Source: https://www.gibsondunn.com/?search=news&s=&practice%5B%5D=1682
Timestamp: 2019-01-24 08:59:37
Document Index: 621858578

Matched Legal Cases: ['UKSC ', 'EWCA ', 'UKSC ', 'Art. 101', '§16600', '§16600', '§ 3462', '§ 7285', '§ 7285', '§ 90', '§ 90', '§ 1019']

UK Employment Update – January 2019
Click for PDF In this, our 2018 end of year alert, we look back at key developments in UK employment law over the past twelve months and look forward to anticipated key developments in the year ahead. A brief overview of developments and key cases from 2018 which we believe will be of interest to our clients is provided below, with more detailed information on each topic available by clicking on the links to the appendix. 1. Employment Status (click on link) We consider recent developments in the law regarding ‘worker status’ in the UK and look at how the Government responded to recommendations on employment status made in the Taylor Review in its Good Work Plan. 2. Good Work Plan (click on link) The Government’s Good Work Plan sets out a number of proposed reforms to UK employment laws and policy changes to ensure that workers can access fair and decent work, that both employers and workers have the clarity they need to understand their employment relationships, and that the enforcement system is fair and fit for purpose. We consider these below. 3. Vicarious Liability (click on link) We consider the impact of two recent decisions of the UK Court of Appeal which look at vicarious liability in both the legal spheres of Employment and Data Protection. In relation to Employment, it was held that there was a sufficient connection between a managing director’s job and his drunken assault on an employee to render the company vicariously liable for his actions. With regards to Data Protection, it was held that an employer was vicariously liable for the criminal actions of an employee who leaked the personal data of almost 100,000 employees, notwithstanding that the employer was held to have taken appropriate steps to mitigate the risk of such criminal actions occurring, and that the employee’s actions were undertaken with the express intention of causing damage to the employer. 4. Sexual Harassment and #metoo (click on link) The #metoo movement has had a significant impact on the use of non-disclosure agreements (“NDAs”) in situations involving allegations of sexual harassment. We consider the circumstances in which it remains appropriate to use NDAs in connection with the settlement of such claims and allegations. 5. Data Protection (click on link) More than six months have now passed since the General Data Protection Regulation (the “GDPR”) became effective in May 2018. Given the potentially significant fines for non-compliance, businesses subject to the GDPR have been investing heavily in GDPR compliance programmes. However, uncertainty still surrounds the GDPR and how it should operate in practice. We consider the enforcement action taken by the Information Commissioner’s Office (the “ICO”) during 2018 and the approach the ICO has said it intends to take with respect to enforcement in the future. We also consider recent guidance on the territorial scope of the GDPR as well as the implications of Brexit on the European and UK data protection regimes. 6. Other News and Areas to Watch (click on link) APPENDIX 1. Employment Status The question of employment status has vexed the UK courts in recent years. Employment law in the UK is unusual in that it recognises three different ways of working: (i) as an employee under a contract of employment; (ii) as an individual who may not be classed as an employee but who otherwise provides services personally in circumstances which may attract ‘worker’ status; and (iii) finally, as a self-employed independent contractor providing services to a client. The distinction between these three categories has been called into question in a spate of recent cases, some involving the gig economy. We previously considered the different employment rights afforded to individuals in these three categories of working relationship in a prior alert. This year, the eagerly awaited judgment from the UK Supreme Court in the case of Pimlico Plumbers Ltd and another v Smith [2018] UKSC 29 gave further guidance on the approach to be taken by the UK courts when determining whether an individual who performs services for a client but who is not an employee should nevertheless enjoy protection under UK law as a ‘worker’. As we indicated in our previous alert, the obligation to perform services personally is a necessary requirement for ‘worker’ status. When considering this issue, the UK Supreme Court highlighted the need to consider the terms of the contract between the parties in full (such that a contractual right of substitution in the Pimlico Plumbers contract was overridden by other clauses of the contract which indicated that the services were to be performed personally). Other relevant factors which contributed to the finding of ‘worker’ status in this case were tight control over the plumber’s attire and administrative aspects of his job, onerous terms as to amount and timing of payment, and a suite of covenants restricting the plumber’s working activities following termination. As a consequence, care should be taken when engaging an independent contractor to ensure that the arrangements are documented clearly and that the terms of engagement (whether individually or taken as a whole) are not consistent with worker status. 2. Good Work Plan The Good Work Plan, published in December 2018, builds on the response given by the Government in relation to the Taylor Review in February 2018, and reports on the progress of the issues raised in various consultations. In it, the Government responds to recommendations on employment status made in the Taylor Review by promising to (i) “bring forward detailed proposals” on how the employment status framework for employment rights and tax should be aligned, and (ii) provide legislation to “improve the clarity” of the employment status tests, “reflecting the reality of modern working practices”. Unfortunately, however, no further information has been given about what this will entail. The Government has also laid down three statutory instruments implementing the Good Work Plan that will become effective from 6 April 2020 and which: (i) provide that the written statement of employment particulars must be given from day one of employment; (ii) change the rules for calculating a week’s pay for holiday pay purposes, increasing the reference period for variable pay from 12 weeks to 52 weeks; (iii) abolish a perceived loophole known as the Swedish Derogation, which allows agency workers to be paid less than if they were directly hired provided they have a contract of employment with the agency and are paid between assignments; (iv) extend the right to a written statement to workers (previously just employees); and (v) lower the percentage required for a valid employee request for the employer to negotiate an agreement on informing and consulting its employees from 10% to 2% (while keeping the minimum 15-employee threshold for initiating proceedings in place). From April 2019, the limit on financial penalties for breaches of employment law which have aggravating factors will be increased from £5,000 to £20,000. 3. Vicarious Liability Update As reported previously, the boundaries of the law on vicarious liability, which determines the circumstances in which an employer will be deemed liable for the acts of its officers and employees, continue to expand. We highlight below two recent decisions of the UK Court of Appeal in the field of vicarious liability: 3.1 Vicarious Liability and Employment: Overturning a decision by the UK High Court, the UK Court of Appeal held that a company was vicariously liable for an assault carried out by the managing director on another employee. In Bellman v Northampton Recruitment Ltd [2018] EWCA Civ 2214, the managing director punched an employee several times at an unscheduled drinking session after the office Christmas party. The UK Court of Appeal confirmed that, when considering the issue of vicarious liability, the UK courts should focus on the “field of activities” assigned to the perpetrator and ask whether the actions for which the employer is claimed to be vicariously liable fell within his or her “field of activities”. In the present case, the managing director’s seniority and the way in which he asserted that authority at the event at which the assault took place were both significant factors leading the court to conclude that the employer was responsible for the assault which he carried out at an unofficial out-of-office event. This decision restores the UK Supreme Court’s broader application of the “close connection” test to incidents of assault by an employee in Mohamud v WM Morrison Supermarkets Plc [2016] UKSC which we reported on previously. 3.2 Vicarious Liability and Data Protection: In a decision that is likely to have far-reaching consequences for employers, the UK Court of Appeal upheld a controversial UK High Court judgment that an employer, Morrisons Plc, was vicariously liable for the criminal actions of an employee, notwithstanding that it had taken appropriate steps to mitigate the risk of such actions occurring. In the first group litigation after a data breach in the UK, Morrisons is liable in damages to over 5,000 individuals. A disgruntled employee of Morrisons leaked the personal details of almost 100,000 employees to the internet. The UK High Court found that Morrisons was not directly liable for the breaches of the Data Protection Act 1998 (the “DPA 1998“), which has since been superseded by the GDPR and the Data Protection Act 2018 (the “DPA 2018“) (which sits alongside the GDPR in the UK and, amongst other things, confirms the UK’s approach to certain flexibilities and exemptions permitted by the GDPR), misuse of private information, and/or breaches of confidence. However, it found that Morrisons was vicariously liable for the employee’s actions. Morrisons appealed to the UK Court of Appeal, however, the appeal was dismissed. The UK Court of Appeal held that (i) it was not implicit that Parliament had intended to exclude vicarious liability from the scope of the DPA 1998 and (ii) the UK High Court had been correct to find that there had been a “seamless and continuous sequence” of events between the breach and the employment relationship. The misuse of the personal data by the employee in this case was found to be within his “field of activities” as there was an “unbroken chain” of events between his work activities and the data leak. Referring to the decision in Bellman, the UK Court of Appeal said it also made no difference that the tort took place away from the workplace. What this means for employers: The UK Court of Appeal’s judgment, whilst concerned with the provisions of the DPA 1998, applies equally to the equivalent duties and responsibilities under the GDPR. In particular, in order to mitigate vicarious liability risks it may not be sufficient for UK employers to simply comply with their obligation under the GDPR to implement “appropriate technical and organisational measures” to ensure that personal data in their possession is appropriately secured. Hence, employers should also consider appropriate insurance coverage, whether by public liability policy or a bespoke cyber insurance policy. It remains to be seen how effective these policies will be, and they are unlikely to cover the entire exposure. 4. Sexual Harassment and the #metoo Movement The #metoo movement has increased the social and political pressure upon UK employers to tackle issues of sexual harassment head on, particularly where perpetrated by those in authority. While settlement agreements and associated non-disclosure provisions remain both useful and appropriate when resolving employment disputes, care must be taken in situations involving allegations of sexual harassment, especially where those allegations have been upheld against the perpetrator or continue to be maintained by the alleged victim. In particular, the use of NDAs or settlement agreements to prevent an employee from repeating, publishing or reporting allegations of sexual harassment has been called into question over the last year. The Women and Equalities Committee of the UK Parliament (“WEC“) conducted an Inquiry into Sexual Harassment in the Workplace (the “Inquiry“) in 2018, highlighting five points in respect of which they called upon the Government to take action: (i) putting sexual harassment at the top of the agenda; (ii) requiring regulators to take a more active role; (iii) making enforcement processes work better for employees; (iv) cleaning up the use of NDAs, and (v) collecting more robust data. The Solicitors Regulation Authority (the “SRA“) subsequently issued a Warning Notice reminding lawyers that NDAs must not: (i) prevent anyone from notifying regulators or law enforcement agencies, of conduct which might otherwise be reportable; (ii) improperly threaten litigation, or (iii) prevent someone who has entered into an NDA from keeping or receiving a copy of the NDA. Further, in December, the UK Government responded to the Inquiry and said that a statutory code of practice on sexual harassment should be introduced, and acknowledged that NDAs require better regulation. The Government committed to consult on how best to achieve this and enforce any new provisions, but noted the lack of data and research on this issue. As a result, in November 2018, the WEC launched a new inquiry into the wider use of NDAs in cases where any form of harassment or discrimination is alleged. The findings of this are expected in Spring 2019. In the circumstances, and while settlement agreements containing non-disclosure provisions remain a lawful and appropriate means by which UK employers can resolve disputes in which allegations of sexual harassment have been made, care should be taken to ensure that: (i) NDAs are not used in circumstances in which the subject of the NDA may feel unable to notify regulators or law enforcement agencies of conduct which might otherwise be reportable; (ii) lawyers do not fail to notify the SRA of misconduct, or a serious breach of regulatory requirements, and (iii) lawyers do not use NDAs as a means of improperly threatening litigation or other adverse consequences. 5. Data Protection 5.1 Enforcement: In a recent speech, the UK’s Information Commissioner revealed that the number of complaints the ICO has received from the public regarding their personal data has increased from 19,000 since the GDPR came into effect, compared to 9,000 in a comparable period predating the GDPR. There have also been more breach reports – more than 8,000 since the GDPR came into effect and reports became mandatory in certain circumstances. The ICO’s headcount has also increased to almost 700, which is 60% higher than in 2016. These increases in complaints and resources have yet to result in increased enforcement action. The ICO has issued one enforcement notice, requiring the deletion of data subjects’ personal data by the entity in default. This enforcement action is notable because it was taken against a Canadian entity and so demonstrates that the ICO will take action against foreign entities which are subject to the GDPR. More recently, the ICO has issued monetary penalties to organisations across the finance, manufacturing and business services sectors for non-payment of the data protection fees all data controllers are required to pay unless certain exemptions apply. The ICO has not yet issued an administrative fine for a breach of the GDPR or DPA 2018. It has however recently imposed the maximum possible fine on an organisation under the DPA 1998, and in doing so indicated that the fine would have been significantly higher had the GDPR been in force when the breach occurred. The ICO has produced a draft Regulatory Action Policy, which sets out the approach the ICO intends to take with respect to enforcement. Although this policy remains subject to Parliamentary approval, organisations regulated by the ICO will be relieved to hear that although the ICO will consider each case on its merits, as a general principle it is the more serious, high-impact, intentional, wilful, neglectful or repeated breaches that can expect to attract stronger regulatory action, and so they are unlikely to attract the highest administrative fines if they have taken sensible and appropriate measures to comply with the GDPR and the DPA 2018. 5.2 Territorial Scope: The GDPR has extraterritorial effect, and may apply both to organisations established in the EU and to organisations not established in the EU. Where an organisation is established in the EU, the GDPR applies to the processing of personal data in the context of the EU establishment’s activities, regardless of where the processing takes place. Where an organisation is not established in the EU, the GDPR applies to processing activities relating to the offering of goods or services to or the monitoring of the behaviour of individuals located in the EU. The European Data Protection Board (the “EDPB“), an EU body which is made up of the head of each European data protection authority and the European Data Protection Supervisor (the EU’s independent data protection authority) (and which is tasked, amongst other things, with ensuring consistent application of the GDPR across the EU) has recently issued guidelines (currently subject to public consultation) on the territorial application of the GDPR, which are intended to provide clarity as to how the GDPR applies in practice. We have set out below some items of particular interest: 5.2.1 The meaning of “Establishment”: An establishment implies the real and effective exercise of an activity through stable arrangements. The EDPB has confirmed that in some circumstances the presence of a single employee or agent in the EU may be sufficient to constitute a stable arrangement. However, the notion of establishment has its limits, and it is not possible to conclude that an organisation is established in the EU merely because its website is accessible in the EU. In addition, the EDPB does not deem a data processor in the EU to be an establishment of a data controller merely by virtue of its status as a data processor. 5.2.2 Data controller-data processor arrangements: Where an organisation subject to the GDPR uses a data processor which is not subject to the GDPR (for example, because that processor is not established in the EU), it will need to ensure that it puts in place a contract with the data processor which complies with the requirements of Article 28 of the GDPR. The processor will thereby become indirectly subject to some obligations under the GDPR. Where an organisation subject to the GDPR acts as a data processor, processing personal data on behalf of a data controller not subject to the GDPR, it will similarly need to ensure that it puts in place a contract with the data controller which complies with the requirements of Article 28 of the GDPR (save insofar as they relate to the provision of assistance to the controller in complying with the controller’s obligations under the GDPR). 5.2.3 “Targeting” data subjects in the EU: An organisation which is not otherwise established in the EU will not become subject to the GDPR merely because it processes the personal data of individuals in the EU; an element of “targeting” those individuals must also be present, such that it is apparent that the organisation envisages offering goods or services to data subjects in the EU. Factors to be considered in this regard include (amongst others) whether the EU or an EU member state is mentioned in connection with the goods or services, whether the organisation uses a language or currency which is not used in its home country but which is used in the EU, and whether the organisation offers the delivery of goods in the EU. This concept of “intention to target” is not relevant to the application of the GDPR with regard to the monitoring of data subjects’ behaviour in the EU – such monitoring may be subject to the GDPR irrespective of any intention (or absence thereof) to do so. 5.3 GDPR and Brexit: On the day the UK leaves the EU, the GDPR will be transposed into UK law as domestic legislation. This means that data protection standards in the UK will not change dramatically after Brexit, at least initially. However, Brexit may affect the way in which the GDPR applies to businesses, and certain businesses may find themselves subject to both the “UK GDPR” and the GDPR proper, depending on the nature and structure of their European operations. Separately, Brexit will have ramifications for personal data transfers, and particularly transfers from the EU to the UK. Currently, there are no restrictions on such data transfers. However, if the UK leaves the EU without the European Commission (“EC“) having formally recognised its data protection laws as adequate, whether as a result of a no-deal Brexit or simply the failure to make an adequacy decision by the end of any transition period, and in the absence of any applicable derogation, adequate safeguards would need to be put in place in respect of any personal data transfers from the EU to the UK. This would typically involve the transferor and recipient entities entering into model clauses approved by the EC, although other options are available. 6. Other news and areas to watch 6.1 Brexit: Whilst it is impossible to predict, at the date of writing, how Brexit will unfold, we can say that Brexit is not expected to have a substantial impact upon employment rights in the UK for the moment, irrespective of the form it takes. A white paper issued in July 2018 by the UK Government indicated that there is no intention to repeal or amend employment or equality laws in the UK, including those which derive from or implement European employment laws. The paper states: “existing workers’ rights enjoyed under EU law will continue to be available in UK law at the day of the withdrawal” and proposed that the UK will commit to a “non-regression of labour standards” in order to maintain a strong trading relationship with the EU. Possible areas for reform post-Brexit could include compensation limits in discrimination claims (which are currently uncapped), as well as provisions for the accrual of statutory vacation and calculation of statutory vacation pay. We are happy to answer any questions which clients may have relating to Brexit and employment law. 6.2 Simplification of tax on termination payments: Since 6 April 2018, any payment in lieu of notice (including a non-contractual payment) has been treated as earnings and subject to tax and class 1 National Insurance Contributions (“NICs“). However, from 6 April 2020, all termination payments above the £30,000 threshold will be subject to class 1A NICs (employer liability only). 6.3 Large and medium sized companies engaging workers through PSCs are to become responsible for PAYE and NICs: In a move that will significantly impact those large and medium-sized companies engaging workers via personal services companies (“PSCs“) from April 2020, the responsibility for operating off-payroll working rules, and deducting any tax and NICs due, will move from individuals to the organisation, agency or other third party paying an individual’s PSC. Organisations will have to reconsider whether there is any material benefit in using PSC structures for their indirectly engaged workforce as opposed to directly engaged self-employed contractors. 6.4 Pay reporting: A new set of regulations that came into force on 1 January 2019 bring in mandatory reporting of the ratio between CEO pay, including all elements of remuneration, and average staff pay for UK incorporated companies that are listed on the London Stock Exchange, an exchange in an EEA member state, the New York Stock Exchange or NASDAQ, and have an average number of UK employees above 250 in their group, all of which will be effective for accounting periods beginning on or after 1 January 2019. Further, the Government launched a consultation on ethnicity pay reporting, looking in particular at the sort of information that employers should be required to publish. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these and other developments. Please feel free to contact the Gibson Dunn lawyer with whom you usually work or the following members of the Labor and Employment team in the firm’s London office: James A. Cox (+44 (0)20 7071 4250, jacox@gibsondunn.com) Georgia Derbyshire (+44 (0)20 7071 4013, gderbyshire@gibsondunn.com) Heather Gibbons (+44 (0)20 7071 4127, hgibbons@gibsondunn.com) Sarika Rabheru (+44 (0)20 7071 4267, srabheru@gibsondunn.com) Thomas Weatherill (+44 (0)20 7071 4164, tweatherill@gibsondunn.com)
