The CMA’s Guidance on Merger Assessments During the Coronavirus (COVID-19) Pandemic and Recent CMA Cases

By Miranda Cole and Jérôme de Ponsay on August 11, 2020 Posted in Competition, COVID-19

On 22 April 2020, the UK Competition and Market Authority (“CMA”) published its guidance on ‘Merger assessments during the Coronavirus (COVID-19) pandemic’ (“the guidance”). Prior to the publication of the guidance, there was some speculation about whether the CMA would be more willing to accept ‘failing firm’ arguments as the economic impact of COVID-19 hit home. However, while the CMA has, as it acknowledged, “been working closely with the government to relax competition law where appropriate”, the guidance and a number of recent CMA cases make it clear that the CMA is not relaxing its merger assessments in response to COVID-19.

The guidance

The guidance refers to several procedural changes, particularly in relation to information-gathering, the timing of investigations, the conduct of meetings and hearings, and interim measures, being made in response to COVID-19-related restrictions. Regarding the substantive assessment of mergers, the CMA clarified that the pandemic will not lead to a relaxation of investigative or assessment standards. Because the CMA’s merger investigations are forward-looking and evidence-led, the impact of COVID-19 will be factored into the substantive assessment of mergers where necessary or appropriate. The CMA states that, despite the uncertainty regarding the duration and full impact of the crisis, even “significant short-term industry-wide economic shocks” would not necessarily be enough in themselves to override competition concerns that a “permanent structural change in the market brought about by a merger” could raise.

The ‘failing firm’ test

The guidance includes an annex on the application of the ‘failing firm’ test, serving as a ‘refresher’ regarding the legal test.

The ‘failing firm’ test is usually considered when a firm involved in the merger is said to be failing financially, and would exit the market, absent the merger. The CMA has previously found that, where the ‘failing firm’ counterfactual is sufficiently evidenced, mergers should be unconditionally cleared. However, the ‘failing firm’ test is strict and only two cases have met the criteria since the CMA’s formation in 2014, namely East Coast Buses/First Scotland East and Alliance Medical Group/IBA Molecular UK.

In the guidance, the CMA notes that COVID-19 might lead to additional submissions from entities involved in mergers that are failing financially and would exit the market absent the mergers. However, the CMA reiterates that such submissions will always be considered on a case-by-case basis, applying the three-limb test for assessing ‘failing firm’ situations set out in the Merger Assessment Guidelines. Specifically, the CMA will consider whether (i) the target’s exit is inevitable without the transaction, (ii) there is an alternative (less anti-competitive) purchaser, and (iii) the transaction is less anticompetitive than the target’s exit.

The first question is whether the target’s exit is inevitable absent the transaction. As noted in the guidance, where a firm may be exiting because of financial failure, the CMA considers both whether the firm is unable to meet its financial obligations in the near future and whether it is unable to restructure itself successfully. These questions are assessed using a broad range of evidence, including internal documents, such as management accounts, and external documents, such as analysis from external advisors.

The second question is whether there would have been substantially less anti-competitive purchasers for the business – are there other buyers whose involvement would produce a more competitive outcome than the transaction being assessed. The CMA will, again, assess this question based on a broad range of evidence, and the fact that there were no other bids at the relevant time is not, in itself, enough. In the same vein, the unwillingness of potential alternative purchasers to pay the asking price or the price ultimately agreed between the parties does not show that there would have been no alternative purchaser.

The third question relates to the impact of the business’ failure on competition, compared to the impact of the transaction in question. While the wording of the Merger Assessment Guidelines suggested a particular focus on the merger’s “impact on sales”, the guidance notes that, in practice, this test is applied “less mechanistically”, such that the CMA might consider the effects on competition more broadly.

Where a firm’s financial circumstances do not meet the conditions of the ‘failing firm’ counterfactual, financial difficulties are still considered in the competitive assessment.

The CMA’s application of the ‘failing firm’ test in recent cases

Consistent with its guidance, the CMA’s recent decisions show that COVID-19 has not led to a relaxation of the CMA’s standards of review.

