the specific term &ldquo;request,&rdquo; &ldquo;file,&rdquo; or &ldquo;complete file.&rdquo; According to the CFPB, FCRA merely requires a consumer to make a &ldquo;request&rdquo; and provide proper identification. Although FCRA does not itself define the term &ldquo;request,&rdquo; the CFPB has construed the meaning of the term broadly. As such, FCRA&rsquo;s file-disclosure requirement would be triggered if a consumer used such language as &ldquo;report,&rdquo; &ldquo;credit report,&rdquo; &ldquo;consumer report,&rdquo; &ldquo;file,&rdquo; or &ldquo;record&rdquo; in a communication with a consumer reporting agency. Moreover, consumers need not use the words &ldquo;complete file&rdquo; to invoke their right to a file disclosure.<br /> <br /> <strong>Information Required Under FCRA Section 609(a)(1)</strong>: If a consumer reporting agency provides a mere summary of information included in a consumer&rsquo;s file, the CFPB has interpreted FCRA as requiring the consumer reporting agency to provide the information forming the basis of such a summary. To ensure that a file disclosure accurately reflects a consumer&rsquo;s information, a consumer reporting agency must provide, for example, criminal history information in the format users see or will see.<br /> <br /> <strong>Sources of Information Under FCRA Section 609(a)(2)</strong>: Suggesting that some consumer reporting agencies have failed to disclose all sources of an item of information in a consumer&rsquo;s file, the CFPB has interpreted FCRA as affirmatively requiring <em>both</em> the original source as well as any intermediary or vendor source for any item contained within a consumer&rsquo;s file. According to the CFPB, consumers need not specifically request that consumer reporting agencies identify<em> all</em> sources of information in their file to trigger the requirement.</p> <h2>Advisory Opinion on Background Screening Requirements</h2> <p>Under Section 607(b) of FCRA, consumer reporting agencies &ldquo;shall follow reasonable procedures to assure maximum possible accuracy of the information&rdquo; included within a consumer report for the purposes of background screening. <br /> <br /> The CFPB&rsquo;s <a rel="noopener noreferrer" href="https://files.consumerfinance.gov/f/documents/cfpb_fair-credi-reporting-background-screening_2024-01.pdf" target="_blank">advisory opinion</a> interprets &ldquo;reasonable procedures to assure maximum possible accuracy&rdquo; as including procedures to (1) prevent duplicative information; (2) include existing disposition information related to arrests, criminal charges, eviction proceedings, or other court filings; and (3) ensure that information expunged, sealed, or otherwise legally restricted from public access is not included. Having previously <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/rules-policy/final-rules/advisory-opinion-on-fair-credit-reporting-facially-false-data/" target="_blank">issued</a> guidance on these aspects of Section 607(b), the CFPB has already brought several actions to enforce its interpretation of the statute.<br /> <br /> This advisory opinion also addresses Section 605(a)(5) of FCRA, which prohibits the reporting of &ldquo;[a]ny adverse item of information&rdquo; that precedes a consumer report &ldquo;by more than seven years.&rdquo; Given that the reporting period of each adverse item of information on a consumer report is unique, consumer reporting agencies must maintain reasonable procedures to prevent duplicative or legally restricted reporting. Moreover, adverse events should not be reopened on a consumer report by the occurrence of subsequent events. The non-conviction disposition of a criminal charge, for example, cannot be reported beyond the seven-year period that begins at the time of such a criminal charge.</p> <h2>Takeaways</h2> <p>Over the course of the past eight years, the CFPB has found incorrect information on consumer reports to represent the greatest share of credit or consumer reporting complaints submitted to the agency. The advisory opinions published should, in turn, signal a heightened focus on consumer reporting agencies and their obligation to maintain accurate consumer credit report information. These advisory opinions also set expectations of and standards for consumer reporting agencies in future enforcement and supervisory proceedings, in addition to affecting the extent of civil liability faced by a consumer reporting agency for a violation of FCRA.<br /> <br /> The guidance also affects the civil liability of consumer reporting agencies for violations of FCRA. Under Section 617, &ldquo;any person who is <em>negligent</em> in failing to comply&rdquo; with FCRA is liable to a consumer in an amount equal to the consumer&rsquo;s actual damages, costs, and reasonable attorney&rsquo;s fees. Under Section 616, &ldquo;any person who <em>willfully</em> fails to comply&rdquo; with FCRA is liable to a consumer in an amount equal to actual or statutory damages of up to $1,000 per violation, punitive damages permitted by a court, costs, and reasonable attorney&rsquo;s fees. Because federal courts have held violations to be willful when inconsistent with agency guidance, the advisory opinions published by the CFPB may increase the potential for civil liability for violations of FCRA.[[N: <em>See, e.g., Safeco Ins. Co. of Am. v. Burr</em>, 551 U.S. 47, 70 (2007); <em>Fuges v. Sw. Fin. Serv. Ltd.</em>, 707 F.3d 241, 253 (3d Cir. 2012).]]<br /> <br /> Institutions interested in how the CFPB&rsquo;s advisory opinions may impact their businesses may contact any of the authors of this Advisory or their usual Arnold &amp; Porter contact. The firm&rsquo;s <a href="https://www.arnoldporter.com/en/services/capabilities/practices/financial-services">Financial Services</a> team would be pleased to assist with any questions about the advisory opinions, or financial regulation or consumer protection more broadly.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{DC1480A5-87FE-461D-AA02-2D6A35A97894}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/compulsory-copyright-license-for-generative-aiMichael E. Kientzlehttps://www.arnoldporter.com/en/people/k/kientzle-michael-eMichael.Kientzle@arnoldporter.comRyan D. Whitehttps://www.arnoldporter.com/en/people/w/white-ryan-dryan.white@arnoldporter.comCopyright Office Seeks Comments on Compulsory Copyright License for Generative AILast year, the United States Copyright Office announced a wide-ranging initiative to examine the copyright law and policy issues raised by artificial intelligence technologies.Thu, 25 Jan 2024 00:00:00 -0600<p>Last year, the United States Copyright Office announced a wide-ranging initiative to examine the copyright law and policy issues raised by artificial intelligence technologies.[[N: U.S. Copyright Office, <a rel="noopener noreferrer" href="https://www.copyright.gov/ai/" target="_blank">Copyright and Artificial Intelligence</a>.]] While much has been written recently about such issues, the Copyright Office has raised at least one question that has so far received relatively little attention. Specifically, should Congress consider establishing a &ldquo;compulsory licensing regime&rdquo;[[N: Artificial Intelligence and Copyright, 88 Fed. Reg. 59,942, 59947 (Aug. 30, 2023).]] for artificial intelligence technologies that use copyrighted works as training materials?<br /> <br /> For more than a century, Congress has used compulsory licensing as a tool to resolve legal disputes arising from the intersection of copyright law and new technologies. Such licenses, however, remain a relatively esoteric subject even among intellectual property lawyers. In this article, we provide a brief history of compulsory licensing in the United States and highlight the key themes raised by commenters addressing the Copyright Office&rsquo;s questions on this subject.</p> <h2>An Introduction To Compulsory Licenses</h2> <p> The Copyright Act vests copyright owners with several exclusive rights, including the exclusive rights to copy, display, and publicly perform their works. Those exclusive rights are tempered by the fair use doctrine, which permits a variety of uses of copyrighted works that otherwise would require a license. Generally, where the fair use doctrine does not apply and a license is necessary, the question of whether or not to grant such a license is left up to the copyright owner&rsquo;s discretion. However, since the early 1900s, Congress has occasionally enacted statutory &ldquo;compulsory&rdquo; licenses that, unlike ordinary copyright licenses, are not within the control of individual copyright owners and are instead available to any entity who complies with their terms. <br /> <br /> Such compulsory licensing regimes have historically reflected a rough, imperfect compromise between the owners of new technologies, who argue that their uses of copyrighted works are non-infringing under current laws, and copyright owners, who argue that new technologies are unfairly profiting from their works without providing compensation. For copyright owners, the benefit of a compulsory licensing regime is the recognition that the new technology affects their exclusive rights in their works and requires compensation. For the owners of new technologies, a compulsory licensing regime ensures continued access to the copyrighted works that their products rely upon, without the need to negotiate with individual copyright owners, so long as they comply with the terms of the new license.<br /> <br /> For example, in 1909, Congress created the United States&rsquo; first compulsory licensing regime in order to resolve a legal battle over what was then a relatively new technology: player pianos that were capable of reproducing a musical work nearly automatically. Early player pianos relied on perforated paper rolls onto which musical works had been translated into cutouts; those cutouts permitted air pressure to pass through and operate pneumatic devices that played musical notes. <br /> <br /> This raised a legal issue: by translating a musical work into cutouts on a perforated roll, did player piano companies infringe the copyright owner&rsquo;s right to create a &ldquo;copy&rdquo; of their work?</p> <p style="margin-left: 40px;">In 1908, the Supreme Court said no:</p> <p style="margin-left: 40px;">These perforated rolls are parts of a machine which, when duly applied and properly operated &hellip; produce musical tones in harmonious combination. But we cannot think that they are copies within the meaning of the copyright act. It may be true that the use of these perforated rolls, in the absence of statutory protection, enables the manufacturers thereof to enjoy the use of musical compositions for which they pay no value. But such considerations properly address themselves to the legislative, and not the judicial, branch of the government.[[N: <em>White-Smith Music Pub. Co. v. Apollo Co.</em>, 209 U.S. 1, 18 (1908).]]</p> <p>Congress responded to this suggestion. In the following year, it enacted legislation that codified a copyright owner&rsquo;s exclusive right &ldquo;to make any arrangement or setting of [a musical composition] &hellip; in any system of notation in any form of record &hellip; from which it may be read or reproduced,&rdquo; <em>e.g.</em>, a perforated roll.[[N: Copyright Act of 1909, Pub. L. 60&ndash;349, &sect; 1(e), 35 Stat. 1075 (Mar. 4, 1909).]] Simultaneously, it tempered that right by providing for the first form of compulsory licensing in the United States:</p> <p style="margin-left: 40px;">[A]s a condition of extending the copyright control to such mechanical reproductions &hellip; whenever the owner of a musical work has used or permitted &hellip; the use of the copyright work upon the parts of instruments serving to reproduce mechanically the musical work, any other person may make similar use of the copyrighted work upon the payment to the copyright proprietor of a royalty of two cents on each such part manufactured.&hellip;[[N: <em>Id.</em>]]</p> <p> This license is typically referred to as the &ldquo;mechanical license.&rdquo; Although Congress has modified it over time to embrace new technologies, and to change its terms, it still exists today, currently codified in 17 U.S.C. &sect; 115. <br /> <br /> More than a half century after creating the mechanical license, Congress again considered difficult copyright questions presented by the emergence of a new technology: cable television. The main purpose of early cable television systems was to retransmit over-the-air broadcast signals to geographic locations that could not easily receive the signals via an antenna. A debate quickly emerged: when a cable system retransmitted an over-the-air broadcast channel, did it infringe the right of the owners of the programming on that channel to publicly perform their works?<br /> <br /> In 1968 and 1974, a pair of Supreme Court decisions held that the retransmission of broadcast signals by cable systems did <em>not</em> infringe copyright owners&rsquo; public performance rights, whether the broadcast signals were transmitted from within the cable system&rsquo;s local television market[[N: <em>Fortnightly Corp. v. United Artists Television Inc.</em>, 392 U.S. 390, 402 (1968).]] or from a distant one.[[N: <em>Teleprompter Corp. v. Columbia Broadcasting System Inc.</em>, 415 U.S. 394 (1974).]] As it had at the start of the century, however, the Supreme Court called again on Congress to resolve the many competing interests at stake:</p> <p style="margin-left: 40px;">We have been invited by the Solicitor General in an amicus curiae brief to render a compromise decision in this case that would, it is said, accommodate various competing considerations of copyright, communications, and antitrust policy. We decline the invitation. That job is for Congress.[[N: <em>Fortnightly</em>, 392 U.S. at 401.]]</p> <p>After years of debate, Congress codified a new compulsory license for cable television in the 1976 Copyright Act. As with the mechanical license before it, the new regime simultaneously accomplished two things. First, it expanded the scope of a copyright protection to render retransmission of programming by cable television systems potentially infringing in the absence of a license.[[N: Pub. L. 94-553, 90 Stat. 2541 (Oct. 19, 1976).]] Second, it tempered that right by providing a compulsory license for such retransmissions, provided that the cable systems complied with relevant FCC regulations and paid a semi-annual royalty fee to the Copyright Office.[[N: <em>Id.</em>]] Like the mechanical license, the cable compulsory license still exists today, currently codified at 17 U.S.C. &sect; 111.<br /> <br /> These examples are not exhaustive, and Congress has continued to enact compulsory licensing regimes since the 1970s. For example, in the early 1990s, Congress created a companion to the cable compulsory license for satellite television carriers.[[N: 17 U.S.C. &sect; 119.]] And in the Digital Millennium Copyright Act, enacted in 1998, Congress created a compulsory licensing regime that permits certain &ldquo;noninteractive&rdquo; Internet streaming services to make digital performances of sound recordings.[[N: 17 U.S.C. &sect;&sect; 112, 114.]]</p> <h2>What Are Commenters Saying About a Compulsory License for Generative AI?</h2> <p> Many commenters, representing both copyright owners and artificial intelligence companies, have weighed in on the Copyright Office&rsquo;s compulsory license question. Several key themes emerge from these comments. </p> <p><em>First</em>, recalling the early debates around the mechanical license and the cable license, some commenters assert that a compulsory license is not necessary because generative AI&rsquo;s use of copyrighted works to train models is non-infringing under current copyright laws. As the Computer &amp; Communications Industry Association argues, for example:</p> <p style="margin-left: 40px;">The existing statutory framework and related case law concerning the fair use right, 17 U.S.C. &sect; 107, clearly permit the ingestion of large amounts of copyrightable material for the purpose of an AI algorithm or process learning its function. Numerous appellate courts have correctly found the mass copying of raw material to build databases, including commercial databases, for automated computational analysis to be fair use under 17 U.S.C. &sect; 107&hellip;. Training AI is a form of this computational analysis.[[N: Computer &amp; Communications Industry Association, <a rel="noopener noreferrer" href="https://www.regulations.gov/comment/COLC-2023-0006-8740" target="_blank">Comments on United States Copyright Office Notice regarding the study of the copyright law and policy issues raised by artificial intelligence (AI) systems</a>, (Oct. 30, 2023).]]</p> <p>These commenters also note the existence of several active lawsuits presenting the same or similar questions and suggest that courts should have the chance to decide the issue before a compulsory license is considered.<br /> <br /> <em>Second</em>, many commenters oppose compulsory licensing in favor of a marketplace-based solution. According to some of these comments, the free market has already begun to provide options for licensing works in the AI context. The Copyright Clearance Center, for example, argues that it &ldquo;already offers market-based, global non-exclusive voluntary licenses to support AI in the commercial research, schools, and education technology sectors&rdquo; and that those licenses &ldquo;were built with rightsholders and users based on agreed understandings of needs and market conditions.&rdquo;[[N: Copyright Clearance Center, <a rel="noopener noreferrer" href="https://www.regulations.gov/comment/COLC-2023-0006-8601" target="_blank">Comments on United States Copyright Office Notice regarding the study of the copyright law and policy issues raised by artificial intelligence (AI) systems</a>, (Oct. 30, 2023).]] These commenters also point to the many criticisms leveled against existing compulsory licenses, including the high costs of administering the licenses, as well as litigation costs associated with setting rates and determining how to allocate royalties among many different copyright owners. <br /> <br /> <em>Third</em>, numerous comments raised concerns that a compulsory licensing regime would be likely to under-compensate copyright owners. For example, the National Music Publishers&rsquo; Association argues &ldquo;[c]ompulsory licensing is an extreme remedy that deprives copyright owners of their right to contract freely in the market, and takes away their ability to choose whom they do business with, how their works are used, and how much they are paid.&rdquo;[[N: National Music Publishers&rsquo; Association, <a rel="noopener noreferrer" href="https://www.regulations.gov/comment/COLC-2023-0006-8806" target="_blank">Comments on United States Copyright Office Notice regarding the study of the copyright law and policy issues raised by artificial intelligence (AI) systems</a>, (Oct. 30, 2023).]] Under-compensation may also occur because of the difficulties associated with tracking uses for royalty-reporting purposes. As the Music Workers Alliance argues, &ldquo;[o]nce the sounds and styles music workers have spent our lives perfecting have been ingested in a generative AI data bank, it will likely be very difficult to detect the myriad uses to which they will be put. This will create significant obstacles to our ability to quantify, and to fairly monetize, the use of our works.&rdquo;[[N: Music Workers Alliance, <a rel="noopener noreferrer" href="https://www.regulations.gov/comment/COLC-2023-0006-8773" target="_blank">Comments on United States Copyright Office Notice regarding the study of the copyright law and policy issues raised by artificial intelligence (AI) systems</a>, (Oct 30, 2023).]] <br /> <br /> <em>Finally</em>, at least some commenters expressed openness to further consideration of a potential compulsory licensing solution. For example, BigBear.ai argued that a compulsory license is &ldquo;worthy of consideration,&rdquo; noting that the license &ldquo;would certainly facilitate AI innovation.&rdquo;[[N: BigBear.ai, <a rel="noopener noreferrer" href="https://www.regulations.gov/comment/COLC-2023-0006-7657" target="_blank">Comments on United States Copyright Office Notice regarding the study of the copyright law and policy issues raised by artificial intelligence (AI) systems</a>, (Oct. 18, 2023).]] Likewise, while the American Intellectual Property Law Association does not &ldquo;believe that the implementation of a compulsory licensing system is appropriate at this time,&rdquo; it is &ldquo;open to, and interested in, considering any proposed legislation or rulemaking pertaining to such a system.&rdquo;</p> <h2>Conclusion</h2> <p> The Copyright Office&rsquo;s AI-initiative is still in its early stages, and the Copyright Office has not yet addressed the comments it has received concerning compulsory licenses. Any further consideration of the issue will likely raise many additional questions that these initial comments largely left unaddressed, including which specific activities would be covered by a compulsory license and the appropriate level of compensation to copyright owners. If history is any guide, it may be years before such questions are answered. </p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{2B93E099-9A26-427F-AD72-AAB5097D9E6D}https://www.biosliceblog.com/2024/01/the-first-virtual-and-digital-health-digest-of-2024/Jacqueline Mulrynehttps://www.arnoldporter.com/en/people/m/mulryne-jacquelinejacqueline.mulryne@arnoldporter.comEmma Elliston, Ph.D.https://www.arnoldporter.com/en/people/e/elliston-emmaemma.elliston@arnoldporter.comAna González-Lamuñohttps://www.arnoldporter.com/en/people/g/gonzalez-lamuno-anaana.lamuno@arnoldporter.comThe First Virtual and Digital Health Digest of 2024Thu, 25 Jan 2024 00:00:00 -0600{1A48FDB4-E675-4074-9DE6-E671781E3345}https://www.arnoldporter.com/en/perspectives/publications/2024/01/virtual-and-digital-health-digestAllison W. Shurenhttps://www.arnoldporter.com/en/people/s/shuren-allison-wallison.shuren@arnoldporter.comJacqueline Mulrynehttps://www.arnoldporter.com/en/people/m/mulryne-jacquelinejacqueline.mulryne@arnoldporter.comChristopher Andersonhttps://www.arnoldporter.com/en/people/a/anderson-christopherchristopher.anderson@arnoldporter.comAbeba Habtemariamhttps://www.arnoldporter.com/en/people/h/habtemariam-abebaAbeba.Habtemariam@arnoldporter.comEugenia E. Piersonhttps://www.arnoldporter.com/en/people/p/pierson-eugenia-eEugenia.Pierson@arnoldporter.comAmanda Cassidy, M.P.P.https://www.arnoldporter.com/en/people/c/cassidy-amandaamanda.cassidy@arnoldporter.comBobby McMillinhttps://www.arnoldporter.com/en/people/m/mcmillin-bobbybobby.mcmillin@arnoldporter.comMonique Nolanhttps://www.arnoldporter.com/en/people/n/nolan-moniquemonique.nolan@arnoldporter.comNancy L. Perkinshttps://www.arnoldporter.com/en/people/p/perkins-nancy-lnancy.perkins@arnoldporter.comDr. Beatriz San Martinhttps://www.arnoldporter.com/en/people/s/san-martinbeatriz.sanmartin@arnoldporter.comEmma Elliston, Ph.D.https://www.arnoldporter.com/en/people/e/elliston-emmaemma.elliston@arnoldporter.comAna González-Lamuñohttps://www.arnoldporter.com/en/people/g/gonzalez-lamuno-anaana.lamuno@arnoldporter.comRachel Mowerhttps://www.arnoldporter.com/en/people/m/mower-rachelrachel.mower@arnoldporter.comAlison H. Petershttps://www.arnoldporter.com/en/people/p/peters-alison-halison.peters@arnoldporter.comKatie Brownhttps://www.arnoldporter.com/en/people/b/brown-katiekatie.brown@arnoldporter.comMickayla A. Stogsdillhttps://www.arnoldporter.com/en/people/s/stogsdill-mickaylamickayla.stogsdill@arnoldporter.comShama Aktarhttps://www.arnoldporter.com/en/people/a/aktar-shamashama.aktar@arnoldporter.comVirtual and Digital Health DigestThis digest covers key virtual and digital health regulatory and public policy developments during December 2023 from the United States, United Kingdom, and European Union.Thu, 25 Jan 2024 00:00:00 -0600<p>This digest covers key virtual and digital health regulatory and public policy developments during December 2023 from the United States, United Kingdom, and European Union.</p> <h2>In this issue, you will find the following:</h2> <h3>U.S. News</h3> <ul> <li><a href="#FDA Regulatory Updates US">FDA Regulatory Updates</a></li> <li><a href="#Corporate Transactions Updates US">Corporate Transactions Updates</a></li> <li><a href="#Provider Reimbursement Updates US">Provider Reimbursement Updates</a></li> <li><a href="#Policy Updates US">Policy Updates</a></li> <li><a href="#Privacy Updates US">Privacy Updates</a></li> </ul> <h3>EU and UK News</h3> <ul> <li><a href="#Regulatory Updates EU">Regulatory Updates</a></li> <a name="FDA Regulatory Updates US"></a> <li><a href="#Privacy Updates EU">Privacy Updates</a></li> <li><a href="#Product Liability Updates EU">Product Liability Updates</a></li> <li><a href="#Intellectual Property Updates EU">Intellectual Property Updates</a></li> </ul> <h2>U.S. News</h2> <h3>FDA Regulatory Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://www.fda.gov/media/175479/download?attachment" target="_blank">CDRH's Annual Report Highlights FDA&rsquo;s Continued Efforts to Foster Digital Health Innovation</a>. </strong>In 2023, FDA&rsquo;s Digital Health Center of Excellence (DHCoE) continued to foster innovation for new and emerging digital health technologies. But just how busy was DHCoE? As reported in the 2023 CDRH Annual Report, DHCoE responded to more than 900 inquiries during the year. Digital health innovation-related accomplishments highlighted in the report include publication of a draft guidance on marketing submissions for predetermined change control plans (PCCPs) for AI/ML-devices, release of guiding principles for PCCPs for ML devices, issuance of final guidance on premarket submissions for device software functions, creation of a digital health advisory committee, and release of new resources on augmented reality and virtual reality devices. Another notable update from the report is that the number of FDA-authorized AI/ML-enabled medical devices is now at over 700, with more under development. </p> <p><strong><a rel="noopener noreferrer" href="https://www.fda.gov/media/155022/download" target="_blank">FDA Issues Final Guidance on Digital Health Technologies for Clinical Investigations</a>.</strong> On December 21, 2023, FDA issued final guidance titled &ldquo;Digital Health Technologies for Remote Data Acquisition in Clinical Investigations&rdquo; (Final Guidance). The guidance provides recommendations for ensuring that remote data acquisition digital health technologies (DHTs) are fit-for-purpose (i.e., that the level of validation associated with the DHT is sufficient to support the use, including the interpretability of its data in the clinical investigation), which involves considerations of both the DHT&rsquo;s form (i.e., design) and function(s) (i.e., distinct purpose(s) within an investigation). The guidance defines a DHT as &ldquo;a system that uses computing platforms, connectivity, software, and/or sensors, for health care and related uses.&rdquo; The guidance outlines recommendations intended to facilitate the use of DHTs in clinical investigations, including regarding (1) selection of DHTs that are suitable for use in clinical investigations, (2) information to include in regulatory applications, (3) verification and validation of DHTs for use in clinical investigations, (4) use of DHTs to collect data for trial endpoints, (5) identification and management of risks associated with the use of DHTs during clinical investigations, and (6) retention and protection of data collected by DHTs. While whether a DHT meets the definition of a medical device is outside the scope of the guidance, certain of the guidance recommendations apply regardless of whether a DHT meets the definition of a device (e.g., verification and validation recommendations).</p> <p><strong><a rel="noopener noreferrer" href="https://www.fda.gov/inspections-compliance-enforcement-and-criminal-investigations/warning-letters/deymed-diagnostic-sro-671076-11072023" target="_blank">FDA Issues Warning Letter to Sponsor of Brain Feedback Devices</a>. </strong>As reported in prior issues of our digest, over the past year, FDA has issued a number of enforcement letters to sponsors of digital health devices. In the latest example, the agency issued a Warning Letter to Deymed Diagnostics s.r.o. (Deymed), a manufacturer of a variety of Class II neurofeedback hardware and software devices. Among other quality system violations, FDA asserts that Deymed&rsquo;s Brain Feedback Pro device has yet to be subject to the company&rsquo;s design control process despite being distributed since 2015. <a name="Corporate Transactions Updates US"></a>The Warning Letter also enumerates various other deficiencies, including ones relating to complaint handling and device history records.</p> <p>For more information on prior Warning Letters involving software-based digital health technologies please see the <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/06/virtual-and-digital-health-digest-june#FDA%20Regulatory%20Updates">June</a>, <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/07/virtual-and-digital-health-digest#FDA%20Regulatory%20Updates">July</a>, and <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/08/virtual-and-digital-health-digest#Regulatory%20Updates%20US">August</a> 2023 issues of Arnold &amp; Porter&rsquo;s Virtual and Digital Health Digest.</p> <h3>Corporate Transactions Updates</h3> <p><strong>Are Brain Implants Digital Health&rsquo;s New Financing Darling?</strong> Neuralink, Elon Musk's company which is developing brain-computer interface (BCI) technology to treat conditions like obesity, autism, depression, and schizophrenia, has raised more than US$323 million over the past six months. Neuralink&rsquo;s goal is to enable paralyzed people to control a cursor or keyboard with just their thoughts. In September 2023, Neuralink announced that it would <a rel="noopener noreferrer" href="https://www.wired.com/story/everything-we-know-about-neuralinks-brain-implant-trial/" target="_blank">start recruiting volunteers for a clinical trial</a> to test its device, which would enable individuals suffering from paralysis to use computers to communicate and do other basic tasks. </p> <p>The race to bring a BCI implant into the digital health market continues to heat up, and Neuralink is not the only entr&eacute;e. This past year, Synchron, which has raised over <a rel="noopener noreferrer" href="https://www.businesswire.com/news/home/20221213006045/en/Synchron-Raises-75M-Series-C-Led-by-ARCH-Venture-Partners-to-Advance-Endovascular-Brain-Computer-Interface" target="_blank">US$145 million</a> in funding to date, made strides by demonstrating its device safely transmitted neural signals from inside a blood vessel in the brain for a year without any serious side effects. Another such competitor is Precision Neuroscience&rsquo;s BCI, which recently <a rel="noopener noreferrer" href="https://www.globenewswire.com/news-release/2023/06/06/2682588/0/en/Precision-Neuroscience-Begins-First-in-Human-Study-of-its-Neural-Interface-Technology.html" target="_blank">conducted pilot studies</a> in which a thin film array was placed temporarily <a name="Provider Reimbursement Updates US"></a>on the surface of the brain while people were undergoing tumor surgery to record and map the brain&rsquo;s activity.</p> <p>The global BCI market size is expected to expand at a staggering compound annual growth rate of 10.32% during the next forecast period, reaching <a rel="noopener noreferrer" href="https://www.linkedin.com/pulse/brain-computer-interface-market-set-see-hwbnf/" target="_blank">US$2,370,500,000 by 2027</a>.</p> <h3>Provider Reimbursement Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://www.help.senate.gov/hearings/s-1840-s-3392-s-3393-and-s-644-12-12-2023" target="_blank">Telehealth Prescribing Reforms Stall in Congress</a>.</strong> On December 12, the House passed its version of the <a rel="noopener noreferrer" href="https://www.congress.gov/118/bills/hr4531/BILLS-118hr4531eh.pdf" target="_blank">SUPPORT Reauthorization Act</a>, which seeks to reauthorize key federal programs for patients with substance use disorder (SUD). The Senate Health, Education, Labor, and Pensions (HELP) Committee <a rel="noopener noreferrer" href="https://www.help.senate.gov/hearings/s-1840-s-3392-s-3393-and-s-644-12-12-2023" target="_blank">advanced</a> its version of the <a rel="noopener noreferrer" href="https://www.congress.gov/118/bills/s3393/BILLS-118s3393is.pdf" target="_blank">reauthorization bill</a> the same day, but it failed to include a <a rel="noopener noreferrer" href="https://www.help.senate.gov/imo/media/doc/496eb3a9-c872-4d69-3c5e-93f05cd1a700/Murkowski%20S.%203393%20Amendment%20%231.pdf" target="_blank">provision</a> that would allow providers to prescribe SUD medications via telehealth without an in-person visit. </p> <p>The Senate version of the SUPPORT Reauthorization Act, however, includes a separate <a rel="noopener noreferrer" href="https://www.congress.gov/118/bills/s3393/BILLS-118s3393is.pdf#page=32" target="_blank">provision</a> that would require the Drug Enforcement Administration (DEA) to issue final regulations within one year outlining a &ldquo;special registration&rdquo; pathway. This special registration would enable certain practitioners to prescribe controlled substances via telemedicine without an in-person visit. The agency was first instructed to establish the special registration pathway more than 15 years ago in the <a rel="noopener noreferrer" href="https://www.congress.gov/110/plaws/publ425/PLAW-110publ425.pdf#page=9" target="_blank">Ryan Haight Act of 2008</a>, but it has not yet done so.</p> <p>As discussed in the <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/12/virtual-and-digital-health-digest#US%20Provider%20Reimbursement%20Updates">December 2023 digest</a>, the DEA allowed physicians to prescribe controlled substances without an in-person visit during the public health emergency (PHE). In February 2023, anticipating the end of the PHE, the agency proposed two rules (<a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/FR-2023-03-01/pdf/2023-04248.pdf" target="_blank">88 Fed. Reg. 12875</a> and <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/FR-2023-03-01/pdf/2023-04217.pdf" target="_blank">88 Fed. Reg. 12890</a>) that, if finalized, would have significantly curtailed the telemedicine flexibilities permitted during the PHE. The agency also <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/FR-2023-03-01/pdf/2023-04248.pdf#page=9" target="_blank">declined</a> to establish a special registration pathway, on the grounds that it would be &ldquo;potentially burdensome for both telehealth providers and patients.&rdquo; 88 Fed. Reg. 12875, 12883. </p> <p>After receiving thousands of comments in opposition to the proposals, the agency issued a <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/FR-2023-10-10/pdf/2023-22406.pdf" target="_blank">temporary rule</a> extending the PHE telemedicine flexibilities through December 31, 2024. 88 Fed. Reg. 69879. The DEA also <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/FR-2023-08-07/pdf/2023-16889.pdf" target="_blank">stated</a> it is &ldquo;open to considering&rdquo; implementing the special registration pathway for telemedicine prescribing of certain controlled substances. 88 Fed. Reg. 52210, 52212. Depending on the final version of the SUPPORT Reauthorization Act passed by Congress, the DEA may soon face increased <a name="Policy Updates US"></a>pressure to establish the special registration pathway in 2024.</p> <p>The DEA is expected to propose new rules governing telehealth prescriptions of controlled substances later this year.</p> <h3>Policy Updates</h3> <p><strong>Federal Spending Deadlines Approach, and House Passes Large Health Package. </strong>The current &ldquo;laddered&rdquo; continuing resolution (CR) extends federal funding through January 19 and February 2. While funding for federal health programs, including Community Health Centers, the National Health Service Corps, Graduate Medical Education programs, and the Pandemic All-Hazards Preparedness Act is set to expire on January 19, other health-related investments made via Labor, Health and Human Services, Education, and Related Agencies will need to be addressed ahead of the second CR deadline on February 2. In December, the House passed sweeping health reforms in the Lower Costs, More Transparency Act (<a rel="noopener noreferrer" href="https://docs.house.gov/billsthisweek/20231211/HR%205378%20(Amended)%20-Rodgers.pdf" target="_blank">H.R. 5378</a>), <a rel="noopener noreferrer" href="https://docs.house.gov/billsthisweek/20231211/HR%205378%20(Amended)%20-Rodgers.pdf" target="_blank">amended on September 8, 2023</a> by a vote of <a rel="noopener noreferrer" href="https://twitter.com/HouseDailyPress/status/1734365727325299199?s=20" target="_blank">320-71</a>. Following House passage of H.R. 5378, Sens. Mike Braun (R-IN), Bernie Sanders (I-VT), Tina Smith (D-MN), and John Hickenlooper (D-CO) introduced the Health Care Prices Revealed and Information to Consumers Explained Transparency Act 2.0 (S. 3548), which contains provisions similar to those included in the Lower Costs, More Transparency Act. </p> <p><strong>House Committee Holds Hearing on AI. </strong>On December 13, the House Energy &amp; Commerce Committee held a <a rel="noopener noreferrer" href="https://energycommerce.house.gov/events/full-committee-hearing-leveraging-agency-expertise-to-foster-american-ai-leadership-and-innovation" target="_blank">hearing</a> titled, &ldquo;Leveraging Agency Expertise to Foster American AI Leadership and Innovation.&rdquo; The committee hosted government officials from the U.S. Department of Health and Human Services (HHS), the Department of Commerce, and the Department of Energy to discuss ways AI can assist health providers, bolster the workforce, and strengthen clinical drug development.</p> <p><strong>GAO Releases Report on AI Implementation. </strong>On December 12, the Government Accountability Office released a <a rel="noopener noreferrer" href="https://www.gao.gov/products/gao-24-105980" target="_blank">report</a> titled, &ldquo;Artificial Intelligence: Agencies Have Begun Implementation but Need to Complete Key Requirements.&rdquo; The report includes 35 recommendations to 19 federal agencies, including directing the Office of Management and Budget to fully implement new federal AI requirements. </p> <p><strong>HHS Releases Guiding Principles for AI-Enabled Technologies.</strong> On December 15, HHS&rsquo; Agency for Health Care Research and Quality <a rel="noopener noreferrer" href="https://www.hhs.gov/about/news/2023/12/15/guiding-principles-help-healthcare-community-address-potential-bias-resulting-from-algorithms.html" target="_blank">released</a> five &ldquo;guiding principles&rdquo; for health providers to follow when using AI-enabled technologies: (1) promoting health and health care equity during all health care algorithm life cycle phases; (2) ensuring health care algorithms and their uses are transparent and explainable; (3) authentically engaging patients and communities during all health care algorithm life cycle phases and earn trustworthiness; (4) explicitly identifying health care algorithmic fairness issues and tradeoffs; and (5) establishing accountability for equity and fairness in outcomes from health care algorithms.</p> <p><strong>Senator Markey Urges for More Diversity in FDA&rsquo;s Digital Health Technologies Committee. </strong>On December 19, Senate Health, Education, Labor, and Pensions Subcommittee on Primary Health and Retirement Security Chair Ed Markey (D-MA) led a <a rel="noopener noreferrer" href="https://www.markey.senate.gov/imo/media/doc/letter_to_fda_-_digital_health_advisory_committee.pdf" target="_blank">letter</a> to FDA Commissioner Robert Califf asking that individuals with a background in civil rights, medical ethics, and <a name="Privacy Updates US"></a>disability rights be added to FDA&rsquo;s Digital Health Technologies Committee, which advises on the development, regulation, and implementation of DHTs, such as AI-enabled technologies, telehealth, and wearable medical devices. The letter was also signed by Senate HELP Chair Bernie Sanders (I-VT) and Sens. Bob Casey (D-PA), Amy Klobuchar (D-MN), Tammy Duckworth (D-IL), and Alex Padilla (D-CA).</p> <h3>Privacy Updates</h3> <p><strong>ONC Publishes Final Rule Addressing Health Data Algorithm Transparency. </strong>On January 9, the HHS Office of the National Coordinator for Health Information Technology (ONC) published in the Federal Register its <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2024/01/09/2023-28857/health-data-technology-and-interoperability-certification-program-updates-algorithm-transparency-and" target="_blank">final rule</a> titled &ldquo;Health Data, Technology, and Interoperability: Certification Program Updates, Algorithm Transparency, and Information Sharing&rdquo; (the Final Rule). The Final Rule, is designed to enhance the access to, exchange, and use of electronic health information while also advancing equity, innovation, and interoperability in health information technology (HIT). In addition to imposing detailed new requirements on HIT developers, the Final Rule makes significant changes to access and support for source attributes and transparency in the use of predictive decision support interventions (DSIs). </p> <p>Under the Final Rule, the existing clinical decision support (CDS) tools certification criteria are modified &ldquo;to reflect an array of contemporary functionalities, data elements, and software application that certified Health IT Modules support to aid decision-making in healthcare.&rdquo; Developers of Health IT Modules will need to submit their CDS tools to real-world testing and provide test results to demonstrating the real-world use of each type of DSI.</p> <p>The Final Rule also establishes a new intervention type, referred to as &ldquo;Predictive DSI.&rdquo; This includes, for example, algebraic equations, machine learning, and natural language processing. Per ONC, predictive DSI will likely encompass models that are trained on relationships in large data sets and that predict, for example, whether a given image contains a malignant tumor or a whether a given patient is at risk for sepsis. Large language models (LLMs) and other forms of generative AI would, as ONC states, likely meet the definition of Predictive DSI <em>to the extent the LLMs are used to support decision-making.</em> </p> <p>ONC expects that increased<a name="Regulatory Updates EU"></a> transparency surrounding the development and use of AI in health care will allow users to make better-informed decisions about whether and how to use emerging software.</p> <p>See more Arnold &amp; Porter coverage of ONC&rsquo;s Final Rule in our <a rel="noopener noreferrer" href="https://www.arnoldporter.com/en/perspectives/advisories/2024/01/onc-final-rule-focuses-on-ai-and-algorithm-transparency">recent Advisory</a>.</p> <h2> EU and UK News</h2> <h3>Regulatory Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://www.consilium.europa.eu/en/press/press-releases/2023/12/09/artificial-intelligence-act-council-and-parliament-strike-a-deal-on-the-first-worldwide-rules-for-ai/" target="_blank">Provisional Agreement Reached on the EU AI Act</a>.</strong> On December 9, the European Parliament (EP) and European Council announced that it had reached a provisional agreement on the text of the EU AI Act that seeks to harmonize rules on AI (see our <a href="https://www.arnoldporter.com/en/perspectives/publications/2022/11/virtual-and-digital-health-digest">November 2022</a>, <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/01/virtual-and-digital-health-digest">January 2023</a>, and <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/06/virtual-and-digital-health-digest-june#Regulatory%20Updates%20EU">June 2023 </a>digests, as well as our <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/07/european-parliament-adopts-its-version-of-ai-act">July 2023 Advisory</a>, for details of how the negotiations have progressed). As we have previously set out, all AI medical devices will be classified as high risk, meaning they will be assessed before being put on the market and also throughout their lifecycle. In addition, some compromises that could be relevant to digital health companies are:</p> <ul> <li>All high-risk AI systems (which includes all health care applications) will be subject to a mandatory fundamental rights impact assessment prior to their use.</li> <li>AI systems can be tested in real-world conditions subject to specific conditions and safeguards being fulfilled.</li> </ul> <p>Now, the EP and European Council must formally adopt the text, with the act expected to become law early in 2024 and to apply two years after its entry into force, except for some specific provisions which will apply earlier. Furthermore, the commission has announced it will be launching an <a rel="noopener noreferrer" href="https://digital-strategy.ec.europa.eu/en/policies/ai-pact" target="_blank">AI Pact</a> to encourage AI developers to implement key obligations of the AI Act ahead of the legislative deadlines.</p> <p><strong><a rel="noopener noreferrer" href="https://www.ema.europa.eu/en/news/artificial-intelligence-workplan-guide-use-ai-medicines-regulation" target="_blank">The HMA and EMA Publish Their Joint AI Workplan 2023-2028</a>.</strong> On December 18, the joint Heads of Medicines Agencies and European Medicines Agency Big Data Steering Group (BDSG) published the 2023-2028 AI workplan, on behalf of the European medicines regulatory network (EMRN). The plan aims to utilize the benefits of AI in the regulation of medicines while managing the associated challenges and risks. The workplan is divided into four arms:</p> <ol> <li><strong>Guidance, policy, and product support.</strong> The EMRN will consider feedback from the public consultation on the AI reflection paper (discussed in our <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/08/virtual-and-digital-health-digest#Regulatory%20Updates-UK">August 2023 digest</a>) and use that to provide continued support on the development and evaluation of AI in the medicines lifecycle, including releasing guidance on specific parts of the lifecycle (e.g., pharmacovigilance). The EMRN will also start preparation for implementation of the AI Act in mid-2024.</li> <li><strong>Tools and technologies.</strong> The EMRN aims to develop and implement knowledge mining tools, start a phased roll-out of large language models, and publish an AI tools policy for open and collaborative AI development.</li> <li><strong>Collaboration and change management.</strong> The EMRN will continue to collaborate with international partners to share knowledge and keep abreast of the evolving field of AI.</li> <li><strong>Experimentation.</strong> The EMRN will <a name="Privacy Updates EU"></a>conduct six monthly experimentation cycles and undertake &ldquo;technical deep dives&rdquo; to gain new insights from AI.</li> </ol> <p>The BDSG states that the workplan will be regularly updated to reflect the evolving technologies and policies, and that key stakeholders will be involved in the implementation of the plan.</p> <h3>Privacy Updates</h3> <p><strong>European Council and European Parliament Adopt Positions on the Regulation Creating a European Health Data Space. </strong>On December 6, the Council of the European Union <a rel="noopener noreferrer" href="https://www.consilium.europa.eu/en/press/press-releases/2023/12/06/european-health-data-space-council-agrees-its-position/" target="_blank">adopted</a> its position on the text of the regulation on creating a European Health Data Space, which was followed by the <a rel="noopener noreferrer" href="https://www.europarl.europa.eu/news/en/press-room/20231208IPR15783/ep-supports-creating-eu-health-data-space-to-boost-access-to-data-and-research" target="_blank">adoption</a> of a position by the members of the European Parliament on December 13. The European Council and the EP must now reach a common provisional agreement on the regulation before it can be formally adopted.</p> <p>On December 1, the European Federation of Pharmaceutical Industries and Associations (EFPIA) <a rel="noopener noreferrer" href="https://www.efpia.eu/news-events/the-efpia-view/statements-press-releases/efpia-response-to-ehds-to-the-text-adopted-by-envilibe-committee-in-the-european-parliament/" target="_blank">reacted</a> to the position of the members of the European Parliament on the regulation creating a European Health Data Space (EHDS), showing a particular concern over the inclusion of opt-in and opt-out mechanisms. According to EFPIA, <a name="Product Liability Updates EU"></a>for certain categories of data such as data concerning rare disease patients, including such mechanisms would discourage the submission of data to the EHDS. Less data means less information, which would hinder the evolution of personalized treatments. In addition, EFPIA calls for clarification on how provisions on IP and trade secret data will coexist with the EHDS regulation, and on each of the types of data and their intended scope.</p> <h3>Product Liability Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://www.europarl.europa.eu/news/en/press-room/20231205IPR15690/deal-to-better-protect-consumers-from-damages-caused-by-defective-products" target="_blank">Provisional Agreement Reached on the New EU Product Liability Directive</a>.</strong> On December 14, a provisional political agreement was reached between the European Parliament and European Council on the commission&rsquo;s proposal for a revised Product Liability Directive (revised PLD) to replace the existing Product Liability Directive (85/374/EEC) and expand its scope to include AI systems and software. Both the EP and the European Council have previously set out their positions (see our <a href="https://www.arnoldporter.com/en/perspectives/publications/2022/11/virtual-and-digital-health-digest">November 2022</a>, <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/07/virtual-and-digital-health-digest#Product%20Liability%20Updates">July 2023</a>, and <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/11/virtual-and-digital-health-digest#Product%20Liability%20Updates%20UK">November 2023</a> digests) and now a compromise text has been announced. Key compromises include:</p> <ul> <li>The definition of &ldquo;product&rdquo; will include digital manufacturing files and software, but the rules will not apply to free and open-source software developed or supplied outside of a commercial activity.</li> <li>A company that makes substantial modifications to a product can be held liable as a manufacturer, as well as importers, authorized representatives, or fulfilment service providers if a manufacturer is established outside of the EU.</li> <li>The burden of proof for claimants has been simplified such that defectiveness may be presumed in certain circumstances, for example where the claimant faces excessive difficulties in doing so due to technical or scientific complexities.</li> <li>An extended liability period of 25 years will apply<a name="Intellectual Property Updates EU"></a>r in exceptional cases.</li> </ul> <p>The revised PLD is set to enter into force once formally approved by the EP and the European Council, with the new rules applying to products on the market 24 months after entry into force. The AI Liability Directive is still being examined by the EP and the European Council.</p> <h3>Intellectual Property Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.supremecourt.uk%2Fcases%2Fdocs%2Fuksc-2021-0201-judgment.pdf&amp;data=05%7C02%7CEmma.Elliston%40arnoldporter.com%7C5959a94600ec4766ab4608dc0d3d08ce%7Cd22d141fae37447facfa2e1d0e5b4969%7C0%7C0%7C638399802994221039%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=Ecqipi5RbnR8zCqGZa1GCRphutC%2FyaX9apMQ0BBSWgE%3D&amp;reserved=0" target="_blank">UK Supreme Court Rules That AI Cannot Be Patent Inventor</a>. </strong>On December 20, the UK Supreme Court ruled that an AI system cannot be the inventor of a patent within the meaning of the Patent Act 1977. The case concerned an AI system called DABUS, created and owned by Dr. Stephen Thaler. Thaler filed two patent applications listing DABUS as the inventor. He argued that the AI devised new inventions independently of him, including a food container and a flashing beacon. The UK Supreme Court unanimously rejected Thaler&rsquo;s appeal, holding that an inventor must be a natural person, and an AI system does not meet this definition. The UK Supreme Court also held that Thaler himself was not entitled to apply for the patents; the patent applications did not have a natural person inventor and Thaler had not acquired any rights to the invention through his ownership of DABUS. The case has brought increased certainty to the application of the Patent Act 1977 to AI outputs and highlights a clear barrier to obtaining patent protection for AI outputs in the UK.</p> <p><span style="font-size: small;"><em>*The following individuals contributed to this Newsletter:</em></span></p> <p><span style="font-size: small;"><em><em>Amanda Cassidy is employed as a&nbsp;</em>Senior Health Policy Advisor at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Amanda is not admitted to the practice of law.<br /> Eugenia Pierson is employed as a Senior Health Policy Advisor at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Eugenia is not admitted to the practice of law.<br /> Mickayla <em>Stogsdill&nbsp;</em>is employed as a Senior Policy Specialist at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Mickayla is not admitted to the practice of law.<br /> Katie Brown is employed as a Policy Advisor at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Katie is not admitted to the practice of law.<br /> Heba Jalil is employed as a Trainee Solicitor at Arnold &amp; Porter's London office. Heba is not admitted to the practice of law.</em></span></p> <p><span style="font-size: small;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{50D7168E-D425-4550-BB86-D8414D8ADD68}https://www.arnoldporter.com/en/perspectives/events/2024/01/antitrust-2023-year-in-review-mergers-transactionsAndre Geverolahttps://www.arnoldporter.com/en/people/g/geverola-andreandre.geverola@arnoldporter.comWilson D. Mudgehttps://www.arnoldporter.com/en/people/m/mudge-wilson-dWilson.Mudge@arnoldporter.comLeah J. Harrellhttps://www.arnoldporter.com/en/people/h/harrell-leah-jleah.harrell@arnoldporter.comMili Nadipallihttps://www.arnoldporter.com/en/people/n/nadipalli-milimili.nadipalli@arnoldporter.comThree-Part Webinar Series: Antitrust 2023 Year in Review: Part III: Cartel/Criminal InvestigationsIn January, Arnold &amp; Porter's U.S. Antitrust/Competition practice hosted a three-part webinar series that explored this 2023&rsquo;s most critical developments in antitrust across mergers and other transactions, private plaintiff and government litigation, and criminal enforcement.Wed, 24 Jan 2024 00:00:00 -0600<p>In January, Arnold &amp; Porter's U.S. Antitrust/Competition practice hosted a three-part webinar series that explored this 2023&rsquo;s most critical developments in antitrust across mergers and other transactions, private plaintiff and government litigation, and criminal enforcement. </p> <p>In the third part of the series, Andre Geverola, Wilson Mudge, Leah Harrell, and Mili Nadipalli discussed major DOJ criminal antitrust matters over the past year, including significant trials and appeals involving labor markets and government contracting.</p>{37916F87-1B9E-4B4E-A1AE-45A7EA405B85}https://www.arnoldporter.com/en/perspectives/news/2024/01/arnold-and-porters-appellate-and-intellectual-property-practices-named-2023Arnold & Porter's Appellate and Intellectual Property Practices Named 2023 Law360 'Practice Groups of the Year'Arnold &amp; Porter&rsquo;s Appellate &amp; Supreme Court and Intellectual Property practices were recognized in the 2023 edition of <em>Law360</em>&rsquo;s &ldquo;Practice Groups of the Year.&rdquo;&nbsp;Tue, 23 Jan 2024 00:00:00 -0600<p>Arnold &amp; Porter&rsquo;s Appellate &amp; Supreme Court and Intellectual Property practices were recognized in the 2023 edition of<em> Law360</em>&rsquo;s &ldquo;<a rel="noopener noreferrer" href="https://www.law360.com/articles/1781974/law360-names-practice-groups-of-the-year" target="_blank">Practice Groups of the Year</a>.&rdquo; The annual list recognizes the practice groups whose work &ldquo;resonated throughout the legal industry this past year.&rdquo; </p> <p>The Appellate &amp; Supreme Court practice was one of only two firms that went undefeated at the U.S. Supreme Court in the 2023 term. Their victories included a landmark First Amendment case, a civil procedure case that will undoubtedly feature in law school textbooks, a precedent-setting nursing home abuse case that preserved civil rights precedents, and a critically important win for voting rights. Appellate &amp; Supreme Court counsel Andrew Tutt was named to <em><a href="/en/perspectives/news/2023/06/law360-names-three-arnold-porter-attorneys-as-2023"><em>Law360</em>'s 2023 "Rising Stars"</a></em> list earlier in 2023.</p> <p>The Intellectual Property group was recognized for its ability to deliver in high-stakes IP cases across various industries, most notably with clients Boston Scientific Corp., Sanofi-Aventis US, and Regeneron Pharmaceuticals Inc. The team&rsquo;s work in <em>Amgen Inc. v. Sanofi</em> took them to the Supreme Court where they secured a victory that invalidated Amgen&rsquo;s patents and marked the first time the Supreme Court addressed enablement since the enactment of the 1952 Patent Act. In 2023, Intellectual Property partner Matthew Wolf was named to <em><a href="/en/perspectives/news/2023/10/arnold-and-porter-partner-matthew-wolf-named-a-2023"><em>Law360</em>&rsquo;s 2023 &ldquo;MVP&rdquo;</a></em> list.</p>{205F475D-B1D8-46CC-89EE-4B4AA329E20E}https://www.americanconference.com/false-claims-qui-tam-enforcement/agenda/the-dojs-civil-cyber-fraud-initiative-in-action-the-latest-cross-industry-trends-and-how-companies-can-become-compliant/tirzah.lollar@arnoldporter.comThe DOJ’s Civil Cyber Fraud Initiative in Action: The Latest Cross-Industry Trends and How Companies Can Become CompliantTue, 23 Jan 2024 00:00:00 -0600{FFB9799B-5FED-4D86-BFE8-E4C10626DE0F}https://www.arnoldporter.com/en/perspectives/news/2024/01/arnold-and-porter-advises-on-aiibs-first-investment-in-brazilArnold & Porter Advises on AIIB's First Investment in BrazilArnold &amp; Porter has successfully guided the Asian Infrastructure Investment Bank (AIIB) in its inaugural Brazilian transaction, a US$30 million on-lending facility to the Development Bank of Minas Gerais (BDMG).&nbsp;Mon, 22 Jan 2024 00:00:00 -0600<p>Arnold &amp; Porter has successfully guided the Asian Infrastructure Investment Bank (AIIB) in its inaugural Brazilian transaction, a US$30 million on-lending facility to the Development Bank of Minas Gerais (BDMG). Sub-borrowers will use the funds to invest in subprojects that operate in renewable energy and other eligible infrastructure-related sectors and may use proceeds to fund subprojects that link Brazil and Asia via enhanced trade and investment flows across a wide range of industries. This transaction signifies a significant step in AIIB's global initiatives.</p> <p>The financing documents were entered into by the parties in December 2023.</p> <p>The Arnold &amp; Porter team was led by partner Chris Willott and included international partner Marc Isaacs and associate Howard Duan. </p>{ACF3D891-E300-433A-891F-4171EB8B7913}https://www.arnoldporter.com/en/perspectives/news/2024/01/stacey-sublett-halliday-joins-arnold-and-porters--environmental-practice-in-washington-dc Stacey Sublett Halliday Joins Arnold & Porter’s Environmental Practice in Washington, D.C.<strong>WASHINGTON, D.C., January 22, 2024</strong>&nbsp; &mdash; Arnold &amp; Porter announced today that environmental justice attorney Stacey Sublett Halliday, a former Special Counsel in the Office of General Counsel (OGC) at the U.S. Environmental Protection Agency (EPA), has joined the firm&rsquo;s Environmental practice as a partner, resident in the firm&rsquo;s Washington, D.C. office.Mon, 22 Jan 2024 00:00:00 -0600<p><strong>WASHINGTON, D.C., January 22, 2024</strong> &mdash; Arnold &amp; Porter announced today that environmental justice attorney Stacey Sublett Halliday, a former Special Counsel in the Office of General Counsel (OGC) at the U.S. Environmental Protection Agency (EPA), has joined the firm&rsquo;s Environmental practice as a partner, resident in the firm&rsquo;s Washington, D.C. office.</p> <p>Richard M. Alexander, Chairman of Arnold &amp; Porter, said, &ldquo;Stacey&rsquo;s litigation and regulatory experience in the private sector and with the EPA will be a great asset to the firm&rsquo;s leading Environmental practice. Her extensive background in environmental justice and ESG issues will help our clients mitigate risk and successfully navigate the novel and constantly evolving environmental landscape.&rdquo; </p> <p>Brian Israel, chair of the firm&rsquo;s Environmental practice group and co-lead of the firm&rsquo;s Environmental, Social, and Corporate Governance (ESG) working group, added, &ldquo;Stacey has in-depth knowledge of the issues related to environmental justice, which will be invaluable to the firm as we continue to grow our environmental practice in the emerging areas of environmental justice, ESG counseling, and energy transition advocacy. More broadly, Stacey&rsquo;s environmental skillset will be a tremendous asset our to our clients.&rdquo;</p> <p>Halliday focuses her practice on environmental justice issues, while also advising clients more broadly on environmental compliance, enforcement, and corporate social responsibility. She has particular experience in working with clients in the energy and technology sectors. As Special Counsel in the OGC at the EPA, she served as primary liaison for external federal, state, and private sector stakeholder engagement. She also served as a senior member of the EPA oversight response team, providing legal and strategic guidance on congressional investigation and hearing preparation, White House and interagency coordination, and crisis management and strategic communications. She also played a key role in the EPA&rsquo;s incident response and crisis management of such diverse matters as the Flint drinking water crisis, the Gold King Mine spill, and the legal defense of the Clean Power Plan and Clean Water Rule.</p> <p>In joining the firm, Halliday said, &ldquo;Arnold &amp; Porter has an incredibly strong environmental practice, which I&rsquo;ve developed tremendous respect for throughout my career. I look forward to growing my environmental justice practice with this team of talented and knowledgeable colleagues who consistently demonstrate their dedication and passion for environmental issues.&rdquo; </p> <p>Halliday earned her J.D. from Howard University and her A.B. from Harvard University. </p> <h3><strong>About Arnold &amp; Porter</strong></h3> <p><em>Arnold &amp; Porter combines sophisticated regulatory, litigation, and transactional capabilities to resolve clients&rsquo; most complex issues. With over 1,000 lawyers practicing in 15 offices worldwide, we offer deep industry experience and an integrated approach that spans more than 40 practice areas. Through multidisciplinary collaboration and focused industry experience, we provide innovative and effective solutions to mitigate risks, address challenges, and achieve successful outcomes.</em></p>{57B28D07-7A8C-430D-AFB7-5BC44AB431BF}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/onc-final-rule-focuses-on-ai-and-algorithm-transparencyAllison W. Shurenhttps://www.arnoldporter.com/en/people/s/shuren-allison-wallison.shuren@arnoldporter.comAbeba Habtemariamhttps://www.arnoldporter.com/en/people/h/habtemariam-abebaAbeba.Habtemariam@arnoldporter.comNancy L. Perkinshttps://www.arnoldporter.com/en/people/p/perkins-nancy-lnancy.perkins@arnoldporter.comJacqueline L. Degannhttps://www.arnoldporter.com/en/people/d/degann-jacquelinejackie.degann@arnoldporter.comDani Elkshttps://www.arnoldporter.com/en/people/e/elks-danidani.elks@arnoldporter.comKatherine Rohdehttps://www.arnoldporter.com/en/people/r/rohde-katherinekate.rohde@arnoldporter.comONC Final Rule on Health Data, Technology, and Interoperability Focuses on AI and Algorithm TransparencyOn January 9, the Office of the National Coordinator for Health Information Technology (ONC), part of the Department of Health and Human Services (HHS), published in the Federal Register its final rule titled Health Data, Technology, and Interoperability: Certification Program Updates, Algorithm Transparency, and Information Sharing (the Final Rule).&nbsp;Mon, 22 Jan 2024 00:00:00 -0600<p><em></em>On January 9, the Office of the National Coordinator for Health Information Technology (ONC), part of the Department of Health and Human Services (HHS), published in the Federal Register its final rule titled Health Data, Technology, and Interoperability: Certification Program Updates, Algorithm Transparency, and Information Sharing (the Final Rule).[[N: <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/FR-2024-01-09/pdf/2023-28857.pdf" target="_blank">Health Data, Technology, and Interoperability: Certification Program Updates, Algorithm Transparency, and Information Sharing</a>, 89 Fed. Reg. 1192 (Jan. 9, 2024).]] The Final Rule, a proposed version of which was published for comment in April 2023,[[N: Health Data, Technology, and Interoperability: Certification Program Updates, Algorithm Transparency, and Information Sharing, 88 Fed. Reg. 23917 (Apr. 18, 2023) (proposed rule).]] is designed to enhance the access, exchange, and use of electronic health information, while also advancing equity, innovation, and interoperability in health information technology (HIT).[[N: 89 Fed. Reg. at 1193.]] The Final Rule imposes significant new transparency and risk management requirements for the use of artificial intelligence (AI) and algorithms used in certified health information technology.</p> <h2>Background</h2> <p>ONC is responsible for administering the ONC Health IT Certification Program (the Program), which provides certification criteria for health IT developers and their health IT modules[[N: <em>Id.</em> A Health IT Module is any service, component, or combination thereof that can meet the requirements of at least one ONC certification criterion, such as Electronic Health Record (EHR) software. See 45 C.F.R. &sect; 170.102.]]. In 2010, the Program established certification criteria for clinical decision support (CDS) within health IT modules[[N: <em>Id.</em> at 1202.]]. CDS encompasses a variety of tools to enhance decision-making in the clinical workflow, including computerized alerts, relevant clinical guidelines, and drug-disease interaction checks. In 2012, ONC began requiring health IT modules to (1) support evidence-based CDS grounded on a defined set of data elements, (2) support CDS configuration for both inpatient and ambulatory settings, and (3) display source attribute or bibliographic citation of CDS.[[N: <em>Id. </em>at 1231. ONC finalized its updated CDS criterion in 2015. See 45 C.F.R. &sect; 170.315(a)(9).]] <br /> <br /> In the past decade, health IT modules have played an increasingly significant part in healthcare across various clinical settings, but the use of AI in healthcare has gone largely unregulated. In late 2022 and early 2023, the Biden administration published three guidance documents outlining principles to prevent discriminatory algorithmic decision-making and advance accountable AI systems.[[N: See White House, <a rel="noopener noreferrer" href="https://www.whitehouse.gov/briefing-room/statements-releases/2022/09/08/readout-of-white-house-listening-session-on-tech-platform-accountability/" target="_blank">Principles for Enhancing Competition and Tech Platform Accountability</a>, Sept. 8, 2022; White House, <a rel="noopener noreferrer" href="https://www.whitehouse.gov/ostp/ai-bill-of-rights/" target="_blank">Blueprint for an AI Bill of Rights</a> (Oct. 4, 2022); <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2023/02/22/2023-03779/further-advancing-racial-equity-and-support-for-underserved-communities-through-the-federal" target="_blank">E.O. 14091</a>, 88 FR 10825-10833.]] In October 2023, the Biden administration directed HHS to prepare a strategy for the responsible deployment and use of AI in healthcare, which led to the present rulemaking.[[N:<a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2023/11/01/2023-24283/safe-secure-and-trustworthy-development-and-use-of-artificial-intelligence" target="_blank"> E.O. 14110</a>, 88 FR 75191.]]</p> <h2>Decision Support Interventions and Predictive Models</h2> <h3>Decision Support Interventions</h3> <p>The Final Rule replaces the Program&rsquo;s CDS criterion with a new certification criterion, &ldquo;decision support interventions&rdquo; (DSIs), which is designed to ensure that health IT modules &ldquo;reflect an array of contemporary functionalities, support data elements important to health equity, and enable the transparent use of predictive models and algorithms to aid decision-making in healthcare.&rdquo;[[N: 89 Fed. Reg. at 1196.]] As discussed below, the Final Rule differentiates between &ldquo;evidence-based DSIs&rdquo; and &ldquo;predictive DSIs&rdquo; and imposes different transparency requirements on each.</p> <h3>Evidence-Based DSI</h3> <p>Evidence-based DSIs are non-predictive interventions actively presented to users in clinical workflow to enhance, inform, or influence decision-making related to the care a patient receives.[[N: <em>Id. </em>at 1240.]] Evidence-based DSIs rely on pre-defined rules based on expert consensus rather than empirical data to support decision-making, such as the SOFA Index and NYHA Heart Failure classification.[[N: <em>Id.</em> at 1246.]] The new requirements for evidence-based DSIs generally track evidentiary requirements that were part of the CDS criterion.[[N:<em> Id.</em> at 1239.]]</p> <h3>Predictive DSI</h3> <p>Predictive DSI is defined as &ldquo;technology that supports decision-making based on algorithms or models that derive relationships from training data and then produce an output that results in prediction, classification, recommendation, evaluation, or analysis.&rdquo;[[N:<em> Id.</em> at 1244; see also 88 Fed. Reg. 23917, 23788 (proposing a broad interpretation of &ldquo;intended to support decision-making&rdquo;).]] Predictive DSIs &ldquo;learn[] or deriv[e] relationships to produce an output.&rdquo;[[N: 89 Fed. Reg. at 1243.]] <br /> <br /> Predictive DSIs may include techniques such as algebraic equations, machine learning, and natural language processing.[[N: <em>Id.</em>]] Some of these tools might be used to predict, for example, whether a given image contains a malignant tumor or whether a given patient is at risk for sepsis.[[N:<em> Id.</em> at 1245-46.]] Large language models and other forms of generative AI also will likely be classified as Predictive DSIs, to the extent they are supplied by developers of certified health IT and are used to support decision-making.[[N:<em> Id.</em> at 1246.]]</p> <h2>Source Attributes</h2> <p>The Final Rule requires health IT developers to produce an expanded set of information, or &ldquo;source attributes,&rdquo; related to both evidence-based DSIs and Predictive DSIs. &ldquo;Source attributes&rdquo; are categories of technical performance and underlying quality information used to create both evidence-based and Predictive DSIs.[[N: <em>Id.</em> at 1196-97.]] The new requirements aim to reduce uncertainty, enhance market transparency, and establish consistency in information availability.[[N:<em> Id.</em> at 1233-34.]]</p> <h3>Requirements for DSIs</h3> <p>Under the Final Rule, evidence-based DSIs must now support 13 source attributes, including the developer and funding source of the intervention, as well as the intervention&rsquo;s use of patient demographics data and social determinants of health data.[[N:<em> Id. </em>at 1431.]] The Final Rule imposes more expansive transparency requirements on Predictive DSIs, which must support 31 source attributes. Among other requirements, developers of Predictive DSIs must produce information about the intervention&rsquo;s training data set, external validation process, and quantitative measures of performance, as well as the process used to ensure fairness and eliminate bias in the development of the intervention.[[N:<em> Id.</em>]] <br /> <br /> The Final Rule also establishes capabilities that health IT modules must support related to source attributes.[[N: <em>Id.</em> at 1256.]] First, the module must provide plain language descriptions of all required source attributes.[[N: <em>Id.</em>]] Second, for Predictive DSIs, the module must indicate when information is not available for review for certain source attributes. If and when information related to these source attributes is generated, the developer of certified health IT must make this information available to users.[[N:<em> Id. </em>at 1256-57.]] Finally, the module must enable a limited set of identified users to record, change, and access the required source attributes.[[N: <em>Id. </em>at 1257.]] <br /> <br /> Starting on January 1, 2025, and on an ongoing basis thereafter, developers of health IT modules certified to &sect; 170.315(b)(11) must review and update, as necessary, required source attribute information, as well as risk management practices described in &sect; 170.315(b)(11)(vi) and summary information provided through &sect; 170.523(f)(1)(xxi).[[N: <em>Id.</em> at 1254.]]</p> <h3>Coordination With the Food and Drug Administration</h3> <p>Whether DSIs enabled by or interfaced with certified health IT are subject to FDA regulation is separate and distinct from the question of whether a developer or a particular technology is subject to regulatory oversight by ONC&rsquo;s Program.[[N: <em>Id.</em> at 1245.]] In finalizing the rule, ONC declined to exclude from the definition for Predictive DSI software that are FDA-regulated medical devices or to exclude third-party software that qualify as non-device software functions per the statutory exemption for certain CDS software functions.[[N: <em>Id.</em>]] Thus, technologies that meet the definition for Predictive DSI within the Program may be considered non-device CDS, be considered CDS with device software functions, or lie outside of FDA&rsquo;s purview, depending on the specifics of the technology.[[N: <em>Id.</em> at 1262.]] As explained by ONC, FDA and ONC have separate and distinct authorities and regulate for separate and distinct purposes with separate and distinct policy objectives.<br /> <br /> Although FDA-regulated CDS are not exempt from the Final Rule, ONC worked with the FDA to minimize duplication of effort and maximize alignment across the distinct and different authorities. For example, ONC coordinated with FDA to ensure source attributes are complementary and not conflicting with the information FDA describes in its September 2022 CDS software guidance.[[N: <em>Id.</em>]] For CDS software that are medical devices and the focus of FDA oversight, the requirements of the Final Rule are consistent with best practices and recommendations provided by the FDA.[[N:<em> Id.</em> at 1263.]]<br /> <br /> This consistency across agencies could reduce burdens on developers who may be responsible for meeting both FDA and ONC requirements for three reasons.[[N: <em>Id.</em>]] First, an entity that develops device software that also meets the definition of Predictive DSI would be able to fulfill informational requirements for both FDA and ONC purposes using the same or similar information. Second, such software may be eligible to be considered non-device CDS according to FDA guidance if the software developer fulfills informational requirements pursuant to the Program. Finally, burdens will be reduced across entities regulated by FDA and ONC because an entity that develops device software that also meets the definition of a Predictive DSI could leverage Program requirements to enable users to select Predictive DSIs and access source attribute information. These capabilities could serve as the technical means to deliver information to users about the credibility of the device software function that is necessary for &ldquo;independent review,&rdquo; without having to build a parallel technological means to deliver such information.[[N: <em>Id.</em>]] However, a determination regarding the information necessary for independent review will continue to lie with the FDA.[[N: <em>Id.</em>]]</p> <h2>Intervention Risk Management</h2> <p>The Final Rule mandates that health IT developers apply intervention risk management (IRM) for each Predictive DSI included in their health IT module.[[N:<em> Id.</em> at 1272.]] Health IT developers will need to analyze potential risks and adverse impacts by considering the DSI&rsquo;s validity, reliability, robustness, fairness, intelligibility, safety, security, and privacy,[[N: <em>Id.</em> at 1274.]] and implement practices to mitigate those risks. Developers must also submit summary information of IRM practices through a publicly accessible hyperlink that allows any person to access the summary information directly.[[N:<em> Id.</em>]]</p> <h2>Implications</h2> <p>In addition to imposing detailed new requirements on HIT developers, the Final Rule makes significant changes to access and support for source attributes, transparency of predictive DSIs, and intervention risk management practices. The Final Rule focuses significantly on enhancing the trustworthiness, transparency, racial equity, and innovation of DSIs to ensure high-quality decisions that improve and support patient care. ONC believes these requirements will help to address disparities and bias that may be propagated through DSIs, as well as to establish consistency in information availability, improve overall data stewardship, and guide the appropriate use of data derived from health information about individuals.[[N: <em>Id. </em>at 1234.]] ONC also believes the increased transparency the Final Rule requires will allow users to make better informed decisions about whether and how to use emerging software.[[N: <em>Id.</em> at 1233.]]<br /> <br /> By taking advantage of the new transparency requirements, users of Predictive DSIs can become smart shoppers in a rapidly evolving health IT landscape. Going forward, health IT developers and those interested in developing or collaborating on DSIs will be required to make significant investments and updates in current and future systems and technology to meet the Final Rule&rsquo;s DSI requirements. Life sciences companies, labs, pharmacies, and others with financial interests in DSIs should also be aware of ONC&rsquo;s acknowledgement that financial arrangements with DSI developers could implicate the Anti-Kickback Statue and that ONC is focused on increased transparency around such arrangements to mitigate the risk of bias or potential patient harm.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{1C3A60F4-1A71-4AD6-B906-DC7A21B80D65}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/01/scientific-evidence-for-cannabis-rescheduling-difficult-to-challenge-says-sklambergScientific Evidence for Cannabis Rescheduling Difficult to Challenge, Says SklambergHoward Sklamberg, Life Sciences &amp; Healthcare Regulatory partner, was quoted in <em>Medscape</em> and <em>MarketWatch</em> regarding the U.S. Department of Health and Human Services&rsquo; (HHS) recommendation to move cannabis from Schedule I to Schedule III on the controlled substances list, which was issued in August of this year and sits with the U.S. Drug Enforcement Administration (DEA).Fri, 19 Jan 2024 00:00:00 -0600<p>Howard Sklamberg, Life Sciences &amp; Healthcare Regulatory partner, was quoted in <em>Medscape</em> and <em>MarketWatch</em> regarding the U.S. Department of Health and Human Services&rsquo; (HHS) recommendation to move cannabis from Schedule I to Schedule III on the controlled substances list, which was issued in August of this year and sits with the U.S. Drug Enforcement Administration (DEA).</p> <p>Newly released documents of the HHS&rsquo; recommendation illustrate that the U.S. Food and Drug Administration (FDA) has determined that cannabis has a legitimate medical use and should thus be moved from Schedule I to Schedule III. Sklamberg told <em>Medscape</em> that although President Biden&rsquo;s directive for the HHS and U.S. Attorney General to review how cannabis is scheduled under federal law &ldquo;certainly made the agencies reconsider&rdquo; rescheduling cannabis, rescheduling &ldquo;was going to happen anyway.&rdquo; Sklamberg predicted that a proposed rule would be issued by mid-summer of 2024, because &ldquo;agencies generally want to get their important rulemaking done before you get too much into the political season and the potential end of a presidency.&rdquo;</p> <p>Discussing claims that the HHS&rsquo; recommendation is low on scientific evidence, Sklamberg told <em>MarketWatch</em> that &ldquo;both in thoroughness of the analysis and its tone,&rdquo; the HHS&rsquo; recommendation &ldquo;is a very, very substantial document.&rdquo; In particular, &ldquo;the part of the analysis covering the science and medicine would be very hard to challenge. You would have to show the agency was acting in an arbitrary way,&rdquo; which Sklamberg said he doubts would happen. &ldquo;It would be hard for a judge to say &lsquo;I am going to overturn the HHS science,&rsquo;&rdquo; he continued.</p> <p><a rel="noopener noreferrer" href="https://www.marketwatch.com/story/these-cannabis-stocks-and-etfs-stand-to-benefit-if-the-biden-administration-reforms-marijuana-laws-887d8759?mod=search_headline" target="_blank">Read the <em>MarketWatch </em>article, &ldquo;Opinion: These cannabis stocks and ETFs stand to benefit if the Biden administration reforms marijuana laws&rdquo;</a> (subscription required).</p> <p><a rel="noopener noreferrer" href="https://www.medscape.com/viewarticle/fda-recommends-dea-move-cannabis-schedule-iii-2024a100010v?form=fpf" target="_blank">Read the <em>Medscape</em> article, &ldquo;FDA Recommends DEA Move Cannabis to Schedule III.&rdquo;</a></p>{46ED9C5E-9535-4A42-A402-13E46A3A4701}https://www.arnoldporter.com/en/perspectives/publications/2024/01/what-the-g7-code-of-conduct-means-for-global-ai-compliancePeter J. Schildkrauthttps://www.arnoldporter.com/en/people/s/schildkraut-peter-jpeter.schildkraut@arnoldporter.comPaula Millarhttps://www.arnoldporter.com/en/people/m/millar-paulapaula.millar@arnoldporter.comThe Illusion of International Consensus - What the G7 Code of Conduct Means for Global AI Compliance ProgramsArtificial intelligence (AI) has captured widespread public attention this year following ChatGPT's launch in late 2022, yet governments worldwide have pondered AI regulation for several years.&nbsp;Fri, 19 Jan 2024 00:00:00 -0600<p>Artificial intelligence (AI) has captured widespread public attention this year following ChatGPT's launch in late 2022, yet governments worldwide have pondered AI regulation for several years. AI has powered many now-common technologies such as search engines, navigation systems, personalized content recommendations, and a host of business applications, and it promises exciting new developments in perhaps every sphere of human activity. The more popular AI has become, however, the more apparent it is that AI presents serious risks from inaccuracy to discrimination, and 'deepfakes' and disinformation to undermining intellectual property (IP) rights, among many others.<br /> <br /> On October 30, 2023, following months of discussions, the G7 nations (Canada, France, Germany, Italy, Japan, the UK, and the US), as well as the EU, agreed to the voluntary Hiroshima Process International Code of Conduct for Organizations Developing Advanced AI Systems (the Code of Conduct). Peter J. Schildkraut and Paula Millar, from Arnold &amp; Porter, delve into the Code of Conduct and explore the different approaches towards stricter AI regulation in the EU and US.<br /> <br /> The Code of Conduct comprises a set of relatively high-level principles rather than concrete requirements and only applies to developers of advanced AI systems &ndash; foundation models and generative AI.[[N: The G7 does not yet have a consensus definition of these terms, and different legal instruments &ndash; to the extent they define the terms &ndash; may offer different definitions. For readers unfamiliar with the terms, we offer the following explanations. 'Foundation models' are large-scale, pre-trained models for AI capabilities that can be adapted and refined for other applications due to having been trained on broad and diverse data sets. 'Generative AI systems' can generate new content based on input data or user prompts.]] It also does not apply to developers of other AI systems or businesses deploying AI systems, advanced or otherwise. Although G7 leaders are generally aligned on the need to mitigate AI's risks and on the desirability of regulatory regimes being interoperable across jurisdictions &ndash; that compliance with one equates with compliance with all &ndash; the relatively restrained ambitions of the Code of Conduct should give global businesses little optimism that regulatory interoperability will emerge anytime soon.<br /> <br /> The current landscape for privacy laws, particularly within the US but elsewhere as well, illustrates how complicated the regulatory framework for AI might become for multinational companies to navigate. The rapid development of privacy statutes and regulations in the past decade has led to inconsistent requirements across jurisdictions, creating potential confusion among both businesses and consumers, and has diverted resources to compliance that companies could have invested in new products and services. Some businesses bite the bullet and expend time and resources to create policies and procedures to manage divergent requirements across borders. Others may self-select out of operating in certain jurisdictions to avoid the added complexity. To keep this dynamic from playing out in AI regulation too would require greater willingness from governments to compromise on their regulatory preferences than has emerged to date.</p> <h2>EU and US approaches</h2> <p>The EU and the US currently approach AI governance differently. Animated by the precautionary principle of proving new technologies are safe before letting them on the market, the EU is close to adopting its Artificial Intelligence Act (AI Act) &ndash; the first broad AI regulation apart from China's. Generally more reluctant to intervene absent demonstrated harms, US leaders have not kept pace with their European counterparts and seem headed towards more targeted rules. Despite consensus on the urgency of global AI rules, the EU and US approaches are difficult to harmonize beyond high-level principles.</p> <h3>EU approach</h3> <p>The EU approach to AI governance centers on the AI Act while also building on various recent laws, most notably the General Data Protection Regulation (GDPR). The European Commission proposed the AI Act in April 2021. The Commission and the EU's co-legislators, the Council of the European Union, and the European Parliament reached a political compromise among their differing versions on December 8, 2023, although the final text continues to be negotiated ahead of votes on adoption in the first part of 2024.<br /> <br /> The AI Act will regulate AI systems according to risk level and will impose highly prescriptive rules on systems used in cases considered to be high-risk. Providers and deployers of high-risk systems will face numerous obligations with respect to risk-management systems, datasets used for training, validation, and testing, as well as recordkeeping and technical documentation requirements. The AI Act will also mandate that high-risk systems undergo assessments of their conformity with the Act before providers may put them into the EU market. The AI Act will charge the European Committee for Standardization (CEN) and European Committee for Electrotechnical Standardization (CENELEC) with establishing harmonized EU standards consistent with these requirements. As adherence to the CEN/CENELEC standards will be a safe harbor for providers and deployers of high-risk systems, these standards should offer a pathway for companies to reduce their compliance burden.<br /> <br /> What the AI Act will demand of general-purpose AI systems, foundation models, and generative AI systems was one of the last issues on which the EU institutions reached a political compromise. In the end, they settled on imposing additional obligations on providers of foundation models, with tiers of requirements depending on various criteria. Providers of all foundation models will have to provide detailed summaries of their training data, among other obligations. Providers of proprietary systems will face heavier burdens than providers of free and open-source models with publicly available parameters.<br /> <br /> Ironically, the very prescriptiveness of the AI Act may cause companies to treat compliance as a check-the-box exercise instead of devoting their resources to managing risks to mitigate the harms the regulation is supposed to prevent.<br /> <br /> The AI Act will have a broad extraterritorial scope, sweeping into its purview providers and deployers of AI systems regardless of whether they are established in the EU. As a result, it is prudent for businesses serving the EU market and selling AI-enabled products or services, or deploying AI systems in their operations, to prepare for compliance.<br /> <br /> While the AI Act is expected to become law soon, its provisions will not have effect for another six months to two years thereafter.