GC Agenda: September 2023

Antitrust

Changes to HSR Filing Requirements and Merger Guidelines

Companies considering mergers and acquisitions should monitor developments regarding the FTC and DOJ’s proposed changes to the Hart-Scott-Rodino (HSR) filing requirements and to the merger guidelines that govern antitrust review.

The FTC’s proposed changes to the HSR filing form and related instructions would increase the time and cost burden on filing parties significantly, including requiring submission of additional:

The draft revised merger guidelines describe 13 guidelines the agencies use to determine whether a merger may substantially lessen competition. Significant changes include:

The public comment periods for both the proposed HSR rules and draft merger guidelines expire in mid-to-late September, though they may be extended. Following the comment periods, the agencies will review and analyze the comments they receive. While the timing is uncertain, the changes could go into effect in late 2023 or early 2024.

(For more on these proposals, see FTC Announces Major Proposal to Change HSR Form and Process on Practical Law and Draft Revised Merger Guidelines in the August 2023 issue of Practical Law The Journal.)

Arbitration

Bellwether Arbitration Agreements

Counsel for companies using bellwether arbitration agreements should consider the impact of recent court decisions finding them unenforceable.

The goal of bellwether arbitration is to facilitate the efficient resolution of mass arbitration claims by arbitrating a small number of them (or batches) at a time to test their merits, which could result in settlements or dismissals of similar claims.

In Heckman v. Live Nation Entertainment, Inc., the US District Court for the Central District of California recently denied the defendant’s motion to compel arbitration, finding that the bellwether arbitration agreement set out in its Terms of Use was unconscionable and therefore unenforceable. The Ninth Circuit is preparing to hear oral arguments concerning a similar bellwether arbitration agreement the US District Court for the Northern District of California found unenforceable in MacClelland v. Cellco Partnership.

Given these recent decisions, counsel should review their company’s own bellwether arbitration agreements to be sure they are not:

(For a model class arbitration waiver that expressly prohibits the consolidation of claims brought by more than one claimant, with explanatory notes and drafting tips, see Class Arbitration Waiver (US) on Practical Law; for a collection of resources to assist counsel in preparing for and conducting arbitrations, see US Arbitration Toolkit on Practical Law).

Capital Markets & Corporate Governance

Cybersecurity Incident Disclosure

New Item 1.05 of Form 8-K will require reporting companies to disclose, beginning December 18, 2023 (June 15, 2024 for smaller reporting companies), certain information related to cybersecurity incidents, as defined in new Item 106(a) of Regulation S-K, that the company determines to be material.

Making the required materiality determination will depend on timely reporting up of all relevant information. Late filings resulting from delayed reporting of information may result in negative press for the company, as well as potential enforcement actions and shareholder lawsuits. Therefore, companies should begin preparing for the new disclosures now by:

(For more on the cybersecurity incident disclosure requirement, including additional information on cybersecurity disclosures in periodic reports, see SEC Cybersecurity Disclosure Rules in this issue of Practical Law The Journal.)

Proposed NOCLAR Auditing Standards

The Public Company Accounting Oversight Board (PCAOB) has proposed changes to auditing standards known as Noncompliance with Laws and Regulations (NOCLAR), which could significantly expand auditors’ responsibilities by requiring additional audit procedures to consider companies’ non-compliance with laws and regulations. As proposed, the changes would cover all ranges of non-compliance, intentional or unintentional, from outright financial statement fraud to non-compliance matters that may have a material effect on the financial statements.

If adopted as currently proposed, the standard would significantly expand:

Although the deadline for comment has passed, companies should continue to monitor this proposal and follow its progress.

(For more on the proposal, see PCAOB Proposes New Requirements for Consideration of Noncompliance with Laws and Regulations (NOCLAR) in an Audit on Practical Law.)

Commercial Transactions

Proposed Amendments to the UCC

Some states have already enacted legislation adopting the 2022 proposed amendments to the UCC, and legislation approving adoption of the amendments is pending in a majority of the remaining states.

Highlights from the proposed amendments include:

(For a 50-state chart tracking the adoption of Articles 1-7 of the proposed amendments, see Quick Compare Chart: UCC — Adoption of 2022 Proposed Amendments — Article 1 through Article 7 on Practical Law; for more on the revised definition of conspicuous, see Revised Definition of Conspicuous in the 2022 Proposed Amendments to the UCC on Practical Law; for a discussion of all 12 proposed amendments, see Proposed 2022 Amendments to the UCC on Practical Law.)

Finance

Crypto Supervision Programs

The Board of Governors of the Federal Reserve System (Federal Reserve Board) recently issued two supervisory bulletins announcing the creation of a new cryptocurrency oversight program and detailing the process for supervision of bank stablecoin and dollar token activities.