Amazon/Deliveroo

Amazon’s acquisition of a minority 16% shareholding in Deliveroo was recently cleared by the CMA. In April, the CMA initially provisionally cleared the investment on the basis that, as a result of COVID-19, Deliveroo would have been likely to exit the market without the additional funding available through the transaction, and that this would have had a more detrimental impact on competition than the transaction under review. However, in its Revised Provisional Findings and its Final Report, the CMA found that the conditions for the failing firm test were not met. Instead, it cleared the transaction on substantive grounds relating to Amazon’s incentives to compete in online restaurant food delivery and online grocery delivery.

In applying the first limb of the test, the CMA reversed its conclusion between the April Provisional Findings, on the one hand, and the Revised Provisional Findings and the Final Report, on the other hand. In the April Provisional Findings, the CMA provisionally found that COVID-19 had substantially affected Deliveroo’s financial position as it experienced both a decline in supply (due to restaurant closures) and a decline in demand. Accordingly, in the April Provisional Findings, the CMA provisionally concluded that the first limb of the test was met, given that Deliveroo would have been likely to exit the market, as a result of COVID-19, without the additional funds. In contrast, in the Revised Provisional Findings and the Final Report, the CMA found, based on updated financial information, that the impact of COVID-19 on Deliveroo’s business had not been as severe as anticipated, and that it would not have exited the market absent the transaction.

In relation to the second limb of the test, while the CMA’s Merger Assessment Guidelines and guidance require the assessment of potential “alternative purchasers”, the CMA adjusted the test because the transaction did not involve a transfer of a business or its sales but rather the acquisition of a minority shareholding. As a result, in its initial assessment of the second limb of the test, the CMA did not consider “alternative purchasers” stricto sensu but whether there were alternative investors, including funding that would have not entailed that acquisition of shares (as Amazon’s investment in Deliveroo contemplated). In particular, it considered three main options for alternative funding: funding from existing shareholders, external funding from new shareholders, and funding through debt. In the April Provisional Findings, the CMA concluded that Deliveroo had no alternative options available to it that would have preserved the business. In the Revised Provisional Findings and the Final Report, the CMA considered that, given Deliveroo’s improved financial situation, it would have had more scope to manage its funding needs and there was a materially greater likelihood that alternative sources of funding would have been available. It therefore concluded that the conditions for second limb of the test were not met.

In assessing the third limb of the test, the CMA noted that, while the transaction in question was not an acquisition, the general principle of the test can still be applied. It therefore considered whether the effect of the investment was substantially less harmful to competition than Deliveroo’s exit from the potential online restaurant food delivery and online convenience grocery delivery markets. In the April Provisional Findings, the CMA concluded that Deliveroo’s exit would have a more negative effect on competition than the investment would have. In its Revised Provisional Findings and its Final Report, the CMA did not assess whether the third limb of the test was met given that the conditions for the first and second limbs of the test were not, such that the transaction would in any case not be cleared applying the failing firm test.

The CMA’s change in approach during the Amazon/Deliveroo investigation highlights its commitment to rigorously applying the legal test, in particular in assessing whether the target would only suffer from short term shocks (related to a crisis such as COVID-19) or whether it would suffer from long term financial difficulties that would lead it to exit the market.

Takeaway.com/Just Eat

In its decision to clear Takeaway.com’s acquisition of Just Eat, the CMA did not consider applying the ‘failing firm’ test. Instead, the CMA’s decision was based on whether Takeaway.com would have re-entered the market for the supply of online food platforms in the UK absent the merger, and if so, whether the re-entry would have resulted in a more competitive situation than would exist after the merger.

Given that this decision was also taken during COVID-19, only a few weeks after the adoption of the April Provisional Findings in Amazon/Deliveroo, and that it related to one of the potential markets in which Deliveroo was also active, the decision highlights the CMA’s case-by-case approach. The CMA’s approach to Deliveroo in the April Provisional Findings was clearly driven by Deliveroo’s circumstances, not COVID-19 generally or even the impact of COVID-19 on online restaurant food delivery more broadly. This is highlighted by the Revised Provisional Findings that Deliveroo’s improved financial circumstances meant that the failing firm defence was not applicable.