Click for PDF 2018 marked an exciting year of trade secret developments and demonstrated the federal government’s increased involvement in protecting trade secrets, a trend expected to continue in 2019. Courts continued to construe the Defend Trade Secrets Act (DTSA)—including first impression rulings under the whistleblower and attorneys’ fees provisions—and juries doled out significant damages awards in trade secrets cases. Massachusetts passed a new trade secrets bill. The Trump administration imposed tariffs on China in response to the alleged theft of trade secrets, and also charged nine Iranian nationals for a series of coordinated cyber intrusions. Jason Schwartz, Greta Williams, Mia Donnelly and Aaron Smith highlight these and other notable trade secrets developments from 2018 in their article “2018 Trade Secrets Litigation Roundup” published by BBNA. Reproduced with permission, January 15, 2019, from Copyright 2019 The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work or the following authors in the firm’s Washington, D.C. office: Jason C. Schwartz (+1 202-955-8242, jschwartz@gibsondunn.com) Greta B. Williams (+1 202-887-3745, gbwilliams@gibsondunn.com) Mia C. Donnelly (+1 202-887-3617, mdonnelly@gibsondunn.com) Please also feel free to contact any of the following practice group leaders and members: Labor and Employment Group: Catherine A. Conway – Los Angeles (+1 213-229-7822, cconway@gibsondunn.com) Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Intellectual Property Group: Wayne Barsky – Los Angeles (+1 310-557-8183, wbarsky@gibsondunn.com) Josh Krevitt – New York (+1 212-351-2490, jkrevitt@gibsondunn.com) Mark Reiter – Dallas (+1 214-698-3360, mreiter@gibsondunn.com) Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Michael Sitzman – San Francisco (+1 415-393-8200, msitzman@gibsondunn.com) Privacy, Cybersecurity and Consumer Protection Group: Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com) Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Gibson, Dunn & Crutcher LLP is pleased to announce its selection by Law360 as a Law Firm of the Year for 2018, featuring the four firms that received the most Practice Group of the Year awards in its profile, “The Firms That Dominated in 2018.” [PDF] Of the four, Gibson Dunn “led the pack with 11 winning practice areas” for “successfully securing wins in bet-the-company matters and closing high-profile, big-ticket deals for clients throughout 2018.” The awards were published on January 13, 2019. Law360 previously noted that Gibson Dunn “dominated the competition this year” for its Practice Groups of the Year, which were selected “with an eye toward landmark matters and general excellence.” Gibson Dunn is proud to have been honored in the following categories: Appellate [PDF]: Gibson Dunn’s Appellate and Constitutional Law Practice Group is one of the leading U.S. appellate practices, with broad experience in complex litigation at all levels of the state and federal court systems and an exceptionally strong and high-profile presence and record of success before the U.S. Supreme Court. Class Action: Our Class Actions Practice Group has an unrivaled record of success in the defense of high-stakes class action lawsuits across the United States. We have successfully litigated many of the most significant class actions in recent years, amassing an impressive win record in trial and appellate courts, including before the U. S. Supreme Court, that have changed the class action landscape nationwide. Competition: Gibson Dunn’s Antitrust and Competition Practice Group serves clients in a broad array of industries globally in every significant area of antitrust and competition law, including private antitrust litigation between large companies and class action treble damages litigation; government review of mergers and acquisitions; and cartel investigations, internationally across borders and jurisdictions. Cybersecurity & Privacy: Our Privacy, Cybersecurity and Consumer Protection Practice Group represents clients across a wide range of industries in matters involving complex and rapidly evolving laws, regulations, and industry best practices relating to privacy, cybersecurity, and consumer protection. Our team includes the largest number of former federal cyber-crimes prosecutors of any law firm. Employment: No firm has a more prominent position at the leading edge of labor and employment law than Gibson Dunn. With a Labor and Employment Practice Group that covers a complete range of matters, we are known for our unsurpassed ability to help the world’s preeminent companies tackle their most challenging labor and employment matters. Energy: Across the firm’s Energy and Infrastructure, Oil and Gas, and Energy, Regulation and Litigation Practice Groups, our global energy practitioners counsel on a complex range of issues and proceedings in the transactional, regulatory, enforcement, investigatory and litigation arenas, serving clients in all energy industry segments. Environmental: Gibson Dunn has represented clients in the environmental and mass tort area for more than 30 years, providing sophisticated counsel on the complete range of litigation matters as well as in connection with transactional concerns such as ongoing regulatory compliance, legislative activities and environmental due diligence. Real Estate: The breadth of sophisticated matters handled by our real estate lawyers worldwide includes acquisitions and sales; joint ventures; financing; land use and development; and construction. Gibson Dunn additionally has one of the leading hotel and hospitality practices globally. Securities: Our securities practice offers comprehensive client services including in the defense and handling of securities class action litigation, derivative litigation, M&A litigation, internal investigations, and investigations and enforcement actions by the SEC, DOJ and state attorneys general. Sports: Gibson Dunn’s global Sports Law Practice represents a wide range of clients in matters relating to professional and amateur sports, including individual teams, sports facilities, athletic associations, athletes, financial institutions, television networks, sponsors and municipalities. Transportation: Gibson Dunn’s experience with transportation-related entities is extensive and includes the automotive sector as well as all aspects of the airline and rail industries, freight, shipping, and maritime. We advise in a broad range of areas that include regulatory and compliance, customs and trade regulation, antitrust, litigation, corporate transactions, tax, real estate, environmental and insurance.
Click for PDF Looking back at the past year’s cacophony of voices in a world trying to negotiate a new balance of powers, it appeared that Germany was disturbingly silent, on both the global and European stage. Instead of helping shape the new global agenda that is in the making, German politics focused on sorting out the vacuum created by a Federal election result which left no clear winner other than a newly formed right wing nationalist populist party mostly comprised of so called Wutbürger (the new prong for “citizens in anger”) that managed to attract 12.6 % of the vote to become the third strongest party in the German Federal Parliament. The relaunching of the Grand-Coalition in March after months of agonizing coalition talks was followed by a bumpy start leading into another session of federal state elections in Bavaria and Hesse that created more distraction. When normal business was finally resumed in November, a year had passed by with few meaningful initiatives formed or significant business accomplished. In short, while the world was spinning, Germany allowed itself a year’s time-out from international affairs. The result is reflected in this year’s update, where the most meaningful legal developments were either triggered by European initiatives, such as the General Data Protection Regulation (“GDPR”) (see below section 4.1) or the New Transparency Rules for Listed German Companies (see below section 1.2), or as a result of landmark rulings of German or international higher and supreme courts (see below Corporate M&A sections 1.1 and 1.4; Tax – sections 2.1 and 2.2 and Labor and Employment – section 4.2). In fairness, shortly before the winter break at least a few other legal statutes have been rushed through parliament that are also covered by this update. Of the changes that are likely to have the most profound impact on the corporate world, as well as on the individual lives of the currently more than 500 million inhabitants of the EU-28, the GDPR, in our view, walks away with the first prize. The GDPR has created a unified legal system with bold concepts and strong mechanisms to protect individual rights to one’s personal data, combined with hefty fines in case of the violation of its rules. As such, the GDPR stands out as a glowing example for the EU’s aspiration to protect the civic rights of its citizens, but also has the potential to create a major exposure for EU-based companies processing and handling data globally, as well as for non EU-based companies doing business in Europe. On a more strategic scale, the GDPR also creates a challenge for Europe in the global race for supremacy in a AI-driven world fueled by unrestricted access to data – the gold of the digital age. The German government could not resist infection with the virus called protectionism, this time around coming in the form of greater scrutiny imposed on foreign direct investments into German companies being considered as “strategic” or “sensitive” (see below section 1.3 – Germany Tightens Rules on Foreign Takeovers Even Further). Protecting sensitive industries from “unwanted” foreign investors, at first glance, sounds like a laudable cause. However, for a country like Germany that derives most of its wealth and success from exporting its ideas, products and services, a more liberal approach to foreign investments would seem to be more appropriate, and it remains to be seen how the new rules will be enforced in practice going forward. The remarkable success of the German economy over the last twenty five years had its foundation in the abandoning of protectionism, the creation of an almost global market place for German products, and an increasing global adoption of the rule of law. All these building blocks of the recent German economic success have been under severe attack in the last year. This is definitely not the time for Germany to let another year go by idly. We use this opportunity to thank you for your trust and confidence in our ability to support you in your most complicated and important business decisions and to help you form your views and strategies to deal with sophisticated German legal issues. Without our daily interaction with your real-world questions and tasks, our expertise would be missing the focus and color to draw an accurate picture of the multifaceted world we are living in. In this respect, we thank you for making us better lawyers – every day. ________________________ TABLE OF CONTENTS 1. Corporate, M&A 2. Tax 3. Financing and Restructuring 4. Labor and Employment 5. Real Estate 6. Compliance 7. Antitrust and Merger Control 8. Litigation 9. IP & Technology 10. International Trade, Sanctions and Export Controls ________________________ 1. Corporate, M&A 1.1 Further Development regarding D&O Liability of the Supervisory Board in a German Stock Corporation In its famous “ARAG/Garmenbeck”-decision in 1997, the German Federal Supreme Court (Bundesgerichtshof – BGH) first established the obligation of the supervisory board of a German Stock Corporation (Aktiengesellschaft) to pursue the company’s D&O liability claims in the name of the company against its own management board after having examined the existence and enforceability of such claims. Given the very limited discretion the court has granted to the supervisory board not to bring such a claim and the supervisory board’s own liability arising from inactivity, the number of claims brought by companies against their (former) management board members has risen significantly since this decision. In its recent decision dated September 18, 2018, the BGH ruled on the related follow-up question about when the statute of limitations should start to run with respect to compensation claims brought by the company against a supervisory board member who has failed to pursue the company’s D&O liability claims against the board of management within the statutory limitation period. The BGH clarified that the statute of limitation applicable to the company’s compensation claims against the inactive supervisory board member (namely ten years in case of a publicly listed company, otherwise five years) should not begin to run until the company’s compensation claims against the management board member have become time-barred themselves. With that decision, the court adopts the view that in cases of inactivity, the period of limitations should not start to run until the last chance for the filing of an underlying claim has passed. In addition, the BGH in its decision confirmed the supervisory board’s obligation to also pursue the company’s claims against the board of management in cases where the management board member’s misconduct is linked to the supervisory board’s own misconduct (e.g. through a violation of supervisory duties). Even in cases where the pursuit of claims against the board of management would force the supervisory board to disclose its own misconduct, such “self-incrimination” does not release the supervisory board from its duty to pursue the claims given the preponderance of the company’s interests in an effective supervisory board, the court reasoned. In practice, the recent decision will result in a significant extension of the D&O liability of supervisory board members. Against that backdrop, supervisory board members are well advised to examine the existence of the company’s compensation claims against the board of management in a timely fashion and to pursue the filing of such claims, if any, as soon as possible. If the board of management’s misconduct is linked to parallel misconduct of the supervisory board itself, the relevant supervisory board member – if not exceptionally released from pursuing such claim and depending on the relevant facts and circumstances – often finds her- or himself in a conflict of interest arising from such self-incrimination in connection with the pursuit of the claims. In such a situation, the supervisory board member might consider resigning from office in order to avoid a conflict of interest arising from such self-incrimination in connection with the pursuit of the claims. Back to Top 1.2 Upcoming New Transparency Rules for Listed German Companies as well as Institutional Investors, Asset Managers and Proxy Advisors In mid-October 2018, the German Federal Ministry of Justice finally presented the long-awaited draft for an act implementing the revised European Shareholders’ Rights Directive (Directive (EU) 2017/828). The Directive aims to encourage long-term shareholder engagement by facilitating the communication between shareholders and companies, in particular across borders, and will need to be implemented into German law by June 10, 2019 at the latest. The new rules primarily target listed German companies and provide some major changes with respect to the “say on pay” provisions, as well as additional approval and disclosure requirements for related party transactions, the transmission of information between a stock corporation and its shareholders and additional transparency and reporting requirements for institutional investors, asset managers and proxy advisors. “Say on pay” on directors’ remuneration: remuneration policy and remuneration report Under the current law, the shareholders determine the remuneration of the supervisory board members at a shareholder meeting, whereas the remuneration of the management board members is decided by the supervisory board. The law only provides for the possibility of an additional shareholder vote on the management board members’ remuneration if such vote is put on the agenda by the management and supervisory boards in their sole discretion. Even then, such vote has no legal effects whatsoever (“voluntary say on pay”). In the future, shareholders of German listed companies will have two options. First, the supervisory board will have to prepare a detailed remuneration policy for the management board, which must be submitted to the shareholders if there are major changes to the remuneration, and in any event at least once every four years (“mandatory say on pay”). That said, the result of the vote on the policy will continue to remain only advisory. However, if the supervisory board adopts a remuneration policy that has been rejected by the shareholders, it will then be required to submit a reviewed (not necessarily revised) remuneration policy to the shareholders at the next shareholders’ meeting. With respect to the remuneration of supervisory board members, the new rules require a shareholders vote at least once every four years. Second, at the annual shareholders’ meeting the shareholders will vote ex post on the remuneration report (which is also reviewed by the statutory auditor) which contains the remuneration granted to the present and former members of the management board and the supervisory board in the past financial year. Again, the shareholders’ vote, however, will only be advisory. Both the remuneration report including the audit report, as well as the remuneration policy will have to be made public on the company’s website for at least ten years. Related party transactions German stock corporation law already provides for various safeguard mechanisms to protect minority shareholders in cases of transactions with major shareholders or other related parties (e.g. the capital maintenance rules and the laws relating to groups of companies). In the future, in the case of listed companies, these mechanisms will be supplemented by a detailed set of approval and transparency requirements for transactions between the company and related parties. Material transactions exceeding certain thresholds will require prior supervisory board approval. A rejection by the supervisory board can be overcome by shareholder vote. Furthermore, a listed company must publicly disclose any such material related party transaction, without undue delay over media providing for a Europe-wide distribution. Identification of shareholders and facilitation of the exercise of shareholders’ rights Listed companies will have the right to request information on the identity of their shareholders, including the name and both a postal and electronic address, from depositary banks, thus allowing for a direct communication line, also with respect to bearer shares (“know-your-shareholder”). Furthermore, depositary banks and other intermediaries will be required to pass on important information from the company to the shareholders and vice versa, e.g. with respect to voting in shareholders’ meetings and the exercise of subscription