[[N: Obligations for AI systems that are themselves, or are safety components of, products governed by certain other product safety regulations will not have effect for another three years thereafter.]] In the meantime, European data protection authorities have been using the GDPR to regulate AI within their jurisdictions. For example, in March 2023, the Italian data protection authority (Garante) banned one leading generative AI service after determining that it did not adhere to the GDPR. The ban was lifted several weeks later after satisfaction of the agency's immediate conditions, but the Garante's investigation continued. Subsequently, data protection authorities in France, Germany, the Netherlands, Poland, and Spain acknowledged opening their own investigations into or receiving complaints about that service's compliance with the GDPR, and the European Data Protection Board (EDPB) launched a task force to investigate the service as well. Additionally, another European body &ndash; the European Data Protection Supervisor (EDPS) &ndash; has a separate task force to ensure generative AI tools adhere to the GDPR's strictures.<br /> <br /> More broadly, the GDPR imposes a number of obligations on companies developing or deploying AI systems &ndash; or using third-party AI-enabled services &ndash; trained or operating on personal data. EU data protection authorities have focused on AI over the past year, and companies should expect this scrutiny to continue ahead of the AI Act's enforceability.</p> <h3>US approach</h3> <p>At the federal level, the US has taken a risk-based, sector-specific approach to AI governance, relying on agencies to police AI under their existing legislative authorizations. The Federal Trade Commission (FTC), the Equal Employment Opportunity Commission (EEOC), the Consumer Financial Protection Bureau (CFPB), and the Department of Justice's Civil Rights Division, among others, have asserted their current authority to protect against various AI harm in the sectors they oversee. As FTC Chair Lina Khan has explained, 'Technological advances can deliver critical innovation &ndash; but claims of innovation must not be cover for lawbreaking.<br /> There is no AI exemption to the laws on the books, and the FTC will vigorously enforce the law to combat unfair or deceptive practices or unfair methods of competition.'<br /> <br /> In practice, this reliance on existing, sector-specific statutes diverges from the EU approach in two fundamental ways. First, regulation varies across sectors in the US while the AI Act and GDPR apply more uniformly. Of greater significance, however, is that the existing statutes generally tell businesses the outcomes to avoid with their AI systems (e.g., do not discriminate unlawfully in employment or credit), but, unlike the AI Act in particular, these US federal statutes from the pre-AI era mostly do not detail what companies must and must not do to prevent harmful outcomes.<br /> <br /> Notwithstanding this sectoral approach, Washington has taken some steps toward comprehensive AI regulation.<br /> <br /> In October 2022, the Biden administration unveiled its Blueprint for an AI Bill of Rights. The AI Bill of Rights set forth five principles for developing and deploying AI systems while protecting individual rights and society. Although these principles are guiding various agencies in developing new, enforceable rules under their existing statutory authorities, the AI Bill of Rights bestows no additional enforcement power on any agency.<br /> <br /> In another such step, the US National Institute of Standards and Technology (NIST) published the first version of its Artificial Intelligence Risk Management Framework (AI RMF 1.0), as well as the companion AI RMF Playbook, in the first quarter of 2023. NIST, which has no regulatory authority, designed AI RMF 1.0 to '[b]e law- and regulation-agnostic,' adaptable to any set of substantive requirements. Moreover, use of AI RMF 1.0 is voluntary although there have been calls for agencies with regulatory powers to mandate its use as they adopt new rules.<br /> <br /> In July 2023, the White House announced that seven leading AI developers pledged to comply with safety commitments to prevent harm from their systems. Eight additional tech companies signed the commitments two months later. While framed as voluntary, having been made publicly the commitments potentially became enforceable by the FTC under its general authority to punish unfair or deceptive trade practices. In somewhat analogous situations, the FTC has sanctioned companies that failed to adhere to their voluntarily adopted privacy policies.<br /> <br /> Building upon the AI Bill of Rights and the voluntary safety commitments, President Biden signed an executive order on safe, secure, and trustworthy AI on October 30, 2023 (Executive Order), the same day as the adoption of the G7 Code of Conduct. The Executive Order seemingly addresses the full spectrum of challenges wrought by AI &ndash; from national security to equity and civil rights, privacy protection to synthetic content, competition to criminal justice, and healthcare to human capital needs.<br /> <br /> Asserting presidential powers under the Defense Production Act, the Executive Order imposes reporting requirements on developers of cutting-edge, 'dual-use' AI foundation models 'that pose a serious risk to [national] security, national economic security, national public health or safety, or any combination of those matters.' Those developers will have to notify the Government when they are training their models. They will also have to provide the Government with the results of their safety testing &ndash; to be performed under standards that NIST will develop &ndash; before they release their models publicly.<br /> <br /> Apart from these narrowly applicable mandates, the Executive Order requires or urges various agencies to develop rules or guidance to combat particular AI harm. Some of these efforts are ongoing, like the FTC's 'commercial surveillance' proceeding (which broadly addresses privacy, cybersecurity, and automated decision-making) and the banking regulators' proposed regulation of mortgage lenders' automated valuation models. Others will be kick-started by the Executive Order.<br /> <br /> Companies operating in the US should be gearing up their AI risk-management efforts in anticipation of new rules in a variety of sectors. On the whole, though, any new requirements will likely be far less prescriptive than the EU AI Act. Nor should companies expect Congress to adopt statutes with significant numbers of detailed mandates. AI regulation has been among Senate Majority Leader Chuck Schumer's top legislative priorities for this session of Congress, and he is pushing his colleagues rapidly up a steep learning curve. The end result, however, will likely give businesses much greater flexibility in developing and deploying AI systems than they will have in the EU. In discussing AI regulation in September 2023, Senator Schumer cautioned that '[i]f you go too fast, you can ruin things.' The EU went 'too fast,' he added. In one leading proposal, Senators John Thune and Amy Klobuchar have released a bipartisan bill they advertise as having a 'light touch' to support innovation while still increasing transparency, accountability, and security of higher-risk AI applications.</p> <h2>Hiroshima Process and Code of Conduct</h2> <p>Against this backdrop of differing regulatory philosophies, G7 leaders agreed in May 2023 to create a multilateral ministerial forum (the Hiroshima AI process) for discussing and developing international guidelines covering generative AI. Later that month, at the close of the fourth EU-US Trade and Technology Council (TTC) ministerial meeting, US and EU officials announced plans to draft a code of conduct to propose to the G7 for potential adoption. Reportedly, the EU sought to have the code of conduct track the AI Act's requirements, which the US resisted.<br /> <br /> Ultimately, what the G7 leaders agreed to on October 30, 2023, were the Hiroshima Process International Guiding Principles for Organizations Developing Advanced AI Systems and the Code of Conduct, based on those principles.<br /> <br /> The Code of Conduct, which only applies to the most advanced AI systems, comprises a non-exhaustive list of 11 encouraged actions for developers of these systems:</p> <ul> <li>take appropriate measures throughout the development of advanced AI systems to identify, evaluate, and mitigate risks across the AI lifecycle;</li> <li>identify and mitigate vulnerabilities, incidents, and patterns of misuse after deployment;</li> <li>publicly report advanced AI systems' capabilities, limitations, and domains of appropriate and inappropriate use, to support ensuring sufficient transparency;</li> <li>work towards responsible information sharing and reporting of incidents among organizations developing advanced AI systems;</li> <li>develop, implement, and disclose AI governance and risk-management policies grounded in a risk-based approach;</li> <li>invest in and implement robust security controls across the AI lifecycle;</li> <li>develop and deploy reliable content authentication and provenance mechanisms to enable users to identify AI-generated content;</li> <li>prioritize research to mitigate societal, safety, and security risks and prioritize investment in effective mitigation measures;</li> <li>prioritize the development of advanced AI systems to address the world's greatest challenges; advance the development and adoption of international technical standards; and</li> <li>implement appropriate data input measures and protection for personal data and IP.</li> </ul> <p>The Code of Conduct itself says, 'Different jurisdictions may take their own unique approaches to implementing these actions in different ways.' In other words, beneath these high-level principles, no consensus exists on how to regulate even the most advanced AI technologies.</p> <h2>The bottom line</h2> <p>So where does this lack of consensus leave companies developing and deploying AI systems across jurisdictions?<br /> <br /> In the short term at least, multinational businesses will have to comply with the most prescriptive legal mandates, or they will have to geofence their products and services to avoid markets with requirements they cannot meet. Putting a finer point on this observation, US and other non-European businesses will confront a choice between adhering to all the prescriptions of the AI Act or being locked out of the European market. While the CEN/CENELEC standards (once they are adopted) may ease the burden of complying, it is doubtful they will erase it entirely. As a result, the AI Act will probably dampen European and US innovation alike &ndash; notwithstanding American policy preferences. European companies, of course, will have no choice but to comply. They may find themselves hampered in competing in other markets against non-European companies that have chosen to forgo European sales and, thus, can escape the AI Act's strictures.<br /> <br /> Over the medium term, the international standards process (of which the CEN/CENELEC process is but a component) may produce harmony at a technical level that has been absent so far at the political level. Widely accepted international standards for 'safe, secure, and trustworthy AI' (language used in both the US Executive Order and the G7 documents) could level the compliance burdens across jurisdictions.<br /> <br /> Alternatively, greater experience or philosophical shifts in one jurisdiction or another could forge a deeper political consensus in the G7 than currently exists and yield truly interoperable regulation. In the meantime, however, companies developing and deploying AI systems need risk-management programs capable of satisfying all the requirements of the various jurisdictions in which they operate.<br /> <br /> <em>*This article was first published in OneTrust DataGuidance on December 8, 2023.</em></p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Article is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{B4A57E1A-8546-4FB2-99E4-3E3FA585F5A2}https://www.arnoldporter.com/en/perspectives/events/2024/01/part-ii-antitrust-litigationDaniel B. Asimowhttps://www.arnoldporter.com/en/people/a/asimow-daniel-bdaniel.asimow@arnoldporter.comSonia Kuester Pfaffenrothhttps://www.arnoldporter.com/en/people/p/pfaffenroth-soniasonia.pfaffenroth@arnoldporter.comC. Scott Lenthttps://www.arnoldporter.com/en/people/l/lent-c-scottscott.lent@arnoldporter.comThree-Part Webinar Series: Antitrust 2023 Year in Review: Part II: Antitrust LitigationIn January, Arnold &amp; Porter's U.S. Antitrust/Competition practice hosted a three-part webinar series that explored 2023&rsquo;s most critical developments in antitrust across mergers and other transactions, private plaintiff and government litigation, and criminal enforcement.Thu, 18 Jan 2024 00:00:00 -0600<p>In January, Arnold &amp; Porter's U.S. Antitrust/Competition practice hosted a three-part webinar series that explored 2023&rsquo;s most critical developments in antitrust across mergers and other transactions, private plaintiff and government litigation, and criminal enforcement. </p> <p>In the second part of the series, C. Scott Lent, Daniel Asimow, and Sonia Kuester Pfaffenroth discussed major developments in antitrust litigation from last year.</p>{D8BBB506-88BD-4BD9-A241-7AA3858407DD}https://www.arnoldporter.com/en/perspectives/news/2024/01/curtis-honored-with-2023-presidential-rank-award-for-years-of-civil-serviceCurtis Honored with 2023 Presidential Rank Award for Years of Civil ServiceArnold &amp; Porter partner Deborah Curtis, former Deputy General Counsel for Litigation and Investigations at the CIA, received the Presidential Rank Award for her years of civil service with the federal government.Thu, 18 Jan 2024 00:00:00 -0600<p>Arnold &amp; Porter partner Deborah Curtis, former Deputy General Counsel for Litigation and Investigations at the CIA, received the <a rel="noopener noreferrer" href="https://www.opm.gov/news/releases/2023/11/release-president-biden-selects-2023-presidential-rank-award-winners/" target="_blank">Presidential Rank Award </a>for her years of civil service with the federal government. The Presidential Rank Award is one of the most prestigious awards in the career of civil service and recognizes the important contributions of public servants across the various agencies of the U.S. federal government.</p> <p>The 2023 Presidential Rank Award winners were selected by President Joe Biden. This year, President Biden selected 232 winners from 31 federal agencies for their exceptional leadership, accomplishments, and service over an extended period. These individuals are all members of the Senior Executive Service, Senior-Level and Scientific and Professional corps.</p> <p>During her tenure as CIA Deputy General Counsel for Litigation and Investigations, Curtis oversaw all litigation matters, including the invocation of state secrets and diplomatic privileges and immunities. She also advised on major international policy initiatives that affect national security, including the U.S.-EU transatlantic data privacy agreement and the interface with the International Criminal Court.</p> <p>As a member of Arnold &amp; Porter&rsquo;s White Collar Defense &amp; Investigations practice, Curtis focuses on national security investigations and defense, as well as other litigation and enforcement matters. An accomplished trial lawyer, Curtis has chaired 17 jury trials and over 50 bench trials as both prosecutor and defense counsel.</p>{1B9CE822-FAF6-40C2-B1F6-91A6A88315BF}https://www.arnoldporter.com/en/perspectives/news/2024/01/arnold-and-porter-recognized-in-chambers-greater-china-region-2024-guideArnold & Porter Recognized in Chambers Greater China Region 2024 GuideThe 2024 <em>Chambers Greater China Region</em> guide highlighted Arnold &amp; Porter as a "Leading Firm" in Life Sciences and recognized three attorneys as "Leading Individuals.&rdquo;Thu, 18 Jan 2024 00:00:00 -0600<p>The 2024<em> Chambers Greater China Region</em> guide highlighted Arnold &amp; Porter as a "Leading Firm" in Life Sciences and recognized three attorneys as "Leading Individuals.&rdquo; The guide ranks leading law firms and individuals based on in-depth market analysis across the Greater China Region.</p> <p><em>Chambers Greater China Region</em> ranked the firm&rsquo;s Life Sciences practice in Band 2 and praised it for being &ldquo;well placed to handle investigations, litigation and cross-border transactional work on behalf of life sciences companies.&rdquo; The guide noted that the practice excels at advising across a wide range of life sciences mandates and offers strength in enforcement and compliance-related issues while simultaneously possessing an &ldquo;impressive client roster.&rdquo;</p> <p>In addition to the practice ranking, the below lawyers were recognized by <em>Chambers Greater China Region</em>:</p> <ul> <li>Andrew Chen&mdash;Life Sciences (International Firms)</li> <li>John Tan&mdash;Corporate Investigations/Anti-Corruption (International Firms) and Life Sciences (International Firms)</li> <li>Anton Ware&mdash;Dispute Resolution: Arbitration (International Firms)</li> </ul>{8ED25D43-DCA5-4041-8412-1A606C38C730}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/ftc-amends-childrens-privacy-regulationsNancy L. Perkinshttps://www.arnoldporter.com/en/people/p/perkins-nancy-lnancy.perkins@arnoldporter.comJason T. Raylesberghttps://www.arnoldporter.com/en/people/r/raylesberg-jason-tjason.raylesberg@arnoldporter.comFTC Proposes Significant Amendments to Children’s Privacy RegulationsOn January 11, the FTC published a notice of proposed rulemaking (the NPRM) to modify the agency&rsquo;s regulations implementing the Children&rsquo;s Online Privacy Protection Act (the COPPA Rule).Thu, 18 Jan 2024 00:00:00 -0600<p>On January 11, the FTC published a <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2024/01/11/2023-28569/childrens-online-privacy-protection-rule" target="_blank">notice of proposed rulemaking</a> (the NPRM) to modify the agency&rsquo;s regulations implementing the Children&rsquo;s Online Privacy Protection Act (the COPPA Rule). The proposed changes (the Proposed Amendments) include expanded requirements for providing privacy notices, obtaining parental consent, data security and record retention, as well as updated obligations for COPPA Safe Harbor Programs. The NPRM discussed these proposed changes in detail, addressing positions taken by interested parties in the more than 175,000 comments submitted in 2019 in response to the FTC&rsquo;s solicitation of comments as part of its statutorily required periodic review of COPPA&rsquo;s implementation and effectiveness. <strong><em>Comments on the NPRM are due on March 11, 2024.</em></strong></p> <h2>Key Proposed Changes</h2> <h3>Scope</h3> <p>The COPPA Rule applies to (1) any operator of a website or online service directed to children under age 13 (referred to here simply as &ldquo;children&rdquo;), as well as (2) any operator who has actual knowledge that it is collecting or maintaining personal information from a child. The Proposed Amendments would clarify the scope of these categories by, among other things:</p> <ul> <li>Adding examples of evidence for the FTC to consider when evaluating whether a website or online service is directed to children, including marketing or promotional materials or plans, representations to consumers or to third parties, reviews by users or third parties, and the age of users on similar websites or services</li> <li>Expanding the definition of &ldquo;website or online service directed to children&rdquo; to apply to companies that have actual knowledge that they collect children&rsquo;s information but do not collect that information directly from users of a child-directed site or service (e.g., they receive that information from third party sources)</li> </ul> <p> The FTC is soliciting comments on whether the FTC should (1) retain the position that an operator will not be deemed to have &ldquo;collected&rdquo; personal information, and therefore does not have to comply with the COPPA Rule, if it employed automated means to delete all or virtually all personal information from one-to-one communications and (2) provide an exemption for operators being deemed directed to children if such operators undertake an analysis of their audience composition and determine no more than a specific percentage of its users are likely under the age of 13.</p> <h3>Personal Information Definition</h3> <p>&ldquo;Personal information&rdquo; is currently defined in the COPPA Rule as &ldquo;individually identifiable information about an individual collected online,&rdquo; including, among a variety of other specific types of identifiers, &ldquo;[a] photograph, video, or audio file where such file contains a child&rsquo;s image or voice.&rdquo;[[N: 16 C.F.R. &sect; 312.2.]] The Proposed Amendments would add to the list of identifier types &ldquo;a biometric identifier that can be used for the automated or semi-automated recognition of an individual, including fingerprints or handprints; retina and iris patterns; genetic data, including a DNA sequence; or data derived from voice data, gait data, or facial data.&rdquo; In addition, the FTC, while not actually proposing it, is requesting comments on whether &ldquo;personal information&rdquo; should be defined to include all government-issued identifiers, rather than just Social Security numbers.</p> <h3>Notice and Consent Requirements</h3> <p>The COPPA Rule currently requires operators to post a privacy policy on their website or other online service describing the operator&rsquo;s practices with respect to children&rsquo;s information collected online. Operators must also provide direct notice to parents and obtain verifiable consent, with limited exceptions, before collecting children&rsquo;s information. The Proposed Amendments would clarify and expand these notice and consent requirements by:</p> <ul> <li>Requiring operators that collect a persistent identifier[[N: The FTC considers a persistent identifier one that can be used to recognize a user over time and across different websites or online services. Examples include a customer number held in a cookie, an IP address, a processor or device serial number, or unique device identifier.]] for use in &ldquo;support for internal operations of the website or online service,&rdquo; which is permissible without parental consent,[[N: Operators that collect persistent identifiers solely for the support of internal operations of the website or service do not need to provide direct notice to and obtain verifiable consent from the parent, but must still comply with the online notice requirement. &ldquo;Support for internal operations&rdquo; refers to activities necessary for the site or service to maintain or analyze its functioning; perform network communications; authenticate users or personalize content; serve contextual advertising or cap the frequency of advertising; protect the security or integrity of the user, website, or online service; ensure legal or regulatory compliance; or fulfill certain requests of a child.]] to (1) specify the particular internal operation(s) for which the operator has collected the persistent identifier and (2) describe the means the operator uses to ensure that it does not use or disclose the persistent identifier to contact a specific individual or for any other purpose other than to support internal operations</li> <li>Requiring, as a condition for disclosure of children&rsquo;s personal information to third parties:</li> </ul> <ul style="margin-left: 40px;"> <li><em>Additional verifiable parental consent: </em>Operators would have to obtain verifiable parental consent to disclose, separate from and in addition to consent to collect, children&rsquo;s information unless such disclosures are integral[[N: The FTC explains that an example of integral disclosure might be an online messaging forum&rsquo;s disclosure of online contact information to other users on that forum.]] to the nature of the website or online service.[[N: Currently, the COPPA Rule provides that operators may rely on a <strong><em>single</em></strong> parental consent for the collection, use, and disclosure of children&rsquo;s information but that they must give parents the option to consent to collection and use without consenting to the disclosure of information to third parties if that disclosure is not integral to the activity the parent is consenting to with respect to collection and use.]] Operators required to obtain separate verifiable consent for disclosures would be prohibited from conditioning access to the website or online service on the provision of such consent.</li> <li><em>Direct notice to parents:</em> Operators would be required to state in their direct notice to parents: (1) the identities or specific categories of the third parties to whom children&rsquo;s personal information will be disclosed (with parental consent) and the purposes for such disclosure and (2) that the parent has the above-mentioned option to consent to the collection and use of the child&rsquo;s personal information without also consenting to the information&rsquo;s disclosure.</li> </ul> <ul> <li>Making it easier for parental consent to be provided:</li> </ul> <ul style="margin-left: 40px;"> <li><em>Consent via text message: </em>Parents would be able to provide verifiable consent via text message. Currently, the COPPA Rule permits operators to collect &ldquo;online contact information&rdquo; (e.g., email address or instant messaging user identifier) to initiate the process of obtaining verifiable consent. The Proposed Amendments would amend the definition of online contact information to include &ldquo;an identifier such as a mobile telephone number, provided the operator uses it only to send a text message.&rdquo;</li> <li><em>Facial recognition technology and knowledge-based authentication: </em>Parents would be able to verify their identity by (1) using facial recognition technology that compares an image of a parent&rsquo;s face taken with a phone camera against government-issued identification or (2) answering dynamic multiple-choice questions that children would have difficulty answering.</li> </ul> <p> The FTC is inviting comments on what role platforms can play in establishing consent mechanisms to enable app developers or other websites or online services to obtain verifiable parental consent. In particular, the FTC is seeking responses about the benefits a common consent mechanism might offer operators and parents and what steps the FTC can take to encourage the development of platform-based consent mechanisms.</p> <h3>New Mixed Audience Definition</h3> <p>In response to comments about the ambiguity of the COPPA Rule&rsquo;s application to websites or online services directed to both children and others (a &ldquo;mixed audience&rdquo;), the FTC is proposing the creation of a separate, stand-alone definition for &ldquo;mixed audience website or online service.&rdquo; As proposed, this would be defined as a website or online service that is directed to children but does not target children as its primary audience, and does not collect personal information from any visitor prior to collecting age information or using another means that is reasonably calculated, in light of available technology, to determine whether a visitor is a child.[[N: This definition effectively codifies existing <a rel="noopener noreferrer" href="https://www.ftc.gov/business-guidance/resources/complying-coppa-frequently-asked-questions" target="_blank">FTC staff guidance</a> that operators, in collecting age information or other means of determining whether a visitor is a child, must do so in a neutral manner that does not default to a set age or encourage visitors to falsify age information.]]</p> <h3>Data Security</h3> <p>The Proposed Amendments would substantially broaden the data security requirements under the COPPA Rule by requiring that operators, at a minimum, establish, implement, and maintain a written comprehensive security program that contains safeguards appropriate to the sensitivity of children&rsquo;s information and to the operator&rsquo;s size, complexity, and nature and scope of activities. Specifically, the security program would need to (1) designate an employee to coordinate the security program; (2) identify and, at least annually, perform additional assessments to identify risks to the confidentiality, security, and integrity of children&rsquo;s information; (3) design, implement, and maintain safeguards to control any identified risks, as well as test and monitor the effectiveness of such safeguards; and (4) at least annually, evaluate and modify the security program.</p> <h3>Data Retention and Deletion</h3> <p>The Proposed Amendments would prohibit operators from retaining children&rsquo;s information collected online any longer than is reasonably necessary to fulfill the specific purpose(s) for which the information was collected. To adhere to this prohibition, operators would have to implement and make available to the public a written children&rsquo;s data retention policy that sets forth the purposes for which children&rsquo;s information is collected, the business need for retaining such information, and a timeframe for deletion of such information that precludes indefinite retention.</p> <h2>Key Takeaways</h2> <p>The NPRM underscores the aggressive approach the FTC is taking to protect misuse of children&rsquo;s data and resulting online abuses. In the last year alone, the FTC took action against <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/03/ftc-finalizes-order-requiring-fortnite-maker-epic-games-pay-245-million-tricking-users-making" target="_blank">Epic Games</a>, <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/06/ftc-will-require-microsoft-pay-20-million-over-charges-it-illegally-collected-personal-information" target="_blank">Microsoft</a>, and <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/05/ftc-proposes-blanket-prohibition-preventing-facebook-monetizing-youth-data" target="_blank">Facebook</a> related to charges of COPPA violations. As FTC Chair Lina Khan stated in <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/12/ftc-proposes-strengthening-childrens-privacy-rule-further-limit-companies-ability-monetize-childrens" target="_blank">announcing</a> the Proposed Amendments: &ldquo;[k]ids must be able to play and learn online without being endlessly tracked by companies looking to hoard and monetize their personal data.&rdquo;<br /> <br /> The FTC will carefully examine and consider the merits of public comments on the Proposed Amendments. Please feel free to contact any of the authors of this Advisory or your principal Arnold &amp; Porter contact if you might be interested in submitting such comments or have any questions about the NPRM or privacy compliance more generally.<br /> <br /> <em>*Adrian Chochorek contributed to this Advisory. Mr. Chochorek is a graduate of the New York University School of Law and is employed at Arnold &amp; Porter's New York office. He is not admitted to the practice of law.</em></p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{B34F15B1-A872-4004-A347-D822935E1A41}https://www.arnoldporter.com/en/perspectives/events/2024/01/exploring-bank-capital-and-liquidity-alternative-solutionsRobert C. Azarowhttps://www.arnoldporter.com/en/people/a/azarow-robert-crobert.azarow@arnoldporter.comJames P. Berginhttps://www.arnoldporter.com/en/people/b/bergin-jamesJames.Bergin@arnoldporter.comLawton M. Camphttps://www.arnoldporter.com/en/people/c/camp-lawton-mlawton.camp@arnoldporter.comStephen Culhanehttps://www.arnoldporter.com/en/people/c/culhane-stephenstephen.culhane@arnoldporter.comDaniel J. Hartnetthttps://www.arnoldporter.com/en/people/h/hartnett-daniel-jdaniel.hartnett@arnoldporter.comExploring Bank Capital and Liquidity Alternative SolutionsThe proposed changes to bank capital requirements will present increased liquidity and capital management challenges for numerous banking organizationsWed, 17 Jan 2024 00:00:00 -0600<p>The proposed changes to bank capital requirements will present increased liquidity and capital management challenges for numerous banking organizations, many of which are already balance sheet-constrained. Please join us for a webinar exploring the new proposal and opportunities available for banking organizations to raise additional capital and liquidity.</p> <h2>Topics</h2> <ul> <li>Federal banking agencies' Basel Endgame capital proposal</li> <li>Bank utilization of bank-sponsored and advised investment funds that purchase loan portfolios and/or loan origination flow</li> <li>Bank utilization of loan participations as an alternative means of financing loan portfolios</li> <li>Sales of distressed loans and distressed loan portfolios</li> <li>Developments relating to credit risk transfer transactions, including recent banking agency guidance and the SEC's adoption of the Conflicts of Interest Rule</li> </ul>{660A29A8-C6BE-48D9-B496-7ACEFEAC6840}https://www.arnoldporter.com/en/perspectives/news/2024/01/arnold-and-porter-achieves-significant-international-arbitration-victories-for-republic-of-peruArnold & Porter Achieves Significant International Arbitration Victories for Republic of PeruArnold &amp; Porter's International Arbitration team, known for its unmatched track record in securing positive outcomes for sovereign states and investors, has advised Peru on two additional significant victories.Wed, 17 Jan 2024 00:00:00 -0600<p>Arnold &amp; Porter's International Arbitration team, known for its unmatched track record in securing positive outcomes for sovereign states and investors, has advised Peru on two additional significant victories.</p> <p>In the case of <em>Latam Hydro LLC and CH Mamacocha S.R.L. v. Republic of Peru</em> (ICSID Case No. ARB/19/28), decided on December 20, 2023, the Tribunal dismissed all claims against Peru. The case, which involved a hydroelectric project, was noted for its complexity, including environmental concerns and multiple legal proceedings. The Tribunal ordered the claimants to reimburse Peru's arbitration costs. The Arnold &amp; Porter team was led by Patricio Gran&eacute; Labat and included partner Amy Endicott, counsel &Aacute;lvaro Nistal, senior associates Claudia M. Taveras, Cristina Arizmendi, and Brian Bombassaro, associates Julia Calder&oacute;n Carcedo, Ana Pirnia, Peter Schmidt, and Peter Saban, attorney Andr&eacute;s &Aacute;lvarez Calder&oacute;n, and legal consultant Natalia Giraldo-Carrillo.</p> <p>In the second case, <em>Worth Capital Holdings 27 LLC v. Republic of Peru</em> (ICSID Case No. ARB/20/51), decided on December 8, 2023, the Tribunal emphasized equity and fairness in its decision to discontinue the arbitration and ordered the claimants to bear all of Peru's legal fees, amounting to US $2,562,627, and arbitration costs. This case marked the 50th positive outcome in the last 51 investment arbitration rulings in which the firm has represented Peru. The team was led by partner Patricio Gran&eacute; Labat and included partner M&eacute;lida Hodgson, senior associate Katelyn Horne, and associates Julia Calder&oacute;n Carcedo, Sebastian Canon Urrutia, and Ernesto Hernandez.</p>{5147681C-B50F-4279-9AEE-1DAE6B4E0BFB}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/01/desjardins-discusses-priorities-for-medical-device-industry-in-2024Desjardins Discusses Priorities for Medical Device Industry in 2024Life Sciences &amp; Healthcare Regulatory partner Philip Desjardins was recently featured in the <em>Medtech Insight</em> article, &ldquo;FDA&rsquo;s LDT Proposal, AI Oversight, Cybersecurity Top US Regulatory Interests In 2024.&rdquo;Wed, 17 Jan 2024 00:00:00 -0600<p>Life Sciences &amp; Healthcare Regulatory partner Philip Desjardins was recently featured in the <em>Medtech Insight</em> article, &ldquo;FDA&rsquo;s LDT Proposal, AI Oversight, Cybersecurity Top US Regulatory Interests In 2024.&rdquo; The article highlights views from industry experts and the U.S. Food and Drug Administration (FDA) on priorities and regulatory topics to watch in 2024. </p> <p>Desjardins told <em>Medtech Insight</em> that the medical device industry is currently grappling with &ldquo;considerable uncertainties, notably in the realm of digital health where the FDA is poised to intensify enforcement activities.&rdquo; He said that a more &ldquo;pronounced regulatory stance&rdquo; is anticipated in 2024, both in terms of volume and severity, and that it is &ldquo;evident that the FDA&rsquo;s focus on the digital health landscape is set to expand.&rdquo; He added that industry stakeholders should prepare for &ldquo;heightened scrutiny&rdquo; and ensure &ldquo;alignment with evolving regulatory frameworks in the dynamic landscape of digital health and artificial intelligence/machine learning applications in medical devices,&rdquo; particularly related to the FDA&rsquo;s planned updates to guidance in these sectors in 2024.</p> <p><a href="https://medtech.citeline.com/MT148565/FDAs-LDT-Proposal-AI-Oversight-Cybersecurity-Top-US-Regulatory-Interests-In-2024">Read the full article</a>.</p>{9F2C7AFB-5E6E-4992-835C-35BACDE8B285}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/01/awareness-of-fara-higher-than-ever-before-jeffress-saysAwareness of FARA Higher Than Ever Before, Jeffress SaysAmy Jeffress, co-chair of the firm&rsquo;s White Collar Defense &amp; Investigations practice, was recently featured in the <em>Law360 Pulse</em> article, &ldquo;Foreign Client Work In Spotlight Amid DOJ Compliance Push.&rdquo;&nbsp;Wed, 17 Jan 2024 00:00:00 -0600<p>Amy Jeffress, co-chair of the firm&rsquo;s White Collar Defense &amp; Investigations practice, was recently featured in the <em>Law360 Pulse</em> article, &ldquo;Foreign Client Work In Spotlight Amid DOJ Compliance Push.&rdquo; The article discusses the U.S. Department of Justice&rsquo;s recent heightened enforcement of the Foreign Agents Registration Act (FARA), which requires those working on behalf of foreign entities to register as &ldquo;a foreign agent&rdquo; with the DOJ. According to the article, the DOJ&rsquo;s enforcement push has placed pressure on law and lobbying firms and other businesses to steer clear of compliance dangers.</p> <p>Jeffress told <em>Law360 Pulse</em> that awareness of FARA issues is &ldquo;higher than ever before.&rdquo; The law includes an exemption for lawyers engaged in the legal representation of a foreign principal, but that exemption is &ldquo;fairly narrow, and not all of a lawyer&rsquo;s work may full under it,&rdquo; she said. </p> <p>Jeffress added that some lawyers do not want to take on work that would require FARA registration because &ldquo;they want to preserve their options for government positions or other activities that might not be open to them if they register.&rdquo; </p> <p><a rel="noopener noreferrer" href="https://www.law360.com/pulse/articles/1785241" target="_blank">Read the full article</a> (subscription required).</p>{F631E0A9-5B91-4151-A4B7-5D2AFE8A4EA3}https://www.arnoldporter.com/en/perspectives/publications/2024/01/global-anti-corruption-insights-winter-2024Marcus A. Asnerhttps://www.arnoldporter.com/en/people/a/asner-marcus-amarcus.asner@arnoldporter.comKathleen Harrishttps://www.arnoldporter.com/en/people/h/harris-kathleenkathleen.harris@arnoldporter.comAmy Jeffresshttps://www.arnoldporter.com/en/people/j/jeffress-amyAmy.Jeffress@arnoldporter.comJohn N. Nassikashttps://www.arnoldporter.com/en/people/n/nassikas-john-njohn.nassikas@arnoldporter.comSoo-Mi Rheehttps://www.arnoldporter.com/en/people/r/rhee-soomisoo-mi.rhee@arnoldporter.comDaniel Bernsteinhttps://www.arnoldporter.com/en/people/b/bernstein-danieldaniel.bernstein@arnoldporter.comJunghyun Baekhttps://www.arnoldporter.com/en/people/b/baek-junghyunjunghyun.baek@arnoldporter.comEliza J. Buergenthalhttps://www.arnoldporter.com/en/people/b/buergenthal-elizaeliza.buergenthal@arnoldporter.comGlobal Anti-Corruption Insights: Winter 2024Reports of the Foreign Corrupt Practices Act&rsquo;s demise remain greatly exaggerated. The U.S. Department of Justice and U.S. Securities and Exchange Commission kicked off the new year by announcing, on January 10, a US$220 million settlement with a German company that paid bribes in South Africa and Indonesia to win government contracts.Wed, 17 Jan 2024 00:00:00 -0600<p>Reports of the Foreign Corrupt Practices Act&rsquo;s demise remain greatly exaggerated. The U.S. Department of Justice and U.S. Securities and Exchange Commission kicked off the new year by <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/sap-pay-over-220m-resolve-foreign-bribery-investigations" target="_blank">announcing</a>, on January 10, a US$220 million settlement with a German company that paid bribes in South Africa and Indonesia to win government contracts.</p> <p>In 2023, U.S. authorities overall brought roughly the same number of corporate FCPA cases as in 2022. DOJ settled criminal FCPA charges with five companies, while the SEC settled civil FCPA charges with nine (two in parallel with DOJ). The total dollar amount collected from FCPA cases was lower in 2023, however, with the largest settlement being the US$218 million paid by a publicly traded chemicals manufacturer based in the United States. DOJ also issued two official declinations pursuant to its Corporate Enforcement Policy.</p> <p>According to DOJ, federal prosecutors this past year brought new charges against 10 individuals in FCPA-related cases and continued to pursue others through trials and appeals.</p> <p>The past year saw new DOJ policies that apply to corporate corruption cases, including policies on voluntary self-disclosures, an M&amp;A safe harbor, and clawbacks of compensation. It also saw legislation come out of Congress to tackle the &ldquo;demand side&rdquo; of foreign bribery.</p> <p>We further observed the continuation of other recent enforcement trends, such as the increasing use of anti-money laundering and sanctions laws to combat corruption around the world.</p> <p>We cover these stories and other highlights below.</p> <h2>DOJ Continues to Emphasize (Prompt) Voluntary Self-Disclosure</h2> <p>In 2023, DOJ provided additional incentives for voluntary self-disclosure through <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/01/revisions-to-the-dojs-corporate-enforcement">an updated Corporate Enforcement Policy</a> and <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/03/doj-unveils-nationwide-vol-selfdisclosure">new national standards</a> for companies to receive credit in corporate criminal enforcement actions. DOJ continued to emphasize the importance of prompt voluntary self-disclosure of misconduct by announcing <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/10/takeaways-from-the-doj-new-safe-harbor">a new M&amp;A Safe Harbor Policy</a>, encouraging companies that make corporate acquisitions to quickly identify and disclose issues at the entities they acquire.</p> <p>Recent enforcement decisions illustrate how DOJ&rsquo;s voluntary self-disclosure program is working in practice. For example, in November, DOJ <a href="https://www.arnoldporter.com/en/perspectives/blogs/enforcement-edge/2023/11/post_acquisition-integration-remediation-of-corporate-misconduct">declined</a> to prosecute Lifecore Biomedical Inc. for violations of the FCPA after the company self-reported improper payments to obtain a permit in Mexico &ldquo;within three months of first discovering the possibility of misconduct and hours after an internal investigation confirmed that misconduct had occurred.&rdquo; </p> <p>By contrast, DOJ <a rel="noopener noreferrer" href="https://www.justice.gov/media/1316796/dl?inline" target="_blank">found</a> that Albemarle Corporation&rsquo;s disclosure to DOJ of bribes paid to government officials in multiple foreign countries was not &ldquo;reasonably prompt&rdquo; when the company had &ldquo;learned of allegations &hellip; approximately 16 months before disclosing&rdquo; and &ldquo;gathered evidence demonstrating the potential misconduct at least approximately nine months prior to the disclosure.&rdquo; Although Albermarle did not receive a declination, DOJ still gave &ldquo;significant weight&rdquo; to the company&rsquo;s self-disclosure (as well as cooperation and remediation), determining, in December, that a non-prosecution agreement was the appropriate form of resolution and reducing the criminal fine by 45% off the bottom of the otherwise-applicable U.S. Sentencing Guidelines fine range.[[N: The company also received an additional fine reduction under the Compensation Incentives and Clawbacks Pilot Program for withholding compensation of employees engaged in misconduct.]] </p> <p>Interestingly, more than half of corporate FCPA enforcement actions in 2023 appear to have involved voluntary self-disclosures to the government.</p> <h2>DOJ and SEC Build Cases Off WhatsApp Chats and Text Messages Turned Over by Companies</h2> <p>The first FCPA settlement of 2024 &mdash; with SAP SE, a publicly traded company based in Germany &mdash; was notable not only for the size of the penalty (US$220 million) but also for the evidence the government obtained from the company: WhatsApp chats and text messages. According to the <a rel="noopener noreferrer" href="https://www.justice.gov/opa/media/1332661/dl?inline" target="_blank">Deferred Prosecution Agreement</a>, the penalty for having paid bribes to win government contracts in Indonesia and South Africa would have been even higher if SAP had not cooperated with the government, including by &ldquo;imaging the phones of relevant custodians at the beginning of the Company&rsquo;s internal investigation, thus preserving relevant and highly probative business communications sent on mobile messaging.&rdquo;</p> <p>The SEC, in its parallel <a rel="noopener noreferrer" href="https://www.sec.gov/files/litigation/admin/2024/34-99308.pdf" target="_blank">civil settlement</a> with SAP, specifically pointed to WhatsApp chat transcripts that show an SAP Indonesia account executive writing to intermediaries &ldquo;Hehehe &hellip; This is government bro, to catch a big fish we need to use a large bait (sic),&rdquo; and discussing cash payments to government officials: &ldquo;Seventy million, in fifty thousand bills &hellip; Bring empty envelope.&rdquo; </p> <p>In another FCPA case that the SEC resolved in parallel with DOJ &mdash; the US$218 million settlement in September 2023 with Albermarle &mdash; the SEC <a rel="noopener noreferrer" href="https://www.sec.gov/files/litigation/admin/2023/34-98622.pdf" target="_blank">noted</a> that the company&rsquo;s cooperation included voluntarily turning over text messages, among other relevant electronic documents.</p> <p>The DOJ also cited WhatsApp chats in its December <a rel="noopener noreferrer" href="https://www.justice.gov/criminal/media/1329231/dl?inline" target="_blank">Deferred Prosecution Agreement</a> with Freepoint Commodities LLC, a commodities trading company that paid US$98 million to resolve an investigation involving a corrupt scheme to pay bribes to Brazilian government officials.</p> <p>The resolution of these FCPA cases involving incriminating chats and texts follow the DOJ&rsquo;s release, in March 2023, of <a rel="noopener noreferrer" href="https://www.justice.gov/criminal-fraud/page/file/937501/download" target="_blank">updated guidance on the evaluation of corporate compliance programs</a>. That guidance now states: &ldquo;In evaluating a corporation&rsquo;s policies and mechanisms for identifying, reporting, investigating, and remediating potential misconduct and violations of law, prosecutors should consider a corporation&rsquo;s policies and procedures governing the use of devices, communications platforms, and messaging applications, including ephemeral messaging applications.&rdquo;</p> <h2>New Legislation and Existing Money Laundering Statutes Enable Prosecution of Foreign Officials for Bribery</h2> <p>On December 22, 2023, President Biden signed into law the <a href="https://www.arnoldporter.com/en/perspectives/blogs/enforcement-edge/2023/12/targeting-the-demand-side-of-bribery">Foreign Extortion Prevention Act</a> (FEPA). The FEPA makes it a crime for &ldquo;any foreign official or person selected to be a foreign official to corruptly demand, seek, receive, accept, or agree to receive or accept, directly or indirectly, anything of value&rdquo; from a U.S. person or company.</p> <p>This bipartisan legislation &mdash; part of the National Defense Authorization Act of FY24 &mdash; extends the federal domestic bribery statute (18 U.S.C. &sect; 201) to foreign officials and complements the FCPA. While the FCPA targets the &ldquo;supply side&rdquo; of foreign bribery (e.g., offering and paying bribes), it does not apply to the &ldquo;demand side&rdquo; (e.g., demanding and receiving bribes). The FEPA helps fill that gap.</p> <p>The FEPA represents more of an evolution than revolution in statutory authority to hold foreign officials accountable for corruption. Even though corrupt foreign officials cannot be prosecuted under the FCPA, they have been charged with and convicted of money laundering offenses in U.S. courts. </p> <p>For example, in early 2023 the former president of the Venezuelan Supreme Court was <a rel="noopener noreferrer" href="https://www.justice.gov/usao-sdfl/pr/former-president-venezuelan-supreme-court-indicted-charges-accepting-bribes-resolve" target="_blank">indicted</a> in Miami on U.S. money laundering charges related to his alleged acceptance of bribes to favorably resolve cases. In December, on the same day as the FEPA&rsquo;s enactment, DOJ unsealed a five-count <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/three-men-charged-international-bribery-and-money-laundering-scheme" target="_blank">indictment</a> against a Honduran government official, as well as two Americans, for their alleged role in a bribery scheme involving contracts to provide uniforms and other goods to the Honduran National Police. All three men were charged with conspiracy to commit money laundering, while the two Americans were charged under the FCPA. </p> <p>As we <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/07/anti-corruption-insights-newsletter">reported</a> earlier this year, individuals have received lengthy prison sentences for money laundering convictions that concern bribery schemes: The former National Treasurer of Venezuela and her husband were each <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/former-venezuelan-national-treasurer-and-her-husband-sentenced-money-laundering-and" target="_blank">sentenced</a> to 15 years in prison after being convicted of money laundering in Florida. And a former Goldman Sachs Managing Director was <a rel="noopener noreferrer" href="https://www.justice.gov/usao-edny/pr/former-goldman-sachs-managing-director-sentenced-10-years-prison-his-role-massive" target="_blank">sentenced</a> in the Southern District of New York to 10 years in prison after a jury found him guilty of money laundering and conspiracy to violate the FCPA.</p> <h2>Foreign Corrupt Practices Act Applies to More Than Just Foreign Corruption: Companies and Individuals Found Liable Under FCPA for Bribery of Illinois State Government Officials</h2> <p>On September 28, 2023, the SEC <a rel="noopener noreferrer" href="https://www.sec.gov/news/press-release/2023-207" target="_blank">charged</a> Exelon Corporation, its subsidiary Commonwealth Energy (ComEd), and ComEd&rsquo;s former CEO with violations of the FCPA&rsquo;s accounting provisions along with securities fraud. The charges concern efforts to influence and reward the former Speaker of the Illinois House of Representatives for helping pass legislation favorable to ComEd, an electric utility company. The charges do not involve any alleged corruption of foreign officials, only corruption of Illinois state officials.</p> <p>To resolve the corporate enforcement action through an administrative proceeding, Exelon agreed to pay a US$46.2 million civil penalty. The civil charges against ComEd&rsquo;s former CEO are pending in federal court in Illinois.</p> <p>This SEC case, filed under the FCPA and other securities laws, follows a May 2, 2023 jury verdict that four former ComEd executives and associates were <a rel="noopener noreferrer" href="https://www.justice.gov/usao-ndil/pr/former-commonwealth-edison-executives-and-associates-found-guilty-conspiring-influence" target="_blank">guilty</a> of criminal conspiracy, bribery, and FCPA violations related to the same political corruption scheme. The indictment alleged that the defendants (1) conspired &ldquo;knowingly and willfully to circumvent a system of internal accounting controls and to falsify any book, record, and account of Exelon and ComEd, in violation of&rdquo; the FCPA accounting provisions that are applicable to public companies and people working on their behalf and (2) &ldquo;knowingly and willfully falsified and caused to be falsified certain ComEd and Exelon books, records, and accounts, so that those books, records, and accounts did not in reasonable detail, accurately and fairly reflect the transactions and dispositions of ComEd&rsquo;s and Exelon&rsquo;s assets,&rdquo; also in violation of the FCPA&rsquo;s accounting provisions.[[N: When <a rel="noopener noreferrer" href="https://www.justice.gov/usao-ndil/pr/commonwealth-edison-agrees-pay-200-million-resolve-federal-criminal-investigation" target="_blank">ComEd settled with the DOJ for US$200 million back in 2020</a>, it agreed to the filing of a one-count criminal information charging the company with bribery under 18 U.S.C. &sect; 666.]]</p> <p>These cases serve as a reminder that public companies and individuals working on their behalf may be liable under the FCPA&rsquo;s accounting provisions, even in the absence of any &ldquo;foreign corrupt practices.&rdquo; Indeed, the SEC routinely charges companies and individuals with violations of the FCPA&rsquo;s accounting provisions in cases involving no allegations of bribery at all (foreign or domestic).[[N: See, e.g., <em>In re Brooge Energy Ltd.</em>, File No. 3-21816 (Dec. 22, 2023) (accounting and offering fraud case in which public company that owns and operates an oil storage facility in the United Arab Emirates was found to have committed not only securities fraud but also violations of the FCPA&rsquo;s books and records and internal controls provisions).]] The ComEd cases also serve as a general reminder of the risks associated with payments to lobbyists and consultants who are closely connected with elected officials and their family members.</p> <h2>SEC Enforcement of FCPA Against Corporations Continues, With No Enforcement Against Individuals in 2023</h2> <p>In 2023, the SEC announced nine corporate settlements of civil FCPA enforcement actions relating to foreign corruption, two more than in 2022 and four more than in 2021. </p> <p>The SEC resolved all nine of these corporate enforcement actions through administrative proceedings rather than in court. Two of the nine were accompanied by parallel DOJ enforcement. Interestingly, it has been over two years since the SEC last charged an individual with violating the FCPA.</p> <p>In the second half of 2023, the SEC entered into the following corporate settlements:</p> <ul> <li>The Albermarle Corporation case, involving agents paying bribes over an eight year period to obtain sales of catalysts to both public-sector and private-sector oil refineries across Asia (US$103.6 million settlement)</li> <li>The Clear Channel Outdoor Holdings case, involving a majority-owned affiliate&rsquo;s bribery of Chinese government officials to obtain advertising contracts (US$26.1 million settlement)</li> <li>The 3M Company&rsquo;s case, involving its Chinese subsidiary&rsquo;s arrangement of events and conferences as a pretext to provide overseas travel and entertainment (US$6.5 million settlement)</li> <li>The Grupo Aval/Corficolombiana case, involving its former president and joint venture partner paying government officials to secure an extension on a highway infrastructure project in Columbia (US$40 million settlement)[[N: See <a rel="noopener noreferrer" href="https://www.sec.gov/enforce/sec-enforcement-actions-fcpa-cases" target="_blank">SEC Enforcement Actions: FCPA Cases</a>.]]</li> </ul> <p>For a discussion of the other settlements from earlier in 2023, see the <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/07/anti-corruption-insights-newsletter">previous edition of our newsletter</a>.</p> <h2> DOJ Issues Two Opinion Procedure Releases on Travel and Entertainment for Foreign Officials</h2> <p>In 2023, DOJ issued two opinion procedure releases under the FCPA, offering guidance on how organizations can lawfully cover travel and entertainment expenses for foreign officials. This was the first time since 2014 that DOJ issued multiple opinion procedure releases in the same year. </p> <p>The <a rel="noopener noreferrer" href="https://www.justice.gov/criminal/media/1320611/dl?inline" target="_blank">first opinion</a> concerned a U.S. adoption service provider&rsquo;s proposed payment for a foreign government official to travel to the United States to visit families that have adopted children from the foreign country. DOJ found that the proposed expenses did not reflect corrupt intent insofar as it was the foreign government that selected the official; the trip was for post-adoption supervision; no cash was being given; the official was provided with economy travel, mid-range accommodations, and only modest recreation; the payments were made directly to the service providers; and the organization making the payments did not have any non-routine business pending with the foreign government. </p> <p>The <a rel="noopener noreferrer" href="https://www.justice.gov/criminal/media/1323631/dl?inline" target="_blank">second opinion</a> stemmed from a U.S. company&rsquo;s proposed payment of stipends to foreign officials attending certain training events in accordance with U.S. government contract task orders. DOJ found that the proposed payments did not reflect corrupt intent and did not appear to be for the purpose of helping the U.S. company obtain or retain business, but rather involved training that was &ldquo;both called-for and ultimately delivered by agencies and/or personnel of the United States Government.&rdquo; </p> <p>For compliance tips related to travel, entertainment, and gifts, please refer to our <a href="https://www.arnoldporter.com/en/perspectives/videos/critical-compliance/2023/10/the-compliance-challenge-of-gifts-and-entertainment">Critical Compliance series</a>.</p> <h2>U.S. Government Continues to Impose Sanctions Linked to Corruption</h2> <p>In the second half of 2023, the U.S. Department of Treasury&rsquo;s Office of Foreign Assets Control (OFAC) imposed economic sanctions on individuals linked to corruption in <a rel="noopener noreferrer" href="https://home.treasury.gov/news/press-releases/jy1941" target="_blank">Guatemala</a>, <a rel="noopener noreferrer" href="https://home.treasury.gov/news/press-releases/jy1973" target="_blank">Afghanistan</a>, <a rel="noopener noreferrer" href="https://home.treasury.gov/news/press-releases/jy1606" target="_blank">Serbia</a>, <a rel="noopener noreferrer" href="https://home.treasury.gov/news/press-releases/jy1916" target="_blank">the Western Balkans</a>, and <a rel="noopener noreferrer" href="https://home.treasury.gov/news/press-releases/jy1687" target="_blank">Lebanon</a>. In addition, the <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/12/fy24-ndaa-navigating-expanded-restrictions">National Defense Authorization Act for Fiscal Year 2024</a> includes a provision that contemplates the imposition of sanctions on those involved in corruption related to Russia&rsquo;s Nord Stream 2 pipeline and requires the Secretary of State to submit a report listing &ldquo;all foreign persons that have engaged in significant corruption in relation to the planning, construction, or operation of the Nord Stream 2 pipeline.&rdquo; </p> <p>Over the past year, DOJ officials have emphasized criminal enforcement of sanctions laws, <a rel="noopener noreferrer" href="https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-monaco-delivers-remarks-american-bar-association-national" target="_blank">describing</a> sanctions as the &ldquo;new FCPA&rdquo; and a national security imperative. We anticipate that DOJ and other agencies, such as OFAC, will continue to focus on sanctions enforcement in 2024. </p> <p style="text-align: center;">*<span style="white-space: pre; white-space:pre;"> </span>* <span style="white-space:pre;"> </span><span style="white-space:pre;"> </span>*</p> <p>For updates on the enforcement of anti-corruption laws and other economic crime matters in the United Kingdom, please see the most recent report from our <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/10/uk-economic-crime-group-enforcement-update">UK Economic Crime Group</a>.</p> <p><span style="font-size: small;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Newsletter is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{16AD8514-17BB-48BD-9D31-BBD52BA2519B}https://www.arnoldporter.com/en/perspectives/news/2024/01/daniel-lisk-joins-arnold-and-porters-real-estate-practice-in-new-yorkDaniel Lisk Joins Arnold & Porter’s Real Estate Practice in New YorkArnold &amp; Porter announced today that Daniel Lisk has joined the firm&rsquo;s Real Estate practice as counsel, resident in New York.&nbsp;Tue, 16 Jan 2024 00:00:00 -0600<p>Arnold &amp; Porter announced today that Daniel Lisk has joined the firm&rsquo;s Real Estate practice as counsel, resident in New York. </p> <p>Lisk handles a variety of commercial real estate transactions, which include mortgage and mezzanine financing, equity investments, construction lending, loan syndication, property acquisitions and dispositions, joint ventures, and workouts and restructurings. With a primarily debt-side focused real estate practice, he represents traditional and non-traditional commercial real estate lenders, institutional property owners, and local developers.</p> <p>Lisk earned his J.D. from Fordham University School of Law and his B.A. from Vassar College.</p> <p>Lisk&rsquo;s arrival follows the additions of <a href="/en/perspectives/news/2021/07/jonathan-boswell-joins-real-estate-practice">Jon Boswell</a>, <a href="/en/perspectives/news/2023/01/alex-hallett-rejoins-arnold-porter-real-estate">Alex Hallett</a>, and <a href="/en/perspectives/news/2022/08/jay-kreismann-joins-arnold-porter-real-estate">Jay Kreismann</a>&nbsp;to the firm&rsquo;s Real Estate practice.</p>{A1EAD130-43F0-4B98-B3E2-96C98B3A8D76}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/01/proposed-copyright-rule-would-ease-registration-for-news-publishers-magnani-saysProposed Copyright Rule Would Ease Registration for News Publishers, Magnani SaysTom Magnani, head of the firm&rsquo;s Technology Transactions practice and co-chair of the Technology, Media, &amp; Telecommunications industry group, was featured in the <em>Bloomberg Law</em> article, &ldquo;Copyright Rule Would Ease News Registration as AI Fight Looms.&rdquo;&nbsp;Tue, 16 Jan 2024 00:00:00 -0600<p>Tom Magnani, head of the firm&rsquo;s Technology Transactions practice and co-chair of the Technology, Media, &amp; Telecommunications industry group, was featured in the <em>Bloomberg Law</em> article, &ldquo;Copyright Rule Would Ease News Registration as AI Fight Looms.&rdquo; The article examines the U.S. Copyright Office&rsquo;s recent proposal to create a new group registration option for frequently updated news websites. The proposed rulemaking would ease copyright registration for online news publishers, who are currently required to submit a separate application, deposit, and filing fee for each website update they want to register for copyright. </p> <p>Magnani told <em>Bloomberg Law</em> that allowing website publishers &mdash; particularly those who belong to websites that update constantly &mdash; to submit a month&rsquo;s worth of updates together is significant from a cost perspective because under the current system, the only option is to file an application for a day's worth of updates and &ldquo;once a day is still one filing fee per day,&rdquo; whereas under the proposed plan the publishers would pay one fee for a whole month's worth of updates. He added that the proposed changes would allow publishers to register more content in one application using representative examples, which means they would not have to be as selective about what specific works they register.</p> <p><a rel="noopener noreferrer" href="https://www.bloomberglaw.com/login?target=https%3A%2F%2Fwww.bloomberglaw.com%2Fproduct%2Fblaw%2Fbloomberglawnews%2Fbloomberg-law-news%2FXF5P7HPO000000%3Fbc%3DW1siU2VhcmNoICYgQnJvd3NlIiwiaHR0cHM6Ly93d3cuYmxvb21iZXJnbGF3LmNvbS9wcm9kdWN0L2JsYXcvc2VhcmNoL3Jlc3VsdHMvZDExOTA3ZTllYjliMjVmM2ZiYTUwYmMzN2VhMmI0YjYiXV0--2bfb082dd41a89db972a08f2c8a0d24f0815d71c%26criteria_id%3Dd11907e9eb9b25f3fba50bc37ea2b4b6%26search32%3DNXFL0VEfeA5kr-uXwntErg%253D%253D-RuDgoD8PvhucKe4XUjuzJOHx0pKFq9QASOH1jteCxsT3y-pJYugJmCoC9sA-KHvFqF9lZWHIr0Hv-6tq6CgF4ukX_nX4voY8Jy4glI1gqRB9sy4dqjxSc5YASgbDStv" target="_blank">Read the full article</a> (subscription required). </p>{8951FEC8-E23C-499F-9439-085E8F9E7622}https://www.compliancelawjournal.com/compliancelawjournal/issue_xi/MobilePagedReplica.action?pm=1&folio=28#pg31trevor.kirby@arnoldporter.comAn Evolution in the Business of Banking: The Neobank PartnershipTue, 16 Jan 2024 00:00:00 -0600{6BABD498-D141-4D22-B28A-988DCB3EC12F}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/01/sec-social-media-hack-was-an-attempt-to-manipulate-crypto-markets-hawke-saysSEC Social Media Hack Was an Attempt to Manipulate Crypto Markets, Hawke SaysSecurities Enforcement Litigation partner Daniel Hawke was recently quoted in <em>The New York Times</em> article, &ldquo;S.E.C. Social Media Hack That Sent Bitcoin Soaring Prompts Investigation.&rdquo;&nbsp;Fri, 12 Jan 2024 00:00:00 -0600<p>Securities Enforcement Litigation partner Daniel Hawke was recently quoted in <em>The New York Times</em> article, &ldquo;S.E.C. Social Media Hack That Sent Bitcoin Soaring Prompts Investigation.&rdquo; The article discusses the recent hack of a social media account used by the U.S. Securities and Exchange Commission (SEC), which has prompted internal and external investigations by the SEC&rsquo;s Office of the Inspector General, the FBI, and appropriate law enforcement entities.</p> <p>The hacker accessed the SEC&rsquo;s official account on X and posted that the commission had approved several Bitcoin investment products that investors have eagerly awaited. The false post caused a rapid surge in Bitcoin&rsquo;s price, which prompted legal experts to suspect that the hack was part of an attempt to profit from the cryptocurrency&rsquo;s price spike. Echoing these sentiments, Hawke, former chief of the SEC's Market Abuse Unit and Director of the SEC's Philadelphia Regional office, told <em>The New York Times</em> that the false post had all the hallmarks of an attempt to &ldquo;manipulate the crypto markets.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://www.nytimes.com/2024/01/10/business/sec-x-hack-bitcoin.html?searchResultPosition=1" target="_blank">Read the full article</a> (subscription required).</p>{CA584EA9-D3AF-42BB-A3DB-7933CCDF6E11}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/capital-snapshot-januaryEugenia E. Piersonhttps://www.arnoldporter.com/en/people/p/pierson-eugenia-eEugenia.Pierson@arnoldporter.comKevin O'Neillhttps://www.arnoldporter.com/en/people/o/oneill-kevinkevin.oneill@arnoldporter.comDavid J.M. Skillmanhttps://www.arnoldporter.com/en/people/s/skillman-daviddavid.skillman@arnoldporter.comPeter E. Duysharthttps://www.arnoldporter.com/en/people/d/duyshart-peterpeter.duyshart@arnoldporter.comLucas Gorakhttps://www.arnoldporter.com/en/people/g/gorak-lucaslucas.gorak@arnoldporter.comCapital Snapshot: A Monthly Overview of the Issues, Events, Timelines, and Polling Data Driving Federal Policy Decisions<span style="color: #152347; background-color: #fefefe;">Our Legislative &amp; Public Policy team is pleased to provide the January 2024 edition of &ldquo;Capital Snapshot,&rdquo; a monthly summary of the issues, events, and timelines driving federal policy and political decisions.&nbsp;</span>Fri, 12 Jan 2024 00:00:00 -0600<p>Our Legislative &amp; Public Policy team is pleased to provide the January 2024 edition of &ldquo;Capital Snapshot,&rdquo; a monthly summary of the issues, events, and timelines driving federal policy and political decisions. This month, we provide an overview of the 2024 congressional schedule. We also provide updates on recent significant developments in Congress, including the status of FY24 appropriations, FY24 supplemental aid and border security negotiations, House Republicans&rsquo; impeachment inquiry into President Biden, and impeachment proceedings for Homeland Security Secretary Alejandro Mayorkas. Additionally, we share updates on developments, outlook, and priorities across a variety of public policy and legislative areas, including (1) the National Defense Authorization Act and Department of Defense; (2) tax; (3) financial services; (4) energy and environment; (5) education; (6) health care; and (7) California policy. We also provide an overview of the state of play for the 2024 general election. Furthermore, we assess what trends, current events, and factors could impact the upcoming political and legislative landscape.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{5E31C0D8-1BD6-4BC8-9E99-719147CD110C}https://www.arnoldporter.com/en/perspectives/events/2024/01/new-years-resolutions-for-healthierTeresa (Terry) L. Johnsonhttps://www.arnoldporter.com/en/people/j/johnson-teresa-lteresa.johnson@arnoldporter.comChristopher P. Petersonhttps://www.arnoldporter.com/en/people/p/peterson-christopher-pchristopher.peterson@arnoldporter.comRobert C. Azarowhttps://www.arnoldporter.com/en/people/a/azarow-robert-crobert.azarow@arnoldporter.comJane Norberghttps://www.arnoldporter.com/en/people/n/norberg-janejane.norberg@arnoldporter.comChristian D. H. Schultzhttps://www.arnoldporter.com/en/people/s/schultz-christianchristian.schultz@arnoldporter.comPaul Nabhanhttps://www.arnoldporter.com/en/people/n/nabhan-paulpaul.nabhan@arnoldporter.comNew Year’s Resolutions for Healthier…SEC Reporting and Compliance<p>Arnold &amp; Porter's Capital Markets team invites you to a webinar discussing recent SEC guidance applicable to public companies' reporting and compliance.</p>Thu, 11 Jan 2024 00:00:00 -0600<p>Arnold &amp; Porter's Capital Markets team invites you to a webinar discussing recent SEC guidance applicable to public companies' reporting and compliance. The panelists on this webinar will include members of Arnold &amp; Porter's Capital Markets and Securities Enforcement teams, who will discuss the SEC's updated disclosure rules and regulations, pertinent enforcement activity, and the trends and noteworthy topics from comment letters from the Staff issued during 2023.</p> <h2>Topics</h2> <ul> <li>New SEC rules and regulations applicable to 2024 public company reporting</li> <li>SEC enforcement actions and priorities related to public company disclosures, including the 2024 rulemaking agenda announced in December 2023</li> <li>Insights regarding trends and other noteworthy topics from SEC comment letters issued during 2023</li> </ul>{E2531CE5-F10D-4CAD-9292-2029677F5D46}https://www.arnoldporter.com/en/perspectives/news/2024/01/arnold-and-porter-advises-intel-on-acquisition-of-silicon-mobilityArnold & Porter Advises Intel on Acquisition of Silicon MobilityArnold &amp; Porter advised Intel in its proposed acquisition of Silicon Mobility, a fabless silicon and software company that specializes in software-defined vehicle system-on-chips for intelligent electric vehicle energy management.&nbsp;Thu, 11 Jan 2024 00:00:00 -0600<p>Arnold &amp; Porter advised Intel in its proposed acquisition of Silicon Mobility, a fabless silicon and software company that specializes in software-defined vehicle system-on-chips for intelligent electric vehicle energy management. The transaction is subject to necessary approvals.</p> <p>The Arnold &amp; Porter team was led by Corporate &amp; Finance partner Bill Choe and counsel Eric Levine.&nbsp;</p>{AA9CC27F-B2FF-4526-8E14-0E4A61D3F6A1}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/nyse-amends-shareholder-approval-rulesSara Adlerhttps://www.arnoldporter.com/en/people/a/adler-sarasara.adler@arnoldporter.comJoel I. Greenberghttps://www.arnoldporter.com/en/people/g/greenberg-joel-ijoel.greenberg@arnoldporter.comNYSE Amends Shareholder Approval Rules for Substantial Security HoldersOn December 26, 2023, the Securities and Exchange Commission approved New York Stock Exchange rule amendments limiting the &ldquo;substantial securities holders&rdquo; to which the shareholder approval requirements of Section 312.03(b)(i) of the NYSE Listed Company Manual (Manual) apply to a newly defined class of &ldquo;Active Related Parties.&rdquo;Thu, 11 Jan 2024 00:00:00 -0600<p>On December 26, 2023, the Securities and Exchange Commission approved New York Stock Exchange rule <a rel="noopener noreferrer" href="https://www.sec.gov/files/rules/sro/nyse/2023/34-99238.pdf" target="_blank">amendments</a> limiting the &ldquo;substantial securities holders&rdquo; to which the shareholder approval requirements of Section 312.03(b)(i) of the NYSE Listed Company Manual (Manual) apply to a newly defined class of &ldquo;Active Related Parties.&rdquo;<br /> <br /> Prior to the amendments, Section 312.03(b)(i) required shareholder approval before an issuance of common stock, or securities convertible into or exercisable for common stock, in any transaction or series of related transactions, to a director, officer, or substantial security holder[[N: Under Manual Section 312.04(e), an interest consisting of less than either 5% of the number of shares of common stock or the voting power outstanding of an entity shall not be considered a substantial interest or cause the holder of such an interest to be regarded as a substantial security holder.]] of the company if the number of shares of common stock to be issued, or the number of shares of common stock into which the securities may be convertible or exercisable, exceeds either 1% of the number of shares of common stock or voting power outstanding before the issuance. There is an exception for cash sales for a price that is at least the Minimum Price.[[N: The Minimum Price is the lower of: (1) the Official Closing Price immediately preceding the signing of the binding agreement or (2) the average Official Closing Price for the five trading days immediately preceding the signing of the binding agreement. &ldquo;Official Closing Price&rdquo; is the official closing price on the NYSE as reported to the Consolidated Tape immediately preceding the signing of a binding agreement to issue the securities.]] As amended, Section 312.03(b)(i) applies to issuances to an Active Related Party, which is defined as a director, officer, controlling shareholder, or member of a control group or any other substantial security holder of the company that has an affiliated person[[N: In determining whether a person is an affiliated person for purposes of the definition of an Active Related Party, the NYSE will consider all relevant facts and circumstances, including, but not limited to, whether such person is an affiliate within the meaning of that term under provisions of the federal securities laws and the rules thereunder.]] who is an officer or director of the company. A &ldquo;group&rdquo; means a group for purposes of Exchange Act Section 13(d)(3)/13(g)(3)[[N: Section 13(d)(3)/13(g)(3) provides: &ldquo;When two or more persons act as a &hellip; group for the purpose of acquiring, holding, or disposing of &amp;#91;equity&amp;#93; securities of an issuer, such &hellip; group shall be deemed a &lsquo;person&rsquo;....&rdquo; The determination under Sections 13(d)(3) and 13(g)(3) as to whether two or more persons are acting as a group does not depend solely on the presence of an express agreement. Depending on the particular facts and circumstances, concerted actions by two or more persons for the purpose of acquiring, holding (which includes voting), or disposing of securities of an issuer are sufficient to constitute the formation of a group.]] and &ldquo;control&rdquo; has the same meaning as defined in Exchange Act Rule 12b-2.[[N: Exchange Act Rule 12b-2 provides that &ldquo;&amp;#91;t&amp;#93;he term &lsquo;control&rsquo; (including the terms &lsquo;controlling,&rsquo; &lsquo;controlled by&rsquo; and &lsquo;under common control with&rsquo;) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.&rdquo;]] For purposes of determining group existence, the NYSE will rely on Schedule 13D and Schedule 13G filings, along with any additional follow-up inquiry that is needed.<br /> <br /> The NYSE noted that although there are significant benefits from the investor protections provided by the shareholder approval requirements in Section 312.03(b)(i) when a purchaser of the securities is an officer, director, or other control person of the company, the previous definition of substantial security holder also applied to security holders who do not participate in the governance or management of the company. Transactions with these &ldquo;passive&rdquo; shareholders generally do not give rise to the potential conflicts of interest that exist where the purchaser has a role in the listed company&rsquo;s board or management. The NYSE also noted that no other national securities exchange has a similar shareholder approval requirement applicable to issuances to these &ldquo;passive&rdquo; shareholders.<br /> <br /> For purposes of Section 312.03(b)(ii),[[N: Section 312.03(b)(ii) provides that shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, where such securities are issued as consideration in a transaction or series of related transactions in which a Related Party has a 5% or greater interest (or such persons collectively have a 10% or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction or series of related transactions and the present or potential issuance of common stock, or securities convertible into common stock, could result in an issuance that exceeds either 5% of the number of shares of common stock or 5% of the voting power outstanding before the issuance.]] the NYSE has retained the broader definition of a Related Party (i.e., &ldquo;a director, officer or substantial security holder of the company&rdquo;). Sales of securities will also continue to be subject to the other shareholder approval requirements of Section 312.03 (including with respect to specified share issuances of 20% or more in number or voting power under 312.03(c), specified equity compensation under Section 312.03(a) and Section 303A.08, and the change of control requirement of Section 312.03(d)). As stated in Manual Section 312.04(a), shareholder approval is required if any of the subparagraphs of Section 312.03 require such approval, notwithstanding the fact that the transaction does not require approval under one or more of the other subparagraphs. As a result, below market sales over 1% to substantial security holders who are not Active Related Parties will be permitted without shareholder approval under Section 312.03(b)(i), but will continue to be subject to all other applicable shareholder approval requirements under Section 312.03.</p> <br /> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{60391870-FFD2-4383-A345-2F2CBE65C609}https://www.arnoldporter.com/en/perspectives/publications/2024/01/antitrust-agency-insights-fourth-quarter-2023Sonia Kuester Pfaffenrothhttps://www.arnoldporter.com/en/people/p/pfaffenroth-soniasonia.pfaffenroth@arnoldporter.comMatthew Tabashttps://www.arnoldporter.com/en/people/t/tabas-matthewmatthew.tabas@arnoldporter.comPatrick A. Furbushhttps://www.arnoldporter.com/en/people/f/furbush-patrick-apatrick.furbush@arnoldporter.comAntitrust Agency Insights: Developments at the U.S. Antitrust Enforcement Agencies — Fourth Quarter 2023Stay informed on the latest antitrust agency investigations and make informed decisions for your business. Our newsletter offers analytical insight into the Department of Justice and Federal Trade Commission's enforcement priorities and approaches to competition issues.Thu, 11 Jan 2024 00:00:00 -0600<h2>Letter From the Editors&nbsp;</h2> <p>The Biden administration&rsquo;s U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC or Commission) leadership have been clear about their goal to reshape antitrust enforcement in the United States. These efforts have taken a number of different forms over the last three years, including aggressive enforcement actions, new expansive policy statements (and withdrawal of prior policy statements), and revised merger guidelines. While 2024 will bring election-year uncertainty and, with it, the potential for change in the leadership at both agencies, current DOJ and FTC leadership are likely to continue to explore ways to instill lasting change in how the federal government and courts approach antitrust enforcement. Over the last three years, the antitrust agencies have been exceptionally active &mdash; but it appears, based on public statements and prior actions, they still have a lot on their &ldquo;to do&rdquo; list. Therefore, rather than look back at developments over the last quarter, your Editors are breaking out their crystal ball and predicting the top 10 potential developments to watch out for in 2024 as DOJ and FTC leaders attempt to cement their legacies.</p> <ol> <li><strong>Pricing Algorithm Enforcement Action</strong>: As discussed in our <a href="https://www.arnoldporter.com/en/perspectives/advisories/2022/07/antitrust-agency-insights">Second Quarter 2022 Antitrust Agency Insights newsletter</a>, the antitrust agencies have expressed concerns about the <a href="https://www.arnoldporter.com/en/perspectives/advisories/2018/04/pricing-algorithms-the-antitrust-implications">potential misuse of pricing algorithms</a>, which allow companies to price dynamically in near-real-time in response to competitor price movements, customer demands, and other market conditions. While the private bar and state enforcers have pursued litigation accusing companies of using technology solutions to fix prices, the federal antitrust enforcers have yet to bring a case. It bears watching whether the DOJ or FTC announce an enforcement action focusing on firms allegedly coordinating with one another through the use of algorithmic pricing.</li> <li><strong>Section 5 Enforcement at the FTC</strong>: FTC leadership has been vocal about their desire to <a href="https://www.arnoldporter.com/en/perspectives/advisories/2022/11/ftc-announces-new-guidelines-for-its-section-5-enf">use all of the Commission&rsquo;s available tools</a> to challenge allegedly anticompetitive activity. While the FTC made waves in 2022 with a far-reaching policy statement addressing unfair methods of competition under Section 5 of the FTC Act, its enforcement activities in this area have been far more limited. The few cases since then with standalone Section 5 claims largely covered categories of conduct commonly understood to raise potential concerns under the Sherman and Clayton Acts. 2024 could bring a high-profile standalone Section 5 action from the FTC&rsquo;s Anticompetitive Practices Division (which has largely been quiet in 2023) to put some teeth around its policy statement.</li> <li><strong>Implementation of the Revised Merger Guidelines</strong>: On December 18, 2023, the DOJ and FTC released their <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/justice-department-and-federal-trade-commission-release-2023-merger-guidelines" target="_blank">final revised Merger Guidelines</a>. The Merger Guidelines largely mirror the <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/07/doj-and-ftc-issue-draft-merger-guidelines">draft version published for public comment</a> in July 2023, with some modest changes to address concerns about the draft&rsquo;s presumption of harm in certain vertical transactions and to streamline the discussion of other principles. While the Merger Guidelines are intended to reflect how the DOJ and FTC approach merger analysis in the ordinary course, it remains to be seen how willing courts will be to credit them in litigation challenges given courts&rsquo; disagreements with a number of recent DOJ and FTC merger challenges.</li> <li><strong>Robinson-Patman Enforcement Action</strong>: As discussed in our <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/07/antitrust-agency-insights-second-quarter-2023">Second Quarter 2023 Antitrust Agency Insights newsletter</a>, FTC leadership, especially Commissioner Alvaro Bedoya, has advocated for a renewed focus on Robinson-Patman Act enforcement. The agency&rsquo;s ongoing efforts to investigate alleged violations of the Robinson-Patman Act by Southern Glazer&rsquo;s Wine and Spirits was brought into the spotlight by a high-profile subpoena enforcement action against Total Wine &amp; More. Dusting off the Robinson-Patman Act would fit squarely within current FTC leadership&rsquo;s populist rhetoric and rejection of a consumer welfare lens for enforcement decisions.</li> <li><strong>PBM Study Report and Enforcement Action</strong>: In June 2022, the FTC launched a study of <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/05/ftc-deepens-inquiry-prescription-drug-middlemen" target="_blank">pharmacy benefit managers</a> (PBMs) under Section 6(b) of the FTC Act to assess the &ldquo;impact of vertically integrated pharmacy benefit managers on the access and affordability of prescription drugs.&rdquo; Since the initial announcement, the FTC has issued requests for information from <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2022/06/ftc-launches-inquiry-prescription-drug-middlemen-industry" target="_blank">group purchasing organizations</a> and PBM affiliates. Despite a <a rel="noopener noreferrer" href="https://www.grassley.senate.gov/imo/media/doc/grassley_et_altoftcpbminvestigation.pdf" target="_blank">request from Congress</a> that the FTC complete its study within a year, the FTC has not published its final report or taken any enforcement actions against PBMs. Given the Biden administration&rsquo;s focus on <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/12/ftc-doj-hhs-work-lower-health-care-drug-costs-promote-competition-benefit-patients-health-care" target="_blank">lowering health care and pharmaceutical costs</a>, a report is likely to issue at some point in 2024. It remains to be seen whether an enforcement action against one or more PBMs will follow soon thereafter.</li> <li><strong>FTC Policy Statement on Artificial Intelligence</strong>: <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/11/antitrust-enforcement-in-the-cutting-edge-ai-era">Regulation of artificial intelligence</a> (AI) is without a doubt a hot topic across all aspects of the economy. On October 30, 2023, the <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/11/president-bidens-eo-on-ai-shaping-the-future-of-ai">Biden administration issued an Executive Order</a> (EO) addressing a range of issues related to AI, including a call on agencies to promote competition in AI. The EO specifically called on the FTC to enact AI rulemaking, but as an interim step, the FTC may issue a policy statement on AI outlining its potential concerns with the use of AI, including the ways in which AI could be used to violate the antitrust laws. The FTC already has launched consumer protection investigations into the use of AI programs.</li> <li><strong>Bank Merger Guidelines</strong>: In June 2023, Assistant Attorney General (AAG) Jonathan Kanter discussed <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/06/dojs-antitrust-division-announces-progress">DOJ efforts to revise the agency&rsquo;s Bank Merger Guidelines</a> and the DOJ&rsquo;s current views regarding the DOJ&rsquo;s role in bank merger enforcement. Last updated in 1995, the Bank Merger Guidelines outline the DOJ&rsquo;s stated approach to investigating bank mergers and describe how it advises the federal banking agencies on the competitive effects of proposed bank mergers. The agencies have clearly been focused on revising their general Merger Guidelines in the intervening six months, but it seems likely they will turn their attention to revising the Bank Merger Guidelines in 2024.</li> <li><strong>DOJ&rsquo;s Criminal Enforcement Efforts in Light of <em>U.S. v. Brewbaker</em></strong>: On December 1, 2023, the U.S. Court of Appeals for the Fourth Circuit <a href="https://www.arnoldporter.com/en/perspectives/blogs/enforcement-edge/2023/12/fourth-circuit-overturns-antitrust-conviction">reversed a Sherman Act, Section 1 criminal conviction for bid rigging</a>, holding that the indictment failed to state a <em>per se</em> antitrust offense because the two companies were a manufacturer and distributor (and thus in a vertical relationship), despite submitting bids for the same contracts. The DOJ has until mid-January to decide whether to seek <em>en banc</em> review of the decision. If the decision stands, it could have a significant impact on DOJ&rsquo;s criminal enforcement agenda in the context of companies in dual distribution arrangements.</li> <li><strong>Hart-Scott-Rodino Act (HSR) Rule Changes</strong>: In June 2023, the DOJ and FTC announced their intent to <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/07/ftc-substantial-revisions-to-hsr-form">make significant changes to the HSR notification form and associated rules</a> that would require parties to reportable transactions to provide substantial additional information and documents, increasing the burden associated with HSR filings. While the agencies have been processing public comments received in connection with the proposed changes, final rule changes are expected in 2024 to ensure their implementation during the current administration.</li> <li><strong>Non-Compete Rule Implementation</strong>: One year ago, in January 2023, the FTC proposed a rule that would ban certain non-compete agreements between employers and their workers as unfair methods of competition in violation of Section 5 of the FTC Act. The announcement attracted a lot of attention with over 20,000 public comments submitted. As the FTC reviews those comments, companies that rely on non-compete agreements have been left in limbo. The FTC is likely to announce a final rule in the coming months, though we would expect immediate court challenges to both the FTC's rulemaking authority and the specifics of the rule.</li> </ol> <h2>Additional Agency Updates</h2> <h3>FTC Staffing Updates</h3> <ul> <li><strong>Senate Holds Hearing on FTC Nominees.