JD Sports Fashion/Footasylum

In its Final Report, the CMA concluded that the merger between JD Sports and Footasylum would result in a substantial lessening of competition, and blocked the transaction. The CMA stated that neither party said they would go out of business absent the merger, so the CMA did not apply the failing firm test. Although much of the investigation was completed before COVID-19, the CMA did consider the impact of COVID-19 on its assessment. While the full impact of COVID-19 remains uncertain, the CMA noted that all retailers are experiencing the same change in market conditions. In addition, the CMA found that, while the sector was clearly being impacted, COVID-19 did not affect the parties in a way that it would make either party’s position weaker or their competitors’ stronger. The CMA did not consider that COVID-19 would “significantly increase the constraints” on the parties to such an extent that it would remove the competition concerns.

The CMA’s approach here is facially different to the approach it took to Deliveroo in its April Provisional Findings, in that it started its assessment with the impact of COVID-19 on the sector as a whole, and then concluded that the parties were not impacted by COVID-19 more than their competitors.

StubHub/viagogo

In its Phase 1 Decision, the CMA found that the completed acquisition of viagogo by StubHub gave rise to a realistic prospect of a substantial lessening of competition in the market for the supply of secondary ticketing exchange in the UK.

While the Parties did not claim that the failing firm test was met, they argued that COVID-19 had a significant adverse impact on revenue generation in the ticketing industry and reduced demand for tickets, market changes which should be taken into account in the CMA’s counterfactual assessment. In particular, the Parties claimed that there was no evidence that all ticketing players would be impacted in the same way by COVID-19. The CMA considered that, while COVID-19 had had a substantial short term impact on the live events and ticketing industries, there still was uncertainty about the duration and long-term effects of the crisis. In addition, similarly to its findings in JD Sports Fashion/Footasylum, the CMA concluded that there was no evidence that COVID-19 will have disproportionate effects on the Parties compared to their competitors or that StubHub would have exited the market, as a result of COVID-19.

Conclusion

COVID-19 has not led to the CMA relaxing its assessment or investigational standards. In the guidance, the CMA emphasised the need to base decisions on “a material body of probative evidence”, rather than speculation, noting that it will consider the impact of COVID-19 on a case-by-case basis. The CMA’s strict approach to the failing firm defence was highlighted by its change of course in the review of Amazon/Deliveroo, in response to updated financial information.

CFTC To Consider Proposals for Refining Uncleared Margin Rules

By Anne M. Termine and Andrew Ruben on August 10, 2020 Posted in Financial

During an open meeting on July 22, 2020, the CFTC Commissioners heard a staff presentation on three specific recommendations for changes to the margin requirements for uncleared swaps for swap dealers and major swap participants. These changes would:

Align the timing and methodology for both the material swaps exposure calculations and the post phase‐in compliance periods with the Basel Committee on Banking Supervision and the International Organization of Securities Commissions and other global regulations;
Codify relief related to minimum transfer amounts as addressed by CFTC staff letters 17‐12 and 19‐25; and
Codify an alternative method for calculating the initial margin that must be collected from the counterparty, in which small swap dealers may rely on the initial margin models of a larger swap dealer counterparty.

The proposals, among others, are covered in more detail in the associated staff report. Commissioner Stump issued a statement generally supportive of the recommendations in the staff report, noting that, “it really should not come as a surprise that now is the time to thoughtfully consider whether rules designed to ensure the exchange of margin between the largest financial institutions need to be tailored to account for the exchange of margin in which one of the counterparties is an insurance provider, a pension plan manager, a mortgage service provider, or other type of end user.”

After Q&A with the staff on these proposals, Chairman Tarbert stated the Commission would consider them over the next few weeks through the CFTC’s seriatim process, by which the proposals are circulated to each Commissioner and voted on in turn, as opposed to consideration and voting being done in an open and public full Commission meeting.

See our blog post on the final rules that the Commission approved during this open meeting and an open meeting on the following day, July 23, 2020.

Making Your Intentions Known in Contract: Complex Formulae

By Graham Vinter on August 6, 2020 Posted in Africa, Financial

As project finance becomes more widespread in Africa, government officials, bankers and developers will all become exposed to the complex documentation that comes with it. Some of the payment mechanisms can be very complicated and lawyers are often asked to include “worked examples” in the documentation. A recent case looked at the use of worked examples in contracts governed by English law. The court concluded the following:

worked examples are integral parts of finance and other commercial contracts;
it is often only when narratives and formulae are worked through that their true effect can properly be seen;
where there is more than one worked example, consistency among the examples (in this case the inclusion of a missing step), strongly suggests that this was a deliberate choice by the drafter; and
it is inherently more probable that the parties’ true bargain is to be found in the worked examples.