rights. Where there is more than one intermediary in a chain, the intermediaries are required to pass on the respective information within the chain. In addition, companies will be required to confirm the votes cast at the request of the shareholders thus enabling them to be certain that their votes have been effectively cast, including in particular across borders. Transparency requirements for institutional investors, asset managers and proxy advisors German domestic institutional investors and asset managers with Germany as their home member state (as defined in the applicable sector-specific EU law) will be required (i) to disclose their engagement policy, including how they monitor, influence and communicate with the investee companies, exercise shareholders’ rights and manage actual and potential conflicts of interests, and (ii) to report annually on the implementation of their engagement policy and disclose how they have cast their votes in the general meetings of material investee companies. Institutional investors will further have to disclose (iii) consistency between the key elements of their investment strategy with the profile and duration of their liabilities and how they contribute to the medium to long-term performance of their assets, and, (iv) if asset managers are involved, to disclose the main aspects of their arrangement with the asset manager. The new disclosure and reporting requirements, however, only apply on a “comply or explain” basis. Thus, investors and asset managers may choose not to make the above disclosures, provided they give an explanation as to why this is the case. Proxy advisors will have to publicly disclose on an annual basis (i) whether and how they have applied their code of conduct based again on the “comply or explain” principle, and (ii) information on the essential features, methodologies and models they apply, their main information sources, the qualification of their staff, their voting policies for the different markets they operate in, their interaction with the companies and the stakeholders as well as how they manage conflicts of interests. These rules, however, do not apply to proxy advisors operating from a non-EEA state with no establishment in Germany. The present legislative draft is still under discussion and it is to be expected that there will still be some changes with respect to details before the act becomes effective in mid-2019. Due to transitional provisions, the new rules on “say on pay” will have no effect for the majority of listed companies in this year’s meeting season. Whether the new rules will actually promote a long-term engagement of shareholders and have the desired effect on the directors’ remuneration of listed companies will have to be seen. In any event, both listed companies as well as the other addressees of the new transparency rules should make sure that they are prepared for the new reporting and disclosure requirements. Back to Top 1.3 Germany Tightens Rules on Foreign Takeovers Even Further After the German government had imposed stricter rules on foreign direct investment in 2017 (see 2017 Year-End German Law Update under 1.5), it has now even further tightened its rules with respect to takeovers of German companies by foreign investors. The latest amendment of the rules under the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, “AWV“) enacted in 2018 was triggered, among other things, by the German government’s first-ever veto in August 2018 regarding the proposed acquisition of Leifeld Metal Spinning, a German manufacturer of metal forming machines used in the automotive, aerospace and nuclear industries, by Yantai Taihai Corporation, a privately-owned industry group from China, on the grounds of national security. Ultimately, Yantai withdrew its bid shortly after the German government had signaled that it would block the takeover. On December 29, 2018, the latest amendment of the Foreign Trade and Payments Ordinance came into force. The new rules provide for greater scrutiny of foreign direct investments by lowering the threshold for review of takeovers of German companies by foreign investors from the acquisition of 25% of the voting rights down to 10% in circumstances where the target operates a critical infrastructure or in sensitive security areas (defense and IT security industry). In addition, the amendment also expands the scope of the Foreign Trade and Payments Ordinance to also apply to certain media companies that contribute to shaping the public opinion by way of broadcasting, teleservices or printed materials and stand out due to their special relevance and broad impact. While the lowering of the review threshold as such will lead to an expansion of the existing reporting requirements, the broader scope is also aimed at preventing German mass media from being manipulated with disinformation by foreign investors or governments. There are no specific guidelines published by the German government as it wants the relevant parties to contact, and enter into a dialog with, the authorities about these matters. While the German government used to be rather liberal when it came to foreign investments in the past, the recent veto in the case of Leifeld as well as the new rules show that in certain circumstances, it will become more cumbersome for dealmakers to get a deal done. Finally, it is likely that the rules on foreign investment control will be tightened even further going forward in light of the contemplated EU legislative framework for screening foreign direct investment on a pan-European level. Back to Top 1.4 US Landmark Decision on MAE Clauses – Consequences for German M&A Deals Fresenius wrote legal history in the US with potential consequences also for German M&A deals in which “material adverse effect” (MAE) clauses are used. In December 2018, for the first time ever, the Supreme Court of Delaware allowed a purchaser to invoke the occurrence of an MAE and to terminate the affected merger agreement. The agreement included an MAE clause, which allocated certain business risks concerning the target (Akorn) for the time period between signing and closing to Akorn. Against the resistance of Akorn, Fresenius terminated the merger agreement based on the alleged MAE, arguing that the target’s EBITDA declined by 86%. The decision includes a very detailed analysis of an MAE clause by the Delaware courts and reaffirms that under Delaware law there is a very high bar to establishing an MAE. Such bar is based both on quantitative and qualitative parameters. The effects of any material adverse event need to be substantial as well as lasting. In most German deals, the parties agree to arbitrate. For this reason, there have been no German court rulings published on MAE clauses so far. Hence, all parties to an M&A deal face uncertainty about how German courts or arbitration tribunals would define “materiality” in the context of an MAE clause. In potential M&A litigation, sellers may use this ruling to support the argument that the bar for the exercise of the MAE right is in fact very high in line with the Delaware standard. It remains to be seen whether German judges will adopt the Delaware decision to interpret MAE clauses in German deals. Purchasers, who seek more certainty, may consider defining materiality in the MAE clause more concretely (e.g., by reference to the estimated impact of the event on the EBITDA of the company or any other financial parameter). Back to Top 1.5 Equivalence of Swiss Notarizations? The question whether the notarization of various German corporate matters may only be validly performed by German notaries or whether some or all of these measures may also be notarized validly by Swiss notaries has long since been the topic of legal debate. Since the last major reform of the German Limited Liability Companies Act (Gesetz betreffend Gesellschaften mit beschränkter Haftung – GmbHG) in 2008 the number of Swiss notarizations of German corporate measures has significantly decreased. A number of the newly introduced changes and provisions seemed to cast doubt on the equivalence and capacity of Swiss notaries to validly perform the duties of a German notary public who are not legally bound by the mandatory, non-negotiable German fee regime on notarial fees. As a consequence and a matter of prudence, German companies mostly stopped using Swiss notaries despite the potential for freely negotiated fee arrangements and the resulting significant costs savings in particular in high value matters. However, since 2008 there has been an increasing number of test cases that reach the higher German courts in which the permissibility of a Swiss notarization is the decisive issue. While the German Federal Supreme Court (Bundesgerichtshof – BGH) still has not had the opportunity to decide this question, in 2018 two such cases were decided by the Kammergericht (Higher District Court) in Berlin. In those cases, the court held that both the incorporation of a German limited liability company in the Swiss Canton of Berne (KG Berlin, 22 W 25/16 – January 24, 2018 = ZIP 2018, 323) and the notarization of a merger between two German GmbHs before a notary in the Swiss Canton of Basle (KG Berlin, 22 W 2/18 – July 26, 2018 = ZIP 2018, 1878) were valid notarizations under German law, because Swiss notaries were deemed to be generally equivalent to the qualifications and professional standards of German-based notaries. The reasons given in these decisions are reminiscent of the case law that existed prior to the 2008 corporate law reform and can be interpreted as indicative of a certain tendency by the courts to look favorably on Swiss notarizations as an alternative to German-based notarizations. Having said that and absent a determinative decision by the BGH, using German-based notaries remains the cautious default approach for German companies to take. This is definitely the case in any context where financing banks are involved (e.g. either where share pledges as loan security are concerned or in an acquisition financing context of GmbH share sales and transfers). On the other hand, in regions where such court precedents exist, the use of Swiss notaries for straightforward intercompany share transfers, mergers or conversions might be considered as an alternative on a case by case basis. Back to Top 1.6 Re-Enactment of the DCGK: Focus on Relevance, Function, Management Board’s Remuneration and Independence of Supervisory Board Members Sixteen years after it has first been enacted, the German Corporate Governance Code (Deutscher Corporate Governance Kodex, DCGK), which contains standards for good and responsible governance for German listed companies, is facing a major makeover. In November 2018, the competent German government commission published a first draft for a radically revised DCGK. While vast parts of the proposed changes are merely editorial and technical in nature, the draft contains a number of new recommendations, in particular with respect to the topics of management remuneration and independence of supervisory board members. With respect to the latter, the draft now provides a catalogue of criteria that shall act as guidance for the supervisory board as to when a shareholder representative shall no longer be regarded as independent. Furthermore, the draft also provides for more detailed specifications aiming for an increased transparency of the supervisory board’s work, including the recommendation to individually disclose the members’ attendance of meetings, and further tightens the recommendations regarding the maximum number of simultaneous mandates for supervisory board members. Moreover, in addition to the previous concept of “comply or explain”, the draft DCGK introduces a new “apply and explain” concept, recommending that listed companies also explain how they apply certain fundamental principles set forth in the DCGK as a new third category in addition to the previous two categories of recommendations and suggestions. The draft DCGK is currently under consultation and the interested public is invited to comment upon the proposed amendments until the end of January 2019. Since some of the proposed amendments provide for a rather fundamentally new approach to the current regime and would introduce additional administrative burdens, it remains to be seen whether all of the proposed amendments will actually come into force. According to the current plan, following a final consultancy of the Government Commission, the revised version of the DCGK shall be submitted for publication in April 2019 and would take effect shortly thereafter. Back to Top 2. Tax On November 23, 2018, the German Federal Council (Bundesrat) approved the German Tax Reform Act 2018 (Jahressteuergesetz 2018, the “Act”), which had passed the German Federal Parliament (Bundestag) on November 8, 2018. Highlights of the Act are (i) the exemption of restructuring gains from German income tax, (ii) the partial abolition of and a restructuring exemption from the loss forfeiture rules in share transactions and (iii) the extension of the scope of taxation for non-German real estate investors investing in Germany. 2.1 Exemption of Restructuring Gains The Act puts an end to a long period of uncertainty – which has significantly impaired restructuring efforts – with respect to the tax implications resulting from debt waivers in restructuring scenarios (please see in this regard our 2017 Year-End German Law Update under 3.2). Under German tax law, the waiver of worthless creditor claims creates a balance sheet profit for the debtor in the amount of the nominal value of the payable. Such balance sheet profit is taxable and would – without any tax privileges for such profit – often outweigh the restructuring effect of the waiver. The Act now reinstates the tax exemption of debt waivers with retroactive effect for debt waivers after February 8, 2017; upon application debt waivers prior to February 8, 2017 can also be covered. Prior to this legislative change, a tax exemption of restructuring gains was based on a restructuring decree of the Federal Ministry of Finance, which has been applied by the tax authorities since 2003. In 2016, the German Federal Fiscal Court (Bundesfinanzgerichtshof) held that the restructuring decree by the Federal Ministry of Finance violates constitutional law since a tax exemption must be legislated by statute and cannot be based on an administrative decree. Legislation was then on hold pending confirmation from the EU Commission that a legislative tax exemption does not constitute illegal state aid under EU law. The EU Commission finally gave such confirmation by way of a comfort letter in August 2018. The Act is largely based on the conditions imposed by a restructuring decree issued by the Federal Ministry of Finance on the tax exemption of a restructuring gain. Under the Act, gains at the level of the debtor resulting from a full or partial debt relief are exempt from German income tax if the relief is granted to recapitalize and restructure an ailing business. The tax exemption only applies if at the time of the debt waiver (i) the business is in need of restructuring and (ii) capable of being restructured, (iii) the waiver results in a going-concern of the restructured business and (iv) the creditor waives the debt with the intention to restructure the business. The rules apply to German corporate income and trade tax and benefit individuals, partnerships and corporations alike. Any gains from the relief must first be reduced by all existing loss-offsetting potentials before the taxpayer can benefit from tax exemptions on restructuring measures. Back to Top 2.2 Partial Abolition of Loss Forfeiture Rules/Restructuring Exception Under the current Loss Forfeiture Rules, losses of a German corporation will be forfeited on a pro rata basis if within a period of five years more than 25% but not more than 50% of the shares in the German loss-making corporation are transferred (directly or indirectly) to a new shareholder or group of shareholders with aligned interests. If more than 50% are transferred, losses will be forfeited in total. There are exceptions to this rule for certain intragroup restructurings, built-in gains and business continuations, especially in the venture capital industry. On March 29, 2017, the German Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) ruled that the pro rata forfeiture of losses (a share transfer of more than 25% but not more than 50%) is incompatible with the constitution. The court has asked the German legislator to amend the Loss Forfeiture Rules retroactively for the period from January 1, 2008 until December 31, 2015 to bring them in line with the constitution. Somewhat surprisingly, the legislator has now decided to fully cancel the pro rata forfeiture of losses with retroactive effect and with no reference to a specific tax period. Currently pending before the German Federal Constitutional Court is the question whether the full forfeiture of losses is constitutional. A decision by the Federal Constitutional Court is expected for early 2019, which may then result in another legislative amendment of the Loss Forfeiture Rules. The Act has also reinstated a restructuring exception from the forfeiture rules – if the share transfer occurs in order to restructure the business of an ailing corporation. Similar to the exemption of restructuring gains, this legislation was on hold until the ECJ’s decision (European Court of Justice) on June 28, 2018 that the restructuring exception does not violate EU law. Existing losses will not cease to exist following a share transfer if the restructuring measures are appropriate to avoid or eliminate the illiquidity or the over-indebtedness of the corporation and to maintain its basic operational structure. The restructuring exception applies to share transfers after December 31, 2007. Back to Top 2.3 Investments in German Real Estate by Non-German Investors So far, capital gains from the disposal of shares in a non-German corporation holding German real estate were not subject to German tax. In a typical structure, in which German real estate is held via a Luxembourg or Dutch entity, a value appreciation in the asset could be realized by a share deal of the holding company without triggering German income taxes. Under the Act, the sale of shares in a non-German corporation is now taxable if, at some point within a period of one year prior to the sale of shares, 50 percent of the book value of the assets of the company consisted of German real estate and the seller held at least 1 percent of the shares within the last five years prior to the sale. The Act is now in line with many double tax treaties concluded by Germany, which allow Germany to tax capital gains in these cases. The new law applies for share transfers after December 31, 2018. Capital gains are only subject to German tax to the extent the value has been increased after December 31, 2018. Until 2018, a change in the value of assets and liabilities, which are economically connected to German real estate, was not subject to German tax. Therefore, for example, profits from a waiver of debt that was used to finance German real estate was not taxable in Germany whereas the interest paid on the debt was deductible for German tax purposes. That law has now changed and allows Germany to tax such profit from a debt waiver if the loan was used to finance German real estate. However, only the change in value that occurred after December 31, 2018 is taxable. Back to Top 3. Financing and Restructuring – Test for Liquidity Status Tightened On December 19, 2017, the German Federal Supreme Court (Bundesgerichtshof – BGH) handed down an important ruling which clarifies the debt and payable items that should be taken into account when determining the “liquidity” status of companies. According to the Court, the liquidity test now requires managing directors and (executive) board members to determine whether a liquidity gap exceeding 10% can be overcome by incoming liquidity within a period of three weeks taking into account all payables which will become due in those three weeks. Prior to the ruling, managing directors had often argued successfully that only those payables that were due at the time when the test is applied needed be taken into account while expected incoming payments within a three week term could be considered. This mismatch in favor of the managing directors has now been rectified by the Court to the disadvantage of the managing directors. If, for example, on June 1 the company liquidity status shows due payables amounting to EUR 100 and plausible incoming receivables in the three weeks thereafter amounting to EUR 101, no illiquidity existed under the old test. Under the new test confirmed by the Court, payables of EUR 50 becoming due in the three week period now also have to be taken into account and the company would be considered illiquid. For companies and their managing directors following a cautious approach, the implications of this ruling are minor. Going forward, however, even those willing to take higher risks will need to follow the court determined principles. Otherwise, delayed insolvency filings could ensue. This not only involves a managing directors and executive board members’ personal liability for payments made on behalf of the company while illiquid but also potential criminal liability for a delayed insolvency filing. Managing directors are thus well advised to properly undertake and also document the required test in order to avoid liability issues. Back to Top 4. Labor and Employment 4.1 GDPR Has Tightened Workplace Privacy Rules The EU General Data Protection Regulation (“GDPR”) started to apply on May 25, 2018. It has introduced a number of stricter rules for EU countries with regard to data protection which also apply to employee personal data and employment relationships. In addition to higher sanctions, the regulation provides for extensive information, notification, deletion, and