</strong> On October 18, 2023, the U.S. Senate Committee on Commerce, Science, and Transportation held a confirmation hearing for FTC nominees Melissa Holyoak and Andrew Ferguson and Commissioner Rebecca Kelly Slaughter. <ul> <li><a rel="noopener noreferrer" href="https://www.commerce.senate.gov/2023/10/executive-session-nominations" target="_blank">Read the Senate Hearing Notice</a></li> </ul> </li> </ul> <ul> <li><strong>New Deputy Assistant Directors in FTC&rsquo;s Merger Divisions.</strong> In November 2023, the FTC promoted Karen Hunt to serve as deputy assistant director of the Mergers IV Division, as well as Abby Dennis and Michael Lovinger as deputy assistant directors in the Mergers II Division. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/attachments/bureau-competition-organization-chart/bc-org-chart.pdf" target="_blank">See the Bureau of Competition Organization Chart</a></li> </ul> </li> </ul> <ul> <li><strong>FTC Names New Director of Policy Planning and Chief of Staff.</strong> After the departure of Elizabeth Wilkins in late November, Chair Lina Khan named Hannah Garden-Monheit as the director of policy planning at the FTC. Prior to joining the FTC, Garden-Monheit worked on the National Economic Council with a focus on competition policy. In addition, Sarah Miller took over Wilkins&rsquo; role as chief of staff to Chair Khan. Miller is a former official with the U.S. Department of Treasury who also founded the American Economic Liberties Project. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/about-ftc/commissioners-staff/bureau-office-directors" target="_blank">See the List of FTC Directors</a></li> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/attachments/about-ftc/ftc_org_chart.pdf" target="_blank">See the FTC's Organization Chart</a></li> </ul> </li> </ul> <h3>DOJ Staffing Updates</h3> <ul> <li><strong>DOJ Names New Deputy Director of PCSF.</strong> In October, Sandra Talbot was recently selected to become the new deputy director of the Procurement Collusion Strike Force (PCSF). Talbot was recently the assistant director of the strike force and led its data analysis initiative. <ul> <li><a rel="noopener noreferrer" href="https://globalcompetitionreview.com/gcr-usa/article/us-enforcers-name-two-new-deputies" target="_blank">Read the Article</a></li> <li><a rel="noopener noreferrer" href="https://www.justice.gov/atr/antitrust-division-leadership-section-and-office-directory" target="_blank">See the DOJ Directory</a></li> </ul> </li> </ul> <h3>FTC Cases and Proceedings</h3> <ul> <li><strong>FTC Abandons Axon Merger Challenge.</strong> On October 6, 2023, the FTC dropped its in-house challenge to Axon Enterprise Inc.&rsquo;s acquisition of VieVu. In response, Axon abandoned its lawsuit challenging the constitutionality of the FTC&rsquo;s adjudication process because the case was moot. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/d9389commissionorderdismisscomplaint.pdf" target="_blank">Read the Administrative Dismissal</a></li> </ul> </li> </ul> <ul> <li><strong>FTC Approves Final Order to Prevent Interlocking Directorate in EQT/Quantum Energy Deal. </strong>On October 10, 2023, the FTC announced that it resolved its first case in 40 years enforcing Section 8 of the Clayton Act, which prohibits interlocking directorates. Earlier last year, EQT agreed to acquire certain assets in Appalachia from Quantum Energy for US$5.2 billion in cash and shares, and to appoint Quantum&rsquo;s chief executive to EQT&rsquo;s board of directors. The FTC alleged that the proposed acquisition would have made Quantum one of EQT&rsquo;s largest shareholders and created an interlocking directorate. The finalized consent order prohibits Quantum from occupying an EQT board seat. The order also unwinds a separate joint venture for purchasing mineral rights, appoints a monitor to track compliance, and bars Quantum from acquiring additional EQT shares without the Commission&rsquo;s approval for the next decade. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/10/ftc-approves-final-order-prevent-interlocking-directorate-arrangement-anticompetitive-information" target="_blank">Read the Press Release</a></li> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/2210121c4799eqtquantumfinalorder.pdf" target="_blank">Read the Consent Order</a></li> </ul> </li> </ul> <ul> <li><strong>FTC Sues Amazon.</strong> On November 2, 2023, the FTC, along with 17 state attorneys general, filed a complaint in the U.S. District Court for the Western District of Washington against Amazon alleging that it engages in exclusionary conduct that prevents existing competitors from growing and new competitors from emerging. The FTC and states allege that Amazon punishes sellers for using Amazon&rsquo;s competitors and requires sellers to use Amazon&rsquo;s fulfillment service. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/09/ftc-sues-amazon-illegally-maintaining-monopoly-power" target="_blank">Read the Press Release</a></li> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/1910134amazonecommercecomplaintrevisedredactions.pdf" target="_blank">Read the Complaint</a></li> </ul> </li> </ul> <ul> <li><strong>FTC Approves Final Order Resolving Antitrust Concerns Surrounding ICE/Black Knight Deal.</strong> On November 3, 2023, the FTC finalized a consent order relating to the acquisition of Black Knight Inc. by Intercontinental Exchange Inc. (ICE), two mortgage technology providers. Under the terms of the consent order first approved on August 31, Black Knight must divest two of its businesses, Optimal Blue and Empower, to third party Constellation Web Solutions Inc. (Constellation), another provider of mortgage-related tools and software. Black Knight and ICE must also offer transition assistance to enable Constellation to operate the businesses in a similar manner. Further, for the next 10 years, ICE and Black Knight must seek FTC approval before reacquiring any divested assets and give notice when acquiring an interest in other similar businesses. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/11/ftc-approves-final-order-resolving-antitrust-concerns-surrounding-ice-black-knight-deal" target="_blank">Read the Press Release</a></li> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/D09413ICEBKFinalOrderPublic.pdf" target="_blank">Read the Consent Order</a></li> </ul> </li> </ul> <ul> <li><strong>FTC Sues 7-Eleven, Alleging Violation of 2018 Consent Order.</strong> On December 4, 2023, the FTC sued 7-Eleven for alleged violations of a 2018 consent order. In response, 7-Eleven noted that it self-reported the error to the FTC and is working in good faith with the Commission. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/ECF1.pdf" target="_blank">Read the Complaint</a></li> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/12/ftc-sues-7-eleven-anticompetitive-acquisition-violation-2018-consent-order" target="_blank">Read the FTC&rsquo;s Press Release</a></li> </ul> </li> </ul> <ul> <li><strong>FTC Settles Dispute With Total Wine Over Civil Investigative Demand Compliance. </strong>On December 9, 2023, the FTC and Total Wine &amp; More (Total Wine) filed a notice of settlement to end the agency&rsquo;s enforcement action against the company. The FTC had filed a petition in federal district court seeking to force Total Wine to comply with a civil investigation demand. The FTC asserted that Total Wine had failed to comply with the FTC&rsquo;s demand, while Total Wine argued that the agency demanded documents that went beyond its investigation into distributor Southern Glazer&rsquo;s Wine &amp; Spirits LLC. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/10/ftc-takes-total-wine-federal-court-enforce-compliance-antitrust-civil-investigative-demand" target="_blank">Read the Press Release</a></li> <li><a rel="noopener noreferrer" href="https://files.lbr.cloud/public/2023-11/FTC%20Wine.pdf?VersionId=xJCuRPZdOuJlp9JechTFVLIBecBx2cLg" target="_blank">Read the Reply</a></li> <li><a href="https://www.arnoldporter.com/en/perspectives/publications/2023/07/antitrust-agency-insights-second-quarter-2023">Read Our Letter on FTC Compulsory Process Enforcement</a></li> </ul> </li> </ul> <ul> <li><strong>FTC Challenges Sanofi&rsquo;s Exclusive License From Maze.</strong> On December 11, 2023, the FTC challenged an exclusive license from Maze Therapeutic Inc. to Sanofi for an investigational treatment of Pompe disease that completed phase 1. Following the challenge, Sanofi agreed to terminate its proposed acquisition. In response, Sanofi noted that it disagreed with the action by the FTC, which would delay potential advancements that could benefit patients, and that it would not be in the best interest of patients to continue the litigation. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/12/ftc-seeks-block-sanofis-acquisition-rare-disease-drug-threatens-sanofis-monopoly?utm_source=govdelivery" target="_blank">Read the Press Release</a></li> <li><a rel="noopener noreferrer" href="https://files.lbr.cloud/public/2023-12/FTC_0.pdf?VersionId=e2mvm2A6KMAJUiD.OfZwC7Ea2dQyX.pq" target="_blank">Read the Complaint</a></li> <li><a rel="noopener noreferrer" href="https://www.sanofi.com/en/media-room/press-releases/2023/2023-12-11-21-08-20-2794272" target="_blank">Read Sanofi's Press Release</a></li> </ul> </li> </ul> <ul> <li> <strong>FTC Approves Final Order Settling Amgen-Horizon Challenge.</strong> On December 14, 2023, the FTC finalized a consent order in its challenge to Amgen&rsquo;s acquisition of Horizon Therapeutics plc. Under the consent order, Amgen agreed to refrain from bundling its products with either of Horizon&rsquo;s medications used to treat certain diseases and from conditioning product rebates for Amgen products on the sale of either of these drugs. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/12/ftc-approves-final-order-settling-horizon-therapeutics-acquisition-challenge" target="_blank">Read the Press Release</a></li> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/d09414amgenhorizonfinalorderpublic.pdf" target="_blank">Read the Consent Order</a></li> </ul> </li> </ul> <ul> <li><strong>FTC Blocks John Muir Health&rsquo;s Takeover of San Ramon Regional Medical Center.</strong> On December 15, 2023, John Muir Health announced that it would terminate its proposed acquisition of San Ramon Regional Medical Center LLC from its current majority owner Tenet Healthcare Corporation after the FTC sued to block the US$142.5 million deal. The Commission alleged that the proposed acquisition would eliminate head-to-head competition between John Muir Health and nearby San Ramon Regional Medical Center. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/12/statement-regarding-termination-john-muirs-takeover-san-ramon-regional-medical-center-tenet" target="_blank">Read the Final Press Release</a></li> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/11/ftc-sues-block-john-muir-healths-takeover-san-ramon-regional-medical-center?utm_source=govdelivery" target="_blank">Read the Initial Press Release</a></li> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/d09421jmhtenetpart3administrativecomplaintpublic.pdf" target="_blank">Read the Administrative Complaint</a></li> </ul> </li> </ul> <ul> <li><strong>Fifth Circuit Remands FTC&rsquo;s Challenge of Illumina/Grail Merger.</strong> On December 15, 2023, the U.S. Court of Appeals for the Fifth Circuit vacated the FTC&rsquo;s order to unwind Illumina&rsquo;s acquisition of Grail and remanded the action for further proceedings. After the Commission found that the transaction would violate Section 7 of the Clayton Act, the Fifth Circuit vacated that decision, holding that the FTC applied an incorrect legal standard when considering Illumina&rsquo;s offer to mitigate competitive concerns from the transaction by offering to enter into contracts to make Illumina&rsquo;s products available to anyone who wanted them. While the Fifth Circuit agreed with the FTC that complaint counsel had satisfied its burden to put forth a prima facie case that the transaction would substantially lessen competition, the court held that the FTC should have considered whether the parties&rsquo; offer would mitigate the transaction&rsquo;s effect such that it was no longer likely to substantially lessen competition rather than eliminate any anticompetitive effects in their entirety. Following this decision, Illumina announced that it would divest Grail. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/12/statement-regarding-illuminas-decision-divest-grail" target="_blank">Read the Statement</a></li> <li><a rel="noopener noreferrer" href="https://files.lbr.cloud/public/2023-12/00517004299.pdf?VersionId=ox5OI17Qh06dyBGWi5q6sc46Bu1x3eSW" target="_blank">Read the Order</a></li> </ul> </li> </ul> <ul> <li> <strong>IQVIA/Propel Media Deal Enjoined. </strong>On December 29, 2023, the U.S. District Court for the Southern District of New York granted the FTC&rsquo;s motion for a preliminary injunction enjoining IQVIA&rsquo;s proposed acquisition of DeepIntent from Propel Media. The judge found that the agency showed a reasonable probability that the proposed acquisition will substantially impair competition. <ul> <li><a rel="noopener noreferrer" href="https://storage.courtlistener.com/recap/gov.uscourts.nysd.602369/gov.uscourts.nysd.602369.324.0.pdf" target="_blank">Read the Order</a></li> </ul> </li> </ul> <h3>DOJ Cases and Proceedings</h3> <ul> <li><strong>DOJ Argued That District Court Incorrectly Required Intent in Civil Section 1 Case. </strong>On October 19, 2023, in an amicus brief filed in the U.S. Court of Appeals for the Fifth Circuit, the DOJ argued that a Louisiana federal district court applied a standard higher than that for criminal liability when it dismissed Section 1 claims brought by Tesla challenging an alleged conspiracy involving the state&rsquo;s auto regulator to exclude Tesla from the market. The DOJ argued that the lower court&rsquo;s order incorrectly held that Tesla needed to establish anticompetitive intent to violate Section 1 of the Sherman Act, which is an element of a criminal Section 1 violation, whereas for civil violations a plaintiff only needs to prove the agreement was knowingly entered into and designed to harm competition. <ul> <li><a rel="noopener noreferrer" href="https://files.lbr.cloud/public/2023-10/doj%20tesla.pdf?VersionId=8mkxs7mOV14WdOxcIuQLlVVr3nqg4yd" target="_blank">Read the DOJ&rsquo;s Brief</a></li> </ul> </li> </ul> <ul> <li><strong>Former President of Asphalt Paving Company Pleads Guilty To Bid Rigging. </strong>On October 30, 2023, the former president of an asphalt paving company in Michigan pleaded guilty in connection with a conspiracy to rig bids. <ul> <li><a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/former-president-asphalt-paving-company-pleads-guilty-bid-rigging" target="_blank">Read the Press Release</a></li> </ul> </li> </ul> <ul> <li><strong>Justice Department Files Lawsuit and Proposed Consent Decree To Prohibit Koch Foods From Imposing Unfair and Anticompetitive Termination Penalties in Contracts With Chicken Growers.</strong> On November 9, 2023, the DOJ announced that Koch Foods Inc. agreed to a consent decree to resolve allegations that it required chicken farmers to pay Koch a termination penalty to switch from working for Koch to a competitor. The DOJ argued that the penalty constituted a <em>de facto</em> noncompete clause and an unfair and deceptive act in violation of the Packers and Stockyards Act, as well as an unreasonable restraint of trade under Section 1. As part of the consent decree, Koch is required to reimburse farmers for all termination fee payments and other out-of-pocket legal expenses, as well as refrain from retaliating against growers. The consent decree would also prohibit Koch from including any termination penalty obligation in future contracts or collecting payments for the next seven years. <ul> <li><a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/justice-department-files-lawsuit-and-proposed-consent-decree-prohibit-koch-foods-imposing" target="_blank">Read the Press Release</a></li> <li><a rel="noopener noreferrer" href="https://files.lbr.cloud/public/2023-11/DOJ.pdf?VersionId=GxKJys72oHnqpljMBhFb_gZwfXF5zvg5" target="_blank">Read the Complaint</a></li> <li><a rel="noopener noreferrer" href="https://files.lbr.cloud/public/2023-11/Koch.pdf?VersionId=KEm3VUhXhS6h9h8v1FexIVNTBWp8fQHB" target="_blank">Read the Consent Decree</a></li> </ul> </li> </ul> <ul> <li><strong>DOJ Seeks Dismissal of No-Poach Case Against Surgical Care Affiliates.</strong> On November 13, 2023, the DOJ filed a motion to dismiss its pending criminal no-poach case, which was filed against UnitedHealth subsidiary Surgical Care Affiliates in January 2021. <ul> <li><a rel="noopener noreferrer" href="https://fingfx.thomsonreuters.com/gfx/legaldocs/egpbmgzervq/DOJ-SCA-motion-dismiss.pdf" target="_blank">Read the Motion to Dismiss</a></li> </ul> </li> </ul> <ul> <li><strong>DOJ Backs Tenants in Case Alleging Price-Fixing. </strong>On November 15, 2023, the DOJ filed a statement of interest in support of plaintiffs in opposition to a motion to dismiss claims against RealPage and apartment owners that used RealPage software when setting rental rates. The DOJ argues that the plaintiffs&rsquo; complaints plausibly allege that defendants are using new technology and complex algorithms to engage in anticompetitive activity in violation of Section 1 of the Sherman Act. <ul> <li><a rel="noopener noreferrer" href="https://www.justice.gov/d9/2023-11/418053a.pdf" target="_blank">Read the Brief</a></li> </ul> </li> </ul> <ul> <li><strong>Fourth Circuit Reverses Criminal Conviction in Bid-Rigging Conspiracy. </strong>On December 1, 2023, after a former executive of Contech Engineered Solutions LLC was sentenced to 18 months in prison for his participation in bid-rigging and fraud schemes, the U.S. Court of Appeals for the Fourth Circuit reversed the Sherman Act conviction on the basis that the agreement did not constitute a <em>per se</em> antitrust violation. <ul> <li><a rel="noopener noreferrer" href="https://www.ca4.uscourts.gov/opinions/224544.P.pdf" target="_blank">Read the Decision</a></li> </ul> </li> </ul> <ul> <li><strong>Executives Charged With Bid Rigging, Territorial Allocation, and Defrauding the U.S. Forest Service After a Wiretap Investigation. </strong>On December 15, 2023, the DOJ announced that two Idaho executives were indicted for conspiring to rig bids and allocate territories in connection with the U.S. Forest Service contracts. The indictment alleges that from February 2014 to March 2023, the defendants coordinated their bids to harm competitors and accepted payment for fuel trucks at noncompetitive daily rates. The grand jury indictments are a result of an investigation conducted by the PCSF. <ul> <li><a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/executives-charged-bid-rigging-territorial-allocation-and-defrauding-us-forest-service-after" target="_blank">Read the Press Release</a></li> </ul> </li> </ul> <h3>Joint FTC and DOJ Policy</h3> <ul> <li><strong>FTC and DOJ Issue the 2023 Merger Guidelines.</strong> On December 18, 2023, after the two agencies released the Draft Merger Guidelines for public comment earlier this year and hosted a public workshop, they released the 2023 Merger Guidelines. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/12/federal-trade-commission-justice-department-release-2023-merger-guidelines?utm_source=govdelivery" target="_blank">Read the FTC Press Release</a></li> <li><a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/justice-department-and-federal-trade-commission-release-2023-merger-guidelines" target="_blank">Read the DOJ Press Release</a></li> <li><a rel="noopener noreferrer" href="https://www.law.uchicago.edu/recordings/public-workshop-dojftc-draft-merger-guidelines" target="_blank">Watch the Public Workshop</a></li> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/P234000-NEW-MERGER-GUIDELINES.pdf" target="_blank">Read the 2023 Merger Guidelines</a></li> </ul> </li> </ul> <ul> <li><strong>FTC and DOJ Issue Fiscal Year 2022 Hart-Scott-Rodino Notification Report. </strong>On December 21, 2023, the FTC and DOJ released their annual report detailing 2022 data on the HSR Premerger Notification Program. The report notes that in 2022, 3,152 transactions were reported under the HSR, the second highest number over the past 10 years. Of those, 47 were subject to a Second Request, which is in line with prior years. The agencies indicated they took 50 merger enforcement actions (including filed matters, settlements, abandonments, and restructuring that led to no action). <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/12/ftc-doj-issue-fiscal-year-2022-hart-scott-rodino-notification-report?utm_source=govdelivery" target="_blank">Read the Press Release</a></li> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/FY2022HSRReport.pdf" target="_blank">Read the Report</a></li> </ul> </li> </ul> <h3>FTC Policy </h3> <ul> <li><strong>FTC Challenges Orange Book Patents Listed With FDA.</strong> On November 7, 2023, the FTC sent notice letters to 10 pharmaceutical manufacturers warning that their allegedly improper listing of patents in the FDA&rsquo;s Orange Book might constitute an unfair method of competition under Section 5 of the FTC Act. While reserving the right to take further action, the FTC informed the recipients that it was using the FDA&rsquo;s administrative process to challenge Orange Book listings under 21 C.F.R. &sect; 314.53(f)(1). <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/11/ftc-challenges-more-100-patents-improperly-listed-fdas-orange-book" target="_blank">Read the Press Release</a></li> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/legal-library/browse/warning-letters/81927" target="_blank">Read the Letters</a></li> </ul> </li> </ul> <h3>DOJ Policy</h3> <ul> <li><strong>DOJ's Procurement Collusion Strike Force Holds Its First Summit To Discuss Strategies to Combat Emerging Threats.</strong> On November 16, 2023, the DOJ&rsquo;s Antitrust Division and the PCSF hosted its first summit to convene its law enforcement partners from across the country to discuss emerging threats and strategies to confront them. Participants discussed the heightened areas of procurement collusion risk resulting from recent spending bills like the Infrastructure Investment and Jobs Act, the Inflation Reduction Act of 2022, the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022, and supplemental funding in response to the invasion of Ukraine. <ul> <li><a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/justice-departments-procurement-collusion-strike-force-holds-its-first-summit-discuss" target="_blank">Read the Press Release</a></li> </ul> </li> </ul> <h3>Inter-Agency Initiatives </h3> <ul> <li><strong>DOJ and the FTC Meet With G7 Enforcement Partners in Tokyo To Discuss the Challenges of Ensuring Competition in Digital Markets. </strong>On November 8, 2023, the FTC and DOJ Antitrust Division participated in the G7 Competition Authorities and Policymakers Summit. The nations discussed ways in which they can address competition issues in digital markets and better understand and anticipate the challenges to competition that AI brings. <ul> <li><a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/justice-department-and-federal-trade-commission-meet-g7-enforcement-partners-tokyo-discuss" target="_blank">Read the Press Release</a></li> </ul> </li> </ul> <ul> <li><strong>White House Announces Joint Effort From DOJ, FTC, and Department of Health and Human Services (HHS). </strong>On December 7, 2023, the White House announced that the DOJ, FTC, and HHS will issue a joint request for information on how private equity and concentration in health care may affect patients. The agencies will use this information to identify areas for future regulation and enforcement prioritization. The agencies are also looking to better identify alleged &ldquo;roll up&rdquo; strategies where multiple small acquisitions can lead to large market consolidation. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/12/ftc-doj-hhs-work-lower-health-care-drug-costs-promote-competition-benefit-patients-health-care" target="_blank">Read the FTC Press Release&nbsp;</a></li> <li><a rel="noopener noreferrer" href="https://www.whitehouse.gov/briefing-room/statements-releases/2023/12/07/fact-sheet-biden-harris-administration-announces-new-actions-to-lower-health-care-and-prescription-drug-costs-by-promoting-competition/" target="_blank">Read the White House Announcement</a></li> </ul> </li> </ul> <h3>FTC Speeches </h3> <ul> <li><strong>FTC Hosted Virtual Roundtable To Discuss Artificial Intelligence. </strong>On October 4, 2023, FTC staff hosted a virtual roundtable in which Commissioner Rebecca Kelly Slaughter and Chair Lina Khan spoke on artificial intelligence in creative industries. Opening the event, the two FTC members discussed the potential dangers of generative AI to creators and artists, as well as antitrust enforcers&rsquo; role in protecting them. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/09/ftc-host-virtual-roundtable-ai-content-creation" target="_blank">Read the Press Release</a></li> </ul> </li> </ul> <ul> <li><strong>Chair Khan Delivers Remarks at the International Competition Network Conference in Barcelona, Spain. </strong>On October 18, 2023, Chair Lina Khan delivered a speech at the International Competition Network Conference addressing the FTC&rsquo;s approach to the revised Merger Guidelines. She outlined the agency&rsquo;s goals and principles, including to update the Merger Guidelines to reflect current market realities, encompass the full scope of congressional intent and legal precedent, and provide a clear and administrable framework for courts and market participants. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/10-18-2023-Chair-Khan-Remarks-at-ICN.pdf" target="_blank">Read the Speech</a></li> </ul> </li> </ul> <ul> <li><strong>Chair Khan Speaks at Stanford Institute for Economic Policy Research. </strong>On November 2, 2023, Chair Khan delivered remarks at the Standard Institute for Economic Policy Research describing her belief that government action has been crucial to protect free and fair competition in the technology industry. She expressed concerns about the dangers of large firms capturing innovative capacity through the hoarding of talent or acquisition of firms, and outlined the ways the FTC sought to protect fair competition in Silicon Valley. <ul> <li><a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/khan-remarks-stanford.pdf" target="_blank">Read the Speech</a></li> </ul> </li> </ul> <ul> <li><strong>Commissioner Bedoya Speaks at Artificial Intelligence Event. </strong>On November 16, 2023, the Open Markets Institute hosted an event on the contemporary artificial intelligence landscape. Among the speakers were FTC Commissioner Alvaro Bedoya, who spoke about his concerns with the increasing use of AI, such as potential bias, harmful use in hiring practices, and the use of AI systems to make health care decisions. <ul> <li><a rel="noopener noreferrer" href="https://www.openmarketsinstitute.org/publications/ai-and-the-public-interest" target="_blank">Watch the Event</a></li> </ul> </li> </ul> <h3>DOJ Speeches </h3> <ul> <li><strong>Criminal Enforcement Section Director Emma Burnham Delivers Remarks to the New York State Bar Association.</strong> On October 18, 2023, DOJ&rsquo;s Criminal Enforcement Section Director Emma Burnham spoke to the New York Bar Association explaining how the DOJ&rsquo;s Antitrust Division has worked with other offices and agencies, as well as international partners, in joint initiatives to investigate and prosecute antitrust crimes. Director Burnham spoke about the agency&rsquo;s emphasis on corporate enforcement and the importance of remediation and strategic divestments. <ul> <li><a rel="noopener noreferrer" href="https://www.justice.gov/opa/speech/director-emma-burnham-antitrust-divisions-criminal-enforcement-section-delivers-remarks" target="_blank">Read the Speech</a></li> </ul> </li> </ul> <ul> <li><strong>Deputy Assistant Attorney General Andrew J. Forman Speaks at the Capitol Forum&rsquo;s Health Care Competition Conference. </strong>On October 26, 2023, Deputy Assistant Attorney General Andrew J. Forman delivered a speech on competition in the health care industry. He described the importance of the health care industry to the U.S. economy, and how the DOJ is focused both on non-merger and conduct-related transactions in the health care space. <ul> <li><a rel="noopener noreferrer" href="https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-andrew-j-forman-delivers-remarks-capitol-forum-health" target="_blank">Read the Speech</a></li> </ul> </li> </ul> <ul> <li><strong>PCSF Director Daniel Glad Speaks at the National Association of State Procurement Officials&rsquo; 10th Annual Law Institute.</strong> On November 9, 2023, Director Daniel Glad delivered remarks to the National Association of State Procurement Officials&rsquo; Law Institute in which he outlined the importance of procurement experts, particularly at a time of increased infrastructure spending. He also described the work of the PCSF and its recent accomplishments. After stressing the significant loss local governments can experience from bid rigging, price fixing, and other collusive schemes, he asked for assistance from other procurement experts and their teams in reporting and investigating potential crimes. <ul> <li><a rel="noopener noreferrer" href="https://www.justice.gov/opa/speech/director-daniel-glad-justice-departments-procurement-collusion-strike-force-delivers" target="_blank">Read the Speech</a></li> </ul> </li> </ul> <ul> <li><strong>AAG Kanter Testifies Before House Judiciary Subcommittee on the Administrative State, Regulatory Reform, and Antitrust.</strong> On November 14, 2023, AAG Jonathan Kanter testified before the regulatory reform and antitrust subcommittee in November. AAG Kanter defended his agency&rsquo;s actions and praised its recent accomplishments. <ul> <li><a rel="noopener noreferrer" href="https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-statement-subcommittee" target="_blank">Read the Speech</a></li> <li><a rel="noopener noreferrer" href="https://judiciary.house.gov/committee-activity/hearings/oversight-department-justice-antitrust-division#:~:text=The%20House%20Judiciary%20Subcommittee%20on,programs%20of%20the%20Antitrust%20Division" target="_blank">Watch the Hearing</a></li> </ul> </li> </ul> <ul> <li><strong>PDAAG Mekki Speaks at Artificial Intelligence Event. </strong>Principal Deputy Assistant Attorney General (PDAAG) Doha Mekki, spoke on the contemporary artificial intelligence landscape on November 16, 2023. PDAAG Mekki covered the DOJ&rsquo;s merger guidelines, the purported danger of AI finding new and efficient ways to collude, and her view of tech companies&rsquo; increased aversion to antitrust regulation. <ul> <li><a rel="noopener noreferrer" href="https://www.openmarketsinstitute.org/publications/ai-and-the-public-interest" target="_blank">Watch the Event</a></li> </ul> </li> </ul> <ul> <li><strong>Deputy Assistant Attorney General Michael Kades Speaks at Annual CRA Brussels Conference 2023. </strong>On December 7, 2023, Deputy Assistant Attorney General Michael Kades discussed recent evolutions in antitrust ideology. He described many economic assumptions that have changed over time, including views on cartels and labor. <ul> <li><a rel="noopener noreferrer" href="https://www.justice.gov/opa/speech/antitrust-division-deputy-assistant-attorney-general-michael-kades-gives-remarks-annual" target="_blank">Read the Speech</a></li> </ul> </li> </ul> <p><span style="font-size: small;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Newsletter is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{F4AD3862-F477-4959-ACFE-0AB12A9AD57B}https://www.arnoldporter.com/en/perspectives/events/2024/01/part-i-antitrust-mergers-transactionsDebbie Feinsteinhttps://www.arnoldporter.com/en/people/f/feinstein-debbiedebbie.feinstein@arnoldporter.comMatthew Tabashttps://www.arnoldporter.com/en/people/t/tabas-matthewmatthew.tabas@arnoldporter.comThree-Part Webinar Series: Antitrust 2023 Year in Review: Part I: Mergers/TransactionsIn January, Arnold &amp; Porter's U.S. Antitrust/Competition practice hosted a three-part webinar series that explored 2023&rsquo;s most critical developments in antitrust across mergers and other transactions, private plaintiff and government litigation, and criminal enforcement.Wed, 10 Jan 2024 00:00:00 -0600<p>In January, Arnold &amp; Porter's U.S. Antitrust/Competition practice hosted a three-part webinar series that explored 2023&rsquo;s most critical developments in antitrust across mergers and other transactions, private plaintiff and government litigation, and criminal enforcement. </p> <p>In the first part of the series, Chair of the firm&rsquo;s Global Antitrust Practice, Debbie Feinstein, and antitrust partner, Matthew Tabas, discussed major developments in U.S. merger antitrust enforcement, including the revised DOJ/FTC Merger Guidelines, proposed changes to the HSR rules, and notable enforcement actions.</p>{BDF7B5C9-0540-4D45-82B9-B80D36DF626B}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/01/brian-israel-discusses-new-doi-nrda-rule-in-law360Brian Israel Discusses New DOI NRDA Rule in Law360Brian Israel, chair of the firm&rsquo;s Environmental practice, was quoted in the <em>Law360</em> article, &ldquo;Biden Admin Floats New Natural Resource Damage Rule,&rdquo; which discusses the U.S. Department of the Interior (DOI) Office of Restoration and Damage Assessment&rsquo;s recent proposed rule to revise natural resource damage assessment (NRDA) regulations under the Comprehensive Environmental Liability and Compensation Act (CERCLA) and the Clean Water Act.&nbsp;<br />Tue, 09 Jan 2024 00:00:00 -0600<p>Brian Israel, chair of the firm&rsquo;s Environmental practice, was quoted in the <em>Law360</em> article, &ldquo;Biden Admin Floats New Natural Resource Damage Rule,&rdquo; which discusses the U.S. Department of the Interior (DOI) Office of Restoration and Damage Assessment&rsquo;s recent proposed rule to revise natural resource damage assessment (NRDA) regulations under the Comprehensive Environmental Liability and Compensation Act (CERCLA) and the Clean Water Act. </p> <p>The new rule aims to increase opportunities to utilize Type A assessments &mdash; CERCLA&rsquo;s simplified, standard regulations that have rarely been used due to their narrow application for certain sites &mdash; by allowing for a wider range of models. Current regulations limit the Type A procedure to sites with damages of $100,000 or less. The rule would increase the limit to $3 million. </p> <p>Israel told <em>Law360</em> that the proposed rule &ldquo;has the potential to dramatically decrease the amount of time it takes to get to restoration at contaminated sites and significantly reduce the transaction costs for both companies and the government.&rdquo; He added that he expects to advise the DOI on the current dollar-value cap for sites. &ldquo;Nobody loses, because it's always in the government's discretion whether to use the Type A methodology,&rdquo; he said. &ldquo;So there is no reason why they need a financial cap.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://www.law360.com/articles/1782777/biden-admin-floats-new-natural-resource-damage-rule" target="_blank">Read the full article</a> (subscription required). </p>{83C07D4F-B849-4574-9445-439EDC6B42F6}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/01/sklamberg-discusses-fdas-request-for-comment-on-improving-agency-guidanceSklamberg Discusses FDA’s Request for Comment on Improving Agency GuidanceHoward Sklamberg, Life Sciences &amp; Healthcare Regulatory partner and former FDA Deputy Commissioner, was quoted in the<em> Law360</em> article, &ldquo;FDA Seeks Comment On Ideas To Improve Agency Guidance.&rdquo;&nbsp;Tue, 09 Jan 2024 00:00:00 -0600<p>Howard Sklamberg, Life Sciences &amp; Healthcare Regulatory partner and former FDA Deputy Commissioner, was quoted in the <em>Law360</em> article, &ldquo;FDA Seeks Comment On Ideas To Improve Agency Guidance.&rdquo; The article discusses the U.S. Food and Drug Administration&rsquo;s recent notice to request comment from pharmaceutical companies, healthcare providers and others on the agency&rsquo;s strategies to improve how it develops and communicates nonbinding guidance.</p> <p>Sklamberg told <em>Law360</em> that the FDA aims to gather public input without delaying the issuance of guidance. &ldquo;There's been some frustration by some in industry, by some in Congress, by other observers that some FDA guidances will remain in draft form for many, many years,&rdquo; he said. &ldquo;There have been calls for FDA to streamline its process and to have its process be more transparent.&rdquo;</p> <p>The FDA outlined its ideas in a draft report on best practices for issuing guidance. Sklamberg noted that lawyers may want to ask their clients if they would like to provide their input on the FDA&rsquo;s proposals. &ldquo;The fact that the agency understands the need to improve its processes regarding things like input and transparency means it is going to generally be open to getting input, even under its existing policies,&rdquo; he said. </p> <p><a rel="noopener noreferrer" href="https://www.law360.com/articles/1781693/fda-seeks-comment-on-ideas-to-improve-agency-guidance" target="_blank">Read the full article</a> (subscription required). </p>{1F47CC50-4BF8-46CD-830D-99001098EE3F}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/01/lohan-talks-chapter-7-bankruptcy-cases-in-billboard-proLohan Talks Chapter 7 Bankruptcy Cases in Billboard ProBankruptcy &amp; Restructuring partner Brian Lohan was quoted in the <em>Billboard Pro</em> article, &ldquo;Merch Company SCP Owes Millions to Clients Like Mitski, Brent Faiyaz &amp; Brand New After Shutting Down,&rdquo; which discusses an Illinois-based merch company&rsquo;s recent plans to file for chapter 7 bankruptcy.&nbsp;Tue, 09 Jan 2024 00:00:00 -0600<p>Bankruptcy &amp; Restructuring partner Brian Lohan was quoted in the<em> Billboard Pro</em> article, &ldquo;Merch Company SCP Owes Millions to Clients Like Mitski, Brent Faiyaz &amp; Brand New After Shutting Down,&rdquo; which discusses an Illinois-based merch company&rsquo;s recent plans to file for chapter 7 bankruptcy. </p> <p>According to the article, the company, SCP, owes more than $4 million to over 300 clients. Lohan told <em>Billboard Pro</em> that the company&rsquo;s creditors may not get more than &ldquo;cents on the dollar,&rdquo; because in chapter 7 bankruptcy cases, creditors do not receive full recovery. &ldquo;If the labels or artists are able to get their merchandise back prior to the filing, that will help them mitigate losses going forward,&rdquo; he said. &ldquo;But if their merchandise has been sold by SCP prior to the filing and they are owed money on account of that inventory, or any inventory is still in possession of SCP at the time of its filing &hellip; they&rsquo;re going to be standing in line as a general unsecured creditor just like everybody else that is owed money.&rdquo; </p> <p>Lohan added that chapter 7 bankruptcy cases can take &ldquo;anywhere from months to years&rdquo; to resolve. &ldquo;However, even on the short end, distributions to creditors on account of their claims will take several months,&rdquo; he said, noting that the process includes resolving &ldquo;potential litigation against various parties&rdquo; involved. </p> <p><a rel="noopener noreferrer" href="https://www.billboard.com/pro/mitski-brand-new-merch-company-scp-shut-down/" target="_blank">Read the full article.</a> </p>{76F34081-951E-4FE0-83B8-9BDA5BCDD884}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/01/sklamberg-talks-rescheduling-of-cannabis-on-nprs-morning-editionSklamberg Talks Rescheduling of Cannabis on NPR’s “Morning Edition” Life Sciences &amp; Healthcare Regulatory partner Howard Sklamberg was recently a guest on <em>NPR</em>&rsquo;s &ldquo;Morning Edition&rdquo; for its &ldquo;What lowering federal restrictions on marijuana could mean&rdquo; episode.Tue, 09 Jan 2024 00:00:00 -0600<p>Life Sciences &amp; Healthcare Regulatory partner Howard Sklamberg was recently a guest on <em>NPR</em>&rsquo;s &ldquo;Morning Edition&rdquo; for its &ldquo;What lowering federal restrictions on marijuana could mean&rdquo; episode. Sklamberg discussed the potential impact of the Biden administration's changes to the federal classification of cannabis, whether rescheduling cannabis from Schedule I to Schedule III will affect cannabis business owners, and the likelihood that cannabis will be decriminalized in the future.</p> <p><a rel="noopener noreferrer" href="https://www.npr.org/2024/01/03/1222600913/what-lowering-federal-restrictions-on-marijuana-could-mean" target="_blank">Listen to the full episode.</a></p>{5D769A2F-5BB5-4DAD-86B3-14B555FEAEA1}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/new-york-state-department-of-financial-services-issuesRobert C. Azarowhttps://www.arnoldporter.com/en/people/a/azarow-robert-crobert.azarow@arnoldporter.comJames P. Berginhttps://www.arnoldporter.com/en/people/b/bergin-jamesJames.Bergin@arnoldporter.comBrian D. Israelhttps://www.arnoldporter.com/en/people/i/israel-brian-dbrian.israel@arnoldporter.comAmber A. Hayhttps://www.arnoldporter.com/en/people/h/hay-amber-aamber.hay@arnoldporter.comTeresa (Terry) L. Johnsonhttps://www.arnoldporter.com/en/people/j/johnson-teresa-lteresa.johnson@arnoldporter.comMichael A. Mancusihttps://www.arnoldporter.com/en/people/m/mancusi-michael-amichael.mancusi@arnoldporter.comKevin M. Toomeyhttps://www.arnoldporter.com/en/people/t/toomey-kevin-mkevin.toomey@arnoldporter.comMonique E. Holmeshttps://www.arnoldporter.com/en/people/h/holmes-monique-emonique.holmes@arnoldporter.comErik Walshhttps://www.arnoldporter.com/en/people/w/walsh-erikerik.walsh@arnoldporter.comMichael Treveshttps://www.arnoldporter.com/en/people/t/treves-michaelmichael.treves@arnoldporter.comNew York State Department of Financial Services Issues Final Guidance on Climate-Related Risk Management<span>On December 21, 2023, the New York State Department of Financial Services (DFS) published final guidance regarding financial institutions&rsquo; assessment and management of material climate-related financial and operational risks (Guidance).&nbsp;</span>Tue, 09 Jan 2024 00:00:00 -0600<p>On December 21, 2023, the New York State Department of Financial Services (DFS) <a rel="noopener noreferrer" href="https://www.dfs.ny.gov/system/files/documents/2023/12/dfs_climate_change_guidance_banking_mortgage_orgs_202312.pdf" target="_blank">published</a> final guidance regarding financial institutions&rsquo; assessment and management of material climate-related financial and operational risks (Guidance). More sweeping than the federal banking agency principles on climate-related risk management, which apply only to financial institutions with over US$100 billion in consolidated assets,[[N: The federal banking agencies finalized interagency principles for large financial institutions&rsquo; management of climate-related financial risk on October 24, 2023 (see our prior <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/11/federal-banking-agencies-issue-final-principles">Advisory</a>).]] DFS&rsquo; Guidance applies to <em>all</em> New York State-regulated banking organizations, New York State-licensed branches and agencies of foreign banking organizations (FBOs), and New York State-regulated mortgage bankers and mortgage servicers (collectively, Regulated Organizations). </p> <p>DFS did not set an implementation timeline for the Guidance. As a first step, during 2024, DFS will request information from Regulated Organizations on their current or planned climate-related risk management processes. DFS will factor the responses to these requests into its determination of the appropriate implementation timing. DFS also will coordinate with relevant federal banking regulators to determine when and how to incorporate an assessment of this Guidance into DFS&rsquo; supervisory examinations. </p> <p>Notwithstanding this undetermined timeline, Regulated Organizations should begin taking the Guidance into account now, as it is not a question of <em>if</em> DFS will incorporate climate-related risk management into the examination process, but <em>when</em>. </p> <h2>Key Elements of the Guidance</h2> <p>The Guidance is substantially the same as the guidance DFS proposed in October 2022 (see our prior&nbsp;<a href="https://www.arnoldporter.com/en/perspectives/advisories/2022/12/ny-state-dept-of-financial-services-seeks-public">Advisory</a>), with some changes in response to public comments. As in the proposed guidance, the final Guidance addresses five areas of climate-related financial and operational risk management: corporate governance; internal control framework; risk management process; data aggregation and reporting; and climate scenario analysis. </p> <p><strong>Corporate Governance</strong>: The Guidance recognizes that corporate governance is the foundational element of an effective climate-related risk management program. While many aspects of the Guidance provide what Regulated Organizations <em>should</em> do, the Guidance states that DFS <em>expects</em> a Regulated Organization&rsquo;s governance framework will ensure that there is a process in place for identifying, measuring, monitoring, and controlling material financial and operational climate-related risks. DFS encourages a risk-based approach to climate-related risk management and therefore does not propose any &ldquo;one-size fits all&rdquo; measures for monitoring or controlling such risks; however, this Guidance makes clear that every Regulated Organization must have a process for, at the very least, considering the impact of climate risk on its business. </p> <p>The Guidance places significant responsibility on the board of directors, providing that the board should, among other things, (1) establish a risk management framework that integrates climate-related financial and operational risks and (2) exercise effective oversight of, and hold management accountable for, its implementation.</p> <p><strong>Internal Control Framework</strong>: Regulated Organizations should incorporate climate-related risks across the three lines of defense:</p> <ul> <li>The first line of defense &mdash; the risk-taking function &mdash; should assess climate-related financial risks during client onboarding, credit application, and credit review processes. A Regulated Organization&rsquo;s credit underwriting and monitoring processes should include a review of how physical and transition climate risks may impact its clients&rsquo; business.[[N: &ldquo;Physical risks&rdquo; refer to harm to people and property arising from acute, climate-related events or chronic shifts in weather patterns. &ldquo;Transition risks&rdquo; refer to stresses to institutions or sectors arising from economic and behavioral shifts driven by policy and regulations, adoption of new technologies, consumer and investor preferences, and changing liability risks.]]</li> <li>The second line of defense &mdash; the risk management function &mdash; should undertake independent, climate-related financial risk assessment and monitoring and assess compliance with climate-related rules, regulations, and internal policies. This function also should assess compliance with fair lending and consumer protection laws, regulations, and guidance.</li> <li>The third line of defense &mdash; the internal audit function &mdash; should conduct regular independent reviews of the Regulated Organization&rsquo;s climate-related internal control framework and systems, taking into account changes in the methodology, business model, and risk profile of the organization, as well as in the quality of underlying data.</li> </ul> <p><strong>Risk Management Process</strong>: DFS expects Regulated Organizations to identify, measure, monitor, and control material climate-related financial and operational risks through their existing risk management framework in line with their board-approved risk appetites. Regulated Organizations should assess the impact of physical and transition risks as drivers of their existing risk categories, including credit risk, liquidity risk, market risk, legal/compliance risk, operational risk, and strategic risk, to the extent material and relevant.</p> <p><strong>Data Aggregation and Reporting</strong>: Regulated Organizations should ensure that their processes for aggregating data and internal reporting are sufficient to monitor material climate-related financial risks and to produce timely information to facilitate board and senior management decision-making. Where the required data for assessing climate-related financial risks is not yet captured by existing information technology infrastructure, Regulated Organizations should enhance existing systems to make it possible to identify, collect, and centralize the data necessary to assess material climate-related financial risks.</p> <p><strong>Climate Scenario Analysis</strong>: The Guidance describes climate scenario analysis &mdash; an internal assessment tool to help identify potential future climate-related risks and risk management capabilities over varying time horizons and climate scenarios &mdash; as an exercise that &ldquo;can be useful,&rdquo; and something that Regulated Organizations &ldquo;should consider&rdquo; conducting. This language indicates that DFS does not expect all Regulated Organizations to conduct climate scenario analyses. Given DFS&rsquo; theme of &ldquo;proportionate implementation&rdquo; (discussed below), it is likely that DFS&rsquo; expectation that a Regulated Organization conduct climate scenario analyses will be commensurate with that entity&rsquo;s climate-related risk exposure. </p> <h2>Proportionate Implementation and Leveraging Parent Company Resources</h2> <p>While the Guidance applies to Regulated Organizations regardless of size, DFS encourages a proportionate approach to climate risk management, appropriate to each organization&rsquo;s exposure to the impacts of climate risk on the organization&rsquo;s operational resilience and safety and soundness. Importantly, the Guidance notes that small asset size should not necessarily be equated with low climate-related risk exposure. Smaller institutions may have concentrated business lines or geographies that are highly exposed to climate-related risks, and DFS will expect such institutions to have commensurate climate-risk management programs, notwithstanding their asset size. </p> <p>The Guidance contains potentially encouraging provisions for FBOs and other entities that are part of a group of affiliated entities or a holding or parent company structure (Group). Such Regulated Organizations may leverage existing Group-level climate-related governance frameworks and risk management policies, procedures, and resources to satisfy DFS&rsquo; supervisory expectations, if the climate-related risks at the Group level include those faced by the Regulated Organization.[[N: These provisions apply also to Regulated Organizations that are part of an intermediate holding company structure.]]</p> <h2>Balancing Climate-Related Risk Management With Fair Lending and Consumer Protection Considerations</h2> <p>DFS expects Regulated Organizations to incorporate climate-related risk management principles, as appropriate, without disinvesting from low- and moderate-income (LMI) communities and communities of color, which are disproportionately harmed by climate change and natural disasters.[[N: DFS also explicitly provides that its Guidance neither prohibits nor establishes limits for providing loans or other services to any specific class or type, as permitted by law or regulation. This statement likely is in response to criticisms that climate-related risk management guidance encourages financial institutions to &ldquo;boycott&rdquo; the oil and gas and other carbon intensive industries.]] Notwithstanding the practices outlined in the Guidance, Regulated Organizations must continue to comply with applicable consumer protection and fair lending laws, regulations, and guidance. </p> <h2>Practical Considerations</h2> <ul> <li>DFS recognizes that management of climate-related risk is an evolving practice, and financial institutions may not currently have complete processes and information to assess climate-related risks. Such statements should not lull financial institutions into complacency. DFS, and other financial regulators, have explicitly stated that uncertainty and data gaps do not justify inaction. Regulated Organizations should begin the process of considering how to incorporate this Guidance now.</li> <li>U.S. management of FBOs seeking to leverage existing Group-level climate-related policies and resources should keep their head office apprised of their climate-related risks and the U.S. regulatory expectations pertinent to their U.S. operations so that the head office may provide appropriate risk management resources to the FBO. The FBO and head office also should ensure that the head office climate-related policies and information systems are sufficiently transparent to allow DFS, and other U.S. supervisors, to assess their adequacy for the FBO&rsquo;s U.S. operations.</li> <li>The Guidance underscores the importance of consumer protection and fair lending compliance to DFS. Regulated Organizations should consider opportunities to mitigate their climate-related financial risks through financing or investments that enhance the climate resiliency of LMI communities and communities of color. Such activities may be eligible for credit under the New York State Community Reinvestment Act.[[N: N.Y. Banking Law &sect; 28-b(4).]]</li> <li>DFS, like its federal counterparts, is focused on potential misleading climate-related public statements. Regulated Organizations should consider a process for ensuring that all such statements and disclosures are vetted for accuracy and consistency with the entity&rsquo;s climate-related strategies, initiatives, risk appetite, and risk management framework.</li> <li>Boards of Directors will need to be engaged in the process of compliance with the Guidelines, starting with board education on climate risk and an evaluation of the governance processes around risk management of climate-related risks.</li> </ul> <h2>Conclusion</h2> <p>Arnold &amp; Porter&rsquo;s Financial Services, Corporate, Environmental, and Securities practice groups continue to monitor climate-related and other ESG developments in the financial services sector and to develop best practices for the firm&rsquo;s financial institution clients. If financial institutions are seeking advice on how to incorporate ESG factors &mdash; including climate-related considerations &mdash; into their business strategy, risk management, or disclosure processes, please contact any author of this Advisory or your regular Arnold &amp; Porter contact.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{01BCF0A9-4019-4201-86EE-3C47B6605D32}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/ftc-case-against-rite-aid-deployment-of-ai-based-technologyPeter J. Schildkrauthttps://www.arnoldporter.com/en/people/s/schildkraut-peter-jpeter.schildkraut@arnoldporter.comAlexis Sabethttps://www.arnoldporter.com/en/people/s/sabet-alexisalexis.sabet@arnoldporter.comNancy L. Perkinshttps://www.arnoldporter.com/en/people/p/perkins-nancy-lnancy.perkins@arnoldporter.comAlex Altmanhttps://www.arnoldporter.com/en/people/a/altman-alexanderalexander.altman@arnoldporter.comThe Crackdown Commences: The FTC’s Case Against Rite Aid’s Deployment of AI-Based TechnologyOn December 19, 2023, the U.S. Federal Trade Commission (FTC) put a big lump of coal in Rite Aid&rsquo;s stocking. The agency filed a complaint and proposed settlement regarding the pharmacy chain&rsquo;s use of artificial intelligence (AI)-based facial-recognition surveillance technology.&nbsp;Mon, 08 Jan 2024 00:00:00 -0600<p>On December 19, 2023, the U.S. Federal Trade Commission (FTC) put a big lump of coal in Rite Aid&rsquo;s stocking. The agency filed a <a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/2023190_riteaid_complaint_filed.pdf" target="_blank">complaint</a> and <a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/2023190_riteaid_stipulated_order_filed.pdf" target="_blank">proposed settlement</a> regarding the pharmacy chain&rsquo;s use of artificial intelligence (AI)-based facial-recognition surveillance technology. The complaint alleges that Rite Aid violated Section 5 of the FTC Act, <a rel="noopener noreferrer" href="https://uscode.house.gov/view.xhtml?hl=false&amp;edition=prelim&amp;req=granuleid%3AUSC-prelim-title15-section45&amp;num=0&amp;saved=%7CZ3JhbnVsZWlkOlVTQy1wcmVsaW0tdGl0bGUxNS1zZWN0aW9uNDVi%7C%7C%7C0%7Cfalse%7Cprelim" target="_blank">15 U.S.C. &sect; 45</a>, by using facial-recognition technology to identify shoplifters in an unfair manner that harmed consumers. The FTC further alleges that Rite Aid violated a 2010 FTC settlement with Rite Aid (the 2010 Order), by failing to employ reasonable and appropriate measures to prevent unauthorized access to personal information. While some may have missed this news in the run-up to the holidays, it marks a major step by the FTC to discipline businesses deploying AI systems &mdash; and provides lessons for companies seeking to avoid similar consequences.</p> <p>For several years, the FTC has warned that it will use its Section 5 power against unfair and deceptive trade practices to penalize deployers of AI and other automated decision-making (ADM) systems that fail to take reasonable steps to protect consumers from harms resulting from inaccuracy, bias, lack of transparency, and breaches of privacy, among others (see the <a rel="noopener noreferrer" href="https://www.ftc.gov/business-guidance/blog/2021/04/aiming-truth-fairness-equity-your-companys-use-ai" target="_blank">FTC&rsquo;s blog post </a>and <a href="https://www.arnoldporter.com/en/perspectives/advisories/2021/05/ai-under-regulatory-scrutiny">our prior Advisory</a>). While the FTC had taken action against alleged privacy-related violations in connection with AI systems (e.g., the <em><a rel="noopener noreferrer" href="https://www.ftc.gov/legal-library/browse/cases-proceedings/192-3172-everalbum-inc-matter" target="_blank">Everalbum</a></em> and <em><a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2022/03/ftc-takes-action-against-company-formerly-known-weight-watchers-illegally-collecting-kids-sensitive" target="_blank">Weight Watchers</a></em> cases) and had issued repeated warnings to businesses deploying AI and other ADM systems (see our <a href="https://www.arnoldporter.com/en/perspectives/blogs/enforcement-edge/2023/03/ftc-warns-all-you-need-to-know-about-ai">March 7, 2023</a>,&nbsp;<a href="https://www.arnoldporter.com/en/perspectives/blogs/enforcement-edge/2023/03/another-month-another-ftc-warning">March 29, 2023</a>, and&nbsp;<a href="https://www.arnoldporter.com/en/perspectives/blogs/enforcement-edge/2023/04/agencies-vow-ia-enforcement">April 26, 2023</a>&nbsp;blog posts) that their actions might violate Section 5, the FTC had not actually used Section 5 to address such non-privacy-related violations before the Rite Aid case. Now, the FTC&rsquo;s crackdown has begun, proving that those threats were not empty. </p> <h2>Background of the Case</h2> <p>According to the FTC&rsquo;s complaint, Rite Aid deployed AI-based facial-recognition technology to identify potential shoplifters at certain of its stores. This technology was trained using Rite Aid&rsquo;s record of individuals who it believed had engaged or attempted to engage in criminal activity in one of its stores. Many of the tens of thousands of images Rite Aid used to train its model, however, were allegedly low-quality and taken from security or phone cameras. </p> <p>The FTC claims that, in operation, the system yielded many erroneous matches and that Rite Aid employees, relying inappropriately on those results, increased surveillance of certain customers, forced customers to leave stores, falsely accused customers of shoplifting &mdash; embarrassing them in front of family, bosses, and coworkers &mdash; and even reported customers to the police. The FTC alleges that the misidentifications disproportionately involved people of color and women. This allegation of particularly poor performance regarding minorities and women is consistent with other research into facial-recognition systems (although the U.S. National Institute of Standards and Technology has <a rel="noopener noreferrer" href="https://www.nist.gov/news-events/news/2019/12/nist-study-evaluates-effects-race-age-sex-face-recognition-software" target="_blank">found</a> that some systems do not produce such high rates of false positives or such pronounced demographic differences in false positives). Indeed, many studies have identified discriminatory treatment of minorities, women, and other protected classes as a frequent failing of other types of AI models too.</p> <p>The complaint&rsquo;s description of Rite Aid&rsquo;s practices reads like a how-to manual for <em>maximizing</em> the risks of AI deployment. It asserts:</p> <p style="margin-left: 40px;">In connection with deploying facial recognition technology in a subset of its retail pharmacy locations, Rite Aid has failed to take reasonable measures to prevent harm to consumers. Among other things, Rite Aid has:</p> <p style="margin-left: 80px;">a. Failed to assess, consider, or take reasonable steps to mitigate risks to consumers associated with its implementation of facial recognition technology, including risks associated with misidentification of consumers at higher rates depending on their race or gender;</p> <p style="margin-left: 80px;">b. Failed to take reasonable steps to test, assess, measure, document, or inquire about the accuracy of its facial recognition technology before deploying the technology;</p> <p style="margin-left: 80px;">c. Failed to take reasonable steps to prevent the use of low-quality images in connection with its facial recognition technology, increasing the likelihood of false-positive match alerts;</p> <p style="margin-left: 80px;">d. Failed to take reasonable steps to train or oversee employees tasked with operating facial recognition technology and interpreting and acting on match alerts; and</p> <p style="margin-left: 80px;">e. Failed to take reasonable steps, after deploying the technology, to regularly monitor or test the accuracy of the technology, including by failing to implement any procedure for tracking the rate of false positive facial recognition matches or actions taken on the basis of false positive facial recognition matches.</p> <p>The key word here is &ldquo;reasonable.&rdquo; Under <a rel="noopener noreferrer" href="https://www.ftc.gov/legal-library/browse/ftc-policy-statement-unfairness" target="_blank">long-settled FTC policy</a>, a practice is unfair under Section 5 only if it meets three tests: the practice causes &ldquo;substantial&rdquo; injury to consumers; the injury &ldquo;must not be outweighed by any countervailing benefits to consumers or competition that the practice produces; and it must be an injury that consumers themselves could not reasonably have avoided.&rdquo; (A <a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/documents/public_statements/410531/831014deceptionstmt.pdf" target="_blank">separate longstanding policy</a> on deception has its own tests.) Use of an AI system is not inherently unfair because the system sometimes makes mistakes. Rather, context matters.</p> <p>Although the FTC&rsquo;s allegations regarding Rite Aid&rsquo;s deployment of AI do not focus on privacy and security violations, the complaint also claims that Rite Aid breached the 2010 Order, which required Rite Aid to implement and maintain a comprehensive information security program and retain documents relating to its compliance with that requirement. In particular, that program was to include &ldquo;development and use of reasonable steps to select and retain service providers capable of appropriately safeguarding personal information they receive from [Rite Aid], and requiring service providers by contract to implement and maintain appropriate safeguards.&rdquo; </p> <p>In the complaint, the FTC alleges that, while Rite Aid did develop such an information security program, it regularly failed to: (1) use reasonable steps to select service providers capable of appropriately safeguarding personal information; (2) periodically reassess service providers; and (3) require service providers by contract to implement and maintain appropriate safeguards for personal information they received from Rite Aid. These charges underscore that businesses must take care in how they entrust personal information with service providers, regardless of the context.</p> <h2>The Settlement</h2> <p>Under the proposed settlement of the FTC&rsquo;s current charges, Rite Aid will be subject to an array of obligations. First, Rite Aid may not use facial-recognition technology for the next five years, other than for certain employment and healthcare uses, and then only if it obtains &ldquo;Affirmative Express Consent&rdquo; from targeted persons. </p> <p>Second, Rite Aid will be required to destroy all photos and videos used or collected in connection with its facial-recognition program and, notably, all &ldquo;data, models, or algorithms derived in whole or in part therefrom.&rdquo; Such &ldquo;algorithmic disgorgement&rdquo; has become a regular feature of the FTC&rsquo;s Section 5 enforcement when it believes personal information has been collected improperly (e.g., <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2019/12/ftc-issues-opinion-order-against-cambridge-analytica-deceiving-consumers-about-collection-facebook" target="_blank"><em>Cambridge Analytica</em></a>, <a rel="noopener noreferrer" href="https://www.ftc.gov/legal-library/browse/cases-proceedings/192-3172-everalbum-inc-matter" target="_blank"><em>Everalbum</em></a>, <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2022/03/ftc-takes-action-against-company-formerly-known-weight-watchers-illegally-collecting-kids-sensitive" target="_blank"><em>Weight Watchers</em></a>, and <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/05/ftc-says-ring-employees-illegally-surveilled-customers-failed-stop-hackers-taking-control-users" target="_blank"><em>Amazon</em></a>). In this case, Rite Aid also must ensure that their service providers and other third parties that received photos and videos of consumers in connection with Rite Aid&rsquo;s facial-recognition program delete those photos and videos, as well as any derived data, models, or algorithms.</p> <p>Third, before using any AI-based &ldquo;Automated Biometric Security or Surveillance System&rdquo; (including, but not limited to, facial recognition once the five-year prohibition is over), Rite Aid must establish, implement, and maintain a risk-management program assessing and mitigating the system&rsquo;s risks, including through contracting requirements, user training, system monitoring and testing, data-quality governance, corporate governance and oversight, notification of information collection and automated decisions to those affected, and a complaint and recourse mechanism for affected individuals leading to a timely review and response. As with the prohibition on facial-recognition technology, this requirement would not apply in certain employment and healthcare contexts if Affirmative Express Consent is obtained.</p> <p>Fourth, Rite Aid must clearly and conspicuously disclose its use of any Automated Biometric Security or Surveillance System.</p> <p>Fifth, Rite Aid generally must delete all biometric information collected in connection with an Automated Biometric Security or Surveillance System after five years (shorter if not reasonably necessary to retain for the full five years).</p> <p>Sixth, Rite Aid must refrain from making misrepresentations related to the privacy and security of a dozen specified categories of personal information.</p> <p>Seventh, Rite Aid must implement an information security program satisfying numerous detailed requirements. It also must engage an independent, third-party &ldquo;Information Security Assessor&rdquo; (satisfactory to the FTC) to perform biennial reviews of the information security program; its effectiveness; and any gaps or weaknesses in, or instances of material noncompliance with, the information security program. Rite Aid must provide these assessments to the FTC.</p> <p>Eighth, Rite Aid&rsquo;s CEO must certify compliance with the settlement to the FTC annually. </p> <p>Ninth, Rite Aid must report all notifiable data breaches to the FTC.</p> <p>Tenth, Rite Aid must adhere to various recordkeeping requirements.</p> <p>Finally, Rite Aid agreed to certain compliance monitoring by the FTC.</p> <p>Other than the five-year ban on using facial-recognition technology, these provisions will last for 20 years.</p> <h2>Implications for Compliance Programs</h2> <p>Risk-management programs like the one to which Rite Aid agreed are prudent not just for companies that come under FTC scrutiny, however. As FTC Commissioner Alvaro M. Bedoya&rsquo;s <a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/2023190_commissioner_bedoya_riteaid_statement.pdf" target="_blank">separate statement</a> underscores &mdash; at least for certain enforcers &mdash; the proposed settlement prescribes a </p> <p style="margin-left: 40px;"><em>baseline</em> for &hellip; a comprehensive algorithmic fairness program. &hellip; Beyond giving people notice, industry should carefully consider how and when people can be enrolled in an automated decision-making system, particularly when that system can substantially injure them. In the future, companies that violate the law when using these systems should be ready to accept the appointment of an independent assessor to ensure compliance.</p> <h2>Conclusion</h2> <p>In light of the FTC&rsquo;s prior warnings, Commissioner Bedoya&rsquo;s statement, and previous statements from Chair Lina Khan (see statement of <a rel="noopener noreferrer" href="https://www.justice.gov/crt/page/file/1581491/download" target="_blank">April 25, 2023</a> and articles dated <a rel="noopener noreferrer" href="https://www.nytimes.com/2023/05/03/opinion/ai-lina-khan-ftc-technology.html" target="_blank">May 3, 2023</a> and <a rel="noopener noreferrer" href="https://www.bloomberg.com/news/articles/2023-06-02/ftc-s-khan-says-enforcers-need-to-be-vigilant-early-with-ai" target="_blank">June 1, 2023</a>) and Commissioner Rebecca Kelly Slaughter, (see statement of <a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/documents/public_statements/1564883/remarks_of_commissioner_rebecca_kelly_slaughter_on_algorithmic_and_economic_justice_01-24-2020.pdf" target="_blank">January 24, 2020</a> and article dated <a rel="noopener noreferrer" href="https://law.yale.edu/sites/default/files/area/center/isp/documents/algorithms_and_economic_justice_master_final.pdf" target="_blank">August 2021</a>), the agency&rsquo;s crackdown is likely to be neither a one-off nor just related to biometric surveillance. Instead, we expect it to mark the beginning of active FTC enforcement against allegedly unfair or deceptive use of ADM systems. Commissioner Bedoya explains:</p> <p style="margin-left: 40px;">It is my view that Section 5 of the FTC Act requires companies using technology to automate important decisions about people&rsquo;s lives &mdash; decisions that could cause them substantial injury &mdash; to take reasonable measures to identify and prevent foreseeable harms. Importantly, these protections extend beyond face surveillance. Indeed, the harms uncovered in this investigation are part of a much broader trend of algorithmic unfairness &mdash; a trend in which new technologies amplify old harms.</p> <p>Businesses would be wise to take heed. Otherwise, they too may receive an unpleasant &ldquo;gift&rdquo; from government enforcers.</p> <p>For questions about this advisory or managing AI&rsquo;s regulatory and other risks, please contact the authors or other members of Arnold &amp; Porter&rsquo;s multidisciplinary <a href="https://www.arnoldporter.com/en/services/capabilities/industries/technology-media-telecommunications/artificial-intelligence">Artificial Intelligence</a> team.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{99CE148D-14AB-4FFA-B8EB-9C549D93A547}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/fda-authorizes-florida-plan-to-import-prescription-drugs-from-canadaHoward Sklamberghttps://www.arnoldporter.com/en/people/s/sklamberg-howardhoward.sklamberg@arnoldporter.comTyler M. Scandalioshttps://www.arnoldporter.com/en/people/s/scandalios-tylertyler.scandalios@arnoldporter.comFDA Authorizes Florida’s Plan Under FD&C Act Section 804 To Import Prescription Drugs From Canada<span>On January 5, the U.S. Food and Drug Administration (FDA or Agency) authorized Florida&rsquo;s proposed program to import prescription drugs from Canada under section 804 of the Federal Food, Drug, and Cosmetic Act (FD&amp;C Act) (21 U.S.C. &sect; 384).</span>Mon, 08 Jan 2024 00:00:00 -0600<p>On January 5, the U.S. Food and Drug Administration (FDA or Agency) <a rel="noopener noreferrer" href="https://www.fda.gov/media/175237/download?attachment" target="_blank">authorized</a> Florida&rsquo;s proposed program to import prescription drugs from Canada under section 804 of the Federal Food, Drug, and Cosmetic Act (FD&amp;C Act) (21 U.S.C. &sect; 384). This means FDA has formally determined that Florida has met the state&rsquo;s obligation under section 804 of the FD&amp;C Act (Section 804) to demonstrate that the program (referred to as a Section 804 importation program or SIP) will result in a significant reduction in the cost of the prescription drugs covered by the SIP to the American consumer without posing additional risk to the public&rsquo;s health and safety. Florida must meet certain additional requirements, however, before the state can begin bringing shipments of prescription drugs into the U.S. from Canada under the SIP. <br /> <br /> FDA&rsquo;s authority to permit the importation of drugs from Canada under a SIP stems from the <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/STATUTE-117/pdf/STATUTE-117-Pg2066.pdf#page=399" target="_blank">Medicare Prescription Drug, Improvement, and Modernization Act of 2003</a>, which added section 804 to the FD&amp;C Act. Section 804 authorized FDA to issue regulations allowing for the importation of certain types of prescription drugs from Canada if the Department of Health and Human Services (HHS) certifies to Congress that doing so will both result in a significant reduction in the cost of covered products to the American consumer and pose no additional risk to the public&rsquo;s health and safety. Otherwise, the FD&amp;C Act generally prohibits importation of prescription drugs into the U.S. without the authorization of the drug manufacturer. For many years, HHS did not make such a certification to Congress, but in December of 2019, FDA issued a proposed rule to implement Section 804, and then in December of 2020 HHS issued the certification to Congress concurrent with FDA issuing the final rule implementing Section 804 (the Section 804 rule) (codified at <a rel="noopener noreferrer" href="https://www.ecfr.gov/current/title-21/chapter-I/subchapter-C/part-251" target="_blank">21 CFR Part 251</a>). The Section 804 rule initially only permits SIP proposals from States or American Indian Tribes (SIP Sponsors), but further provides that FDA may consider SIP proposals from other types of SIP Sponsors in the future. Section 804 and the Section 804 rule prohibit the importation of certain types of prescription drugs under a SIP, including biologics, controlled substances, infused drugs, and intravenously injected drugs.[[N: The Section 804 rule (at the definition of &ldquo;Eligible Prescription Drug,&rdquo; in 21 CFR &sect; 251.2), provides a more comprehensive list of drugs prohibited from being imported under a SIP.&nbsp;]] Florida&rsquo;s authorized SIP proposal should include a list of the specific prescription drugs Florida intends to import under the SIP, although at this time a copy of Florida&rsquo;s authorized SIP proposal has not been made public.<br /> <br /> In accordance with the Section 804 rule and FDA&rsquo;s letter authorizing Florida&rsquo;s SIP, before any shipment of prescription drugs can be imported under Florida&rsquo;s SIP, Florida must ensure certain information about the shipment is submitted to FDA by the importer in the form of a &ldquo;Pre-Import Request.&rdquo; No shipment can be imported under the SIP until FDA grants a Pre-Import Request that covers the shipment. SIP Sponsors must also ensure several other requirements are met related to import of the shipment, including ensuring that the drugs are relabeled with the FDA-required labeling and a statement that the drugs were imported under a SIP; that the drugs are screened for evidence that they are adulterated, counterfeit, damaged, tampered with, expired, suspect foreign product, or illegitimate; and that the drugs are subjected to laboratory testing for authenticity, stability, and compliance with established specifications and standards. Other SIP Sponsor obligations include ensuring integrity of the supply chain, monitoring and submitting adverse event reports, complying with drug recall procedures, and submitting quarterly reports to FDA. <br /> <br /> In line with the provisions of the Section 804 rule, FDA&rsquo;s letter authorizing Florida&rsquo;s SIP provides that the SIP will automatically terminate after two years unless reauthorized by FDA. Currently Florida&rsquo;s SIP is the only SIP authorized by FDA, although over the past few years several other states have also announced that they have submitted SIPs to FDA for review and approval. <br /> <br /> If you have any questions about the content discussed here or would like more information, please reach out to one of the authors of this Advisory or to your existing Arnold &amp; Porter contact.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{148DE981-6FC7-4495-96FF-D89B25054A8B}https://www.americanbar.org/events-cle/mtg/web/436451763/caleb.song@arnoldporter.comNuts and Bolts: Licensing - IP and AntitrustMon, 08 Jan 2024 00:00:00 -0600{0D6CFBA3-3FC6-4E96-A22A-9CE7D1E75C05}https://globalcompetitionreview.com/tools/cases-and-precedents/mergers/jurisdiction/178Zeno J. Fredianihttps://www.arnoldporter.com/en/people/f/frediani-zenozeno.frediani@arnoldporter.comLudovica Pizzettihttps://www.arnoldporter.com/en/people/p/pizzetti-ludovicaludovica.pizzetti@arnoldporter.comWilliam (Will) Radcliffehttps://www.arnoldporter.com/en/people/r/radcliffe-williamwilliam.radcliffe@arnoldporter.comCases and PrecedentsMon, 08 Jan 2024 00:00:00 -0600{176A8F37-B515-42D9-BFB8-BF620BD065AA}https://www.arnoldporter.com/en/perspectives/news/2024/01/arnold-and-porter-advises-on-historic-2-billion-acquisition-in-brazilArnold & Porter Advises on Historic $2 Billion Acquisition in BrazilArnold &amp; Porter has played a pivotal role in the largest acquisition by an individual in Brazil's history, advising businessman Jose Seripieri Filho (known as J&uacute;nior) on his $2 billion acquisition of Amil, a leading healthcare operator with 31 hospitals and over 3.1 million customers.&nbsp;Fri, 05 Jan 2024 00:00:00 -0600<p>Arnold &amp; Porter has played a pivotal role in the largest acquisition by an individual in Brazil's history, advising businessman Jose Seripieri Filho (known as J&uacute;nior) on his $2 billion acquisition of Amil, a leading healthcare operator with 31 hospitals and over 3.1 million customers. </p> <p>This deal sets the stage for J&uacute;nior's strategic re-entry into the healthcare market, having previously founded Qualicorp, a health plan administration and brokerage service company. </p> <p>The leveraged buyout transaction involves the purchase of Amil from United Health and includes R$2 billion in equity and R$9 billion in assumed liabilities. Amil is poised for transformation under new leadership, and the transaction represents bolstered prospects for growth and innovation in Brazil's healthcare sector.</p> <p>The Arnold &amp; Porter team was led by partners Carlos Lobo and Greg Harrington and included associate Kristen Acosta and attorneys Ana Ramazzotti and Renata Politanski.</p>{3C23C456-1365-4515-ACE0-C4B5F8E5D9C4}https://www.arnoldporter.com/en/perspectives/news/2024/01/arnold-and-porter-advises-on-over-30-billion-of-sovereign-finance-deals-in-2023Arnold & Porter Advises on Over $30 Billion of Sovereign Finance Deals in 2023In 2023, Arnold &amp; Porter represented issuers on sovereign finance transactions totaling approximately $30.5 billion in deals for Brazil, Colombia, Costa Rica, Hungary, Panama, and Turkey.Fri, 05 Jan 2024 00:00:00 -0600<p>In 2023, Arnold &amp; Porter represented issuers on sovereign finance transactions totaling approximately $30.5 billion in deals for Brazil, Colombia, Costa Rica, Hungary, Panama, and Turkey. These transactions included groundbreaking first issuances of social and sustainable sovereign bonds, ushering in a new era of sustainable financing in Latin America and beyond.</p> <p>&ldquo;In a difficult year generally for the international bond markets, sovereign issuers were a rare bright spot, especially with respect to historic issuances of green, social, sustainable and sustainability-linked (GSSS) bonds,&rdquo; said Gregory Harrington, co-chair of the firm&rsquo;s sovereign finance practice.</p> <p>&ldquo;We are proud to continue the firm&rsquo;s long tradition of precedent-setting deals for sovereign issuers,&rdquo; said Whitney Debevoise, co-chair of the firm&rsquo;s sovereign finance practice.</p> <p>See below for more details on the practice&rsquo;s 2023 activity.</p> <h2>Deal Specifics</h2> <h3>Federative Republic of Brazil </h3> <p><em>The firm advised Brazil on every issue from 1996 to 2014 and both of its issues in 2023.</em></p> <ul> <li>US$2 billion 6.250% Global Bonds due 2031 &mdash; Brazil's landmark inaugural issue of bonds under its new Sovereign Sustainable Bond Framework. <ul> <li>Partner Gregory Harrington led the team, which included partners Whitney Debevoise, David Sausen, and Simon Firth, counsel Carlos Pelaez, and associates Mateo Morris, Lauren Hoepfner, and Valentina Garzon.</li> </ul> </li> <li>US$2.250 billion 6.000% Global Bonds due 2033 <ul> <li>Partner Gregory Harrington led the team, which included partners Whitney Debevoise, David Sausen, and Simon Firth, counsel Carlos Pelaez, and associates Mateo Morris, Lauren Hoepfner, and Valentina Garzon.</li> </ul> </li> </ul> <h3>Republic of Colombia</h3> <p><em>The firm has advised Colombia on global finance matters for almost two decades.</em></p> <ul> <li>Historic first issuances of social bonds in the international capital markets: <ul> <li>US$1.25 billion 8.000% Global Bonds due 2035, and&nbsp;</li> <li>US$1.25 billion 8.750% Global Bonds due 2053. <ul> <li>Partner Gregory Harrington led the team, which included partners Simon Firth, David Sausen, and William Needle, counsel Carlos Pelaez and Arturo Caraballo, and associates Mateo Morris, Lauren Hoepfner, and Valentina Garzon.</li> </ul> </li> </ul> </li> <li>US$2.2 billion of 7.500% Global Bonds due 2034; plus an offer to purchase US$394,309,000 face amount of outstanding 4.000% Global Bonds due 2024 and US$122,655,000 face amount of 8.125% Global Bonds due 2024. <ul> <li>Partner Gregory Harrington led the team, which included counsel Carlos Pelaez, and associates Mateo Morris and Valentina Garzon.&nbsp;</li> </ul> </li> </ul> <h3>Republic of Costa Rica</h3> <ul> <li>Rule 144A/Reg. S offering of US$1.5 billion of 6.550% Notes due 2034.&nbsp; <ul> <li>Partners Gregory Harrington and Raul Herrera led the team, which included associates Mateo Morris and Valentina Garzon.</li> </ul> </li> </ul> <h3>Republic of Hungary</h3> <ul> <li>Issuance of US$500 million of 6.125% Notes due 2028. <ul> <li>Partner Whitney Debevoise led the team, which included partner Jeremy Willcocks, counsel Carlos Pelaez, and associates Valentina Garzon and Kardia Leung.</li> </ul> </li> <li>Rule 144A/Reg. S offerings of&nbsp; <ul> <li>US$1.5 billion of 6.125% Notes due 2028,&nbsp;</li> <li>US$1.5 billion of 6.250% Notes due 2032, and&nbsp;</li> <li>US$1.25 billion of 6.750% Notes due 2052; plus a tender offer to purchase US$380.3 million face amount of outstanding 5.750% Notes due 2023 and US$619.7 million face amount of outstanding 5.375% Notes due 2024.&nbsp; <ul> <li>Partner Whitney Debevoise led the team, which included counsel Carlos Pelaez, and associates Mateo Morris and Valentina Garzon.</li> </ul> </li> </ul> </li> <li>Issuance of US$150 million 6.125% Notes due 2028 and US$300 million 6.250% Notes due 2032. <ul> <li>Partner Whitney Debevoise led the team, which included counsel Carlos Pelaez and associate Valentina Garzon.</li> </ul> </li> </ul> <h3>Republic of Panama</h3> <p><em>The firm has represented Panama in all its sovereign issuances since the early 1990s, when the firm advised on a bond exchange and subsequent Brady restructuring.</em></p> <ul> <li>SEC-registered offerings of:&nbsp; <ul> <li>US$800 million of 6.400% Global Bonds due 2035, and US$1 billion of 6.853% Global Bonds due 2054. <ul> <li>Partner Whitney Debevoise led the team, which included partner Gregory Harrington, counsel Carlos Pelaez, and associates Mateo Morris and Valentina Garzon.</li> </ul> </li> <li>US$1 billion 6.875% Global Bonds due 2036 and US$400 million 6.853% Global Bonds due 2054. <ul> <li>Partner Whitney Debevoise led the team, which included partner Gregory Harrington, which included counsel Carlos Pelaez, and associates Mateo Morris and Valentina Garzon.</li> </ul> </li> </ul> </li> <li>Issuance of US$700 million 6.375% Treasury Bonds (Bonos del Tesoro) due 2033. <ul> <li>Partner Whitney Debevoise led the team, which included partner Gregory Harrington, counsel Carlos Pelaez, and associates Mateo Morris and Valentina Garzon.</li> </ul> </li> </ul> <h3>Republic of T&uuml;rkiye (Turkey)</h3> <p><em>The firm has represented Turkey on global finance matters for more than 20 years.</em></p> <ul> <li>SEC-registered offerings of US$7.5 billion of Notes, including:&nbsp; <ul> <li>US$2.75 billion of 9.375% Notes due 2033;&nbsp;</li> <li>US$2.25 billion of 9.375% Notes due 2029; and&nbsp;</li> <li>US$2.5 billion of 9.125% Notes due 2030. <ul> <li>Partner Christopher Peterson led the team for each offering, which included associates Brady Randall, Sean Atkinson, and Kexi Jin.</li> </ul> </li> </ul> </li> <li>US$2.5 Billion Sukuk issuance due 2029. <ul> <li>Partner Christopher Peterson led the team, which included partners Jeremy Willcocks, David Sausen, and William Needle, counsel Kathleen Wechter, and associates Brady Randall, Kardia Leung, Sean Atkinson, Kexi Jin, and Lauren Hoepfner.</li> </ul> </li> </ul>{3912160A-FB96-45E2-AA85-E66B54E78738}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/department-of-defense-issues-cmmc-2-proposed-ruleThomas A. Pettithttps://www.arnoldporter.com/en/people/p/pettit-thomasthomas.pettit@arnoldporter.comRonald D. Leehttps://www.arnoldporter.com/en/people/l/lee-ronald-dRonald.Lee@arnoldporter.comCharles A. Blanchardhttps://www.arnoldporter.com/en/people/b/blanchard-charles-aCharles.Blanchard@arnoldporter.comTirzah S. Lollarhttps://www.arnoldporter.com/en/people/l/lollar-tirzah-stirzah.lollar@arnoldporter.comSonia Tabrizhttps://www.arnoldporter.com/en/people/t/tabriz-soniasonia.tabriz@arnoldporter.comTrevor G. Schmitthttps://www.arnoldporter.com/en/people/s/schmitt-trevor-gtrevor.schmitt@arnoldporter.comDepartment of Defense Issues CMMC 2.0 Proposed RuleOn December 26, 2023, the Department of Defense (DoD) issued a long-awaited proposed rule that, if enacted, would establish the Cybersecurity Maturity Model Certification (CMMC) Program, which is intended to strengthen cybersecurity in the DoD contracting community.Fri, 05 Jan 2024 00:00:00 -0600<p>On December 26, 2023, the Department of Defense (DoD) issued a long-awaited <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2023/12/26/2023-27280/cybersecurity-maturity-model-certification-cmmc-program" target="_blank">proposed rule</a> that, if enacted, would establish the Cybersecurity Maturity Model Certification (CMMC) Program, which is intended to strengthen cybersecurity in the DoD contracting community. The proposed rule is the latest development in the long-running CMMC saga, which began in 2019. The initial stages of DoD&rsquo;s CMMC effort peaked in September 2020 when DoD issued a rule establishing the initial CMMC Program (CMMC 1.0). DoD later rescinded CMMC 1.0 and, in November 2021, developed CMMC 2.0, which adjusted various aspects of the CMMC Program. The proposed rule seeks to codify CMMC 2.0 with some adjustments from past CMMC 2.0 guidance documents. <strong>Comments on the proposed rule are due February 26, 2024.</strong></p> <h2>In this Advisory, you will find the following:</h2> <p><strong><a href="#I. Summary">I. Summary</a></strong></p> <p> <strong><a href="#II. Current Cybersecurity Requirements for Defense Contractors">II. Current Cybersecurity Requirements for Defense Contractors</a></strong></p> <ul> <li>FAR 52.204-21</li> <li>DFARS 252.204-7012</li> <li>DFARS 252.204-7019 and DFARS 252.204-7020</li> </ul> <p><strong><a href="#III. CMMC">III. CMMC</a></strong></p> <ul> <li>Applicability</li> <li>CMMC Levels</li> <li>Assessments and Affirmations</li> <li>Cloud Products and Services</li> <a name="I. Summary"></a> <li>Subcontractors</li> <li>Waivers</li> </ul> <p><strong><a href="#IV. Takeaways">IV. Takeaways</a></strong></p> <h2>I. Summary</h2> <ul> <li><strong>Overview: </strong>CMMC is DoD&rsquo;s consolidated framework of cybersecurity requirements for unclassified non-federal information systems that defense contractors (including prime contractors and subcontractors) use to store, process, or transmit federal contract information (FCI) or controlled unclassified information (CUI) when performing DoD contracts. The proposed rule would create CMMC in the new 32 C.F.R. Part 170, but it does not propose new or revised Defense Federal Acquisition Regulation Supplement (DFARS) clauses. DoD does not anticipate issuing new DFARS provisions (though it might ultimately decide to do so), but it will revise DFARS 252.204-7021, Cybersecurity Maturity Model Certification Requirements, and likely other clauses, in a future rulemaking. We anticipate that DoD will make any changes to the DFARS through an interim rule (rather than a proposed rule) because DoD is providing the Defense Industrial Base (DIB) with an opportunity to comment on the substance of CMMC through this proposed rule and issuing an interim rule would allow DoD to implement CMMC faster.