Important Takeaways from This Case

English law legal drafters should strongly consider including worked examples where complex formulae are used;
they should include more than one worked example; and
boilerplate construction clauses should be carefully drafted to ensure they do not contribute to any confusion concerning the precedence of worked examples.

One of the issues that the case does not address is that parties in a project financing also often rely on agreed and audited computer models when determining whether or not loans can be drawn or dividends paid. This case gives no guidance on what should happen if that computer model does not accurately reflect the terms of the loan documentation. This issue should be specifically addressed in the relevant documentation.

Case reference: Altera Voyageur Production Ltd v Premier Oil E&P UK Ltd [2020] EWHC 1891 (Comm) (17 July 2020)

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Project Development and Finance Practice:

Steven Gamble +27 823 305 689 sgamble@cov.com
Graham Vinter +44 20 7067 2062 gvinter@cov.com

This post can also be found on CovAfrica, the firm’s blog on legal, regulatory, political and economic developments in Africa.

An Update on South Africa’s 2013 Protection of Personal Information Act

By Robert Kayihura and Shivani Naidoo on July 24, 2020 Posted in Africa

President Cyril Ramaphosa announced on June 22, 2020, that certain sections of the Protection of Personal Information Act, 2013 (Act 4 of 2013) (“POPIA”) would become effective on July 1, 2020. POPIA gives effect to the right to privacy in section 14 of the Constitution of the Republic of South Africa, 1996 (Act 108 of 1996). POPIA will impact all responsible parties that collect, store, process and / or disseminate personal information as part of their business activities. POPIA defines a responsible party as “a public or private body or any other person which, alone or in conjunction with others, determines the purpose of and means for processing personal information”. The commencement of these essential provisions contained in POPIA, now position South Africa in line with global best practice on data protection and privacy. The commencement of POPIA signifies a great advance for the South African data protection and privacy legal landscape.

Background

Since 2013, POPIA has been put into operation incrementally, with a number of sections of POPIA having been implemented in April 2014 (i.e. the definitions; legislation pertaining to the establishment and operation of the South African Information Regulator (“Information Regulator”); the power for the Minister of Justice and the Information Regulator to make and publish Regulations to give effect to POPIA and the procedural sections relating thereto). The incremental implementation of POPIA was largely due to the publication of the draft EU General Data Protection Regulations (“GDPR”) in 2013 and its commencement thereafter in May 25, 2018, which guided and informed the South African legislature in the drafting of POPIA. The South African legislature has ensured that POPIA mirrors the essential provisions contained in the GDPR. For example, under the GDPR, as under POPIA, individuals have a right to request the deletion of their information or request a limitation of the processing of their information in certain instances, and all businesses now have a duty to report any data breach to the Information Regulator within 72 hours of becoming aware of the breach, where practicable.

POPIA provisions effective as of July 1, 2020

The POPIA provisions effective as of July 1, 2020 pertain to:

the conditions for the lawful processing of personal information.;
the regulation pertaining to the processing of special personal information;
codes of conduct issued by the Information Regulator;
procedures for dealing with complaints;
provisions regulating direct marketing by means of unsolicited electronic communication and the general enforcement of POPIA; and
all forms of processing of personal information must, within 1 year after the commencement of the section, be made to conform to POPIA. In other words, all private and public entities will need to ensure compliance with POPIA by July 1, 2021 (see section 114(1) of POPIA)

See No. R. 21 of 2020 in Government Gazette no. 11136, Vol. 660 No 43461 dated June 22, 2020 sections 2 to 38; sections 55 to 109; section 111; and sections 114 (1), (2) and (3).Sections 110 and 114(4) of POPIA will take effect June 30, 2021. The delay in relation to the commencement of sections 110 and 114(4) is as a result of the fact that these sections pertain to the amendment of laws and the effective transfer of functions of the Promotion of Access to Information Act, 2000 (Act 2 of 2000) (“PAIA”) from the South African Human Rights Commission to the Information Regulator, which is yet to be concluded.