documentation obligations. While many of these data privacy rules had already been part of the previous German workplace privacy regime under the German Federal Data Protection Act (Bundesdatenschutzgesetz – BDSG), the latter has also been amended and provides for specific rules applicable to employee data protection in Germany (e.g. in the context of internal investigations or with respect to employee co-determination). However, the most salient novelty is the enormous increase in potential sanctions under the GDPR. Fines for GDPR violations can reach up to the higher of EUR 20 million or 4% of the group’s worldwide turnover. Against this backdrop, employers are well-advised to handle employee personnel data particularly careful. This is also particularly noteworthy as the employer is under an obligation to prove compliance with the GDPR – which may result in a reversal of the burden of proof e.g. in employment-related litigation matters involving alleged GDPR violations. Back to Top 4.2 Job Adverts with Third Gender Following a landmark decision by the German Federal Constitutional Court in 2017, employers are gradually inserting a third gender into their job advertisements. The Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) decided on October 10, 2017 that citizens who do not identify as either male or female were to be registered as “diverse” in the birth register (1 BvR 2019/16). As a consequence of this court decision, many employers in Germany have broadened gender notations in job advertisements from previously “m/f” to “m/f/d”. While there is no compelling legal obligation to do so, employers tend to signal their open-mindedness by this step, but also mitigate the potential risk of liability for a discrimination claim. Currently, such liability risk does not appear alarming due to the relative rarity of persons identifying as neither male nor female and the lack of a statutory stipulation for such adverts. However, employers might be well-advised to follow this trend, particularly after Parliament confirmed the existence of a third gender option in birth registers in mid-December. Back to Top 4.3 Can Disclosure Obligation Reduce Gender Pay-Gap? In an attempt to weed out gender pay gaps, the German lawmaker has introduced the so-called Compensation Transparency Act in 2017. It obliges employers, inter alia, to disclose the median compensation of comparable colleagues of the opposite gender with comparable jobs within the company. The purpose is to give a potential claimant (usually a female employee) an impression of how much her comparable male colleagues earn in order for her to consider further steps, e.g. a claim for more money. However, the new law is widely perceived as pointless. First, the law itself and its processes are unduly complex. Second, even after making use of the law, the respective employee would still have to sue the company separately in order to achieve an increase in her compensation, bearing the burden of proof that the opposite-gender employee with higher compensation is comparable to her. Against this background, the law has hardly been used in practice and will likely have only minimal impact. Back to Top 4.4 Employers to Contribute 15% to Deferred Compensation Schemes In order to promote company pension schemes, employers are now obliged to financially support deferred compensation arrangements. So far, employer contributions to any company pension scheme had been voluntary. In the case of deferred compensation schemes, companies save money as a result of less social security charges. The flipside of this saving was a financial detriment to the employee’s statutory pension, as the latter depends on the salary actually paid to the employee (which is reduced as a result of the deferred compensation). To compensate the employee for this gap, the employer is now obliged to contribute up to 15% of the respective deferred compensation. The actual impact of this new rule should be limited, as many employers already actively support deferred compensation schemes. As such, the new obligatory contribution can be set off against existing employer contributions to the same pension scheme. Back to Top 5. Real Estate – Notarization Requirement for Amendments to Real Estate Purchase Agreements Purchase agreements concerning German real estate require notarization in order to be effective. This notarization requirement relates not only to the purchase agreement as such but to all closely related (side) agreements. The transfer of title to the purchaser additionally requires an agreement in rem between the seller and the purchaser on the transfer (conveyance) and the subsequent registration of the transfer in the land register. To avoid additional notarial fees, parties usually include the conveyance in the notarial real estate purchase agreement. Amendment agreements to real estate purchase agreements are quite common (e.g., the parties subsequently agree on a purchase price adjustment or the purchaser has special requests in a real estate development scenario). Various Higher District Courts (Oberlandesgerichte), together with the prevailing opinion in literature, have held in the past that any amendments to real estate purchase agreements also require notarization unless such an amendment is designed to remove unforeseeable difficulties with the implementation of the agreement without significantly changing the parties’ mutual obligations. Any amendment agreement that does not meet the notarization requirement may render the entire purchase agreement (and not only the amendment agreement) null and void. With its decision on September 14, 2018, the German Federal Supreme Court (Bundesgerichtshof – BGH) added another exception to the notarization requirement and ruled that notarization of an amendment agreement is not required once the conveyance has become binding and the amendment does not change the existing real estate transfer obligations or create new ones. A conveyance becomes binding once it has been validly notarized. Before this new decision of the BGH, amendments to real estate purchase agreements were often notarized for the sake of precaution because it was difficult to determine whether the conditions for an exemption from the notarization requirement had been met. This new decision of the BGH gives the parties clear guidance as to when amendments to real estate purchase agreements require notarization. It should, however, be borne in mind that notarization is still required if the amendment provides for new transfer obligations concerning the real property or the conveyance has not become effective yet (e.g., because third party approval is still outstanding). Back to Top 6. Compliance 6.1 Government Plans to Introduce Corporate Criminal Liability and Internal Investigations Act Plans of the Federal Government to introduce a new statute concerning corporate criminal liability and internal investigations are taking shape. Although a draft bill had already been announced for the end of 2018, pressure to respond to recent corporate scandals seems to be rising. With regard to the role and protection of work product generated during internal investigations, the highly disputed decisions of the Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) in June 2018 (BVerfG, 2 BvR 1405/17, 2 BvR 1780/17 – June 27, 2018) (see 2017 Year-End German Law Update under 7.3) call for clearer statutory rules concerning the search of law firm premises and the seizure of documents collected in the course of an internal investigation. In its dismissal of complaints brought by Volkswagen and its lawyers from Jones Day, the Federal Constitutional Court made remarkable obiter dicta statements in which it emphasized the following: (1) the legal privilege enjoyed for the communication between the individual defendant (Beschuldigter) and its criminal defense counsel is limited to their communication only; (2) being considered a foreign corporate body, the court denied Jones Day standing in the proceedings, because the German constitution only grants rights to corporate bodies domiciled in Germany; and (3) a search of the offices of a law firm does not affect individual constitutional rights of the lawyers practicing in that office, because the office does not belong to the lawyers’ personal sphere, but only to their law firm. The decision and the additional exposure caused by it by making attorney work product created in the course of an internal investigation accessible was a major blow to German corporations’ efforts to foster internal investigations as a means to efficiently and effectively investigate serious compliance concerns. Because it does not appear likely that an entirely new statute concerning corporate criminal liability will materialize in the near future, the legal press expects the Federal Ministry of Justice to consider an approach in which the statutes dealing with questions around internal investigations and the protection of work product created in the course thereof will be clarified separately. In the meantime, the following measures are recommended to maximize the legal privilege for defense counsel (Verteidigerprivileg): (1) Establish clear instructions to an individual criminal defense lawyer setting forth the scope and purpose of the defense; (2) mark work product and communications that have been created in the course of the defense clearly as confidential correspondence with defense counsel (“Vertrauliche Verteidigerkorrespondenz”); and (3) clearly separate such correspondence from other correspondence with the same client in matters that are not clearly attributable to the criminal defense mandate. While none of these measures will guarantee that state prosecutors and courts will abstain from a search and seizure of such material, at least there are good and valid arguments to defend the legal privilege in any appeals process. However, with the guidance provided to courts by the recent constitutional decision, until new statutory provisions provide for clearer guidance, companies can expect this to become an up-hill battle. Back to Top 6.2 Update on the European Public Prosecutor’s Office and Proposed Cross-Border Electronic Evidence Rules Recently the European Union has started tightening its cooperation in the field of criminal procedure, which was previously viewed as a matter of national law under the sovereignty of the 28 EU member states. Two recent developments stand out that illustrate that remarkable new trend: (1) The introduction of the European Public Prosecutor’s Office (“EPPO”) that was given jurisdiction to conduct EU-wide investigations for certain matters independent of the prosecution of these matters under the national laws of the member states, and (2) the proposed EU-wide framework for cross-border access to electronically stored data (“e-evidence”) which has recently been introduced to the European Parliament. As reported previously (see 2017 Year-End German Law Update under 7.4), the European Prosecutor’s Office’s task is to independently investigate and prosecute severe crimes against the EU’s financial interests such as fraud against the EU budget or crimes related to EU subsidies. Corporations receiving funds from the EU may therefore be the first to be scrutinized by this new EU body. In 2018 two additional EU member states, the Netherlands and Malta, decided to join this initiative, extending the number of participating member states to 22. The EPPO will presumably begin its work by the end of 2020, because the start date may not be earlier than three years after the regulation’s entry into force. As a further measure to leverage multi-jurisdictional enforcement activities, in April 2018 the European Commission proposed a directive and a regulation that will significantly facilitate expedited cross-border access to e-evidence such as texts, emails or messaging apps by enforcement agencies and judicial authorities. The proposed framework would allow national enforcement authorities in accordance with their domestic procedure to request e-evidence directly from a service provider located in the jurisdiction of another EU member state. That other state’s authorities would not have the right to object to or to review the decision to search and seize the e-evidence sought by the national enforcement authority of the requesting EU member state. Companies refusing delivery risk a fine of up to 2% of their worldwide annual turnover. In addition, providers from a third country which operate in the EU are obliged to appoint a legal representative in the EU. The proposal has reached a majority vote in the Council of the EU and will now be negotiated in the European Parliament. Further controversial discussions between the European Parliament and the Commission took place on December 10, 2018. The Council of the EU aims at reaching an agreement between the three institutions by the end of term of the European Parliament in May 2019. Back to Top 7. Antitrust and Merger Control 7.1 Antitrust and Merger Control Overview 2018 In 2018, Germany celebrated the 60th anniversary of both the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen -GWB) as well as the German federal cartel office (Bundeskartellamt) which were both established in 1958 and have since played a leading role in competition enforcement worldwide. The celebrations notwithstanding, the German antitrust watchdog has had a very active year in substantially all of its areas of competence. On the enforcement side, the Bundeskartellamt concluded a number of important cartel investigations. According to its annual review, the Bundeskartellamt carried out dawn raids at 51 companies and imposed fines totaling EUR 376 million against 22 companies or associations and 20 individuals from various industries including the steel, potato manufacturing, newspapers and rolled asphalt industries. Leniency applications remained an important source for the Bundeskartellamt‘s antitrust enforcement activities with a total of 21 leniency applications received in 2018 filling the pipeline for the next few months and years. On the merger control side, the Bundeskartellamt reviewed approximately 1,300 merger cases in 2018 – only 1% of which (i.e. 13 merger filings) required an in-depth phase 2 review. No mergers were prohibited but in one case only conditional clearance was granted and three filings were withdrawn in phase 2. In addition, the Bundeskartellamt had its first full year of additional responsibilities in the area of consumer protection, concluded a sector inquiry into internet comparison portals, and started a sector inquiry into the online marketing business as well as a joint project with the French competition authority CNIL regarding algorithms in the digital economy and their competitive effects. Back to Top 7.2 Cartel Damages Over the past few years, antitrust damages law has advanced in Germany and the European Union. One major legislative development was the EU Directive on actions for damages for infringements of competition law, which was implemented in Germany as part of the 9th amendment to the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen -GWB). In addition, there has also been some noteworthy case law concerning antitrust damages. To begin with, the German Federal Supreme Court (Bundesgerichtshof, BGH) strengthened the position of plaintiffs suing for antitrust damages in its decision Grauzementkartell II in 2018. The decision brought to an end an ongoing dispute between several Higher District Courts and District Courts, which had disagreed over whether a recently added provision of the GWB that suspends the statute of limitations in cases where antitrust authorities initiate investigations would also apply to claims that arose before the amendment entered into force (July 1, 2015). The Federal Supreme Court affirmed the suspension of the statute of limitations, basing its ruling on a well-established principle of German law regarding the intertemporal application of statutes of limitation. The decision concerns numerous antitrust damage suits, including several pending cases concerning trucks, rails tracks, and sugar cartels. Furthermore, recent case law shows that European domestic courts interpret arbitration agreements very broadly and also enforce them in cases involving antitrust damages. In 2017, the England and Wales High Court and the District Court Dortmund (Landgericht Dortmund) were presented with two antitrust disputes where the parties had agreed on an arbitration clause. Both courts denied jurisdiction because the antitrust damage claims were also covered by the arbitration agreements. They argued that the parties could have asserted claims for contractual damages instead, which would have been covered by the arbitration agreement. In the courts’ view, it would be unreasonable, however, if the choice between asserting a contractual or an antitrust claim would give the parties the opportunity to influence the jurisdiction of a court. As a consequence, the use of arbitration clauses (in particular if inconsistently used by suppliers or purchasers) may add significant complexity to antitrust damages litigation going forward. Thus, companies are well advised to examine their international supply agreements to determine whether included arbitration agreements will also apply to disputes about antitrust damages. Back to Top 7.3 Appeals against Fines Risky? In German antitrust proceedings, there is increasing pressure for enterprises to settle. Earlier this year, Radeberger, a producer of lager beer, withdrew its appeal against a significant fine of EUR 338 million, which the Bundeskartellamt had imposed on the company for its alleged participation in the so-called “beer cartel”. With this dramatic step, Radeberger paid heed to a worrisome development in German competition law. Repeatedly, enterprises have seen their cartel fines increased by staggering amounts on appeal (despite such appeals sometimes succeeding on some substantive legal issues). The reason for these “appeals for the worse” – as seen in the liquefied gas cartel (increase of fine from EUR 180 million to EUR 244 million), the sweets cartel (average increase of approx. 50%) and the wallpaper cartel (average increase of approx. 35%) – is the different approach taken by the Bundeskartellamt and the courts to calculating fines. As courts are not bound by the administrative practice of the Bundeskartellamt, many practitioners are calling for the legislator to step in and address the issue. Back to Top 7.4 Luxury Products on Amazon – The Coty Case In July 2018, the Frankfurt Higher District Court (Oberlandesgericht Frankfurt) delivered its judgement in the case Coty / Parfümerie Akzente, ruling that Coty, a luxury perfume producer, did not violate competition rules by imposing an obligation on its selected distributors to not sell on third-party platforms such as Amazon. The judgment followed an earlier decision of the Court of Justice of the European Union (ECJ) of December 2017, by which the ECJ had replied to the Frankfurt court’s referral. The ECJ had held that a vertical distribution agreement (such as the one in place between Coty and its distributor Parfümerie Akzente) did not as such violate Art. 101 of the Treaty on the Functioning of the European Union (TFEU) as long as the so-called Metro criteria were fulfilled. These criteria stipulate that distributors must be chosen on the basis of objective and qualitative criteria that are applied in a non-discriminatory fashion; that the characteristics of the product necessitate the use of a selective distribution network in order to preserve their quality; and, finally, that the criteria laid down do not go beyond what is necessary. Regarding the platform ban in question, the ECJ held that it was not disproportionate. Based on the ECJ’s interpretation of the law, the Frankfurt Higher District Court confirmed that the character of certain products may indeed necessitate a selective distribution system in order to preserve their prestigious reputation, which allowed consumers to distinguish them from similar goods, and that gaps in a selective distribution system (e.g. when products are sold by non-selected distributors) did not per se make the distribution system discriminatory. The Higher District Court also concluded that the platform ban in question was proportional. However, interestingly, it did not do so based on its own reasoning but based on the fact that the ECJ’s detailed analysis did not leave any scope for its own interpretation and, hence, precluded the Higher District Court from applying its own reasoning. Pointing to the European Commission’s E-Commerce Sector Inquiry, according to which sales platforms play a more important role in Germany than in other EU Member States, the Higher District Court, in fact, voiced doubts whether Coty’s sales ban could not have been imposed in a less interfering manner. Back to Top 8. Litigation 8.1 The New German “Class Action” On November 1, 2018, a long anticipated amendment to the German Code of Civil Procedure (Zivilprozessordnung, ZPO) entered into force, introducing a new procedural remedy for consumers to enforce their rights in German courts: a collective action for declaratory relief. Although sometimes referred to as the new German “class action,” this new German action reveals distinct differences to the U.S.