</li> <li><strong>Applicability:</strong> With the exception of contracts exclusively for commercially available off-the-shelf (COTS) items, CMMC will apply to all DoD contracts exceeding the micro-purchase threshold in which defense contractors will store, process, or transmit FCI or CUI using unclassified non-federal information systems. The proposed rule would allow DoD to waive CMMC requirements for particular procurements, though the proposed rule is light on details.</li> <li><strong>CMMC Levels:</strong> CMMC 2.0 is, in many ways, a simplified version of CMMC 1.0. DoD proposes replacing the more complicated five &ldquo;Maturity Levels&rdquo; from CMMC 1.0 with three &ldquo;CMMC Levels.&rdquo; Those CMMC Levels align more closely with existing cybersecurity requirements:</li> </ul> <table style="width: 698px; height: 325px; background-color: #dbe5f1; border-style: solid; color: #000000; border-color: #bfbfbf #d8d8d8 #d8d8d8;"> <tbody> <tr> <td style="text-align: center; vertical-align: middle; background-color: #1f497d;"><span style="font-size: 13px; color: #ffffff;"><strong>&nbsp;CMMC Level</strong></span></td> <td style="text-align: center; vertical-align: middle; background-color: #1f497d;"><strong><span style="font-size: 13px; color: #ffffff;">Applicability</span></strong></td> <td style="text-align: center; vertical-align: middle; background-color: #1f497d;"><strong><span style="font-size: 13px; color: #ffffff;">Security Requirements</span></strong></td> </tr> <tr> <td style="text-align: center; background-color: #c6d9f0; vertical-align: middle;"><span style="font-size: 13px;">1</span></td> <td style="text-align: left; vertical-align: middle; background-color: #c6d9f0;"><span style="font-size: 13px;">Applies where defense contractors will store, process, or transmit Federal Contract Information (FCI) using unclassified non-federal information systems.</span></td> <td style="text-align: left; vertical-align: middle; background-color: #c6d9f0;"><span style="font-size: 13px;">&nbsp;FAR 52.204-21</span></td> </tr> <tr> <td style="text-align: center; background-color: #dbe5f1; vertical-align: middle;"><span style="font-size: 13px;">2</span></td> <td style="text-align: left; vertical-align: middle; background-color: #dbe5f1;"><span style="font-size: 13px;">Applies where defense contractors will store, process, or transmit Controlled Unclassified Information (CUI) using unclassified non-federal information systems.</span></td> <td style="text-align: left; vertical-align: middle; background-color: #dbe5f1;"><span style="font-size: 13px;">&nbsp;NIST SP 800-171</span></td> </tr> <tr> <td style="text-align: center; background-color: #c6d9f0; vertical-align: middle;"><span style="font-size: 13px;">3</span></td> <td style="text-align: left; vertical-align: middle; background-color: #c6d9f0;"><span style="font-size: 13px;">&nbsp;Applies to specified contracts.</span></td> <td style="text-align: left; vertical-align: middle; background-color: #c6d9f0;"><span style="font-size: 13px;">&nbsp;NIST SP 800-171, plus select controls from NIST SP 800-172</span></td> </tr> </tbody> </table> <ul><br /> <li><strong>Plans of Action and Milestones (POA&amp;Ms): </strong>DoD will only permit use of POA&amp;Ms for specific security controls in NIST SP 800-171 and NIST SP 800-172, and contractors must close out all POA&amp;Ms within 180 days.</li> <li><strong>Assessments:</strong> The proposed rule contemplates different types of assessments depending on the CMMC Level and DoD discretion. For CMMC Level 1, defense contractors must perform Self-Assessments. For CMMC Level 2, DoD may, depending on the contract, require either a Self-Assessment or a Certification Assessment performed by a CMMC Third-Party Assessment Organization (C3PAO). For CMMC Level 3, DoD will assess compliance with NIST SP 800-172. DoD proposed a process for resolving disputes between contractors and C3PAOs and the Accreditation Body.</li> <li><strong>Affirmations:</strong> Defense contractors must affirm compliance with the applicable CMMC Level after each assessment, after POA&amp;M closeout, and annually thereafter. Affirmations must be submitted by a &ldquo;senior official&rdquo; of the contractor (i.e., the person responsible for ensuring compliance with CMMC).</li> <li><strong>Timing: </strong>Unlike CMMC 1.0, DoD will not use a pilot program. Instead, DoD plans to implement CMMC in four phases over a three-year period:</li> </ul> <table style="color: #000000; background-color: #dbe5f1; height: 583px; width: 709px; border-color: #bfbfbf #d8d8d8 #d8d8d8; border-style: solid;"> <tbody> <tr> <td style="background-color: #1f497d; text-align: center; vertical-align: middle;"><span style="color: #ffffff;"><strong>Phase&nbsp;</strong></span></td> <td style="background-color: #1f497d; text-align: center; vertical-align: middle;"><strong><span style="color: #ffffff;">When Does the Phase Begin?</span></strong></td> <td style="background-color: #1f497d; text-align: center; vertical-align: middle;"><strong><span style="color: #ffffff;">Key Elements of the Phase</span></strong></td> </tr> <tr> <td style="background-color: #c6d9f0; text-align: center; vertical-align: middle;">1</td> <td style="background-color: #c6d9f0; text-align: left; vertical-align: middle;">On the effective date of revisions to DFARS 252.204-7021</td> <td style="background-color: #c6d9f0; text-align: left; vertical-align: middle;"> <ul> <li>Default requirement is that Self-Assessments will be allowed for CMMC Level 1 and CMMC Level 2, but DoD has discretion to require CMMC Level 2 Certification Assessments for applicable DoD solicitations and contracts.</li> <li>Offerors must complete CMMC Level 1 and Level 2 Self-Assessments to be eligible for award of contracts issued after the effective date.</li> <li>Contracting officers have discretion to require CMMC Level 1 and 2 Self-Assessments before exercising option periods on contracts awarded prior to the effective date.</li> </ul> </td> </tr> <tr> <td style="text-align: center; vertical-align: middle;">&nbsp;2</td> <td style="text-align: left; vertical-align: middle;">Six months after Phase 1 begins</td> <td style="text-align: left; vertical-align: middle;"> <ul> <li>DoD will require CMMC Level 2 Certification Assessments for applicable DoD solicitations and contracts prior to award.</li> <li>DoD has discretion to postpone CMMC Level 2 Certification Assessments to an option period.</li> <li>DoD may begin including CMMC Level 3 Certification Assessments in applicable DoD solicitations and contracts.</li> </ul> </td> </tr> <tr> <td style="background-color: #c6d9f0; text-align: center; vertical-align: middle;">&nbsp;3</td> <td style="background-color: #c6d9f0; text-align: left; vertical-align: middle;">One calendar year after Phase 2 begins</td> <td style="background-color: #c6d9f0; text-align: left; vertical-align: middle;"> <ul> <li>CMMC Level 2 Certification Assessments will be required for applicable DoD solicitations and contracts prior to award and prior to exercising option periods.</li> <li>CMMC Level 3 Certification Assessments will be required for applicable DoD solicitations and contracts prior to award, but DoD has discretion to delay CMMC Level 3 Certification Assessments to an option period.</li> </ul> </td> </tr> <tr> <td style="background-color: #dbe5f1; text-align: center; vertical-align: middle;">&nbsp;4</td> <td style="background-color: #dbe5f1; text-align: left; vertical-align: middle;">One calendar year after Phase 3 begins</td> <td style="background-color: #dbe5f1; text-align: left; vertical-align: middle;">Full implementation; CMMC requirements must be met prior to award and prior to DoD exercising options.</td> </tr> </tbody> </table> <ul><br /> <a name="II. Current Cybersecurity Requirements for Defense Contractors"></a> <li><strong>Enforcement: </strong>The proposed rule vests the CMMC Program Management Office (PMO) with authority to investigate allegations that an active CMMC Self-Assessment or CMMC Certification Assessment is inaccurate. The PMO may launch an investigation based on, among other things, &ldquo;reports from the CMMC Accreditation Body, a C3PAO, or anyone knowledgeable of the security processes and activities of the OSA.&rdquo;[[N: 88 Fed. Reg. 89058, 89123 (Dec. 26, 2023) (32 C.F.R. &sect; 170.6(b)).]] The CMMC PMO can then revoke the assessment.</li> </ul> <h2>II. Current Cybersecurity Requirements for Defense Contractors</h2> <p>CMMC is premised largely on existing cybersecurity obligations, but it introduces additional requirements. Thus, familiarity with certain existing FAR and DFARS cybersecurity requirements is important for understanding CMMC.</p> <p><strong>FAR 52.204-21</strong>: FAR 52.204-21, Basic Safeguarding of Covered Contractor Information Systems, provides the most basic cybersecurity requirements for government contractors. That clause establishes 15 baseline security controls for any information system &ldquo;owned or operated by a contractor that processes, stores, or transmits&rdquo; FCI (i.e., &ldquo;information, not intended for public release, that is provided by or generated for the Government under a contract to develop or deliver a product or service to the Government&rdquo;).</p> <p><strong>DFARS 252.204-7012</strong>: Defense contractors that use covered contractor information systems (i.e., unclassified non-federal information systems that store, process, or transmit covered defense information)[[N: Covered defense information includes unclassified controlled technical information and other CUI that is marked as such or collected, developed, received, transmitted, used, or stored by or on behalf of the contractor in support of the performance of the contract. DFARS 252.204-7012(a).]] are subject to broader requirements. DFARS 252.204-7012, Safeguarding Covered Defense Information and Cyber Incident Reporting, requires such contractors to provide &ldquo;adequate security&rdquo; for these information systems. Specifically, for covered information systems other than cloud services, defense contractors must comply with National Institute of Standards and Technology (NIST) Special Publication (SP) 800-171 (typically the version in effect when DoD issued the relevant solicitation unless amended). NIST SP 800-171 establishes 110 security controls and requires contractors to develop a system security plan (SSP) that, among other things, explains how those controls have been implemented. For any unimplemented controls, the contractor must prepare a POA&amp;M that provides a path forward to implement those controls and explains how the contractor will mitigate risks in the interim. Cloud services provided by an external cloud service provider (CSP) must meet security requirements equivalent to at least the Federal Risk and Authorization Management Program (FedRAMP) Moderate baseline. Additionally, DFARS 252.204-7012 mandates cyber incident reporting and related requirements.</p> <p><strong>DFARS 252.204-7019 and DFARS 252.204-7020</strong>: At a high level, DFARS 252.204-7019, Notice of NIST SP 800-171 DoD Assessment Requirements, requires offerors subject to DFARS 252.204-7012 to undergo a NIST SP 800-171 assessment in accordance with DFARS 252.204-7020, NIST SP 800-171 <a name="III. CMMC"></a>DoD Assessment Requirements, and have a current assessment score (i.e., a score from an assessment conducted within the past three years) in the DoD Supplier Performance Risk System (SPRS) to be eligible for award of a prime contract. DFARS 252.204-7020 also prohibits prime contractors from awarding a subcontract if the prospective subcontractor has a covered contractor information system and has not completed the required assessment.</p> <h2>III. CMMC</h2> <p>DoD developed CMMC to address pitfalls in, and monitor compliance with, these FAR and DFARS clauses and otherwise bolster cybersecurity across the DIB. Below is an overview of the key elements of DoD&rsquo;s proposed CMMC program.</p> <h3>A. Applicability</h3> <p> With the exception of contracts solely for COTS items, CMMC will apply to all DoD prime contracts and subcontracts where the prime contractor or subcontractor &ldquo;handles FCI or CUI on its own contractor information systems.&rdquo;[[N: 88 Fed. Reg. at 89067.]]</p> <h3>B. CMMC Levels</h3> <p> CMMC 2.0 <a rel="noopener noreferrer" href="https://dodcio.defense.gov/CMMC/Model/" target="_blank">replaces the five maturity levels from CMMC 1.0 with three &ldquo;CMMC Levels.&rdquo;</a> Below is a chart summarizing the CMMC Levels, followed by a more in-depth discussion of each level.</p> <table style="color: #000000; background-color: #dbe5f1; height: 687px; width: 713px; border-color: #bfbfbf #d8d8d8 #d8d8d8; border-style: solid;"> <tbody> <tr> <td style="background-color: #1f497d; text-align: center; vertical-align: middle;"><strong><span style="color: #ffffff;">CMMC Level</span></strong></td> <td style="background-color: #1f497d; text-align: center; vertical-align: middle;"><strong><span style="color: #ffffff;">&nbsp;Security Requirements</span></strong></td> <td style="background-color: #1f497d; text-align: center; vertical-align: middle;"><span style="color: #ffffff;"><strong>POA&amp;Ms</strong></span></td> <td style="background-color: #1f497d; text-align: center; vertical-align: middle;" colspan="2"><strong><span style="color: #ffffff;">Assessments and Affirmations</span></strong><br /> </td> </tr> <tr> <td style="background-color: #c6d9f0; text-align: left; vertical-align: middle;">&nbsp; &nbsp; &nbsp; &nbsp;1</td> <td style="background-color: #c6d9f0; text-align: left; vertical-align: middle;">&nbsp;FAR 52.204-21</td> <td style="background-color: #c6d9f0; text-align: left; vertical-align: middle;"><span>Not permitted</span></td> <td style="background-color: #c6d9f0; text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>Self-Assessment</li> <li>Contractor enters assessment information into the SPRS</li> <li>Affirmation required annually</li> </ul> </td> </tr> <tr> <td style="text-align: left; vertical-align: middle;" rowspan="3"> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp; &nbsp; &nbsp; &nbsp;2</p> <p> &nbsp;<br /> <br /> </p> </td> <td style="text-align: left; vertical-align: middle;" rowspan="3">&nbsp;NIST SP 800-171</td> <td style="text-align: left; vertical-align: middle;" rowspan="3">Allowed for certain controls; must be closed out in 180 days<br /> </td> <td style="text-align: center;" colspan="2">&nbsp;<em>Assessment type determined at contract level</em></td> </tr> <tr> <td style="text-align: left; vertical-align: middle;"><em>&nbsp;Self-Assessment</em></td> <td style="text-align: left; vertical-align: middle;"> <ul> <li>Valid for three years</li> <li>Contractor enters assessment information into the SPRS</li> <li>Affirmation required after each assessment, POA&amp;M closeout, and annually thereafter</li> </ul> </td> </tr> <tr> <td style="text-align: left; vertical-align: middle;"><em>Certification Assessment</em></td> <td style="text-align: left; vertical-align: middle;"> <ul> <li>Valid for up to three years</li> <li>C3PAO enters assessment information into eMASS, which transmits assessment results into the SPRS</li> <li>Affirmation required after each assessment, POA&amp;M closeout, and annually thereafter</li> </ul> </td> </tr> <tr> <td style="background-color: #c6d9f0; text-align: left; vertical-align: middle;">&nbsp; &nbsp; &nbsp; &nbsp;3</td> <td style="background-color: #c6d9f0; text-align: left; vertical-align: middle;">CMMC Level 2 + 24 requirements from NIST SP 800-172</td> <td style="background-color: #c6d9f0; text-align: left; vertical-align: middle;">Allowed for certain controls; must be closed out in 180 days</td> <td style="background-color: #c6d9f0; text-align: left; vertical-align: middle;" colspan="2"> <ul> <li>DoD assessment and certification</li> <li>Valid up to three years</li> <li>DoD enters assessment information into eMASS, which transmits assessment results into the SPRS</li> <li>Affirmation required after each assessment, POA&amp;M closeout, and annually thereafter</li> </ul> </td> </tr> </tbody> </table> <br /> <h4>1. CMMC Level 1 (FCI and FAR 52.204-21; 32 C.F.R. &sect; 170.15)</h4> <p>CMMC Level 1 is largely coextensive with FAR 52.204-21. Defense contractors that use non-federal information systems to store, process, or transmit FCI must implement the 15 security requirements in that clause. Unlike FAR 52.204-21, however, defense contractors will be required to formally self-assess their compliance with FAR 52.204-21, report Self-Assessment information in the SPRS, and &ldquo;annually affirm continuing compliance&rdquo; in the SPRS.</p> <h4>2. CMMC Level 2 (CUI and DFARS 252.204-7012; 32 C.F.R. &sect; 170.16)</h4> <p>CMMC Level 2 generally aligns with the security provisions in DFARS 252.204-7012 (i.e., covered contractor information systems must comply with NIST SP 800-171), with important differences:</p> <ul> <li><strong>Limitations on POA&amp;Ms</strong>: POA&amp;Ms would be limited to specific security controls and must &ldquo;be closed out within 180 days of the assessment.&rdquo;</li> <li><strong>Assessments</strong>: The proposed rule contemplates two types of assessments: Self-Assessments performed by the contractor and CMMC Level 2 Certification Assessments performed by CMMC Third-Party Assessment Organizations (C3PAOs). Each contract will specify the type of assessment required. Self-Assessments are valid for three years, and defense contractors must enter assessment information into the SPRS.[[N: The proposed rule suggests DoD will allow CMMC Level 2 Self-Assessments in Phases 2, 3, and 4, but it is arguably ambiguous. DoD may clarify this issue in the final rule.]] CMMC Level 2 Certifications are valid for up to three years, and C3PAOs enter assessment information into the CMMC Enterprise Mission Assurance Support Service (eMASS), which automatically transmits assessment information to the SPRS. Defense contractors with High confidence assessments under DFARS 252.204-7020 will be a step ahead, as DoD intends to allow contractors to rely upon those assessments for CMMC Level 2.</li> <li><strong>Affirmation</strong>: Contractors must affirm compliance in the SPRS following each assessment, POA&amp;M closeout, and annually.</li> </ul> <h4>3. CMMC Level 3 (CMMC Level 2, Plus Certain NIST SP 800-172 Controls; 32 C.F.R. &sect; 170.17)</h4> <p>CMMC Level 3 builds upon CMMC Level 2. In addition to meeting CMMC Level 2, contractors must implement specific requirements from NIST SP 800-172.</p> <ul> <li><strong>Limitations on POA&amp;Ms</strong>: POA&amp;Ms will be limited to specific security controls and must be closed out within 180 days of the assessment.</li> <li><strong>Assessments</strong>: Defense contractors leverage CMMC Level 2 certifications, and DoD (through the Defense Contract Management Agency (DCMA), Defense Industrial Base Cybersecurity Assessment Center (DIBCAC)), assesses compliance with the additional NIST SP 800-172 requirements. CMMC Level 3 assessments are valid for up to three years, and the DoD assessor enters assessment information into eMASS, which transmits that information to the SPRS.</li> <li><strong>Affirmation</strong>: Contractors must affirm compliance in the SPRS following each assessment, POA&amp;M closeout, and annually.</li> </ul> <h3>C. Assessments and Affirmations</h3> <p>Assessments will be based on the CMMC Scoring Methodology,[[N:<em> Id.</em> at 89136 (32 C.F.R. &sect; 170.24).]] which bears similarities to the NIST SP 800-171 DoD Assessment Methodologies. For each security control, the contractor will receive a finding of &ldquo;MET,&rdquo; &ldquo;NOT MET,&rdquo; or &ldquo;NOT APPLICABLE.&rdquo; Currently, DFARS 252.204-7012 vests the DoD CIO (or an authorized representative of the DoD CIO) with authority to adjudicate variances from NIST SP 800-171, including determining whether specific controls are nonapplicable or authorizing an alternative security measure.[[N: DFARS 252.204-7012(b)(2)(ii)(B) (&ldquo;The Contractor shall submit requests to vary from NIST SP 800-171 in writing to the Contracting Officer, for consideration by the DoD CIO. The Contractor need not implement any security requirement adjudicated by an authorized representative of the DoD CIO to be nonapplicable or to have an alternative, but equally effective, security measure that may be implemented in its place.&rdquo;).]] It is not clear whether DoD intends to maintain this process before a defense contractor or whether a C3PAO can declare a security control &ldquo;NOT APPLICABLE&rdquo; under the CMMC Scoring Methodology.</p> <p>Affirmations are required at the intervals explained above, must be submitted in SPRS by a senior official of the contractor, and must include that official&rsquo;s name, title, and contact information and the affirmation statement provided in the regulations.[[N: <em>Id. </em>at 89136 (32 C.F.R. &sect; 170.22(a)(2)(ii)).]] The official must be the senior official responsible for ensuring compliance with CMMC.</p> <h3>D. Cloud Products and Services</h3> <p>Cloud products and services will be subject to CMMC and must meet the FedRAMP Moderate Baseline security requirements to achieve CMMC Level 2. CSP offerings are considered CMMC Level 2-compliant if they are FedRAMP Authorized at the FedRAMP Moderate baseline or, alternatively, meet the FedRAMP Moderate baseline, as documented in the CSP&rsquo;s SSP and a Customer Responsibility Matrix (CRM). On-premises cloud offerings must have a SSP and CRM and be assessed as part of CMMC assessments.[[N: <em>Id. </em>at 89130-31 (32 C.F.R.&sect; 170.16).]]</p> <h3>E. Subcontractors</h3> <p>The proposed rule would require subcontractors throughout the supply chain to comply with CMMC.[[N: <em>Id.</em> (32 C.F.R. &sect; 170.23(a)).]] Prime contractors and higher-tier subcontractors must &ldquo;require subcontractor compliance,&rdquo; but the proposed rule would not require prime contractors or higher-tier subcontractors to monitor subcontractor compliance. The CMMC Level that will apply to a subcontractor is the CMMC Level that aligns with the type of information the subcontractor will store, process, or transmit, which may be different from the CMMC Level that applies to the prime contractor or a higher-tier subcontractor. For instance, a prime contractor with CUI would need to meet CMMC Level 2 requirements, but a subcontractor with only FCI would only need to achieve CMMC Level 1.</p> <a name="IV. Takeaways"></a> <h3>F. Waivers</h3> <p>The proposed rule would permit DoD &ldquo;Program Managers to seek approval to waive inclusion of CMMC requirements in solicitations that involve disclosure or creation of FCI or CUI as part of the contract effort.&rdquo;[[N: <em>Id.</em> at 891119 (32 C.F.R. &sect; 170.3(c)(2).]] The proposed rule lacks details on the waiver process.</p> <h2>IV. Takeaways</h2> <ul> <li><strong>Start Preparing Now</strong>:<strong> </strong>Defense contractors should promptly develop or improve SSPs for covered contractor information systems and address and close open items in POA&amp;Ms. Under the new regime, DoD will require accurate CMMC Level assessments as a condition of award and prior to DoD exercising option periods. The proposed rule would limit contractor flexibility to implement applicable security controls, including limiting POA&amp;Ms to specific NIST SP 800-171 (CMMC Level 2) and NIST SP 800-172 (CMMC Level 3) controls and requiring those POA&amp;Ms to be closed out within 180 days. Although this is a proposed rule, we do not expect material changes to the basic elements of CMMC. Defense contractors that delay these efforts might find themselves ineligible for contract awards and extensions or the target of investigations and enforcement actions, including under the False Claims Act (FCA).[[N: The Department of Justice in October 2021 announced its Civil Cyber-Fraud Initiative, which uses the False Claims Act to pursue cybersecurity related fraud by government contractors and grant recipients.]]</li> <li><strong>Open Questions Regarding Task and Delivery Orders</strong>: The proposed rule is not clear about how CMMC will apply to contract vehicles (e.g., IDIQ contracts) and task and delivery orders. Will DoD require assessments at the contract vehicle level (e.g., prior to award of an IDIQ contract)? If so, how will DoD determine which CMMC Level applies, since no work is performed and no information is exchanged prior to DoD issuing an order? Could DoD require CMMC Level 1 Self-Assessments at the IDIQ level and require compliance with CMMC Levels 2 and 3 depending on the nature of an order? We expect DoD to clarify this issue in the final rule or in revisions to DFARS 252.204-7021.</li> <li><strong>Consider Scoping the Information Technology Environment</strong>: The proposed rule places the burden on the contractor of properly defining the information technology (IT) environment subject to CMMC assessments. This could prove to be a challenging process for contractors with dispersed information systems and may require changes to the IT environment. Consider an enterprise-wide approach or, alternatively, a segregated and dedicated environment for federal (or DoD) contracts. This could ease the scoping process and limit the risk of FCI or CUI spillage onto other systems.</li> <li><strong>NIST SP 800-171 Revision 3</strong>: In May 2023, NIST released an initial public draft of Revision 3 to NIST SP 800-171. (We discussed that draft in a <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/05/nist-issues-proposed-revision">prior Advisory</a>.) On November 9, 2023, NIST issued a final public draft of that revision. Revision 3, if issued, could create a conflict between CMMC and DFARS 252.204-7012. The proposed CMMC rule would require compliance with NIST SP 800-171 Rev 2 for CMMC Level 2. DFARS 252.204-7012, however, requires defense contractors to comply with the version of NIST SP 800-171 &ldquo;in effect at the time the solicitation is issued or as authorized by the Contracting Officer.&rdquo;[[N: DFARS 252.204-7012(b)(2)(i).]] Perhaps DoD anticipates relying on Revision 2 on an ongoing basis under the &ldquo;as authorized by the Contracting Officer&rdquo; provision, but we expect DoD to clarify this issue in any revisions to DFARS clauses.</li> <li><strong>Consider Involving Legal Counsel and a Third-Party Cybersecurity Consultant in Assessments</strong>: Defense contractors should involve legal counsel with proficiency in these cybersecurity requirements, including when conducting Self-Assessments and in connection with internal assessments prior to undergoing a Certification Assessment. Given the potentially significant consequences resulting from noncompliance, including CMMC PMO, DoD Office of Inspector General, and Department of Justice investigations and associated liability, involving legal counsel from the outset can support a contractor's efforts to achieve compliance and undertake any necessary remediation.</li> <li><strong>Consider Submitting Comments</strong>: As noted above, DoD will likely revise various DFARS provisions through an interim rule, leveraging any comments that it receives on the substance of the pending CMMC proposed rule. Thus, defense contractors should consider submitting comments either independently or through an industry group by the February 26, 2024 deadline.</li> </ul> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p> <style type="text/css" id="telerik-reTable-1"> .telerik-reTable-1 { border-width: 0px; border-style: none; border-collapse: collapse; font-family: Tahoma; } .telerik-reTable-1 tr.telerik-reTableHeaderRow-1 { margin: 10px; padding: 10px; color: #3F4D6B; background: #D6E8FF; text-align: left; font-size: 10pt; font-style: normal; font-family: Tahoma; text-transform: capitalize; font-weight: bold; border-spacing: 10px; line-height: 14pt; vertical-align: top; } .telerik-reTable-1 td.telerik-reTableHeaderFirstCol-1 { padding: 0in 5.4pt 0in 5.4pt; color: #3a4663; line-height: 14pt; } .telerik-reTable-1 td.telerik-reTableHeaderLastCol-1 { padding: 0in 5.4pt 0in 5.4pt; color: #3a4663; line-height: 14pt; } .telerik-reTable-1 td.telerik-reTableHeaderOddCol-1 { padding: 0in 5.4pt 0in 5.4pt; color: #3a4663; line-height: 14pt; } .telerik-reTable-1 td.telerik-reTableHeaderEvenCol-1 { padding: 0in 5.4pt 0in 5.4pt; color: #3a4663; line-height: 14pt; } .telerik-reTable-1 tr.telerik-reTableOddRow-1 { color: #666666; background-color: #F2F3F4; font-size: 10pt; vertical-align: top; } .telerik-reTable-1 tr.telerik-reTableEvenRow-1 { color: #666666; background-color: #E7EBF7; font-size: 10pt; vertical-align: top; } .telerik-reTable-1 td.telerik-reTableFirstCol-1 { padding: 0in 5.4pt 0in 5.4pt; } .telerik-reTable-1 td.telerik-reTableLastCol-1 { padding: 0in 5.4pt 0in 5.4pt; } .telerik-reTable-1 td.telerik-reTableOddCol-1 { padding: 0in 5.4pt 0in 5.4pt; } .telerik-reTable-1 td.telerik-reTableEvenCol-1 { padding: 0in 5.4pt 0in 5.4pt; } .telerik-reTable-1 tr.telerik-reTableFooterRow-1 { background-color: #D6E8FF; color: #4A5A80; font-weight: 500; font-size: 10pt; font-family: Tahoma; line-height: 11pt; } .telerik-reTable-1 td.telerik-reTableFooterFirstCol-1 { padding: 0in 5.4pt 0in 5.4pt; border-top: solid gray 1.0pt; text-align: left; } .telerik-reTable-1 td.telerik-reTableFooterLastCol-1 { padding: 0in 5.4pt 0in 5.4pt; border-top: solid gray 1.0pt; text-align: left; } .telerik-reTable-1 td.telerik-reTableFooterOddCol-1 { padding: 0in 5.4pt 0in 5.4pt; text-align: left; border-top: solid gray 1.0pt; } .telerik-reTable-1 td.telerik-reTableFooterEvenCol-1 { padding: 0in 5.4pt 0in 5.4pt; text-align: left; border-top: solid gray 1.0pt; } </style>{9583753F-BA5D-47E3-B91D-D055311C0B3E}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/new-doi-nrda-rule-issued-todayLauren Danielhttps://www.arnoldporter.com/en/people/d/daniel-laurenlauren.daniel@arnoldporter.comBrian D. Israelhttps://www.arnoldporter.com/en/people/i/israel-brian-dbrian.israel@arnoldporter.comNew DOI NRDA Rule Issued TodayToday, the U.S. Department of the Interior (DOI) Office of Restoration and Damage Assessment issued a notice of proposed rulemaking to revise its existing natural resource damage assessment (NRDA) regulations to provide simplified NRDA procedures at certain contaminated sites.Fri, 05 Jan 2024 00:00:00 -0600<p>Today, the U.S. Department of the Interior (DOI) Office of Restoration and Damage Assessment issued a <a rel="noopener noreferrer" href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.federalregister.gov%2Fdocuments%2F2024%2F01%2F05%2F2024-00005%2Fnatural-resource-damages-for-hazardous-substances&amp;data=05%7C02%7CTheresa.Denson%40arnoldporter.com%7C34459ee5bc214caece5608dc0e5290a6%7Cd22d141fae37447facfa2e1d0e5b4969%7C0%7C0%7C638400994967913369%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=nhMtnesxI2jCbuZSVygHczI%2Ft50yGG9W%2BmGlDfbNe5o%3D&amp;reserved=0" target="_blank">notice of proposed rulemaking</a> to revise its existing natural resource damage assessment (NRDA) regulations to provide simplified NRDA procedures at certain contaminated sites. While DOI&rsquo;s existing NRDA regulations do provide simplified NRDA procedures (called the Type A Rule), these are currently available in extremely limited circumstances and have, as a matter of practice, rarely been used. The new Type A Rule would greatly expand the circumstances in which simplified procedures are available to include significantly more contaminated sites. In addition, the new Type A Rule modernizes the approach to simplified assessment to adopt procedures advocated by industry that regulators have found to result in fair and efficient resolution of natural resource damage (NRD) cases. </p> <h2>To which contaminated sites will the new procedures apply?</h2> <p>First, it is important to note that the DOI rules apply only to NRD claims proceeding under the Comprehensive Environmental Liability and Compensation Act (CERCLA) and the Clean Water Act. NRD claims arising under the Oil Pollution Act are governed by separate regulation promulgated by the National Oceanic and Atmospheric Association and are not impacted by the proposed change. Pursuant to the proposed rule, Type A procedures will be available at CERCLA contaminated sites where either:</p> <ul> <li>The NRD claim value is expected to be less than US$3 million (excluding reasonable assessment costs).</li> <li>The NRD claim relates to a relatively discrete event like a spill (contrasted from historic contamination released over long periods of time), there are a small number of potentially responsible parties, and the NRD claim value is expected to be less than US$5 million.</li> </ul> <p>The rule also requires that at least one potentially responsible party (PRP) at the site voluntarily agree to use the Type A procedures and that the U.S. obtain from the PRPs an agreement to toll all NRD claims for at least one year. </p> <h2>What do the new procedures entail? </h2> <p>The new procedures provide significant flexibility to allow Trustees and PRPs to rely upon models that are already widely used in NRD assessments (for example, habitat equivalency analysis or &ldquo;HEA&rdquo; and recreational equivalency analysis or &ldquo;REA&rdquo; models) to achieve faster settlement with responsible parties. The proposed rule provides specificity as to what types of documentation must be included in the administrative record to support conclusions in a &ldquo;Type A Report,&rdquo; and issuance of the &ldquo;Type A Report&rdquo; will trigger public notice and comment procedures, but the technical approaches to applying NRDA models are largely left to the discretion of the Trustees. </p> <p>While this approach could be viewed as increasing agency discretion to assess NRD values, it also imposes important controls, including that a PRP must consent to the use of Type A procedures. Thus, the technical flexibility provided by the rule is aimed more at providing Trustees and PRPs with an efficient path to settlement that will ensure access to all available legal protection (if legally challenged, a NRDA that complies with regulation &mdash; Type A or the much more arduous Type B &mdash; is entitled to a rebuttable presumption of accuracy in its assessment of damages). </p> <h2>Will the new rule improve the likelihood of efficiently resolving NRD matters?</h2> <p>The idea of revising the Type A procedures to facilitate faster and more efficient NRDA settlements was first proposed in an article we published in 2018 (Standardizing NRD assessments, ABA Trends, Vol. 49 No. 6). In that article, we argued that DOI should, &ldquo;modify the Type A NRD regulations to include equivalency models and PRP cooperation.&rdquo; We further argued that, &ldquo;if the Trustees include both elements, they will enjoy the statutory rebuttable presumption, the PRPs will resolve their liabilities faster, transaction costs will be nearly eliminated, and environmental restoration will occur years, or decades, sooner.&rdquo; Today&rsquo;s proposed rule revision largely tracks these recommendations. We are continuing to evaluate the details of DOI&rsquo;s proposed rule and anticipate filing a comment letter. Comments are due Tuesday, March 5.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{B59B17B1-25EE-4151-9AEF-A461E3B43035}https://www.chasecambria.com/site/journal/article.php?id=1648Whether a Person or Entity Qualifies as a ‘Foreign Representative’ in a Chapter 15 Case is a Matter of US Law, not Foreign LawFri, 05 Jan 2024 00:00:00 -0600{2B235F50-5E54-477C-8162-A00C9720DC84}https://www.arnoldporter.com/en/perspectives/advisories/2024/01/fincens-final-access-ruleRichard M. Alexanderhttps://www.arnoldporter.com/en/people/a/alexander-richard-mrichard.alexander@arnoldporter.comMarcus A. Asnerhttps://www.arnoldporter.com/en/people/a/asner-marcus-amarcus.asner@arnoldporter.comJames W. Cooperhttps://www.arnoldporter.com/en/people/c/cooper-james-wJames.W.Cooper@arnoldporter.comDavid F. Freeman, Jr.https://www.arnoldporter.com/en/people/f/freeman-david-fDavid.Freeman@arnoldporter.comMichael A. Mancusihttps://www.arnoldporter.com/en/people/m/mancusi-michael-amichael.mancusi@arnoldporter.comKevin M. Toomeyhttps://www.arnoldporter.com/en/people/t/toomey-kevin-mkevin.toomey@arnoldporter.comChristopher L. Allenhttps://www.arnoldporter.com/en/people/a/allen-christopher-lChristopher.Allen@arnoldporter.comErik Walshhttps://www.arnoldporter.com/en/people/w/walsh-erikerik.walsh@arnoldporter.comMichael Treveshttps://www.arnoldporter.com/en/people/t/treves-michaelmichael.treves@arnoldporter.comWhat Financial Institutions Should Know About FinCEN’s Final “Access Rule” <span>On December 21, 2023, the Financial Crimes Enforcement Network (FinCEN) finalized its long-anticipated Access Rule, the second of its three major rulemakings to implement the Corporate Transparency Act (CTA).</span>Wed, 03 Jan 2024 00:00:00 -0600<p>On December 21, 2023, the Financial Crimes Enforcement Network (FinCEN) finalized its long-anticipated <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2023/12/22/2023-27973/beneficial-ownership-information-access-and-safeguards" target="_blank">Access Rule</a>, the second of its three major rulemakings to implement the Corporate Transparency Act (CTA).[[N: The other two key rulemakings are (1) the BOI Reporting Rule, issued on September 22, 2022, which requires certain entities to report their BOI to FinCEN (see our <a href="https://www.arnoldporter.com/en/perspectives/topics/corporate-transparency-act">BOI Reporting Resource Page</a>) and (2) a revised version of FinCEN&rsquo;s 2016 Customer Due Diligence Rule (2016 CDD Rule) that, among other things, will account for financial institutions&rsquo; access to BOI reported to FinCEN. The CTA requires FinCEN to revise the 2016 CDD Rule by January 1, 2025.]] The Access Rule prescribes the circumstances under which beneficial ownership information (BOI) reported to FinCEN may be disclosed to authorized recipients, and how recipients must safeguard the BOI. The Access Rule takes effect on February 20; however, FinCEN will stage access to its BOI database, with financial institutions (and financial institution supervisors) being the last category of users to receive access.[[N: According to FinCEN, financial institutions&rsquo; access to its BOI database will roughly coincide with the implementation of the revised 2016 CDD Rule. FinCEN anticipates providing information on the timing and details regarding the staged access approach in early 2024.]]</p> <h2>Key Access Rule Provisions</h2> <p> The final Access Rule largely adopts the proposed rule (summarized in our <a href="https://www.arnoldporter.com/en/perspectives/advisories/2022/12/fincens-notice-of-proposed-rulemaking-on-who-can">prior Advisory</a>) as-is, with several modifications intended to align with fundamental CTA objectives, including safeguarding reported BOI, ensuring the reporting system will be &ldquo;highly useful&rdquo; in combatting the abuse of shell and front companies, and facilitating financial institutions&rsquo; compliance with their Bank Secrecy Act (BSA), anti-money laundering (AML), countering the financing of terrorism (CFT), and customer due diligence (CDD) legal requirements. <br /> <br /> Key provisions of the Access Rule for financial institutions include:</p> <ul> <li><strong>Scope/Qualified Financial Institution Recipients</strong>: FinCEN may provide BOI database access to &ldquo;covered financial institutions&rdquo; as defined in the 2016 CDD Rule, i.e., banks, including credit unions; broker dealers; futures commission merchants and introducing brokers in Commodity Futures Trading Commission-registered commodities; and mutual funds subject to 31 C.F.R. &sect; 1020.320. In a modification to the proposed rule, FinCEN has determined that, under the CTA, it also has discretion to provide access to other financial institutions with AML program requirements, such as money service businesses; insurance companies; casinos; and dealers in precious metals, precious stones, or jewels. Initially, however, FinCEN will provide access only to the defined &ldquo;covered financial institutions&rdquo; while it further evaluates whether it is appropriate and feasible to expand access to such other entities.</li> <li><strong>Purpose of Financial Institution&rsquo;s Request for BOI</strong>: Under the proposed rule, a financial institution would have been permitted access to FinCEN&rsquo;s BOI database only for use in complying with its obligations under the 2016 CDD Rule, i.e., identifying and verifying the beneficial owners of certain legal entity customers at account opening. The final Access Rule expands the permissible use of BOI obtained from FinCEN to include &ldquo;any legal requirement or prohibition designed to counter money laundering or the financing of terrorism, or to safeguard the national security of the United States,&rdquo; if, to comply with such obligations, it is reasonably necessary to obtain or verify BOI of a legal entity customer. This means that financial institutions can use BOI obtained from FinCEN &ldquo;to help discharge its AML/CFT obligations under the BSA, including its AML program, customer identification, SAR filing, and enhanced due diligence requirements.&rdquo; <br /> <br /> Financial institutions are <em><strong>not</strong></em> permitted to use BOI for other reasons. For example, FinCEN stated that BOI cannot be used for ordinary business reasons, such as assessing whether to extend credit to a legal entity or for client development purposes.</li> </ul> <ul> <li><strong>Obtaining Customer Consent</strong>: The CTA authorizes FinCEN to disclose a reporting company&rsquo;s BOI to a financial institution only if the reporting company consents to the disclosure. The final Access Rule removes a proposed requirement that consent be in writing, and only requires that consent be documented. Financial institutions are not required to notify a reporting company each time it obtains the reporting company&rsquo;s BOI from FinCEN, nor are financial institutions required to submit proof of consent to FinCEN. The Access Rule only requires that a financial institution obtain a reporting company&rsquo;s consent prior to its initial request to FinCEN for the reporting company&rsquo;s BOI; the financial institution may rely on that consent for subsequent requests, including when opening additional accounts for that reporting company, unless consent is revoked.</li> <li><strong>Securing BOI Obtained From FinCEN</strong>: Although the specific requirements vary based on the category of authorized recipient, the Access Rule generally requires that recipients establish a secure system for storing BOI, restrict access to BOI to only authorized personnel and only for authorized purposes, maintain auditable BOI request records, conduct audits, and provide FinCEN with reports and certifications. The Access Rule provides that a financial institution may satisfy its obligations under the rule by applying to BOI obtained from FinCEN the same security and information handling procedures used to comply with section 501 of the Gramm-Leach-Bliley Act and its implementing regulations.</li> <li><strong>Third-Party Access</strong>: A financial institution may rely on a third-party service provider or contractor to request, obtain, or access BOI from FinCEN. The financial institution will ultimately be responsible for the activity of any provider accessing BOI on its behalf. Service providers are not permitted to repurpose BOI for their own use, such as in data aggregation or on behalf of other financial institution clients.</li> <li><strong>Re-Disclosure of BOI</strong>: As a general matter, financial institutions may not re-disclose BOI they receive from FinCEN. Financial institution personnel may, however, re-disclose BOI obtained from FinCEN to other personnel or third-party service providers of the same financial institution so long as the re-disclosure is for the particular purpose or activity for which the BOI was requested, is consistent with the security and confidentiality requirements of the Access Rule, and is not sent to Russia, China, any jurisdiction designated as a state sponsor of terrorism, or any jurisdiction that is subject to comprehensive sanctions under U.S. law. (This is a notable modification from the proposed rule, which authorized internal re-disclosure only to personnel and service providers located in the U.S.) The authorization to re-disclose BOI to personnel of the &ldquo;same financial institution&rdquo; does not include affiliated financial institutions. FinCEN has indicated that it may consider future guidance on the re-disclosure of BOI in other situations, for example, sharing BOI obtained from FinCEN in response to another financial institution&rsquo;s 314(b) request or sharing BOI with other financial institutions in a syndicated loan arrangement. In the meantime, financial institutions seeking to re-disclose BOI in such circumstances should request written authorization from FinCEN, which will evaluate requests on a case-by-case basis. <br /> <br /> Financial institutions also may re-disclose BOI received from FinCEN to federal functional regulators, specified Self-Regulatory Organizations (SROs), and other appropriate regulatory agencies (including state regulators) that: (1) are authorized by law to determine the financial institution&rsquo;s compliance with CDD requirements under applicable law; (2) will use the information solely for making such determination; and (3) have entered into an agreement with FinCEN providing for appropriate protocols governing the safekeeping of information.</li> </ul> <ul> <li><strong>Violations for Unauthorized Disclosure</strong>: The Access Rule tracks the CTA&rsquo;s language making it unlawful for individuals to knowingly disclose or knowingly use BOI &mdash; regardless of whether the BOI was obtained directly or indirectly from FinCEN &mdash; except as authorized by the CTA and the Access Rule. Violations may result in civil penalties of $500 each day a violation continues or is not remedied, or criminal penalties of up to a $250,000 fine or up to five years imprisonment, or both. Criminal penalties may be enhanced up to $500,000, 10 years imprisonment, or both, if a person commits the violation while violating another U.S. law or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period.</li> </ul> <h2>Practical Considerations for Financial Institutions</h2> <p> In an interagency <a rel="noopener noreferrer" href="https://www.fincen.gov/sites/default/files/shared/Interagency_Statement_for_Banks_On_the_Issuance_of_the_Access_Rule_12.15.2023.v2.pdf" target="_blank">statement to banks</a> issued the same day as the Access Rule, FinCEN and the banking agencies clarified that the Access Rule does not create a regulatory requirement or supervisory expectation that banks obtain BOI from FinCEN, and therefore the Access Rule does not necessitate changes to banks&rsquo; existing BSA/AML compliance programs designed to comply with the 2016 CDD Rule or other BSA requirements, such as customer identification program and suspicious activity reporting requirements.[[N: FinCEN and Treasury issued a <a rel="noopener noreferrer" href="https://www.fincen.gov/sites/default/files/shared/Statement_for_Non_Bank_Financial_Institutions_Issuance_of_the_Access_Rule_12.15.2023.v3.pdf" target="_blank">similar statement to non-bank financial institutions</a> the same day.]]<br /> <br /> The interagency statement reiterated, however, that the access and use of BOI obtained from FinCEN must comply with the requirements of the CTA and the Access Rule. Financial institutions, therefore, might consider the following in advance of their ability to access FinCEN&rsquo;s BOI database:</p> <ul> <li>Developing and implementing policies and procedures for obtaining and recording legal entity customer consent to access their BOI from FinCEN. While FinCEN is giving financial institutions &ldquo;substantial discretion&rdquo; in the manner in which they obtain customer consent, FinCEN is requiring that such consent be documented. Financial institutions should update their onboarding forms and customer files accordingly.</li> <li>Developing and implementing policies that govern (1) a limited number of individuals within the institution who will be authorized to directly request BOI from FinCEN; (2) the individuals authorized to receive &ldquo;re-disclosed&rdquo; BOI (consider limiting the list on a &ldquo;need to know&rdquo; basis); and (3) the permissible reasons to request BOI from FinCEN and to re-disclose such BOI to colleagues or service providers.</li> <li>Assessing current and future service contracts to ensure that third-party providers will comply with all requirements for accessing, using, and safeguarding BOI in accordance with the CTA and Access Rule.</li> <li>Establishing an Access Rule training program. The Access Rule requires financial institutions to train its employees who will access FinCEN&rsquo;s BOI database on the institution&rsquo;s BOI access, use, and security protocols. Such personnel also are required to complete FinCEN-provided online training.</li> </ul> <p style="text-align: center;"> * * *</p> <p>On February 8, from noon to 2:15 p.m. EST, please join Arnold &amp; Porter for our annual discussion of regulatory and enforcement trends in the year ahead for AML and sanctions, drawing on insight and experiences from attorneys in our Financial Services, White Collar Defense &amp; Investigations, Anti-Corruption, Securities &amp; Enforcement, and Litigation practices. Discussion topics will include regulatory compliance challenges in 2024, AML Act implementation, trends and predictions in global enforcement and investigations, changes in the sanctions landscape, and much more. <a rel="noopener noreferrer" href="https://comms.arnoldporter.com/6/5249/landing-pages/accept--blank-.asp" target="_blank">Register for the webinar here</a>.</p> <p>For additional information on BSA/AML reform, including FinCEN efforts under the AML Act, please visit Arnold &amp; Porter&rsquo;s <a href="https://www.arnoldporter.com/en/perspectives/topics/bsa-aml-reform-resource-center">BSA/AML Reform</a> and <a href="https://www.arnoldporter.com/en/perspectives/topics/corporate-transparency-act">Beneficial Ownership Information Reporting</a> Resource Centers. Financial institutions with questions about the final rule may contact any of the authors or their usual Arnold &amp; Porter contact. The firm&rsquo;s Financial Services team would be pleased to assist with any questions about BOI reporting or BSA/AML compliance and enforcement more broadly. </p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{D19BEE38-CB8B-4793-95D0-67FEC74D5601}https://www.arnoldporter.com/en/perspectives/media-mentions/2024/01/epley-shares-thoughts-on-us-house-financial-services-raceEpley Shares Thoughts on U.S. House Financial Services RaceLegislative &amp; Public Policy partner Mark Epley was quoted in the recent <em>CQ Roll Call</em> article, &ldquo;Luetkemeyer, Hill favorites for top Financial Services Republican,&rdquo; which discusses the race to replace Patrick McHenry, former speaker pro tempore for the U.S. House of Representatives.&nbsp;Tue, 02 Jan 2024 00:00:00 -0600<p>Legislative &amp; Public Policy partner Mark Epley was quoted in the recent <em>CQ Roll Call </em>article, &ldquo;Luetkemeyer, Hill favorites for top Financial Services Republican,&rdquo; which discusses the race to replace Patrick McHenry, former speaker <em>pro tempore</em> for the U.S. House of Representatives. McHenry recently announced his retirement from Congress as the top Republican on the House Financial Services Committee. </p> <p>Reps. Blaine Luetkemeyer (R-Mo.) and French Hill (R-Ark.) are early front-runners in the race. &ldquo;What&rsquo;s interesting about this race is you&rsquo;ve got actually a lot of really strong horses,&rdquo; Epley told <em>CQ Roll Call</em>, adding that Reps. Bill Huizenga (R-Mich.) and Andy Barr (R-Ky.) could also be in the running. Epley said that Hill and Luetkemeyer could have an advantage over the other candidates, because they both sit on the House Steering Committee and are strong on policy. Despite being a strong negotiator and consensus builder, however, Epley said that Hill&rsquo;s relationship with former House speaker Kevin McCarthy could work against him.</p> <p>Epley emphasized that seniority, fundraising and regional balance, and relationships with other members, especially the House Steering Committee, were all qualities the Republican conference considers when electing panel leadership. &ldquo;One other factor is sort of all-around athlete kind of thing. This is going to vary from member to member. What is their sort of athletic superpower,&rdquo; Epley added. &ldquo;Are they particularly strong communicators? Particularly strong policy people? Are they really, really strong fundraisers, party-builders, those kinds of things.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://www.charlotteobserver.com/news/politics-government/national-politics/article282972723.html" target="_blank">Read the full article.</a></p>{69369010-21E4-43CE-9A92-9C4476453728}https://www.arnoldporter.com/en/perspectives/advisories/2023/12/california-regulating-admt-using-personal-informationNancy L. Perkinshttps://www.arnoldporter.com/en/people/p/perkins-nancy-lnancy.perkins@arnoldporter.comAlex Altmanhttps://www.arnoldporter.com/en/people/a/altman-alexanderalexander.altman@arnoldporter.comJason T. Raylesberghttps://www.arnoldporter.com/en/people/r/raylesberg-jason-tjason.raylesberg@arnoldporter.comCalifornia Edges Closer to Regulating Automated Decision-Making Technology Using Personal Information<p>The board of the California Privacy Protection Agency (the Agency) recently met to discuss the Agency&rsquo;s <a rel="noopener noreferrer" href="https://cppa.ca.gov/meetings/materials/20231208_item2_draft.pdf" target="_blank">draft regulations</a> on automated decision-making technology (ADMT), which will implement provisions of the California Privacy Rights Act amendments to the California Consumer Privacy Act (CCPA). The meeting marked an important step toward adoption of the regulations (Draft ADMT Rules); the next step is the formal rulemaking process, which is expected to commence in early 2024.</p>Tue, 02 Jan 2024 00:00:00 -0600<p>The board of the California Privacy Protection Agency (the Agency) recently met to discuss the Agency&rsquo;s <a rel="noopener noreferrer" href="https://cppa.ca.gov/meetings/materials/20231208_item2_draft.pdf" target="_blank">draft regulations</a> on automated decision-making technology (ADMT), which will implement provisions of the California Privacy Rights Act amendments to the California Consumer Privacy Act (CCPA). The meeting marked an important step toward adoption of the regulations (Draft ADMT Rules); the next step is the formal rulemaking process, which is expected to commence in early 2024. </p> <p>The ADMT regulations will place significant limitations on the use of personal information of California residents (Consumers) for automated decision-making by businesses subject to the CCPA (Businesses). &ldquo;Consumers&rdquo; in this context include not only individual customers of a Business, but also a Business&rsquo; employees, job applicants, and business-to-business contacts. As currently drafted, the rules would, in certain contexts (1) require Businesses to notify Consumers prior to applying ADMT to their personal information; (2) allow Consumers to opt out of certain uses of ADMT; and (3) allow Consumers to access information about the Business&rsquo; use of ADMT. Businesses that use or anticipate using personal information of California residents in ADMT should consider how they might be able to impact the details of the final CCPA ADMT regulations during the formal rulemaking process in the coming year.</p> <h2>Scope</h2> <p>The&nbsp;Draft ADMT Rules define ADMT as &ldquo;any system, software, or process &mdash; including one derived from machine learning &mdash; that processes personal information and uses computation as whole or part of a system to make or execute a decision or facilitate human decisionmaking.&rdquo; Under this definition, the CCPA regulations would have a markedly broader application than, for example, automated decision-making rules in the European Union, which apply solely to decisions made using automated processing without human intervention. In the Agency board&rsquo;s recent meeting, one board member raised concerns about the breadth of this definition, observing that it could encompass nearly any piece of software.</p> <p>ADMT under the Draft ADMT Rules encompasses, but is not limited to, &ldquo;profiling,&rdquo; which the CCPA defines as &ldquo;any form of automated processing of personal information to evaluate certain personal aspects relating to a natural person and in particular to analyze or predict aspects concerning that natural person&rsquo;s performance at work, economic situation, health, personal preferences, interests, reliability, behavior, location, or movements.&rdquo; As with the definition of ADMT, concerns were raised at the December 8 meeting about the breadth of activities that could be considered &ldquo;profiling&rdquo; under the Draft ADMT Rules.</p> <h2>Pre-Use Notice</h2> <p>As noted, the Draft ADMT Rules would require a Business to provide Consumers with specific notice <em>before</em> it uses their personal information in ADMTs under any of three circumstances when the Business uses ADMT to (1) make decisions producing &ldquo;legal or similarly significant effects&rdquo; on a Consumer; (2) profile a Consumer who is acting in their capacity as an employee, independent contractor, job applicant, or student; and (3) profile a Consumer in a publicly accessible place.</p> <p>The Draft ADMT Rules clarify that a decision producing &ldquo;legal or similarly significant effects&rdquo; is one &ldquo;that results in access to, or the provision or denial of, financial or lending services, housing, insurance, education enrollment or opportunity, criminal justice, employment or independent contracting opportunities or compensation, healthcare services, or essential goods and services.&rdquo; The pre-use notice would need to explain how the Business plans to use ADMT, how the Consumer may opt out of such uses, and how the Consumer may access additional information about the Business&rsquo; use of ADMT. Importantly, a Business would not need to include a description of opt-out rights if its use of ADMT falls entirely within one or more exemptions, as discussed further below.</p> <p>With respect to notifying employees, independent contractors, job applicants, and students of the use of ADMT for profiling, the Draft ADMT Rules explain that profiling in this context would include the use of &ldquo;keystroke loggers, productivity or attention monitors, video or audio recording or live-streaming, facial- or speech-recognition or -detection, automated emotion assessment, location trackers, speed trackers, and web-browsing, mobile-application, or social-media monitoring tools&rdquo; that would capture such individuals&rsquo; personal information. At the Agency&rsquo;s recent board meeting, one member raised concerns about considering all of these activities to be &ldquo;profiling,&rdquo; noting that this obligation could require prior notice of typical safety and productivity activities, such as monitoring transportation workers for alertness, and suggested that a &ldquo;reasonable expectation&rdquo; threshold apply to notice and opt-out requirements in the profiling context.</p> <p>Regarding profiling in a publicly accessible place, of which prior notice also would be required, the Draft ADMT rules provide that this would include, for example &ldquo;using wi-fi or Bluetooth tracking, radio frequency identification, drones, video or audio recording or live-streaming, facial- or speech-recognition or -detection, automated emotion assessment, geofencing, location trackers, or license-plate recognition.&rdquo; A &ldquo;publicly accessible place&rdquo; not only would mean public spaces such as parks or sidewalks, but also privately-owned locations such as shopping malls, movie theaters, stadiums, and hospitals.</p> <h2>Opt-Out Right</h2> <p>Under the Draft ADMT Rules, Businesses would be required to provide Consumers a mechanism to opt out of the Business&rsquo; use of ADMT in the same three situations where pre-use notice is required, along with one or more of three possible additional circumstances (presented for the Agency board&rsquo;s consideration) (1) where ADMT is used to profile Consumers for behavioral advertising (not limited to &ldquo;cross-context behavioral advertising,&rdquo; which is already subject to opt-out requirements); (2) where ADMT is used to profile a Consumer that the Business has actual knowledge is under the age of 16; and (3) where a Consumer&rsquo;s personal information is used to train ADMT. At the Agency board&rsquo;s recent meeting, the impact on employee data and an employee&rsquo;s right to opt out of the use of ADMT was a point of contention.</p> <p>Under these circumstances, Businesses generally would be required to provide Consumers with two or more methods to opt out of the use of ADMT, at least one of which must reflect how the Business generally interacts with Consumers (an online-only Business would be required to accept opt-out requests through an interactive form linked in its pre-use notice). Except where the opt-out request is for behavioral advertising, a Business would be permitted to require verification if it determines that Consumers would be negatively impacted by honoring fraudulent opt-out requests. If a Business believes a Consumer&rsquo;s request to opt out is fraudulent, it would be permitted to deny the request.</p> <p>The timing of a Consumer&rsquo;s opt-out request would impact whether a Business may begin processing the Consumer&rsquo;s data at all. If a Consumer submits an opt-out request before the Business has begun using their personal information for ADMT, the Business would not be allowed to begin processing that information using ADMT. If the Consumer did not opt out via the pre-use notice and the Business has already begun using their data for ADMT, the Business would be required to (1) stop processing the Consumer&rsquo;s personal information within 15 business days and not retain the Consumer&rsquo;s personal information and (2) communicate the Consumer&rsquo;s opt-out to relevant service providers and third parties to effectuate the opt-out. After a Consumer has opted out, a Business would be required to wait at least one year before asking that Consumer to consent to the use of ADMT again.</p> <p>A Business would be exempted from the opt-out requirement when its use of ADMT complies with Section 7002 of the CCPA regulations (Restrictions on the Collection and Use of Personal Information) and is necessary to achieve and is <em>solely</em> for (1) preventing and investigating security incidents; (2) resisting malicious, deceptive, fraudulent, or illegal actions; (3) protecting the life and physical safety of Consumers; or (4) providing the good or service specifically requested by the Consumer, provided that the Business has no reasonable alternative means of providing the good or service.</p> <h2>Right to Access Information About ADMT</h2> <p>Under the Draft ADMT Rules, upon the Consumer&rsquo;s request, a Business would be required to provide (1) a plain language explanation of the purpose for which the Business utilizes ADMT; (2) the output of the ADMT with respect to the Consumer; (3) how the Business used (or plans to use) the output to make a decision with respect to the Consumer; (4) how the ADMT worked regarding that Consumer; (5) how the Consumer can obtain the entire range of possible outputs;[[N:In its draft risk assessment regulations, the Agency indicated that outputs may include text, images, audio, or video that makes predictions, recommendations, or decisions that influence physical or virtual environments. For example, ATDS may produce an output consisting of a spreadsheet analyzing employee productivity metrics that a company could use to determine compensation for its employees.]] (6) how the Consumer can exercise other CCPA rights; and (7) how the Consumer can submit a complaint to the Business regarding its use of ADMT.</p> <p>If a Business has used ADMT to make a decision regarding a Consumer resulting in the denial of goods or services, it would be required to notify the Consumer (1) that the Business has made a decision about them; (2) that the Consumer has a right to access information about the Business&rsquo; use of ADMT; (3) how the Consumer can exercise their right to access additional information about the Business&rsquo; use of ADMT; and (4) that the Consumer can file a complaint regarding the Business&rsquo; use of ADMT with the Agency and the California Attorney General.</p> <h2>Takeaways for Businesses</h2> <p>The Draft ADMT Rules could have a substantial impact on Businesses processing personal information of California residents, including employees and Business contacts. The scope of activities encompassed by these rules would be much broader than those covered by many other consumer privacy laws, both within and outside the United States. For example, Businesses that monitor employee productivity via ADMT may be required to honor opt-out requests, potentially hamstringing a broad range of safety- and productivity-monitoring tools. And Businesses employing behavioral advertising &mdash; even within their own websites &mdash; would need to navigate a special set of rules while already being subject to rules regarding opt-outs for sharing personal information for cross-context behavioral advertising.</p> <h2>Next Steps</h2> <p>As noted above, the Draft ADMT Rules will need to undergo a formal rulemaking process prior to finalization and adoption. The Agency board directed the regulatory drafting team to consult with individual board members and present a new draft at a future board meeting. The board may then agree to submit the draft for public comment, after which yet another draft may be published reflecting consideration of the comments received. When the board agrees on a final version of the regulations, they will be submitted to the California Office of Administrative Law for review and will not be formally adopted absent approval by that Office.</p> <p>Organizations that have an interest in the outcome of the ADMT regulations may wish to consider preparing comments on the proposed version of the regulations when issued for public comment. Organizations with such an interest, and the CCPA more generally, should feel free to contact any of the authors of this Advisory or their usual Arnold &amp; Porter contact. The firm&rsquo;s <a href="https://www.arnoldporter.com/en/services/capabilities/practices/privacy-cybersecurity-data-strategy" target="_self">Privacy, Cybersecurity &amp; Data Strategy</a> team would be pleased to consult about the submission of comments, as well as to assist with any questions about privacy compliance and enforcement more broadly.</p> <p>* <em>Claire Fahlman contributed to this Advisory. Claire is a graduate of Georgetown University Law Center and is employed at Arnold &amp; Porter's New York office. Claire is not admitted to the practice of law in New York.</em></p> <p><span style="font-size: small;"></span></p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{926578AD-CA94-4670-A0F7-546577C5D276}https://www.arnoldporter.com/en/perspectives/publications/2019/12/deskbook-on-internal-investigationsMarcus A. Asnerhttps://www.arnoldporter.com/en/people/a/asner-marcus-amarcus.asner@arnoldporter.comJohn P. Barkerhttps://www.arnoldporter.com/en/people/b/barker-john-pjohn.barker@arnoldporter.comJohn B. Bellinger, IIIhttps://www.arnoldporter.com/en/people/b/bellinger-john-bjohn.bellinger@arnoldporter.comDaniel Bernsteinhttps://www.arnoldporter.com/en/people/b/bernstein-danieldaniel.bernstein@arnoldporter.comJames W. Cooperhttps://www.arnoldporter.com/en/people/c/cooper-james-wJames.W.Cooper@arnoldporter.comSean Curranhttps://www.arnoldporter.com/en/people/c/curran-seansean.curran@arnoldporter.comDeborah A. Curtishttps://www.arnoldporter.com/en/people/c/curtis-deborahdeborah.curtis@arnoldporter.comJohn M. Fietkiewiczhttps://www.arnoldporter.com/en/people/f/fietkiewicz-john-mjohn.fietkiewicz@arnoldporter.comPaul J. Fishmanhttps://www.arnoldporter.com/en/people/f/fishman-paul-jpaul.fishman@arnoldporter.comAndre Geverolahttps://www.arnoldporter.com/en/people/g/geverola-andreandre.geverola@arnoldporter.comJonathan E. Greenhttps://www.arnoldporter.com/en/people/g/green-jonathan-ejonathan.green@arnoldporter.comKathleen Harrishttps://www.arnoldporter.com/en/people/h/harris-kathleenkathleen.harris@arnoldporter.comRyan Hartmanhttps://www.arnoldporter.com/en/people/h/hartman-ryanryan.hartman@arnoldporter.comDaniel M. Hawkehttps://www.arnoldporter.com/en/people/h/hawke-daniel-mDaniel.Hawke@arnoldporter.comValarie Hayshttps://www.arnoldporter.com/en/people/h/hays-valarievalarie.hays@arnoldporter.comSuneeta Hazrahttps://www.arnoldporter.com/en/people/h/hazra-suneetasuneeta.hazra@arnoldporter.comDavid Hibeyhttps://www.arnoldporter.com/en/people/h/hibey-daviddavid.hibey@arnoldporter.comMurad Hussainhttps://www.arnoldporter.com/en/people/h/hussain-muradmurad.hussain@arnoldporter.comAmy Jeffresshttps://www.arnoldporter.com/en/people/j/jeffress-amyAmy.Jeffress@arnoldporter.comMichael Kim Krousehttps://www.arnoldporter.com/en/people/k/michael-kim-krousemichael.krouse@arnoldporter.comTirzah S. Lollarhttps://www.arnoldporter.com/en/people/l/lollar-tirzah-stirzah.lollar@arnoldporter.comTal R. Machneshttps://www.arnoldporter.com/en/people/m/machnes-tal-rTal.Machnes@arnoldporter.comCraig D. Margolishttps://www.arnoldporter.com/en/people/m/margolis-craig-dcraig.margolis@arnoldporter.comManvin S. Mayellhttps://www.arnoldporter.com/en/people/m/mayell-manvin-smanvin.mayell@arnoldporter.comAaron F. Minerhttps://www.arnoldporter.com/en/people/m/miner-aaron-faaron.miner@arnoldporter.comJohn N. Nassikashttps://www.arnoldporter.com/en/people/n/nassikas-john-njohn.nassikas@arnoldporter.comJane Norberghttps://www.arnoldporter.com/en/people/n/norberg-janejane.norberg@arnoldporter.comEvelina J. Norwinskihttps://www.arnoldporter.com/en/people/n/norwinski-evelina-jevelina.norwinski@arnoldporter.comMeredith Osbornhttps://www.arnoldporter.com/en/people/o/osborn-meredithmeredith.osborn@arnoldporter.comPaula Ramerhttps://www.arnoldporter.com/en/people/r/ramer-paulapaula.ramer@arnoldporter.comSoo-Mi Rheehttps://www.arnoldporter.com/en/people/r/rhee-soomisoo-mi.rhee@arnoldporter.comMichael A. Rogoffhttps://www.arnoldporter.com/en/people/r/rogoff-michael-amichael.rogoff@arnoldporter.comDebra E. Schreckhttps://www.arnoldporter.com/en/people/s/schreck-debra-edebra.schreck@arnoldporter.comChristian D. H. Schultzhttps://www.arnoldporter.com/en/people/s/schultz-christianchristian.schultz@arnoldporter.comChristian D. Sheehanhttps://www.arnoldporter.com/en/people/s/sheehan-christianchristian.sheehan@arnoldporter.comSara L. Shudofskyhttps://www.arnoldporter.com/en/people/s/shudofsky-sarasara.shudofsky@arnoldporter.comCraig A. Stewarthttps://www.arnoldporter.com/en/people/s/stewart-craig-acraig.stewart@arnoldporter.comJohn Tanhttps://www.arnoldporter.com/en/people/t/tan-johnjohn.tan@cn.arnoldporter.comKevin M. Toomeyhttps://www.arnoldporter.com/en/people/t/toomey-kevin-mkevin.toomey@arnoldporter.comBaruch Weisshttps://www.arnoldporter.com/en/people/w/weiss-baruchbaruch.weiss@arnoldporter.comDeskbook on Internal Investigations, Corporate Compliance, and White Collar Issues (2nd ed.)<p>A generation ago, corporations,<img alt="Deskbook on Internal Investigations, Corporate Compliance, and White Collar Issues" src="/-/media/images/publication-recognition-logos/2020/deskbook-on-internal-investigations.jpg?h=256&amp;w=200&amp;rev=9cd30820fd6e488480d1f0f59e01682b&amp;sc_lang=en&amp;hash=E84BC959759A25DA545F03B6AF082D79" style="float: right; padding-left: 5px; padding-bottom: 2px; padding-top: 5px;" width="200" height="256" /> even in regulated industries, allocated scant resources to legal compliance. There were few treatises or seminars to guide an attorney whose corporate client suspected wrongdoing by an officer or employee. There were no U.S. Department of Justice policy statements or amnesty programs from which to judge the risks and benefits of voluntary disclosure of a company's violation of law. The Organizational Sentencing Guidelines lay in the future, an unheralded and unforeseen revolution in organization sentencing philosophy.</p> <p>As never before, in giving advice to corporate criminal and regulatory issues, a company's in-house counsel must have at least a working knowledge of the many issues that surround modern criminal and regulatory practice. The Arnold &amp; Porter Kaye Scholer LLP <em>Deskbook on Internal Investigations, Corporate Compliance, and White Collar Issues</em> represents the <em>beginning</em> of the process of reaching that level of understanding. It can never be a substitute for the advice of experienced white collar law practitioners.</p> <p>The Deskbook is divided into two parts. Part I addresses "process" issues, including corporate compliance, internal investigations, and government leniency programs. Part II addresses "substance," that is, selected, specific white collar substantive law issues, such as pharmaceutical drug offenses, the False Claims Act, the Foreign Corrupt Practices Act, criminal antitrust, perjury statutes and money laundering.</p> <p><a href="/-/media/files/perspectives/publications/2019/11/introtocbioswhitecollardeskbookarnoldporterr7.pdf?rev=dc2e1a199d6c49e78398ff1fef47c5ed&sc_lang=en&hash=2AE4DBAF61816D6E1C292C665A062D40">&raquo; Read the full Deskbook Introduction, Table of Contents and Group Biographies</a></p> <p><a href="/-/media/files/perspectives/publications/2019/11/chapter2whitecollardeskbookr7.pdf?sc_lang=en&amp;rev=e205f459e302470a831876597e322585&amp;hash=6DE423290589AA9455D3E4391632EB57">&raquo; Read Chapter 2: "The Attorney-Client Privilege, Work-Products Protection, and Self-Critical Privilege in Internal Investigations"</a></p> <p><a href="/-/media/files/perspectives/publications/2019/11/chapter11whitecollardeskbookr7.pdf?sc_lang=en&amp;rev=eb3e4b9661694cb89aceb8cab6841c0d&amp;hash=A4C05D4BDB7C89D14299D7FE78A22C6C">&raquo; Read Chapter 11: "Government Investigations Under the False Claims Act and Its Qui Tam Provisions"</a></p>Mon, 01 Jan 2024 00:00:00 -0600{BB3D3FF4-C7A9-480B-917E-DEBE378B6AC7}https://www.law360.com/media/articles/1777968?nl_pk=169ab8a9-2b82-4b78-ab02-18f0eea7f12a&utm_source=newsletter&utm_medium=email&utm_campaign=media&utm_content=2024-01-02&read_main=1&nlsidx=0&nlaidx=1%5CTrademark Cases To Watch In 2024Mon, 01 Jan 2024 00:00:00 -0600{EF54B701-041B-4FFA-8578-D0EB699CD4E9}https://www.chasecambria.com/site/journal/article.php?id=1625Golden Sphinx Provides Further Guidance on Discovery in Chapter 15 Bankruptcy ProceedingsSun, 31 Dec 2023 00:00:00 -0600{2CB1AA93-83D4-444B-8DDB-6D1F5E98D63C}https://www.chasecambria.com/site/journal/article.php?id=1611ryan.trombley@arnoldporter.comA Matter of Semantics: Conversion of Foreign Restructuring Proceeding into Liquidation Does Not Require New Chapter 15Sat, 30 Dec 2023 00:00:00 -0600{F3F5C331-B140-411E-AAA0-0A725923CC2B}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/12/sklamberg-clarifies-misconceptions-about-bidens-marijuana-policySklamberg Clarifies Misconceptions About Biden's Marijuana PolicyLife Sciences &amp; Healthcare Regulatory partner Howard Sklamberg was recently featured in the <em>POLITICO</em> article &ldquo;Why Fears About Biden&rsquo;s Marijuana Moves Are Overblown.&rdquo;&nbsp;Thu, 28 Dec 2023 00:00:00 -0600<p>Life Sciences &amp; Healthcare Regulatory partner Howard Sklamberg was recently featured in the <em>POLITICO</em> article &ldquo;Why Fears About Biden&rsquo;s Marijuana Moves Are Overblown.&rdquo; </p> <p>In the extensive Q&amp;A, Sklamberg, a former high-ranking FDA official, discussed the potential impact of the Biden administration's move to reclassify marijuana under federal drug policy and addressed concerns from legalization advocates about this policy shift. He shared insights on the myths surrounding the rescheduling's impact on state cannabis programs and the pharmaceutical industry's involvement.</p> <p>Sklamberg also highlighted the improbability of increased enforcement following reclassification, noting that "If you're going to launch an enforcement initiative against cannabis, why would you start off with saying, &lsquo;Oh, by the way, it's less of a risk than we thought," and pointed out the limited resources of the FDA for cannabis enforcement.</p> <p><a rel="noopener noreferrer" href="https://subscriber.politicopro.com/article/2023/12/why-fears-about-bidens-marijuana-moves-are-overblown-00132890" target="_blank">Read the full article</a> (subscription required).</p>{9B6F061D-8B43-46C3-B0C4-18FB3E20E893}https://www.arnoldporter.com/en/perspectives/advisories/2023/12/target-of-russian-military_industrial-baseJohn P. Barkerhttps://www.arnoldporter.com/en/people/b/barker-john-pjohn.barker@arnoldporter.comSoo-Mi Rheehttps://www.arnoldporter.com/en/people/r/rhee-soomisoo-mi.rhee@arnoldporter.comBaruch Weisshttps://www.arnoldporter.com/en/people/w/weiss-baruchbaruch.weiss@arnoldporter.comMichael A. Mancusihttps://www.arnoldporter.com/en/people/m/mancusi-michael-amichael.mancusi@arnoldporter.comKevin M. Toomeyhttps://www.arnoldporter.com/en/people/t/toomey-kevin-mkevin.toomey@arnoldporter.comTal R. Machneshttps://www.arnoldporter.com/en/people/m/machnes-tal-rTal.Machnes@arnoldporter.comTrevor G. Schmitthttps://www.arnoldporter.com/en/people/s/schmitt-trevor-gtrevor.schmitt@arnoldporter.comKerry K. Walshhttps://www.arnoldporter.com/en/people/w/walsh-kerrykerry.walsh@arnoldporter.comBiden Administration Grants Treasury Department New Authority to Target Foreign Financial Institutions Facilitating Russian Military-Industrial Base<p>On December 22, President Biden signed an <a rel="noopener noreferrer" href="https://ofac.treasury.gov/media/932441/download?inline" target="_blank">Executive Order</a> (E.O.) granting the U.S. Department of the Treasury (Treasury Department) additional authority to impose sanctions on foreign financial institutions (FFIs) that directly or indirectly aid Russia&rsquo;s military-industrial base. The E.O., titled &ldquo;Executive Order on Taking Additional Steps With Respect to the Russian Federation&rsquo;s Harmful Activities,&rdquo; amends existing E.O.s targeting certain sectors of Russia&rsquo;s economy in light of its ongoing war against Ukraine, E.O. 14024 and E.O. 14068. </p>Thu, 28 Dec 2023 00:00:00 -0600<p>On December 22, President Biden signed an <a rel="noopener noreferrer" href="https://ofac.treasury.gov/media/932441/download?inline" target="_blank">Executive Order</a> (E.O.) granting the U.S. Department of the Treasury (Treasury Department) additional authority to impose sanctions on foreign financial institutions (FFIs) that directly or indirectly aid Russia&rsquo;s military-industrial base. The E.O., titled &ldquo;Executive Order on Taking Additional Steps With Respect to the Russian Federation&rsquo;s Harmful Activities,&rdquo; amends existing E.O.s targeting certain sectors of Russia&rsquo;s economy in light of its ongoing war against Ukraine, E.O. 14024 and E.O. 14068. </p> <p>Alongside the E.O., the Treasury Department&rsquo;s Office of Foreign Assets Control (OFAC) published several new measures implementing its new authority to target FFIs, discussed in further detail below. Together with the E.O., these new measures send a clear message to FFIs that they may face sanctions for conducting or facilitating transactions involving Russia&rsquo;s military-industrial base.</p> <p>In the Treasury Department&rsquo;s <a rel="noopener noreferrer" href="https://home.treasury.gov/news/press-releases/jy2011" target="_blank">press release</a> announcing the new actions, Treasury Secretary Janet Yellen cautioned that the Treasury Department &ldquo;expect[s] financial institutions will undertake every effort to ensure that they are not witting or unwitting facilitators of circumvention and evasion&rdquo; and &ldquo;will not hesitate to use the new tools provided by this authority to take decisive, and surgical, action against financial institutions that facilitate the supply of Russia&rsquo;s war machine.&rdquo;</p> <p>FFIs, including U.S. banks with foreign affiliates, should carefully review OFAC&rsquo;s new actions and corresponding guidance given OFAC&rsquo;s ongoing and seemingly heightened commitment to scrutinizing financial transactions involving Russian individuals and entities.</p> <h2>&ldquo;Secondary Sanctions&rdquo; Authorized by the New E.O.</h2> <p>The E.O. allows for the imposition of &ldquo;secondary sanctions&rdquo; on FFIs, which are intended to discourage persons outside of the United States&rsquo; jurisdictional reach from engaging in certain specified activities. In other words, OFAC can now sanction FFIs for facilitating transactions that support Russia&rsquo;s military-industrial base, even if those transactions have no nexus to the United States.</p> <p>More specifically, the E.O. grants the Treasury Department authority to impose sanctions on FFIs where FFIs are (1) facilitating significant transactions on behalf of persons designated for operating in certain key sectors of the Russian economy that support the country&rsquo;s military-industrial base, including, for example, the technology, defense and related materiel, construction, aerospace, or manufacturing sectors (the Specific Sectors) or (2) facilitating significant transactions or providing services involving Russia&rsquo;s military-industrial base, including those relating to specific manufacturing inputs and technological materials that Russia is seeking to obtain from foreign sources (the Specified Items).</p> <p>The E.O. allows the Treasury Department to impose full blocking sanctions on, or prohibit or restrict the maintenance of correspondent accounts in the United States for, FFIs that run afoul of these restrictions. Importantly, the E.O. broadly defines &ldquo;foreign financial institution&rdquo; as any foreign entity that is engaged in the business of accepting deposits; making, granting, transferring, holding, or brokering loans or credits; purchasing or selling foreign exchange, securities, futures, or options; or procuring purchasers or sellers thereof, as principal or agent. The E.O. identifies several entities that would qualify as FFIs, including but not limited to depository institutions, banks, savings banks, insurance companies, securities brokers and dealers, investment companies, and employee benefit plans.</p> <p>Additionally, separate from the new FFI-related sanctions, the E.O. grants the Treasury Department expanded authority to prohibit the importation of certain goods into the United States, such as Russian seafood and diamond products, even if they have been substantially transformed in third countries.</p> <h2>OFAC Measures Accompanying the New E.O.</h2> <p>The E.O. was accompanied by several OFAC actions, including the issuance of three Determinations pursuant to E.O.s 14024 and 14068, three General Licenses (GLs), twelve new and three amended Frequently Asked Questions (FAQs), and a Sanctions Advisory.</p> <p>The three Determinations include:</p> <ul> <li>A Determination pursuant to Section 11(a)(ii) of Executive Order 14024 (the <a rel="noopener noreferrer" href="https://ofac.treasury.gov/media/932446/download?inline" target="_blank">Russia Critical Items Determination</a>), identifying the Specified Items subject to the new restrictions identified in the E.O. These Specified Items include semiconductor and manufacturing equipment, certain electronic test equipment, and chemical precursors for propellants and explosives, among others.</li> <li>A Determination pursuant to Section 1(a)(i)(B) of Executive Order 14068 (<a rel="noopener noreferrer" href="https://ofac.treasury.gov/media/932451/download?inline" target="_blank">Prohibitions Related to Imports of Certain Categories of Fish, Seafood, and Preparations Thereof</a>), prohibiting the importation into the United States of certain categories of fish or seafood from Russia, including where the fish or seafood has been incorporated or substantially transformed into another product outside of Russia</li> <li>An amended Determination pursuant to Section 1(a)(i)(A) of Executive Order 14068 (<a rel="noopener noreferrer" href="https://ofac.treasury.gov/media/923986/download?inline" target="_blank">Prohibitions Related to Imports of Gold of Russian Federation Origin (as Amended)</a>), prohibiting the importation into the United States of Russian-origin gold, excluding gold of Russian-origin that was located outside of Russia prior to June 28, 2022</li> </ul> <p>The new GLs include:</p> <ul> <li><a rel="noopener noreferrer" href="https://ofac.treasury.gov/media/932471/download?inline" target="_blank">General License 83</a>, authorizing certain transactions related to the importation into the United States of fish, seafood, or seafood-derivative products until February 21, 2024</li> <li><a rel="noopener noreferrer" href="https://ofac.treasury.gov/media/932476/download?inline" target="_blank">General License 84</a>, authorizing certain transactions related to closing a correspondent or payable-through account maintained by U.S. financial institutions for FFIs</li> <li><a rel="noopener noreferrer" href="https://ofac.treasury.gov/media/932481/download?inline" target="_blank">General License 85</a>, authorizing the wind down of transactions and the closure of accounts involving Expobank Joint Stock Company</li> </ul> <p>OFAC also published several new and amended FAQs describing the contours of the new measures pursuant to the E.O. Those FAQs are available here: new <a rel="noopener noreferrer" href="https://ofac.treasury.gov/faqs/added/2023-12-22" target="_blank">FAQs 1146 through 1157</a> and amended <a rel="noopener noreferrer" href="https://ofac.treasury.gov/faqs/updated/2023-12-22" target="_blank">FAQs 973, 1070, and 1126</a>. Most notably, <a rel="noopener noreferrer" href="https://ofac.treasury.gov/faqs/1151" target="_blank">FAQ 1151</a> defines &ldquo;significant transaction or transactions&rdquo; for purposes of the new E.O. restrictions on FFIs. FAQ 1151 explains that OFAC will consider the &ldquo;totality of the facts and circumstances&rdquo; when determining whether a transaction involving the Specific Sectors or Specified Items is &ldquo;significant,&rdquo; such that the FFI would be exposed to secondary sanctions risk. Some of the factors OFAC may consider in that determination include the size, number, and frequency of the transaction(s); the nature of the transaction(s); the level of awareness of management and whether the transactions are part of a pattern of conduct; the nexus of the transaction(s) to persons sanctioned under E.O. 14024 or to persons operating in Russia&rsquo;s military-industrial base; whether the transaction(s) involve deceptive practices; and the impact of the transaction(s) on U.S. national security objectives.</p> <h2>OFAC Guidance for Financial Institutions</h2> <p>Finally, along with the new authority, OFAC published a <a rel="noopener noreferrer" href="https://ofac.treasury.gov/media/932436/download?inline" target="_blank">Sanctions Advisory</a> that provides guidance to financial institutions on the new measures. In addition to laying out the general framework of the new restrictions on FFIs, the Sanctions Advisory provides examples of activities that could expose FFIs to sanctions risk pursuant to the new E.O. These activities include:</p> <ul> <li>Maintaining accounts, transferring funds, or providing other financial services for any persons already designated for operating in the Specific Sectors</li> <li>Maintaining accounts, transferring funds, or providing other financial services for any persons, whether inside or outside Russia, that support Russia&rsquo;s military-industrial base, including those that operate in the Specific Sectors</li> <li>Facilitating the sale, supply, or transfer, directly or indirectly, of the Specified Items to Russian importers or companies shipping Specified Items to Russia</li> <li>Helping companies or individuals evade U.S. sanctions of Russia&rsquo;s military-industrial base, including by facilitating alternative or non-transparent payment mechanisms, obscuring customer names or other relevant payment information, or otherwise concealing the purpose of transactions to evade sanctions</li> </ul> <p>The Sanctions Advisory also outlines several recommendations for financial institutions to identify and mitigate sanctions risks. The advisory notes that these steps should be taken in conjunction with baseline customer due diligence procedures and other anti-money laundering (AML) controls. OFAC recommends that financial institutions, among other safeguarding measures:</p> <ul> <li>Review their customer base to determine exposure to customers who may be involved in the Specific Sectors or with the Specified Items</li> <li>Communicate compliance expectations to customers, including advising customers on the sanctions restrictions</li> <li>Take appropriate mitigation measures for customers or counterparties engaged in high-risk activity, including restricting accounting, limiting permissible activity, and placing customers on watchlists</li> <li>Incorporate risks related to Russia&rsquo;s military-industrial base into sanctions risk assessments and customer risk rating criteria</li> <li>Implement enhanced trade finance controls related to the Specified Items</li> </ul> <p>Further, the Sanctions Advisory directs FFIs to one of OFAC&rsquo;s previously-published guidance documents, &ldquo;<a rel="noopener noreferrer" href="https://ofac.treasury.gov/media/16331/download?inline" target="_blank">A Framework for OFAC Compliance Commitments</a>.&rdquo;[[N:Arnold &amp; Porter previously authored an <a href="https://www.arnoldporter.com/en/perspectives/advisories/2019/05/not-as-close-to-the-vest" target="_self">Advisory</a> on this framework when it was first published by OFAC in 2019.]] This framework sets forth several expectations and best practices for effective risk-based sanctions compliance programs. The framework encourages financial institutions to adopt certain safeguarding measures including, but not limited to, conducting training on sanctions risk and common red flags, ensuring effective reporting mechanisms are in place and promoting a &ldquo;culture of compliance,&rdquo; and communicating effectively and efficiently with U.S. and other correspondent banks on due diligence expectations and requests for information.