Key POPIA Provisions

With the commencement of POPIA, businesses operating within this space must demonstrate that they have implemented measures prescribed under and in terms of POPIA and its regulations, to ensure that personal information in its possession are protected from any unauthorized access, loss and/or use. For example, Regulation 4 (Responsibilities of Information officers) read together with sections 55 to 56 of POPIA make provision for the appointment of an information officer, who must ensure that:

“a compliance framework is developed, implemented, monitored and maintained;
a personal information impact assessment is done to ensure that adequate measures;
and standards exist in order to comply with the conditions for the lawful processing of personal information;
a manual is developed, monitored, maintained and made available as prescribed in sections 14 and 51 of the PAIA;
internal measures are developed together with adequate systems to process request for information or access thereto; and
internal awareness sessions are conducted regarding the provisions of POPIA, regulations made in terms of POPIA, codes of conduct, or information obtained from the Information Regulator”.
POPIA also requires businesses to incorporate suitable technical and security measures to protect personal information, in line with the volume, nature, and sensitivity of the personal information in a business’s possession.

POPIA provides data subjects who are affected by a data breach the right to institute a claim against a business that has inadequately stored information. Data subjects will not be required to prove that the business storing and/or processing the information was negligent in doing so. This means that, POPIA empowers data subjects to institute claims against parties responsible for their personal information on a strict liability basis.Furthermore, section 114(1) is of particular importance as it states that all forms of processing of personal information must, within 1 year after the commencement of the section, be made to conform to POPIA, which means that both public and private entities must ensure compliance with the POPIA by July 1, 2021. However, it stands to reason that all entities subject to POPIA should attempt to comply with the provisions of the POPIA as soon as possible in order to give effect to the right of privacy.Businesses should note that once POPIA is in full force and effect, non-compliance with POPIA may result in administrative fines of up to R10 million, imprisonment, civil damages and most importantly, reputational harm.

For further information on POPIA, please contact Robert Kayihura at RKayihura@cov.com or Shivani Naidoo at SNaidoo@cov.com.

This post can also be found on CovAfrica, the firm’s blog on legal, regulatory, political and economic developments in Africa.

OCC Interpretation Paves Way for Banks to Custody Cryptocurrency

By Randy Benjenk on July 23, 2020 Posted in Blockchain, Fintech

Today, the OCC released an interpretive letter concluding that national banks and federal savings associations (together, “banks”) may permissibly provide cryptocurrency custody services for customers. The letter, written by Chief Counsel Jonathan Gould, describes custody of cryptocurrency as a modern form of the traditional banking activity of providing safekeeping and custody services, which the agency has previously permitted banks to conduct through electronic means. The letter also “reaffirms the OCC’s position that national banks may provide permissible banking services to any lawful business they choose, including cryptocurrency businesses, so long as they effectively manage the risks and comply with applicable law.”

The letter addresses the following notable topics:

Scope of permissible custodial activities. The letter primarily addresses the activity of a bank holding cryptographic keys associated with a customer’s cryptocurrency assets. It notes that digital currencies exist only on the blockchain or a distributed ledger, meaning that no party has physical possession of the asset. As such, a bank “holding” digital currencies on behalf of a customer will actually be taking possession of the cryptographic access keys to a unit of cryptocurrency, either through “hot” wallets (i.e., internet-connected devices) or “cold” wallets (i.e., non-internet connected devices such as paper or hardware wallets that can be stored in a physical vault). The letter also states that a bank may provide “related” custodial services, and in a footnote, lists the examples of facilitating a customer’s cryptocurrency and fiat currency exchange transactions, transaction settlement, trade execution, recording keeping, valuation, tax services, reporting, or other appropriate services.
Types of charters covered. The letter describes the authority of a bank to engage in cryptocurrency custody services as being within both the business of banking and incidental powers (with respect to non-fiduciary custody) and fiduciary powers (with respect to fiduciary-related custody). Accordingly, the letter concludes that providing cryptocurrency custody services is permissible for a bank acting in both non-fiduciary and fiduciary capacities, meaning that a national trust company or trust-only federal savings association should likewise have authority to provide such services to fiduciary clients pursuant to its fiduciary powers. The letter notes that a bank would be subject to the OCC’s fiduciary regulations when providing cryptocurrency custody services in a fiduciary capacity.
Risk management processes and controls. The OCC expects a bank to conduct its activities pursuant to appropriate risk management processes and controls. For example, the letter directs banks to OCC Bulletin 2017-43, which addresses risk management principles in the context of offering new, modified, or expanded products and services.
- Use of custody agreements. The letter notes that custody agreements are an important risk management tool and should clearly establish the custodian’s duties and responsibilities. Additionally, the handling, treatment, and servicing of cryptocurrencies held in custody may raise unique issues that should be addressed in the agreement, such as the treatment of “forks” or splits in the code underlying the cryptocurrency being held.
- Use of sub-custodians. The letter also permits a bank acting as custodian to engage a sub-custodian for cryptocurrency it holds on behalf of customers, but states that the custodian bank should develop processes to ensure that the sub-custodian’s operations have proper internal controls to protect the customer’s cryptocurrency.
Supervisory consultation. The letter does not require a bank to make a filing with the OCC to engage in cryptocurrency custody activities, but states that a national bank should consult with OCC supervisors “as appropriate” prior to engaging in the activities.
Other laws and regulations. The letter notes that cryptocurrencies that are considered “securities” under the federal securities laws may be subject to the OCC’s regulations governing recordkeeping and confirmation requirements for securities transactions, 12 C.F.R. Part 12, as well as the federal securities laws.

Increased Enforcement Risk for Criminal Campaign Finance Violations

By Robert Kelner, Peter Koski and William Sokolove on July 17, 2020 Posted in Campaign Finance, Uncategorized

Every four years, prosecutors at the Department of Justice (“DOJ”) train their sights on money spent to influence the outcome of the presidential election—and those who spend it. While the Federal Election Commission (FEC) has exclusive jurisdiction to penalize and enforce civil violations of the Federal Election Campaign Act (FECA), 52 U.S.C. § 30101 et seq., DOJ is responsible for criminally prosecuting “knowing and willful” FECA violations that rise to a certain monetary threshold. The Department always “has a strong interest in the prosecution of election-related crimes,” but the massive influx of money that comes with a presidential election creates increased enforcement opportunities—and carries increased risk for companies and individuals to run afoul of FECA and other laws aimed at protecting the integrity of U.S. elections. Even the most well-meaning company or individual may be caught in the crossfire of an investigation or subpoena.

Several high-profile FECA cases related to the 2016 presidential election cycle suggest that FECA will be at the top of federal prosecutors’ minds this time around. For example, the guilty plea of President Trump’s former lawyer, Michael Cohen, included two related FECA violations. Specifically, Cohen admitted to knowingly and willfully violating both 52 U.S.C. § 30116, which limits excessive contributions, for arranging six-figure in-kind donations to the President’s election campaign (well above the $2,700 individual contribution total permitted per election cycle), and § 30118, FECA’s prohibition on corporate contributions made directly to federal campaigns, for facilitating payment of the in-kind donations through a corporation.

In addition to FECA’s limits on excessive and corporate contributions, criminal penalties are available for knowing and willful violations of several other FECA provisions, as recent prosecutions have demonstrated. The following are likely to be specific enforcement priorities for the Department:

Ban on Contributions and Donations From Foreign Nationals (§ 30121): FECA’s ban on contributions and donations from “foreign nationals” applies to non-citizens who are not lawful permanent residents (i.e., non-citizens who are not green card holders), as well as “foreign principal[s]” as that term is defined in the Foreign Agents Registration Act (FARA), 22 U.S.C. § 611, including foreign governments, foreign political parties, and foreign corporations. One particularly thorny compliance area is the applicability of this prohibition to domestic U.S. subsidiaries of parent corporations organized under the law of, or with their principal place of business in, a foreign country. Although the issue is not directly addressed by the statute, the FEC has offered guidance that such domestic subsidiaries do not qualify as “foreign principals” and are therefore not independently subject to FECA’s ban on donations by foreign nationals (keeping in mind that contributions by both foreign and domestic corporations are prohibited at the federal level). However, a donation by the domestic subsidiary may not be funded by the foreign parent, nor can foreign nationals participate in any way in the donation. FECA’s ban on political donations by foreign nationals applies with equal force to donations to presidential inaugural committees and any state- and local-level donations. In fact, this is one of the few areas where the federal government can regulate, and DOJ can prosecute, activity in non-federal elections.