-American remedy. Foremost, the right to bring the collective action is limited to consumer protection organizations or other “qualified institutions” (qualifizierte Einrichtung) who can only represent “consumers” within the meaning of the German Code of Civil Procedure. In addition, affected consumers are not automatically included in the action as part of a class but must actively opt-in by registering their claims in a “claim index” (Klageregister). Furthermore, the collective action for declaratory relief does not grant any monetary relief to the plaintiffs which means that each consumer still has to enforce its claim in an individual suit to receive compensation from the defendant. Despite these differences, the essential and comparable element of the new legal remedy is its binding effect. Any other court which has to decide an individual dispute between the defendant and a registered consumer that is based on the same facts as the collective action is bound by the declaratory decision of the initial court. At the same time, any settlement reached by the parties has a binding effect on all registered consumers who did not decide to specifically opt-out. As a result, companies must be aware of the increased litigation risks arising from the introduction of the new collective action for declaratory relief. Even though its reach is not as extensive as the American class action, consumer protection organizations have already filed two proceedings against companies from the automotive and financial industry since the amendment has entered into force in November 2018, and will most likely continue to make comprehensive use of the new remedy in the future. Back to Top 8.2 The New 2018 DIS Arbitration Rules On March 1, 2018, the new 2018 DIS Arbitration Rules of the German Arbitration Institute (DIS) entered into force. The update aims to make Germany more attractive as a place for arbitration by adjusting the rules to international standards, promoting efficiency and thereby ensuring higher quality for arbitration proceedings. The majority of the updated provisions and rules are designed to accelerate the proceedings and thereby make arbitration more attractive and cost-effective for the parties. There are several new rules on time limitations and measures to enhance procedural efficiency, i.e. the possibility of expedited proceedings or the introduction of case management conferences. Furthermore, the rules now also allow for consolidation of several arbitrations and cover multi-party and multi-contract arbitration. Another major change is the introduction of the DIS Arbitration Council which, similar to the Arbitration Council of the ICC (International Chamber of Commerce), may decide upon challenges of an arbitrator and review arbitral awards for formal defects. This amendment shows that the influence of DIS on their arbitration proceedings has grown significantly. All in all, the modernized 2018 DIS Arbitration Rules resolve the deficiencies of their predecessor and strengthen the position of the German Institution of Arbitration among competing arbitration institutions. Back to Top 9. IP & Technology – Draft Bill of German Trade Secret Act The EU Trade Secrets Directive (2016/943/EU) on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure has already been in effect since July 5, 2016. Even though it was supposed to be implemented into national law by June 9, 2018 to harmonize the protection of trade secrets in the EU, the German legislator has so far only prepared and published a draft of the proposed German Trade Secret Act. Arguably, the most important change in the draft bill to the existing rules on trade secrets in Germany will be a new and EU-wide definition of trade secrets. This proposed definition requires the holder of a trade secret to take reasonable measures to keep a trade secret confidential in order to benefit from its protection – e.g. by implementing technical, contractual and organizational measures that ensure secrecy. This requirement goes beyond the current standard pursuant to which a manifest interest in keeping an information secret may be sufficient. Furthermore, the draft bill provides for additional protection of trade secrets in litigation matters. Last but not least, the draft bill also provides for increased protection of whistleblowers by reducing the barriers for the disclosure of trade secrets in the public interest and to the media. As a consequence, companies would be advised to review their internal procedures and policies regarding the protection of trade secrets at this stage, and may want to adapt their existing whistleblowing and compliance-management-systems as appropriate. Back to Top 10. International Trade, Sanctions and Export Controls – The Conflict between Complying with the Re-Imposed U.S. Iran Sanctions and the EU Blocking Statute On May 8, 2018, President Donald Trump announced his decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA) and re-impose U.S. nuclear-related sanctions. Under the JCPOA, General License H had permitted U.S.-owned or -controlled non-U.S. entities to engage in business with Iran. But with the end of the wind-down periods provided for in President Trump’s decision on November 5, 2018, such non-U.S. entities are now no longer broadly permitted to provide goods, services, or financing to Iranian counterparties, not even under agreements executed before the U.S. withdrawal from the JCPOA. In response to the May 8, 2018 decision, the EU amended the EU Blocking Statute on August 6, 2018. The effect of the amended EU Blocking Statute is to prohibit compliance by so-called EU operators with the re-imposed U.S. sanctions on Iran. Comparable and more generally drafted anti-blocking statutes had already existed in the EU and several of its member states which prohibited EU domiciled companies to commit to compliance with foreign boycott regulations. These competing obligations under EU and U.S. laws are a concern for U.S. companies that own or seek to acquire German companies that have a history of engagement with Iran – as well as for the German company itself and its management and the employees. But what does the EU prohibition against compliance with the re-imposed U.S. sanctions on Iran mean in practice? Most importantly, it must be noted that the EU Blocking Statute does not oblige EU operators to start or continue Iran related business. If, for example, an EU operator voluntarily decides, e.g. due to lack of profitability, to cease business operations in Iran and not to demonstrate compliance with the U.S. sanctions, the EU Blocking Statute does not apply. Obviously, such voluntary decision must be properly documented. Procedural aspects also remain challenging for companies: In the event a Germany subsidiary of a U.S. company were to decide to start or continue business with Iran, it would usually be required to reach out to the U.S. authorities to request a specific license for a particular transaction with Iran. Before doing so, however, EU operators must first contact the EU Commission directly (not the EU member state authorities) to request authorization to apply for such a U.S. special license. Likewise, if a Germany subsidiary were to decide not to start or to cease business with Iran for the sole reason of being compliant with the re-imposed U.S. Iran sanctions, it would have to apply for an exception from the EU Blocking Statute and would have to provide sufficient evidence that non-compliance would cause serious damage to at least one protected interest. The hurdles for an exception are high and difficult to predict. The EU Commission will e.g. consider, “(…) whether the applicant would face significant economic losses, which could for example threaten its viability or pose a serious risk of bankruptcy, or the security of supply of strategic goods or services within or to the Union or a Member State and the impact of any shortage or disruption therein.” As such, any company caught up in this conflict of interests between the re-imposed U.S. sanctions and the EU Blocking Statute should be aware of a heightened risk of litigation. Third parties, such as Iranian counterparties, might successfully sue for breach of contract with the support of the EU Blocking Regulation in cases of non-performance of contracts as a result of the re-imposed U.S. nuclear sanctions. Finally, EU operators are required to inform the EU Commission within 30 days from the date on which information is obtained that the economic and/or financial interests of the EU operator are affected, directly or indirectly, by the re-imposed U.S. Iran sanctions. If the EU operator is a legal person, this obligation is incumbent on its directors, managers and other persons with management responsibilities of such legal person. Back to Top The following Gibson Dunn lawyers assisted in preparing this client update: Birgit Friedl, Marcus Geiss, Silke Beiter, Lutz Englisch, Daniel Gebauer, Kai Gesing, Maximilian Hoffmann, Philipp Mangini-Guidano, Jens-Olrik Murach, Markus Nauheim, Dirk Oberbracht, Richard Roeder, Martin Schmid, Annekatrin Schmoll, Jan Schubert, Benno Schwarz, Balthasar Strunz, Michael Walther, Finn Zeidler, Mark Zimmer, Stefanie Zirkel and Caroline Ziser Smith. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The two German offices of Gibson Dunn in Munich and Frankfurt bring together lawyers with extensive knowledge of corporate, tax, labor, real estate, antitrust, intellectual property law and extensive compliance / white collar crime experience. The German offices are comprised of seasoned lawyers with a breadth of experience who have assisted clients in various industries and in jurisdictions around the world. Our German lawyers work closely with the firm’s practice groups in other jurisdictions to provide cutting-edge legal advice and guidance in the most complex transactions and legal matters. For further information, please contact the Gibson Dunn lawyer with whom you work or any of the following members of the German offices: General Corporate, Corporate Transactions and Capital Markets Lutz Englisch (+49 89 189 33 150), lenglisch@gibsondunn.com) Markus Nauheim (+49 89 189 33 122, mnauheim@gibsondunn.com) Ferdinand Fromholzer (+49 89 189 33 121, ffromholzer@gibsondunn.com) Dirk Oberbracht (+49 69 247 411 510, doberbracht@gibsondunn.com) Wilhelm Reinhardt (+49 69 247 411 520, wreinhardt@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Silke Beiter (+49 89 189 33 121, sbeiter@gibsondunn.com) Marcus Geiss (+49 89 189 33 122, mgeiss@gibsondunn.com) Annekatrin Pelster (+49 69 247 411 521, apelster@gibsondunn.com Finance, Restructuring and Insolvency Sebastian Schoon (+49 89 189 33 160, sschoon@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Alexander Klein (+49 69 247 411 518, aklein@gibsondunn.com) Marcus Geiss (+49 89 189 33 122, mgeiss@gibsondunn.com) Tax Hans Martin Schmid (+49 89 189 33 110, mschmid@gibsondunn.com) Labor Law Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Real Estate Peter Decker (+49 89 189 33 115, pdecker@gibsondunn.com) Daniel Gebauer (+49 89 189 33 115, dgebauer@gibsondunn.com) Technology Transactions / Intellectual Property / Data Privacy Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Corporate Compliance / White Collar Matters Benno Schwarz (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 530, fzeidler@gibsondunn.com) Antitrust Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Jens-Olrik Murach (+32 2 554 7240, jmurach@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Litigation Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 530, fzeidler@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) International Trade, Sanctions and Export Control Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Richard Roeder (+49 89 189 33 218, rroeder@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Supreme Court Rejects “Wholly Groundless” Exception To Rule That Parties May Refer Arbitrability Disputes To Arbitration
Click for PDF Decided January 8, 2019 Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272 The Supreme Court held 9-0 that courts may not decline to enforce agreements delegating arbitrability issues to an arbitrator, even if the court concludes that the claim of arbitrability is “wholly groundless.” Background: The Federal Arbitration Act generally permits courts to decide whether a contract requires arbitration of a dispute. The Act, however, also requires courts to interpret contracts as written, and the Supreme Court has held that an arbitration agreement may “clearly” and “unmistakably” refer the arbitrability issue to an arbitrator. Here, the defendants in an antitrust lawsuit sought to compel arbitration, citing a clause in their contracts with the plaintiff requiring arbitration of any “dispute arising under or related to” the contracts, “except for actions seeking injunctive relief.” Although the plaintiff sought both damages and injunctive relief, the defendants argued that arbitration was required because damages were the predominant form of relief requested. The Fifth Circuit held that the trial court properly declined to refer the arbitrability issue to an arbitrator because the plaintiff’s claim for injunctive relief made the defendants’ request for arbitration “wholly groundless.” Issue: May a court decline to enforce an agreement delegating arbitrability issues to an arbitrator, and resolve arbitrability disputes itself, if it concludes that the claim of arbitrability is “wholly groundless”? Court’s Holding: No. Courts must enforce agreements to delegate arbitrability issues to an arbitrator, even if the court concludes that a claim of arbitrability is “wholly groundless,” because the Federal Arbitration Act does not contain a “wholly groundless” exception. “The [Federal Arbitration] Act does not contain a ‘wholly groundless’ exception. . . . When the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.” Justice Kavanaugh, writing for the unanimous Court What It Means: In Justice Kavanaugh’s first opinion, the Court was “dubious” that recognizing a “wholly groundless” exception would save time and money, as such an exception would “inevitably spark collateral litigation” over whether a claim for arbitration is “groundless,” as opposed to “wholly groundless.” The decision removes an opportunity for plaintiffs to avoid arbitration of threshold issues of arbitrability where a contract has delegated those issues to an arbitrator. The Court emphasized again the importance of enforcing arbitration agreements as they are drafted and refusing to create exceptions that would permit judicial second-guessing of arbitration agreements. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Labor and Employment Practice Catherine A. Conway +1 213.229.7822 cconway@gibsondunn.com Jason C. Schwartz +1 202.955.8242 jschwartz@gibsondunn.com © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Washingtonian magazine named five DC partners to its 2018 Top Lawyers, featuring “[t]he area’s star legal talent” in their respective practice areas: Karen Manos was named a Top Lawyer in Government Contracts – Karen is Chair of the firm’s Government Contracts Practice Group. She has nearly 30 years’ experience on a broad range of government contracts issues, including civil and criminal fraud investigations and litigation, complex claims preparation and litigation, bid protests, qui tam suits under the False Claims Act, defective pricing, cost allowability, the Cost Accounting Standards, and corporate compliance programs Eugene Scalia was named a Top Lawyer in Employment Defense – Co-Chair of the Administrative Law and Regulatory Practice Group, Gene has a national practice handling a broad range of labor, employment, appellate, and regulatory matters. His success bringing legal challenges to federal agency actions has been widely reported in the legal and business press Jason Schwartz was recognized as a Top Lawyer in Employment Defense – Jason’s practice includes sensitive workplace investigations, high-profile trade secret and non-compete matters, wage-hour and discrimination class actions, Sarbanes-Oxley and other whistleblower protection claims, executive and other significant employment disputes, labor union controversies, and workplace safety litigation F. Joseph Warin is a Top Lawyer in Criminal Defense, White Collar – Co-chair of the firm’s global White Collar Defense and Investigations Practice Group. His practice includes complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation Joseph West was named a Top Lawyer in Government Contracts – Joe concentrates his practice on contract counseling, compliance/enforcement, and dispute resolution. He has represented both contractors and government agencies, and has been involved in cases before various United States Courts of Appeals and District Courts, the United States Court of Federal Claims, numerous Federal Government Boards of Contract Appeals, and both the United States Government Accountability Office and Small Business Administration The list was published in the December 2018 issue.
California Court of Appeal Decision Creates Uncertainty Regarding the Continued Enforceability of Employee Non-Solicitation Provisions
Click for PDF A new ruling from a California Court of Appeal calls into question the common wisdom in California that, while non-competes are generally barred, reasonable employee non-solicitation provisions are enforceable. Earlier this month, in AMN Healthcare, Inc. v. Aya Healthcare Servs., Inc., a California Court of Appeal ruled that an employer could not enforce its employee non-solicit against former company recruiters, after finding that the clause would keep the recruiters from performing their jobs in violation of California Business and Professions Code §16600.[1] For the last 30 years, employers have cited Loral Corp. v. Moyes (1985) 174 Cal. App. 3d 268, 279-80, in support of their employee non-solicits under California law—but in AMN Healthcare, the Court of Appeal expressed doubt regarding Loral‘s continued viability. The AMN Healthcare Court stopped short of overruling Loral, and instead expressly distinguished it, providing employers with the ability to argue that Loral may still remain good law. Nonetheless, going forward, employers should carefully consider whether to include employee non-solicits in their employment contracts with California employees. Employee Non-Solicits Long Viewed as Enforceable in California Under California law, all employees owe their employer a fiduciary duty of loyalty during their employment. Once the employment relationship ends, however, such duties end automatically and only legally enforceable, contractually-negotiated duties remain. As a result, employers have historically sought to exercise some measure of control over the mobility of former employees by employing three types of post-employment restrictive covenants: (1) non-competes (i.e., clauses preventing former employees from working in the same field or in the same geographic region in which the former employer operates); (2) customer non-solicits (i.e., clauses preventing former employees from soliciting their former employer’s customers for their own business purposes); and (3) employee non-solicits (i.e., clauses preventing former employees from soliciting their former employer’s current employees for employment opportunities elsewhere).[2] Subject only to three narrow statutory exceptions,[3] California courts have long held that both non-competes and customer non-solicits are void and unenforceable as against public policy under California Business and Professions Code §16600, which provides “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”[4] Likewise, broad “no-hire” covenants entered into between two business entities (i.e., contractual arrangements between a vendor and a client, etc., to the effect that neither entity will hire individuals employed by the other entity) have also been found to be unenforceable, on similar grounds.[5] In contrast, however, narrowly drawn employee non-solicits have historically been viewed as enforceable, ever since Loral Corp. v. Moyes (1985) 174 Cal. App. 3d 268, where a California Court of Appeal concluded that employee non-solicits only “slightly” affect employment opportunities, and thus do not constitute unreasonable restraints on trade that run afoul of Section 16600. For more than 30 years now, employers have cited Loral as the touchstone decision in support of the proposition that reasonable employee non-solicits remain enforceable. Indeed, despite several potential challenges under Section 16600 over the years, Loral and the employee non-solicit have survived. For example, in Edwards v. Arthur Andersen LLP (2008) 44 Cal. 4th 937, the Supreme Court stated that Section 16600 establishes a bright-line “per se” rule, which invalidates any post-employment covenant that has the practical effect of restraining a former employee’s ability to work in his or her chosen profession (subject only to the narrow statutory carve-outs noted above).[6] And yet, despite its bright line rule, the Supreme Court did not overrule Loral—in fact, the Edwards decision actually cites Loral approvingly (albeit for an unrelated legal proposition).[7] Likewise, one post-Edwards Court of Appeal decision (Fillpoint, LLC v. Maas (2012) 208 Cal. App. 4th 1170) reveals similar tension with Loral‘s reasoning, specifically by striking down a customer non-solicit—but Fillpoint did not directly address Loral or even the employee non-solicit found in the Fillpoint contract. Up until AMN Healthcare, no further appellate decisions have addressed the continuing viability of Loral; as a result, parties have continued to cite Loral as support for the enforceability of employee non-solicits. AMN Healthcare Calls the Employee Non-Solicit into Question On November 1, 2018, however, a California Court of Appeal, in AMN Healthcare, Inc. v. Aya Healthcare Servs., Inc., finally issued a published decision that directly addresses Loral—finding it factually distinguishable, but also expressing skepticism about its continued viability. The employer in question, AMN Healthcare, Inc. (“AMN”), is a recruiter and provider of temporary healthcare professionals, specifically travel nurses, to health-care facilities. The defendants, several former AMN recruiters, were all required to sign Confidentiality and Non-Disclosure Agreements (“CNDAs”) which prevented them from soliciting any other AMN employees for a period of one year following their terminations from AMN. In addition, the CNDAs also required defendants not to disclose confidential information (including information related to customers, marketing and development, and financial information) to third parties. After defendants left AMN to work for competitor Aya Healthcare Services (“Aya”), they solicited AMN travel nurses to join Aya—relying on information that they allegedly learned while working at AMN. AMN brought suit against both the former employees and Aya, claiming violations of the CNDA (including the employee non-solicit) and related torts. The trial court granted Aya’s motion for summary judgment after finding that the employee non-solicit within the CNDA was void as against public policy under Section 16600. AMN appealed. The Court of Appeal affirmed the trial court’s decision, holding that the employee non-solicit unlawfully restricted the former AMN recruiters from practicing their chosen profession—i.e., recruiting travel nurses—in violation of Section 16600. The Court of Appeal stressed that in Edwards, the California Supreme Court expressly rejected the Ninth Circuit’s “narrow restraint exception” to Section 16600, making illegal only those restraints which completely preclude one from engaging in their chosen profession.