</p> <h2>Conclusion</h2> <p>Financial institutions, both FFIs and U.S. entities with foreign affiliates, should remain vigilant in the wake of the new E.O. and OFAC&rsquo;s new actions. These actions underscore the importance of global and robust risk-based sanctions compliance programs and reporting mechanisms. Financial institutions should carefully review OFAC&rsquo;s new measures and consider whether their existing compliance programs adequately capture the safeguarding measures identified by OFAC.</p> <p>Financial institutions seeking advice on sanctions compliance requirements and processes, or seeking assistance in responding to an OFAC investigation, are encouraged to contact any of the authors of this Advisory or their usual Arnold &amp; Porter contact.</p> <p style="text-align: center;">*&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; *</p> <p>On February 8, 2024, from noon to 2 p.m. EST, please join Arnold &amp; Porter for our annual discussion of regulatory and enforcement trends in the year ahead for AML and sanctions, drawing on insight and experiences from attorneys in our Financial Services, White Collar Defense &amp; Investigations, Anti-Corruption, Securities &amp; Enforcement, and Litigation practices. Discussion topics will include the Treasury Department&rsquo;s new authority to target foreign financial institutions, regulatory compliance challenges in 2024, trends and predictions in global enforcement and investigations, changes in the sanctions landscape, and much more. <a href="https://comms.arnoldporter.com/6/5249/landing-pages/accept--blank-.asp" target="_self">Register for the webinar here</a>.</p> <p><span style="font-size: small;"></span></p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{E6FB7BC6-4C47-45ED-8B33-EB3055E70D0E}https://www.arnoldporter.com/en/perspectives/news/2023/12/arnold-and-porter-advises-aquila-on-acquisition-of-financial-systems-company-sasArnold & Porter Advises Aquila on Acquisition of Financial Systems Company SASArnold &amp; Porter has advised Aquila, a global investment firm that focuses on acquiring and investing in software companies, on its acquisition of Financial Systems Company SAS ("FSC"), marking a significant development in the financial technology landscape of Latin America.Tue, 26 Dec 2023 00:00:00 -0600<p>Arnold &amp; Porter has advised Aquila, a global investment firm that focuses on acquiring and investing in software companies, on its acquisition of Financial Systems Company SAS ("FSC"), marking a significant development in the financial technology landscape of Latin America.</p> <p>FSC, with a history dating back to 1994 and headquartered in Colombia, has extended its reach to Chile and Peru, establishing itself as a critical provider of omnichannel debt and credit collection technology. The company's solutions have been integral to optimizing the collection processes for a wide range of clients, including major banks, financial institutions, multinational corporations, and contact centers throughout Latin America.</p> <p>With this acquisition, Aquila, a subsidiary of Constellation Software Inc., aims to enhance its position in the Latin American market, leveraging FSC's technology to expand its fintech offerings. FSC will continue to function as an autonomous business unit within Aquila, focusing on delivering high-quality debt and credit collection solutions.</p> <p>The transaction, which concluded on November 21, was led by partner Carlos Lobo, associate Kristen Acosta, and attorney Ana Ramazzotti.</p>{8F10FFD5-467A-44B1-ABA0-DF44D4047BBB}https://www.arnoldporter.com/en/perspectives/advisories/2023/12/california-evidence-code-801-1David A. Kerschnerhttps://www.arnoldporter.com/en/people/k/kerschner-david-adavid.kerschner@arnoldporter.comKathryn Podsiadlohttps://www.arnoldporter.com/en/people/p/podsiadlo-kathrynkathryn.podsiadlo@arnoldporter.comCalifornia Evidence Code 801.1: What You Need To Know About the New California Law Governing Expert Testimony <span style="line-height: 107%;">Effective January 1, 2024, the California Evidence Code will contain a new provision governing expert testimony that effectively raises the standard for defense experts testifying as to medical causation relating to alternative causes.&nbsp;</span>Fri, 22 Dec 2023 00:00:00 -0600<p>Effective January 1, 2024, the California Evidence Code will contain a new provision governing expert testimony that effectively raises the standard for defense experts testifying as to medical causation relating to alternative causes. Often in medical causation cases, such as product liability actions, defense experts testify about possible alternative causes of the plaintiff&rsquo;s injury to cast doubt on whether the defendant&rsquo;s product caused the injury. This new provision provides that defense opinions related to alternative causes must be held to the same standard as that of plaintiff experts: they must be made to a reasonable medical probability, meaning the injury was &ldquo;more likely than not&rdquo; a result of the alternative cause. According to the legislative history, this law &ldquo;heightens the bar to which experts will be held to ensure this particularly impactful testimony is reliable and not misleading.&rdquo; (Sen. Judiciary Com. on Sen. Bill No. 652 (2023-2024 Reg. Sess. p. 7.)) In effect, this new provision may make it easier for plaintiffs to challenge defense expert testimony and prevent them from providing affirmative opinions on alternative causes in cases concerning medical causation. </p> <h2>The New Law</h2> <p>The new law stems from California Senate Bill No. 652 (2023-2024 Reg. Sess.) &mdash; sponsored by the Consumer Attorneys of California (per the group&rsquo;s website, its mission is to &ldquo;stand for plaintiffs seeking accountability from those who do wrong&rdquo;) and codified as Section 801.1 &mdash; titled &ldquo;Expert opinions regarding medical causation.&rdquo; This law diverges from <em>Kline v. Zimmer Inc.</em> (2022) 79 Cal.App.5th 123, which held that the requirement of proving causation to a reasonable medical probability in a personal injury action applies &ldquo;only to the party bearing the burden of proof on the issue which is the subject of the opinion.&rdquo; The court&rsquo;s rationale was that it was &ldquo;imperative that the party without the burden of proof be allowed to suggest alternative causes &hellip; to less than a reasonable medical probability&rdquo; because &ldquo;to withhold such information from the jury is to deprive it of relevant information in assessing whether the plaintiff has met its ultimate burden of persuasion.&rdquo; </p> <p>Prompted by this ruling, the California legislature amended the California Evidence Code to add: </p> <p style="margin-left: 40px;"><strong>801.1. Expert opinions regarding medical causation.</strong> </p> <p style="margin-left: 40px;">(a) In a general civil case, as defined in Rule 1.6 of the California Rules of Court, where the party bearing the burden of proof proffers expert testimony regarding medical causation and where that party&rsquo;s expert is required as a condition of testifying to opine that causation exists to a reasonable medical probability, the party <em>not</em> bearing the burden of proof may offer a contrary expert only if its expert is able to opine that the proffered alternative cause or causes each exists to a reasonable medical probability, except as provided in subdivision (b).</p> <p style="margin-left: 40px;">(b) Subdivision (a) does not preclude a witness testifying as an expert from testifying that a matter cannot meet a reasonable degree of probability in the applicable field, and providing the basis for that opinion.</p> <p>Subsection (a) strays from the holding in <em>Kline</em> by mandating that the party not bearing the burden of proof (such as a corporate defendant) can offer an expert opinion on an alternative cause of the plaintiff&rsquo;s injury <strong><em>only if</em></strong> the expert is able to opine that the proffered alternative cause or causes each exists to a reasonable medical probability. The &ldquo;reasonable medical probability&rdquo; standard described in <em>Kline</em> remains. As stated in <em>Kline</em>, this standard &ldquo;mirrors the more-likely-than-not standard of proof in general negligence actions.&rdquo; In other words, possible or attenuated potential causes are not likely to pass muster under 801.1. </p> <p>Subsection (b) includes an exception. Under this section, a defense expert can still &ldquo;rebut&rdquo; the testimony of plaintiff&rsquo;s expert by explaining that the proffered cause cannot meet a reasonable degree of probability in the applicable field because, for example, the plaintiff&rsquo;s expert failed to consider or rule out other alternative causes. Likewise, it does not alter the scope of cross-examination of plaintiff&rsquo;s expert. </p> <h2>Takeaways and Practical Implications</h2> <p>This law is unlikely to have a major impact in cases where there is a clear alternative cause adequately supported by underlying medical evidence and literature. However, the application of this rule is unlikely to be straightforward because the exception leaves room for parties to frame admission of expert testimony regarding alternative causes in a way that places it within the exception. </p> <p>There are a few practical implications that are clear with respect to affirmative opinions under subsection (a): </p> <ul> <li><strong>Another tool for plaintiffs to exclude expert testimony</strong>: This rule will likely give plaintiffs a new basis to move to exclude defense expert testimony. For example, plaintiffs may argue that a defense expert&rsquo;s alternative causation opinion is not grounded in adequate evidence in order for the opinion to be held to a reasonable degree of medical probability. Expert opinions will need to be supported by adequate medical evidence and literature concerning risk factors for the injury, including epidemiological studies supporting the association between the risk factor and injury. </li> <li><strong>Discovery</strong>: Defendants may be wise to seek more extensive discovery from plaintiffs on their medical history and consult with experts earlier in the discovery process in order to identify significant alternative causes and ensure the expert is armed with medical records, deposition testimony, and peer-reviewed literature.</li> <li><strong>Testimony</strong>: It is common for experts to opine that they &ldquo;cannot rule out&rdquo; a given risk factor, but those days are no more under 801.1. Experts will need to be careful &mdash; at trial and at deposition &mdash; not to characterize an affirmative alternative cause as an attenuated risk factor that cannot be ruled out.</li> <li><strong>Expert disclosure</strong>: Lawyers must be diligent to use the right language in disclosing expert testimony to ensure that it either meets this heightened standard or is directed at challenging the opposition&rsquo;s expert opinion on causation. </li> </ul> <p>For more information regarding expert testimony under this new California law, please contact any of the authors of this Advisory or your primary Arnold &amp; Porter attorney.</p> <p><span style="font-size: small;"></span></p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{3E99A0D7-B5DA-41B6-A8E6-EC138AAE9EB8}https://www.arnoldporter.com/en/perspectives/advisories/2023/12/fy24-ndaa-navigating-expanded-restrictionsCharles A. Blanchardhttps://www.arnoldporter.com/en/people/b/blanchard-charles-aCharles.Blanchard@arnoldporter.comDeborah A. Curtishttps://www.arnoldporter.com/en/people/c/curtis-deborahdeborah.curtis@arnoldporter.comRonald D. Leehttps://www.arnoldporter.com/en/people/l/lee-ronald-dRonald.Lee@arnoldporter.comSoo-Mi Rheehttps://www.arnoldporter.com/en/people/r/rhee-soomisoo-mi.rhee@arnoldporter.comSonia Tabrizhttps://www.arnoldporter.com/en/people/t/tabriz-soniasonia.tabriz@arnoldporter.comMarne Marottahttps://www.arnoldporter.com/en/people/m/marotta-marnemarne.marotta@arnoldporter.comJunghyun Baekhttps://www.arnoldporter.com/en/people/b/baek-junghyunjunghyun.baek@arnoldporter.comKyung Liu-Katzhttps://www.arnoldporter.com/en/people/l/liu-katz-kyungkyung.liu-katz@arnoldporter.comFY24 NDAA: Navigating Expanded Restrictions on DoD Contracting, Buy American Provisions, and Other Key National Security ProvisionsOn December 14, the United States Congress passed the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2024. The FY24 NDAA contains numerous provisions that impose new or expanded prohibitions on Department of Defense (DoD) procurement activities, including an effort to ascertain and limit the potential nexus to &ldquo;countries of concern,&rdquo; such as China and Russia.Fri, 22 Dec 2023 00:00:00 -0600<p>On December 14, the United States Congress passed the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2024.</p> <p>The FY24 NDAA contains numerous provisions that impose new or expanded prohibitions on Department of Defense (DoD) procurement activities, including an effort to ascertain and limit the potential nexus to &ldquo;countries of concern,&rdquo; such as China and Russia. Major changes in the FY24 NDAA include a requirement that companies providing consulting services to the DoD make certifications regarding potential conflicts of interest involving &ldquo;covered foreign entities,&rdquo; including the Chinese and Russian governments, a prohibition on the use of DoD funds to procure batteries produced by certain entities, and the new &ldquo;American Security Drone Act of 2023&rdquo; that, among other things, prohibits the procurement of any &ldquo;covered unmanned aircraft system&rdquo; that is &ldquo;manufactured or assembled by a covered foreign entity.&rdquo;</p> <p>The FY24 NDAA also furthers the recent focus on increased preference for U.S. sources of supply through numerous provisions, including increased domestic content requirements, and a new requirement to provide DoD premerger notification. Finally, the FY24 NDAA includes requirements to conduct new studies and assessments that might result in the imposition of additional restrictions in future NDAAs.</p> <p>This Advisory offers an overview of key provisions from the FY24 NDAA.</p> <h2>Restrictions on Dealings With Entities That Have Ties to China</h2> <p>The FY24 NDAA imposes additional restrictions on dealings with entities that have ties to China. Key provisions include:</p> <ul> <li>Section 805: Prohibition of DoD procurement related to entities identified as Chinese military companies operating in the United States</li> <li>Section 812: Preventing conflicts of interest for entities that provide certain consulting services to DoD</li> <li>Section 825: Countering adversary logistics information technologies</li> </ul> <p> <strong>Section 805</strong> prohibits DoD from contracting with, or entering into contracts that include goods or services produced or developed by, the Chinese military companies that are identified by DoD pursuant to Section 1260H of the FY21 NDAA. Notably, Section 805 creates exceptions for DoD&rsquo;s &ldquo;procurement of goods, services, or technology to provide a service that connects to the facilities of a third party, including backhaul, roaming, and interconnection arrangements.&rdquo; Section 805 also lays out an exception for &ldquo;components,&rdquo; defined in 41 U.S.C. &sect; 105 as &ldquo;an item supplied to the Federal Government as part of an end item or of another component.&rdquo; The prohibition on use or procurement is otherwise broad, banning not only new contracts, but also renewal and extension of existing contracts with the covered entities, with the exception of those contracts entered into with the Chinese military companies before June 30, 2026, or with other contractors before June 30, 2027. While the specifics will likely be laid out in the implementing regulations, this prohibition may require DoD contractors to conduct diligence to ascertain whether goods or services produced or developed by the identified Chinese military companies are included in their supply chain in order to confirm compliance with associated restrictions and obligations.</p> <p><strong>Section 812</strong> seeks to prevent conflicts of interest for companies providing consulting services to DoD and assigned a North American Industry Classification System (NAICS) code beginning with 5416 (management, scientific, and technical consulting). Specifically, Section 812 requires that the Secretary of Defense amend the Defense Federal Acquisition Regulation Supplement (DFARS) to require such companies to certify that (1) neither the company nor any of its subsidiaries or affiliates holds a consulting services contract with &ldquo;covered foreign entities,&rdquo; including the Chinese government or (2) the company maintains an auditable Conflict of Interest Mitigation plan. That plan must identify any covered foreign entity that the company provides services to, a written course of action for avoiding, neutralizing or mitigating the actual or potential conflict of interest with DoD, and other related information.[[N:&nbsp;<strong>Section 812</strong> also extends to companies providing consulting services to DoD that hold contracts with the Russian government or entities sanctioned under Executive Order 13662 for supporting the Russian invasion of Ukraine, as listed in the definition of &ldquo;covered foreign entity.&rdquo;]]</p> <p><strong>Section 825</strong> targets logistics information technologies affiliated with the Chinese government. First, it prohibits DoD from contracting with entities that provide data to &ldquo;covered logistics platforms,&rdquo; which include LOGINK, the national transportation logistics public information platform provided by the Chinese government. Covered logistics platforms also include other national transportation logistics information platforms affiliated with the Chinese government. Second, &ldquo;covered entities,&rdquo; i.e., federally funded port authorities, commercial strategic seaports, federal and state agencies and instrumentalities, and private maritime terminal companies operating in federally regulated seaports, that accept federal grant funding are prohibited from using a &ldquo;covered logistics platform.&rdquo; </p> <h2>Restrictions on Dealings With Entities That Have Ties to Russia</h2> <p> The FY24 NDAA imposes additional restrictions on dealings with entities that have ties to Russia. In addition to Section 812, which applies to both Russia and China, key provisions include:</p> <ul> <li>Section 804: Prohibition on contracting with persons that have fossil fuel operations with the government of the Russian Federation or the Russian energy sector</li> <li>Section 5405: Imposition of sanctions under Global Magnitsky Human Rights Accountability Act</li> </ul> <p> <strong>Section 804</strong> prohibits DoD from contracting with persons that have fossil fuel operations within Russia or the Russian energy sector. Specifically, DoD may not procure goods or services from an entity that is owned 50% or more by the Russian government, or a fossil fuel company operating in Russia. Section 804 also prohibits DoD from contracting with a person who, on or after the effective date of the FY24 NDAA, has fossil fuel business operations with such entities. This section is set to sunset on December 31, 2029. This prohibition does not apply if the Secretary of Defense and Secretary of State jointly determine that the contract: (1) is &ldquo;necessary&rdquo; for purposes of providing humanitarian assistance to the Russian people or for providing disaster relief or other urgent life-saving measures; (2) is vital to military readiness, basing, or operations of the United States or the North Atlantic Treaty Organization (NATO); (3) is vital to national security interest of the United States; or (4) was a business operation with a fossil fuel company in a country other than Russia that was entered into prior to the date of enactment of Section 804. Furthermore, DoD may still contract with a person who holds a valid Office of Foreign Assets Control license to operate in Russia notwithstanding the sanctions.</p> <p><strong>Section 5405</strong> contemplates the potential for imposing sanctions under the Global Magnitsky Human Rights Accountability Act and, to that end, requires the Secretary of State to submit a report listing &ldquo;all foreign persons that have engaged in significant corruption in relation to the planning, construction, or operation of the Nord Stream 2 pipeline.&rdquo; The United States has previously designated NORD STREAM 2 AG to its Specially Designated Nationals and Blocked Persons List (SDN List) in March 2022.</p> <h2>Buy American Provisions</h2> <p> In line with the Biden administration&rsquo;s Buy American initiative, the FY24 NDAA includes requirements for DoD to source more articles, materials, and technology domestically. Key provisions include:</p> <ul> <li>Section 833: Amendment to requirement to buy certain metals from American sources</li> <li>Section 835: Enhanced domestic content requirement for major defense acquisition programs</li> <li>Section 1414: Critical mineral independence</li> </ul> <p> <strong>Section 833</strong> amends 10 U.S.C. &sect; 4863, which generally requires the procurement of specialty metals from domestic sources. Under this amendment, the exception relating to agreements with foreign governments is expanded. Under this amendment, DoD may also procure specialty metals as a mill product or as incorporated into a component other than an end item from another country, so long as the specialty metal is melted or produced where the mill product or component was procured or in another country for which the U.S. has a trade agreement. This rule may trigger an amendment to DFARS 252.225-7009, which currently requires domestic purchase of specialty metals incorporated in items delivered pursuant to a DoD contract. Specifically, the DFARS provision may be amended to allow an exception for &ldquo;specialty metal incorporated into a component other than an end item &hellip; [that is] melted or produced &hellip; in the country from which the mill product or component is procured.&rdquo; In addition, Section 833 also requires suppliers of any flight-related system or component using aerospace-grade materials to inform DoD if any such materials were manufactured or processed in China, Iran, North Korea, and Russia.</p> <p><strong>Section 835</strong> establishes domestic content requirements for major DoD programs for the purpose of administering the Buy American Act. Under the new rule, the domestic source content standard for procurements in connection with a major defense acquisition program will become increasingly stringent, rising from 60% of the cost to 75% in 2029. The provision also establishes an exclusion for certain manufactured articles and contemplates a fallback threshold for certain foreign end products. DoD is also directed to submit a report within one year of enactment of the NDAA assessing the domestic source content of procurements carried out for a major defense program This provision may have significant impact on certain entities in the defense procurement supply chain, depending on current lines of business and sourcing.</p> <p><strong>Section 1414</strong> requires the Under Secretary of Defense for Acquisition and Sustainment to submit, within one year of enactment of the NDAA, a strategy for the development of supply chains for DoD that are not dependent on the mining or processing of critical minerals by &ldquo;covered countries,&rdquo; including China, Iran, North Korea, and Russia, in order to achieve critical mineral supply chain independence by 2035.</p> <h2>Other Key Provisions</h2> <p> The FY24 NDAA contains several other provisions that may impact DoD contractors and require DoD and other federal agencies to conduct studies and assessments that may inform future restrictions in furtherance of the federal government&rsquo;s national security interests. Key provisions include:</p> <ul> <li>Section 154: Prohibition on availability of funds for procurement of certain batteries</li> <li>Section 857: DoD notification of certain transactions</li> <li>Section 1312: Analysis of certain biotechnology entities</li> <li>Section 1821 to 1833: The American Security Drone Act of 2023</li> <li>Section 3523: Study on foreign ownership and control of marine terminals</li> <li>Section 7405: Assessment of threat posed to United States ports by cranes manufactured by countries of concern</li> </ul> <p> <strong>Section 154</strong> states that, beginning on October 1, 2027, no funds appropriated or made available for DoD may be obligated or expended to procure a battery produced by the following Chinese entities or their successors: Contemporary Amperex Technology Company, Limited; BYD Company, Limited; Envision Energy, Limited; EVE Energy Company, Limited; Gotion High tech Company, Limited; and Hithium Energy Storage Technology Company, Limited. Section 154 explains that a battery is considered as &ldquo;produced&rdquo; by one of those entities if that entity assembled or manufactured the final product, or created or otherwise provided a majority of the components.</p> <p><strong>Section 857</strong> states that parties required to file a premerger notification and supplementary information with the Department of Justice or Federal Trade Commission under Section 7A of the Clayton Act must concurrently submit such information to DoD, if the proposed merger or acquisition would require DoD review. Generally, DoD reviews mergers or acquisitions involving major defense suppliers or non-defense contractors for which DoD is a significant customer. </p> <p><strong>Section 1312</strong> requires the Secretary of Defense to conduct an analysis within 180 days of enactment of the NDAA regarding whether any biotechnology entities or their subsidiaries, parents, affiliates, or successors should be identified as a Chinese military company or military-civil fusion contributor. The results of the analysis may inform the designation of certain biotechnology entities as Chinese military companies and result in additional prohibitions.</p> <p><strong>Sections 1821 to 1833</strong> were passed under the title American Security Drone Act of 2023. These provisions contain numerous prohibitions, including the Section 1823 ban on the procurement of any &ldquo;covered unmanned aircraft system&rdquo; that is &ldquo;manufactured or assembled by a covered foreign entity,&rdquo; which includes &ldquo;[a]ny entity domiciled in the People&rsquo;s Republic of China or subject to the influence or control by the Government of the People&rsquo;s Republic of China or the Communist Party of the People&rsquo;s Republic of China, as determined by the Secretary of Homeland Security.&rdquo; Section 1822 provides definitions for the terms used throughout these provisions. These provisions also require that executive agencies account for existing inventories of covered unmanned aircraft systems within one year of enactment of the NDAA. </p> <p><strong>Section 3523</strong> requires the Secretary of Transportation to contract with a federally funded research and development center to evaluate how foreign state-owned enterprises with leases, long term concessions, partial-ownership, or ownership of marine terminals at the fifteen largest United States container ports may affect United States economic and national security. The results of this evaluation may inform future restrictions on marine terminal operators and other contractors whose operation involves large container ports.</p> <p><strong>Section 7405</strong> requires the Director of National Intelligence to assess the threat posed to United States ports by cranes manufactured by countries of concern and commercial entities of those countries, including those made by Chinese companies such as Shanghai Zhenhua Heavy Industries Co. The results of this assessment may inform potential future restrictions on foreign-made cranes.</p> <h2>Status of the Outbound Investment Review</h2> <p> In addition to discussing key provisions of the FY24 NDAA, it bears mention that several proposed provisions involving national security were left out. Notably missing from the FY24 NDAA is a specific provision regarding outbound investment review.</p> <p>By way of background, President Biden passed an Executive Order on August 9 to review national security-related investments to foreign countries. The Executive Order&rsquo;s goal was to curb China-based military, intelligence, surveillance, and cyber-enabled advancements by targeting United States investment in the semiconductors and microelectronics, quantum computing, and artificial intelligence (AI) sectors in China, Hong Kong, and Macao. Pursuant to the Executive Order, the Department of the Treasury that same day issued an advance notice of proposed rulemaking, its first step in establishing the program introduced in the Executive Order, which is not immediately effective until implemented by the Department of the Treasury. (For discussion of the Executive Order on outbound investment review and related advance notice of proposed rulemaking, please read our <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/08/chinese-investment-eo">Advisory</a>.)</p> <p>Despite early deliberations included in legislative proposals for the FY24 NDAA, the NDAA does not include a specific provision regarding outbound investment review. While other standalone bills include legislative proposals on this point, the likelihood that such bills will pass in the near future is uncertain. Therefore, for now, the outbound investment review program will likely be governed by President Biden&rsquo;s Executive Order and forthcoming regulations from the Department of the Treasury. It remains to be seen whether provisions regarding outbound investment review will make their way into the FY25 NDAA &mdash; as the House Financial Service Committee Chairman Patrick McHenry (R-NC), who prevented the outbound investment review provision from being included in the FY24 NDAA, is retiring in 2024.</p> <p>Please contact the authors of this Advisory or other members of Arnold &amp; Porter&rsquo;s <a href="https://www.arnoldporter.com/en/services/capabilities/practices/government-contracts">Government Contracts</a>, <a href="https://www.arnoldporter.com/en/services/capabilities/practices/national-security">National Security</a>, or <a href="https://www.arnoldporter.com/en/services/capabilities/practices/white-collar-defense-and-investigations">White Collar Defense &amp; Investigations</a> practices for more specific guidance on the potential impact of FY24 NDAA.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{6A6B1391-641A-444E-9336-F763158A1BD0}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/12/feinstein-talks-recent-ruling-in-antitrust-acquisition-caseFeinstein Talks Recent Ruling in Antitrust Acquisition CaseDebbie Feinstein, head of the firm&rsquo;s Global Antitrust group, was quoted in the <em>Global Competition Review</em> (<em>GCR</em>) article, &ldquo;Illumina ruling showcases tribunal&rsquo;s power.&rdquo;&nbsp;Thu, 21 Dec 2023 00:00:00 -0600<p>Debbie Feinstein, head of the firm&rsquo;s Global Antitrust group, was quoted in the <em>Global Competition Review</em> (<em>GCR</em>) article, &ldquo;Illumina ruling showcases tribunal&rsquo;s power.&rdquo; The article discusses the U.S. Court of Appeals for the Fifth Circuit&rsquo;s upholding of the Federal Trade Commission&rsquo;s (FTC) ruling against Illumina&rsquo;s acquisition of Grail, in which the agency argued the acquisition threatened competition in the market for cancer detection tests. The Fifth Circuit&rsquo;s decision resulted in Illumina, a DNA sequencing company, opting to divest Grail, a cancer-screening company.</p> <p>Feinstein told <em>GCR</em> that the decision indicates federal courts will find that vertical mergers violate Section 7 of the Clayton Act, which prohibits mergers or acquisitions that might lessen competition. The decision may also encourage more companies to propose fixes while changing how the FTC and Department of Justice evaluate those proposals. &ldquo;It may mean that settlements come about because the government realises that the court is going to find the remedy meaningful,&rdquo; Feinstein said, adding that the government &ldquo;may decide to settle on its terms rather than having the court approve the transaction in light of the settlement.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://globalcompetitionreview.com/gcr-usa/article/illumina-ruling-showcases-tribunals-power" target="_blank">Read the full article</a> (subscription required). </p>{1A4555B5-1D61-445E-8163-875AD675BD1D}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/12/feinstein-and-gleklen-discuss-major-merger-review-developments-from-2023Feinstein and Gleklen Discuss Major Merger Review Developments From 2023Debbie Feinstein, head of the firm&rsquo;s Global Antitrust group, and Jonathan Gleklen, chair of the firm&rsquo;s U.S. Antitrust/Competition practice, were featured in the recent<em> Law360</em> article, &ldquo;Agencies' Aggressive Merger Approach Was Tested In 2023.&rdquo;&nbsp;Thu, 21 Dec 2023 00:00:00 -0600<p>Debbie Feinstein, head of the firm&rsquo;s Global Antitrust group, and Jonathan Gleklen, chair of the firm&rsquo;s U.S. Antitrust/Competition practice, were featured in the recent <em>Law360</em> article, &ldquo;Agencies' Aggressive Merger Approach Was Tested In 2023.&rdquo; The article recaps major merger review developments from 2023 and highlights the Federal Trade Commission (FTC) and U.S. Department of Justice&rsquo;s Antitrust Division&rsquo;s approach to merger enforcement, which has made the agencies less willing to accept fixes from merging parties to address potential concerns. </p> <p>Feinstein discussed one of the most closely watched merger cases of 2023, the Fifth Circuit's ruling in an antitrust battle between a gene sequencing company and a cancer testing company, and a theory about &ldquo;potential competition&rdquo; in the FTC&rsquo;s challenge of a merger in early 2023. Gleklen discussed the DOJ&rsquo;s Third Circuit loss in its challenge to U.S. Sugar&rsquo;s acquisition of Imperial Sugar, which turned in part on whether distributors should be considered competitors in the relevant market.</p> <p><a rel="noopener noreferrer" href="https://www.law360.com/articles/1778645/agencies-aggressive-merger-approach-was-tested-in-2023" target="_blank">Read the full article</a> (subscription required). </p>{CED3F5E2-0F66-42C6-9C9C-C6452DFF5A02}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/12/hussain-talks-upcoming-changes-to-foreign-agents-registration-actHussain Talks Upcoming Changes to Foreign Agents Registration ActWhite Collar Defense &amp; Investigations partner Murad Hussain was quoted in the recent <em>Bloomberg Law</em> article, &ldquo;US Hints at Curbing Foreign Agent Registration Exemptions,&rdquo; which discusses a U.S. Department of Justice (DOJ) official&rsquo;s remarks at a recent conference about forthcoming changes to DOJ regulations under the Foreign Agents Registration Act (FARA).&nbsp;Wed, 20 Dec 2023 00:00:00 -0600<p>White Collar Defense &amp; Investigations partner Murad Hussain was quoted in the recent <em>Bloomberg Law</em> article, &ldquo;US Hints at Curbing Foreign Agent Registration Exemptions,&rdquo; which discusses a U.S. Department of Justice (DOJ) official&rsquo;s remarks at a recent conference about forthcoming changes to DOJ regulations under the Foreign Agents Registration Act (FARA). Although DOJ has previously read one of FARA&rsquo;s statutory exemptions as covering foreign entities&rsquo; political activities that do not primarily benefit foreign governments, the official suggested that DOJ will now read that exemption as only covering political activities that primarily benefit a domestic interest. &ldquo;Figuring out whether something primarily benefits a domestic interest versus a foreign interest can be a hard line to draw, especially when you&rsquo;re talking about U.S. subsidiaries of foreign companies,&rdquo; said Hussain, who attended the conference. </p> <p><a rel="noopener noreferrer" href="https://www.bloomberglaw.com/login?target=https%3A%2F%2Fwww.bloomberglaw.com%2Fproduct%2Fblaw%2Fbloomberglawnews%2Fbloomberg-law-news%2FX3PCH00G000000%3Fbc%3DW1siU2VhcmNoICYgQnJvd3NlIiwiaHR0cHM6Ly93d3cuYmxvb21iZXJnbGF3LmNvbS9wcm9kdWN0L2JsYXcvc2VhcmNoL3Jlc3VsdHMvZGJiMGQzNjQ5OWQwNzIwZTdjOWJhNjFlMzNkNzIzMGEiXV0--57030f07302760cc75154291d4cdb2d41a4147c4%26criteria_id%3Ddbb0d36499d0720e7c9ba61e33d7230a%26search32%3D1RTCEF9JNUb1T_EmcQu5nw%253D%253DZUz_57ZJbXWFP0f3thE_SVBAdpXKtE4VFv0P9mUOVQt9eF8Yamks4JR42aTJlQaDM2saSZxsh3sHtGg9DzkVo6BjxCY_acJrWjzI2JXQjZ184CuUQPoHFFyXoQZa0oj4" target="_blank">Read the full article</a> (subscription required). </p>{429F8861-FCC9-4AFF-B777-4E7C7A20C784}https://www.dailyjournal.com/articles/376305-optimizing-justice-means-the-days-should-be-long-but-the-trial-shortmeredith.osborn@arnoldporter.comOptimizing justice means the days should be long, but the trial shortWed, 20 Dec 2023 00:00:00 -0600{9CF5BA72-4DF3-482F-AEF1-FA7780A2F1C2}https://www.arnoldporter.com/en/perspectives/publications/2023/12/virtual-and-digital-health-digestAllison W. Shurenhttps://www.arnoldporter.com/en/people/s/shuren-allison-wallison.shuren@arnoldporter.comChristopher Andersonhttps://www.arnoldporter.com/en/people/a/anderson-christopherchristopher.anderson@arnoldporter.comAbeba Habtemariamhttps://www.arnoldporter.com/en/people/h/habtemariam-abebaAbeba.Habtemariam@arnoldporter.comEugenia E. Piersonhttps://www.arnoldporter.com/en/people/p/pierson-eugenia-eEugenia.Pierson@arnoldporter.comAmanda Cassidy, M.P.P.https://www.arnoldporter.com/en/people/c/cassidy-amandaamanda.cassidy@arnoldporter.comBobby McMillinhttps://www.arnoldporter.com/en/people/m/mcmillin-bobbybobby.mcmillin@arnoldporter.comJacqueline Mulrynehttps://www.arnoldporter.com/en/people/m/mulryne-jacquelinejacqueline.mulryne@arnoldporter.comMonique Nolanhttps://www.arnoldporter.com/en/people/n/nolan-moniquemonique.nolan@arnoldporter.comNancy L. Perkinshttps://www.arnoldporter.com/en/people/p/perkins-nancy-lnancy.perkins@arnoldporter.comDr. Beatriz San Martinhttps://www.arnoldporter.com/en/people/s/san-martinbeatriz.sanmartin@arnoldporter.comEmma Elliston, Ph.D.https://www.arnoldporter.com/en/people/e/elliston-emmaemma.elliston@arnoldporter.comAna González-Lamuñohttps://www.arnoldporter.com/en/people/g/gonzalez-lamuno-anaana.lamuno@arnoldporter.comRachel Mowerhttps://www.arnoldporter.com/en/people/m/mower-rachelrachel.mower@arnoldporter.comAlison H. Petershttps://www.arnoldporter.com/en/people/p/peters-alison-halison.peters@arnoldporter.comKatie Brownhttps://www.arnoldporter.com/en/people/b/brown-katiekatie.brown@arnoldporter.comMickayla A. Stogsdillhttps://www.arnoldporter.com/en/people/s/stogsdill-mickaylamickayla.stogsdill@arnoldporter.comShama Aktarhttps://www.arnoldporter.com/en/people/a/aktar-shamashama.aktar@arnoldporter.comVirtual and Digital Health DigestThis digest covers key virtual and digital health regulatory and public policy developments during November 2023 from the United States, United Kingdom, and European Union.Wed, 20 Dec 2023 00:00:00 -0600<p>Thank you to all who joined us for our <a href="https://www.arnoldporter.com/en/perspectives/events/2023/12/the-2023-race-to-regulate-the-us-eu-and-uk">December 13 panel titled the &ldquo;Race to Regulate.&rdquo;</a>&nbsp;In case you missed it, unpack this year&rsquo;s pivotal legal challenges impacting the 2023 &mdash; and 2024 &mdash; digital legal landscape in our <a href="/-/media/files/perspectives/publications/2023/12/virtual-and-digital-health-digest-yir-pocket-guide.pdf?rev=5a5dfa3ca7e04591b65cb47daa6860bf&amp;hash=26893350ED7CD092F9D1AB7C19ED89F0">Year in Review Pocket Book</a>. Do you have a 2023 digital health highlight or something you would like to see covered on the Digest in 2024? Tell us about it: <a href="http://">digitaldigest_editors@arnoldporter.com</a>.</p> <p>This digest covers key virtual and digital health regulatory and public policy developments during November 2023 from the United States, United Kingdom, and European Union.</p> <h2>In this issue, you will find the following:</h2> <h3>U.S. News</h3> <ul> <li><a href="#US FDA Regulatory Updates">FDA Regulatory Updates</a></li> <li><a href="#US Healthcare Fraud and Abuse Updates">Healthcare Fraud and Abuse Updates</a></li> <li><a href="#US Corporate Transactions Updates">Corporate Transactions Updates</a></li> <li><a href="#US Provider Reimbursement Updates">Provider Reimbursement Updates</a></li> <li><a href="#US Policy Updates">Policy Updates</a></li> <li><a href="#US Privacy Updates">Privacy Updates</a></li> </ul> <h3>EU and UK News</h3> <a name="US FDA Regulatory Updates"></a> <ul> <li><a href="#EU Regulatory Updates">Regulatory Updates</a></li> <li><a href="#EU Privacy Updates">Privacy Updates</a></li> <li><a href="#EU Intellectual Property Updates">Intellectual Property Updates</a>&nbsp;</li> </ul> <h2>U.S. News</h2> <h3>FDA Regulatory Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://www.fda.gov/medical-devices/medical-device-regulatory-science-research-programs-conducted-osel/artificial-intelligence-program-research-aiml-based-medical-devices" target="_blank">Center for Devices and Radiological Health (CDRH) Issues Update on Its Artificial Intelligence (AI) Program</a>.</strong> On November 16, CDRH issued an update on its AI program. The program conducts regulatory science research to ensure patient access to safe and effective medical devices using AI or ML, and is one of 20 research programs in CDRH&rsquo;s Office of Science and Engineering Laboratories. In this update, CDRH noted a number of regulatory science gaps that the AI program is focused on addressing. These gaps include (1) a lack of methods to analyze the training and test methods to understand, measure, and minimize bias of AI-enabled devices; (2) a lack of methods to evaluate the safety and effectiveness of continuously learning AI algorithms; and (3) a lack of methods to evaluate the safety and effectiveness of emerging clinical applications of AI-enabled medical devices. CDRH also described the research areas it focuses on, including methods to measure and quantify algorithmic bias, reduce performance difference among subpopulations, and ensure generalizability.</p> <p><strong><a rel="noopener noreferrer" href="https://www.fda.gov/medical-devices/medical-devices-news-and-events/cdrh-takes-steps-advance-further-discussions-pulse-oximeters" target="_blank">CDRH Announces New Initiatives on Pulse Oximeters</a>.</strong> On November 16, CDRH also announced two new initiatives relating to pulse oximeters. First, CDRH announced that it will hold a virtual public meeting of the Anesthesiology and Respiratory Therapy Devices Panel of the Medical Devices Advisory Committee on February 2, 2024 to discuss pulse oximeters. Planned discussion topics for this meeting include &ldquo;a new approach to improve the quality of premarket studies and associated methods used to evaluate the performance of pulse oximeters submitted for premarket review, taking into consideration a patient&rsquo;s skin pigmentation and patient-reported race and ethnicity&rdquo; and &ldquo;the type and amount of data that should be provided by manufacturers to the FDA to evaluate the performance of pulse oximeters submitted for premarket review ... to ensure pulse oximetry is equitable and accurate for all patients.&rdquo; Second, CDRH announced that it published a discussion paper, &ldquo;<a rel="noopener noreferrer" href="https://www.fda.gov/medical-devices/products-and-medical-procedures/pulse-oximeters#discussionpaper" target="_blank">Approach for Improving the Performance Evaluation of Pulse Oximeter Devices Taking Into Consideration Skin Pigmentation, Race and Ethnicity</a>.&rdquo; CDRH stated that it &ldquo;hope[s] that this discussion paper and request for feedback will help to engage stakeholders and obtain public comment about concerns with pulse oximetry before the upcoming virtual public meeting.&rdquo; According to CDRH, these new initiatives were informed by an earlier November 2022 advisory committee meeting, where stakeholders shared perspectives about ongoing concerns that pulse oximeters may be less accurate in individuals with darker skin pigmentation.</p> <p><strong><a rel="noopener noreferrer" href="https://owletcare.com/pages/fda-response" target="_blank">Owlet, Inc. (Owlet) Receives De Novo Clearance for Over-the-Counter Pulse Oximeter Sock for Infants</a>.</strong> On November 9, Owlet announced that it received <em>de novo</em> marketing authorization for Dream Sock&reg;, its over-the-counter pulse oximeter sock for infants. According to Owlet, <a name="US Healthcare Fraud and Abuse Updates"></a>the cleared Dream Sock&reg; monitors and displays health readings from infants wearing the sock, including pulse rate and oxygen saturation level. It also alerts caregivers if their infant&rsquo;s readings fall outside of preset ranges. This clearance follows Owlet&rsquo;s receipt of a <a rel="noopener noreferrer" href="https://www.fda.gov/inspections-compliance-enforcement-and-criminal-investigations/warning-letters/owlet-baby-care-inc-616354-10052021" target="_blank">Warning Letter</a> from the FDA in October 2021, relating to the regulatory status of the company&rsquo;s Smart Sock products.</p> <h3>Healthcare Fraud and Abuse Updates</h3> <p><strong>OIG Issues Consumer Alert on Remote Patient Monitoring Schemes.</strong> On November 21, OIG <a rel="noopener noreferrer" href="https://oig.hhs.gov/fraud/consumer-alerts/consumer-alert-remote-monitoring/" target="_blank">issued a consumer alert</a> warning individuals of fraud involving telemedicine and remote patient monitoring (RPM). The alert identified a marked rise in medically unnecessary orders for equipment used to monitor patients remotely arising from consumer-directed ads and patient cold-calling by DME companies or pharmacies. According to the OIG, equipment may or may not be sent or the equipment sent may not be FDA-approved. The alert urged consumers to review their explanation of benefits and report fraud to the dedicated U.S. Department of Health and Human Services (HHS) hotline. Interestingly, the alert also gave insight into OIG&rsquo;s thoughts on when RPM is medically necessary. Specifically, the OIG stated RPM &ldquo;is beneficial for those whose condition might deteriorate quickly, where monitoring can reduce complications, hospitalizations, or death.&rdquo;</p> <p>The November RPM consumer alert is the latest in a range of OIG&rsquo;s enforcement tactics (e.g., <a rel="noopener noreferrer" href="https://oig.hhs.gov/documents/root/1045/sfa-telefraud.pdf" target="_blank">July 2022 Special Fraud alert</a>, <a rel="noopener noreferrer" href="https://www.justice.gov/opa/pr/justice-department-charges-dozens-12-billion-health-care-fraud" target="_blank">DOJ announcement of coordinated law enforcement action against telemedicine health care fraud</a>, etc.) and guidance (OIG issued an updated <a rel="noopener noreferrer" href="https://www.foley.com/insights/publications/2023/11/hhs-oig-new-general-compliance-program-guidance/" target="_blank">Compliance Program Guidance</a> last month) to stimy a sharp rise in fraudulent claims following a major industry shift to telemedicine spurred by the COVID-19 pandemic. This alert comes on the heels of hefty fines and penalties for medically unnecessary DME schemes (see coverage of select, key enforcement actions in this area in the <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/10/virtual-and-digital-health-digest">October</a> and <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/11/virtual-and-digital-health-digest">November</a> digests). DOJ and HHS summarized some of the telemedicine enforcement actions in its <a rel="noopener noreferrer" href="https://oig.hhs.gov/publications/docs/hcfac/FY2022-hcfac.pdf" target="_blank">most recent annual report</a>, published in November. Consumer alerts are usually followed by increased OIG enforcement action. Looking ahead, expect to see continued enforcement in the RPM space, including scrutiny on providers&rsquo; DME arrangements with third-party vendors.</p> <h3>Corporate Transactions Updates</h3> <p><strong>New Amazon Prime Benefit: Unlimited Doctor Visits for $9 a Month Through One Medical. </strong>On November 8, Amazon announced it now offers 24/7 on-demand virtual care nationwide as a Prime membership benefit for an additional $9 a month. The new benefit, available only to Amazon Prime members, will offer healthcare services for preventive care, immediate concerns, and chronic conditions like diabetes. $9 a month also allows Prime members access to in-person office visits at any of One Medical&rsquo;s hundreds of locations in the U.S., advertising &ldquo;longer appointments so you don&rsquo;t feel rushed.&rdquo; This announcement comes less than a year after Amazon first announced its US$3.9 billion acquisition of the primary care provider One Medical, which had promising financials with US$1 billion in revenue, but was not yet profitable at the time of the acquisition.</p> <p>$9 a month for healthcare appears to be a slam-dunk for Amazon, but it is too early to tell whether this will be Amazon&rsquo;s golden ticket to secure a lasting spot in the digital health market.</p> <p><strong>Will Relaxation of Certain California Telehealth Laws Promote More Investment? </strong>California recently passed two bills that will make it easier for California residents to access telehealth services. AB1369 authorizes non-California licensed specialists to provide telehealth care to California residents who have life-threatening conditions or diseases. This could make the concept of virtual on-call specialists or subspecialists platforms easier to access in smaller, more rural communities without the specific employment costs, and thus create opportunities for geographically independent multi-specialty groups to market outside of their primary service area. Likewise, AB 232 addresses a critical shortage in behavioral health counselors by authorizing marriage and<a name="US Provider Reimbursement Updates"></a> family therapists, professional clinical counselors, and clinical social workers licensed in other states to provide mental health services to California residents for up to 30 days. Investment and consolidation of behavioral health providers has continued to be strong as result of the ongoing high demand, and this bill will likely promote continued growth in this sector.</p> <h3>Provider Reimbursement Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://www.finance.senate.gov/hearings/ensuring-medicare-beneficiary-access-a-path-to-telehealth-permanency" target="_blank">Senate Finance Subcommittee Considers Telehealth Permanency</a>. </strong>On November 14, the Senate Finance Subcommittee on Health Care held a&nbsp;<a rel="noopener noreferrer" href="https://www.finance.senate.gov/hearings/ensuring-medicare-beneficiary-access-a-path-to-telehealth-permanency" target="_blank">hearing</a> titled &ldquo;Ensuring Medicare Beneficiary Access: A Path to Telehealth Permanency&rdquo; to discuss making a broad range of pandemic-era telehealth flexibilities permanent. The senators heard testimony from telehealth practitioners and researchers on a range of telehealth flexibilities set to expire at the end of 2024, which include removing geographic restrictions and waiving in-person visit requirements for mental health telehealth services.</p> <p>Witnesses stressed that Congress should make these flexibilities permanent far in advance of their expiration date so that regulatory uncertainty does not hinder telehealth investment. While most witnesses agreed that reimbursement for telehealth services should continue at parity for in-person visits to account for technology costs, telehealth researcher and Harvard professor Dr. Ateev Mehrotra <a rel="noopener noreferrer" href="https://www.finance.senate.gov/imo/media/doc/1114_mehrotra_testimony.pdf" target="_blank">argued</a> in his testimony that payment parity would give virtual-only companies an unfair competitive advantage.</p> <p>A group of bipartisan lawmakers expressed support for continued telehealth flexibility. Many lawmakers commented specifically on the ability of telehealth to expand Medicare beneficiaries&rsquo; access to care. Remarking on the value of telemedicine to rural communities, Ranking Member Steve Daines (R-MT) shared, &ldquo;It&rsquo;s safe to say there&rsquo;s no going back now, as we&rsquo;ve seen how transformative telehealth can be.&rdquo; Earlier this year, subcommittee Chairman Ben Cardin (D-MD) and Sen. Daines co-sponsored the <a rel="noopener noreferrer" href="https://www.congress.gov/118/bills/s2016/BILLS-118s2016is.pdf" target="_blank">CONNECT for Health Act of 2023</a>, a bipartisan bill that would make most telehealth flexibilities permanent.</p> <p><strong><a rel="noopener noreferrer" href="https://www.medpac.gov/wp-content/uploads/2023/03/November-2023-meeting-transcript-SEC.pdf" target="_blank">MedPAC Debates Reimbursement for Software as a Medical Service</a>.</strong> On November 2, commissioners on the Medicare Payment Advisory Commission (MedPAC) held a preliminary meeting to discuss how Medicare should cover and pay for software as a medical service.</p> <p>Since 2018, Medicare has covered <a rel="noopener noreferrer" href="https://www.medpac.gov/wp-content/uploads/2023/03/SaaS-MedPAC-11.23.pdf#page=5" target="_blank">software</a> that helps providers make clinical decisions, such as algorithmic diagnostic systems that analyze images of the eye to detect retinal diseases. Such services generally have been <a rel="noopener noreferrer" href="https://www.medpac.gov/wp-content/uploads/2023/03/SaaS-MedPAC-11.23.pdf#page=7" target="_blank">separately payable</a> under the Outpatient Prospective Payment System and Physician Fee Schedule. While payments for software programs are typically <a rel="noopener noreferrer" href="https://www.medpac.gov/wp-content/uploads/2023/03/SaaS-MedPAC-11.23.pdf#page=10" target="_blank">bundled</a> under the Inpatient Prospective Payment System, manufacturers can apply for new technology add-on payments, which provide additional payments for two to three years. </p> <p>Several commissioners voiced <a rel="noopener noreferrer" href="https://www.medpac.gov/wp-content/uploads/2023/03/November-2023-meeting-transcript-SEC.pdf#page=203" target="_blank">concern</a> over this payment program, arguing that Medicare should not be providing additional payments for technology that should make healthcare more efficient.</p> <p>While Medicare <a rel="noopener noreferrer" href="https://www.medpac.gov/wp-content/uploads/2023/03/SaaS-MedPAC-11.23.pdf#page=8" target="_blank">spending</a> on separately payable software programs has remained low, the MedPAC commissioners <a rel="noopener noreferrer" href="https://www.medpac.gov/wp-content/uploads/2023/03/November-2023-meeting-transcript-SEC.pdf#page=201" target="_blank">acknowledged</a> that spending on software as a medical service may increase rapidly as technology evolves. Other commissioners advocated an active role for the Medicare program in driving <a rel="noopener noreferrer" href="https://www.medpac.gov/wp-content/uploads/2023/03/November-2023-meeting-transcript-SEC.pdf#page=197" target="_blank">innovation</a> and suggested <a rel="noopener noreferrer" href="https://www.medpac.gov/wp-content/uploads/2023/03/November-2023-meeting-transcript-SEC.pdf#page=195" target="_blank">reforms</a> such as creating a new benefit category or adjusting the definition of durable medical equipment to include standalone software products.</p> <p>The MedPAC commissioners agreed the payment for software as a medical service would require further study. In concluding the discussion, Commissioner Robert Cherry <a rel="noopener noreferrer" href="https://www.medpac.gov/wp-content/uploads/2023/03/November-2023-meeting-transcript-SEC.pdf#page=221" target="_blank">stated</a>, &ldquo;[w]e are far away from having a set of recommendations about how these things should be dealt with.&rdquo;</p> <p><strong><a rel="noopener noreferrer" href="https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202310&amp;RIN=1117-AB40" target="_blank">DEA Expects to Propose New Telemedicine Regulations</a>.</strong> According to the Biden administration&rsquo;s updated <a rel="noopener noreferrer" href="https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST&amp;currentPub=true&amp;agencyCode=&amp;showStage=active&amp;agencyCd=1100&amp;csrf_token=B5B9F83B4176FA2075604066786EDABA67002B651BF563E549595094304807B3F6F4BEFA8F6343C8CC31CA756C62E07869B9" target="_blank">regulatory agenda</a>, the Drug Enforcement Administration (DEA) expects to propose new rules governing the prescription of controlled substances via telemedicine later this month.</p> <p>As we covered in the <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/10/virtual-and-digital-health-digest#Provider%20Reimbursement%20Updates">October digest</a>, the DEA allowed physicians to prescribe controlled substances without an in-person visit during the public health emergency (PHE). In February 2023, anticipating the end of the PHE, the agency proposed two rules (<a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/FR-2023-03-01/pdf/2023-04248.pdf" target="_blank">first PHE rule available here</a> and <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/FR-2023-03-01/pdf/2023-04217.pdf" target="_blank">second PHE rule available here</a>) that, if finalized, would have significantly curtailed the telemedicine flexibilities permitted during the PHE. After receiving thousands of comments in opposition to the proposal, the agency issued a <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/FR-2023-10-10/pdf/2023-22406.pdf" target="_blank">temporary rule</a> extending the telemedicine flexibilities until December 31, 2024. The agency stated it expects to promulgate new standards or safeguards by the fall of 2024.</p> <p><strong><a rel="noopener noreferrer" href="https://epicresearch.org/articles/telehealth-utilization-higher-than-pre-pandemic-levels-but-down-from-pandemic-highs" target="_blank">Data Shows Telehealth Decline</a>.</strong> <a name="US Policy Updates"></a>According to recently released data from <a rel="noopener noreferrer" href="https://epicresearch.org/" target="_blank">Epic Research</a>, telehealth usage has dropped nearly 25 percentage points since its peak in 2020 but remains higher than before public health emergency levels. The dataset, gathered from health systems using Epic Electronic Health Records software, shows that telehealth still accounts for 37% of mental health encounters and 11% of infectious disease appointments.</p> <h3>Policy Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://www.whitehouse.gov/briefing-room/legislation/2023/11/17/press-release-bill-signed-h-r-6363/#:~:text=On%20Thursday%2C%20November%2016%2C%202023,funded%20in%20four%20appropriations%20bills." target="_blank">Congress Averts Shutdown and Pushes Funding Debate to 2024</a>.</strong> Throughout November, Congress considered various pathways forward to avoid a potential federal government shutdown on November 17. On November 16, President Biden signed into law a &ldquo;laddered&rdquo; continuing resolution that extends current federal funding through January 19 and February 2. Before the end of the year, Congress must pass the &ldquo;National Defense Authorization Act (NDAA) for Fiscal Year 2024&rdquo; (<a rel="noopener noreferrer" href="https://www.congress.gov/bill/118th-congress/house-bill/2670" target="_blank">H.R. 2670</a>/<a rel="noopener noreferrer" href="https://www.congress.gov/bill/118th-congress/senate-bill/2226" target="_blank">S. 2226</a>) and may consider a national security supplemental funding package as requested by President Biden earlier this fall. While the House and Senate have met throughout the fall to reconcile significant differences between the two versions of the NDAA bills, the NDAA is expected to receive a vote by mid- to late-December. If passed, the supplemental funding package could include funding for Israel, Ukraine, the Indo-Pacific region (Taiwan), humanitarian assistance for the Gaza Strip, border security, and the processing of migrants at the southern U.S. border.</p> <p><strong><a rel="noopener noreferrer" href="https://crsreports.congress.gov/product/pdf/R/R47849" target="_blank">CRS Reports on Biosecurity Concerns From Use of AI</a>.</strong> On November 22, the Congressional Research Service published a report titled &ldquo;Artificial Intelligence in the Biological Sciences: Uses, Safety, Security, and Oversight.&rdquo; The report discusses some of the challenges that digital technologies&rsquo; AI-enabled software may pose to the U.S. health system, including laboratory biosecurity and biosafety concerns.</p> <p><strong><a rel="noopener noreferrer" href="https://energycommerce.house.gov/events/health-subcommittee-hearing-understanding-how-ai-is-changing-health-care" target="_blank">House Hearings on Health-Related AI Issues</a>.</strong> On November 29, the House Energy &amp; Commerce Health Subcommittee held a hearing titled, &ldquo;Understanding How AI is Changing Health Care.&rdquo; Members discussed the importance of establishing robust privacy standards to protect patients&rsquo; data, including Rep. Greg Pence (R-IN) speaking in support of expanding privacy protections beyond what is already established under the <a name="US Privacy Updates"></a>Health Insurance Portability and Accountability Act (HIPAA) given the advent of new biometric and wearable health technology. The Energy &amp; Commerce Committee plans to host government officials from HHS, the Department of Commerce, and the Department of Energy for a <a rel="noopener noreferrer" href="https://energycommerce.house.gov/posts/chair-rodgers-announces-full-committee-ai-hearing-with-energy-health-and-commerce-departments" target="_blank">hearing</a> on December 13 titled, &ldquo;Leveraging Agency Expertise to Foster American AI Leadership and Innovation.&rdquo;</p> <h3>Privacy Updates</h3> <p><strong>Class Action Suit Claims UnitedHealthcare Used AI to Wrongfully Deny Claims.</strong> On November 14, the estates of two deceased beneficiaries of UnitedHealthcare&rsquo;s Medicare Advantage plans filed a <a rel="noopener noreferrer" href="https://aboutblaw.com/bbs8" target="_blank">class action lawsuit</a> against UnitedHealthcare (UHC) for its alleged deployment of AI to make adverse coverage decisions about elderly patients. According to the complaint, which was filed in the U.S. District Court for the District of Minnesota, UHC knew that the AI model known as &ldquo;nH Predict&rdquo; had a 90% error rate and that roughly 0.2% of policyholders would appeal denied claims while &ldquo;the vast majority [would] either pay out-of-pocket costs or forgo the remainder of their prescribed post-acute care.&rdquo; According to the complaint, the nH Predict AI Model, as used by UHC, directs the insurer&rsquo;s medical review employees to cease covering care without considering an individual patient's needs. By &ldquo;eliminating the labor costs associated with paying doctors and other medical professionals for the time needed to conduct an individualized, manual review of each of its insured&rsquo;s claims,&rdquo; the plaintiffs assert, UHC saves money by denying claims they otherwise would have paid. As alleged in the complaint, UHC&rsquo;s use of the tool to deny the members' post-acute coverage is &ldquo;systematic, illegal, malicious, and oppressive.&rdquo;</p> <p>UHC <a rel="noopener noreferrer" href="https://news.bloomberglaw.com/health-law-and-business/unitedhealthcare-accused-of-using-ai-to-wrongfully-deny-claims" target="_blank">reportedly</a> plans to defend the suit as meritless. A spokesperson for naviHealth, UHC&rsquo;s care management company behind the algorithm, stated that the nH Predict tool was not used for making coverage determinations, but rather &ldquo;as a guide to help us inform providers, families, and other caregivers about what sort of assistance and care the patient may need both in the facility and after returning home.&rdquo;</p> <p>UHC is not the only health insurer to face allegations of misuse of AI. In July, Cigna was sued by a purported class (represented by the same firm that filed the suit against UHC) in the U.S. District Court for the Eastern District of California. The <a rel="noopener noreferrer" href="https://aboutblaw.com/9vN" target="_blank">suit</a> alleges that Cigna Corp. and Cigna Health and Life Insurance Co. engaged in a scheme &ldquo;to systematically, wrongfully, and automatically deny its insureds the thorough, individualized physician review of claims guaranteed to them by California law and, ultimately, the payments for necessary medical procedures owed to them under Cigna&rsquo;s health insurance policies.&rdquo; According to the complaint, Cigna developed an algorithm known as PXDX &ldquo;to enable its doctors to automatically deny payments in batches of hundreds or thousands at a time for treatments that do not match certain preset criteria, thereby evading the legally-required individual physician review process.&rdquo;</p> <p><strong>HHS Releases Strategic Plan to Improve Cybersecurity in the Healthcare Sector.</strong> On December 6, HHS issued a <a rel="noopener noreferrer" href="https://aspr.hhs.gov/cyber/Documents/Health-Care-Sector-Cybersecurity-Dec2023-508.pdf" target="_blank">plan of action</a> for improving cybersecurity protections in the healthcare sector. According to HHS, there was a 93% increase in large cybersecurity breaches reported to the HHS Office for Civil Rights in the 2018-2022 period, with a 278% increase in large breaches involving ransomware. To help prevent future cybersecurity incidents, the HHS plan of action, building on the <a rel="noopener noreferrer" href="https://www.whitehouse.gov/wp-content/uploads/2023/03/National-Cybersecurity-Strategy-2023.pdf" target="_blank">National Cybersecurity Strategy</a> announced by President Biden in 2022, sets forth four targeted strategic steps HHS will take in the coming year:</p> <ul> <li><strong>Publish cybersecurity performance goals.</strong> HHS will publish &ldquo;Healthcare and Public Health Sector-specific Cybersecurity Performance Goals&rdquo; (HPH CPGs) designed to help healthcare institutions prioritize implementation of high-impact cybersecurity practices. The HPH CPGs will distinguish between &ldquo;essential&rdquo; goals for minimum foundational cybersecurity practices and &ldquo;enhanced&rdquo; goals encouraging adoption of more advanced practices.</li> <li><strong>Provide resources to incentivize and implement cybersecurity practices. </strong>HHS plans to work with Congress to obtain new authority and funding to administer financial support and incentives for high-impact cybersecurity practices in the healthcare sector.</li> <li><strong>Support greater enforcement and accountability.</strong> HHS will propose new enforceable cybersecurity standards, informed by the HPH CPGs, which would be incorporated into existing programs. CMS will propose new cybersecurity requirements for hospitals through Medicare and Medicaid, and the HHS Office for Civil Rights will propose adding new cybersecurity requirements to the HIPAA Security Rule.</li> <li><strong>Enhance the HHS &ldquo;one-stop shop&rdquo; for <a name="EU Regulatory Updates"></a>healthcare sector cybersecurity. </strong>HHS will enhance its &ldquo;one-stop shop&rdquo; cybersecurity support function for the healthcare sector within the Administration of Strategic Preparedness and Response to make it easier for the healthcare industry to access the support and services the federal government has to offer. This would enable industry members more readily to obtain technical assistance and guidance from various federal agencies with sophisticated cybersecurity expertise.</li> </ul> <h2>EU and UK News</h2> <h3>Regulatory Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://www.medtecheurope.org/resource-library/the-future-of-europes-medical-technology-regulations/" target="_blank">MedTech Europe Proposes Changes in the IVDR and MDR</a>.</strong> On November 7, the European trade association for the medical technology industry, MedTech Europe, published a position paper proposing changes to the In-Vitro Diagnostic Medical Devices Regulation (IVDR) and Medical Devices Regulation (MDR). In the position paper, MedTech Europe outlines what it believes are the structural issues with the regulations, stressing that they are causing innovation to be hampered. The structural issues identified are:</p> <ul> <li>The unpredictability and inefficiency of the certification processes regarding the information expected from companies, the requirements, and the timelines</li> <li>The inefficiencies caused by the existing decentralized system of notified bodies</li> </ul> <p>According to MedTech, these issues risk widening a gap in access to medical technology, and MedTech proposes certain measures, in particular:</p> <ul> <li>Introducing an efficient CE Marking System that guarantees access to devices and innovations, including solutions such as cutting down on bureaucracy or fully digitizing the EU system, allowing digital labelling</li> <li>Incorporating an innovation principle, including solutions such as creating accelerated assessment pathways for medical technologies innovations addressing unmet medical needs or pre-certification access models</li> <li>Introducing an Accountable Governance Structure that is able to coordinate and manage the decentralized network of notified bodies, take system level decisions, issue guidance, and represent them within Europe and globally</li> </ul> <p><strong><a rel="noopener noreferrer" href="https://health.ec.europa.eu/latest-updates/update-rev-1-mdcg-position-paper-notice-manufacturers-and-notified-bodies-ensure-timely-compliance-2023-11-29_en" target="_blank">The MDCG Issues Revised Position Paper on Compliance With the MDR and IVDR</a>.</strong> On November 29, the Medical Device Coordination Group (MDCG) published a revised version of the notice to manufacturers and notified bodies to ensure timely compliance with MDR and IVDR requirements that was published in June 2022. In the position paper, the MDCG calls on manufacturers to transition to the regulations and submit their certification applications as soon as possible, as delaying submissions could lead to a backlog of requests to notified bodies, resulting in delays and, ultimately, in product shortages. The call particularly urges manufacturers of class D IVD devices, which must transition to the IVDR by May 2025.</p> <p>In addition, and in line with some of the recommendations from industry above, the MDCG calls on notified bodies to make the certification process more efficient, transparent, and predictable, and highlights the importance of properly guiding and assisting manufacturers in the conformity assessment application. The MDCG also calls on the notified bodies to regularly provide data on the situation regarding the certifications, and to increase the transparency about their capacity and timelines, ideally on a common website compiling that of every other notified body in Europe.</p> <p><strong><a rel="noopener noreferrer" href="https://publications.parliament.uk/pa/cm5804/cmselect/cmsctech/248/report.html" target="_blank">Updates on the Regulation of AI in the UK</a>.</strong> On November 16, the UK government published its response to the <a rel="noopener noreferrer" href="https://publications.parliament.uk/pa/cm5803/cmselect/cmsctech/1769/report.html#heading-7" target="_blank">interim report</a> from the Science, Innovation and Technology Committee dated August 31, 2023 (discussed in our <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/09/virtual-and-digital-health-digest">September digest</a>). The interim report highlighted 12 key challenges in relation to the governance of AI and the government&rsquo;s progress in addressing these challenges, as well as actions set out in its <a rel="noopener noreferrer" href="https://www.gov.uk/government/publications/ai-regulation-a-pro-innovation-approach" target="_blank">white paper</a> published in March 2023 (see our <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/04/virtual-and-digital-health-digest">April digest</a>). The most notable updates are:</p> <ul> <li>The intent to still <em>not</em> introduce new AI-specific legislation at this stage and to continue an evidence-based and iterative approach to regulation</li> <li>The establishment of a &ldquo;Central AI Risk Function&rdquo; within the Department for Science, Innovation and Technology to identify and monitor developing risks from AI and coordinate their mitigation using broad expertise</li> <li>The plan to pilot a multi-agency advice service known as the &ldquo;DRCF AI and Digital Hub&rdquo; for innovators of AI technologies to access tailored support from multiple regulators simultaneously</li> <li>The establishment of the &ldquo;AI Safety Institute&rdquo; (previously called the Frontier AI Taskforce) to provide insights into the capabilities and risks of frontier AI and foundation models</li> </ul> <p>The government&rsquo;s response to the AI white paper consultation, with updates on its regulatory approach to AI, is expected before the end of 2023. </p> <p>On the topic of AI regulation, on November 23, a <a rel="noopener noreferrer" href="https://bills.parliament.uk/bills/3519/publications" target="_blank">Private Members&rsquo; Bill</a> was introduced to the House of Lords. The main purpose of the bill is <a name="EU Privacy Updates"></a>to establish a central AI authority to coordinate and monitor the regulatory approach to AI, while promoting transparency, reducing bias, and balancing regulatory burden against risk. This largely tracks the government&rsquo;s white paper, but seeks to introduce the terms into law. While only a minority of Private Members&rsquo; Bills become legislation, it is clear there is a growing debate in the UK about whether the proposed approach to regulation is correct.</p> <h3>Privacy Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://www.europarl.europa.eu/news/en/press-room/20231127IPR15422/personal-health-data-better-portability-and-safe-sharing" target="_blank">European Parliament Agrees on Text of the EHDS Regulation</a>.</strong> On November 28, the members of the European Parliament working on the European Health Data Space regulation reached an agreement on the text for the regulation. The agreed text aims to promote the use of aggregated health data for public interest reasons, but introduces limits on the use of these data, including bans to its use (e.g., in advertising or sharing with third parties), and making access subject to a request to national bodies. </p> <p>The agreed text includes the need to obtain explicit permission from patients to use aggregated sensitive health data, provides patients with an opt out mechanism for other health data, and the option to challenge a decision of a health data access body, either personally or through a non-profit organization on their behalf. In addition, the agreed text underlines the importance of providing for sanctions in case of misuse of personal health data and includes the obligation to store health data in the EU. The text will have to be formally adopted by the European Parliament in a plenary vote in December and, if approved, will then need to be adopted by the Council.</p> <p><strong><a rel="noopener noreferrer" href="https://www.consilium.europa.eu/en/press/press-releases/2023/11/27/data-act-council-adopts-new-law-on-fair-access-to-and-use-of-data/" target="_blank">Council of the European Union Adopts Data Act</a>. </strong>On November 27, the Council of the European Union formally adopted the regulation on harmonized rules on fair access to and use of data (Data Act), following the formal <a rel="noopener noreferrer" href="https://www.europarl.europa.eu/news/en/press-room/20231106IPR09025/parliament-backs-plans-for-better-access-to-and-use-of-data" target="_blank">adoption</a> by the European Parliament on November 9. The Data Act aims to make data more accessible and ensure fair access and use, and establishes harmonized rules on sharing data generated through the use of connected products and services. The adopted text includes measures related to:</p> <ul> <li>Trade secrets, including a definition and adequate safeguards</li> <li>Data sharing, including measures to prevent abuse of contractual imbalances in data sharing contracts, safeguards against unlawful data transfers, and the possibility for the European Commission, the European Central Bank, and EU bodies to access and use data held by private sector in case of public emergencies or public interest</li> <li>Governance, including an option for member states to have a data coordinator authority, which would act as a single point of contact</li> </ul> <p>The Data Act will now be published in the EU Official Journal in the following weeks, and will enter into force 20 days after its publication. Note that the application of the new rules will be 20 months after its entry into force.</p> <p><strong><a rel="noopener noreferrer" href="https://www.ncsc.gov.uk/collection/guidelines-secure-ai-system-development" target="_blank">Global Guidelines for AI Security Published</a>. </strong>On November 27, the UK&rsquo;s National Cyber Security Centre published its Guidelines for Secure AI System Development, which were developed in collaboration with the U.S. Cybersecurity and Infrastructure Security Agency. The guidelines have been endorsed by cybersecurity agencies from 16 additional countries, including those in France, Germany, and Japan, and are intended to assist developers make informed cybersecurity decisions at all stages of the development process and beyond. The guidelines are split into four key areas (secure design, secure development, secure deployment, <a name="EU Intellectual Property Updates"></a>and secure operation and maintenance) with suggested considerations and mitigations to help improve security at each stage of the AI system life cycle. The guidelines are voluntary but all stakeholders are urged to read and take account of the guidelines. It is possible that the guidelines will inform the minimum cybersecurity requirements that are expected to be imposed through the proposed EU AI Act and AI Liability Directive. </p> <h3>Intellectual Property Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://www.bailii.org/ew/cases/EWHC/Ch/2023/2948.html" target="_blank">Landmark UK High Court Decision Makes It Easier to Patent AI-Related Inventions</a>. </strong>On November 21, the UK High Court handed down its judgment on <a rel="noopener noreferrer" href="https://www.bailii.org/ew/cases/EWHC/Ch/2023/2948.html" target="_blank">Emotional Perception AI Ltd. v. Comptroller-General of Patents, Designs, and Trade Marks</a>, overturning the UK Intellectual Property Office&rsquo;s (UKIPO) <a rel="noopener noreferrer" href="https://www.ipo.gov.uk/p-challenge-decision-results/p-challenge-decision-results-bl?BL_Number=O/542/22" target="_blank">refusal</a> to recognize a trained Artificial Neural Network (ANN) as patentable. The patentee&rsquo;s invention concerned a process which identified semantically similar media files to the input media file via an ANN, to provide end users with recommended media files, for example, similar songs. The UKIPO refused to grant the patent on the basis that the application was a &ldquo;computer program as such,&rdquo; thus falling under the exclusion to patentability under s.1(2)(c) of the Patents Act 1977. On appeal, the High Court disagreed with the UKIPO concluding that the trained ANN was not a computer program, and in any case, the invention made a substantial technical contribution, and therefore could be patentable. Although the case was not directly related to digital health, this decision is welcome news for AI innovators including those involved in the development of medical technologies, as providing an important route to avoid engaging the computer program exclusion in the UK. The UKIPO has taken prompt action and already <a rel="noopener noreferrer" href="https://www.gov.uk/government/publications/examination-of-patent-applications-involving-artificial-neural-networks/examination-of-patent-applications-involving-artificial-neural-networks-ann" target="_blank">published a notification</a> of an immediate change to practice for the examination of ANNs, such that inventions involving an ANN should not be objected to under the &ldquo;program for a computer&rdquo; exclusion.</p> <p><span style="font-size: small;"><em>*The following individuals contributed to this Newsletter:</em></span></p> <p><span style="font-size: small;"><em><em>Amanda Cassidy is employed as a&nbsp;</em>Senior Health Policy Advisor at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Amanda is not admitted to the practice of law.<br /> Eugenia Pierson is employed as a Senior Health Policy Advisor at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Eugenia is not admitted to the practice of law.<br /> Mickayla <em>Stogsdill&nbsp;</em>is employed as a Senior Policy Specialist at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Mickayla is not admitted to the practice of law.<br /> Katie Brown is employed as a Policy Advisor at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Katie is not admitted to the practice of law.<br /> </em></span></p> <p><span style="font-size: small;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{95FCE7E8-7630-4A4F-8C97-33263B88B57D}https://www.biosliceblog.com/2023/12/latest-virtual-and-digital-health-digest-2/Jacqueline Mulrynehttps://www.arnoldporter.com/en/people/m/mulryne-jacquelinejacqueline.mulryne@arnoldporter.comEmma Elliston, Ph.D.https://www.arnoldporter.com/en/people/e/elliston-emmaemma.elliston@arnoldporter.comAna González-Lamuñohttps://www.arnoldporter.com/en/people/g/gonzalez-lamuno-anaana.lamuno@arnoldporter.comLatest Virtual and Digital Health DigestWed, 20 Dec 2023 00:00:00 -0600{459885AB-D2AD-4447-A081-B297AC5860D0}https://www.arnoldporter.com/en/perspectives/advisories/2023/12/new-california-labor-laws-affecting-the-workplace-in-2024David J. Reishttps://www.arnoldporter.com/en/people/r/reis-david-jdavid.reis@arnoldporter.comMatthew R. Ditonhttps://www.arnoldporter.com/en/people/d/diton-matthew-rmatthew.diton@arnoldporter.comKatharine L. Watershttps://www.arnoldporter.com/en/people/w/waters-katharine-lkatharine.waters@arnoldporter.comNew California Labor Laws Affecting the Workplace in 2024<p>With 2024 quickly approaching, it&rsquo;s time for employers to prepare for new California laws affecting the workplace. </p>Wed, 20 Dec 2023 00:00:00 -0600<p>With 2024 quickly approaching, it&rsquo;s time for employers to prepare for new California laws affecting the workplace. Here are some of the more important employment laws to come out of Sacramento this year (with a more detailed description below):</p> <ul> <li>SB 497: Presumption of Employer Retaliation in the California Labor Code</li> <li>AB 2188 and SB 700: Limits on Cannabis Use in Employment Decisions</li> <li>2 CCR &sect; 11017.1 (2023): Consideration of Criminal History in Employment Decisions</li> <li>SB 616: Increase to Minimum Paid Sick Leave Requirements</li> <li>SB 848: New Reproductive Loss Leave (Pursuant to Existing Applicable Leave Policies)</li> <li>SB 553: Mandatory Workplace Violence Prevention Plan and Injury and Illness Prevention Plan </li> <li>AB 1076 and SB 699: Strengthening and Broadening California Non-Competition Laws</li> <li>SB 365: Litigation Stays Pending Arbitration Appeals</li> <li>AB 636: Wage Theft Prevention Notice Additions </li> <li>SB 525: Minimum Wage Increases for Healthcare Workers</li> </ul> <p>These laws take effect on <strong>January 1, 2024</strong>, unless otherwise noted. </p> <h2>Harassment, Discrimination, and Retaliation</h2> <h3>SB 497: Presumption of Employer Retaliation in the California Labor Code</h3> <p>This bill creates a rebuttable presumption[[N:This means that the law presumes that the employer retaliated against the employee under these specified circumstances. As a result, the burden shifts to the employer to affirmatively show that the adverse employment action was <strong>not</strong> related to the employee&rsquo;s protected activity.]] of retaliation in favor of the employee, if an employer takes an adverse employment action against an employee <strong>within 90</strong> days of that employee engaging in certain protected conduct under Labor Code sections 98.6 or 1197.5, which includes, notably, exercising rights under the California Equal Pay Act, filing or participating in a Labor Commissioner claim, or engaging in lawful, off-duty conduct. It is already unlawful to discriminate or retaliate against an employee for engaging in these protected activities, but the presence of a rebuttable presumption will no doubt spur further claims from disgruntled former employees who otherwise lack direct evidence of retaliation. The bill additionally expands the maximum civil penalty under California&rsquo;s whistleblower statute (Labor Code section 1102.5) to <strong>$10,000 per employee for each violation</strong>, from the previous maximum of $10,000 per violation. </p> <p><strong>What Should Employers Do To Prepare</strong>: Employers should implement trainings for supervisory employees about the effect of the new law, including the importance of contemporaneously documenting performance issues so that the employer can, if need be, successfully rebut the law&rsquo;s presumption of retaliation. </p> <h3>AB 2188 and SB 700: Limits on Cannabis Use in Employment Decisions</h3> <p>Under AB 2188, employers may not discriminate against an employee or applicant based on the person&rsquo;s off-duty, off-worksite use of cannabis. The law still allows employers to conduct preemployment drug testing and an employer may still refuse to hire on the basis of a valid preemployment drug test that looks <strong>only</strong> for psychoactive cannabis metabolites. The law maintains an employer&rsquo;s right to insist upon a drug-free workplace, and likewise does not permit employees to possess, be impaired by, or use cannabis on the job. SB 700 additionally prohibits employers from requesting information from job applicants relating to prior use of cannabis. </p> <p><strong>What Should Employers Do To Prepare</strong>: Employers should review application materials and employment policies to ensure full compliance with the law. Employers should also train all interviewing and hiring employees on relevant prohibited questions relating to cannabis use. Employers who conduct preemployment drug testing should check policies and practices to ensure the test does not screen for non-psychoactive cannabis metabolites.</p> <h3>2 CCR &sect; 11017.1 (2023): Consideration of Criminal History in Employment Decisions</h3> <p>The Fair Chance Act, enacted in 2018, limited the use of criminal history in employment decisions. Under existing law, it is unlawful for an employer to inquire about an applicant&rsquo;s criminal history prior to a conditional offer of employment, subject to limited exceptions. Existing law also dictates express requirements when an employer intends to rescind a conditional offer, in whole or in part, due to the applicant&rsquo;s criminal history. This includes an individualized assessment of whether the applicant&rsquo;s criminal history has a direct and adverse relationship to the job position. In the event of an intended recission of the conditional offer, the law requires notice to the applicant in writing and a chance for the applicant to challenge the decision. </p> <p>Newly in effect as of <strong>October 1, 2023</strong>, the law clarifies the definition of applicant to be inclusive of applicants, current employees seeking another position within the company, and employees who may undergo a background check due to a company&rsquo;s change in management or changes in policy or practice. While the initial individualized assessment presently exists, new regulations set forth a more detailed list of factors to consider.[[N:This includes, but is not limited to specific personal conduct resulting in conviction; harm to property or people; permanence of the harm; age at the time of the offense; and the nature of the job sought including duties and whether the context of the conviction is likely to arise in the workplace.]] Likewise, if an applicant chooses to challenge the decision to rescind the job offer and provides mitigating evidence,[[N:Under the new regulations, there is a lengthy list of the types of mitigating evidence, such as evidence of consistent employment before and after offense; participation in self-improvement efforts, such as schooling, rehabilitation, community service, and more; age at the time of the offense; and likelihood that similar conduct will occur. This list is illustrative, not exhaustive.]] the employer is required to consider it. </p> <p>The revised law specifically prohibits consideration of non-felony convictions for marijuana possession that are two or more years old, pursuant to Labor Code section 432.8. However, the law also recognizes and affirms that employers who are subject to federal or state laws that prohibit individuals with certain criminal records from holding particular positions or occupations or mandate a screening process, can comply with those laws.[[N:The law also recognizes that &ldquo;compliance with federal or state laws or regulations that mandate particular criminal history screening processes or requiring that an employee or applicant possess or obtain any required occupational licenses constitute rebuttable defenses to an adverse impact claim under the Act.&rdquo;]] Examples include, but are not limited to, health facilities where applicants will have regular access to patients or health facilities and pharmacies where applicants would have access to medication and controlled substances. </p> <p><strong>What Should Employers Do To Prepare</strong>: Employers should review internal hiring procedures and ensure any of the employer&rsquo;s agents, such as hiring agencies, are compliant with the act. Employers should prepare check lists or update any template notices to ensure that any notices of recission for conditional offers include all required information. While the notice to the applicant requires detail individual to the applicant, there are some boilerplate information sections that can be prepared in advance.