The issue of foreign money in elections has in the last several election cycles been a special focus for the Department. For example, in 2016 the Department successfully obtained a guilty plea from Bilal Shehu, who admitted to illegally funneling $80,000 of funds from a foreign national into Barack Obama’s 2012 reelection campaign. DOJ’s interest in the case stemmed from a remarkable series of events: the money that Shehu illegally contributed went toward two $40,000 tickets to a San Francisco fundraiser with then-President Obama. One of those tickets was used by Edi Rama—now the Prime Minister of Albania—who was denied entry to the fundraiser, yet able to get a photograph with the president. Rama used his photograph with the president as part of his successful campaign in Albania during the country’s national elections.

Other notable foreign money FECA cases in recent years include DOJ’s ongoing prosecution of Lev Parnas and Igor Fruman for alleged federal and state donations funded by foreign nationals to facilitate licensing of a business venture, and the successful guilty plea DOJ obtained from Imaad Zuberi for funneling foreign funds into hundreds of thousands of dollars of illegal campaign contributions.

“Conduit” Contributions (§ 30122): also known as “reimbursed contributions,” “straw donor” contributions, and contributions in the name of another, these are one of the most common FECA violations. A conduit contribution entails one individual passing money to a second “conduit” individual, to fund a donation in the conduit’s name to a federal candidate. Conduit contributions are typically used to hide the identity of the true donor, often for the purpose of evading FECA’s substantive prohibitions, such as the limits on excessive contributions and contributions funded from impermissible sources as prohibited by § 30118 (corporate contributions) and § 30121 (contributions funded by foreign nationals). Conduit contributions may also be subject to felony prosecution under federal conspiracy and false statement statutes.

A particular area of conduit contribution exposure for corporate clients is donations that are arranged by a corporate official, but made in the names of employees who are then reimbursed from corporate funds. Such contributions are illegal under FECA, and, if over $10,000 in the aggregate and knowingly and willfully made, prosecutable as felonies under § 30118 and § 30122. This can potentially lead to substantial monetary penalties and even prison sentences for individuals involved: conduit contributions over $10,000 can lead to up to two years in jail time, and conduit contributions over $25,000 can lead to up to five years in jail time.

Just yesterday, former Kentucky Democratic Party chairman Jerry Lundergan was sentenced to 21 months in prison and fined $150,000 for “orchestrating a multi-year scheme to funnel more than $200,000 in secret, unlawful corporate contributions” from a company he owned into the Senate campaign of his daughter, Alison Lundergan Grimes. A jury had previously convicted Lundergan of ten felony counts, including one count of making a corporate campaign contribution. Another example of a recent prosecution is the $1.6 million penalty agreed to in November of 2019 by Dannenbaum Engineering Corporation, which entered into a Deferred Prosecution Agreement with DOJ to resolve $323,000 of illegal conduit contributions made through its employees over a two-year period.

“Coordinated Expenditures” (§ 30116): independent expenditures by individuals and political action committees can become impermissible “coordinated” expenditures if made “in cooperation, consultation, or concert, with, or at the request or suggestion of” a candidate or a candidate’s authorized committee. Coordinated expenditures are treated as “contributions” for the purposes of FECA and can lead to criminal penalties. While impermissible “coordination” cases are considered difficult to prosecute, the 2015 case of Virginia political consultant Tyler Harber—sentenced to two years of jail time for exactly this conduct—shows that such prosecutions are not impossible. In a case hailed as “the first criminal prosecution in the United States based upon the coordination of campaign contributions between political committees,” Harber pleaded guilty to violating FECA for making and directing $325,000 of expenditures as part of a PAC he created and operated to benefit a candidate for Congress, while simultaneously serving as the campaign manager for that candidate. Harber admitted to “participating in the purchase of specific advertising” by the PAC in order to benefit the candidate, while knowing that such coordination was unlawful. Even though the circumstances of Harber’s coordination that led to prosecution in this case were particularly egregious, given the increased use of independent expenditures it is possible that prosecutors will use the Harber case as a model for more aggressively pursuing other coordination cases in the future.