[8] The Edwards Court found that this clearly contradicted both the “unambiguous” language of Section 16600 and California’s fundamental public policy in favor of promoting employee mobility.[9] While declining to reject Loral outright, the Court of Appeal in AMN Healthcare thus noted that Edwards, which held that Section 16600 was unambiguous and applied to even narrowly tailored post-employment covenants, cast “doubt [on] the continuing viability of [Loral] post-Edwards.”[10] Nevertheless, the Court of Appeal expressly recognized that Loral is factually distinguishable from AMN Healthcare. Unlike a former executive officer’s ability to solicit employees (which was at issue in Loral), a recruiter’s job necessarily involves the solicitation of employees. In this way, the non-solicit in AMN Healthcare works like a traditional non-compete, by preventing the recruiters from doing their job. The same may not be true (at least to the same degree) with respect to most other types of employees, making AMN Healthcare very unique.[11] And the Court of Appeal also observed that the employee non-solicit period in question in AMN Healthcare extended for a full year, even though temporary nursing assignments typically last only 13 weeks. Under the facts of the case, this was held as an unreasonable time restriction—another way in which the AMN Healthcare decision may be factually distinguishable from Loral (where the restrictive covenant in question was found to be reasonable in both scope and duration).[12] How Do Employers Make Sense of AMN Healthcare? By distinguishing Loral rather than outright overruling it, the AMN Healthcare Court left uncertain the ongoing viability of employee non-solicits under California law. This uncertainty is unlikely to be resolved unless and until the Supreme Court of California—which has already had ample opportunity to overturn Loral, and which previously declined to do so in Edwards—definitively decides the matter.[13] In light of this uncertainty, prudent employers may now wish to reconsider the potential risks and rewards of continuing to include employee non-solicits in future contracts with California employees. For example, although the employer would have strong arguments that the law is, at best, unsettled, plaintiff’s counsel might seek to impose liability for the use of an allegedly unlawful post-employment covenant under the California Labor Code, California’s Unfair Competition law, or California common law. On the other hand, employee non-solicits can be an incredibly valuable tool to employers seeking to protect their business from being raided by former employees. Indeed, in emerging technology sectors, among others, qualified, knowledgeable workers may be the employer’s most valuable asset. And enforceable non-solicits create a certain level of stability for a company, helping to reduce the risk that the departure of a key employee does not result in a mass exodus of other valuable employees. [1] AMN Healthcare, Inc. v. Aya Healthcare Servs., Inc. (2018) No. D071924, 2018 WL 5669154, at *8. [2] Employees working in technical fields are also often required to execute invention assignment agreements (i.e., contracts under which the employee is required to disclose and assign to the employer any contributions and inventions relating to the employer’s business that were conceived or created during the employment period), and such provisions are generally enforceable under California law. California courts also routinely enforce both post-employment confidentiality and non-disclosure clauses, and California business owners additionally enjoy robust trade secret protection under the California Uniform Trade Secret Act, codified at California Civil Code § 3462, et seq. [3] The three narrow statutory exceptions are carved out under sections 16601-16602.5, which collectively provide that non-compete and employee non-solicitation agreements may be enforceable—if reasonable in scope and duration—against an individual who sells a business; a former business partner; and/or a former member of an LLC. [4] See, e.g., Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 948-950; Dowell v. Biosense Webster, Inc. (2009) 179 Cal. App. 4th 564, 574. [5] See, e.g., VL Systems, Inc. v. Unisen, Inc. (2007) 152 Cal. App. 4th 708. [6] Edwards, supra, 44 Cal. 4th at p. 948. [7] Id. at p. 954. [8] AMN, supra, 2018 WL 5669154, at p.*8. [9] Ibid. [10] Id. at p. *9. [11] Id. at p. *8. [12] Loral, supra, 174 Cal. App. 3d at p. 279. [13] Edwards, supra, 44 Cal. 4th at p. 954. The following Gibson Dunn lawyers assisted in preparing this client update: Catherine Conway, Jason Schwartz, Jesse Cripps, Katherine V.A. Smith, Adam Yarian and Kat Ryzewska. Gibson Dunn lawyers are available to assist in addressing any questions you may have about the AMN Healthcare decision, and in evaluating the risks and benefits of inserting non-solicits in future employment contracts with California employees. Please contact the Gibson Dunn lawyer with whom you usually work or the following Labor and Employment practice group leaders and members: Labor and Employment Group: Catherine A. Conway – Co-Chair, Los Angeles (+1 213-229-7822, cconway@gibsondunn.com) Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com) Jesse A. Cripps – Los Angeles (+1 213-229-7792, jcripps@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Michele L. Maryott – Orange County (+1 949-451-3945, mmaryott@gibsondunn.com) Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Gibson Dunn Ranked in the 2019 UK Legal 500
The UK Legal 500 2019 ranked Gibson Dunn in 13 practice areas and named six partners as Leading Lawyers. The firm was recognized in the following categories: Corporate and Commercial: Equity Capital Markets Corporate and Commercial: M&A – Upper Mid-Market and Premium Deals, £250m+ Corporate and Commercial: Private Equity – High-value Deals Dispute Resolution: Commercial Litigation Dispute Resolution: International Arbitration Finance: Acquisition Finance Finance: Bank Lending: Investment Grade Debt and Syndicated Loans Human Resources: Employment – Employers Public Sector: Administrative and Public Law Real Estate: Commercial Property – Hotels and Leisure Real Estate: Commercial Property – Investment Real Estate: Property Finance Risk Advisory: Regulatory Investigations and Corporate Crime The partners named as Leading Lawyers are Sandy Bhogal – Corporate and Commercial: Corporate Tax; Steve Thierbach – Corporate and Commercial: Equity Capital Markets; Philip Rocher – Dispute Resolution: Commercial Litigation; Cyrus Benson – Dispute Resolution: International Arbitration; Jeffrey Sullivan – Dispute Resolution: International Arbitration; and Alan Samson – Real Estate: Commercial Property and Real Estate: Property Finance. Claibourne Harrison has also been named as a Next Generation Lawyer for Real Estate: Commercial Property.
Surveying The State Of Workplace Harassment Investigations
Washington, D.C. partners Jason Schwartz and Greta Williams and associate Brittany Raia are the authors of “Surveying The State Of Workplace Harassment Investigations,” [PDF] published in Law360 on November 6, 2018.
SEC Warns Public Companies on Cyber-Fraud Controls
Click for PDF On October 16, 2018, the Securities and Exchange Commission issued a report warning public companies about the importance of internal controls to prevent cyber fraud. The report described the SEC Division of Enforcement’s investigation of multiple public companies which had collectively lost nearly $100 million in a range of cyber-scams typically involving phony emails requesting payments to vendors or corporate executives.[1] Although these types of cyber-crimes are common, the Enforcement Division notably investigated whether the failure of the companies’ internal accounting controls to prevent unauthorized payments violated the federal securities laws. The SEC ultimately declined to pursue enforcement actions, but nonetheless issued a report cautioning public companies about the importance of devising and maintaining a system of internal accounting controls sufficient to protect company assets. While the SEC has previously addressed the need for public companies to promptly disclose cybersecurity incidents, the new report sees the agency wading into corporate controls designed to mitigate such risks. The report encourages companies to calibrate existing internal controls, and related personnel training, to ensure they are responsive to emerging cyber threats. The report (issued to coincide with National Cybersecurity Awareness Month) clearly intends to warn public companies that future investigations may result in enforcement action. The Report of Investigation Section 21(a) of the Securities Exchange Act of 1934 empowers the SEC to issue a public Report of Investigation where deemed appropriate. While SEC investigations are confidential unless and until the SEC files an enforcement action alleging that an individual or entity has violated the federal securities laws, Section 21(a) reports provide a vehicle to publicize investigative findings even where no enforcement action is pursued. Such reports are used sparingly, perhaps every few years, typically to address emerging issues where the interpretation of the federal securities laws may be uncertain. (For instance, recent Section 21(a) reports have addressed the treatment of digital tokens as securities and the use of social media to disseminate material corporate information.) The October 16 report details the Enforcement Division’s investigations into the internal accounting controls of nine issuers, across multiple industries, that were victims of cyber-scams. The Division identified two specific types of cyber-fraud – typically referred to as business email compromises or “BECs” – that had been perpetrated. The first involved emails from persons claiming to be unaffiliated corporate executives, typically sent to finance personnel directing them to wire large sums of money to a foreign bank account for time-sensitive deals. These were often unsophisticated operations, textbook fakes that included urgent, secret requests, unusual foreign transactions, and spelling and grammatical errors. The second type of business email compromises were harder to detect. Perpetrators hacked real vendors’ accounts and sent invoices and requests for payments that appeared to be for otherwise legitimate transactions. As a result, issuers made payments on outstanding invoices to foreign accounts controlled by impersonators rather than their real vendors, often learning of the scam only when the legitimate vendor inquired into delinquent bills. According to the SEC, both types of frauds often succeeded, at least in part, because responsible personnel failed to understand their company’s existing cybersecurity controls or to appropriately question the veracity of the emails. The SEC explained that the frauds themselves were not sophisticated in design or in their use of technology; rather, they relied on “weaknesses in policies and procedures and human vulnerabilities that rendered the control environment ineffective.” SEC Cyber-Fraud Guidance Cybersecurity has been a high priority for the SEC dating back several years. The SEC has pursued a number of enforcement actions against registered securities firms arising out of data breaches or deficient controls. For example, just last month the SEC brought a settled action against a broker-dealer/investment-adviser which suffered a cyber-intrusion that had allegedly compromised the personal information of thousands of customers. The SEC alleged that the firm had failed to comply with securities regulations governing the safeguarding of customer information, including the Identity Theft Red Flags Rule.[2] The SEC has been less aggressive in pursuing cybersecurity-related actions against public companies. However, earlier this year, the SEC brought its first enforcement action against a public company for alleged delays in its disclosure of a large-scale data breach.[3] But such enforcement actions put the SEC in the difficult position of weighing charges against companies which are themselves victims of a crime. The SEC has thus tried to be measured in its approach to such actions, turning to speeches and public guidance rather than a large number of enforcement actions. (Indeed, the SEC has had to make the embarrassing disclosure that its own EDGAR online filing system had been hacked and sensitive information compromised.[4]) Hence, in February 2018, the SEC issued interpretive guidance for public companies regarding the disclosure of cybersecurity risks and incidents.[5] Among other things, the guidance counseled the timely public disclosure of material data breaches, recognizing that such disclosures need not compromise the company’s cybersecurity efforts. The guidance further discussed the need to maintain effective disclosure controls and procedures. However, the February guidance did not address specific controls to prevent cyber incidents in the first place. The new Report of Investigation takes the additional step of addressing not just corporate disclosures of cyber incidents, but the procedures companies are expected to maintain in order to prevent these breaches from occurring. The SEC noted that the internal controls provisions of the federal securities laws are not new, and based its report largely on the controls set forth in Section 13(b)(2)(B) of the Exchange Act. But the SEC emphasized that such controls must be “attuned to this kind of cyber-related fraud, as well as the critical role training plays in implementing controls that serve their purpose and protect assets in compliance with the federal securities laws.” The report noted that the issuers under investigation had procedures in place to authorize and process payment requests, yet were still victimized, at least in part “because the responsible personnel did not sufficiently understand the company’s existing controls or did not recognize indications in the emailed instructions that those communications lacked reliability.” The SEC concluded that public companies’ “internal accounting controls may need to be reassessed in light of emerging risks, including risks arising from cyber-related frauds” and “must calibrate their internal accounting controls to the current risk environment.” Unfortunately, the vagueness of such guidance leaves the burden on companies to determine how best to address emerging risks. Whether a company’s controls are adequate may be judged in hindsight by the Enforcement Division; not surprisingly, companies and individuals under investigation often find the staff asserting that, if the controls did not prevent the misconduct, they were by definition inadequate. Here, the SEC took a cautious approach in issuing a Section 21(a) report highlighting the risk rather than publicly identifying and penalizing the companies which had already been victimized by these scams. However, companies and their advisors should assume that, with this warning shot across the bow, the next investigation of a similar incident may result in more serious action. Persons responsible for designing and maintaining the company’s internal controls should consider whether improvements (such as enhanced trainings) are warranted; having now spoken on the issue, the Enforcement Division is likely to view corporate inaction as a factor in how it assesses the company’s liability for future data breaches and cyber-frauds. [1] SEC Press Release (Oct. 16, 2018), available at www.sec.gov/news/press-release/2018-236; the underlying report may be found at www.sec.gov/litigation/investreport/34-84429.pdf. [2] SEC Press Release (Sept. 16, 2018), available at www.sec.gov/news/press-release/2018-213. This enforcement action was particularly notable as the first occasion the SEC relied upon the rules requiring financial advisory firms to maintain a robust program for preventing identify theft, thus emphasizing the significance of those rules. [3] SEC Press Release (Apr. 24, 2018), available at www.sec.gov/news/press-release/2018-71. [4] SEC Press Release (Oct. 2, 2017), available at www.sec.gov/news/press-release/2017-186. [5] SEC Press Release (Feb. 21, 2018), available at www.sec.gov/news/press-release/2018-22; the guidance itself can be found at www.sec.gov/rules/interp/2018/33-10459.pdf. The SEC provided in-depth guidance in this release on disclosure processes and considerations related to cybersecurity risks and incidents, and complements some of the points highlighted in the Section 21A report. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Securities Enforcement or Privacy, Cybersecurity and Consumer Protection practice groups, or the following authors: Marc J. Fagel – San Francisco (+1 415-393-8332, mfagel@gibsondunn.com) Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com) Please also feel free to contact the following practice leaders and members: Securities Enforcement Group: New York Barry R. Goldsmith – Co-Chair (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark K. Schonfeld – Co-Chair (+1 212-351-2433, mschonfeld@gibsondunn.com) Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Laura Kathryn O’Boyle (+1 212-351-2304, loboyle@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Avi Weitzman (+1 212-351-2465, aweitzman@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Washington, D.C. Richard W. Grime – Co-Chair (+1 202-955-8219, rgrime@gibsondunn.com) Stephanie L. Brooker (+1 202-887-3502, sbrooker@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) San Francisco Marc J. Fagel – Co-Chair (+1 415-393-8332, mfagel@gibsondunn.com) Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) Thad A. Davis (+1 415-393-8251, tdavis@gibsondunn.com) Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8234, mwong@gibsondunn.com) Palo Alto Paul J. Collins (+1 650-849-5309, pcollins@gibsondunn.com) Benjamin B. Wagner (+1 650-849-5395, bwagner@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) Los Angeles Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas M. Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com) Privacy, Cybersecurity and Consumer Protection Group: Alexander H. Southwell – Co-Chair, New York (+1 212-351-3981, asouthwell@gibsondunn.com) M. Sean Royall – Dallas (+1 214-698-3256, sroyall@gibsondunn.com) Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com) Christopher Chorba – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Richard H. Cunningham – Denver (+1 303-298-5752, rhcunningham@gibsondunn.com) Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com) Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com) H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com) Shaalu Mehra – Palo Alto (+1 650-849-5282, smehra@gibsondunn.com) Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com) Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com) Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com) Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com) Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Click for PDF On September 30, 2018, Governor Edmund G. Brown signed several new workplace laws, and vetoed others, that arose out of the #MeToo movement. We briefly review the newly signed legislation and also highlight bills that Governor Brown rejected. Unless otherwise indicated, these new laws will take effect on January 1, 2019. New Requirements for Employers New Training Requirements Expanded Requirements for Harassment and Discrimination Training. Most California employers are aware that, under existing California law, employers with 50 or more employees must provide at least two hours of prescribed training regarding sexual harassment within six months of an individual’s hiring or promotion to a supervisory position and every two years while an employee remains in a supervisory position. SB 1343 expands this requirement in two critical ways: The training requirements now cover all employers with five or more employees, which includes temporary or seasonal employees, meaning that many smaller employers are now subject to California’s training requirements. All covered employers must now provide at least one hour of sexual harassment training to non-supervisory employees by January 1, 2020, and once every two years thereafter, which may greatly expand the scope of required training for employers with large line-level workforces. SB 1343 also requires the California Department of Fair Employment and Housing (DFEH) to make available online training courses that employers may use to meet these requirements. However, employers may wish to work with their counsel and Human Resources departments to develop training that is specific to their business and industry, which is generally regarded as more effective than “one size fits all” trainings. Education and Training for Employees in Entertainment Industry. AB 2338 requires, prior to the issuance of a permit to employ a minor in the entertainment industry, that the minor and the minor’s parents or legal guardians receive and complete sexual harassment training. The law also requires that talent agencies ensure that minors have a valid work permit, and that agencies provide adult artists with accessible educational material “regarding sexual harassment prevention, retaliation, and reporting resources,” as well as nutrition and eating disorders. Anti-Harassment Legislation Restrictions on Non-Disclosure and Confidentiality Agreements and More Rigorous Sexual Harassment Standards. SB 1300 amends California’s Fair Employment and Housing Act (FEHA) to prohibit an employer from requiring an employee to agree to a non-disparagement agreement or other document limiting the disclosure of information about unlawful workplace acts in exchange for a raise or bonus, or as a condition of employment or continued employment. Employers are also prohibited from requiring an individual to “execute a statement that he or she does not possess any claim or injury against the employer” or to release “a right to file and pursue a civil action or complaint with, or otherwise notify, a state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity.” Under the law, any such agreement is contrary to public policy and unenforceable. (Some of these activities, such as reporting to law enforcement, are already protected, of course.) While negotiated settlement agreements of civil claims supported by valuable consideration are exempted from these prohibitions, employers will want to review their various employee agreement templates to ensure none contain these or other types of prohibited clauses. SB 1300 also codifies several legal standards that may make it more challenging for employers to prevail on harassment claims before trial. For example, the law provides that a single incident of harassing conduct may create a triable issue of fact in a hostile work environment case; that it is irrelevant to a sexual harassment case that a particular occupation may have been characterized by more sexualized conduct in the past; and that “hostile working environment cases involve issues ‘not determinable on paper.'” Employers can expect to see SB 1300 cited in any plaintiff’s opposition to summary judgment in a sexual harassment case, and they will need to give serious consideration as to whether and how to seek summary judgment in light of the new law. Limitations on Confidentiality in Settlement Agreements. SB 820 prohibits provisions in settlement agreements entered into on or after January 1, 2019 that prevent the disclosure of facts related to sexual assault, harassment, and discrimination claims that have been “filed in a civil action or a complaint filed in an administrative action.” Note, however, that SB 820 does not prohibit provisions precluding the disclosure of the settlement payment amount, and the law carves out an exception for provisions protecting the identity of the claimant where requested by the claimant. Expanded Sexual Harassment Liability to Cover Certain Business Relationships. Businesses in the venture capital, entertainment, and similar industries will want to be alert to SB 224, which modifies California Civil Code section 51.9 and would include within the elements in a cause of action for sexual harassment when the plaintiff proves, among other things, that the “defendant holds himself or herself as being able to help the plaintiff establish a business, service, or professional relationship with the defendant or a third party.” The law identifies additional examples of potential defendants under the statute, such as investors, elected officials, lobbyists, directors, and producers. Limitations on Barring Testimony Related to Criminal Conduct or Sexual Harassment. AB 3109 prohibits waivers of a party’s right to testify in an administrative, legislative, or judicial proceeding concerning alleged criminal conduct or sexual harassment by the other party to a contract, when the party has been required or requested to attend the proceeding pursuant to a court order, subpoena, or written request from an administrative agency or the legislature. Mandating Gender Diversity on Boards of Directors for Publicly Held Corporations SB 826 requires a minimum number of female directors on the boards of publicly traded corporations with principal executive offices in California. The location of a corporation’s principal executive office will be determined by the Annual Report on Form 10-K. Under SB 826, a corporation covered by the law must have at least one female member on its board of directors by December 31, 2019, and additional female members by 2021 depending on the size of the board. If the corporation has a board of directors with: four members or less, no additional female directors are required; five members, the board must have at least two female directors by December 31, 2021; and six or more members, at least three female directors are required to be in place by December 31, 2021. The California Secretary of State can impose fines of $100,000 for a first violation and $300,000 for subsequent violations. Potential challengers of this law argue that it suffers from numerous legal deficiencies, including that it violates the Commerce Clause and the Equal Protection Clause of the United States Constitution. Indeed, Governor Brown himself acknowledged in his signing statement that this new law has “potential flaws that indeed may provide fatal to its ultimate implementation” and will likely be subject to challenge. For more information on SB 826, please consult our Securities Regulation and Corporate Governance group’s analysis, available here. Bills Vetoed by Governor Brown Governor Brown also vetoed several bills relating to sexual harassment that could have significantly impacted employers in California, including: The closely watched AB 3080, which sought to forbid mandatory arbitration agreements in the workplace. AB 1867, which sought to require employers with fifty or more employees to “maintain records of employee complaints alleging sexual harassment” for a period of five years after the last day of employment of either “the complainant or any alleged harasser named in the complaint, whichever is later.” AB 1870, which sought to extend the deadline in which a complainant may file an administrative charge with the DFEH alleging employment discrimination from one year to three years. AB 3081, which sought to require a client employer and a labor contractor to share all “civil legal responsibility and civil liability for harassment” for all workers supplied by that labor contractor and prohibit an employer from shifting its duties or liabilities to a labor contractor. Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. We have been engaged by numerous clients recently to conduct investigations of #MeToo complaints; to proactively review sexual harassment policies, practices and procedures for the protection of employees and the promotion of a safe, respectful and professional workplace; to conduct training for executives, managers and employees; and to handle related counseling and litigation. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work or the following Labor and Employment or Securities Regulation and Corporate Governance practice group leaders and members: Labor and Employment Group: Catherine A. Conway – Co-Chair, Los Angeles (+1 213-229-7822, cconway@gibsondunn.com) Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com) Jesse A. Cripps – Los Angeles (+1 213-229-7792, jcripps@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Michele L. Maryott – Orange County (+1 949-451-3945,mmaryott@gibsondunn.com) Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com) Securities Regulation and Corporate Governance Group: Elizabeth Ising – Co-Chair, Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Lori Zyskowski – Co-Chair, New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Update On Calif. Immigrant Worker Protection Act
Los Angeles partner Jesse Cripps and Washington, D.C. associate Ryan Stewart are the authors of “Update On Calif. Immigrant Worker Protection Act” [PDF] published in Law360 on September 17, 2018.
Jesse Cripps and Michele Maryott Named Among California’s Top Labor & Employment Lawyers
The Daily Journal named Los Angeles partner Jesse Cripps and Orange County partner Michele Maryott to its 2018 list of Top Labor and Employment Lawyers, which features attorneys based in California. The list was published on July 18, 2018.
Update on California Immigrant Worker Protection Act (AB 450)
Click for PDF On July 5, 2018, Judge John A. Mendez of the Eastern District of California issued an important ruling involving California employers’ legal obligations during federal immigration enforcement actions at the workplace. In the lawsuit at issue, the federal government seeks to invalidate a series of recent California “sanctuary” statutes, including AB 450, which imposes various restrictions and requirements on California employers, including that employers are not permitted to voluntarily consent to a federal agent’s request to access the worksite and employee records without a warrant. In his 60-page order yesterday, Judge Mendez granted in part and denied in part the federal government’s motion for preliminary injunction and forbade California and its officials from enforcing several portions of AB 450 during the pendency of the litigation. While private California employers will not be subject to many of AB 450’s requirements for the time being, the fight over AB 450 is likely to proceed, including at the appellate level. In the meantime, employers should make sure that they are knowledgeable about their obligations (and potential future obligations) under federal immigration law and AB 450 and seek counsel regarding how best to prepare for and ensure compliance with those obligations. Background California Governor Jerry Brown signed the Immigrant Worker Protection Act (also known as “Assembly Bill 450” or AB 450) into law on October 5, 2017. AB 450 became effective on January 1, 2018, and applies to both public and private employers. The statute prohibits employers from consenting to immigration enforcement agents’ access to the workplace or to employee records (unless permitted by judicial warrant) and also requires that employers provide prompt notice to employees of any impending inspection. Violations of these requirements may result in penalties of between $2,000 and $5,000 for the first offense, and up to $10,000 for subsequent offenses. The law does not provide for a private right of action; rather it is enforced exclusively through civil action by California’s Labor Commissioner or Attorney General, who recovers the penalties. AB 450 Requirements, The Specifics AB 450 sets forth several obligations (each of which is limited by the phrase, “except as otherwise required by federal law”) on employers that can be grouped into three main categories detailed below. The California Labor Commissioner and Attorney General also provided joint guidance that sheds additional light on the application of AB 450 available here: https://www.dir.ca.gov/dlse/AB_450_QA.pdf. Deny Access To Premises/Employee Records. Under the new law, employers are prohibited from “provid[ing] voluntary consent to an immigration enforcement agent’s [attempt] to enter any nonpublic areas of a place of labor.” Employers may only permit access when the agent provides a judicial warrant.[1] A judicial warrant must be issued by a court and signed by a judge.[2]Similarly, employers may not “provide voluntary consent to an immigration enforcement agent to access, review, or obtain the employer’s employee records.” Again, the employer may permit access when the agent provides a judicial warrant or subpoena or when the employer is providing access to I-9 Employment Eligibility Verification forms or other documents for which a Notice of Inspection (“NOI”) has been provided to the employer.[3]The state-provided guidance makes clear that “whether or not voluntary consent was given by the employer is a factual, case-by-case determination that will be made based on the totality of the circumstances in each specific situation,” but, at minimum, the new law “does not require physically blocking or physically interfering with an immigration enforcement agent in order to show that voluntary consent was not provided.” Provide Employees Notice. AB 450 requires employers to provide each current employee notice of any upcoming inspections of I-9 records or other employment records within 72 hours of receiving an NOI.[4] Notice must be posted in the language the employer normally communicates with its employees and contain (at minimum): (i) the name of the immigration agency conducting the inspection; (ii) the date the employer received the NOI; (iii) the nature of the inspection; and (iv) a copy of the NOI.After an inspection has been completed, employers must provide any affected employees (employees identified by the agency as potentially lacking work authorization or having deficiencies in their authorization documents) with notice of that information.[5] Specifically, the affected employee (and his/her authorized representative) must receive a copy of the agency’s notice providing the results of the inspection and written notice of the employer’s and employee’s obligations resulting from the inspection within 72 hours of its receipt. Employers must provide this notice by hand at work, if possible, or otherwise via both mail and email. Limit Reverification Of Current Employees. Finally, the law penalizes employers for the reverification of the employment eligibility of a current employee “at a time or in a manner not required by [federal law.]”[6] Federal Government Response Within weeks of AB 450 becoming law, ICE’s Acting Director Thomas Homan responded by announcing that the agency planned to increase significantly the number of worksite-related investigations it initiated nationwide during 2018. Homan later called AB 450 and Senate Bill 54, a related statute enacted at the same time as AB 450 that seeks to limits permissible cooperation between California agencies and federal immigration authorities, “terrible.” And he stated that Californians “better hold on tight.” On March 6, 2018, the U.S. Department of Justice filed legal action against the state of California, Governor Jerry Brown, and Attorney General of California Xavier Becerra in federal court, requesting that the Court invalidate AB 450 and other so-called sanctuary laws on the ground, in part, that they are preempted by federal immigration law and are therefore unconstitutional.[7] The federal government also moved for a preliminary injunction forbidding enforcement of AB 450 during the pendency of the lawsuit.[8] In short, the federal government contends that the laws intentionally obstruct federal law and impermissibly interfere with federal immigration authorities’ ability to carry out their lawful duties and, thereby violate the Supremacy Clause of the United States Constitution. The lawsuit generated significant interest, including no fewer than sixteen amici curiae briefs in support of both sides and multiple (unsuccessful) motions to intervene. The California defendants’ motion to dismiss the case, filed on May 4, 2018, is pending before the Court. The district court heard argument on the federal government’s preliminary injunction motion on June 20, 2018, in Sacramento, California. Yesterday, the Court found in the federal government’s favor (in part), enjoining California and its officials from enforcing all provisions of AB 450 except for the provisions relating to employee notice.[9] The Court noted that the lawsuit involves several “unique and novel constitutional issues,” including “whether state sovereignty includes the power to forbid state agents and private citizens from voluntarily complying with a federal program.” In a detailed legal analysis, noting that it “expresse[d] no views on the soundness of the policies or statutes involved,” the Court found: That the federal government is likely to prevail in its arguments against the provisions of AB 450 that impose penalties on private employers who “voluntarily consent to federal immigration enforcement’s entry into nonpublic areas of their place of business or access to their employment records” because they “impermissibly discriminate[] against those who choose to deal with the Federal Government;” That the federal government is likely to prevail in its arguments against AB 450’s prohibition on reverification of employee eligibility, albeit “with the caveat that a more complete evidentiary record could impact the Court’s analysis at a later stage of th[e] litigation;” and That the federal government is not likely to prevail in its arguments against AB 450’s notice requirements adopted in Cal. Labor Code section 90.2. The Court explained that “notice provides employees with an opportunity to cure any deficiency in their paperwork or employment eligibility” and does not impermissibly impede the federal government’s interests. As a result, the Court enjoined California from enforcing all provisions of AB 450 as applied to private employers except those regarding employee notice. Private employers therefore only need to ensure compliance with those notice requirements for the time being. As the Court itself noted, however, its ruling was only as to the likelihood of success at this early stage of the litigation and is subject to further review and a final determination on the merits after additional evidence is presented, as well as to further potential review by the Ninth Circuit Court of Appeals. Practical Considerations & Best Practices While yesterday’s ruling enjoins enforcement of most of the obligations imposed by AB 450, the ruling is only temporary and employers should seek counsel from immigration and/or employment counsel and should determine in advance how they will comply with these obligations, should AB 450 go into full effect. Among other measures, employers should consider: Preparing facility managers and other employees most likely to encounter an immigration enforcement agent seeking access to the worksite or records on the proper procedures for handling an inspection, including how to determine whether the agent has a valid judicial warrant (as opposed, for example, to an administrative subpoena) and to consult immediately with counsel; Implementing procedures for handling notice to employees on an expedited basis, including a template to ensure all necessary information is provided (the state Labor Commissioner has provided a form template available here: https://www.dir.ca.gov/DLSE/LC_90.2_EE_Notice.pdf); and Ensuring any reverification of employment eligibility complies with federal legal obligations and conducting training on the verification and reverification process. [1] Cal. Gov. Code § 7285.1(a), (e). [2] Guidance No. 11, available at https://www.dir.ca.gov/dlse/AB_450_QA.pdf. [3] Cal. Gov. Code § 7285.2(a)(1), (a)(2). [4] Cal. Labor Code § 90.2(a). [5] Cal. Labor Code § 90.2(b). [6] Cal. Labor Code § 1019.2(a). [7] U.S. v. State of California, Case No. 1:18-cv-00490-JAM-KJN, Dkt. No. 1 (E.D. Cal. Mar. 6, 2018), available at https://www.justice.gov/opa/press-release/file/1041431/download. [8] Id. at Dkt. No. 2, available at https://www.justice.gov/opa/press-release/file/1041436/download. [9] Id. at Dkt. No. 193 (E.D.Cal. July 5, 2018). The following Gibson Dunn lawyers assisted in preparing this client update: Jesse Cripps and Ryan Stewart. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding the issues discussed above. Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following in the firm’s Labor and Employment practice group: Catherine A. Conway – Co-Chair, Los Angeles (+1 213-229-7822, cconway@gibsondunn.com) Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com) Jesse A. Cripps – Los Angeles (+1 213-229-7792, jcripps@gibsondunn.com) Michele L. Maryott – Orange County (+1 949-451-3945, mmaryott@gibsondunn.com) Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)
French Supreme Court Holds That Ultimate Controlling Shareholder of a Liquidated French Subsidiary Should Compensate Employees for Job Loss