Supervisory Bulletin SR 23-7 introduces the Novel Activities Supervision Program, which is designed to enhance the Federal Reserve Board’s supervision of banks that engage in novel activities including:

Supervisory Bulletin SR 23-8 details the process for member banks seeking to issue, hold, or transact in dollar tokens. Under the process, a member bank must notify its lead supervisory point of contact at the Federal Reserve Board that it intends to engage in a transaction involving stablecoins or dollar tokens and provide details about the proposed activity. The bank must demonstrate that appropriate risk-management practices have been established, including that it has adequate systems in place to identify, measure, monitor, and control the risks of proposed activities and the ability to do so on an ongoing basis. In reviewing requests for supervisory non-objection, the Federal Reserve Board will focus on:

A member bank that has applied for supervisory non-objection of its stablecoin or dollar token activities should wait to receive a written notification of supervisory non-objection before engaging in the proposed activity.

(For more on these programs, see Federal Reserve Establishes Programs for Oversight of Bank Crypto and “Dollar Token” Activities on Practical Law).

Health Care

Orphan Drugs

Counsel to health care companies should be aware of another legal challenge to the FDA’s orphan drug policy, which is pending in the US District Court for the District of Columbia.

Orphan drugs are products that are specially designated and approved to treat rare diseases. The Orphan Drug Act grants new orphan drugs seven years of exclusive time on the market to recoup their development costs.

Jazz Pharmaceuticals v. Becerra is the fourth legal challenge to the FDA’s orphan drug policies in the last five years. Jazz is challenging the FDA’s approval of Avadel Pharmaceuticals’ narcolepsy drug, Lumryz, as clinically superior to Jazz’s Xyrem, on the grounds that the Orphan Drug Act prohibits the FDA from overriding orphan drug exclusivity to approve clinically superior products. According to the FDA, Lumryz is superior because it does not require patients to wake up during the night for a second dose.

The FDA suspended orphan exclusivity decisions for almost two years after the Eleventh Circuit ruled against it in a similar 2021 case. In Catalyst Pharmaceuticals, Inc. v. Becerra, the court held that orphan exclusivity bars the FDA from approving the same active ingredient to treat any patients with the same rare disease during the exclusivity period. The FDA had claimed authority to limit exclusivity to treat subpopulations, such as approving one product to treat pediatric patients and another to treat adults.

In a January 2023 response to Catalyst in the Federal Register, the agency explained that while it followed the circuit court’s order with respect to the litigants in the case, the agency declined to change its policies for future products.

The Jazz case is significant because it is pending in the District of Columbia, the circuit that has direct jurisdiction over federal agencies. A ruling against the FDA would compel the agency to change how it approves orphan drugs, and a ruling in its favor would create a circuit split with the Eleventh Circuit. As a result, any decision in Jazz will likely be appealed to the US Supreme Court.

(For more on orphan drugs, see Orphan Drug Act: Overview on Practical Law; for more on regulatory exclusivity, see FDA Regulatory Exclusivity for Drugs and Biologics: Overview on Practical Law.)

Intellectual Property & Technology

IPR Estoppel

Companies involved in inter partes review (IPR) proceedings at the Patent Trial and Appeal Board should take note of two recent Federal Circuit decisions that may complicate managing the interaction between IPRs and parallel patent infringement litigation.

A key aspect of every IPR is the statutory estoppel precluding the challenger from asserting in related proceedings in district court (or the International Trade Commission) any grounds for invalidity against IPR-challenged claims that they raised or reasonably could have raised during the IPR.

Recent Federal Circuit decisions clarify:

These developments are double-edged swords for IPR litigants. In particular:

(For more on IPR estoppel, see Inter Partes Review: Section 315(e) Estoppel Considerations on Practical Law.)

Labor & Employment

Pregnant Workers Fairness Act

Employers with 15 or more employees should revise their policies and procedures to provide reasonable accommodations for employees and applicants with limitations related to pregnancy, childbirth, or related medical conditions in light of the recently effective Pregnant Workers Fairness Act (PWFA).

The PWFA fills the gap in federal protections for workers affected by pregnancy, childbirth, and related medical conditions by allowing workers with uncomplicated pregnancies to seek accommodations. Employer coverage is the same as Title VII of the Civil Rights Act of 1964 (Title VII) and the Americans with Disabilities Act (ADA). The PWFA uses the same definitions of “reasonable accommodation,” “undue hardship,” and “interactive process” as the ADA.

Considering this new law, employers should understand that:

Employers should also:

(For more on the PWFA, see Pregnancy Discrimination and Pregnancy and Parental Leave on Practical Law.)

Religious Accommodations Under Title VII

The Supreme Court recently changed the religious accommodation standard under Title VII that employers have relied on for over 40 years.

In Groff v. DeJoy, the Court rejected the standard that allowed employers to deny requests for religious accommodation that would impose more than a de minimis burden on the employer. The Court held that an employer denying a religious accommodation must show that the burden of granting it would result in substantial increased cost in relation to conducting the employer’s business.