[[N:For example, information on how to provide mitigating evidence, if desired, and a non-exhaustive list of types of mitigating evidence.]] Whatever method you choose, it is important to ensure that the employee responsible for drafting the applicant notice includes all required information. </p> <h2>Leaves of Absence</h2> <h3>SB 616: Increase to Minimum Paid Sick Leave Requirements</h3> <p>This law increases required paid sick leave that an employer must provide each year from three days (24 hours) to <strong>five days (40 hours)</strong> and increases the minimum total accrual cap from six days (48 hours) to <strong>10 days (80 hours)</strong>. Employers may still use an accrual method of one hour of paid sick leave for every 30 hours worked, or a different accrual method so long as the accrual is on a regular basis such that the employee has no less than 3 days (or 24 hours) of paid sick leave by the completion of the employee&rsquo;s 120th calendar day of employment, and no less than 5 days (or 40 hours) of paid sick leave by the completion of the employee&rsquo;s 200th calendar day of employment.</p> <p>Employers still may limit an employee&rsquo;s annual usage of paid sick leave, but the annual usage cap increases from 24 hours to <strong>40 hours</strong>. Additionally, employers must allow employees to roll over at least <strong>five days</strong> of accrued sick leave into the following year (up from three days under prior law). Employers still must provide written notice to employees about the amount of paid sick leave they have available, such as including their current balance on pay stubs.</p> <p>Notably, this bill generally excludes employees covered by collective bargaining agreements (CBAs) that meet certain criteria, but does extend some provisions regarding the use of paid sick leave to non-construction industry CBAs. For example, CBA employees who use paid sick leave cannot be required to search for or find a replacement worker for that time. CBA employees are also entitled to a rebuttable presumption of retaliation if an employer takes adverse action within 30 days of certain protected activity. </p> <p><strong>What Should Employers Do To Prepare</strong>: Employers should examine their existing paid sick leave policy (or general paid time off policy if the policies are combined) to ensure their existing policies are compliant with the new requirements.</p> <h3>SB 848: New Reproductive Loss Leave (Pursuant to Existing Applicable Leave Policies)</h3> <p>SB 848 requires employers with five or more employees to provide employees who have worked for at least 30 days with up to <strong>five days</strong> (which can be nonconsecutive) of reproductive loss leave. The leave shall be taken under an existing applicable leave policy of the employer and can be unpaid if there is no existing policy that would provide leave for these purposes, except that an employee can use certain other paid leave balances that are available, such as vacation or accrued and available paid sick leave. The list of qualifying events, which is illustrative and not exhaustive, includes miscarriage, failed adoption, stillbirth, or an unsuccessful assisted reproduction. </p> <p>The leave must be taken within three months of the qualifying event. If the employee chooses to take leave under another leave entitlement provision, reproductive loss leave must be taken within three months of the last day of the other leave entitlement end date (for example, leave under the California Family Rights Act). If an employee experiences multiple qualifying events, employers are not required to grant more than 20 days of leave in one twelve-month period. Unlike California&rsquo;s recent bereavement leave law, SB 848 is silent regarding the provision of documentation supporting the need to take reproductive loss leave. The new law also requires employers to maintain employee confidentiality relating to requests for, or use of, reproductive loss leave.</p> <p><strong>What Should Employers Do To Prepare</strong>: Employers should update their employee handbook to include notice to employees of their right to take reproductive loss leave. Employers should also train supervisors and managers regarding their obligations under these provisions. </p> <h2>Workplace Safety Laws</h2> <h3>SB 553: Mandatory Workplace Violence Prevention Plan and Injury and Illness Prevention Plan </h3> <p>Effective <strong>July 1, 2024</strong>, employers will be required to implement and train employees on a Workplace Violence Prevention Plan (WVPP) and an Injury and Illness Prevention Plan (IIPP). These requirements apply to nearly all employers, excluding employees teleworking from a location of the employee&rsquo;s choice; employment workplaces with fewer than 10 employees working at any given time and where the workplace is not accessible to the public; healthcare facilities operating under Cal/OSHA&rsquo;s Violence Prevention in Health Care regulation; and law enforcement agencies.</p> <p>The WVPP must be <strong>in writing</strong> and easily accessible to all employees, authorized representatives, and representatives of Cal/OSHA, at all times. The WVPP must include: </p> <ul> <li>Names or job titles of persons responsible for implementing the plan</li> <li>Effective procedures to obtain active involvement of employees and authorized employee representatives in developing and implementing the plan</li> <li>Methods employer will use to coordinate implementation</li> <li>Effective procedures to accept and respond to reports of workplace violence</li> <li>Effective procedures to ensure compliance with the plan</li> <li>Effective procedures to communicate with employees on workplace violence matters such as how employees report incidents and how incidents will be investigated</li> <li>Effective procedures to respond to actual or prospective workplace violence emergencies</li> <li>Procedures to develop and provide training</li> <li>Procedures to identify and evaluate workplace hazards</li> <li>Procedures to correct workplace violence hazards</li> <li>Procedures to review the effectiveness of the plan</li> <li>Any other procedures or other information required by Cal/OSHA</li> </ul> <p>Likewise, the IIPP must be <strong>in writing</strong> and include:</p> <ul> <li>Identification of person(s) responsible for implementing the program</li> <li>Employer&rsquo;s system for identifying and evaluating workplace hazards, including scheduled periodic inspections</li> <li>Employer&rsquo;s methods and procedures for correcting unsafe or unhealthy conditions and work practices</li> <li>An occupational health and safety training program designed to instruct employees in general safe and health work practices, including specific instruction regarding hazards specific to each employee&rsquo;s job assignment</li> <li>Employer&rsquo;s system for communicating with employees on health and safety matters</li> <li>Employer&rsquo;s system for ensuring employee compliance</li> <li>A WVPP compliant with this law</li> </ul> <p>Employers are required to create workplace violence incident logs. The new law defines &ldquo;workplace violence&rdquo; as &ldquo;any act of violence or threat of violence that occurs in a place of employment&rdquo; and includes &ldquo;threat or use of physical force against an employee,&rdquo; or &ldquo;[a]n incident involving a threat or use of a firearm or other dangerous weapon.&rdquo; Notably, there is no requirement of actual injury. Lawful acts of self-defense or defense of others are not considered &ldquo;workplace violence.&rdquo;</p> <p>Workplace violence incident logs must contain specific information about the incident, including the date, time, and location of the incident; the type of workplace violence; a detailed description of the incident; a classification of who committed the violence; a classification of circumstances at the time of the incident; a classification of where the incident occurred; the type of incident and whether it involved things like a weapon, sexual assault, or a threat of violence; any consequences of the incident; and information about the person completing the incident log. </p> <p>Violence incident logs and records of workplace violence hazard identification, evaluation, and correction shall be maintained for a minimum of <strong>five years</strong>, and training records shall be maintained for a minimum of <strong>one year</strong>. On request and without cost, records shall be made available for examination and copying within <strong>15 calendar days</strong> of the request. Records of workplace violence investigations must be maintained for a minimum of <strong>five years</strong> and shall be available to the Division of Occupational Safety and Health upon request for examination and copying. </p> <p>Effective <strong>January 1, 2025</strong>, the WVPP will additionally allow an affected employee&rsquo;s collective bargaining representative[[N:This expansion does not limit an employer&rsquo;s existing ability to seek a Temporary Restraining Order on behalf of an employee under Code of Civil Procedure section 527.8.]] to seek a Temporary Restraining Order (TRO) against the individual responsible for violence (or threat thereof) on behalf of the employee. Effective the same date, TROs may also be sought for harassment in the workplace. </p> <p><strong>What Should Employers Do To Prepare</strong>: Employers should create Cal/OSHA compliant plans relating to Workplace Violence Prevention and Injury and Illness Prevention. Though the law does not take effect until July 1, 2024, these requirements are extensive and will take time to implement. </p> <h2>Non-Compete Agreements</h2> <h3>AB 1076 and SB 699: Strengthening and Broadening California Non-Competition Laws</h3> <p>Aside from very narrow exceptions, non-compete agreements are generally unenforceable in California. AB 1076 codifies existing case law in California that, in effect, makes it unlawful for employers to require employees to sign a non-competition agreement or include a non-compete clause in an employment agreement, aside from very narrowly-specified exceptions under the law. </p> <p>The law also requires employers to send <strong>written notice</strong> by <strong>February 14, 2024</strong> to any <strong>current or former</strong> employee (employed after <strong>January 1, 2022</strong>) who signed an invalid non-competition agreement. The notice must inform the employee that the non-competition agreement (or clause) is void. Any such notices must be delivered to the last known address and the email address of the employee or former employee.</p> <p>Relatedly, SB 699 adds that non-competition agreements are void and unenforceable under existing California law regardless of where they are signed and regardless of whether the employment was maintained outside of California. Facially, this would, for example, prohibit an Oregon employer who has a valid non-compete agreement under Oregon law with an Oregon-based employee from seeking to enforce that agreement against an employee who wishes to move to California to join a competitor. </p> <p>Notably, this bill creates a private right of action, allowing a current, former, or prospective employee to seek an injunction and civil penalties challenging an allegedly unlawful non-competition provision, and, if successful, to recover attorney&rsquo;s fees and costs. </p> <p><strong>What Should Employers Do To Prepare</strong>: Employers should look at all current employment agreements and restrictive covenants and ensure that any non-competition language is either removed or meets an exception within the law &mdash; even if the employer has no intention of actually enforcing any unlawful restrictive covenants. Although we expect the portions of this law that purport to invalidate non-competition agreements between out-of-state employers and out-of-state employees to be subject to quick legal challenge, unless (and until) those portions are struck down, the significant penalties available to employees make it potentially very costly for an employer to either agree to, or seek to enforce, an invalid restrictive covenant agreement. </p> <p>Moreover, employers should determine which current or former employees require notice and create a plan for meeting the written notification requirement by February 14, 2024. Employers should maintain copies of any such notices in the employees&rsquo; or former employees&rsquo; personnel files.</p> <h2>Discretionary Stays Pending Appeals of Arbitrability </h2> <h3>SB 365: Litigation Stays Pending Arbitration Appeals</h3> <p>California Code of Civil Procedure section 916 generally grants an automatic stay of trial proceedings when a party appeals a trial court order, including an order dismissing or denying a petition to compel arbitration. SB 365 changes this law, and gives courts discretion as to whether to stay a case pending an appeal of an order dismissing or denying a petition to compel arbitration. </p> <h2>Notice and Minimum Wage</h2> <h3>AB 636: Wage Theft Prevention Notice Additions </h3> <p>Employers are already required under existing law (Labor Code section 2810.5) to provide a wage and employment notice to new, non-exempt hires (sometimes referred to as a Wage Theft Prevention Notice). AB 636 amends Section 2810.5 to require employers to provide additional information in their Wage Theft Prevention Notices regarding federal and state emergency declarations applicable to any counties where employees are employed that may affect the employees&rsquo; health and safety during their employment and that were issued within 30 days before the employee&rsquo;s first day of work. </p> <p>The Labor Commissioner will create and post an updated template on its website that is compliant with the new requirements.</p> <p>Separately, by <strong>March 15, 2024</strong>, agricultural employers will also be required to give a separate notice to H-2A employees on their first day of work. </p> <p><strong>What Should Employers Do To Prepare</strong>: Employers should check the Labor Commissioner website for revised Section 2810.5 notice templates and, once issued, update their new-hire documents to include the revised notices for non-exempt employees. </p> <h3>SB 525: Minimum Wage Increases for Healthcare Workers</h3> <p>This bill establishes <strong>five</strong> scheduled minimum wage increases for covered healthcare workers, starting <strong>June 1, 2024</strong>. (Though, some county-owned facilities are not subject to these increases until <strong>2025</strong>.) </p> <p>The schedules depend on the nature of the employer and schedules vary as to dates of compliance and wage amounts. Wages range from <strong>$18 to $25 per hour</strong> and applicable dates range as early as <strong>June 1, 2024</strong> and, at times, continue compliance through at least <strong>June 1, 2033</strong>. Rates of increase also vary widely depending on the type of healthcare facility. For example, for large employers and integrated health systems with 10,000 or more full-time equivalent employees, the minimum wage will increase to $23 per hour on June 1, 2024, $24 per hour on June 1, 2025, and $25 per hour on June 1, 2026. For most other hospitals, the minimum wage will increase to $18 per hour on June 1, 2024, with 3.5% increases annually until May 31, 2033, when the minimum wage will become $25 per hour.</p> <p>The law also requires the creation of a process for employers who believe they cannot continue to operate as a going concern if forced to meet the new minimum wages to seek a temporary pause or alternative phase in schedule of the minimum wage requirements. This process must be established by the Department of Industrial Relations no later than <strong>March 1, 2024</strong>.</p> <p><strong>What Should Employers Do To Prepare</strong>: While many California healthcare employees&rsquo; wages are set by collective bargaining agreements, healthcare employers should examine the new law to determine what their new minimum wage rates will be beginning on June 1, 2024. Employers who think they may need to apply for a temporary pause or alternative phase in schedule should contact their employment counsel to navigate the application process. </p> <p>The above advisory was created by Labor and Employment attorneys at Arnold &amp; Porter&rsquo;s San Francisco office. The <a href="https://www.arnoldporter.com/en/services/capabilities/practices/labor-and-employment" target="_self">Labor and Employment</a> group can offer a range of services from general advice, reviewing policies and practices for compliance, dispute settlement, litigation, traditional labor work, and more. Should any questions or concerns arise, please feel free to contact any of the attorneys listed here for additional support.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{B7CDB8C0-7FDD-4638-BA95-1652F15E6603}https://www.arnoldporter.com/en/perspectives/advisories/2023/12/ftc-publishes-final-cars-ruleMichael A. Mancusihttps://www.arnoldporter.com/en/people/m/mancusi-michael-amichael.mancusi@arnoldporter.comRaqiyyah Pippinshttps://www.arnoldporter.com/en/people/p/pippins-raqiyyahraqiyyah.pippins@arnoldporter.comAnthony Raglanihttps://www.arnoldporter.com/en/people/r/raglani-anthonyanthony.raglani@arnoldporter.comGeorge Eichelbergerhttps://www.arnoldporter.com/en/people/e/eichelberger-georgeGeorge.Eichelberger@arnoldporter.comFTC Publishes Final CARS Rule Targeting Unfair and Deceptive Auto Sales PracticesOn December 12, the Federal Trade Commission (FTC) issued a final rule imposing a broad set of new regulatory requirements and restrictions on the sale and financing of automobiles to consumers.&nbsp;Wed, 20 Dec 2023 00:00:00 -0600<p>On December 12, the Federal Trade Commission (FTC) issued a final rule[[N: Federal Trade Commission, <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/12/ftc-announces-cars-rule-fight-scams-vehicle-shopping" target="_blank">FTC Announces CARS Rule to Fight Scams in Vehicle Shopping</a> (Dec. 12, 2023).]] imposing a broad set of new regulatory requirements and restrictions on the sale and financing of automobiles to consumers. In brief, the final rule &mdash; or the Combating Auto Retail Scams Trade Regulation Rule (the CARS Rule) &mdash; establishes new disclosure obligations for covered automobile dealers (or auto dealers) and specifically prohibits taking certain actions and making certain representations in the course of selling, leasing, or arranging financing for automobiles or offering and selling related products and services. <br /> <br /> The CARS Rule will take effect on July 30, 2024. This article summarizes the new requirements and prohibitions imposed by the CARS Rule and provides key takeaways for industry participants as they prepare to comply with these new federal regulatory requirements.</p> <h2>Background</h2> <p> The FTC has the authority to prescribe regulations regarding unfair or deceptive acts and practices by auto dealers,[[N: 15 U.S.C. &sect; 45.]] and to take action against such entities for engaging in such practices in violation of the Federal Trade Commission Act (FTC Act).[[N: 12 U.S.C. &sect; 5519(d).]] Concurrently, the Bureau of Consumer Financial Protection (CFPB) possesses the authority to enforce federal consumer financial laws applicable to the financing of automobile purchases by auto finance companies &mdash; including the prohibition against unfair, deceptive, or abusive acts or practices &mdash; and also has supervision and examination authority over &ldquo;larger participants&rdquo; in the automobile financing market.[[N: Auto dealers, which take ownership of automobiles and sell them directly to consumers (and, in certain cases, also provide direct financing for the sale of an automobile), and auto finance companies, which provide &ldquo;indirect&rdquo; financing options to consumers to enable them to purchase automobiles from auto dealers, collectively effect a significant majority of the sales and financing of automobiles to consumers. While certain consumers may arrange separately for &ldquo;direct&rdquo; financing of an automobile purchase through a bank or other financial institution, as noted in the preamble to the CARS Rule, most consumers finance automobile purchases through one of the two channels summarized above.]] However, under the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which created the CFPB, auto dealers are expressly excluded from the CFPB&rsquo;s jurisdiction.[[N: 12 U.S.C. &sect; 5519(a).]] Instead, the Dodd-Frank Act reserved regulatory authority over consumer protection matters related to traditional auto dealers to the FTC. <br /> <br /> While FTC is the primary federal regulator tasked with protecting consumers from unfair or deceptive practices by auto dealers themselves, the CFPB and other federal and state agencies have for several years been active in enforcing consumer finance and trade practices laws and regulations applicable to the automobile sale and financing process and the actors operating in that market. For instance, since 2019, the CFPB has commenced enforcement proceedings involving auto finance companies and service providers based upon allegations of unfair, deceptive, or abusive acts and practices and other violations of applicable laws and regulations resulting in the payment by such companies of over US$63 million in aggregate consumer redress and US$26 million in civil money penalties. Likewise, in the past several years, the FTC and various state law enforcement agencies have brought numerous actions against auto dealers for potentially unfair and deceptive sales practices conducted by auto dealers.[[N: Federal Trade Commission, <a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/p204800_cars_rule.pdf" target="_blank">Combating Auto Retail Scams Trade Regulation Rule</a>, p. 27-28.]] <br /> <br /> The adoption by the FTC of the CARS Rule therefore is consistent with the broader and ongoing efforts of federal and state governmental authorities to scrutinize automobile sales and financing practices, as well as the sale and servicing of related vehicle protection products (VPPs), or &ldquo;add-on&rdquo; products as they are described in the CARS Rule, by auto dealers, auto finance companies, and other market actors. <br /> <br /> As noted in the preamble to the CARS Rule, despite years of enforcement activity at the federal and state levels as referenced above, the FTC issued a proposed rule in June 2022 to establish a host of new regulatory requirements and prohibitions specifically aimed at auto sales practices due to the agency&rsquo;s perception of continued engagement by market actors in unfair and deceptive acts and practices. Industry participants and other interested parties submitted tens of thousands of comments to the FTC regarding the proposed rule, and after over a year of consideration, deliberation, and revision, the FTC finalized the regulations set forth by the CARS Rule. <br /> <br /> Although the FTC appeared to address in the CARS Rule numerous concerns voiced by commenters during the rulemaking process, certain industry participants have expressed the view that the requirements imposed by the CARS Rule are based on flawed assumptions, insufficient data regarding the extent of alleged consumer harm, inadequate cost-benefit analysis, and a lack of input from the full spectrum of industry stakeholders, and therefore violates federal law, including the Administrative Procedure Act and the FTC&rsquo;s procedures for issuing regulations under Section 5 of the FTC Act.[[N: 5 U.S.C. &sect;&sect; 551&ndash;559; 15 U.S.C. &sect; 57a.]] It is therefore possible, if not probable, that certain industry participants will pursue legal challenges to prevent or delay implementation of the CARS Rule on the bases summarized above, potentially among others.</p> <h2>The Scope of the CARS Rule</h2> <p> The CARS Rule regulates the conduct of covered &ldquo;motor vehicle dealers&rdquo; or &ldquo;dealers&rdquo; in respect of the sale or financing of &ldquo;covered motor vehicles,&rdquo; within the meaning given to those terms under the final rule. The CARS Rule defines a covered &ldquo;motor vehicle dealer&rdquo; as any person, including any individual or entity, or resident in the United States, or any territory of the United States, that (1) is licensed by a state, a territory of the United States, or the District of Columbia to engage in the sale of covered motor vehicles; (2) takes title to, holds an ownership interest in, or takes physical custody of covered motor vehicles; and (3) is predominantly engaged in the sale and servicing of covered motor vehicles, the leasing and servicing of covered motor vehicles, or both.</p> <p> Importantly, the definition of &ldquo;covered motor vehicle&rdquo; under the CARS Rule applies only to a certain subset of motor vehicles. The CARS Rule defines a &ldquo;covered motor vehicle&rdquo; as any self-propelled vehicle designed for transporting persons or property on a street, highway, or other road. The CARS Rule explicitly excludes motorcycles, motor homes, and boats and marine equipment from this definition. These exclusions are a departure from the proposed rule, which had specifically included each of these vehicles in the definition of covered motor vehicle.</p> <h2>Prohibited Conduct</h2> <p> The CARS Rule identifies a number of specific misrepresentations involving &ldquo;material&rdquo; information that violate the FTC Act&rsquo;s prohibition against unfair or deceptive trade practices. Under the final rule, &ldquo;material&rdquo; information is defined as information which is likely to affect a person&rsquo;s choice of, or conduct regarding, goods or services. Although the FTC received numerous comments addressing each of the specific misrepresentations included below, the text of the final rule is largely identical to the text of the proposed rule, with only minor changes being implemented following the public comment period.</p> <p>A covered dealer is prohibited by the CARS Rule from making any misrepresentation, expressly or by implication, regarding material information about the following:</p> <ul> <li>The costs or terms of purchasing, financing, or leasing a vehicle</li> <li>Any costs, limitation, benefit, or any other aspect of a VPP or &ldquo;add-on&rdquo; product or service</li> <li>Whether the terms are, or transaction is, for financing or a lease</li> <li>The availability of any rebates or discounts that are factored into the advertised price but not available to all consumers</li> <li>The availability of vehicles at an advertised price</li> <li>Whether any consumer has been or will be preapproved or guaranteed for any product, service, or term</li> <li>Any information on or about a consumer&rsquo;s application for financing</li> <li>When the transaction is final or binding on all parties</li> <li>Keeping cash down payments or trade-in vehicles, charging fees, or initiating legal process or any action if a transaction is not finalized or if the consumer does not wish to engage in a transaction</li> <li>Whether or when a dealer will pay off some or all of the financing or lease on a consumer&rsquo;s trade-in vehicle</li> <li>Whether consumer reviews or ratings are unbiased, independent, or ordinary consumer reviews or ratings of the dealer or the dealer&rsquo;s products or services</li> <li>Whether the dealer or any of the dealer&rsquo;s products is associated with the United States government or any federal, state, or local government</li> <li>Whether consumers have won a prize or sweepstakes</li> <li>Whether, or under what circumstances, a vehicle may be moved, including across state lines or out of the country</li> <li>Whether, or under what circumstances, a vehicle may be repossessed</li> <li>Any of the disclosures required by the CARS Rule (discussed in detail below)</li> </ul> <p> In addition to the prohibitions outlined above, the CARS Rule also separately prohibits (1) selling VPPs that provide no benefit to consumers or (2) charging a consumer for any item unless the dealer obtains express, informed consent by the consumer for the charge. With regard to the former prohibition, the final regulations provide illustrative examples of VPPs that the FTC deems to provide &ldquo;no benefit&rdquo; to consumers. Notably, these examples include products or services that do not provide coverage for the motor vehicle, the consumer, or the transaction or that are duplicative of warranty coverage, specifically including a guaranteed asset/auto protection (GAP) product if the consumer&rsquo;s vehicle or neighborhood is excluded from coverage or the loan-to-value ratio would result in the consumer not benefiting financially from the product or service. The FTC rejected appeals from certain commenters to prohibit the sale of VPPs that do not provide &ldquo;substantial, material&rdquo; benefits or that provide only &ldquo;minimal&rdquo; benefits; however, the determination of whether a VPP or related service that is not expressly identified by rule may benefit a particular consumer involves a degree of inherent subjectivity. Accordingly, stakeholders may wish to monitor the implementation and enforcement of this provision of the CARS Rule to obtain further clarity regarding its scope.</p> <h2>New Disclosures Required by the CARS Rule</h2> <p> The CARS Rule also requires covered dealers to make disclosures to consumers related to the sale or financing of covered vehicles, in specific instances. Required disclosures must be made &ldquo;clearly and conspicuously.&rdquo; That term is given a complex definition that varies depending upon the method of communication (e.g., visual or audible); however, as a general matter, disclosures must be &ldquo;difficult to miss (i.e., easily noticeable)&rdquo; and &ldquo;easily understandable.&rdquo; An important component of compliance with this standard is providing disclosures in languages other than English when doing so is necessary for the consumer to &ldquo;easily understand&rdquo; the content of the disclosure. More broadly, guidance published in connection with the publication of the final rule indicates that, as a practical matter, dealers should apply the same principles that they would follow in developing their own marketing materials.[[N: Federal Trade Commission, <a rel="noopener noreferrer" href="https://www.ftc.gov/business-guidance/resources/ftc-cars-rule-combating-auto-retail-scams-dealers-guide#answers" target="_blank">FTC CARS Rule: Combating Auto Retail Scams &mdash; A Dealers Guide</a> (Dec. 2023).]]</p> <p>These new disclosure requirements are summarized as follows:</p> <ul> <li><strong>Offering Price.</strong> In connection with the sale or financing of a covered vehicle, a dealer must disclose the offering price in any advertisement for a specific vehicle and any communication with the consumer that discusses a specific vehicle.</li> <li><strong>VPPs Are Not Required.</strong> When making any representation, expressly or by implication, about a VPP or &ldquo;add-on&rdquo; product or service, a dealer must disclose that the additional product or service is not required and that the consumer can purchase the vehicle without it. The CARS Rule defines an &ldquo;add-on product&rdquo; as any product or service not provided to the consumer or installed on the vehicle by the vehicle manufacturer and for which the dealer, directly or indirectly, charges a consumer in connection with a vehicle sale, lease, or financing transaction. This definition includes extended warranties, service and maintenance plans, payment programs, and GAP agreements, among other products.</li> <li><strong>Total of Payments and Consideration for a Financed or Lease Transaction.</strong> When making any representation, expressly or by implication, about a monthly payment for any vehicle, a dealer must also disclose the total amount the consumer will pay to purchase or lease a vehicle if making all payments as scheduled.</li> <li><strong>Monthly Payments Comparison.</strong> When making any comparison between payment options, expressly or by implication, that includes discussion of a lower monthly payment, a dealer must disclose that the lower monthly payment will increase the total amount the consumer will pay to purchase or lease the vehicle.</li> </ul> <h2>Penalty Provisions</h2> <p> Violations of the CARS Rule will be enforced in the same manner as other violations of Section 5 of the FTC Act. Specifically, violations may result in a company being required to reform its business practices, pay restitution to impacted consumers, and pay civil money penalties in amounts of up to $50,120 per violation (subject to annual adjustments for inflation).[[N: Federal Trade Commission, <a rel="noopener noreferrer" href="https://www.ftc.gov/business-guidance/resources/ftc-cars-rule-combating-auto-retail-scams-dealers-guide#answers" target="_blank">FTC CARS Rule: Combating Auto Retail Scams &mdash; A Dealers Guide</a> (Dec. 2023); Federal Trade Commission, <a rel="noopener noreferrer" href="https://www.ftc.gov/enforcement/penalty-offenses" target="_blank">Notices of Penalty Offenses</a> (last visited Dec. 19, 2023).]]</p> <h2>Takeaways</h2> <p> The FTC&rsquo;s publication of the CARS Rule is the latest step in an ongoing effort by federal and state governmental authorities to enhance oversight of auto sales and financing and enforce applicable laws and regulations against market actors that may engage in unlawful business practices. As noted at the outset, the CARS Rule will take effect on July 30, 2024; until then, however, covered dealers should take the following steps to prepare for these new requirements:</p> <ul> <li><strong>Advertising and Consumer Communications Should Be Reviewed.</strong> The CARS Rule establishes new disclosure obligations relating to advertisements and other communications with consumers. As discussed above, these requirements apply to communications involving a vehicle&rsquo;s offering price, the sale of VPPs, and payment information relating to the purchase. Express or implied communications addressing covered matters may be subject to the requirements of the final rule. Additionally, dealers must adhere to the truth and transparency standards established by the final rule irrespective of the method of communication or the primary language of the consumer. These provisions of the CARS Rule may require covered dealers to reassess the content, format, and delivery mechanisms associated with relevant consumer communications and advertisements.</li> <li><strong>Enhancement of Internal Controls and Training Will Be Required. </strong>The CARS Rule indicates that enhanced regulatory scrutiny will be applied to the specific forms of potentially unfair or deceptive conduct outlined in the final rule. Covered dealers should ensure that personnel are aware of specifically prohibited conduct and are trained to avoid engaging in unfair and deceptive trade practices as established under the final rule.</li> <li><strong>VPP Sales Practices Are Under Scrutiny. </strong>The provisions of the CARS Rule addressing the offering and sale of VPPs and related services reflects the ongoing supervisory focus of federal and state governmental authorities on the practices of auto dealers relating to the offering and sale of VPPs, such as extended warranties, service and maintenance plans, and GAP products. Notably, in addition to restricting the sale of certain VPPs that provide consumers with &ldquo;no benefits,&rdquo; consumers must provide their express, informed consent before being charged for a VPP covered by the final rule. The FTC may pursue enforcement actions against dealers that engage in practices that subvert express, informed consent (e.g., providing a prechecked box or engaging in any other practice that has the effect of impairing consumers&rsquo; autonomy, decision making, or choice).[[N: Federal Trade Commission, <a rel="noopener noreferrer" href="https://www.ftc.gov/business-guidance/resources/ftc-cars-rule-combating-auto-retail-scams-dealers-guide#answers" target="_blank">FTC CARS Rule: Combating Auto Retail Scams &mdash; A Dealers Guide</a> (Dec. 2023).]]</li> <li><strong>Supervision and Enforcement Activity Is Likely To Intensify. </strong>Regulatory oversight by federal and state governmental authorities in matters relating to auto sales and finance has been intensifying in recent years. The publication of the CARS Rule is likely to further bolster these efforts by creating a regulatory regime that can be used as a basis for supervision, investigation, and enforcement by the FTC. Industry participants should expect increased regulatory scrutiny on their businesses in the coming years, in particular where their businesses intersect with the subject matter of the CARS Rule, such as the offering and sale of VPPs and communications and advertisements provided to consumers.</li> </ul> <p> Institutions interested in how the FTC&rsquo;s CARS Rule may impact their businesses may contact any of the authors of this Advisory or their usual Arnold &amp; Porter contact. The firm&rsquo;s <a href="https://www.arnoldporter.com/en/services/capabilities/practices/financial-services">Financial Services</a> and <a href="https://www.arnoldporter.com/en/services/capabilities/practices/consumer-protection-and-advertising">Consumer Protection &amp; Advertising</a> teams would be pleased to assist with any questions about the CARS Rule or financial regulation and consumer protection more broadly.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{9F082DBB-5898-47C5-BDFA-CBDFCCB24F17}https://www.biosliceblog.com/2023/12/european-commission-hma-and-ema-publish-first-union-list-of-critical-medicines/Ana González-Lamuñohttps://www.arnoldporter.com/en/people/g/gonzalez-lamuno-anaana.lamuno@arnoldporter.comAlexander Roussanovhttps://www.arnoldporter.com/en/people/r/roussanov-alexanderalexander.roussanov@arnoldporter.comEuropean Commission, HMA and EMA Publish First Union List of Critical MedicinesTue, 19 Dec 2023 00:00:00 -0600{6452EFB0-8721-4B2D-A427-D6DA1C7AF26A}https://www.arnoldporter.com/en/perspectives/news/2023/12/election-of-9-new-partners-7-new-counselArnold & Porter Announces Election of 9 New Partners, 7 New Counsel<p>Arnold &amp; Porter Chairman Richard M. Alexander said, &ldquo;I'm honored to announce this year's talented group of promotions. Through their excellent work and commitment to client service and the Firm&rsquo;s values, they have enhanced the Firm&rsquo;s ability to continue to meet the complex needs of our clients across a wide range of practices, geographies, and industries.&rdquo;</p>Mon, 18 Dec 2023 00:00:00 -0600<p><strong>WASHINGTON, D.C., December 18, 2023 &mdash;</strong> Arnold &amp; Porter is pleased to announce the election of nine new partners and seven new counsel, effective January 1, 2024.</p> <p>Arnold &amp; Porter Chairman Richard M. Alexander said, &ldquo;I'm honored to announce this year's talented group of promotions. Through their excellent work and commitment to client service and the Firm&rsquo;s values, they have enhanced the Firm&rsquo;s ability to continue to meet the complex needs of our clients across a wide range of practices, geographies, and industries.&rdquo;</p> <h2>Partners</h2> <p><a href="/en/people/b/brown-alastair">Alastair Brown</a> is a member of the Antitrust practice, resident in the London office. He earned his Diploma in Legal Practice at the University of Glasgow School of Law and L.L.B. at Glasgow University, with honors.</p> <p><a href="/en/people/c/cobb-jeremy">Jeremy Cobb</a> is a member of the Intellectual Property &amp; Technology practice, resident in the Washington, D.C. office. He earned his J.D. from the University of North Carolina School of Law, high honors, Order of the Coif, his M.S. in Synthetic Organic Chemistry from the University of Illinois at Urbana-Champaign, and a B.S. in Chemistry from Butler University, <em>cum laude</em>.</p> <p><a href="/en/people/c/cook-bobby">Bobby Cook</a> is a member of the Real Estate practice, resident in the New York office. He earned his J.D. at the New York University School of Law, where he was a Dean's Scholar. He earned his M.B.A. from Oxford University&rsquo;s Sa&iuml;d Business School, Dean's List, and his B.A., <em>magna cum laude</em>, from Rutgers University, where he was a Bloustein Scholar.</p> <p><a href="/en/people/g/glover-sara-mouledoux">Sara Mouledoux Glover</a> is a member of the firm&rsquo;s Corporate &amp; Finance practice, resident in the Denver office. She earned her earned her J.D. from Loyola University New Orleans College of Law and received her B.B.A. from the University of Mississippi. She clerked for The Honorable Jay Zainey, U.S. District Court, Eastern District of Louisiana.</p> <p><a href="/en/people/j/jendrek-bettina-m">Bettina Jendrek</a> is a member of the Product Liability Litigation group, resident in the Washington, D.C. office. She earned her J.D. from Georgetown University Law Center, <em>magna cum laude</em>, Order of the Coif, and received her B.A. from Emory University. </p> <p><a href="/en/people/k/kirsch-matthew-s">Matt Kirsch</a> is a member of the Real Estate practice, resident in the Washington, D.C. office. He earned his J.D. from The George Washington University Law School, honors, and his B.B.A. from Emory University, honors.</p> <p><a href="/en/people/m/mallorie-charlotte">Charlotte Mallorie</a> is a member of the Complex Litigation practice, resident in the London office. She earned her Postgraduate Diploma in Legal Practice at the College of Law (London), with distinction, and her L.L.B. at the University of Southampton. </p> <p><a href="/en/people/s/schwartz-david-b">David B. Schwartz</a> is a member of the Privacy, Cybersecurity &amp; Data Strategy practice, resident in the New York office. He earned his J.D. from New York University School of Law and received his B.A. from Grinnell College.</p> <p><a href="/en/people/t/thomson-amanda-s">Amanda Thomson</a> is a member of the Complex Litigation practice, resident in Houston. She earned her J.D. from University of Texas School of Law and received her B.S., <em>summa cum laude</em>, from Texas Tech University.</p> <h2>Counsel</h2> <p><a href="/en/people/b/burkett-ashley">Ashley Burkett</a> is a member of the Product Liability Litigation practice, resident in the Washington, D.C. office. She earned her J.D. from University of Alabama School of Law, <em>summa cum laude</em>, and received her B.A. from Huntingdon College, <em>summa cum laude</em>. She clerked for The Honorable Ed Carnes, U.S. Court of Appeals for the Eleventh Circuit, and The Honorable Kevin C. Newsom, U.S. Court of Appeals for the Eleventh Circuit.</p> <p><a href="/en/people/k/konkel-kaitlin">Kaitlin Konkel</a> is a member of the White Collar Defense &amp; Investigations practice, resident in the Washington, D.C. office. She earned her J.D. from Yale Law School and her B.A. from Williams College. She clerked for The Honorable Catherine C. Blake, U.S. District Court, District of Maryland. </p> <p><a href="/en/people/o/otto-karen-c">Karen Otto</a> is a member of the Antitrust practice, resident in the Washington, D.C. office. She earned her J.D. from Duke University School of Law, <em>summa cum laude</em>, Order of the Coif, her M.A. from Georgetown University, and her B.A. from University of Virginia, with distinction. She clerked for The Honorable Stanley Marcus, U.S. Court of Appeals for the Eleventh Circuit. </p> <p><a href="/en/people/s/sherwood-amanda">Amanda Sherwood</a> is a member of the Government Contracts &amp; National Security practice, resident in the Washington, D.C. office. She earned her J.D. from University of Pennsylvania Law School, <em>summa cum laude</em>, Order of the Coif, and her B.A. from University of Pennsylvania, <em>summa cum laude</em>.</p> <p><a href="/en/people/t/tutt-andrew">Andrew Tutt</a> is a member of the Appellate &amp; Supreme Court practice, resident in the Washington, D.C. office. He earned his J.D. from Yale Law School and his B.S. from Duke University. He clerked for The Honorable Cornelia T.L. Pillard, Court of Appeals for the District of Columbia Circuit. </p> <p><a href="/en/people/w/wagner-will">Will Wagner</a> is a member of the Consumer Products &amp; Retail practice, resident in the San Francisco office. He earned his J.D. from the Sandra Day O&rsquo;Connor College of Law, <em>cum laude</em>, and his B.A. from the University of Nevada, Reno. He clerked for The Honorable Justice James Hardesty, Supreme Court of Nevada.</p> <p><a href="/en/people/w/wiesner-jocelyn-a">Jocelyn Wiesner</a> is a member of the Product Liability Litigation practice, resident in the Washington, D.C. office. She earned her J.D. from George Washington School of Law, Order of the Coif, where she served as a member of the editorial board for the Law Review. She received her B.A. from Providence College.</p> <h3>About Arnold &amp; Porter</h3> <p><em>Arnold &amp; Porter combines sophisticated regulatory, litigation, and transactional capabilities to resolve clients&rsquo; most complex issues. With over 1,000 lawyers practicing in 15 offices worldwide, we offer deep industry experience and an integrated approach that spans more than 40 practice areas. Through multidisciplinary collaboration and focused industry experience, we provide innovative and effective solutions to mitigate risks, address challenges, and achieve successful outcomes.</em></p>{8F1D59A6-F272-4670-9845-46C73B3A8B79}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/12/epas-update-to-tsca-risk-evaluation-rule-would-be-a-sea-change-prero-saysEPA’s Update to TSCA Risk Evaluation Rule Would be a ‘Sea Change,’ Prero SaysEnvironmental counsel Judah Prero was quoted in the <em>Chemical Watch</em> article, &ldquo;Update to TSCA risk evaluation rule would be &lsquo;sea change&rsquo; for existing chemicals programme,&rdquo; which discusses the U.S. Environmental Protection Agency&rsquo;s (EPA) recent proposal to rework its previous risk evaluation framework rule that was published in 2017.&nbsp;Mon, 18 Dec 2023 00:00:00 -0600<p>Environmental counsel Judah Prero was quoted in the <em>Chemical Watch</em> article, &ldquo;Update to TSCA risk evaluation rule would be &lsquo;sea change&rsquo; for existing chemicals programme,&rdquo; which discusses the U.S. Environmental Protection Agency&rsquo;s (EPA) recent proposal to rework its previous risk evaluation framework rule that was published in 2017. </p> <p>By mandating a whole-chemical approach for risk determinations, the proposal aims to codify the EPA&rsquo;s current policies for conducting reviews of chemicals with high-priority. The proposal also calls to remove the EPA&rsquo;s discretion to exclude any conditions of use from an evaluation, to require consideration of fence line communities, to edit and remove certain scientific definitions, and to overhaul current procedures for manufacturer-requested risk evaluations. </p> <p>Prero told <em>Chemical Watch</em> that the proposal represents a &ldquo;sea change&rdquo; for the existing chemicals program. &ldquo;If it really goes ahead as EPA is proposing, it&rsquo;s totally shifting the dynamic,&rdquo; he said. He added that putting the proposal&rsquo;s policies into a regulation would eventually result in a long risk evaluation process and &ldquo;more onerous and conservative&rdquo; risk management rules. &ldquo;Legally, the bar has been raised,&rdquo; Prero said. The EPA &ldquo;may not necessarily realize the totality of what will happen if this actually gets finalized.&rdquo; </p> <p><a rel="noopener noreferrer" href="https://chemicalwatch.com/914153/update-to-tsca-risk-evaluation-rule-would-be-sea-change-for-existing-chemicals-programme" target="_blank">Read the full article</a> (subscription required). </p>{EE122384-C309-41BC-90C5-778DFC7D7253}https://www.arnoldporter.com/en/perspectives/news/2023/12/arnold-and-porter-again-named-to-global-competition-reviews-2024-gcr-100-guideArnold & Porter Again Named to Global Competition Review's 2024 ‘GCR 100’ Guide<em>Global Competition Review</em> once again included Arnold &amp; Porter in its annual &ldquo;GCR 100&rdquo; guide of law firms and economic consultancies who are &ldquo;doing the most important antitrust work around the world.&rdquo;&nbsp;Fri, 15 Dec 2023 00:00:00 -0600<p><em>Global Competition Review</em> once again included Arnold &amp; Porter in its annual &ldquo;<a rel="noopener noreferrer" href="https://globalcompetitionreview.com/survey/gcr-100/24th-edition/article/the-global-elite" target="_blank">GCR 100</a>&rdquo; guide of law firms and economic consultancies who are &ldquo;doing the most important antitrust work around the world.&rdquo; The guide again ranked Arnold &amp; Porter as a &ldquo;Global Elite&rdquo; firm for competition law. The firm was also included in the guide&rsquo;s list of the world&rsquo;s best private litigation practices.</p> <p>Arnold &amp; Porter&rsquo;s antitrust/competition practice continues to be recognized worldwide for its breadth and depth of experience and its track record of excellence. <em>Global Competition Review</em> highlighted the firm&rsquo;s strong docket of work, particularly in the pharmaceutical sector and on the merger control side. The publication also lauded the firm&rsquo;s work advising the Oakland Raiders in an antitrust suit filed by the City of Oakland after the team&rsquo;s relocation to Las Vegas, where the firm successfully secured the dismissal of the City&rsquo;s claims in both state and federal court as well as in appellate decisions upholding the dismissals. Arnold &amp; Porter&rsquo;s international antitrust capabilities and clients were also featured in the guide&rsquo;s regional sections for Brussels, California, New York, and Washington, D.C. </p> <p>Earlier this year, Arnold &amp; Porter&rsquo;s work advising the Oakland Raiders was recognized as &ldquo;<a href="/en/perspectives/news/2023/04/litigation-of-the-year-non-cartel-defence">Litigation of the Year &ndash; Non-Cartel Defence</a>&rdquo; at the 13th annual <em>GCR</em> Awards.</p> <p>Debbie Feinstein leads the firm&rsquo;s Global Antitrust practice, Jonathan Gleklen serves as chair of the firm's U.S. Antitrust/Competition practice, and Niels Ersb&oslash;ll is head of the European Antitrust/Competition practice.</p>{23923C59-9A0F-455B-BF92-D42A59E36473}https://www.arnoldporter.com/en/perspectives/news/2023/12/arnold-and-porter-recognized-in-chambers-asia-pacific-2024Arnold & Porter Recognized in Chambers Asia-Pacific 2024In its 2024 edition, <em>Chambers Asia-Pacific</em> recognized Arnold &amp; Porter as a &ldquo;Leading Firm&rdquo; in two practice areas and highlighted three lawyers as &ldquo;Leading Individuals.&rdquo;&nbsp;Thu, 14 Dec 2023 00:00:00 -0600<p>In its 2024 edition, <em><a rel="noopener noreferrer" href="https://chambers.com/legal-guide/asia-pacific-8" target="_blank">Chambers Asia-Pacific</a></em> recognized Arnold &amp; Porter as a &ldquo;Leading Firm&rdquo; in two practice areas and highlighted three lawyers as &ldquo;Leading Individuals.&rdquo; The annual legal guide ranks law firms and individuals based on independent research conducted by <em>Chambers</em> researchers and includes Australia, India, Japan, South Korea, Singapore, Nepal, Afghanistan, and nine Pacific Island nations. </p> <p><em>Chambers Asia-Pacific</em> recognized the firm&rsquo;s International Trade/WTO practice for its experience representing clients in U.S. anti-dumping and countervailing duty disputes and for &ldquo;frequently acting for clients in the chemical, electronics and heavy industry sectors&rdquo; in trade remedy disputes. The guide also highlighted the firm&rsquo;s Dispute Resolution practice for its experience in cross-border litigation, international trade disputes, and class actions on behalf of clients from a wide range of sectors, noting that clients described the practice as providing &ldquo;brilliant strategy&rdquo; and delivering &ldquo;excellent work.&rdquo;</p> <p>In addition to the two practice rankings, the following lawyers were recognized by <em>Chambers Asia-Pacific</em>:</p> <ul> <li>Jun Hee Kim&mdash;Dispute Resolution: International Firms (South Korea)</li> <li>James K. Lee&mdash;Dispute Resolution: International Firms (South Korea)</li> <li>J. David Park&mdash;International Trade/WTO (Asia-Pacific Region)</li> </ul>{81EB7CEE-C605-4342-845D-BA7D22D8BAB4}https://www.arnoldporter.com/en/perspectives/events/2023/12/the-2023-race-to-regulate-the-us-eu-and-ukAllison W. Shurenhttps://www.arnoldporter.com/en/people/s/shuren-allison-wallison.shuren@arnoldporter.comAbeba Habtemariamhttps://www.arnoldporter.com/en/people/h/habtemariam-abebaAbeba.Habtemariam@arnoldporter.comJacqueline Mulrynehttps://www.arnoldporter.com/en/people/m/mulryne-jacquelinejacqueline.mulryne@arnoldporter.comAlexander Roussanovhttps://www.arnoldporter.com/en/people/r/roussanov-alexanderalexander.roussanov@arnoldporter.comAlison H. Petershttps://www.arnoldporter.com/en/people/p/peters-alison-halison.peters@arnoldporter.comThe 2023 Race to Regulate: The U.S., EU, and UK Grapple With Emerging Health Care Technologies<p>2023 was marked by the race to regulate. Like Newton&rsquo;s Third Law, this year, each new digital patient platform, telemedicine innovation, and high-profile investment in digital or AI technologies was met with a swift action from U.S., EU, and UK governing bodies to restrict, refine, and/or otherwise limit the ripple effects of a new digital and virtual frontier. This push-pull dynamic between government and innovation has long-lasting impacts on our approach to understanding and estimating legal risks of virtual and digital health ventures and delivery of services. Please join Allison Shuren, Abeba Habtemariam, Jackie Mulryne, Alexander Roussanov, partners at Arnold &amp; Porter, in a discussion moderated by Ali Peters, as they unpack this year's pivotal legal challenges impacting the 2023&mdash;and 2024&mdash;digital legal landscape.</p>Wed, 13 Dec 2023 00:00:00 -0600{F302D55D-ECD2-41DF-88B2-74D470BBB5EE}https://www.arnoldporter.com/en/perspectives/news/2023/12/johnson-installed-as-bar-association-of-san-francisco-presidentJohnson Installed as Bar Association of San Francisco PresidentTeresa Johnson, co-head of Arnold &amp; Porter&rsquo;s Capital Markets practice, was installed as the President of the Bar Association of San Francisco (BASF) during the group&rsquo;s Annual Membership Luncheon and Installation of Officers.Wed, 13 Dec 2023 00:00:00 -0600<p>Teresa Johnson, co-head of Arnold &amp; Porter&rsquo;s Capital Markets practice, was installed as the President of the Bar Association of San Francisco (BASF) during the group&rsquo;s Annual Membership Luncheon and Installation of Officers. Johnson will serve a one-year term.</p> <p>Founded in 1872, BASF is a nonprofit voluntary membership organization with over 5,300 members including attorneys, law students, and legal professionals in the San Francisco Bay Area. </p> <p>Johnson also was installed as the President of BASF&rsquo;s Justice and Diversity Center, which provides pro bono legal services to homeless individuals and families, survivors of domestic violence, senior citizens, community-based organizations, and residents in underserved neighborhoods. </p> <p>In addition to her work with BASF, Johnson is one of the leaders of the Legal Alliance for Reproductive Rights, which is a coalition among BASF, the San Francisco City Attorney, and a large cohort of law firms, including Arnold &amp; Porter. The coalition coordinates providing pro bono legal assistance in connection with the exercise of reproductive rights following the <em>Dobbs</em> decision.</p> <p>Johnson advises clients on corporate and finance matters, often serving as a trusted advisor to the C-suite and board members, working closely with boards of directors in the boardroom and in committee meetings. As one of the co-founders of the firm&rsquo;s Environmental, Social, and Governance (ESG) practice, Johnson also focuses on board diversity, stakeholder capitalism and other ESG matters. </p>{3EED573D-EE28-4708-961B-52B0EFF2F246}https://www.arnoldporter.com/en/perspectives/advisories/2023/12/lessons-learned-from-the-sec-complaint-against-solarwindsRobert C. Azarowhttps://www.arnoldporter.com/en/people/a/azarow-robert-crobert.azarow@arnoldporter.comDaniel M. Hawkehttps://www.arnoldporter.com/en/people/h/hawke-daniel-mDaniel.Hawke@arnoldporter.comJane Norberghttps://www.arnoldporter.com/en/people/n/norberg-janejane.norberg@arnoldporter.comChristian D. H. Schultzhttps://www.arnoldporter.com/en/people/s/schultz-christianchristian.schultz@arnoldporter.comJami Vibberthttps://www.arnoldporter.com/en/people/v/vibbert-jamijami.vibbert@arnoldporter.comDavid B. Schwartzhttps://www.arnoldporter.com/en/people/s/schwartz-david-bdavid.schwartz@arnoldporter.comM. Hannah Kosekihttps://www.arnoldporter.com/en/people/k/koseki-m-hannahhannah.koseki@arnoldporter.comIs Your Company Ready for the New SEC Cybersecurity Disclosure Requirements? Lessons Learned From the SEC Complaint Against Solarwinds and Its CISOThe Securities and Exchange Commission (SEC) recently&nbsp;sued&nbsp;SolarWinds Corporation and its Chief Information Security Officer (CISO), Timothy Brown, alleging their efforts to conceal the company&rsquo;s poor cybersecurity practices and downplay its software&rsquo;s vulnerabilities to cybersecurity attacks defrauded SolarWinds investors and customers.&nbsp;Wed, 13 Dec 2023 00:00:00 -0600<p>The Securities and Exchange Commission (SEC) recently <a rel="noopener noreferrer" href="https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-227.pdf" target="_blank">sued</a> SolarWinds Corporation and its Chief Information Security Officer (CISO), Timothy Brown, alleging their efforts to conceal the company&rsquo;s poor cybersecurity practices and downplay its software&rsquo;s vulnerabilities to cybersecurity attacks defrauded SolarWinds investors and customers. The landmark lawsuit asserts violations of the antifraud provisions of the federal securities laws against both SolarWinds and Brown and underscores the increased importance the SEC places on companies&rsquo; cybersecurity disclosures.<br /> <br /> With the adoption of the new SEC cybersecurity disclosure rules that become effective on December 15, the SEC will increase its scrutiny of companies&rsquo; cybersecurity representations. A summary of these new cybersecurity disclosure rules, which are designed to allow investors to evaluate a registrant&rsquo;s exposure to cybersecurity risks and incidents and its ability to manage and mitigate such risks, can be found in our <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/08/approved-cybersecurity-disclosure-rules">August 4 Advisory</a>. <br /> <br /> We examine the interplay between the SolarWinds case and the new cybersecurity disclosure rules, and offer key takeaways for companies and individuals.</p> <h2>Background and Key Allegations in the Complaint</h2> <p>SolarWinds is an information technology firm that provides infrastructure management software. From October 2018 through January 2021, SolarWinds had nearly 300,000 customers, which included state, federal, and foreign governments. The SEC alleges that, despite statements that it followed well-recognized industry standard cybersecurity practices, SolarWinds&rsquo; internal assessments and communications made clear that the company, and Brown, were aware they were misleading investors. According to the SEC, the &ldquo;true state&rdquo; of SolarWinds&rsquo; poor cybersecurity practices, controls, and risks, were brought to light in December 2020 when SolarWinds disclosed that its flagship product, Orion, was the target of a major, two-year long cyberattack. We previously examined the lessons learned from the attack in our <a href="https://www.arnoldporter.com/en/perspectives/advisories/2021/06/lessons-learned-from-the-solarwinds-cyberattack">June 2021 Advisory</a>.<br /> <br /> The SEC&rsquo;s complaint highlights several areas of public disclosures in which SolarWinds allegedly made multiple materially false and misleading statements and omissions, including the company&rsquo;s Security Statement, SEC registration forms, and December 2020 Form 8-K filing, which disclosed the Orion attack.</p> <h3>SolarWinds&rsquo; Security Statement</h3> <p>The Security Statement which, according to the complaint, was posted on SolarWinds&rsquo; website and regularly provided to customers, indicated that the company followed industry standard cybersecurity practices, including: (1) complying with the NIST Framework; (2) creating and developing its software using a secure development lifecycle (SDL); (3) having strong password protection; and (4) maintaining access controls. As alleged in the complaint, however, internal emails, assessments, and presentations made clear that although SolarWinds claimed to adhere to well-recognized cybersecurity practices, it had no policies or practices in place for the NIST framework, did not consistently develop its software using an SDL, did not enforce strong password requirements on its systems, and failed to maintain adequate access controls. <br /> <br /> Notably, the SEC relies on informal internal employee communications to support its position that SolarWinds suffered from &ldquo;pervasive cybersecurity issues.&rdquo; For example, the SEC highlighted instant messages between information security employees referring to SolarWinds as a house with &ldquo;faulty electrics&rdquo; and describing SolarWinds as being &ldquo;so far from &hellip; a security minded company.&rdquo; The SEC also pointed to an August 2018 email in which Brown &ldquo;bluntly admitted&rdquo; that SolarWinds did not fully comply with its Security Statement&rsquo;s SDL section. These statements, according to the SEC, reflected a culture that did not take cybersecurity issues seriously and showcased SolarWinds&rsquo; scheme to conceal its poor cybersecurity practices from its investors and customers.</p> <h3>SEC Filings</h3> <p>According to the SEC, although SolarWinds and Brown were aware that the company faced heightened cybersecurity risks, its SEC filings only contained boilerplate, generic disclosures. The SEC highlighted SolarWinds&rsquo; cybersecurity risk disclosure from its October 2018 Registration Statement on Form S-1, which stated that &ldquo;<em>if</em>&rdquo; the company suffered from system failures, cyberattacks, or other data security breaches it could suffer a loss of revenue and increased costs, exposure to liability, or reputational harm. The disclosures, which the SEC also characterized as hypothetical, failed to alert investors to known or elevated risks. For instance, despite two different customers providing SolarWinds with evidence of similar malicious activity on the Orion software, SolarWinds failed to disclose the attacks to investors or other customers and further concealed problems that riddled Orion. <br /> <br /> The SEC also emphasized that although Brown documented the cybersecurity issues facing the company, SolarWinds not only failed to disclose and remediate the issues, but also continued to repeat the same materially false and misleading risk disclosures in its SEC filings. Moreover, although SolarWinds disclosed the vulnerability that was exploited as part of the Orion attack in December 2020, its disclosure &ldquo;created a materially misleading picture&rdquo; because it referred to the vulnerability as theoretical (and did not disclose that the compromise had actually already occurred).</p> <h3>Internal Control Failures</h3> <p>The SEC also alleged that SolarWinds lacked sufficient internal controls, including accounting controls, to protect its key assets, and had deficient disclosure controls. According to the SEC, as a result of its poor cybersecurity practices, SolarWinds failed to maintain sufficient controls to reasonably protect its critical assets such as its information technology network environment, source code, and products. Further, although Brown certified to the effectiveness of SolarWinds&rsquo; information technology controls, he could not identify the list of relevant controls to the SEC. The SEC also claimed that SolarWinds lacked controls to ensure that information related to potentially material cybersecurity risks, incidents, and vulnerabilities were reported to the executives that were responsible for SolarWinds&rsquo; disclosures.</p> <h2>Key Takeaways</h2> <p>The SolarWinds complaint, the new SEC cybersecurity disclosure rules, and past SEC enforcement cases showcase the SEC&rsquo;s focus on cybersecurity disclosures and controls. Below are our key takeaways:</p> <ul> <li><strong>Review your upcoming Form 10-K Risk Factors for &ldquo;boilerplate&rdquo; language. </strong>The SEC noted in the SolarWinds complaint that the company&rsquo;s SEC filings referred to vulnerabilities as theoretical and made &ldquo;boilerplate&rdquo; disclosures. The SEC has brought other cases against companies in the past under a similar theory. Registrants should review their upcoming Form 10-K risk factors and update them as necessary, ensuring known cybersecurity threats or breaches are sufficiently disclosed and not described as theoretical. See our <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/09/2023-annual-reporting-and-2024-proxy-season">September 20 Advisory</a> for other thoughts related to the upcoming annual reporting season.</li> <li><strong>The SEC is taking a careful look at disclosure controls. </strong>In its <a rel="noopener noreferrer" href="https://www.sec.gov/news/press-release/2023-227" target="_blank">statement announcing the lawsuit</a>, the SEC noted that the action &ldquo;underscores [its] message to issuers: implement strong controls calibrated to your risk environments and level with investors about known concerns.&rdquo; The SEC alleges that SolarWinds had both deficient accounting controls and disclosure controls environments. SolarWinds is not the SEC&rsquo;s first disclosure controls case, as it <a rel="noopener noreferrer" href="https://www.sec.gov/news/press-release/2021-102" target="_blank">announced a settled action</a> alleging a failure to maintain sufficient disclosure controls and procedures in 2021, and we discussed a recent example in our <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/02/what-the-secs-activision-blizzard-settlemnt-means">February 23 Advisory</a>. We anticipate SEC disclosure controls cases will become more common with the implementation of the new cybersecurity disclosure rules. The next paragraph highlights that disclosure controls should include statements and speaking engagements by executive officers.</li> <li><strong>Statements by CISOs (and all officers and directors of a public company) should be part of the disclosure controls process.</strong> The SEC&rsquo;s action against Brown underscores the importance of disclosure controls related to all officer&rsquo;s and director&rsquo;s public statements. The SEC emphasized that Brown acted as SolarWinds&rsquo; cybersecurity spokesperson in multiple public statements, including podcasts, blog posts, and press releases. Brown&rsquo;s statements, according to the SEC, failed to paint an accurate picture of SolarWinds&rsquo; cybersecurity practices. For instance, the SEC claims that although SolarWinds had multiple unaddressed cybersecurity problems, Brown made statements in blog posts and podcasts falsely claiming that SolarWinds adhered to sound security practices and procedures. CISOs and other company officers or representatives should work within their company&rsquo;s disclosure control procedures to ensure that all their public disclosures and statements, regardless of format, accurately represent their company&rsquo;s cybersecurity practices and ability to mitigate potential risks.</li> <li><strong>Internal employee communications will be critically assessed. </strong>Throughout the complaint, the SEC pointed to numerous internal communications, including presentations, emails, and instant messages between SolarWinds&rsquo; employees, as evidence that the company and Brown were aware of its poor cybersecurity practices. For example, the SEC highlighted instant messages between employees describing the Orion platform as being &ldquo;riddled&rdquo; with vulnerabilities as evidence that SolarWinds and Brown knew about the company&rsquo;s cybersecurity risks and failed to disclose them. Given the SEC&rsquo;s reliance on internal employee communications in the SolarWinds lawsuit, companies should be mindful that even informal communications will be heavily scrutinized by the SEC.</li> </ul> <p>The SEC&rsquo;s allegations of scienter-based fraud charges not only against the company, but against the CISO, raise the stakes related to cybersecurity disclosures. This stance, coupled with the release of its new cybersecurity disclosure rules, highlights the SEC&rsquo;s increased emphasis on companies&rsquo; cybersecurity disclosures and its intention to aggressively enforce cybersecurity disclosure regulations.<br /> <br /> Please reach out to any of the authors of this Advisory or your regular Arnold &amp; Porter contact with questions on this topic. </p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{3BE15EB2-BA34-490A-8636-9796CB6A2EEF}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/12/johnson-advocates-for-the-independence-of-the-us-judiciary-on-kqeds-doing-democracy-podcastJohnson Advocates for the Independence of the U.S. Judiciary on KQED’s ‘Doing Democracy’ PodcastTeresa Johnson, Corporate &amp; Finance partner in the firm&rsquo;s San Francisco office and co-head of the Capital Markets practice, was recently a guest on <em>KQED</em>&rsquo;s radio program &ldquo;Doing Democracy&rdquo; for its &ldquo;Why Do We Elect State Court Judges?&rdquo; episode.&nbsp;Mon, 11 Dec 2023 00:00:00 -0600<p>Teresa Johnson, Corporate &amp; Finance partner in the firm&rsquo;s San Francisco office and co-head of the Capital Markets practice, was recently a guest on <em>KQED</em>&rsquo;s radio program &ldquo;Doing Democracy&rdquo; for its &ldquo;<a rel="noopener noreferrer" href="https://www.kqed.org/forum/2010101895243/why-do-we-elect-state-court-judges" target="_blank">Why Do We Elect State Court Judges?</a>&rdquo; episode. The episode delves into the reasons why the U.S. elects judges, highlights arguments for and against the custom, and broadly discusses what it means when judges have to stand for election. Johnson specifically spoke as incoming president of the Bar Association of San Francisco (BASF) about judicial independence and BASF&rsquo;s response to current challenges to judges in San Francisco.</p> <p><a rel="noopener noreferrer" href="https://www.kqed.org/forum/2010101895243/why-do-we-elect-state-court-judges" target="_blank">Listen to the full episode</a>.</p>{277E5A5C-136D-414C-8809-66714FF118FC}https://www.arnoldporter.com/en/perspectives/advisories/2023/12/california-enacts-landmark-digital-assets-licensing-lawRobert C. Azarowhttps://www.arnoldporter.com/en/people/a/azarow-robert-crobert.azarow@arnoldporter.comLawton M. Camphttps://www.arnoldporter.com/en/people/c/camp-lawton-mlawton.camp@arnoldporter.comDaniel M. Hawkehttps://www.arnoldporter.com/en/people/h/hawke-daniel-mDaniel.Hawke@arnoldporter.comMeredith Osbornhttps://www.arnoldporter.com/en/people/o/osborn-meredithmeredith.osborn@arnoldporter.comKevin M. Toomeyhttps://www.arnoldporter.com/en/people/t/toomey-kevin-mkevin.toomey@arnoldporter.comMonique E. Holmeshttps://www.arnoldporter.com/en/people/h/holmes-monique-emonique.holmes@arnoldporter.comHoward L. Hydehttps://www.arnoldporter.com/en/people/h/hyde-howard-lHoward.Hyde@arnoldporter.comAnthony Raglanihttps://www.arnoldporter.com/en/people/r/raglani-anthonyanthony.raglani@arnoldporter.comPaul Limhttps://www.arnoldporter.com/en/people/l/lim-paulpaul.lim@arnoldporter.comMichael Treveshttps://www.arnoldporter.com/en/people/t/treves-michaelmichael.treves@arnoldporter.comCalifornia Enacts Landmark Digital Assets Licensing Law<p>On October 13, California Governor Gavin Newsom signed AB 39, called the&nbsp;Digital Financial Assets Law&nbsp;(DFAL), to regulate companies engaged in digital asset activities in California.&nbsp;</p>Mon, 11 Dec 2023 00:00:00 -0600<p>On October 13, California Governor Gavin Newsom signed AB 39, called the <a rel="noopener noreferrer" href="https://legiscan.com/CA/text/AB39/2023" target="_blank">Digital Financial Assets Law</a> (DFAL), to regulate companies engaged in digital asset activities in California. The DFAL is a comprehensive regulatory framework for digital asset companies, including licensing, disclosure, reporting and recordkeeping requirements, establishment of examination and enforcement powers, and other requirements with significant implications for California digital asset companies as well as out-of-state companies that engage in a digital asset business in California. The law requires virtual currency exchanges and other businesses engaged in digital asset activities to take measures to protect consumers. The law becomes effective on July 1, 2025. California simultaneously passed SB 401, which regulates digital asset ATMs.<br /> <br /> California is the third state to introduce a license framework for companies engaged in the digital asset business, following New York and Louisiana. In June of 2015, the New York State Department of Financial Services (NYDFS) issued the first-in-the-nation virtual currency regulation (BitLicense). Until the DFAL was enacted, California had not taken a definitive position on whether digital asset firms were subject to California&rsquo;s existing money transmission regulatory framework, and digital asset firms had not been required to obtain a money transmission license to operate in California, as required by other states. Many requirements imposed by the DFAL, such as disclosure, various policies and procedures (including antifraud, disaster recovery, and anti-money laundering programs), and capital requirements are similar to those required by the BitLicense regime. This Advisory provides an overview of the DFAL, a comparison with the NYDFS BitLicense regulation, and includes key takeaways and other considerations for institutions that would be covered by the DFAL.</p> <h2>Covered Institutions and Activities</h2> <p> The DFAL applies broadly to any person or entity that engages in, or holds itself out as engaging in, a &ldquo;digital financial asset business activity&rdquo; with, or on behalf of, a California resident. &ldquo;Digital financial asset business activity&rdquo; is broadly defined to include:</p> <ul> <li>Exchanging, transferring, or storing a digital financial asset or engaging in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor</li> <li>Holding electronic precious metals or electronic certificates representing interests in precious metals on behalf of another person or issuing shares or electronic certificates representing interests in precious metals</li> <li>Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either a digital financial asset offered by or on behalf of the same publisher or legal tender or bank or credit union credit outside the online game, game platform, or family of games offered by or on behalf of the same publisher</li> </ul> <p> Notably, the third provision above implies that if in-game virtual currencies or tokens can be redeemed for a digital financial asset or cash, such activity may be within the scope of the DFAL licensing requirement. <br /> <br /> &ldquo;Digital financial asset&rdquo; (DFA) means a digital representation of value that is used as a medium of exchange, unit of account, or store of value, and that is not legal tender, whether or not denominated in legal tender. DFA expressly excludes reward points and value issued and usable only within an online gaming platform, similar to carveouts under the NYDFS BitLicense regulation. The definition of DFA also excludes securities that are registered, or exempt from registration, with the U.S. Securities and Exchange Commission (SEC).</p> <h2>Exempt Entities</h2> <p> The DFAL explicitly does not apply to the activity by certain persons, including government agencies, banks, certain trust companies and credit unions, and notably:</p> <ul> <li>Persons whose participation in a payment system is limited to providing processing, clearing, or performing settlement services solely for transactions between or among persons that are exempt from the licensing requirements</li> <li>Providers of connectivity software or computing power to secure a network or of storage or security services</li> <li>Persons using a digital financial asset or obtaining a digital financial asset as payment solely for the person&rsquo;s behalf for personal, family, or household purposes or academic purposes</li> <li>Persons whose digital financial asset business activity with, or on behalf of, California residents is reasonably expected to be valued, in the aggregate, on an annual basis at $50,000 or less</li> <li>Merchants who accept a DFA as payment for goods or services that do not include DFAs themselves</li> <li>Entities registered under the federal Commodity Exchange Act (CEA) to the extent activities are conducted under the CEA, are actually regulated by the Commodity Futures Trading Commission, and are entitled to preemption</li> <li>Persons registered as a securities broker-dealer under federal or state securities laws to the extent of their operation as broker-dealers</li> </ul> <p> In addition to the enumerated exemptions, the DFAL authorizes the Commissioner of the California Department of Financial Protection and Innovation (DFPI) to further exempt any class of persons or transactions either by regulation or order, if the Commissioner finds such action to be in the public interest.</p> <h2>The DFAL Licensing Requirements</h2> <p> Effective July 1, 2025, covered persons must be licensed or have submitted a licensing application. While the application requirements under the DFAL are similar to those for a traditional money transmitter, the requirements go further, requiring applicants to have policies and procedures to address business continuity, disaster recovery, and an anti-fraud and general compliance program. In addition, the applicant must provide insurance coverage information, information about licenses held in other states, and information about the controlling persons of the applicant.<br /> <br /> The DFAL allows for conditional licensure for an applicant with a pending license application, if that applicant holds a BitLicense with the NYDFS or is chartered as a New York State limited purpose trust company with approval to conduct a virtual currency business in New York issued on or before January 1, 2023.</p> <h2> Licensee Obligations</h2> <p> The DFAL subjects licensees to extensive ongoing compliance obligations, which largely track the requirements of the NYDFS BitLicense regulation. Key obligations under the DFAL include:</p> <ul> <li>Maintaining sufficient capital and liquidity, and a surety bond or trust account in the amount as determined by the DFPI</li> <li>Maintaining comprehensive records of all DFA business activity with or on behalf of residents for five years after the date of the activity</li> <li>Submitting an annual report to the DFPI, including, among other things, financial statements, descriptions of material changes in various aspects of business operations, data security breach or cybersecurity events, and transaction data</li> <li>Obtaining DFPI approval for certain corporate reorganizations or changes in control, including merger or consolidation</li> <li>Providing required disclosures to residents before and after engaging in DFA business activity with them, including, among other things, disclosure of fees, information regarding whether the product or service is insured against loss, recognition that the transaction is irrevocable, liability for unauthorized transactions, and disclosure of a California resident&rsquo;s right to at least 14 days&rsquo; prior notice of a change in a fee schedule</li> <li>Maintaining an amount of each type of DFA, which must be in its control and sufficient to satisfy the aggregate entitlements of such persons and not subject to the claims of the licensee&rsquo;s creditors[[N: Entities obligated to safeguard assets held for platform users should be mindful of the accounting and additional financial disclosure requirements under the SEC&rsquo;s Staff Accounting Bulletin No. 121.]]</li> <li>Establishing and maintaining various policies and procedures, including, among other things, business continuity program, disaster recovery program, anti-fraud program, anti-money laundering and counter-terrorism program, information security program, and operational security program</li> </ul> <h2> Stablecoin-Specific Requirements</h2> <p> The DFAL prohibits a person from exchanging, transferring, or storing stablecoins unless (1) the stablecoin issuer is an applicant, licensee, bank, or trust company and (2) the issuer at all times holds eligible securities with an aggregate market value of no less than the value of outstanding stablecoins issued or sold. The DFPI has discretion in approving which stablecoins are approved for exchange, transfer, or storage, looking at enumerated factors such as &ldquo;any legally enforceable rights provided by the issuer of the stablecoin to holders of the stablecoin&rdquo; and &ldquo;amount, nature, and quality of assets owned or held by the issuer of the stablecoin that may be used to fund any redemption requests from residents.&rdquo; In addition, the DFAL provides that the DFPI may require issuers of stablecoins to be licensed by the DFPI prior to issuing certain stablecoins.</p> <h2> Exchange-Specific Requirements</h2> <p> Similar to the requirements imposed under the NYDFS BitLicense regulation, the DFAL imposes specific obligations on exchanges. Among other things, an exchange must certify that it has done the following:</p> <ul> <li>Identified the likelihood that the DFA would be deemed a security by federal or California regulators</li> <li>Conducted a comprehensive risk assessment designed to ensure consumers are adequately protected from cybersecurity risk, risk of malfeasance, including theft, risks related to code or protocol defects, or market-related risks, including price manipulation and fraud</li> <li>Established policies and procedures to reevaluate the appropriateness of the continued listing or offering of the DFA and to cease listing or offering the DFA</li> </ul> <p> Notably, certification is not required for any DFA-approved for listing on or before January 1, 2023, under the BitLicense regulation.</p> <h2> Enforcement</h2> <p> The DFPI may take an enforcement action against a licensee or a person who is not a licensee but has engaged in DFA business activity in various instances, including, among other things, material violation of the DFAL or other applicable laws, failure to cooperate in a DFPI examination or investigation, and engaging in an unsafe or unsound act of practice. Persons that are not licensees engaging in DFA business activity with, or on behalf of, a California resident can be charged a civil penalty of up to $100,000 per day. In addition, the DFPI can assess a civil penalty of up to $20,000 per day for a material violation of, or for each act of omission that materially violates, the DFAL.</p> <h2> Comparison to NYDFS BitLicense Regime</h2> <p> While modeled after NYDFS&rsquo; BitLicense regime, the DFAL includes a few different requirements. Notably, under the DFAL, the definitions of exchange, transfer, or storage of a DFA require the assumption or maintenance of &ldquo;control&rdquo; of the asset. Control is defined as the power to &ldquo;execute unilaterally or prevent indefinitely&rdquo; a DFA transaction. In other words, a person cannot be engaged in the exchange, transfer, or storage of a DFA under the DFAL unless the person has the ability to execute unilaterally or prevent indefinitely a DFA transaction. On the other hand, the BitLicense regulation does not define the term &ldquo;control,&rdquo; even though the term is used several times in its definition of covered activities, leaving uncertainties as to the exact scope of covered activities. This difference opens the question whether decentralized exchanges, which perform the exchange of DFAs without taking possession or custody of the assets, could be subject to licensing requirements under the BitLicense regulation, but would not be subject to licensing requirements under the DFAL.<br /> <br /> Under the DFAL, an exchange must certify to the DFPI that it has identified the likelihood that the DFA would be deemed a security by federal or California regulators before listing or offering it. This requirement to identify the &ldquo;likelihood&rdquo; that a DFA would be deemed a security appears to be more onerous than the BitLicense regulation&rsquo;s requirement that a licensee consider regulatory risks before listing or offering a digital asset, including whether a regulator has determined that the digital asset is a security. Determining the likelihood that a DFA would be deemed a security may be extra burdensome to licensees, especially considering the current regulatory uncertainties regarding whether a digital asset is a security and ongoing SEC litigation against cryptocurrency companies.<br /> <br /> In addition, the stablecoin-specific requirements under the DFAL are not as detailed as the NYDFS&rsquo;s <a rel="noopener noreferrer" href="https://www.dfs.ny.gov/industry_guidance/industry_letters/il20220608_issuance_stablecoins" target="_blank">Guidance on the Issuance of U.S. Dollar-Backed Stablecoins</a>. For example, the NYDFS guidance imposes more stringent reserve and redemption requirements than what the DFAL currently provides. Stablecoin issuers should keep in mind that the DFPI may adopt regulations or guidance that impose more robust requirements on stablecoin issuers, similar to the NYDFS guidance. <br /> <br /> Digital asset companies that have already received a BitLicense from the NYDFS have distinct advantages in complying with the DFAL. The requirements under the DFAL largely track the requirements under the NYDFS BitLicense regulation. In addition, companies that hold a BitLicense may receive a conditional license from the DFPI while their application is pending before the DFPI.</p> <h2> Key Takeaways</h2> <p> While the DFAL does not take effect until July 1, 2025, institutions engaging in or planning to engage in digital asset activities in California should begin evaluating whether their current or planned activities will be subject to the DFAL. In addition, digital asset companies should pay attention to future developments regarding the DFAL, as the DFPI is likely to introduce implementing regulations and guidance prior to the law&rsquo;s effective date. <br /> <br /> While similar to the BitLicense regulation, the DFAL includes different requirements, which institutions looking to engage in DFA business activities in California will have to assess to determine what additional compliance measures are necessary to ensure regulatory compliance with both states. <br /> <br /> Companies seeking a license under the DFAL should expect an extended application process if recent experience with the NYDFS is any indication.<br /> <br /> A company is not required to be located in California, have California employees, or even be registered to do business in California in order to become subject to the DFAL. Merely engaging in business with California residents is sufficient. Continuing to engage in a DFA business with California residents without a license under the DFAL will likely subject that company to potential enforcement action, similar to actions taken by the NYDFS. <br /> <br /> Institutions interested in how the DFAL may impact their businesses may contact any of the authors of this Advisory or their usual Arnold &amp; Porter contact. The firm&rsquo;s <a href="https://www.arnoldporter.com/en/services/capabilities/practices/financial-services">Financial Services</a> team would be pleased to assist with any questions about the DFAL or digital asset regulation in general. </p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{0E2A79B5-E3DD-49AD-88B3-D1E59B94DFBF}https://www.arnoldporter.com/en/perspectives/advisories/2023/12/capital-snapshot-decemberKevin O'Neillhttps://www.arnoldporter.com/en/people/o/oneill-kevinkevin.oneill@arnoldporter.comDavid J.M. Skillmanhttps://www.arnoldporter.com/en/people/s/skillman-daviddavid.skillman@arnoldporter.comPeter E. Duysharthttps://www.arnoldporter.com/en/people/d/duyshart-peterpeter.duyshart@arnoldporter.comLucas Gorakhttps://www.arnoldporter.com/en/people/g/gorak-lucaslucas.gorak@arnoldporter.comCapital Snapshot: A Monthly Overview of the Issues, Events, Timelines, and Polling Data Driving Federal Policy DecisionsOur Legislative &amp; Public Policy team is pleased to provide the December 2023 edition of &ldquo;Capital Snapshot,&rdquo; a monthly summary of the issues, events, and timelines driving federal policy and political decisions.&nbsp;Fri, 08 Dec 2023 00:00:00 -0600Our Legislative &amp; Public Policy team is pleased to provide the December 2023 edition of &ldquo;Capital Snapshot,&rdquo; a monthly summary of the issues, events, and timelines driving federal policy and political decisions. This month, we provide an overview of the December 2023 congressional schedule, as well as the 2024 congressional schedule. We also provide updates on recent significant developments in Congress, including the expulsion of George Santos from the House, and House Republicans&rsquo; impeachment inquiry into President Biden. Additionally, we share updates on developments, outlook, and priorities across a variety of public policy and legislative areas, including (1) appropriations; (2)&nbsp; the National Defense Authorization Act&nbsp;and Department of Defense; (3) tax; (4) financial services; (5) artificial intelligence; (6) energy and environment; (7) education; (8) health care; and (9) California policy. We also provide an overview of the state of play for the 2024 elections. Furthermore, we assess what trends, current events, and factors could impact the upcoming political and legislative landscape. <p>&nbsp;</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{6096084A-04D9-4D32-BD50-D6D58A22F178}https://www.arnoldporter.com/en/perspectives/events/2023/12/part-ii-key-developments-in-esg-related-regulationNiels Christian Ersbøllhttps://www.arnoldporter.com/en/people/e/ersbll-niels-christianniels.ersboll@arnoldporter.comTom Foxhttps://www.arnoldporter.com/en/people/f/fox-tomTom.Fox@arnoldporter.comDr. Alexander Italianerhttps://www.arnoldporter.com/en/people/i/italianer-alexanderalexander.italianer@arnoldporter.comLazarinka Naydenovahttps://www.arnoldporter.com/en/people/n/naydenova-lazarinkalazarinka.naydenova@arnoldporter.comESG Series: Part II: Key Developments in ESG-Related Regulation, Enforcement, and Competition Law in the EU and UK<p>A push for ESG accountability in the EU and UK has been driven in part by investor and consumer demand and pressure on regulators to act swiftly in the pursuit of ambitious global sustainability goals.