Click for PDF The French Supreme Court for civil law matters (Cour de cassation) made public on June 28, 2018 an important decision dated May 24, 2018. The Social Chamber (Chambre sociale) of the Cour de cassation decided that the ultimate controlling shareholder of a liquidated French subsidiary committed several faults justifying to condemn it to compensate the French employees for the loss of their jobs. In early 2010, Lee Cooper France filed for bankruptcy and was ultimately liquidated. 74 employees were dismissed. 27 of these employees went to court to obtain that Sun Capital Partners Inc. be recognized as the co-employer of the dismissed employees. The former employees were also asking that Sun Capital Partners Inc. be condemned to pay damages as a consequence of its extra-contractual tortious liability having led to the loss of their jobs. Sun Capital Partners Inc. was not found to be the co-employer of the French employees. It was held, however, that it was tortiously liable to pay damages (of several tens of thousands dollars) to each of the dismissed employees to compensate them for the loss of their jobs. The Court started by considering that Sun Capital Partners Inc. was the main shareholder of the “Lee Cooper group”, holding Lee Cooper France via companies it controls. From the court decision, it appears that Lee Cooper France was 100% controlled by a Dutch company named Vivat Holding BV, itself 100% controlled by another Dutch company named Avatar BV, itself 100% controlled by another Dutch company named Lee Cooper Group SCA, itself controlled by Sun Capital Partners Inc. The issue raised by the Court is that Lee Cooper France financed the “group” for amounts disproportionate with its means. Examples are as follows: the right to use the trademark “Lee Cooper” was transferred for no consideration to a company named “Doserno”, which was 100% controlled by Lee Cooper Group SCA which subsequently charged royalties for the use of the “Lee Cooper” trademark by Lee Cooper France; Lee Cooper France granted a mortgage over a building it owned to secure a bank loan to the exclusive benefit of another subsidiary of the group. The building was subsequently sold to the benefit of the lenders; an inventory of goods to be resold was given as a security to lenders and then sold to Lee Cooper France which was then opposed the lenders’ retention right; and services performed for other entities of the group were only partially paid for. Although Sun Capital Partners Inc. was “isolated” from Lee Cooper France by four layers of corporate entities having the status of limited liability corporations, Sun Capital Partners Inc. was held liable for having “via the companies of the group, made detrimental decisions in its sole shareholder interest which led to the liquidation of Lee Cooper France.” The decision, which does not involve any piercing of the corporate veil, is based only on theories of tortious liability, the various entities of the group of companies controlled by Sun Capital Partners Inc. being treated as mere instruments for the commission of these faults by the controlling shareholders. This decision is a reminder that intra-group transactions involving French entities need to be carefully reviewed to ensure the existence of a corporate interest for the French entity. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the Paris office by phone (+33 1 56 43 13 00) or by email (see below): Jean-Philippe Robé – jrobe@gibsondunn.com Eric Bouffard – ebouffard@gibsondunn.com Jean-Pierre Farges – jpfarges@gibsondunn.com Pierre-Emmanuel Fender – pefender@gibsondunn.com Benoît Fleury – bfleury@gibsondunn.com © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Click for PDF The Indian Market The Indian economy continues to be an attractive investment destination and one of the fastest growing major economies. After a brief period of uncertainty, following the introduction of a uniform goods and services tax and the announcement that certain banknotes would cease to be legal tender, the growth rate of the economy has begun to rebound, increasing to 7.7 percent in the first quarter of 2018, up from 6.3 percent in the previous quarter. In the World Bank’s most recent Ease of Doing Business rankings, India climbed 30 spots to enter the top 100 countries. This update provides a brief overview of certain key legal and regulatory developments in India between May 1, 2017 and June 28, 2018. Key Legal and Regulatory Developments Foreign Investment Compulsory Reporting of Foreign Investment: The Reserve Bank of India (“RBI“) has notified a one-time reporting requirement[1] for Indian entities with foreign investment. Each such entity must report its total foreign investment in a specified format (asking for certain basic information such as the entity’s main business activity) no later than July 12, 2018. Indian entities can submit their reports through RBI’s website. Indian entities that do not comply with this requirement will be considered to be in violation of India’s foreign exchange laws and will not be permitted to receive any additional foreign investment. This one-time filing requirement is a precursor to the implementation of a single master form that aims to integrate current foreign investment reporting requirements by consolidating nine separate forms into one single form. Single Brand Retail: The Government of India (“Government“) has approved up to 100% foreign direct investment (“FDI“) in single brand product retail trading (“SBRT“) under the automatic route (i.e., without prior Government approval), subject to certain conditions.[2] Previously, FDI in SBRT entities exceeding 49% required the approval of the Government. The Government has also relaxed local sourcing conditions attached to such foreign investment. SBRT entities with more than 51% FDI continue to be subject to local sourcing requirements in India, unless the entity is engaged in retail trading of products that have ‘cutting-edge’ technology. All such SBRT entities are required to source 30% of the value of goods purchased from Indian sources. The Government has now relaxed this sourcing requirement by allowing such SBRT entities to count any purchases made for its global operations towards the 30% local sourcing requirement for a period of five years from the year of opening its first store. The Government has clarified that this relaxation is limited to any increment in sourcing from India from the preceding financial year to the current one, measured in Indian Rupees. After this five year period, the threshold must be met directly by the FDI-receiving SBRT entity through its India operations, on an annual basis. Real Estate Broking Service: The Government has clarified that real estate broking service does not qualify as real estate business and is therefore eligible to receive up to 100% FDI under the automatic route.[3] Introduction of the Standard Operating Procedure: In mid-2017 the Government abolished the Foreign Investment Promotion Board – the Government body responsible for rendering decisions on FDI investments requiring Government approval. Instead, in order to streamline regulatory approvals, it has introduced the Standard Operating Procedure for Processing FDI Proposals (“SOP“).[4] The Government has designated certain competent authorities who are to process an application for FDI in the sector assigned to them. For example, the Ministry of Civil Aviation is responsible for considering and approving FDI proposals in the civil aviation sector. Under the SOP, the competent authorities must adhere to time limits within which a decision must be given. Significantly, the SOP mandates a relevant competent authority to obtain the DIPP’s concurrence before it rejects an application or imposes conditions on a proposed investment. Mergers and Acquisitions Relaxation of Merger Notification Timelines: Previously, parties to a transaction, regarded as a combination within the meaning of the [Indian] Competition Act, 2002 were required to notify the Competition Commission of India (“CCI“) within 30 days of a triggering event, such as execution of transaction documents or approval of a merger or amalgamation by the board of directors of the combining parties. Now, the CCI has exempted parties to combinations from the 30 day notice requirement until June 2022.[5] This move will provide parties involved in a combination sufficient time to compile a comprehensive notification and will possibly lead to faster approvals by easing the burden on CCI’s case teams. Rules for Listed Companies Involved in a Scheme: The Securities and Exchange Board of India (“SEBI“)’s listing rules requires listed companies involved in schemes of arrangement under the [Indian] Companies Act, 2013 (“Companies Act“), to file a draft version of the scheme with a stock exchange. This is in order to obtain a no objection/observation letter before the scheme can be filed with the National Company Law Tribunal. In March 2017, SEBI issued a revised framework for schemes proposed by listed companies in India. In January 2018, SEBI issued a circular[6] amending the 2017 framework. As a part of the 2018 amendments, SEBI clarified that a no objection/observation letter is not required to be obtained from a recognized stock exchange for a demerger/hive off of a division of a listed company into a wholly owned subsidiary, or a merger of a wholly owned subsidiary into its parent company. However, draft scheme documents will still need to be filed with the stock exchange for the purpose of information. The stock exchange will then disseminate the information on their website. Companies Act Action Against Non-Compliant Companies: Registrars of companies (“RoC“) in various Indian states, acting on powers granted under the Companies Act, have initiated action against companies which have either not commenced operations or have not been carrying on business in the past two years. In September 2017, the Government announced that over 200,000 companies had been struck-off from the register of companies based on the powers described above.[7] Further, the director identification numbers for individuals serving as directors on the board of such companies were cancelled, resulting in their disqualification to serve on the board of any company for a period of five years. The striking-off was targeted at Indian companies that failed to fulfill regulatory and compliance requirements (such as filing annual returns) for three years.[8] Notification of Layering Rules: The Government has notified a proviso to subsection 87[9] of Section 2 of the Companies Act along with the Companies (Restriction on Number of Layers) Rules, 2017 (the “Layering Rules“).[10] The effect of these notifications is that an Indian company which is not a banking company, non-banking financial company, insurance company or a government company, is not allowed to have more than two layers of subsidiaries. For the purposes of computing the number of layers, Indian companies are not required to take into account one layer consisting of one or more wholly owned subsidiaries. Further, the Layering Rules do not prohibit Indian companies from acquiring companies incorporated outside India which have subsidiaries beyond two layers (as long as such a structure is permitted in accordance with the laws of the relevant country). Provisions of Companies Act Extended to all Foreign Companies: India has enacted the Companies (Amendment) Act, 2017 in order to amend various sections of the Companies Act. The provisions of the amendment act are being brought into effect in a phased manner. Recently, the Government has notified a provision in the Companies (Amendment) Act, 2017[11] which extends the applicability of sections 380 to 386 and sections 392 and 393 of the Companies Act to all foreign companies which have a place of business in India or conduct any business activity in the country. Prior to this amendment, these provisions were only applicable to foreign companies where a minimum of fifty percent of the shares were held by Indian individuals or companies. These provisions of the Companies Act include a requirement to (a) furnish information and documents to the RoC, such as certified copies of constitutional documents, the company’s balance sheet and profit and loss account; and (b) comply with the provisions governing issuance of debentures, preparation of annual returns and maintaining books of account. Notification of Cross Border Merger Rules: The Government had notified Section 234 of the Companies Act and Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules 2016. Please refer to our regulatory update dated May 1, 2017 for further details. In this update, we had referred to the requirement of the RBI’s prior permission in order to commence cross border merger procedures under the Companies Act. On March 20, 2018, the RBI issued the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (the “Cross Border Merger Rules“).[12] The Cross Border Merger Rules provide for the RBI’s deemed approval where the proposed cross-border merger is in accordance with the parameters specified by it. These parameters include, where the resultant company is an Indian company, a requirement that any borrowings or guarantees transferred to the resultant entity comply with RBI regulations on external commercial borrowings within a period of two years from the effectiveness of the merger. End-use restrictions under the existing RBI regulations do not have to be complied with. However, where the resultant company is an offshore company, the transfer of any borrowings in rupees to the resultant company requires the consent of the Indian lender and must be in compliance with Foreign Exchange Management Act, 1999 and regulations issued thereunder. In addition, repayment of onshore loans will need to be in accordance with the scheme approved by the National Company Law Tribunal. Currently, these provisions apply only to mergers and amalgamations, and not to demergers. Labour Laws States Begin Implementing Model Labour Law: In mid-2016, the Government introduced the Model Shops and Establishments (Regulation of Employment and Conditions of Service) Bill (“S&E Bill“). The S&E Bill, as is the case with other shops and establishments legislation in India, mandates working hours, public holidays and regulates the condition of workers employed in non-industrial establishments such as shops, restaurants and movie theatres. States in India can either adopt the S&E Bill in its entirety, superseding existing regulations, or choose to amend their existing enactments based on the S&E Bill. The S&E Bill seeks to update Indian laws, adapting them to current business requirement for non-industrial establishments. For example, the S&E Bill (a) enables establishments to remain open 365 days in a year, and (b) allows women to work night shifts, while containing provisions for employers to ensure safety of women workers. Registration provisions under the new legislation have also been eased. In late 2017, the State of Maharashtra notified a new shops and establishments statute based on the S&E Bill. Other states in India are expected to follow suit. Start–ups Issue of Convertible Notes by Start-ups: The Government had eased funding for start-ups in India in January 2016. Please refer to our regulatory update dated May 18, 2016, for an overview of this initiative. In January 2017, the RBI had permitted start-ups to receive foreign investment through the issue of convertible notes.[13] The revised FDI Policy issued in 2017 now incorporates these provisions. The provisions allow for an investment of INR 2,500,000 (approx. USD 36,700) or more to be made in a single tranche. These notes are repayable at the option of the holder, and convertible within a five year period. The issuance of the notes is subject to entry route, sectoral caps, conditions, pricing guidelines and other requirements that are prescribed for the sector by the RBI.[14] Capital Gains Tax Charging of Long Term Capital Gains Tax: An important amendment to Indian tax laws introduced by the Finance Act, 2018[15] is the levy of tax at the rate of 10% on capital gains made on the sale of certain securities (including listed equity shares) held at least for a year. The tax is levied if the total amount of capital gains exceeds INR 100,000 (approx. USD 1,448). This amendment came into effect on April 1, 2018. However, all gains made on existing holdings until January 31, 2018 are exempt from the tax. In all such ‘grandfathering’ cases, the cost of acquisition of a security is deemed to be the higher of the actual cost of acquisition and the fair market value of the security as on January 31, 2018. Where the consideration received on transfer of the security is lower than the fair market value as on January 31, 2018, the cost of acquisition is deemed to be the higher of the actual cost of acquisition and the consideration received for the transfer.[16] [1] RBI Notification on Reporting in Single Master Form dated June 7, 2018. Available at https://rbidocs.rbi.org.in/rdocs/Notification/PDFs/NT194481067EB1B554402821A8C2AB7A52009.PDF [2] Press Note No. 1 (2018 Series) dated January 23, 2018, Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India. [3] Id. [4] Standard Operating Procedure dated June 29, 2017. Available at http://www.fifp.gov.in/Forms/SOP.pdf [5] MCA Notification dated June 29, 2017. Available at http://www.cci.gov.in/sites/default/files/notification/S.O.%202039%20%28E%29%20-%2029th%20June%202017.pdf [6] SEBI Circular dated January 3, 2018. Available at https://www.sebi.gov.in/legal/circulars/jan-2018/circular-on-schemes-of-arrangement-by-listed-entities-and-ii-relaxation-under-sub-rule-7-of-rule-19-of-the-securities-contracts-regulation-rules-1957-_37265.html. [7] Press Information Bureau, Government of India, Ministry of Finance, “Department of Financial Services advises all Banks to take immediate steps to put restrictions on bank accounts of over two lakh ‘struck off’ companies”, http://pib.nic.in/newsite/PrintRelease.aspx?relid=170546 (September 5, 2017). [8] Live Mint, “Govt blocks bank accounts of 200,000 dormant firms”, http://www.livemint.com/Companies/oTcu9b66rZQnvFw6mgSCGK/Black-money-Bank-accounts-of-209-lakh-companies-frozen.html (September 6, 2017). [9] MCA Notification vide S.O. No. 3086(E) dated September 20, 2017. [10] Notification No. G.S.R. 1176(E) dated September 20, 2017. Available at http://www.mca.gov.in/Ministry/pdf/CompaniesRestrictionOnNumberofLayersRule_22092017.pdf[11] MCA Notification dated February 9, 2018. Available at http://www.mca.gov.in/Ministry/pdf/Commencementnotification_12022018.pdf [12] FEMA Notification dated March 20, 2018. Available at https://rbidocs.rbi.org.in/rdocs/notification/PDFs/CBM28031838E18A1D866A47F8A20201D6518E468E.pdf [13] RBI Notification of changes to RBI regulations dated January 10, 2017. Available at https://rbi.org.in/scripts/NotificationUser.aspx?Id=10825&Mode=0 [14] Consolidated FDI Policy Circular of 2017. Available at http://dipp.nic.in/sites/default/files/CFPC_2017_FINAL_RELEASED_28.8.17.pdf [15] Section 33 of the Finance Act, 2018. Available at http://egazette.nic.in/writereaddata/2018/184302.pdf [16] CBDT Notification No. F. No. 370149/20/2018-TPL. Available at https://www.incometaxindia.gov.in/news/faq-on-ltcg.pdf Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the following authors in the firm’s Singapore office: India Team: Jai S. Pathak (+65 6507 3683, jpathak@gibsondunn.com) Karthik Ashwin Thiagarajan (+65 6507 3636, kthiagarajan@gibsondunn.com) Prachi Jhunjhunwala (+65.6507.3645, pjhunjhunwala@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Supreme Court Holds That Public-Sector Union “Agency Fees” Violate The First Amendment
Click for PDF Decided June 27, 2018 Janus v. American Federation of State, County, and Municipal Employees, Council 31, No. 16-1466 Today, the Supreme Court held 5-4 that the First Amendment does not permit public-sector unions to collect mandatory fees from non-members to cover the costs of collective bargaining. Background: Mark Janus, a non-union State employee, brought a First Amendment challenge to mandatory “agency fees” that public-sector labor unions collect from non-members ostensibly to cover the costs of collective bargaining with government employers. Janus argued that the Supreme Court’s 1977 decision in Abood v. Detroit Board of Education—which upheld agency fees because they avoid labor strife and prevent non-members from benefiting from collective bargaining without paying for union membership—should be overruled because agency fees compel non-members to subsidize union speech intended to influence governmental policies on matters of public importance, such as education, healthcare, and climate change, that frequently arise in collective bargaining between public-sector unions and government employers. Issue: Whether Abood should be overruled and compulsory public-sector agency fees invalidated under the First Amendment. Court’s Holding: Yes. Public-sector agency fees violate the First Amendment because they compel non-members to subsidize union speech on matters of public concern. Abood is overruled. “Because the compelled subsidization of private speech seriously impinges on First Amendment rights, it cannot be casually allowed.” Justice Alito, writing for the 5-4 Court What It Means: This issue was presented to the Court in 2016 in Friedrichs v. CTA. Following the death of Justice Scalia, however, the Court split 4-4 and summarily affirmed the judgment below. In Janus, the Court reached the issue that it had not addressed in Friedrichs. The Court embraced a broad view of the First Amendment’s limitations on compelled speech. The agency fees at issue infringed non-members’ First Amendment rights by forcing them to lend their support to union speech on a host of controversial issues of public concern that could arise during collective-bargaining discussions. According to the Court, that was unacceptable, and the First Amendment instead requires public-sector employees to affirmatively choose to support a union before any fees can be collected from them. The Court expressly overruled Abood because its “free-rider” rationale—that agency fees were necessary to prevent non-members from enjoying the benefits of union membership as to collective bargaining without incurring the costs—could not justify the burdens imposed on First Amendment rights by agency fees. The fees were unnecessary to ensure that unions were willing to serve as the exclusive representative for all employees, because that designation included numerous other benefits (such as a privileged place in negotiations). The Court’s decision invalidates the laws of more than 20 states that require public-sector unions to collect agency fees. Public-sector unions may see their funding and membership levels drop as a consequence. The Court’s holding applies “when a State requires its employees to pay agency fees,” and thus does not reach private-sector unions. The Court deemed it “questionable” whether the First Amendment would be implicated when a State merely authorizes—yet does not require—private parties to enter into an agency-fee agreement, but left the question open. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com Related Practice: Labor and Employment Catherine A. Conway +1 213.229.7822 cconway@gibsondunn.com Eugene Scalia +1 202.955.8206 escalia@gibsondunn.com Jason C. Schwartz +1 202.955.8242 jschwartz@gibsondunn.com © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.