In response to this development, employers should:

When evaluating a request for religious accommodation, employers should:

(For more on religious accommodation, see Religious Discrimination and Accommodation Under Title VII and Religious Accommodation Policy on Practical Law.)

Litigation

Service of Process via NFT

Parties struggling to serve process on a person located in a foreign country by traditional methods should be aware that some courts have recently allowed plaintiffs to serve a foreign party over the blockchain through an NFT.

In Sun v. Defendant 1, the US District Court for the Southern District of Florida granted the plaintiff’s motion to serve a defendant located in the People’s Republic of China under Federal Rule of Civil Procedure 4(f)(3) through an NFT by sending it to the blockchain addresses of the defendants’ cryptocurrency wallets and cryptocurrency exchange accounts. Last year, in LCX AG v. John Doe, the Supreme Court of the State of New York also allowed a plaintiff to serve a wallet address with an NFT that included links to the legal notice.

Despite a growing list of virtual options available for serving defendants, certain courts may discourage these methods, especially where service is attempted by NFT, because there is no way to prove that the intended recipient was the one to actually open the NFT. Therefore, counsel should not resort to non-traditional virtual methods until they exhaust all available traditional service of process procedures under applicable federal or state law.

(For more on domestic and international service of process, see Commencing a Federal Lawsuit: Overview, Commencing a Federal Lawsuit: Filing and Serving the Complaint, and International Litigation: US Laws Governing Cross-Border Service of Process on Practical Law.)

Real Estate

Lender Remedies

The US commercial real estate market has come under stress in 2023 due to retail and office closures and rising interest rates. As an estimated $20 billion of office CMBS (commercial mortgage-backed securities) loans are maturing this year, lenders are considering their options for avoiding major losses.

To mitigate some of these projected losses, some lenders are:

While loan extensions and modifications are an effective way to push loan maturations to later years in the hope that the market stabilizes, lenders should carefully consider:

(For more on lender remedies, see Commercial Real Estate Loan Modifications Toolkit (National and Select States), Loan Sale Agreement (Commercial Real Estate), and Borrower Defaults and Lender Remedies in Commercial Real Estate Loans on Practical Law.)

Tax

Temporary Relief from Foreign Tax Credit Regulations

Multinationals should take note of recently issued Notice 2023-55 providing temporary relief from controversial foreign tax credit (FTC) regulations published in January 2022.

The 2022 FTC regulations include a stricter standard for what qualifies as a foreign income tax for which a foreign tax credit may be claimed, and have created uncertainty about whether certain previously creditable taxes are still creditable under the new standard. Under prior FTC regulations, a foreign levy generally qualified as a creditable income tax if it was a tax and the tax’s character was predominantly that of an income tax in the US sense. The predominant character test was met if the foreign tax met a net gain requirement. The net gain requirement was in turn satisfied if the foreign tax met realization, gross receipts, and net income requirements.

The 2022 FTC regulations eliminated the predominant character test and significantly revised the net gain requirement, including a new attribution requirement. For foreign taxes on residents to meet the attribution requirement, foreign tax law must determine the pricing of related party transactions under arm’s-length principles. For non-residents, the gross receipts and costs included in the base of the foreign tax must satisfy one of the following three requirements:

The notice generally allows taxpayers to temporarily:

The temporary relief applies to taxable years beginning on or after December 28, 2021 and ending on or before December 31, 2023. However, under a special rule in the notice, foreign taxes whose base is gross receipts or gross income will not meet the net income requirement of the prior FTC regulations except for foreign taxes whose base consists solely of investment income that is not derived from a trade or business. This special rule is meant to prevent the crediting of digital services taxes.

Proof-of-Stake Validation Rewards

The IRS recently issued Revenue Ruling 2023-14 setting forth its position on the taxation of proof-of-stake validation rewards. Under the ruling, a cash-basis taxpayer who receives additional units of cryptocurrency as a proof-of-stake validation reward includes the fair market value of the additional units in gross income when the taxpayer is able to sell, exchange, or otherwise dispose of the additional units without restriction.

Prior to the ruling, some taxpayers and tax practitioners questioned whether proof-of-stake validation rewards are income upon receipt or self-created property only taxable on a later disposition. In Jarrett v. United States, taxpayers argued that new Tezos tokens resulting from staking activities are newly created property that should only be taxable on sale or exchange, and not in the year of receipt. The IRS granted a refund to the taxpayers, and the district court dismissed the case as moot. The taxpayers have appealed the mootness determination to the Sixth Circuit.

Proof-of-stake validation requires potential validators with a stake in the blockchain to lock up tokens. If a chosen validator successfully validates cryptocurrency transactions, the validator receives the proof-of-stake validation reward. Unsuccessful validations may subject a potential validator to a penalty in the form of “slashing,” a process by which all or a portion of the staked units are forfeited.