</p>Thu, 07 Dec 2023 00:00:00 -0600<p>A push for ESG accountability in the EU and UK has been driven in part by investor and consumer demand and pressure on regulators to act swiftly in the pursuit of ambitious global sustainability goals. There have been numerous legislative initiatives that require businesses to assess not only their own behavior and accountability, but also that of their entire supply chains. At the same time, there has been a flurry of activity from competition regulators setting the framework for assessing sustainability agreements under the competition rules. For companies and their advisors, it has been a challenge to understand what they can and cannot do, particularly because regulators have adopted greatly varying approaches.</p> <p>This webinar will focus on the key legislative and enforcement developments in relation to environmental and chemicals regulation, green claims, corporate social responsibility, and antitrust in the EU and UK. We will give practical insight on how companies can mitigate risk, and we will provide predictions on what to expect in the future.</p>{A4B4A8DD-9CF7-4400-915D-3E8CB7FCAE7A}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/12/dashefsky-and-glantz-discuss-new-york-market-in-legal-business-ukDashefsky and Glantz Discuss New York Market in Legal Business UKLowell Dashefsky, co-head of each of the firm&rsquo;s Private Equity and Life Sciences Transactions practices, and Alan Glantz, co-head of the firm&rsquo;s Syndicated &amp; Leveraged Finance practice, were recently featured in the <em>Legal Business UK</em> article, &ldquo;<em>The Legal 500</em> View - The word from Manhattan.&rdquo;&nbsp;Thu, 07 Dec 2023 00:00:00 -0600<p>Lowell Dashefsky, co-head of each of the firm&rsquo;s Private Equity and Life Sciences Transactions practices, and Alan Glantz, co-head of the firm&rsquo;s Syndicated &amp; Leveraged Finance practice, were recently featured in the <em>Legal Business UK</em> article, &ldquo;<em>The Legal 500</em> View - The word from Manhattan.&rdquo; The article summarizes the perspectives of private equity and corporate partners on several topics involving the New York market &mdash; namely, the impact of the pandemic and rising interest rates and how firms are adapting to new market realities.</p> <p>Dashefsky explained that rising interest rates &mdash; which has made private and public debt more expensive &mdash; coupled with a declining number of &ldquo;attractive targets,&rdquo; has resulted in an increase in prices that is &ldquo;limiting the impact of financial engineering.&rdquo; </p> <p>Glantz, who discussed the growth of new direct lenders supporting transactions, explained that while they &ldquo;traditionally have been an important source of financing in just middle market transactions,&rdquo; the rapid growth of direct lending &ldquo;has led to many direct lenders being able to provide commitments that are greater in size to support large-cap transactions as well.&rdquo;</p> <p>Discussing how firms should adapt to new market realities, Dashefsky told <em>Legal Business UK</em> that effectively managing evolving regulatory pressures is important. &ldquo;The enhanced regulatory environment has resulted in the M&amp;A market being more complex to navigate,&rdquo; he said. &ldquo;Firms with antitrust and regulated industry expertise, along with strong transactional practices, will be sought out by clients.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://www.legalbusiness.co.uk/analysis/the-legal-500-view-the-word-from-manhattan/" target="_blank">Read the full article</a> (subscription required). </p>{6F098ADC-BA77-4025-A726-1F92A2FD0CD9}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/12/magnani-talks-new-ftc-comment-on-regulating-ai-copyright-practicesMagnani Talks New FTC Comment on Regulating AI Copyright PracticesTom Magnani, head of the firm&rsquo;s Technology Transactions practice and co-chair of the Technology, Media, &amp; Telecommunications industry group, was featured in the <em>Legaltech News</em> article, &ldquo;Knock, Knock, It's the FTC&mdash;And It Wants to Regulate the Copyright Implications of AI.&rdquo;&nbsp;Thu, 07 Dec 2023 00:00:00 -0600<p>Tom Magnani, head of the firm&rsquo;s Technology Transactions practice and co-chair of the Technology, Media, &amp; Telecommunications industry group, was featured in the <em>Legaltech News</em> article, &ldquo;Knock, Knock, It's the FTC&mdash;And It Wants to Regulate the Copyright Implications of AI.&rdquo; The article examines the U.S. Federal Trade Commission&rsquo;s (FTC) recent comment, which was submitted to the U.S. Copyright Office (USCO). The comment stated that the FTC aims to investigate potential cases against AI developers involving use of copyrighted content, and that under Section 5 of the FTC Act, activity that may not constitute copyright infringement might nevertheless constitute unfair competition. </p> <p>Magnani told <em>Legaltech News</em> that he was surprised by the FTC&rsquo;s approach. &ldquo;I don&rsquo;t think a lot of people thought the FTC was going to start thinking about its role in protecting competition as encompassing the authors and publishers of copyrighted works, but they clearly believe that is within their purview,&rdquo; he said. </p> <p>He added that if the FTC continues with its approach, AI developers and companies will face several hurdles. &ldquo;Even if these [AI] developers get off on copyright claims, the FTC may bring unfair competition claims and say, &lsquo;The use of these tools to compete with the artists whose work was used to train the tool is somehow unfair competition, even if it&rsquo;s not copyright infringement.&rsquo; I think that&rsquo;s big news.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://www.law.com/legaltechnews/2023/12/04/knock-knock-its-the-ftc-and-it-wants-to-regulate-the-copyright-implications-of-ai/" target="_blank">Read the full article</a> (subscription required). </p>{267BED16-944B-45EA-8496-EFD84CAEE518}https://www.kqed.org/forum/2010101895243/why-do-we-elect-state-court-judgesteresa.johnson@arnoldporter.comWhy Do We Elect State Court Judges?Thu, 07 Dec 2023 00:00:00 -0600{7E03294F-7638-44B3-B9FD-57A197216CED}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/12/blanchard-remembers-justice-sandra-day-oconnorBlanchard Remembers Justice Sandra Day O’ConnorGovernment Contracts &amp; National Security partner Charles Blanchard was quoted in the <em>Law360</em> article, &ldquo;Former Clerks Say Justice O'Connor Still Worth Emulating.Wed, 06 Dec 2023 00:00:00 -0600<p>Government Contracts &amp; National Security partner Charles Blanchard was quoted in the <em>Law360</em> article, &ldquo;Former Clerks Say Justice O'Connor Still Worth Emulating.&rdquo; The article discusses the recent death of former U.S. Supreme Court Justice Sandra Day O&rsquo;Connor and highlights the reactions of the lawyers she mentored. </p> <p>Blanchard, who clerked for Justice O&rsquo;Connor, praised her &ldquo;brand of narrow, fact-based&rdquo; decision-making. &ldquo;The chaos that&rsquo;s been created by the current Supreme Court is the result of an approach that has less respect for precedent, and is more inclined to rush towards grand pronouncements,&rdquo; he told <em>Law360</em>. &ldquo;I hope that someday we return to the way Justice O&rsquo;Connor did things.&rdquo; </p> <p><a rel="noopener noreferrer" href="https://www.law360.com/articles/1771990/former-clerks-say-justice-o-connor-still-worth-emulating" target="_blank">Read the full article</a> (subscription required). </p>{F2DE9C45-EE0D-46A0-8CB5-A75B87A01198}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/12/companies-should-prepare-for-regulations-and-enforcement-after-ai-executive-order-says-schildkrautCompanies Should Prepare for Regulations & Enforcement After AI Executive Order, Says SchildkrautPeter Schildkraut, co-leader of the Technology, Media &amp; Telecommunications industry team, was quoted in the <em>Bloomberg Law </em>article, &ldquo;AI Rules From US Government Push Companies to Show Tech Is Safe.&rdquo;&nbsp;Wed, 06 Dec 2023 00:00:00 -0600<p>Peter Schildkraut, co-leader of the Technology, Media &amp; Telecommunications industry team, was quoted in the <em>Bloomberg Law</em> article, &ldquo;AI Rules From US Government Push Companies to Show Tech Is Safe.&rdquo; The article discusses companies&rsquo; approaches to the Biden Administration&rsquo;s recent executive order on the &ldquo;Safe, Secure and Trustworthy Development and Use of Artificial Intelligence,&rdquo; which aims to alleviate AI-related risks.</p> <p>Schildkraut told <em>Bloomberg Law</em> that although the order will take months to carry out, companies should begin managing AI risks to be prepared for future and current regulations. He emphasized that the order would lead to agency enforcement and rulemaking actions that could potentially constrain companies&rsquo; operations. </p> <p><a rel="noopener noreferrer" href="https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/X5CBDQ14000000?bc=W1siU2VhcmNoICYgQnJvd3NlIiwiaHR0cHM6Ly93d3cuYmxvb21iZXJnbGF3LmNvbS9wcm9kdWN0L2JsYXcvc2VhcmNoL3Jlc3VsdHMvZGJiMGQzNjQ5OWQwNzIwZTdjOWJhNjFlMzNkNzIzMGEiXV0--57030f07302760cc75154291d4cdb2d41a4147c4&amp;criteria_id=dbb0d36499d0720e7c9ba61e33d7230a&amp;search32=QFrfbESpnpjbZ8bZCE0xgw%3D%3DQOe4vM0VDmIK8SF3bWyCu3pO0KAyW9byINovcbRIOCO2v-9qQnwWpD_bW_oFB6ZM5Mlc4TjLK3DxkjE898H4_xIXvHlgYAlrPTWu43WZtoglIGlK-lRldbEFi3B5_mQr" target="_blank">Read the full article</a> (subscription required). </p>{8F41043F-645D-49A8-9501-36EE0FACE4ED}https://www.arnoldporter.com/en/perspectives/advisories/2023/12/requirements-for-dtc-tv-and-radio-prescription-drug-advertisingMahnu V. Davarhttps://www.arnoldporter.com/en/people/d/davar-mahnu-vmahnu.davar@arnoldporter.comAbeba Habtemariamhttps://www.arnoldporter.com/en/people/h/habtemariam-abebaAbeba.Habtemariam@arnoldporter.comTyler M. Scandalioshttps://www.arnoldporter.com/en/people/s/scandalios-tylertyler.scandalios@arnoldporter.comFDA Issues Final Rule Tightening Certain Requirements for DTC TV and Radio Prescription Drug AdvertisingOn November 21, the U.S. Food and Drug Administration (FDA or Agency) issued a<a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2023/11/21/2023-25428/direct-to-consumer-prescription-drug-advertisements-presentation-of-the-major-statement-in-a-clear#:~:text=This%20final%20rule%20implements%20a,side%20effects%20and%20contraindications%20(major" target="_blank">&nbsp;final rule</a>&nbsp;establishing the standards for determining whether direct-to-consumer (DTC) advertisements in television or radio format for human prescription drugs and biological products (DTC TV and radio drug ads) present the major statement relating to side effects and contraindications (the major statement) in a &ldquo;clear, conspicuous, and neutral manner&rdquo; as required by section 502(n) of the Federal Food, Drug, and Cosmetic Act (FD&amp;C Act) (21 U.S.C. 352(n)).Wed, 06 Dec 2023 00:00:00 -0600<p>On November 21, the U.S. Food and Drug Administration (FDA or Agency) issued a<a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2023/11/21/2023-25428/direct-to-consumer-prescription-drug-advertisements-presentation-of-the-major-statement-in-a-clear#:~:text=This%20final%20rule%20implements%20a,side%20effects%20and%20contraindications%20(major" target="_blank"> final rule</a> establishing the standards for determining whether direct-to-consumer (DTC) advertisements in television or radio format for human prescription drugs and biological products (DTC TV and radio drug ads) present the major statement relating to side effects and contraindications (the major statement) in a &ldquo;clear, conspicuous, and neutral manner&rdquo; as required by section 502(n) of the Federal Food, Drug, and Cosmetic Act (FD&amp;C Act) (21 U.S.C. 352(n)).[[N: <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2023/11/21/2023-25428/direct-to-consumer-prescription-drug-advertisements-presentation-of-the-major-statement-in-a-clear" target="_blank">Direct-to-Consumer Prescription Drug Advertisements: Presentation of the Major Statement in a Clear, Conspicuous, and Neutral Manner in Advertisements in Television and Radio Format, 88 Fed. Reg. 80958 (Nov. 21, 2023)</a>. The provisions of the final rule will be primarily codified at 21 CFR 202.1(e)(1).]] The final rule has evidently been in the works since FDA published the proposed rule back in March of 2010, albeit subject to delays due to &ldquo;competing demands for limited Agency resources&rdquo;;[[N: <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2023/11/21/2023-25428/direct-to-consumer-prescription-drug-advertisements-presentation-of-the-major-statement-in-a-clear#p-94" target="_blank">88 Fed. Reg. at 80963</a>.]] and the requirement that FDA issue such a regulation dates back to the Food and Drug Administration Amendments Act of 2007 (FDAAA).<br /> <br /> In general, the final rule aligns with FDA&rsquo;s longstanding expectations that DTC TV and radio drug ads include important safety information, provide a fair balance between benefit and risk information, be understandable to consumers, and do not downplay or distract consumers from the advertisement&rsquo;s presentation of risks and other important information about the safety and limitations of the drug. FDA has taken the opportunity in the intervening years to conduct social science research in an effort to develop a more informed position on risk information comprehension as it relates to these issues. <br /> <br /> Importantly, the final rule establishes a <em>new</em> requirement that DTC TV drug ads must present the major statement of risk information in <em>concurrent</em> audio and text (the dual modality requirement). The final rule also creates some ambiguity as to how the terms &ldquo;media&rdquo; and &ldquo;television format&rdquo; would apply to content played on the internet or social media platforms. This is important because the format of required information may change depending on the answer. <br /> <br /> While the final rule does not deviate from FDA&rsquo;s 2010 proposal in terms of the content which must be included in the major statement, the final rule does establish five standards intended to help ensure that the major statement is presented in a clear, conspicuous, and neutral manner in DTC TV or radio drug ads. Specifically, the final rule provides that the major statement in a DTC TV or radio drug ad meets the requirement to be presented in a clear, conspicuous, and neutral manner if:</p> <ul> <li>The major statement is presented in consumer-friendly language and in terminology that is readily understandable</li> <li>The audio information of the major statement, in terms of the volume, articulation, and pacing used, is at least as understandable as the audio information presented in the rest of the advertisement</li> <li>During the presentation of the major statement, the advertisement does not include audio or visual elements, alone or in combination, that are likely to interfere with comprehension of the major statement</li> <li>Additionally, for DTC TV drug ads specifically: <ul> <li>The major statement is presented concurrently using both audio and text (the dual modality requirement)</li> <li>For the text portion of the major statement, the size and style of font, the contrast with the background, and the placement on the screen allow the information to be read easily</li> </ul> </li> </ul> <p>To satisfy the &ldquo;dual modality&rdquo; requirement (which applies only to DTC TV drug ads) the rule provides the option for the major statement text to either display the verbatim complete transcript of the corresponding audio or to display &ldquo;the verbatim key terms or phrases&rdquo; from the corresponding audio. The rule further specifies that the major statement text must be displayed for a sufficient duration to allow it to be read easily, and explains the duration is considered sufficient if the text display begins at the same time and ends at approximately the same time as the corresponding audio. As an example of how to comply with the dual modality requirement, in the preamble, FDA provides an example of a voiceover stating that &ldquo;the most common side effects of DRUGX are dry mouth, headache, and heartburn&rdquo; while accompanying text presents bullets stating &ldquo;dry mouth,&rdquo; &ldquo;headache,&rdquo; and &ldquo;heartburn.&rdquo;[[N: <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2023/11/21/2023-25428/direct-to-consumer-prescription-drug-advertisements-presentation-of-the-major-statement-in-a-clear#p-215" target="_blank">88 Fed. Reg. at 80975.</a>]]<br /> <br /> The dual modality requirement is a significant departure from the prior regulation and may be controversial.[[N: While most of the other standards established by the rule arguably clarify certain existing FDA requirements and expectations, the dual modality requirement explicitly changes a regulatory requirement that has been in place for television advertisements for many years. The option to present the major statement in either audio or audio and visual format in TV and radio ads dates back to 1969 (see FDA, &ldquo;Prescription-Drug Advertisements: Order Acting on Objections,&rdquo; 34 Fed. Reg. 7802 (May 16, 1969)).]] Prior to the publication of the final rule, FDA regulations had specifically provided that DTC TV drug ads could present the major statement in either the audio or in both the audio and visual parts of the advertisement,[[N: This provision was in the now-to-be-amended 21 C.F.R. 202.1(e)(1).]] permitting a &ldquo;voiceover&rdquo; approach which became an accepted approach in the industry. The new dual modality requirement is also a change in the way the Agency and industry have previously thought about presentation of risk information. The change may require some companies to more concretely establish which side effects and contraindications are &ldquo;major,&rdquo; as those side effects and contraindications in particular will need to be presented with accompanying text. As FDA has acknowledged, because risks vary from product to product, which side effects and contraindications are &ldquo;major,&rdquo; and how much information must be included about each of them to satisfy the major statement requirements, will vary from product to product.[[N: See, e.g., <a rel="noopener noreferrer" href="https://www.fda.gov/about-fda/center-drug-evaluation-and-research-cder/opdp-frequently-asked-questions-faqs" target="_blank">OPDP Frequently Asked Questions on FDA.gov</a>.]] <br /> <br /> Notably, FDA devotes a significant portion of the rule&rsquo;s preamble to addressing concerns that the Agency may apply the provisions of the rule in an overly restrictive manner or in a manner that suppresses effective marketing techniques. In particular, FDA clarifies that the rule does not require the major statement to be presented in a bland manner such that the audience becomes disengaged during that part of the ad, nor does FDA intend to require a &ldquo;tombstone&rdquo; (e.g., black and white) presentation of the major statement. FDA also clarifies that the rule does not categorically prohibit visual depictions of benefits, or positive imagery, during presentation of the major statement.[[N: <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2023/11/21/2023-25428/direct-to-consumer-prescription-drug-advertisements-presentation-of-the-major-statement-in-a-clear#p-192" target="_blank">88 Fed. Reg. at 80972</a>.]]<br /> <br /> It is understandable, however, that companies may be wary of how FDA will apply these standards, particularly considering that FDA had previously sought to implement a separate provision of FDAAA &mdash; a provision authorizing pre-dissemination review of TV commercials by FDA &mdash; in a manner that much of industry saw as unduly aggressive.[[N: See FDA Draft Guidance for Industry, "Direct-to-Consumer Television Advertisements &mdash; FDAAA DTC Television Ad PreDissemination Review Program&rdquo; (March 2012) (implementing FDAAA section 503B). This proposed predissemination review program was never finalized, in the wake of significant pushback from industry and concerns about the proposed program&rsquo;s Constitutional legality.]] Perhaps in anticipation of legal and policy challenges down the road, FDA has devoted a significant portion of the preamble to the rule explaining the Agency&rsquo;s rationale as to why it believes it has the authority to regulate DTC TV and radio communications in the manner set forth in the final rule. Further, FDA explains that even if one or more of the rule&rsquo;s standards is stayed or invalidated, the remaining standards would continue to advance the statutory objectives of ensuring the major statement is presented in a clear, conspicuous, and neutral manner.[[N: Specifically, FDA states: &ldquo;Although we believe that the five standards established by this rule, when applied collectively, will best help ensure that the major statement in a DTC TV/radio ad is presented in a clear, conspicuous, and neutral manner, each standard independently enhances the manner of presentation to increase the likelihood that consumers will notice, attend to, and understand the advertised drug&rsquo;s major side effects and contraindications. In the event of a stay or invalidation of any standard(s), those that remain in effect would continue to function sensibly to advance these statutory objectives and provide useful standards for firms to meet their existing statutory obligation.&hellip; Therefore, it is FDA&rsquo;s intent to preserve each of the rule&rsquo;s standards to the fullest possible extent, to help advance the important Government interests described &amp;#91;above&amp;#93;.&rdquo; <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2023/11/21/2023-25428/direct-to-consumer-prescription-drug-advertisements-presentation-of-the-major-statement-in-a-clear#p-135" target="_blank">88 Fed. Reg. at 80967</a>.]] <br /> <br /> While the final rule is set to go into effect May 20, 2024, the compliance date for the rule is November 20, 2024. At such time, the standards established by the rule would apply to all DTC TV and (as applicable) radio drug ads in circulation. <br /> <br /> If you have any questions about the content discussed here or would like more information, please reach out to one of the authors of this Advisory or to your existing Arnold &amp; Porter contact.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{0282D41C-D434-4C03-A799-46A165FA9900}https://www.arnoldporter.com/en/perspectives/events/2023/12/looking-toward-2024-legislation-regulationE. Alex Beroukhimhttps://www.arnoldporter.com/en/people/b/beroukhim-e-alexalex.beroukhim@arnoldporter.comWill Wagnerhttps://www.arnoldporter.com/en/people/w/wagner-willwill.wagner@arnoldporter.comKatie (Katherine) Pettibonehttps://www.arnoldporter.com/en/people/p/pettibone-katie-katherinekatie.pettibone@arnoldporter.comLooking Toward 2024: Legislation, Regulation, and Litigation Trends for Companies Selling Products in CaliforniaWith changing consumer habits, a greater focus on ESG, and the threat of a recession, 2023 has brought a variety of challenges for companies selling products in California.Tue, 05 Dec 2023 00:00:00 -0600<p>With changing consumer habits, a greater focus on ESG, and the threat of a recession, 2023 has brought a variety of challenges for companies selling products in California. Having a strong pulse on legislation, regulation, and litigation trends that address these complex and often overlapping issues is ever-important. This webinar will discuss the legal landscape in consumer products this year, and what trends may come in 2024.</p> <p>In this one-hour CLE, attorneys from our California Consumer Products and Legislative practices will dive into upcoming and pending legislation, chemical and environmental regulation developments, false advertising trends, and litigation risks affecting companies with products being sold in California &mdash; whether in the retail, food and beverage, supplemental, personal care, technology, apparel, or other industries.</p>{C4101302-F7F8-463B-BDAB-120A29419824}https://www.arnoldporter.com/en/perspectives/news/2023/12/arnold-and-porter-named-a-top-10-firm-by-law360-pulse-2023-leaderboardArnold & Porter Named a Top 10 Firm by Law360 Pulse 2023 LeaderboardArnold &amp; Porter was recognized as a top 10 firm in the 2023 <em>Law360 Pulse</em> Leaderboard, which analyzes the prestige, social impact, and legal footprint of U.S. law firms.Tue, 05 Dec 2023 00:00:00 -0600<p>Arnold &amp; Porter was recognized as a top 10 firm in the 2023 <em>Law360 Pulse</em> Leaderboard, which analyzes the prestige, social impact, and legal footprint of U.S. law firms. The recognition showcases the legal acumen and social impact work conducted by the nation&rsquo;s top law firms. The <em>Law360 Pulse</em> Leaderboard assesses firms based on three key indicators of a leading law firm: prestige, social impact, and practice footprint.</p> <p>In October 2023, <em>Law360 Pulse</em>&rsquo;s <a rel="noopener noreferrer" href="https://www.law360.com/pulse/articles/1721999" target="_blank">Social Impact Leaders</a> report, which highlights firms who are &ldquo;setting the bar for social impact,&rdquo; recognized Arnold &amp; Porter as one of the top 5 firms for social impact and one of the top 2 firms for pro bono. The firm was also included in <em>Law360 Pulse</em>&rsquo;s subsequent <a rel="noopener noreferrer" href="https://www.law360.com/pulse/content/prestige-leaders" target="_blank">Prestige Leaders</a> report in November 2023, which highlights firms that are &ldquo;first-in-class&rdquo; in the legal industry. The two reports, combined with the firm&rsquo;s footprint in high-profile litigation and transaction work, culminate in Arnold &amp; Porter&rsquo;s placement in the <em>Law360 Pulse</em> Leaderboard. </p>{758C1E63-8F3A-4FBB-9B2C-BA9E00C7257E}https://www.arnoldporter.com/en/perspectives/news/2023/12/arnold-and-porter-again-recognized-by-the-human-rights-campaigns-corporate-equality-indexArnold & Porter Again Recognized by the Human Rights Campaign’s Corporate Equality IndexArnold &amp; Porter again earned a score of 100 on the Human Rights Campaign Foundation's Corporate Equality Index (CEI) and received the new &ldquo;Equality 100 Award: Leader in LGBTQ+ Workplace Inclusion&rdquo; designation.Tue, 05 Dec 2023 00:00:00 -0600<p>Arnold &amp; Porter again earned a score of 100 on the Human Rights Campaign Foundation's <a rel="noopener noreferrer" href="https://www.hrc.org/resources/corporate-equality-index" target="_blank">Corporate Equality Index</a> (CEI) and received the new &ldquo;Equality 100 Award: Leader in LGBTQ+ Workplace Inclusion&rdquo; designation. This marks the 17th year that the firm has been recognized on the CEI, which is a national benchmarking survey and report on corporate policies and practices related to LGBTQ+ workplace equality.</p> <p>Richard M. Alexander, Chairman of Arnold &amp; Porter, said: "The Human Rights Campaign's longstanding recognition of Arnold &amp; Porter underscores our dedication to cultivating diversity and inclusion in a positive work environment, where everyone is supported, and accorded dignity and respect.&rdquo; </p> <p>Partner Angela Vicari, who co-chairs Pride, the firm's LGBTQ+ affinity group, added: &ldquo;The continued recognition on the Corporate Equality Index and receiving a score of 100 is a direct result of Arnold &amp; Porter&rsquo;s inclusive culture. I am proud to be part of a firm that values the contributions each person makes and enables colleagues to be comfortable being themselves.&rdquo; </p> <p>The CEI assesses top-rated law firms and businesses on their non-discrimination policies, benefits for LGBTQ+ employees and their families, internal accountability metrics that promote inclusion and competency, and public commitment to LGBTQ+ equality. The CEI incrementally raises the bar on the criteria that are factored into its scores to ensure that ranked companies continue to meet the highest industry standards for LGBTQ+ workplace inclusion. </p>{F4415D50-99DA-4FE1-BFEE-4C3C34BEF919}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/12/desjardins-discusses-current-goals-future-of-device-industry-and-fda-priorities-for-2024Desjardins Discusses Current Goals, Future of Device Industry, and FDA Priorities for 2024Life Sciences &amp; Healthcare Regulatory partner Philip Desjardins, who recently rejoined the firm, was profiled in the <em>Medtech Insight</em> article, &ldquo;&lsquo;One Little Cog&rsquo;: Former J&amp;J Attorney Discusses Return To Private Practice.&rdquo;Mon, 04 Dec 2023 00:00:00 -0600<p>Life Sciences &amp; Healthcare Regulatory partner Philip Desjardins, who recently rejoined the firm, was profiled in the <em>Medtech Insight</em> article, &ldquo;&lsquo;One Little Cog&rsquo;: Former J&amp;J Attorney Discusses Return To Private Practice.&rdquo; The article discusses Desjardins&rsquo; current goals at the firm, the future of the device industry and device regulation, and the U.S. Food and Drug Administration&rsquo;s priorities for 2024.</p> <p>In the Q&amp;A, Desjardins emphasized his interest in the device industry. &ldquo;I really do feel like I'm connected to patient health and to public health,&rdquo; he told <em>Medtech Insight</em>. &ldquo;I&rsquo;m one little cog in the wheel of the health care ecosystem. The work that I do that enables new technologies to reach patients means I&rsquo;m playing a role in patient access and patient health.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://medtech.citeline.com/MT148484/One-Little-Cog-Former-JJ-Attorney-Discusses-Return-To-Private-Practice" target="_blank">Read the full article.</a> </p>{26FFAE26-721D-4828-8D4D-1C183CFE8324}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/12/epas-request-for-6ppd-rule-curious-says-preroEPA’s Request for 6PPD Rule ‘Curious,’ Says PreroEnvironmental counsel Judah Prero was quoted in the <em>Chemical Watch</em> article, &ldquo;US EPA grants TSCA petition to regulate 6PPD in tyres,&rdquo; which discusses the U.S. Environmental Protection Agency&rsquo;s (EPA) recent grant of a request made by Native tribes that EPA develop a Toxic Substances Control Act (TSCA) rule restricting 6PPD, a chemical widely used as an additive in vehicle tires.Mon, 04 Dec 2023 00:00:00 -0600<p>Environmental counsel Judah Prero was quoted in the <em>Chemical Watch</em> article, &ldquo;US EPA grants TSCA petition to regulate 6PPD in tyres,&rdquo; which discusses the U.S. Environmental Protection Agency&rsquo;s (EPA) recent grant of a request made by Native tribes that EPA develop a Toxic Substances Control Act (TSCA) rule restricting 6PPD, a chemical widely used as an additive in vehicle tires.</p> <p>Prero described the EPA&rsquo;s decision to focus on restricting the use of the chemical specifically in tires as &ldquo;curious&rdquo; in light of EPA&rsquo;s approach towards making risk determinations on a &ldquo;whole-substance&rdquo; basis. He added that the agency&rsquo;s current approach to 6PPD &ldquo;raises a lot of questions,&rdquo; and that if a final rule results in litigation, the EPA &ldquo;is going to have a lot of explaining to do.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://chemicalwatch.com/881524/us-epa-grants-tsca-petition-to-regulate-6ppd-in-tyres" target="_blank">Read the full article</a> (subscription required). </p>{F8291219-B1CD-4FED-A370-01F3199228D0}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/12/fda-lab-test-rule-should-be-finalized-by-may-to-avoid-republican-challenge-mcmillin-saysFDA Lab Test Rule May Be Finalized by May 2024 to Avoid Republican Challenge, McMillin SaysBobby McMillin, Managing Director of the firm&rsquo;s Legislative &amp; Public Policy practice, was recently quoted in the <em>Inside Health Policy</em> article, &ldquo;LDT Rule Must Be Finalized By May To Avoid Congressional Scrutiny.&rdquo;Mon, 04 Dec 2023 00:00:00 -0600<p>Bobby McMillin, Managing Director of the firm&rsquo;s Legislative &amp; Public Policy practice, was recently quoted in the <em>Inside Health Policy</em> article, &ldquo;LDT Rule Must Be Finalized By May To Avoid Congressional Scrutiny.&rdquo; The article discusses the U.S. Food and Drug Administration&rsquo;s (FDA) recent rule that allows the agency to assert greater regulatory oversight over laboratory developed tests (LDTs). </p> <p>McMillin told <em>Inside Health Policy</em> that the FDA may push to get the rule finalized before May 2024. Any further delay could give Republican critics of the rule the opportunity to unwind it through the Congressional Review Act should they win the presidency and both Houses of Congress in 2024&rsquo;s elections. &ldquo;If I were the administration, I would want to make sure any potentially controversial major rules, including LDTs, are finalized by Memorial Day if not earlier,&rdquo; McMillin said.</p> <p><a rel="noopener noreferrer" href="https://insidehealthpolicy.com/daily-news/ldt-rule-must-be-finalized-may-avoid-congressional-scrutiny#:~:text=Republican%20critics%20of%20FDA's%20controversial,lookback%20period%20for%20so-called%20%E2%80%9C" target="_blank">Read the full article.</a> </p>{F6CE78C4-0CBE-4834-9C4B-82D88A76768A}https://www.arnoldporter.com/en/perspectives/advisories/2023/12/final-data-breach-notification-amendment-to-safeguards-ruleKevin M. Toomeyhttps://www.arnoldporter.com/en/people/t/toomey-kevin-mkevin.toomey@arnoldporter.comNancy L. Perkinshttps://www.arnoldporter.com/en/people/p/perkins-nancy-lnancy.perkins@arnoldporter.comAnthony Raglanihttps://www.arnoldporter.com/en/people/r/raglani-anthonyanthony.raglani@arnoldporter.comGeorge Eichelbergerhttps://www.arnoldporter.com/en/people/e/eichelberger-georgeGeorge.Eichelberger@arnoldporter.comJason T. Raylesberghttps://www.arnoldporter.com/en/people/r/raylesberg-jason-tjason.raylesberg@arnoldporter.comFTC Publishes Final Data Breach Notification Amendment to Safeguards RuleThe Federal Trade Commission (FTC) recently published a final rule (the Amendment) amending the Standards for Safeguarding Customer Information, known as the &ldquo;Safeguards Rule,&rdquo; implemented pursuant to the Gramm-Leach-Bliley Act (GLBA).Mon, 04 Dec 2023 00:00:00 -0600<p>The Federal Trade Commission (FTC) recently published a <a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/p145407_safeguards_rule.pdf" target="_blank">final rule</a> (the Amendment) amending the Standards for Safeguarding Customer Information, known as the &ldquo;Safeguards Rule,&rdquo; implemented pursuant to the Gramm-Leach-Bliley Act (GLBA). The Amendment will require certain non-bank financial institutions to report to the FTC incidents involving the unauthorized acquisition of unencrypted, personally identifiable, nonpublic financial information of at least 500 customers. These reports will be accessible to the public through a new database to be created by the FTC. The reports must include, in addition to other information, the name of the financial institution affected by the breach, the date of the breach, the number of consumers potentially affected, and a general description of the data breach itself. The Amendment was adopted following the 2021 adoption of a more comprehensive set of amendments to the Safeguards Rule, which were discussed in <a href="https://www.arnoldporter.com/en/perspectives/advisories/2021/11/ftc-amends-glba-safeguards-rule-and-privacy-rule">a previous advisory by Arnold &amp; Porter</a>. The 2021 amendments left open the question of how the FTC would address data breaches experienced by non-bank financial institutions. The Amendment answers that question, as discussed further below, and the obligations it imposes will be effective on May 13, 2024.</p> <h2>Scope</h2> <p> The Safeguards Rule applies only to non-bank financial institutions subject to the FTC&rsquo;s oversight under GLBA. The definition of &ldquo;financial institutions&rdquo; under the Safeguards Rule encompasses all entities significantly engaged in activities determined by the Federal Reserve Board to be incidental to financial activities, but the FTC&rsquo;s jurisdiction over these entities is limited to <strong><em>non-bank</em></strong> institutions such as:</p> <ul> <li>Non-bank mortgage lenders</li> <li>Payday lenders</li> <li>Finance companies</li> <li>Mortgage brokers</li> <li>Account servicers</li> <li>Check cashers</li> <li>Wire transferors</li> <li>Travel agencies operated in connection with financial services</li> <li>Debt collection agencies</li> <li>Credit counselors and other financial advisors</li> <li>Tax preparation firms</li> <li>Non-federally insured credit unions</li> <li>Investment advisors that are not required to register with the Securities and Exchange Commission</li> <li>Entities acting as intermediary&nbsp;&ldquo;finders&rdquo;</li> </ul> <p> Thus, the Safeguards Rule does<strong> <em>not</em></strong> apply to depository institutions including banks, savings associations insured by the Federal Deposit Insurance Corporation (FDIC), and credit unions, nor does it apply to insurance companies regulated by state insurance departments. The Safeguards Rule also does not apply to securities broker-dealers, investment companies, or investment advisers regulated by the Securities and Exchange Commission. <br /> <br /> The reporting obligations of the institutions subject to the Safeguards Rule Amendment extend only to security breaches. &ldquo;Customer information&rdquo; is defined by the Safeguards Rule as &ldquo;any record containing nonpublic personal information about a customer of a financial institution, whether in paper, electronic, or other form, that is handled or maintained by or on behalf of [the financial institution or its] affiliates.&rdquo; In some cases, breaches involving such information will also require the affected financial institution to provide notifications under applicable state laws; accordingly, financial institutions subject to the Safeguards Rule should pay close attention to whether notifications are required not only to the FTC but also to state authorities and affected state residents.</p> <h2> The Amendment</h2> <p> The Amendment requires non-bank financial institutions to notify the FTC after the discovery of a &ldquo;Notification Event&rdquo; involving a data breach that affects the information of at least 500 individuals. The Amendment defines a Notification Event as the acquisition of unencrypted customer information without the authorization of the affected customer themselves. Importantly, under the amendment, unauthorized acquisition is presumed if unauthorized access to customer information has occurred unless there is reliable evidence demonstrating that customer information has <em><strong>not</strong></em> been, or could not reasonably have been, acquired. Thus, if a financial institution is aware a bad actor has accessed the customer information maintained by the institution, the institution must presume that the bad actor <em><strong>acquired</strong></em> that customer information unless there is reliable evidence to the contrary. <br /> <br /> Upon discovery that unencrypted customer information was acquired without authorization, financial institutions subject to the amendment must notify the FTC as soon as possible &ndash; and no later than 30 days after discovery. Discovery occurs on the first day a notification event becomes known to the affected financial institution or any of its employees, officers, or agents.</p> <h2> Required Elements of the Notification</h2> <p> The notice to the FTC required by the Amendment must include certain information about the data breach, including:</p> <ul> <li>The name and contact information of the reporting financial institution</li> <li>A description of the types of information involved in the event</li> <li>If possible, the date or date range of the notification event</li> <li>The number of consumers potentially affected by the event</li> <li>A general description of the notification event</li> <li>If applicable, whether law enforcement has determined that notifying the public of the breach would impede a criminal investigation or cause damage to national security</li> </ul> <p> The notice must be submitted through an electronic form to be available on the FTC&rsquo;s website.</p> <p>As noted above, every report of a data breach made to the FTC pursuant to the Safeguards Rule will be accessible in a publicly available database. There was industry pushback during the rulemaking process regarding potential negative effects that could follow mandated public disclosure of consumer data breaches, such as the risk of &ldquo;pile-on&rdquo; cybersecurity attacks on vulnerable institutions. However, the FTC concluded that the interest in providing actionable information for individuals who were directly affected and giving consumers an opportunity to consider proactive safety measures outweighed the potential negative effects of public reporting. The FTC&rsquo;s approach places the Safeguards Rule in contrast with other federal data breach regulations, such as the Interagency Computer-Security Incident Notification rule jointly promulgated by the Office of the Comptroller of the Currency, FDIC, and Federal Reserve Board that took effect in May 2022, which does not require that incident reports be made publicly accessible.</p> <h2> Takeaways</h2> <p> The Amendment was formally published in the Federal Register on November 13 and <strong><em>it will take effect on May 13, 2024</em></strong>. In the meantime, it may be prudent for financial institutions to:</p> <ul> <li><strong>Determine whether they are subject to the Safeguards Rule.</strong> The siloed nature of financial regulation in the United States, as well as the broad scope of relevant covered financial activities, can make identifying the applicability of regulations like the Safeguards Rule potentially daunting. Non-bank financial institutions that believe they may be subject to the FTC&rsquo;s regulatory authority under GLBA should consult with their legal counsel to determine whether they are required to comply with the Amendment.</li> <li><strong>Revisit their security response plans.</strong> Financial institutions should review and, as needed, revise their security response plans and disclosure processes to account for the new requirements of the amendment.</li> <li><strong>Prepare for data breaches to go public.</strong> Financial institutions should be prepared to navigate any potential harms, including security risks and reputational damage, that may emerge from the public disclosure of a data breach affecting customer information.</li> <li><strong>Identify what state laws overlap with the Amendment&rsquo;s data breach notification requirement. </strong>The FTC&rsquo;s Amendment may overlap with state data privacy and cybersecurity laws that provide additional data breach reporting requirements. Financial institutions should identify what information is required to be reported under the multiple cybersecurity regimes and make sure their compliance and legal teams are prepared to handle overlapping cybersecurity and data privacy requirements.</li> </ul> <p> Institutions interested in how the Amendment may impact their businesses may contact any of the authors of this Advisory or their usual Arnold &amp; Porter contact. The firm&rsquo;s <a href="https://www.arnoldporter.com/en/services/capabilities/practices/financial-services">Financial Services</a> and <a href="https://www.arnoldporter.com/en/services/capabilities/practices/privacy-cybersecurity-data-strategy">Privacy, Cybersecurity, and Data Strategy</a> teams would be pleased to assist with any questions about the Amendment, the Safeguards Rule, or cybersecurity and data privacy issues facing financial institutions more broadly.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{621E61D5-E8C1-4F9C-B46A-0E90B54B2935}https://www.arnoldporter.com/en/perspectives/news/2023/12/arnold-and-porter-again-named-to-law-com-internationals-uk-a-listArnold & Porter Again Named to Law.com International’s UK A-List<p>Arnold &amp; Porter was recognized in <em>Law.com International</em>&rsquo;s UK A-List, one of only 20 top firms to receive this honor. The list highlights firms in the UK that are managing &ldquo;to succeed across the multiple fronts of financial success, diversity and social efforts&rdquo; and are striving &ldquo;to give back through pro bono efforts.&rdquo;</p>Fri, 01 Dec 2023 00:00:00 -0600<p>Arnold &amp; Porter was recognized in <a rel="noopener noreferrer" href="https://www.law.com/international-edition/2023/11/28/the-top-law-firms-to-work-for-the-uk-a-list-2023/#:~:text=This%20year%2C%20Ropes%20%26%20Gray%20secured,came%20second%20to%20Munger%20Tolles." target="_blank"><em>Law.com International</em>&rsquo;s UK A-List</a>, one of only 20 top firms to receive this honor. The list highlights firms in the UK that are managing &ldquo;to succeed across the multiple fronts of financial success, diversity and social efforts&rdquo; and are striving &ldquo;to give back through pro bono efforts.&rdquo;</p> <p>The UK A-List recognizes firms based on a combination of factors: revenue per lawyer, racial diversity, gender partnership parity, and pro bono commitment, with revenue per lawyer and pro bono given double weight. Rankings for the UK A-List were compiled from four different <em>Law.com International</em> surveys that rated firms&rsquo; performances for the previous fiscal year: the <a rel="noopener noreferrer" href="https://www.law.com/international-edition/2023/09/14/the-uk-top-50-ranked-by-revenue-turnover-rise-not-enough-to-maintain-profit-levels/" target="_blank">UK Top 50</a>, the <a rel="noopener noreferrer" href="https://www.law.com/international-edition/2023/06/12/the-law-firms-with-the-most-female-equity-partners-2023/" target="_blank">firms with the most female equity partners</a>, the <a rel="noopener noreferrer" href="https://www.law.com/international-edition/2023/07/14/the-uks-top-law-firms-for-racial-diversity-2023/" target="_blank">top firms for racial diversity</a>, and the <a rel="noopener noreferrer" href="https://www.law.com/international-edition/2023/11/06/the-best-law-firms-for-pro-bono-in-the-uk-2023/" target="_blank">UK Pro Bono Survey</a>.</p> <p>Earlier this year, Arnold &amp; Porter was named to <em><a href="/en/perspectives/news/2023/08/arnold-and-porter-ranked-among-the-top-10-us"><em>The American Lawyer</em>&rsquo;s A-List</a></em>, which features the &ldquo;most well-rounded members of the Am Law 200&rdquo; who are &ldquo;able to adjust to change quickly, no matter the challenge.&rdquo;</p>{5FACF47F-9E25-470F-8835-EC1B4AA2EEE8}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/11/ai-copyright-case-litmus-test-for-future-casesAI Copyright Case ‘Litmus Test’ for Future CasesTom Magnani, head of the firm&rsquo;s Technology Transactions practice and co-chair of the Technology, Media, &amp; Telecommunications industry group, was featured in the <em>Legaltech News</em> article, &ldquo;Inside Judge Orrick's AI Copyright Order: Is LAION a Copycat?&rdquo;&nbsp;Fri, 01 Dec 2023 00:00:00 -0600<p>Tom Magnani, head of the firm&rsquo;s Technology Transactions practice and co-chair of the Technology, Media, &amp; Telecommunications industry group, was featured in the <em>Legaltech News</em> article, &ldquo;Inside Judge Orrick's AI Copyright Order: Is LAION a Copycat?&rdquo; The article discusses how a California federal court&rsquo;s recent decision to dismiss claims filed by three artists against several AI platforms raises questions about AI copyright suits, specifically regarding how the judiciary views copyright infringement for AI generators. </p> <p>The artists accused the AI companies of taking training images from public websites and using copyrighted images to create and train their AI systems. Magnani told <em>Legaltech News</em> that the judge&rsquo;s dismissal was predictable, as the artists&rsquo; arguments were surprising. &ldquo;We&rsquo;ve never heard a plaintiff argue that something was, by definition, infringing, even when it was not substantially similar to a copyrighted work,&rdquo; he said.</p> <p><a href="https://www.law.com/legaltechnews/2023/11/22/inside-judge-orricks-ai-copyright-order-is-laion-a-copycat/">Read the full article</a>.</p>{6C4D8BFF-E93C-4BB6-ACDC-FD54CE890B8E}https://www.nationalacademies.org/event/41428_12-2023_challenges-in-supply-market-competition-and-regulation-of-infant-formula-in-the-united-states-infant-formula-regulation-open-sessionhoward.sklamberg@arnoldporter.comChallenges in Supply, Market Competition, and Regulation of Infant Formula in the United States - Infant Formula Regulation Open SessionFri, 01 Dec 2023 00:00:00 -0600{7F747536-FFE4-4C15-BA8B-2CF79E58647B}https://www.arnoldporter.com/en/perspectives/advisories/2023/12/amended-federal-rule-of-evidence-702Assad H. Rajanihttps://www.arnoldporter.com/en/people/r/rajani-assad-hassad.rajani@arnoldporter.comAnna K. Thompsonhttps://www.arnoldporter.com/en/people/t/thompson-anna-kanna.thompson@arnoldporter.comAmended Federal Rule of Evidence 702: What You Need To Know About the Admissibility of Expert TestimonyEffective today, Federal Rule of Evidence 702 (Rule 702) has been amended to clarify how trial judges, as gatekeepers, should decide the admissibility of expert testimony.Fri, 01 Dec 2023 00:00:00 -0600<p>Effective today, Federal Rule of Evidence 702 (Rule 702) has been amended to clarify how trial judges, as gatekeepers, should decide the admissibility of expert testimony. According to the Advisory Committee on Evidence Rules (Advisory Committee), the amendments address common misinterpretations and misapplications of Rule 702 by trial courts.</p> <h2>Judicial Gatekeeping of Expert Testimony</h2> <p>Under Rule 702, federal judges have traditionally enjoyed broad discretion as gatekeepers of expert testimony. But according to the Fourth Circuit, some courts had &ldquo;abdicate[d] that duty by opening the gate indiscriminately to <em>any</em> proffered expert witness&rdquo; and &ldquo;exposing jurors to &lsquo;dubious scientific testimony&rsquo; that [could] ultimately &lsquo;sway[]&rsquo; their verdict.&rdquo;[[N: <em>Sardis v. Overhead Door Corp</em>., 10 F.4th 268, 275 (4th Cir. 2021) (citations omitted; emphasis in original).]] <br /> <br /> Prompted by trial courts&rsquo; common misapplication of Rule 702, the Advisory Committee amended the rule as follows:</p> <p style="margin-left: 40px;">Rule 702. Testimony by Expert Witness</p> <p style="margin-left: 40px;">A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if&nbsp;<strong><span style="text-decoration: underline;">the proponent demonstrates to the court that it is more likely than not that</span></strong>:</p> <p style="margin-left: 40px;">(a) the expert&rsquo;s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;</p> <p style="margin-left: 40px;">(b) the testimony is based on sufficient facts or data;</p> <p style="margin-left: 40px;">(c) the testimony is the product of reliable principles and methods.; and</p> <p style="margin-left: 40px;">(d) the <del>expert has reliably applied</del> <strong><span style="text-decoration: underline;">expert&rsquo;s opinion reflects a reliable application of</span></strong> the principles and methods to the facts of the case.</p> <p><strong>First</strong>, the amended Rule clarifies that the party offering expert opinions must prove admissibility by a preponderance of the evidence. Previously, citing a &ldquo;liberal standard of admissibility,&rdquo; many courts wrongly presumed that questions about the sufficiency of the expert&rsquo;s basis or methodology went to the weight of the evidence, not its admissibility. The Advisory Committee made clear that &ldquo;[t]hese rulings are an incorrect application of Rules 702 and 104(a).&rdquo;[[N: Proposed Amendments to the Federal Rules of Evidence, Rule 702, advisory comm. note 1.]]<br /> <br /> <strong>Second</strong>, the amended Rule clarifies and emphasizes that &ldquo;each expert opinion must stay within the bounds of what can be concluded from a reliable application of the expert&rsquo;s basis and methodology.&rdquo;[[N: Proposed Amendments to the Federal Rules of Evidence, Rule 702, advisory comm. note 2.]] As the Advisory Committee explained, the explicit reference to the &ldquo;expert&rsquo;s opinion&rdquo; invites a trial court to give more direct scrutiny to an expert&rsquo;s ultimate conclusions, not just the underlying principles and methods employed.[[N:<em> Id.; see also </em>May 15, 2022 Report of the Advisory Committee on Evidence Rules at 6 (&ldquo;The language of the amendment more clearly empowers the court to pass judgment on the conclusions that the expert has drawn from the methodology. . . . &amp;#91;T&amp;#93;hat is because the methodology must not only be reliable, it must be reliably applied.&rdquo;).]]</p> <h2>Takeaways: Back to the Future</h2> <p>Amended Rule 702 takes effect on December 1. It applies to new cases and all pending cases &ldquo;insofar as just and practicable.&rdquo;[[N: April 24, 2023 Supreme Court Order.]] We expect the Rule&rsquo;s application to pending cases to be relatively pain-free, because the amendments are meant to clarify how Rule 702 should have been interpreted and applied all along.[[N: <em>See</em> Proposed Amendments to the Federal Rules of Evidence, Rule 702, advisory comm. note 2 (&ldquo;Nothing in the amendment imposes any new specific procedures.&rdquo;); <em>In re Anderson</em>, No. 15-21681, 2023 WL 2229355, at *3 (W.D. Tenn. Bankr. Jan. 20, 2023) (&ldquo;To reiterate, these changes are not substantive; rather, they clarify how the Rule was meant to be applied since it was first amended in 2000.&rdquo;).]] Moreover, over the last few years, courts have already started to apply the Advisory Committee&rsquo;s remarks to align their analyses under Rule 702.[[N: <em>See, e.g., Sardis</em>, 10 F.4th at 283; <em>Collision Commc&rsquo;ns Inc</em>. v. <em>Nokia Sols. &amp; Networks OY</em>, 2023 WL 5646096, at *1, *3 (D.N.H. Aug. 31, 2023); <em>United States v. Briscoe</em>, 2023 WL 8096886, at *4, *12-13 (D.N.M. Nov. 21, 2023).]]<br /> <br /> Litigants who are briefing motions to exclude expert testimony (or where a court has recently decided such a motion) should look closely for any reliance on propositions of law with which the Advisory Committee took issue. Depending on the circumstances, one or both parties may want to seek clarification or reconsideration to preserve the issue for appeal. <br /> <br /> These amendments should result in more expert opinions being excluded. Litigants are likely to be more bullish in challenging an expert&rsquo;s ultimate opinions, especially under Rule 702(b) and (d). Likewise, trial courts will find it more difficult to categorically brush aside these challenges as nothing more than fodder for cross-examination. That said, the Advisory Committee made clear in its comments that not every challenge to an expert&rsquo;s opinion must go to admissibility: &ldquo;[O]nce the court has found it more likely than not that the admissibility requirement has been met, any attack by the opponent will go only to the weight of the evidence.&rdquo;[[N: Proposed Amendments to the Federal Rules of Evidence, Rule 702, advisory comm. note 1.]] This offers a glimpse into how judges might recast their conclusions by focusing on whether the threshold burden has been met, then setting aside further challenges for the jury to weigh at trial.<br /> <br /> For more information regarding the admissibility of expert testimony, please contact any of the authors or your primary Arnold &amp; Porter attorney.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{FDF6A779-5977-4AC4-8C8B-86D9BF74DDD7}https://www.arnoldporter.com/en/perspectives/advisories/2023/12/updates-from-the-fca-on-sdr-and-greenwashingSimon Firthhttps://www.arnoldporter.com/en/people/f/firth-simonsimon.firth@arnoldporter.comLewis Popehttps://www.arnoldporter.com/en/people/p/pope-lewislewis.pope@arnoldporter.comUpdates from the FCA on SDR and GreenwashingOn November 28, the United Kingdom Financial Conduct Authority (FCA) published a&nbsp;<a rel="noopener noreferrer" href="https://www.fca.org.uk/publication/policy/ps23-16.pdf" target="_blank">policy statement</a>&nbsp;(Policy Statement) on its upcoming sustainability disclosure requirements (SDR).&nbsp;Fri, 01 Dec 2023 00:00:00 -0600<p>On November 28, the United Kingdom Financial Conduct Authority (FCA) published a <a rel="noopener noreferrer" href="https://www.fca.org.uk/publication/policy/ps23-16.pdf" target="_blank">policy statement</a> (Policy Statement) on its upcoming sustainability disclosure requirements (SDR). The statement contains new rules and guidance covering, among other things, greenwashing, investment labelling, and naming and marketing requirements, with the aim of improving trust and transparency in the market for sustainable investment products.</p> <h2>The Rules and Guidance</h2> <p>The Policy Statement follows the FCA&rsquo;s earlier <a rel="noopener noreferrer" href="https://www.fca.org.uk/publication/consultation/cp22-20.pdf" target="_blank">consultation paper</a>, published in October 2022, which in turn built on the FCA&rsquo;s November 2021 <a rel="noopener noreferrer" href="https://www.fca.org.uk/publication/discussion/dp21-4.pdf" target="_blank">discussion paper</a>. The essential elements of the proposals remain the same but there are some noteworthy changes.</p> <h3>Anti-Greenwashing Rule</h3> <p>All FCA-authorized firms must ensure that sustainability-related claims are fair, clear, and not misleading. The rule will apply to all communications about financial products or services which refer to the environmental or social characteristics of those products or services. </p> <p>The FCA initially proposed that this rule would come into effect on the publication of the Policy Statement. However, in response to industry concerns over timelines, the effective date has been delayed to May 31, 2024. In the meantime, the FCA has launched a consultation on its new<a rel="noopener noreferrer" href="https://www.fca.org.uk/publication/guidance-consultation/gc23-3.pdf" target="_blank"> anti-greenwashing guidance</a>. The guidance explains that to be &ldquo;fair, clear and not misleading,&rdquo; claims should be correct, capable of substantiation, clearly presented, complete, and fair and meaningful in relation to any comparisons with other products or services. The consultation will remain open until January 26, 2024. </p> <h3>Investment Labels</h3> <p>The labelling regime will allow firms to use one of four labels for their products if they meet certain qualifying criteria. The labels are: (1) &ldquo;Sustainability Impact&rdquo; (for products designed to provide solutions to environmental or social problems); (2) &ldquo;Sustainability Focus&rdquo; (for investment in assets that are environmentally or socially sustainable); (3) &ldquo;Sustainability Improvers&rdquo; (for products designed to improve the sustainability of assets over time); and (4) &ldquo;Sustainability Mixed Goals.&rdquo; Sustainability Mixed Goals is intended to address concerns that funds invested with a combination of the attributes of other labels might fall between categories.</p> <h3>Naming and Marketing Rules</h3> <p>The FCA proposed to prevent firms which offer non-labelled products to retail investors from using terms such as &ldquo;ESG,&rdquo; &ldquo;green,&rdquo; or &ldquo;sustainable.&rdquo; This received broadly negative feedback in the latest consultation. Consequently, the FCA will allow firms to use sustainability-related terms for non-labelled products if they make certain disclosures (see below), and a statement to clarify why they do not use a label.</p> <h3>Disclosures</h3> <p>Firms that offer products using a label or sustainability-related terms without a label must:</p> <ul> <li>Provide consumer-facing disclosure in a prominent place on the digital medium through which the product is offered.</li> <li>Include sustainability information in pre-contractual disclosure (i.e., from the date the label is first used or by December 2, 2024 for products without a label) and ongoing product-level disclosure.</li> </ul> <p>The disclosure must include the following information:</p> <ul> <li>The product&rsquo;s sustainability objective and label, or a statement to clarify that the product does not have a label</li> <li>The investment policy and strategy (including what the product will and will not invest in)</li> <li>Appropriate sustainability-related metrics</li> <li>Details of where a consumer can access other relevant sustainability and non-sustainability information</li> <li>For the &ldquo;Sustainability Mixed Goals&rdquo; label only, the proportion of assets invested in accordance with each of the other three relevant labels</li> </ul> <p>Additionally, the FCA proposes that all asset managers with assets under management above a certain threshold (&pound;50 billion initially, then &pound;5 billion) must disclose how they are managing risks and opportunities in a &ldquo;sustainability entity report.&rdquo;</p> <h3>Distributors</h3> <p>Distributors must ensure that labels and consumer-facing disclosure are available to retail investors, either on a relevant digital medium or using a channel they would ordinarily use to communicate information. They must keep the labels and disclosures up to date.</p> <h2>Who Will This Affect?</h2> <p>The anti-greenwashing rule applies to all FCA-authorized firms who make sustainability-related claims about their products and services. The investment labels, disclosure, and naming and marketing rules apply to UK asset managers. The distribution rules apply to distributors of investment products to retail investors in the UK. The rules do not apply to portfolio management products and services yet, though the FCA will consult on a wider application in the near future.</p> <h2>What Happens Next?</h2> <p>The key dates are:</p> <p style="margin-left: 40px;"><strong>May 31, 2024: </strong>The anti-greenwashing rule comes into force.</p> <p style="margin-left: 40px;"><strong>July 31, 2024: </strong>Firms can begin to use labels, with accompanying disclosures.<br /> <br /> <strong>December 2, 2024:</strong> The naming and marketing rules come into force, with accompanying disclosures.<br /> <br /> <strong>December 2, 2025: </strong>Ongoing product-level and entity-level disclosures for firms with AUM above &pound;50 billion. <br /> <br /> <strong>December 2, 2026:</strong> Entity-level disclosure rules are extended to firms with AUM above &pound;5 billion.</p> <p>The FCA advises that:</p> <ul> <li>All <strong>authorized firms </strong>should prepare for the anti-greenwashing rules and read the associated guidance.</li> <li><strong>UK asset managers</strong> should decide whether to label products or use sustainability-related terms and should familiarize themselves with the new regime. </li> </ul> <p>This Advisory provides a high-level summary of the Policy Statement and SDR regime. Please reach out to any of the authors or your regular Arnold &amp; Porter contact if you have specific questions or would like our advice or support on particular issues regarding the Policy Statement, the upcoming sustainability disclosure requirements, or any other matter.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{AD5F0B3A-ECEE-4F2A-B090-5D069EF3C067}https://www.arnoldporter.com/en/perspectives/news/2023/11/asimow-recognized-by-daily-journal-in-top-antitrust-lawyers-2023-reportAsimow Recognized by Daily Journal in Top Antitrust Lawyers 2023 ReportSan Francisco-based Antitrust/Competition partner Daniel Asimow was named to <em>Daily Journal</em>'s 2023 "Top Antitrust Lawyers" report.&nbsp;Thu, 30 Nov 2023 00:00:00 -0600<p>San Francisco-based Antitrust/Competition partner Daniel Asimow was named to <em>Daily Journal</em>'s 2023 "Top Antitrust Lawyers" report. The special feature annually profiles the top antitrust lawyers in California. </p> <p>In the profile, Asimow discussed his representation of the Oakland Raiders in antitrust litigation initiated by the City of Oakland. The case concerned the Raiders' relocation to Las Vegas. Asimow and Arnold &amp; Porter successfully secured the dismissal of the City&rsquo;s claims in both state and federal court as well as appellate decisions upholding the dismissals.</p> <p>This is the fourth time Asimow has been recognized by the <em>Daily Journal</em> in this area. He was previously recognized in <a href="/en/perspectives/news/2020/06/asimow-daily-journal-top-antitrust-lawyers-2020">2020</a>, <a href="/en/perspectives/news/2021/11/asimow-named-to-daily-journals-2021">2021</a>, and <a href="/en/perspectives/news/2022/11/asimow-named-daily-journal-top-antitrust-lawyers">2022</a>.</p>{850FB755-B62C-40B7-9692-A018B9CCCB37}https://www.arnoldporter.com/en/perspectives/news/2023/12/eric-levine-rejoins-arnold-and-porters-corporate-and-finance-practice-in-northern-californiaEric Levine Rejoins Arnold & Porter’s Corporate & Finance Practice in Northern CaliforniaArnold &amp; Porter announced today that Eric Levine has rejoined the firm&rsquo;s Corporate &amp; Finance practice as counsel, resident in Silicon Valley.&nbsp;Thu, 30 Nov 2023 00:00:00 -0600<p>Arnold &amp; Porter announced today that Eric Levine has rejoined the firm&rsquo;s Corporate &amp; Finance practice as counsel, resident in Silicon Valley. </p> <p>A former Arnold &amp; Porter associate and counsel, Levine has more than 15 years of experience working with clients on a variety of complex business transactions in the life sciences, technology, healthcare and telecommunications industries, with a focus on M&amp;A transactions on behalf of public and private companies and private equity sponsors. He also has significant experience representing issuers and underwriters with respect to debt and equity financings, public offerings, securities law compliance and reporting and corporate governance matters.</p> <p>Levine earned his J.D. from Georgetown University Law Center and his B.A. from Tufts University.</p> <p>His arrival follows the recent West Coast additions of <a href="/en/perspectives/news/2023/07/gina-cavalier-joins-arnold-and-porters-life">Gina Cavalier</a>&nbsp;in Los Angeles, <a href="/en/perspectives/news/2023/11/william-choe-joins-arnold-and-porters-corporate-and-finance-practice-as-partner-in">William Choe</a>&nbsp;in Silicon Valley, and <a href="/en/perspectives/news/2023/01/catherine-hagerty-joins-arnold-porter">Catherine Hagerty</a>&nbsp;&amp; <a href="/en/perspectives/news/2023/09/former-sf-city-attorneys-office-chief-trial-deputy">Meredith Osborn</a>&nbsp;in San Francisco. </p>{58BBAE6C-0AF1-49F3-B098-0DACEE116357}https://www.arnoldporter.com/en/perspectives/advisories/2023/11/sec-announces-2024-examination-prioritiesChristian D. H. Schultzhttps://www.arnoldporter.com/en/people/s/schultz-christianchristian.schultz@arnoldporter.comVeronica E. Callahanhttps://www.arnoldporter.com/en/people/c/callahan-veronica-rendnveronica.callahan@arnoldporter.comEllen Kaye Fleishhackerhttps://www.arnoldporter.com/en/people/f/fleishhacker-ellen-kayeellen.fleishhacker@arnoldporter.comDaniel M. Hawkehttps://www.arnoldporter.com/en/people/h/hawke-daniel-mDaniel.Hawke@arnoldporter.comJane Norberghttps://www.arnoldporter.com/en/people/n/norberg-janejane.norberg@arnoldporter.comKathleen Reillyhttps://www.arnoldporter.com/en/people/r/reilly-kathleenkathleen.reilly@arnoldporter.comStephanna F. Szotkowskihttps://www.arnoldporter.com/en/people/s/szotkowski-stephannastephanna.szotkowski@arnoldporter.comVolodymyr Ponomarovhttps://www.arnoldporter.com/en/people/p/ponomarov-volodymyrvolodymyr.ponomarov@arnoldporter.comSEC Announces 2024 Examination PrioritiesOn October 16, the Division of Examinations (the Division or Exams) at the U.S. Securities and Exchange Commission (SEC) announced its 2024 examination priorities.&nbsp;Thu, 30 Nov 2023 00:00:00 -0600<p>On October 16, the Division of Examinations (the Division or Exams) at the U.S. Securities and Exchange Commission (SEC) <a rel="noopener noreferrer" href="https://www.sec.gov/news/press-release/2023-222?utm_medium=email&amp;utm_source=govdelivery" target="_blank">announced</a> its <a rel="noopener noreferrer" href="https://www.sec.gov/files/2024-exam-priorities.pdf" target="_blank">2024 examination priorities</a>. The Division released these priorities only eight months after releasing its <a rel="noopener noreferrer" href="https://www.sec.gov/news/press-release/2023-24?utm_medium=email&amp;utm_source=govdelivery" target="_blank">2023 examination priorities</a> (see our previous <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/02/sec-announces-2023-exam-priorities">Advisory</a>) to align with the start of the SEC&rsquo;s fiscal year and to provide earlier insight to market participants of the areas of focus for the coming year.</p> <p>The Division indicated it will continue to utilize a risk-based approach and focus examinations on certain practices, products, and services that it believes present potentially heighted risks to investors or the integrity of U.S. capital markets. For 2024, this focus will include, among other things: (1) information security and operational resiliency; (2) cryptocurrency assets and emerging financial technology; and (3) anti-money laundering (AML) practices. While environmental, social, and governance issues are not an articulated priority for 2024, as they have been the past several years, we expect Exams to continue to monitor the market for compliance in this area during the coming year.</p> <p> We outline risk areas that broadly impact market participants and some entity-specific risks below.</p> <h2>Risk Areas Broadly Impacting Market Participants</h2> <p><strong>Information Security and Operational Resiliency:</strong> The Division noted that &ldquo;[o]perational disruption risks remain elevated due to the proliferation of cybersecurity attacks, firms&rsquo; dispersed operations, intense weather-related events, and geopolitical concerns.&rdquo; Accordingly, Exams will monitor broker-dealer and registered investment adviser practices to prevent interruptions to mission-critical services and to protect investor information, records, and assets, focusing on policies and procedures, internal controls, governance practices, employee training, and responses to cyber-related incidents. Exams also will focus on cybersecurity issues associated with third-party vendors, including firms&rsquo; visibility into the security and integrity of third-party products and services.</p> <p><strong>Crypto Assets and Emerging Financial Technology:</strong> Observing &ldquo;the continued volatility of, and activity around, the crypto asset markets,&rdquo; Exams will focus on all activity related to crypto assets and related products, including the offer, sale, recommendation of, advice regarding, and trading in such investment opportunities. This will include evaluating whether firms are meeting their standards of conduct when it comes to understanding and recommending or advising about crypto assets, maintaining proper compliance policies and procedures regarding such investments, and satisfying custody obligations if the crypto assets are funds or securities. Exams will assess whether any technological risks associated with the use of blockchain and distributed ledger technology have been addressed, including whether compliance policies and procedures are reasonably designed to address these risks, accurate disclosures are made to investors, and whether risks pertaining to the security of crypto asset securities are addressed (if required by law). Exams also will remain focused on certain services, including automated investment tools, artificial intelligence, and trading algorithms or platforms, and the risks associated with the use of emerging technologies and alternative sources of data.<br /> <br /> <strong>Anti-Money Laundering Programs: </strong>Exams will continue to focus on AML programs to review whether broker-dealers and certain registered investment companies are: (1) tailoring their AML programs to their business models and associated AML risks; (2) conducting independent testing; (3) establishing an adequate customer identification program, including for beneficial owners of legal entity customers; and (4) meeting their Suspicious Activity Reports filing obligations. Exams will also review whether broker-dealers and advisers are monitoring Office of Foreign Assets Control sanctions and ensuring compliance.</p> <h2> Entity-Specific Risks</h2> <p> <strong>Registered Investment Advisers (RIAs): </strong>Exams will continue to focus on whether RIAs comply with their duty of care and duty of loyalty obligations and review:</p> <ul> <li>Investment advice provided to clients, particularly older investors and those saving for retirement, regarding complex financial products and high cost or illiquid products</li> <li>Processes for determining that the investment advice provided is in the clients&rsquo; best interests, including those for: (1) making initial and ongoing suitability determinations, (2) seeking best execution, (3) evaluating costs and risks, and (4) identifying and addressing conflicts of interest</li> <li>Economic incentives that an adviser and its financial professionals may have to recommend products, services, or account types, including revenue sharing, markups, or other incentivizing revenue arrangements</li> <li>Disclosures made to investors and whether they include all material facts relating to conflicts of interest sufficient to allow the client to provide informed consent to the conflict</li> </ul> <p> Exams noted its continued review of advisers&rsquo; compliance policies and procedures, including areas discussed in the adopting release for the <a rel="noopener noreferrer" href="https://www.sec.gov/rule-release/ia-2204" target="_blank">Compliance Rule</a> under the Investment Advisers Act of 1940 (Advisers Act), and identified other particular areas of RIA examination focus for 2024:</p> <ul> <li>Marketing practices, including assessments for whether advisers, including advisers to private funds, have adopted and implemented reasonably designed written policies and procedures to prevent violations of the Advisers Act and the rules thereunder including reforms to the Marketing Rule, and whether marketing materials include any untrue statements of a material fact, are materially misleading, or are otherwise deceptive and, as applicable, comply with the requirements for performance (including hypothetical and predecessor performance), third-party ratings, and testimonials and endorsements</li> <li>Compensation arrangement assessments focusing on: (1) fiduciary obligations of advisers to their clients, including registered investment companies, particularly with respect to the advisers&rsquo; receipt of compensation for services or other material payments made by clients and others; (2) alternative ways that advisers try to maximize revenue, such as revenue earned on clients&rsquo; bank deposit sweep programs; and (3) fee breakpoint calculation processes, particularly when fee billing systems are not automated</li> <li>Valuation assessments regarding advisers&rsquo; recommendations to clients to invest in illiquid or difficult to value assets, such as commercial real estate or private placements</li> <li>Safeguarding assessments for advisers&rsquo; controls to protect clients&rsquo; material non-public information, particularly when multiple advisers share office locations, have significant turnover of investment adviser representatives, or use expert networks</li> <li>Disclosure assessments to review the accuracy and completeness of regulatory filings, including Form CRS, with a particular focus on inadequate or misleading disclosures and registration eligibility</li> </ul> <p> As in prior years, Exams will continue to prioritize examinations of advisers that have never been examined or those that have not been examined for a number of years.</p> <p>Exams also pointed out that because advisers to private funds remain a significant portion of the SEC-registered adviser population, those advisers also will remain a focus of examination in 2024, including with respect to the following specific topics: (1) portfolio management risks; (2) adherence to contractual requirements regarding limited partnership advisory committees or similar structures; (3) accurate calculation and allocation of private fund fees and expenses, including valuation of illiquid assets, calculation of post commitment period management fees, adequacy of disclosures, and potential offsetting of such fees and expenses; (4) due diligence practices; (5) conflicts, controls, and disclosures regarding private funds managed alongside registered investment companies; (6) compliance with the Advisers Act requirements regarding custody, accurate Form ADV reporting, and timely completion of audits and distribution of private fund audited financials; and (7) policies and procedures for reporting certain events on Form PF.</p> <p><strong>Investment Companies: </strong>Exams indicated it will continue to prioritize examinations of registered investment companies, including mutual funds and exchange-traded funds, due to their importance to retail investors, particularly those saving for retirement. Exams will continue to focus on compliance programs and fund governance practices, disclosures to investors, accuracy of reporting to the SEC, valuation practices (particularly those addressing fair valuation practices), and effectiveness of derivatives and liquidity risk management programs. The Division highlighted examination focus areas will include: (1) fees and expenses and reviewing whether registered investment companies have adopted effective written compliance policies and procedures concerning the oversight of advisory fees and associated fee waivers and reimbursements; (2) derivatives risk management assessments; and (3) compliance with the terms of exemptive order conditions and the issues associated with recent market volatility, including whether investment companies are following liquidating procedures. Similar to investment advisers, the Division has indicated that it will prioritize examinations for registered investment companies that have never been examined or have not been for a number of years.</p> <p><strong>Broker-Dealers: </strong>Exams will assess broker-dealers&rsquo; compliance with Regulation Best Interest, which establishes the standard of conduct for when broker-dealers recommend to a retail customer a securities transaction or investment strategy. Specifically, Exams stated that particular areas of interest will include: (1) recommendations with regard to products, investment strategies, and account types; (2) disclosures made to investors regarding conflicts of interest; (3) conflict mitigation practices; (4) processes for reviewing reasonably available alternatives; and (5) factors considered in light of the investor&rsquo;s investment profile, including investment goals and account characteristics. Exams indicated that it will evaluate whether the broker-dealer has complied with Regulation Best Interest as a whole, including by establishing, maintaining, and enforcing written policies and procedures reasonably designed to do so. The Division will continue to focus on dual registrants and potential conflicts of interest, account allocation and selection practices, as well as supervision of branch office locations. Finally, Exams may review: (1) the content of a broker-dealer&rsquo;s relationship summary (i.e., Form CRS); (2) compliance with the Net Capital Rule and the Customer Protection Rule and related internal processes, procedures, and controls; and (3) equity and fixed income trading practices by the broker-dealer.</p> <p><strong>Other Market Participants: </strong>Exams will continue to focus on the following types of other market participants, including: (1) municipal advisors and whether they have met their fiduciary duty obligations and are in compliance with requirements to document municipal advisory relationships and to disclose conflicts of interest as well as those related to registration, professional qualification, continuing education, recordkeeping, and supervision; (2) security-based swap dealers, including whether they have implemented policies and procedures to comply with security-based swap rules and are complying with applicable capital, margin, and segregation requirements and relevant conditions in SEC orders governing substituted compliance; and (3) transfer agents, including processing of items and transfers, recordkeeping and record retention, safeguarding of funds and securities, filings with SEC, and transfer agents that service certain types of issuers (e.g., those that issue microcap and crypto assets) and that use emerging technologies.</p> <h2> Today&rsquo;s Rule Is Tomorrow&rsquo;s Exams and Enforcement Agenda</h2> <p> As we have <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/02/sec-announces-2023-exam-priorities">discussed previously</a>, new Commission rules routinely become Exams&rsquo; priorities, as well as priorities for the Division of Enforcement (Enforcement). For example, following the November 4, 2022 effective date of the Marketing Rule, which among other things proscribes how RIAs market hypothetical performance of their funds to investors, Exams put at the top of its <a rel="noopener noreferrer" href="https://www.sec.gov/news/press-release/2023-24?utm_medium=email&amp;utm_source=govdelivery" target="_blank">2023 Priorities</a> a focus on whether RIAs have adopted and implemented written policies and procedures that are reasonably designed to prevent violations of the Marketing Rule by the RIAs and their associated persons. On September 11, Enforcement <a rel="noopener noreferrer" href="https://www.sec.gov/news/press-release/2023-173" target="_blank">announced</a> settlements with nine RIA firms as part of a months-long and ongoing industry-wide sweep of RIA firms&rsquo; &ldquo;advertising hypothetical performance to the general public on their websites without adopting and/or implementing policies and procedures required by the Marketing Rule.&rdquo; As noted above, compliance with the Marketing Rule remains an Exams priority for 2024.<br /> <br /> On July 26, the SEC <a rel="noopener noreferrer" href="https://www.sec.gov/news/press-release/2023-140" target="_blank">proposed</a> new rules that purport to address risk to investors from conflicts of interest related to the use of predictive data analytics (PDA) and artificial intelligence (AI) by broker-dealers and RIAs &mdash; what we will refer to as the Proposed PDA/AI Rules. When it came to conflicts of interest, and as a disclosure-based agency, the SEC historically focused on broker-dealer and RIA disclosures to clients and investors about both actual and potential conflicts. The Proposed PDA/AI Rules take a different tack and would require firms to &ldquo;eliminate, or neutralize&rdquo; certain conflicts of interest from interactions with investors that involve &ldquo;technologies that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes.&rdquo; The comment period for the Proposed PDA/AI Rules closed on October 10, and time will tell how the final rules may differ from what were proposed in July 2023. If past is prologue, broker-dealers and RIAs should expect PDA and AI, and firms&rsquo; compliance with the final PDA/AI Rules, will be Exams priorities for the foreseeable future.</p> <h2> Conclusion</h2> <p> The 2024 examination priorities report reflects the Division&rsquo;s assessment of the most significant risks, issues, and policy matters affecting market participants and provides a road map to the specific areas that Exams will focus on during the coming year. As the SEC continues to pursue a rigorous regulatory and enforcement agenda, firms should carefully review their policies and procedures and proactively assess and, as necessary, address these areas prior to any upcoming examinations.</p> <p> Arnold &amp; Porter&rsquo;s <a href="https://www.arnoldporter.com/en/services/capabilities/practices/securities-enforcement-and-litigation">Securities Enforcement and Litigation</a>, <a href="https://www.arnoldporter.com/en/services/capabilities/practices/investment-management">Investment Management</a>, and <a href="https://www.arnoldporter.com/en/services/capabilities/practices/financial-services">Financial Services</a> practices have been actively monitoring and advising in this area. Please reach out to any of the authors or your regular Arnold &amp; Porter contact to discuss how to stay ahead of this continuously evolving landscape.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{D623ED3B-8F36-499A-B623-607ED4D624C1}https://latinlawyer.com/guide/the-guide-environmental-social-and-corporate-governance/second-edition/article/carbon-markets-in-latin-americawhitney.debevoise@arnoldporter.comCarbon Markets in Latin AmericaThu, 30 Nov 2023 00:00:00 -0600{2EEB7F1F-63D7-48F8-BD45-41EB0484C527}https://www.arnoldporter.com/en/perspectives/advisories/2023/11/antiboycott-enforcement-trendsSoo-Mi Rheehttps://www.arnoldporter.com/en/people/r/rhee-soomisoo-mi.rhee@arnoldporter.comJunghyun Baekhttps://www.arnoldporter.com/en/people/b/baek-junghyunjunghyun.baek@arnoldporter.comIncreasing Focus on Antiboycott Enforcement: Antiboycott Enforcement TrendsIn 2022 and 2023, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) announced policy changes signaling enhanced focus on antiboycott enforcement.&nbsp;Tue, 28 Nov 2023 00:00:00 -0600<p>In 2022 and 2023, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) announced policy changes signaling enhanced focus on antiboycott enforcement. This year&rsquo;s BIS antiboycott enforcement actions reflect this enhanced focus. We anticipate that BIS will continue to be active in this space. It may be time for U.S. companies and their foreign subsidiaries &mdash; especially those conducting business in or involving the Middle East region &mdash; to establish, review, and/or update their antiboycott compliance programs.</p> <h2>Brief Overview of U.S. Antiboycott Laws and Regulations</h2> <p>The United States maintains two sets of antiboycott laws and regulations that are designed to counteract U.S. persons&rsquo; participation in economic boycotts or restrictive trade practices by other countries that are not sanctioned by the U.S. government. BIS administers a set of antiboycott regulations under Part 760 of the U.S. Export Administration Regulations (EAR), while the U.S. Department of the Treasury administers a set of antiboycott laws under Section 999 of the Internal Revenue Code. While the specific requirements under these laws and regulations differ from each other, these laws and regulations generally prohibit and/or penalize U.S. persons from participating in, or cooperating with, unsanctioned international boycotts and also require reporting of certain boycott-related requests.</p> <p>Violations of the antiboycott regulations administered by BIS may result in public enforcement actions, which may entail civil monetary penalties, denial of export privileges, and/or revocation of existing export licenses. On the other hand, violations of the antiboycott laws administered by U.S. Department of the Treasury may result in negative tax consequences. Willful violations of either sets of antiboycott laws and regulations can also result in criminal monetary penalties and imprisonment.</p> <p> A primary example of unsanctioned boycott that is the focus of U.S. antiboycott laws and regulations is the Arab League&rsquo;s boycott of Israel. However, U.S. antiboycott laws and regulations could be applied to all foreign boycotts that have not been endorsed by the U.S .government.</p> <h2>Changes to BIS Antiboycott Enforcement Policy</h2> <p>BIS recently issued two memoranda on antiboycott enforcement policy changes. First, on October 6, 2022, Matthew S. Axelrod, the Assistant Secretary for Export Enforcement at BIS, issued a memorandum on &ldquo;<a rel="noopener noreferrer" href="https://www.bis.doc.gov/index.php/documents/policy-guidance/3149-axelrod-oac-policy-memo-10-6-22/file" target="_blank">Enhanced Enforcement of the Antiboycott Rules</a>&rdquo; (October 2022 Memo). The October 2022 Memo outlines BIS&rsquo;s policy changes with respect to antiboycott enforcement, including (1) enhanced penalties; (2) requirement on admission of misconduct in enforcement actions; (3) increased focused on foreign subsidiaries of U.S. companies; and (4) reprioritization of violation categories.</p> <p> Second, on July 26, 2023, Axelrod issued a memorandum on &ldquo;<a rel="noopener noreferrer" href="https://www.bis.doc.gov/index.php/documents/policy-guidance/3301-strengthening-antiboycott-reporting-and-compliance/file" target="_blank">Strengthening Antiboycott Reporting and Compliance</a>&rdquo; (July 2023 Memo). The July 2023 Memo outlines BIS&rsquo;s further measures to enhance its antiboycott enforcement efforts, including by requiring that a boycott request report identify the specific party who made the request. Previously, BIS only required that the report identify the country from which the request originated.</p> <h2>BIS Antiboycott Enforcement Trends</h2> <p>This year&rsquo;s antiboycott enforcement actions reflect BIS&rsquo;s policy changes and its enhanced focus. We discuss antiboycott enforcement trends and key aspects of BIS enforcement actions this year below.</p> <h3>1. Increased Antiboycott Enforcement Activity</h3> <p>According to enforcement data dating back to 2007, which is available on the <a rel="noopener noreferrer" href="https://efoia.bis.doc.gov/index.php/electronic-foia/index-of-documents/7-electronic-foia/226-alleged-antiboycott-vilations" target="_blank">BIS website</a>, BIS has brought an average of 6.8 enforcement actions between 2007 and 2017. After peaks in 2010 (thirteen settlements) and 2017 (eight settlements), however, the number of BIS&rsquo;s antiboycott enforcement settlements decreased.</p> <p> This year, we are seeing an uptick in BIS&rsquo;s antiboycott enforcement activities, reflecting BIS&rsquo;s enhanced focus on antiboycott enforcement. To date, there have been five BIS settlements for violations of antiboycott regulations, which is more than double the average number of BIS antiboycott settlements in the preceding five years. We anticipate that BIS will continue to be active in bringing antiboycott enforcement actions.</p> <p>The below chart shows the number of BIS antiboycott settlements since 2007.</p> <p><img alt="" style="left: 439.653px; top: 1007.29px;" src="/-/media/files/perspectives/publications/2023/11/20231228-chart1.jpg?h=298&amp;w=769.444&amp;rev=8a1c1c2245e04555a7424712f10e5ae1&amp;hash=ABF4E306BC43E83A4931A71FABD842F8" width="782.333" height="300.222" /></p> <h3>2. Penalties in Cases That Are Voluntarily Disclosed</h3> <p>All five BIS antiboycott settlements in 2023 involved companies that submitted voluntary self-disclosures (VSDs). Nonetheless, BIS decided to impose civil penalties on these companies. In comparison, in the preceding five years, less than half of the antiboycott settlements (or five out of eleven settlements) involved companies that submitted VSDs.</p> <p> BIS&rsquo;s increased antiboycott enforcement activities in cases involving VSDs may be a reflection of its enhanced focus on antiboycott enforcement. At the same time, however, this may undermine <a rel="noopener noreferrer" href="https://www.arnoldporter.com/en/perspectives/blogs/enforcement-edge/2023/04/non-disclosure-of-export-controls-violation" target="_blank">BIS's recent policy announcements</a> encouraging submission of VSDs for violations of the EAR as this may impact companies&rsquo; risk calculus in deciding whether to file VSDs for potential antiboycott violations.</p> <h3>3. Penalties for Reporting Violations Only</h3> <p>Two of the BIS antiboycott enforcement actions this year only involved reporting violations. That is, companies were required to pay civil penalties for violations falling under Category C (the lowest category in terms of seriousness of the violations under BIS&rsquo;s guidance) even though they did not engage in other more serious violations and filed VSDs.</p> <p> The imposition of civil penalties for reporting violations only, especially when such violations were voluntarily self-disclosed, has not been common. In the preceding five years, there have been a total of three BIS antiboycott enforcement actions where companies paid civil penalties when failures to report were the only identified violation. In only one of those cases, penalties were assessed even though the company voluntarily self-disclosed the violation.</p> <p> Reportable boycott requests are often found in fine prints or in general terms and conditions sections of purchase orders, letters of credits, and other transaction documents that may be easy to be overlooked. Reporting violations are also often considered mere &ldquo;technical&rdquo; violations. Nevertheless, the 2023 enforcement actions highlight the importance of ensuring that companies establish processes and controls to identify and report boycott related requests.</p> <h3>4. Admission of Misconduct</h3> <p>In line with the policy changes outlined in BIS&rsquo;s October 2022 memorandum, recent antiboycott enforcement actions include the relevant companies&rsquo; admission of their misconduct. This is in stark difference to past civil settlements which typically did not include parties&rsquo; admission of the underlying misconduct.</p> <p> BIS&rsquo;s requirement that parties admit to underlying misconduct may have broader impacts. For example, the admission of underlying misconduct could be used as evidence in shareholder litigations or derivative litigations involving the same underlying misconduct.</p> <h3>5. Enforcement Against Foreign Subsidiary</h3> <p>In 2023, there was one antiboycott settlement with a foreign subsidiary of a U.S. company. Previously, BIS antiboycott enforcement actions generally have focused on U.S. companies that receive boycott related requests. In the October 2022 Memo, however, BIS stated that it intends to &ldquo;be more aggressive in exploring ways to deter foreign parties from issuing or making boycott requests of U.S. persons,&rdquo; and &ldquo;bring a renewed focus to [its] enforcement efforts against controlled foreign subsidiaries of U.S. parent companies.&rdquo; Therefore, we expect to see more future enforcement actions against foreign subsidiaries of U.S. companies (in addition to enforcement actions against the U.S. parents).</p> <h2>Conclusion</h2> <p>This year&rsquo;s BIS antiboycott enforcement actions demonstrate BIS&rsquo;s increased focus on antiboycott compliance, which we expect will continue. In particular, the Israel-Hamas conflict could prompt more boycott requests in the region and increase U.S. government scrutiny on compliance with U.S. antiboycott laws and regulations. In addition, with the apparent increase in civil penalties that may be assessed in cases involving more serious violations, and the new requirement for admission of misconduct in antiboycott settlements, the potential cost of antiboycott violations has increased. Therefore, U.S. companies and their foreign subsidiaries &mdash; especially those conducting business in, or involving, the Middle East region &mdash; may wish to review their existing antiboycott compliance programs. For those that currently do not have antiboycott compliance programs, now may be the time to establish one.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{2D3DF287-9206-47FE-B59B-944291BCE40F}https://ourcuriousamalgam.com/episode/249-global-semiconductor-sector/david.emanuelson@arnoldporter.comWhat Happens When Competition and Geopolitical Issues Intertwine? Surveying the Landscape of the Global Semiconductor SectorMon, 27 Nov 2023 00:00:00 -0600{E875E02A-36C8-40B1-B7DB-DD765657D59B}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/11/sklamberg-talks-legacy-of-retiring-fda-commissioner-janet-woodcockSklamberg Talks Legacy of Retiring FDA Commissioner Janet WoodcockLife Sciences &amp; Healthcare Regulatory partner Howard Sklamberg was recently featured in several articles speaking about the upcoming retirement of the U.S. Food and Drug Administration&rsquo;s Commissioner Janet Woodcock and the lasting imprint she will leave on the agency when she leaves.&nbsp;Wed, 22 Nov 2023 00:00:00 -0600<p>Life Sciences &amp; Healthcare Regulatory partner Howard Sklamberg was recently featured in several articles speaking about the upcoming retirement of the U.S. Food and Drug Administration&rsquo;s Commissioner Janet Woodcock and the lasting imprint she will leave on the agency when she leaves. </p> <p>&ldquo;I would say it is not an exaggeration to say she is one of the most consequential public health figures over the last 30 years,&rdquo; Sklamberg told <em>Regulatory Focus</em>, adding that Woodcock &ldquo;moved the agency forward&rdquo; on real world evidence.</p> <p>Sklamberg told <em>Endpoints News</em> that Woodcock&rsquo;s &ldquo;expertise and impact ranged from designing the modern drug approval process, reorganizing drug compliance and oversight, making countless critical drug approval decisions, establishing and overseeing the many programs that have accelerated patient access to important therapies, and more recently improving FDA&rsquo;s food program.&rdquo; </p> <p>In <em>Pink Sheet</em>, Sklamberg said that Woodcock started thinking of succession planning more than a decade ago. However, there is still a concern about the institutional memory that will leave with her. </p> <p>&ldquo;What you miss is there are people who can do what she did. But it's hard to find somebody who is as proficient an issue spotter as she is in so many different areas,&rdquo; Sklamberg said. &ldquo;And the other thing is somebody who combines all the skills and all that knowledge, with a master ability to manage and get things done. ...Those are often very different skill sets.&rdquo;</p> <p>Read the <em><a rel="noopener noreferrer" href="https://www.raps.org/News-and-Articles/News-Articles/2023/11/This-Week-at-FDA-Woodcock%E2%80%99s-irreplaceable-legacy-a" target="_blank">Regulatory Focus </a></em><a rel="noopener noreferrer" href="https://www.raps.org/News-and-Articles/News-Articles/2023/11/This-Week-at-FDA-Woodcock%E2%80%99s-irreplaceable-legacy-a" target="_blank">article</a>: &ldquo;This Week at FDA: Woodcock&rsquo;s irreplaceable legacy and an averted shutdown.&rdquo;</p> <p>Read the <a rel="noopener noreferrer" href="https://endpts.com/fdas-janet-woodcock-to-retire-in-early-2024/" target="_blank"><em>Enpoints News</em> article</a>: &ldquo;FDA's Janet Woodcock to retire in early 2024&rdquo; (subscription required). </p> <p>Read the <a rel="noopener noreferrer" href="https://pink.citeline.com/PS149368/With-Woodcocks-Retirement-US-FDA-Loses-A-Renaissance-Woman#:~:text=With%20Woodcock's%20Retirement%2C%20US%20FDA%20Loses%20A%20Renaissance%20Woman,-16%20Nov%202023&amp;text=The%20FDA%20will%20go%20on,colleagues%20told%20the%20Pink%20Sheet." target="_blank"><em>Pink Sheet </em>article</a>: &ldquo;With Woodcock&rsquo;s Retirement, US FDA Loses A Renaissance Woman&rdquo; (subscription required). </p>{62BD9641-1052-49B2-8578-E18E9F9F4214}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/11/monahan-featured-in-playbill-on-legislation-aimed-at-helping-non-profit-theatersMonahan Featured in Playbill on Legislation Aimed at Helping Non-Profit TheatersJessica Monahan, a policy advisor in firm&rsquo;s Legislative &amp; Public Policy practice, was featured in the <em>Playbill</em> article, &ldquo;The STAGE Act: How It Could Save Non-Profit Theatres, and How You Can Help,&rdquo; where she spoke about the yet to be introduced legislation, which would provide relief to non-profit theaters that have struggled to recover after COVID-19.&nbsp;Wed, 22 Nov 2023 00:00:00 -0600<p>Jessica Monahan, a policy advisor in firm&rsquo;s Legislative &amp; Public Policy practice, was featured in the <em>Playbill</em> article, &ldquo;The STAGE Act: How It Could Save Non-Profit Theatres, and How You Can Help,&rdquo; where she spoke about the yet to be introduced legislation, which would provide relief to non-profit theaters that have struggled to recover after COVID-19. </p> <p>The Supporting Theater and Generating Economic Activity (STAGE) Act proposes to provide $2.5 billion in federal funding over five years. &ldquo;It's not just a one-time infusion of cash into the industry for recovery effort. It's a long-term investment in the industry that I think is very important and long overdue,&rdquo; Monahan told <em>Playbill</em>. </p> <p><a rel="noopener noreferrer" href="https://www.playbill.com/article/the-stage-act-how-it-could-save-non-profit-theatres-and-how-you-can-help" target="_blank">Read the full article</a>. </p>{F4CD6A26-FED0-48EA-84E8-BCF3D58243F0}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/11/gutermuth-quoted-in-gcr-on-the-implementation-of-the-eus-digital-markets-actGutermuth Quoted in GCR on the Implementation of the EU’s Digital Markets ActAntitrust partner Axel Gutermuth was recently quoted in the <em>Global Competition Review</em> (<em>GCR</em>) article, &ldquo;EU&rsquo;s Digital Markets Act faces first challenges.&rdquo;&nbsp;Wed, 22 Nov 2023 00:00:00 -0600<p>Antitrust partner Axel Gutermuth was recently quoted in the <em>Global Competition Review</em> (<em>GCR</em>) article, &ldquo;EU&rsquo;s Digital Markets Act faces first challenges.&rdquo; The article discusses recent challenges from Meta and TikTok related to the EU&rsquo;s decision to designate these companies as &ldquo;gatekeepers&rdquo; under the Digital Markets Act (DMA). Overall, the EU designated six companies as &ldquo;gatekeepers,&rdquo; meaning those companies must ensure their core platform services are in compliance with the DMA&rsquo;s new rules intended to protect competition in the online economy by March 2024. </p> <p>While Meta and TikTok have formally challenged their designations, other companies that received the gatekeeper designation, including Google and Microsoft, have indicated they won&rsquo;t be challenging the decision. This is a &ldquo;positive sign&rdquo; for the DMA, Gutermuth told <em>GCR</em>, and is &ldquo;an encouraging sign that gatekeepers can constructively interact with the commission on the DMA.&rdquo; </p> <p>Gutermuth cautioned that companies designated as gatekeepers could launch additional appeals after the DMA requirements become fully operational. As a result, the compliance phase of the DMA might be a better barometer for assessing its success, he said. </p> <p><a rel="noopener noreferrer" href="https://globalcompetitionreview.com/article/eus-digital-markets-act-faces-first-challenges" target="_blank">Read the full article</a> (subscription required). </p>{C586F501-6389-45F8-B2C4-CBC0D39AB46C}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/11/oneill-quoted-in-national-law-journal-and-cq-roll-call-on-legislativeO’Neill Quoted in National Law Journal and CQ Roll Call on Legislative Advocacy Under New Speaker of the HouseKevin O&rsquo;Neill, chair of the Legislative &amp; Public Policy practice group, was quoted in <em>The National Law Journal</em> and <em>CQ Roll Call</em> discussing the appointment of Rep. Mike Johnson as Speaker of the House and its effect on legislative advocacy.&nbsp;Tue, 21 Nov 2023 00:00:00 -0600<p>Kevin O&rsquo;Neill, chair of the Legislative &amp; Public Policy practice group, was quoted in <em>The National Law Journal</em> and <em>CQ Roll Call</em> discussing the appointment of Rep. Mike Johnson as Speaker of the House and its effect on legislative advocacy. </p> <p>In <em>CQ Roll Call</em>, O'Neill described Johnson's ascension as "a curveball like no other in lobbying history," highlighting the unique challenges his brief tenure and limited network pose to lobbyists. He also pointed out the necessity for lobbying firms to adapt, stating, &ldquo;people had less time to cultivate a Mike Johnson network and similarly he has had less time to build one.&rdquo;</p> <p>O'Neill noted in <em>The National Law Journal</em> that lobbyists are actively working to understand Johnson's stance on various client issues and how they align with the broader House Republican conference. He said this will be the key to effectively navigating the dynamics on Capitol Hill and advocating for client interests under the new leadership.</p> <p>Read <em><a rel="noopener noreferrer" href="https://www.law.com/nationallawjournal/2023/11/08/big-law-policy-practices-prepare-for-busy-end-of-year/" target="_blank">The National Law Journal</a></em><a rel="noopener noreferrer" href="https://www.law.com/nationallawjournal/2023/11/08/big-law-policy-practices-prepare-for-busy-end-of-year/" target="_blank"> article</a>: &ldquo;Big Law Policy Practices Prepare for Busy End of Year&rdquo; (subscription needed). </p> <p>Read <a rel="noopener noreferrer" href="https://rollcall.com/2023/11/13/curveball-like-no-other-johnsons-rise-has-k-street-trying-to-keep-up/" target="_blank">the <em>CQ Roll Call</em> article</a>: &ldquo;&lsquo;Curveball like no other:&rsquo; Johnson&rsquo;s rise has K Street trying to keep up.&rdquo;</p>{A71982F7-656B-44FC-9D46-FD772FAF312C}https://www.arnoldporter.com/en/perspectives/media-mentions/2023/11/schildkraut-talks-ai-executive-order-in-legaltech-newsSchildkraut Talks AI Executive Order in Legaltech NewsPeter Schildkraut, co-leader of the Technology, Media &amp; Telecommunications industry team, was quoted in the <em>Legaltech News </em>article, "White House's AI Executive Order Opens the Door Wide to New Rules, Enforcement Actions.&rdquo;&nbsp;Tue, 21 Nov 2023 00:00:00 -0600<p>Peter Schildkraut, co-leader of the Technology, Media &amp; Telecommunications industry team, was quoted in the <em>Legaltech News</em> article, "White House's AI Executive Order Opens the Door Wide to New Rules, Enforcement Actions.&rdquo; The article discusses the Biden Administration&rsquo;s new executive order on the &ldquo;Safe, Secure and Trustworthy Development and Use of Artificial Intelligence,&rdquo; which takes a different approach to mitigating AI-induced risks and tasks both Congress and the executive branch with passing new legislation, developing new standards and safeguards, and issuing new requirements.</p> <p>Schildkraut told <em>Legaltech News</em> that the executive order is &ldquo;long on the government leading by example, encouragement and capacity building, and short on new legal obligations for businesses.&rdquo; He added that those obligations &ldquo;will mostly come from the new statutes and regulations for which the White House has called,&rdquo; and that the order&rsquo;s support of agencies and regulators&rsquo; efforts in their various sectors reflects that the Administration has &ldquo;really thought through a comprehensive set of dimensions that they really need to consider for an AI policy.&rdquo;</p> <p><a rel="noopener noreferrer" href="https://www.law.com/legaltechnews/2023/11/01/white-houses-ai-executive-order-opens-the-door-wide-to-new-rules-enforcement-actions/" target="_blank">Read the full article</a> (subscription required).</p>{A3202183-7580-49D0-96F0-56B2BE2FC903}https://www.arnoldporter.com/en/perspectives/advisories/2023/11/cfpb-takes-action-aimed-at-promoting-open-bankingAmber A. Hayhttps://www.arnoldporter.com/en/people/h/hay-amber-aamber.hay@arnoldporter.comMichael A. Mancusihttps://www.arnoldporter.com/en/people/m/mancusi-michael-amichael.mancusi@arnoldporter.comKevin M. Toomeyhttps://www.arnoldporter.com/en/people/t/toomey-kevin-mkevin.toomey@arnoldporter.comChristopher L. Allenhttps://www.arnoldporter.com/en/people/a/allen-christopher-lChristopher.Allen@arnoldporter.comMeredith Osbornhttps://www.arnoldporter.com/en/people/o/osborn-meredithmeredith.osborn@arnoldporter.comAnthony Raglanihttps://www.arnoldporter.com/en/people/r/raglani-anthonyanthony.raglani@arnoldporter.comTrevor Kirbyhttps://www.arnoldporter.com/en/people/k/kirby-trevortrevor.kirby@arnoldporter.comMichael Treveshttps://www.arnoldporter.com/en/people/t/treves-michaelmichael.treves@arnoldporter.comCFPB Takes Action Aimed At Promoting Open Banking and Enhancing Oversight of Consumer Finance MarketsThe Bureau of Consumer Financial Protection (CFPB) in the last month made three significant announcements aimed at shifting the financial services industry towards a more &ldquo;open&rdquo; system for consumers and strengthening the CFPB&rsquo;s oversight of certain consumer finance markets.Tue, 21 Nov 2023 00:00:00 -0600<p>The Bureau of Consumer Financial Protection (CFPB) in the last month made three significant announcements aimed at shifting the financial services industry towards a more &ldquo;open&rdquo; system for consumers and strengthening the CFPB&rsquo;s oversight of certain consumer finance markets:</p> <ul> <li>On October 11, the CFPB <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-guidance-to-halt-large-banks-from-charging-illegal-junk-fees-for-basic-customer-service/" target="_blank">issued</a> first-of-its-kind guidance on section 1034(c) of the Dodd-Frank Act advising that financial institutions with over US$10 billion in assets cannot charge hidden fees to consumers for reasonable data requests.</li> <li>On October 19, the CFPB <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/personal-financial-data-rights/" target="_blank">announced</a> a notice of proposed rulemaking (NPRM) under section 1033 of the Dodd-Frank Act that would require financial institutions to provide consumers with the ability to transfer their personal financial data.</li> <li>On November 7, the CFPB <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-proposes-new-federal-oversight-of-big-tech-companies-and-other-providers-of-digital-wallets-and-payment-apps/" target="_blank">released</a> an NPRM that would establish supervisory oversight of digital payment providers under section 1024 of the Dodd-Frank Act.</li> </ul> <p> This Advisory provides an overview of the proposed rulemakings and new CFPB guidance and outlines several key takeaways for financial institutions. Together, these actions show a CFPB moving to level the playing field between traditional large financial institutions, community banks, and &ldquo;Big Tech&rdquo; companies. Along with reports that the agency is staffing up its Enforcement Division, these actions suggest that the CFPB will continue its aggressive approach to protecting consumers across the financial services industry through a mix of administrative actions.</p> <h2> Takeaways for Financial Institutions</h2> <p> The CFPB&rsquo;s recent actions come as part of the Biden-Harris administration&rsquo;s initiative to lower costs and increase transparency for consumers in the financial services industry. In 2022, as part of President Biden&rsquo;s agenda to increase competition following his <a rel="noopener noreferrer" href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-on-promoting-competition-in-the-american-economy/" target="_blank">Executive Order on Promoting Competition</a>, President Biden <a rel="noopener noreferrer" href="https://www.whitehouse.gov/briefing-room/statements-releases/2022/09/26/readout-of-the-third-meeting-of-the-white-house-competition-council/" target="_blank">called</a> on federal agencies to crack down on surprise, hidden fees and the challenges consumers face in switching away from their service providers. <br /> <br /> Following the <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-lauches-new-effort-to-promote-competition-and-innovation-in-consumer-finance/" target="_blank">creation</a> of the CFPB&rsquo;s Office of Competition and Innovation in 2022, which is tasked with promoting competition and identifying stumbling blocks for new market entrants, these recent moves show that the CFPB is focused on protecting consumers&rsquo; ability to toggle freely and safely between traditional and non-traditional financial products and services:</p> <ul> <li>The CFPB&rsquo;s Advisory Opinion regarding section 1034(c) highlights the agency&rsquo;s interest in controlling the competitive advantages that it perceives incumbent financial institutions have over newer firms. According to the CFPB, when consumers are &ldquo;stuck&rdquo; with their service providers, those providers are not incentivized to provide better service. The CFPB&rsquo;s so-called &ldquo;junk fee&rdquo; initiative can be seen as an effort to constrain the ability of financial institutions to impose any number and amount of charges on consumers when there are little to no competitive consequences for doing so.</li> <li>Likewise, the CFPB&rsquo;s proposed rulemaking under section 1033 was accompanied by <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-of-cfpb-director-rohit-chopra-on-the-proposed-personal-financial-data-rights-rule/#:~:text=The%20Personal%20Financial%20Data%20Rights,services%20with%20more%20favorable%20rates." target="_blank">prepared remarks</a> by Director Rohit Chopra in which he expressed that he believes &ldquo;a handful of very large banks and financial firms control much of the market,&rdquo; and that the proposed rule will &ldquo;lead to a more open and decentralized banking and finance system where consumers can more easily switch, escape junk fees, and obtain better service, rather than feeling stuck and taken for granted.&rdquo; Director Chopra noted that the proposed rule would help smaller financial institutions and startups attract consumers away from larger institutions.</li> <li>Finally, the CFPB&rsquo;s proposed rulemaking under section 1024 is a decisive move toward bringing &ldquo;Big Tech&rdquo; companies under its authority to protect consumers. The CFPB has recognized that non-traditional financial products and services have blurred the traditional lines separating banking and payments from commercial activities. The agency has asserted that this dynamic may expose consumers to risk, especially when traditional banking safeguards like deposit insurance may not apply. To the extent that digital payment apps compete with bank products, the proposed rule is intended to foster a level playing field and protect consumers who may not appreciate the differences between these products.</li> </ul> <p> The CFPB has signaled that there is still more to come. With respect to &ldquo;junk fees,&rdquo; the CFPB has demonstrated that it is taking a wide focus on fees and charges utilized by financial institutions and will incrementally expand the list of fees and charges that it considers to be unlawful. Regarding consumers&rsquo; rights to their personal financial data, the CFPB has indicated that it intends to cover additional product types &mdash; beyond financial firms offering transaction accounts like checking accounts, prepaid cards, credit cards, and digital wallets &mdash; in future rulemakings. And, given the broad grant of supervisory authority under section 1024 to the CFPB over large participants operating in markets for consumer financial products and services that play a substantial role in consumers&rsquo; everyday lives, we anticipate that the CFPB will continue to issue new rulemakings expanding its supervisory reach in this space.</p> <h2> Proposed Rulemaking Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications</h2> <p> The CFPB&rsquo;s <a rel="noopener noreferrer" href="https://files.consumerfinance.gov/f/documents/cfpb_nprm-digital-payment-apps-lp-rule_2023-11.pdf" target="_blank">proposed rule</a> would extend the agency&rsquo;s supervisory authority over 17 &ldquo;Big Tech&rdquo; companies, including Apple, PayPal, Venmo, and Google, which each offer consumer financial products and services commonly described as &ldquo;digital wallets,&rdquo; &ldquo;payment apps,&rdquo; &ldquo;funds transfer apps,&rdquo; and &ldquo;person-to-person payment apps.&rdquo; Under the proposed rule, the CFPB would conduct regular examinations of these digital payment providers for compliance with applicable federal consumer financial protection laws, including protections against unfair, deceptive, and abusive acts and practices, rights of consumers transferring money, and privacy rights. These 17 digital payments providers collectively facilitated 12.8 billion individual transactions in 2021, totaling US$1.7 billion in value. <br /> <br /> Despite requesting information from Amazon and Chinese giants Alipay and WeChat Pay in 2022 in anticipation of this proposed rule, the CFPB has expressly excluded such digital marketplaces from its proposed supervision. However, the CFPB explicitly included digital currency payments, including tokens and other crypto assets, which is potentially a sea change for digital payment providers who will now have a federal agency examining their policies and operations from the inside out. Perhaps more significantly, the CFPB&rsquo;s supervisory authority would also extend to service providers of the &ldquo;Big Tech&rdquo; larger participants under the proposed rulemaking. This could mean that there is a significantly larger pool of market participants who will now be under federal scrutiny. <br /> <br /> The proposed rule would be the sixth in a series of rulemakings that have extended CFPB supervisory authority by defining larger participants of markets for consumer financial products and services for purposes of section 1024(a)(1)(B). The CFPB has already issued rules allowing for examination of larger participants in the markets of consumer reporting, consumer debt collection, international money transfers, and automobile financing. <br /> <br /> If finalized, the proposed rulemaking would subject to CFPB supervision larger nonbank companies that participate in the market for &ldquo;general-use digital consumer payment applications.&rdquo; The proposed rule would define a market for general-use digital consumer payment applications to cover consumer financial products and services that provide &ldquo;funds transfer functionality&rdquo; or &ldquo;wallet functionality&rdquo; through a digital application for consumers&rsquo; general use in making &ldquo;consumer payment transactions,&rdquo; as defined in the proposed rule. The proposed rule defines a &ldquo;consumer payment transaction&rdquo; as &ldquo;the transfer of funds by or on behalf of a consumer physically located in a State to another person primarily for personal, family, or household purposes.&rdquo; This term would exclude four types of transfers:</p> <ol> <li>International money transfers defined under 12 C.F.R. &sect; 109.107(a)</li> <li>A transfer of funds by a consumer that is either linked to the consumer&rsquo;s receipt of a different form of funds, such as a transaction for foreign exchange or excluded from the definition of &ldquo;electronic fund transfer&rdquo; under Regulation E</li> <li>A payment transaction conducted by a merchant for the sale or lease of goods or services, which a consumer selected from a store or marketplace operated prominently in the merchant&rsquo;s name or its affiliated company</li> <li>An extension of consumer credit made by using a digital application provided by the person extending the credit or that person&rsquo;s affiliated company</li> </ol> <p> The first two exclusions deal with remittances, for which there is already a larger participant rule, and foreign currency exchanges. The CFPB &ldquo;expects that participants in the proposed market will generally be aware of indicators regarding the consumer&rsquo;s location at the time of the transaction&rdquo; for the purposes of determining whether the payments are initiated by a consumer physically located in a foreign country, and thus excluded from the definition of &ldquo;consumer payment transaction.&rdquo; This will put significant responsibility on digital payment providers to collect and maintain information about the consumers using their platforms in a way that may be designed to complement recent agency actions targeting crypto exchanges for money laundering and sanctions abuses. Regardless, the proposed rule creates incentives for companies to provide enhanced visibility into the sources and destinations of their digital currency transactions that clearly benefit the government&rsquo;s interest in oversight and law enforcement. <br /> <br /> Under the proposed rule, a &ldquo;funds transfer functionality&rdquo; would include either receiving funds for the purpose of transmitting them, or accepting and transmitting payment instructions. A &ldquo;wallet functionality&rdquo; would include a product or service that stores account or payment credentials, including in an encrypted or tokenized form, and transmits, routes, or otherwise processes stored account or payment credentials in connection with a consumer payment transaction.<br /> <br /> The proposed rule defines &ldquo;digital application&rdquo; as a software program that is &ldquo;accessible to a consumer through a personal computing device,&rdquo; such as a mobile phone, and either downloaded to such a device or accessed via the internet or biometric identifier. Moreover, the use of a payment functionality is &ldquo;general&rdquo; if it includes &ldquo;the absence of significant limitations on the purpose of consumer payment transactions,&rdquo; such as sending funds to friends and family. The proposed rule offers four examples of payment functionalities that are not for &ldquo;general-use&rdquo;:</p> <ol> <li>A payment functionality used solely to purchase or lease specific services, goods, or property, such as transportation, food, or a dwelling</li> <li>A payment functionality from certain tax-advantaged health medical spending accounts, dependent care accounts, transit or parking reimbursement arrangements, closed-loop accounts for spending at certain military facilities, and several types of gift certificates and gift cards</li> <li>A payment functionality to pay a debt or repayment of an extension of consumer credit, such as through a consumer mortgage lender&rsquo;s mobile application or website</li> <li>A payment functionality that solely helps consumers divide up charges and payments for specific goods or services, such as a payment application that aids consumers in splitting a restaurant bill</li> </ol> <p> The proposed rule sets forth a two-part test to determine whether a nonbank covered person is a larger participant of the general-use digital consumer payment applications market. A nonbank covered person would be a larger participant if it (1) together with its affiliated companies, provides general-use digital consumer payment applications with an annual volume of at least five million consumer payment transactions; and (2) does not constitute a &ldquo;small business concern&rdquo; based on the Small Business Administration&rsquo;s size standard list under 13 C.F.R. Part 121. Any nonbank covered person that qualifies as a larger participant would remain a larger participant until two years from the first day of the tax year in which the person last met the larger-participant test.<br /> <br /> Comments on the proposed rulemaking are due on or before January 8, 2024, or 30 days after publication of the proposed rule in the Federal Register, whichever is later.</p> <h2> Proposed Rulemaking on Personal Financial Data Rights (Data Portability Rule)</h2> <p> According to Director Chopra, the proposed data portability rule is designed to &ldquo;accelerate much-needed competition and decentralization in banking&rdquo; by giving customers &ldquo;the power to walk away from bad service&rdquo; and more easily switch providers. The <a rel="noopener noreferrer" href="https://files.consumerfinance.gov/f/documents/cfpb-1033-nprm-fr-notice_2023-10.pdf" target="_blank">proposed rule</a> would require covered financial institutions to provide consumers and authorized third parties, upon request, access to personal financial information in electronic form and a standardized format. The proposed rule would, for the first time, implement section 1033 of the Dodd-Frank Act, preventing covered financial institutions from imposing any fees on consumers or authorized third parties in connection with a data request. <br /> <br /> If finalized, the proposed rule would impose several new obligations on &ldquo;data providers&rdquo; and &ldquo;authorized third parties.&rdquo; A &ldquo;data provider&rdquo; includes &ldquo;financial institutions&rdquo; as defined under Regulation E, &ldquo;card issuers&rdquo; as defined under Regulation Z, and other payment facilitation providers that control or possess information related to a covered consumer financial product or service. The proposed rule excludes depository institutions that do not have a &ldquo;consumer interface,&rdquo; an interface by which a data provider receives requests for covered data and makes available such data in electronic form. Under the proposed rule, an &ldquo;authorized third party&rdquo; includes entities that seek access to &ldquo;covered data&rdquo; on behalf of a consumer and have complied with authorization procedures set forth in the proposed rule.<br /> <br /> Subject to exceptions, data providers would be required to provide authenticated customers, authorized third parties, or data aggregators acting on behalf of authorized third parties with &ldquo;covered data&rdquo; related to a &ldquo;covered consumer financial product or service&rdquo; through a digital interface. The proposed rule defines &ldquo;covered data&rdquo; as the following:</p> <ul> <li>Transaction information</li> <li>Account balances</li> <li>Information to initiate payment to or from a Regulation E account</li> <li>Terms and conditions</li> <li>Upcoming bill information</li> <li>Basic account verification information</li> </ul> <p> &ldquo;Covered data&rdquo; would not include confidential commercial information; information collected for the sole purpose of preventing fraud or money laundering; information collected for the detection or making of any report regarding other unlawful or potentially unlawful conduct; information required to be kept confidential by any other provision of law; and information that the data provider could not retrieve in the ordinary course of its business with respect to that information. The proposed rule also defines a &ldquo;covered consumer financial product or service&rdquo; as an account defined under Regulation E, a credit card defined under Regulation Z, or the facilitation of payments from a Regulation E account or Regulation Z account.<br /> <br /> The proposed rule would require data providers to establish and maintain a &ldquo;consumer interface&rdquo; and a &ldquo;developer interface,&rdquo; by which the data provider would receive requests for covered data related to a covered consumer financial product or service. Consumer and developer interfaces would need to provide covered data, upon request, in a machine-readable file that could be retained by a consumer or authorized third party and transferred into a separate information system. The proposed rule would also require additional standardized format, performance, and security requirements of a data provider&rsquo;s developer interface, as well as written policies and procedures to ensure retention of records.<br /> <br /> The proposed rule would limit a third party&rsquo;s collection, use, and retention of any covered data to what is &ldquo;reasonably necessary&rdquo; and prohibit the sale of covered data. Third parties would also be subject to authorization and certification procedures, as well as requirements related to security, written policies and procedures, and document retention.<br /> <br /> Following publication of the final rule in the Federal Register, the proposed rule would impose four tiered compliance dates. The first compliance date would occur six months after publication and apply to depository institutions with at least US$500 billion in total assets. The second compliance date would occur one year after publication and apply to depository institutions with at least US$50 billion in total assets. The third compliance date would occur two and one-half years after publication and apply to depository institutions with at least US$850 million in total assets. The final compliance date would occur four years after publication and apply to depository institutions with less than US$850 million in total assets. <br /> <br /> Comments on the proposed rulemaking may be submitted on or before December 29.</p> <h2> Advisory Opinion on Consumer Information Requests to Banks and Credit Unions</h2> <p> As discussed in <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/10/biden-harris-administration-cfpb-and-ftc">our prior Advisory</a>, Section 1034(c) of the Dodd-Frank Act generally requires that covered depository institutions &mdash; banks and credit unions with more than US$10 billion in assets &mdash; and their affiliates comply with consumer requests about financial products and services related to their accounts in a &ldquo;timely manner,&rdquo; subject to limited exceptions and with supporting written documentation. In addition to detailing how the CFPB will administer legal requirements under section 1034(c), the <a rel="noopener noreferrer" href="https://files.consumerfinance.gov/f/documents/cfpb-1034c-advisory-opinion-2023_10.pdf" target="_blank">Advisory Opinion</a> notes that fees for consumer inquiries into (1) deposit accounts; (2) loan balances; (3) supporting documentation, such as check images or an original account agreement; and (4) time spent seeking such information or documentation likely constitute an &ldquo;unreasonable impediment&rdquo; in violation of section 1034(c).<br /> <br /> Institutions interested in how the CFPB&rsquo;s Advisory Opinion and proposed rulemakings may impact their businesses or wishing to submit comments to the CFPB may contact any of the authors of this Advisory or their usual Arnold &amp; Porter contact. The firm&rsquo;s <a rel="noopener noreferrer" href="https://www.arnoldporter.com/en/services/capabilities/practices/financial-services">Financial Services</a> team would be pleased to assist with any questions about the Advisory Opinion and NPRMs, submitting a comment to the agency, or financial regulation or consumer protection more broadly.</p> <p><span style="font-size: 13px;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>{5F4B35BB-85DB-4933-8017-982ED9AB8A7C}https://www.arnoldporter.com/en/perspectives/publications/2023/11/virtual-and-digital-health-digestAllison W. Shurenhttps://www.arnoldporter.com/en/people/s/shuren-allison-wallison.shuren@arnoldporter.comChristopher Andersonhttps://www.arnoldporter.com/en/people/a/anderson-christopherchristopher.anderson@arnoldporter.comAbeba Habtemariamhttps://www.arnoldporter.com/en/people/h/habtemariam-abebaAbeba.Habtemariam@arnoldporter.comJacqueline Mulrynehttps://www.arnoldporter.com/en/people/m/mulryne-jacquelinejacqueline.mulryne@arnoldporter.comEugenia E. Piersonhttps://www.arnoldporter.com/en/people/p/pierson-eugenia-eEugenia.Pierson@arnoldporter.comAmanda Cassidy, M.P.P.https://www.arnoldporter.com/en/people/c/cassidy-amandaamanda.cassidy@arnoldporter.comBobby McMillinhttps://www.arnoldporter.com/en/people/m/mcmillin-bobbybobby.mcmillin@arnoldporter.comMonique Nolanhttps://www.arnoldporter.com/en/people/n/nolan-moniquemonique.nolan@arnoldporter.comNancy L. Perkinshttps://www.arnoldporter.com/en/people/p/perkins-nancy-lnancy.perkins@arnoldporter.comEmma Elliston, Ph.D.https://www.arnoldporter.com/en/people/e/elliston-emmaemma.elliston@arnoldporter.comAna González-Lamuñohttps://www.arnoldporter.com/en/people/g/gonzalez-lamuno-anaana.lamuno@arnoldporter.comRachel Mowerhttps://www.arnoldporter.com/en/people/m/mower-rachelrachel.mower@arnoldporter.comAlison H. Petershttps://www.arnoldporter.com/en/people/p/peters-alison-halison.peters@arnoldporter.comKatie Brownhttps://www.arnoldporter.com/en/people/b/brown-katiekatie.brown@arnoldporter.comMickayla A. Stogsdillhttps://www.arnoldporter.com/en/people/s/stogsdill-mickaylamickayla.stogsdill@arnoldporter.comVirtual and Digital Health DigestThis digest covers key virtual and digital health regulatory and public policy developments during October 2023 from the United States, United Kingdom, and European Union.Tue, 21 Nov 2023 00:00:00 -0600<p>This digest covers key virtual and digital health regulatory and public policy developments during October 2023 from the United States, United Kingdom, and European Union.</p> <h2>Letter from the Editors:</h2> <p> Spurred, in part, by the COVID-19 pandemic and the need for new ways to reach patients at home, 2023 saw a boom in digital technologies and healthcare solutions: one-stop-shop telemedicine platforms, app-based remote patient monitoring, direct-to-consumer online pharmacies, software-based medical devices, and artificial intelligence/machine learning to bolster delivery of telehealth services. Then came a robust government response: <a rel="noopener noreferrer" href="https://www.fda.gov/media/167973/download" target="_blank">FDA&rsquo;s Discussion Paper on use of AI/ML in Drug Development</a> and the <a rel="noopener noreferrer" href="https://www.fda.gov/medical-devices/digital-health-center-excellence/fda-digital-health-advisory-committee" target="_blank">formation of the Digital Health Advisory Committee</a>, <a rel="noopener noreferrer" href="https://oig.hhs.gov/documents/root/1045/sfa-telefraud.pdf" target="_blank">Office of Inspector General&rsquo;s Special Fraud Alert on Telefraud</a>, the <a rel="noopener noreferrer" href="https://www.cms.gov/newsroom/fact-sheets/cms-waivers-flexibilities-and-transition-forward-covid-19-public-health-emergency" target="_blank">end of COVID-19 public health emergency regulations</a> and&nbsp;<a rel="noopener noreferrer" href="https://www.dea.gov/press-releases/2023/02/24/dea-announces-proposed-rules-permanent-telemedicine-flexibilities#:~:text=The%20proposed%20rules%20would%20provide,prescribing%20of%20a%20controlled%20medication." target="_blank">complimentary state-level telemedicine reforms</a>, <a rel="noopener noreferrer" href="https://www.democrats.senate.gov/imo/media/doc/dear_colleague_9123.pdf" target="_blank">congressional briefings on AI</a>, and <a rel="noopener noreferrer" href="https://www.whitehouse.gov/briefing-room/statements-releases/2023/10/30/fact-sheet-president-biden-issues-executive-order-on-safe-secure-and-trustworthy-artificial-intelligence/" target="_blank">the Biden Administration&rsquo;s Executive Order on AI</a>, to name a few examples of government action. </p> <p>And that was just in the U.S. In the EU and UK, regulatory bodies also grappled with the introduction of machine learning, AI, and other software into healthcare services by, for example, new guidance from the EU <a rel="noopener noreferrer" href="https://health.ec.europa.eu/medical-devices-sector/new-regulations/guidance-mdcg-endorsed-documents-and-other-guidance_en#sec13" target="_blank">Medical Device Coordination Group</a> and UK <a rel="noopener noreferrer" href="https://www.gov.uk/government/publications/software-and-artificial-intelligence-ai-as-a-medical-device/software-and-artificial-intelligence-ai-as-a-medical-device" target="_blank">Medicines and Healthcare products Regulatory Agency </a>on software medical devices, the <a rel="noopener noreferrer" href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52021PC0206" target="_blank">EU&rsquo;s AI Act</a> and the UK government&rsquo;s <a rel="noopener noreferrer" href="https://www.gov.uk/government/publications/ai-regulation-a-pro-innovation-approach" target="_blank">AI White paper</a>, the <a rel="noopener noreferrer" href="https://www.ema.europa.eu/en/use-artificial-intelligence-ai-medicinal-product-lifecycle" target="_blank">European Medicines Agency reflection paper</a> on use of AI in the product lifecycle, the <a rel="noopener noreferrer" href="https://edpb.europa.eu/system/files/2023-02/edpb_opinion52023_eu-us_dpf_en.pdf" target="_blank">EU Data Privacy Framework</a> and the equivalent <a rel="noopener noreferrer" href="https://www.legislation.gov.uk/uksi/2023/1028/made" target="_blank">UK-U.S. data bridge</a>, and the <a rel="noopener noreferrer" href="https://health.ec.europa.eu/ehealth-digital-health-and-care/european-health-data-space_en" target="_blank">European Health Data Space</a>.&nbsp;<br /> <br /> We call this the &ldquo;Race to Regulate.&rdquo; This push-pull dynamic between digital health innovation and government regulation is key to evaluating regulatory risks in today&rsquo;s shifting legal landscape. This digest seeks to keep up with these changes and provide you with an overview of the key guidelines and developments as the landscape develops. As we come to the end of 2023, join us on December 13 as we unpack pivotal moments in the <a href="https://www.arnoldporter.com/en/perspectives/events/2023/12/the-2023-race-to-regulate-the-us-eu-and-uk"><strong>2023 Race to Regulate</strong></a>&nbsp;and discuss what&rsquo;s next for virtual and digital health.&nbsp;<br /> <br /> <strong>Do you have thoughts or feedback on our newsletter?</strong> We would like to hear from you. Contact us at <a href="mailto:digitaldigest_editors@arnoldporter.com">digitaldigest_editors@arnoldporter.com</a>.&nbsp;<br /> <br /> We look forward to hearing from you.&nbsp;<br /> <br /> Jackie and Allison</p> <h2>In this issue, you will find the following:</h2> <h3>U.S. News</h3> <ul> <li><a href="#FDA Regulatory Updates US">FDA Regulatory Updates</a></li> <li><a href="#Healthcare Fraud and Abuse Updates US">Healthcare Fraud and Abuse Updates</a></li> <li><a href="#Corporate Transactions Updates US">Corporate Transactions Updates</a></li> <li><a href="#Provider Reimbursement Updates US">Provider Reimbursement Updates</a></li> <li><a href="#Policy Updates US">Policy Updates</a></li> <li><a href="#Privacy Updates US">Privacy Updates</a></li> </ul> <h3>EU and UK News</h3> <ul> <li><a href="#Regulatory Updates UK">Regulatory Updates</a></li> <a name="FDA Regulatory Updates US"></a> <li><a href="#Privacy Updates UK">Privacy Updates</a></li> <li><a href="#Product Liability Updates UK">Product Liability Updates</a></li> </ul> <h2>U.S. News</h2> <h3>FDA Regulatory Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://www.fda.gov/media/173206/download?attachment" target="_blank">FDA Issues Guiding Principles for Predetermined Change Control Plans for Machine Learning Devices</a></strong>. To help support the quality of advancement in digital health technologies, on October 24, FDA, Health Canada, and the U.K.&rsquo;s Medicines and Healthcare products Regulatory Agency (MHRA) issued guiding principles for predetermined change control plans for machine-learning medical devices (PCCP Guiding Principles). PCCPs, which are being developed and implemented in different ways in different regulatory jurisdictions, are increasingly being used to manage certain pre-defined device changes without requiring additional regulatory authorizations. The PCCP Guiding Principles include that a PCCP be focused and bounded, risk-based, evidence-based, and transparent. Issuance of the PCCP Guiding Principles follows the prior issuance of Good Machine Learning Practice guiding principles in 2021. Both sets of guiding principles are intended to lay a foundation for machine learning practices and encourage international harmonization.</p> <p>Feedback on the PCCP Guiding Principles can be submitted to FDA&rsquo;s <a rel="noopener noreferrer" href="https://www.regulations.gov/docket/FDA-2019-N-1185" target="_blank">docket</a> on a proposed framework for modification to AI/ML-based devices.</p> <p><strong><a rel="noopener noreferrer" href="https://www.fda.gov/medical-devices/digital-health-center-excellence/cdrh-seeks-public-comment-digital-health-technologies-detecting-prediabetes-and-undiagnosed-type-2#:~:text=CDRH%20is%20seeking%20to%20gather,focused%20on%20advancing%20health%20equity." target="_blank">FDA Seeks Public Comment on Digital Health Technologies (DHTs) for Detecting Prediabetes and Diabetes</a></strong>. On November 2, FDA&rsquo;s Center for Devices and Radiological Health announced that it is seeking public comments on how DHTs, including AI/ML (artificial intelligence/machine learning), may help with early detection of risk factors for type 2 diabetes, prediabetes, and type 2 undiagnosed diabetes. In requesting comments, FDA noted that while many health care stakeholders are embracing DHTs to transform the way health care is delivered in patients&rsquo; homes, the full potential of DHTs for the detection of prediabetes and diabetes, especially in diverse populations, has yet to be realized. FDA is seeking input on several questions, including relating to community engagement, consortia research, current DHT diabetes-related uses, potential uses of AI/ML on healthcare datasets for detection of prediabetes, and integration of digital derived biomarkers into clinical decision support systems to identify undiagnosed diabetes. </p> <p>Comments, which can be submitted to the <a rel="noopener noreferrer" href="https://www.regulations.gov/document/FDA-2023-N-4853-0001" target="_blank">docket</a>, are due by January 31, 2024.</p> <p><strong><a rel="noopener noreferrer" href="https://www.fda.gov/medical-devices/software-medical-device-samd/artificial-intelligence-and-machine-learning-aiml-enabled-medical-devices?utm_medium=email&amp;utm_source=govdelivery" target="_blank">FDA Updates List of AI/ML-Enabled Devices</a></strong>. On October 19, FDA updated its publicly available list of AI/ML-enabled medical devices to add 171 devices to the list. Of those devices newly added to the list, 155 were devices with final decision dates between August 1, 2022 and July 30, 2023, and 16 were devices with decisions from prior periods that were identified through a revision of methods used to generate the list. With this latest update, the AI/ML devices list now has nearly 700 devices, reflecting the continued growth and adoption of technologies employing AI/ML in patient care. Although the AI/ML devices span therapeutic areas, radiology devices continue to account for the majority of devices on the list. FDA explains that &ldquo;in addition to having the largest number of submissions, Radiology has experienced the steadiest increase of AI/ML-enabled device submissions of any specialty.&rdquo;</p> <p><strong><a rel="noopener noreferrer" href="https://www.fda.gov/media/136290/download" target="_blank">FDA Updates Enforcement Policy for Certain Remote Monitoring Devices</a></strong>. On October 19, FDA issued final guidance titled &ldquo;Enforcement Policy for Non-Invasive Remote Monitoring Devices Used to Support Patient Monitoring.&rdquo; This guidance supersedes the covid-era enforcement policy guidance on remote monitoring devices first issued in March 2020. The updated policy applies to modified devices where the original device was a legally marketed, noninvasive remote monitoring device of a type listed in the guidance that measures or detects common physiological parameters and that is used to support patient monitoring. The guidance describes an enforcement discretion policy for limited modifications to the indications, functionality, or hardware or software of device types in the scope of the guidance without prior submission of a 510(k) <a name="Healthcare Fraud and Abuse Updates US"></a>provided the modifications do not create undue risk and do not directly affect the physiological parameter measurement algorithm. For subject devices, examples of such modifications include hardware or software changes to allow for increased remote monitoring capability, as well as a change in indications regarding use in the home setting. The guidance sets forth recommendations for labeling as well as design control and validation.</p> <h3>Healthcare Fraud and Abuse Updates</h3> <p><strong>Doctor Convicted for Engaging in Genetic Testing and Durable Medical Equipment Telemedicine Scheme</strong>. On October 18, Dr. Alex Gloster, an independent contractor for several purported telemedicine companies, <a rel="noopener noreferrer" href="https://www.justice.gov/usao-edla/pr/metairie-doctor-pleads-guilty-5600000-medicare-fraud-scheme" target="_blank">pled guilty for defrauding Medicare</a> by ordering medically unnecessary durable medical equipment (DME) and Cancer Genetic Testing (CGx). Dr. Gloster signed thousands of doctors&rsquo; orders for DME and CGx tests for patients he never treated nor spoke to between September 2017 and August 2019. Dr. Closter&rsquo;s orders amounted to over US$5.6 million in false and fraudulent claims submitted to Medicare, with Medicare reimbursing over US$2.4 million. Dr. Gloster made numerous false statements in&nbsp;<span></span>the scheme, such as falsely certifying in medical records and requisition forms that he was the beneficiaries&rsquo; treating physician, that he had personally examined patients, and used ordered DME and CGx tests to manage patients&rsquo; conditions. For ordering DME and CGx tests and electronically reviewing patient charts, Dr. Gloster was paid a set fee per doctor&rsquo;s order, and generated $270,570 in fees under the scheme.</p> <p><em>Why this matters?</em></p> <p>While we have covered several similar cases this year involving ordering of medically unnecessary testing or DME, this case sets itself apart in that (1) it includes fraudulent ordering of DME <em>and</em> genetic testing, two areas we flagged in the October Digest as likely to draw additional claim scrutiny due to the potential for high reimbursement and (2) Dr. Gloster did not appear to have any contact with the beneficiaries prior to ordering the medically unnecessary services. The hefty penalty for this particularly brazen fraudulent scheme &mdash; US$5.6 million &mdash;is one of the highest penalties we saw in similar cases this year. </p> <p><strong>DOJ Investigates Telehealth/Medicine Provider, Cerebral</strong>. A June 2022 <em>qui tam</em> against Cerebral Inc. and Cerebral Medical Group, P.A. (Cerebral) was <a rel="noopener noreferrer" href="https://www.insidethefalseclaimsact.com/wp-content/uploads/sites/860/2023/10/Cerebral-Qui-Tam.pdf" target="_blank">unsealed</a> on October 16. The documents detail how Cerebral allegedly engaged in improper inducement of providers to prescribe stimulant controlled substances treating ADHD. Specifically, Katherine Keaton, a nurse practitioner who provided telemedicine care to patients and prescribed medication to patients for a variety of mental health disorders, previously worked at Cerebral Medical Group from approximately May 4, 2021 until her resignation on January 27, 2022. Keaton brought this action, alleging that Cerebral induced their providers to prescribe a &ldquo;specific and excessive&rdquo; amount of controlled substances to ADHD patients. In return, Cerebral would allegedly offer to reimburse the providers&rsquo; federal DEA certification costs. According to Keaton, Cerebral purportedly offered <a name="Corporate Transactions Updates US"></a>her reimbursement for her $800 DEA certification in exchange for Keaton prescribing approximately 400 prescriptions of stimulant drugs to treat ADHD. As a result of this improper inducement, Cerebral allegedly caused federal health insurance programs, such as Medicare, Medicaid, and TRICARE, to pay false and fraudulent claims for the reimbursement of Cerebral&rsquo;s telemedicine mental health care services and medications. This case is still ongoing.</p> <h3>Corporate Transactions Updates</h3> <p><strong>Still in Digital Health IPO Drought: Shaky Market Delays Waystar&rsquo;s Initial Public Offering</strong>. Waystar Holding Corp., a digital health company that facilitated <a rel="noopener noreferrer" href="https://www.sec.gov/Archives/edgar/data/1990354/000110465923109397/tm2324110-6_s1.htm" target="_blank">over US$4 billion</a> in healthcare payment transactions last year by assisting hospitals and clinics in managing their finances, made its initial public offering (IPO) filing public in mid-October after filing confidentially in August. Waystar, the first and only digital health company to make its IPO filing public in 2023, was projected to be valued at up to US$8 billion (including debt) in its upcoming IPO. However, this excitement was short-lived &mdash; it was announced on November 1 that Waystar would delay its IPO until December or 2024 to ride out the market volatility and avoid a similar fate to other high-profile companies that recently went public only to trade <a rel="noopener noreferrer" href="https://www.pymnts.com/news/ipo/2023/birkenstock-may-struggle-to-find-footing-in-rocky-ipo-market/" target="_blank">below their IPO prices</a>. </p> <p>Waystar expressed its intention to list on the Nasdaq and has indicated that it still plans to go through with the IPO under the ticker symbol &ldquo;WAY&rdquo; when the market stabilizes. News of the Waystar IPO delay surfaced in early November, almost concurrently with the announcement that Olive AI, a health automation company once dubbed a &ldquo;Telehealth Unicorn&rdquo; after raising US$848 million and implementing its enterprise&rsquo;s AI in over 900 hospitals, reportedly joined the club of &ldquo;Fallen Unicorns&rdquo; and sold its remaining assets to a number of corporations, including Waystar.</p> <p><strong>Digital Health Meets the Military: Telehealth Giant Amwell Strikes a Deal With the Defense Health Agency</strong>. In late October, telehealth giant Amwell (formerly American Well) and technology firm Leidos announced that they had been awarded a contract worth US$180 million with the Department of Defense&rsquo;s Health Agency (DHA). The deal will allow the government to utilize the technology of Amwell and Leidos to provide a hybrid care technology platform<a name="Provider Reimbursement Updates US"></a> that will power the &ldquo;digital first&rdquo; transformation of the Military Health System. It has been reported that the new health technology platform will be initially implemented at five locations, followed by an enterprise-phased rollout. In 2023, Amwell&rsquo;s losses rose to US$629 million, but executives have remained outwardly optimistic, stating that the new contract with the DHA will have a significant impact on Amwell&rsquo;s future financials.</p> <h3>Provider Reimbursement Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://public-inspection.federalregister.gov/2023-24184.pdf" target="_blank">CMS Issues Physician Fee Schedule Final Rule</a></strong>. On November 2, the Centers for Medicare &amp; Medicaid Services (CMS) issued the calendar year (CY) 2024 Medicare Physician Fee Schedule <a rel="noopener noreferrer" href="https://public-inspection.federalregister.gov/2023-24184.pdf" target="_blank">final rule</a>. The rule implements provisions of the Consolidated Appropriations Act, 2023 (CAA, 2023) that temporarily extend the telehealth flexibilities established during the COVID-19 Public Health Emergency (PHE) through December 31, 2024. As we detailed in the July <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/07/virtual-and-digital-health-digest" target="_self">Digest</a>, CMS proposed several changes related to telehealth reimbursement to align with the CAA, 2023; the final rule adopts those proposals in full and reminds stakeholders that many limitations on telehealth in effect prior to the PHE will resume effective January 1, 2025, unless Congress changes the Medicare statute. In particular, the rule:</p> <ul> <li>Continues to permit all telehealth services to be furnished in a patient&rsquo;s home through December 31, 2024. Beginning in 2025, Medicare will only cover telehealth services furnished in a patient&rsquo;s home for (1) mental health services; (2) substance use disorder services; and (3) clinical assessments related to End-Stage Renal Disease for beneficiaries receiving home dialysis. (p. <a rel="noopener noreferrer" href="https://public-inspection.federalregister.gov/2023-24184.pdf#page=105" target="_blank">105</a>). 42 U.S.C. &sect; 1395m(m)(4)(C)(ii)(X).</li> <li>Delays in-person visit requirements for mental health telehealth services through December 31, 2024. Beginning in 2025, beneficiaries must have an in-person visit with their practitioners before beginning mental health telehealth services and, with some exceptions, every 12 months thereafter. (p. <a rel="noopener noreferrer" href="https://public-inspection.federalregister.gov/2023-24184.pdf#page=149" target="_blank">149</a>). 42 C.F.R. &sect; 410.78(b)(3)(xiv).</li> <li>Continues to authorize occupational therapists, physical therapists, speech pathologists, and audiologists to offer telehealth services through December 31, 2024. Beginning in 2025, these professionals will not be eligible telehealth practitioners. (p. <a rel="noopener noreferrer" href="https://public-inspection.federalregister.gov/2023-24184.pdf#page=152" target="_blank">152</a>). 42 U.S.C. &sect; 1395m(m)(4)(E).</li> </ul> <p>In addition to temporarily extending telehealth flexibilities, the final rule also establishes a new categorization scheme and approval process for the Medicare Telehealth Services List. Beginning in CY 2025, all telehealth services will be designated either &ldquo;permanent&rdquo; or &ldquo;provisional,&rdquo; and CMS will use a five-step process to consider requests to add a new telehealth service or to make a provisional telehealth service permanent. (pp. <a rel="noopener noreferrer" href="https://public-inspection.federalregister.gov/2023-24184.pdf#page=120" target="_blank">120</a>-<a rel="noopener noreferrer" href="https://public-inspection.federalregister.gov/2023-24184.pdf#page=139" target="_blank">139</a>). CMS also provided clarification on changes in billing requirements for remote physiological and therapeutic monitoring that took effect when the PHE expired in May. After the end of the PHE, remote monitoring can only be furnished to established patients and requires at least 16 days of data collection over a 30-day period in order to bill for remote monitoring codes. CMS responded to questions about billing for remote monitoring during global surgical periods and in conjunction with care management services. (pp. <a rel="noopener noreferrer" href="https://public-inspection.federalregister.gov/2023-24184.pdf#page=182" target="_blank">182</a>-<a rel="noopener noreferrer" href="https://public-inspection.federalregister.gov/2023-24184.pdf#page=185" target="_blank">185</a>). </p> <p><strong><a rel="noopener noreferrer" href="https://www.finance.senate.gov/imo/media/doc/discussion_draft_of_titles_xviii_and_xix_of_the_social_security_act_to_expand_the_mental_health_care_workforce_and_services_reduce_prescription_drug_costs_and_extend_certain_expiring_provisions_under_medicare_and_medicaid_and_for_other_purposes.pdf" target="_blank">Senate Finance Committee Considers Telehealth Reform</a></strong>. On November 2, Senate Finance Committee Chair Ron Wyden (D-OR) and Ranking Member Sen. Mike Crapo (R-ID) <a name="Policy Updates US"></a>released a draft of health care legislation with several telehealth provisions. The draft legislation would require CMS to establish a code or modifier to identify mental health services furnished through telehealth. It would also task the agency with issuing guidance on telehealth best practices, with a focus on patients with limited English proficiency and patients who are visually or hearing impaired. The committee is scheduled to vote on the draft legislation on Wednesday, November 8.</p> <h3>Policy Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://clerk.house.gov/Votes/2023527?Date=10%2F25%2F2023" target="_blank">House Elects New Speaker as Federal Funding Deadline Looms</a></strong>. Federal government funding is set to expire on November 17, and both the House and Senate will be in session the majority of November, except for the week of Thanksgiving. On October 25, House Republican Conference Vice Chair Mike Johnson (R-LA) was unanimously elected as Speaker of the House in a 220-209 vote, ending the 22-day period since former Speaker Kevin McCarthy (R-CA) was ousted. Ever since being elected as the 56th Speaker of the House, Speaker Johnson has focused on passing the rest of the House Republican&rsquo;s Fiscal Year 2024 appropriations bills. All of the House&rsquo;s appropriations bills have been partisan, and thus are very unlikely to be considered by the Democratic-controlled Senate. On November 1, the Senate <a rel="noopener noreferrer" href="https://www.appropriations.senate.gov/news/majority/senate-passes-bipartisan-funding-package-in-82-15-vote" target="_blank">passed</a> its first appropriations &ldquo;minibus&rdquo; package (<a rel="noopener noreferrer" href="https://www.congress.gov/amendment/118th-congress/senate-amendment/1092/text" target="_blank">S.Amdt. 1092 to H.R. 4366</a>) by a <a name="Privacy Updates US"> bipartisan vote of </a><a rel="noopener noreferrer" href="https://www.senate.gov/legislative/LIS/roll_call_votes/vote1181/vote_118_1_00284.htm" target="_blank">82-15</a>. While the House has passed more individual appropriations bills on the floor than the Senate has so far this year, the passage of the Senate minibus package is notable because it includes the only appropriations bills that have passed through either chamber of Congress with broad bipartisan support this year. Speaker Johnson has previously suggested a continuing resolution that extends government funding through January 15 or April 15, in an effort &ldquo;to ensure the Senate cannot jam the House with a Christmas omnibus.&rdquo; </p> <a name="Privacy Updates US"> </a> <h3>Privacy Updates</h3> <p><strong>Biden Executive Order on Artificial Intelligence Highlights Privacy Risks</strong>. On October 30, President Biden signed an Executive Order titled &ldquo;<a rel="noopener noreferrer" href="https://www.whitehouse.gov/briefing-room/presidential-actions/2023/10/30/executive-order-on-the-safe-secure-and-trustworthy-development-and-use-of-artificial-intelligence/" target="_blank">Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence</a>,&rdquo; addressing many issues related to AI with directives to over 40 federal agencies. President Biden highlighted the risks that AI may pose to personal privacy, including by &ldquo;making it easier to extract, re-identify, link, infer, and act on sensitive information about people&rsquo;s identities, locations, habits, and desires.&rdquo; To address these risks, the EO calls on federal agencies to develop &ldquo;privacy-enhancing technologies&rdquo; (PETs), meaning a &ldquo;software or hardware solution, technical process, technique, or other technological means of mitigating privacy risks arising from data processing, including by enhancing predictability, manageability, disassociability, storage, security, and confidentiality.&rdquo; To complement this effort, the EO directs the National Institutes of Standards and Technology (NIST) to &ldquo;create guidelines for agencies to evaluate the efficacy of differential-privacy-guarantee protections, including for AI&rdquo; that &ldquo;at a minimum, describe the significant factors that bear on differential-privacy safeguards and common risks to realizing differential privacy in practice.&rdquo; NIST is also directed to coordinate with the Secretary of Energy and the Director of the NSF to develop and help ensure the availability of AI testing environments &ldquo;to support the design, development, and deployment of associated PETs.&rdquo; </p> <p>In addition, the EO directs the Secretary of HHS to establish an HHS AI Task Force on responsible deployment of AI and to &ldquo;develop a strategy, in consultation with relevant agencies, to determine whether AI-enabled technologies in the health and human services sector maintain appropriate levels of quality, including&rdquo; with respect to privacy. The EO suggests that HHS provide technical assistance to providers and payers about their obligations under privacy laws and issuing guidance or taking other action in response to complaints or reports of noncompliance with federal privacy laws in the AI context. </p> <p><strong>American Hospital Association Sues HHS Over Directives on the Use of Online Tracking Technologies</strong>. In a <a rel="noopener noreferrer" href="https://dd80b675424c132b90b3-e48385e382d2e5d17821a5e1d8e4c86b.ssl.cf1.rackcdn.com/external/aha-v-hhs-web-tracking-complaint-11-2-23.pdf" target="_blank">complaint</a> filed on November 2, the American Hospital Association (AHA) and three other plaintiffs, the Texas Hospital Association, the United Regional Health Care System, and Texas Health Resources, allege that HHS overstepped its authority in seeking to discipline HIPAA-covered entities and their business associates for the use of web tracking technologies. As reported in our October Digest, the AHA complained about the HHS position on tracking technologies in the association&rsquo;s September 2023 letter to Senator Bill Cassidy (R-LA), urging that HHS withdraw its guidance on the potential privacy and security violations that may occur through the use of web tracking technologies. </p> <p>In its complaint, the AHA claims that the data collected through web tracking technologies is not regulated under HIPAA because it does<a name="Regulatory Updates UK"></a> not constitute &ldquo;individually identifiable health information,&rdquo; and that HHS exceeded its authority in asserting otherwise. Invoking the Administrative Procedure Act, as well as the First Amendment, as the basis for its claims, the AHA is seeking an injunction prohibiting HHS from pursuing enforcement actions against AHA member hospitals, as well as members of the other plaintiff organizations named in the lawsuit, for actions involving web tracking technologies. </p> <h2>EU and UK News</h2> <h3>Regulatory Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://health.ec.europa.eu/latest-updates/mdcg-2023-4-medical-device-software-mdsw-hardware-combinations-guidance-mdsw-intended-work-2023-10-18_en" target="_blank">The MDCG Adopts Guidance on Medical Device Software Intended To Work in Combination With Hardware or Hardware Components</a></strong>. On October 18, the Medical Devices Coordination Group (MDCG) adopted guidance on Medical Device Software (MDSW) intended to work in combination with hardware or hardware components that generate or provide input data to the software. For example, MDSW downloaded or available on wearables (e.g., smartwatches or augmented reality goggles) may achieve their intended purpose by receiving and analyzing data provided by a hardware or hardware component (e.g., camera or optical sensors). The guidance clarifies how to identify whether the hardware or hardware component are regulated as a medical device or an accessory to a medical device and how to comply with the respective regulatory requirements by setting out guidance on the qualification and appropriate regulatory pathway for the hardware. The guidance also sets out the three regulatory options for manufacturers of such products:</p> <ol> <li>The hardware or hardware component is placed on the market as an accessory to a MDSW.</li> <li>The hardware or hardware component is placed on the market as a medical device either (1) as part of a system, (2) as a combination with another medical device, or (3) as an integral part of a medical device. </li> <li>The hardware or hardware component is an integral part of a general consumer product or wearable digital product and is not a medical device or an accessory to a medical device and has no intended medical purpose.</li> </ol> <p><strong><a rel="noopener noreferrer" href="https://www.gov.uk/government/news/mhra-to-launch-the-ai-airlock-a-new-regulatory-sandbox-for-ai-developers" target="_blank">UK Regulatory Sandbox Coming Soon</a></strong>. On October 30, the MHRA announced that it aims to launch the &ldquo;AI-Airlock&rdquo; in April 2024. The AI-Airlock will be a novel regulatory sandbox, which will allow developers of software and AI medical devices to test their products in a safe environment, generate robust evidence for regulatory submissions, and address any challenges with a technology&rsquo;s safety and efficacy evaluation. The sandbox will be monitored by the MHRA and will consist of a collaborative approach between regulators, developers, academia, and the NHS. It is hoped the AI-Airlock will ultimately mean that patients can access new technologies faster. </p> <p><strong>UK Government Announces Large Investments in Innovative Technologies</strong>. On October 3, the UK Department of Health and Social Care (DHSC) <a rel="noopener noreferrer" href="https://www.gov.uk/government/news/government-to-invest-30-million-in-innovative-technology-for-nhs?utm_medium=email&amp;utm_campaign=govuk-notifications-topic&amp;utm_source=5897c4de-47b1-4094-95af-c0f2694e0c0d&amp;utm_content=daily#full-publication-update-history" target="_blank">announced</a> a &pound;30 million investment to support the roll out of innovative technologies for the NHS. According to the DHSC, this investment will help ease the pressures on the NHS this winter and could include the expansion of virtual wards, the investment in wearable medical devices for use by patients at home to aid diagnosis and management of chronic conditions, and the investment in diagnostic imaging technologies. On October 29, the Prime Minister <a rel="noopener noreferrer" href="https://www.gov.uk/government/news/new-100-million-fund-to-capitalise-on-ais-game-changing-potential-in-life-sciences-and-healthcare" target="_blank">announced</a> the launch of a &pound;100 million investment in AI in healthcare particularly in areas such as dementia, mental health, and oncology. Finally, on October 30, the DHSC also <a rel="noopener noreferrer" href="https://www.gov.uk/government/news/ai-to-speed-up-lung-cancer-diagnosis-deployed-in-nhs-hospitals" target="_blank">announced</a> &pound;21 million of funding to deploy AI tools to speed up the diagnosis and treatment of lung cancer. </p> <p><strong><a rel="noopener noreferrer" href="https://www.uk-cpi.com/news/cpi-reports-reveal-challenges-and-opportunities-for-uk-healthtech" target="_blank">CPI Report Reveals Challenges and Opportunities for UKMedTech</a></strong>. On October 23, the UK Centre for Process Innovation (CPI) published two reports calling for an urgent MedTech industrial strategy to avoid the UK falling behind in the rapidly growing HealthTech sector. The first report, written in collaboration with the Association of British HealthTech Industries, is titled &ldquo;<a rel="noopener noreferrer" href="https://www.uk-cpi.com/healthtech-scale-up-report" target="_blank">Challenges and Opportunities for UK HealthTech Manufacturing Scale Up</a>.&rdquo; It highlights that many companies may be moving from the UK to other countries to benefit from more competitive pricing and more flexible manufacturing processes. The second report titled &ldquo;<a rel="noopener noreferrer" href="https://www.uk-cpi.com/healthtech-digital-health-report" target="_blank">An Action Plan: Driving Growth of the UK Digital Health Industry</a>&rdquo; maps the changes that may be needed for the UK to maximize its global potential in the digital health market.</p> <p><strong><a rel="noopener noreferrer" href="https://www.governinghealthfutures2030.org/" target="_blank">Digital Transformations for Health Lab Launched During World Health Summit</a></strong>. On October 16, the Digital Transformations for Health Lab (DTH-Lab) was launched during the World Health Summit. The DTH-Lab is a global consortium that will implement the Lancet and Financial Times Commission <a rel="noopener noreferrer" href="https://www.thelancet.com/commissions/governing-health-futures-2030" target="_blank">Report</a> on Governing Health Futures 2030. The report contained four actions to address health inequalities and promote public health in the era of digitalization: </p> <ol> <li>Recognize digital technologies as determinants of health.</li> <li>Build a governance architecture that creates trust in digital health.</li> <li>Develop a new approach to the collection and use of health data based on data solidarity.</li> <li>Invest in digitally transformed health systems.</li> </ol> <p>These recommendations will now be implemented by the DTH-Lab, which will explore how digital and AI transformations can improve health and well-being and strengthen citizenship and empowerment. </p> <p><strong><a rel="noopener noreferrer" href="https://www.who.int/news/item/19-10-2023-who-outlines-considerations-for-regulation-of-artificial-intelligence-for-health" target="_blank">WHO Publishes Guidance on Regulatory Principles Applicable To Use of AI in Health</a></strong>. On October 18, the World Health Organization (WHO) published guidance on &ldquo;Regulatory considerations on artificial intelligence for health.&rdquo; The publication aims to outline key principles that governments and regulatory authorities can follow to develop new guidance or adapt existing guidance on AI at national or regional levels. The new guidance emphasizes the importance of establishing AI systems&rsquo; safety and effectiveness, rapidly making appropriate systems available to those who need them, and fostering dialogue among stakeholders, including developers, regulators, manufacturers, health workers, and patients. It outlines six areas for regulation of AI for health: transparency and documentation; risk management; validating data and being clear about intended use; data quality; privacy and data protection; and collaboration between relevant bodies and individuals.</p> <p><strong><a rel="noopener noreferrer" href="https://ec.europa.eu/commission/presscorner/detail/en/ip_23_5379" target="_blank">G7 Agree on Guiding Principles and Voluntary Code of Conduct for AI Developers</a></strong>. On October 30, G7 leaders agreed on International Guiding Principles on Artificial Intelligence and a voluntary Code of Conduct for AI developers under the Hiroshima AI process. These principles and the voluntary Code of Conduct will complement, at an international level, the legally binding rules that the EU co-legislators are currently finalizing under the EU AI Act. The aim of the Code of Conduct and the Guiding Principles is to promote safe <a name="Privacy Updates UK"></a>and trustworthy AI. As discussed in our September <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/10/virtual-and-digital-health-digest" target="_self">Digest</a>, the voluntary Code of Conduct will provide practical guidance and attempt to create a non-binding rulebook for AI developers. Both documents will be reviewed and updated as necessary, including through multistakeholder consultations, to ensure they remain fit for purpose and responsive to this rapidly evolving technology.</p> <h3>Privacy Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://curia.europa.eu/juris/document/document.jsf?text=&amp;docid=278542&amp;pageIndex=0&amp;doclang=FR&amp;mode=lst&amp;dir=&amp;occ=first&amp;part=1&amp;cid=225583" target="_blank">GC Dismisses Request for Interim Relief Sought Against the EU-US Data Privacy Framework</a></strong>. On October 12, the European General Court dismissed the application for interim measures lodged by a French member of the European Parliament, Philippe Latombe, to suspend the application of the EU-U.S. Data Privacy Framework (the Data Bridge), which was discussed in the October <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/10/virtual-and-digital-health-digest" target="_self">Digest</a>. The General Court dismissed the interim measures application on the grounds that the urgency required for the adoption of such measures had not been demonstrated. Accordingly, the Data Bridge remains fully applicable for the time being. However, the dismissal has been appealed, although it is not yet clear when this appeal will be determined. The results of these pending proceedings are not only relevant for entities concerned by the Data Bridge, but also for those concerned by the UK-U.S. Data Bridge, which, as discussed in our October <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/10/virtual-and-digital-health-digest" target="_self">Digest</a>, is an extension of the EU Data Bridge. </p> <p><strong><a rel="noopener noreferrer" href="https://www.gov.uk/government/publications/code-of-practice-for-app-store-operators-and-app-developers/code-of-practice-for-app-store-operators-and-app-developers-new-updated-version#fn:7" target="_blank">Updated Code of Practice for Operators and Developers of Apps</a></strong>. On October 13, the UK&rsquo;s Department for Science, Innovation and Technology published an updated version of the code of practice for app store operators and app developers (Code). The Code was first published on December 9, 2022, with the aim of setting out minimum security and privacy requirements of apps to protect users. As mentioned in our January <a href="https://www.arnoldporter.com/-/media/files/perspectives/publications/2023/01/digitalhealth_newsletter_0123.pdf?" target="_self">Digest</a>, the Code applies to all apps, including health-related apps. Some of the changes include:</p> <ul> <li>Principle 2.7: Instead of the previous requirement that developers should provide users with a mechanism to delete locally held data, developers need only provide a mechanism for users to request deletion of their personal data.</li> <li>Principles 3.1 and 3.3.1: The vulnerability disclosure process, which the developer must create and maintain for every app, must be accessible within the app store. </li> <li>Principle 8.1: The reporting process for personal data breaches has been clarified such that the operator must inform the developer, and the developer informs other relevant stakeholders. </li> </ul> <p>Operators and developers were initially granted nine months to implement the Code, but based on feedback that some provisions required clarification and that certain barriers to implementation existed, this has been extended by a further nine months. Operators and developers should now comply with the Code by June 2024. </p> <p><strong>Opinions From the EDPS on AI Act</strong>. On October 23, the European Data Protection Supervisor (EDPS) adopted <a rel="noopener noreferrer" href="https://edps.europa.eu/data-protection/our-work/publications/opinions/2023-10-23-edps-opinion-442023-artificial-intelligence-act-light-legislative-developments_en" target="_blank">Opinion 44/2023</a> on the EC proposal for the AI Act in the light of legislative developments. Details on the AI Act can be found in our Advisories <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/01/europe-ai-act-moves-forward" target="_self">here</a> and <a href="https://www.arnoldporter.com/en/perspectives/advisories/2023/07/european-parliament-adopts-its-version-of-ai-act" target="_self">here</a>. The EDPS sets out a number of recommended changes to the proposal. These include: </p> <ul> <li>Broadening the scope of the AI Act (e.g., to high-risk AI systems existing prior to its application date)</li> <li>Introducing explicit prohibitions on the use of AI systems (e.g., using AI to infer emotions if not used for health or research purposes)</li> <a name="Product Liability Updates UK"></a> <li>Introducing additional specifications for high-risk AI systems</li> <li>Clarifying elements for cross-border cases involving AI-systems (e.g., definition of national territory)</li> <li>Clarifying the tasks, duties and powers of the authorities involved in the implementation of the AI Act, including those of the EDPS</li> </ul> <h3>Product Liability Updates</h3> <p><strong><a rel="noopener noreferrer" href="https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?lang=en&amp;reference=2022/0302(COD)" target="_blank">European Parliament Adopts Negotiating Position on the New EU Product Liability Directive</a></strong>. On October 18, the European Parliament (EP) adopted its negotiating mandate on the European Commission&rsquo;s (EC) proposal for the revised Product Liability Directive (PLD), as discussed in our November 2022 <a href="https://www.arnoldporter.com/-/media/files/perspectives/publications/2022/11/virtual-and-digital-health-digest.pdf?" target="_self">Digest</a>. The EP&rsquo;s proposed revisions to the PLD are set out in a <a rel="noopener noreferrer" href="https://www.europarl.europa.eu/doceo/document/A-9-2023-0291_EN.html" target="_blank">report</a> dated October 12, 2023. Some of the key changes include clarification that the PLD will not apply to free and open-source software, extending the limitation period to 30 years for latent defects and clarification that economic operators that make substantial modifications to a product should be limited to the modified part of the product only. The European Council&rsquo;s negotiation position was published in June 2023 (discussed in our July <a href="https://www.arnoldporter.com/en/perspectives/publications/2023/07/virtual-and-digital-health-digest" target="_self">Digest</a>) and so on October 23, the EC, European Council, and EP began trialogue negotiations to agree on the final text of the PLD. The next trialogue is likely to happen in December 2023. </p> <p><strong><a rel="noopener noreferrer" href="https://www.efpia.eu/media/aojlgals/final-pld-industry-joint-trilogues-letter-oct-2023.pdf" target="_blank">Statement From Industry on the Proposed EU Product Liability Directive</a></strong>. On October 23, the European Federation of Pharmaceutical Industries and Associations, MedTech Europe, and others published an industry statement calling for &ldquo;<em>a major rethink</em>&rdquo; on the EC&rsquo;s proposal for a revised PLD. The industry states that as currently proposed, the PLD is unbalanced, being too consumer-friendly. For example, industry notes that the current draft disproportionately shifts the burden of proof onto defendants and could lead to abusive disclosure exercises. The industry also calls for compensation thresholds to be reintroduced and for further investigation into the effects of including software in the strict liability regime. Overall, the industry has concerns that the PLD would lead to an increase in litigation, a reduction in innovation, and much more uncertainty for businesses. </p> <p><strong>Opinion From the EDPS on AI Liability Act</strong>. On October 11, the EDPS adopted <a rel="noopener noreferrer" href="https://edps.europa.eu/data-protection/our-work/publications/opinions/2023-10-11-edps-opinion-422023-two-directives-ai-liability-rules_en" target="_blank">Opinion 42/2023</a> on the EC proposals for the revised PLD and the AI Liability Directive. The <a rel="noopener noreferrer" href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52022PC0496" target="_blank">proposal</a> for the AI Liability Directive aims to ensure victims of damage caused by AI can obtain equivalent protection to damage caused by other products. The EDPS fully endorses this aim and sets out a number of recommended changes to the proposal. These include: </p> <ul> <li>Ensure individuals that suffer damage caused by AI systems produced or used by EU institutions enjoy the same protection as if the damage were caused by AI systems produced or used by private entities or national authorities.</li> <li>Extend the disclosure of evidence mechanism and the rebuttable presumption of a causal link to all AI systems, not just those defined as &ldquo;high-risk.&rdquo;</li> <li>State that the proposal is without prejudice to EU GDPR, such that individuals can obtain redress through different avenues.</li> </ul> <p><span style="font-size: small;"><em>*The following individuals contributed to this Newsletter:</em></span></p> <p><span style="font-size: small;"><em><em>Amanda Cassidy is employed as a&nbsp;</em>Senior Health Policy Advisor at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Amanda is not admitted to the practice of law.<br /> Eugenia Pierson is employed as a Senior Health Policy Advisor at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Eugenia is not admitted to the practice of law.<br /> Mickayla <em>Stogsdill&nbsp;</em>is employed as a Senior Policy Specialist at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Mickayla is not admitted to the practice of law.<br /> Katie Brown is employed as a Policy Advisor at Arnold &amp; Porter&rsquo;s Washington, D.C. office. Katie is not admitted to the practice of law.<br /> Heba Jalil is employed as a Trainee Solicitor at Arnold &amp; Porter's London office. Heba is not admitted to the practice of law.</em></span></p> <p><span style="font-size: small;">&copy; Arnold &amp; Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.</span></p>