“Scam PACs”: a developing area of criminal campaign finance enforcement is “Scam PACs,” or “political committees that collect political contributions, frequently using the name of a candidate, but which spend little to none of the proceeds on political activity benefitting that candidate.” Because there is no clear rule setting out how much money a PAC must spend on advancing political causes versus compensating the PAC managers, criminal Scam PAC cases can be difficult to pursue under FECA. Nonetheless, DOJ first successfully prosecuted a Scam PAC case in November of 2018 as a wire fraud conspiracy, and there have been several more prosecutions since then. In January of 2020, for example, a Maryland political consultant was sentenced to three years in prison for operating “Conservative StrikeForce” PAC, through which he solicited donor funds for conservative candidates and causes, but then spent the donations on himself. And in July of 2019, a former candidate for Congress pleaded guilty to operating “fraudulent and unregistered political action committees” through which he collected over $1 million, which he spent on “purely personal expenses.” The defendant in that case admitted to knowingly and willfully violating FECA’s PAC disclosure requirements, in addition to one count of wire fraud.

Individuals and corporate entities moving to increase their political contributions and expenditures over the next four months—whether through corporate PACs, individual donations by employees, or otherwise—must be mindful of the FECA provisions above and the potentially serious criminal penalties for violations. Even those that are not themselves the target of law enforcement may be swept into a costly investigation that could have been avoided through effective compliance, using discretion when determining which organizations and individuals to transact with, and consulting outside counsel when questions arise.

The European Commission launches an antitrust sector inquiry into the sector of Internet of Things for consumer-related devices and services

By Kevin Coates, Johan Ysewyn and Andrea Zulli on July 17, 2020 Posted in Antitrust, Competition, EU Law and Regulatory, Internet of Things (IoT)

On 16 July 2020, the European Commission (“Commission”) announced that it has launched an antitrust sector inquiry into “consumer-related products and services that are connected to a network and can be controlled at a distance, for example via a voice assistant or mobile device.”

Commission Executive Vice President and Competition Commissioner Vestager said that “[t]he sector inquiry will cover products such as wearable devices (e.g. smart watches or fitness trackers) and connected consumer devices used in the smart home context, such as fridges, washing machines, smart TVs, smart speakers and lighting systems. The sector inquiry will also collect information about the services available via smart devices, such as music and video streaming services and about the voice assistants used to access them.” Connected cars are outside of the scope of the inquiry.Commissioner Vestager noted that the Internet is increasingly embedded in consumer devices (around 180 million devices in 2023 with an estimated value of around Euro 22 billion), and that: “[t]he consumer Internet of Things is expected to grow significantly in the coming years and become commonplace in the daily lives of European consumers […] There are indications that certain company practices may structurally distort competition. In particular, there are indications relating to restrictions of data access and interoperability, as well as certain forms of self-preferencing and practices linked to the use of proprietary standards. Internet of Things ecosystems are often characterised by strong network effects and economies of scale, which might lead to the fast emergence of dominant digital ecosystems and gatekeepers and might present tipping risks. Therefore, through this competition sector inquiry, the Commission will gather market information to better understand the nature, prevalence and effects of these potential competition issues, and to assess them in light of EU antitrust rules.”

Commissioner Vestager also indicated that the key focus areas of the sector inquiry are expected to be:

Data: “…access to large amounts of user data appears to be the key for success in this sector, so we have to make sure that market players are not using their control over such data to distort competition, or otherwise close off these markets for competitors. This sector inquiry will help us better understand the nature and likely effects of the possible competition problems in this sector”;
Risk of gatekeepers and “tipping” markets: the Commission wants to establish if/to what extent IOT markets face such risks. Commissioner Vestager mentioned that the risk markets reaching a “tipping point” must be avoided.
Interoperability: the Commission wants to ensure that smart devices are truly interoperable and able to communicate with each other. Commissioner Vestager emphasised that “[i]nteroperability is of the essence if we want to make this market accessible“
Devices including voice assistants: Devices, including voice assistants are interfaces between consumers and products and can have an impact on consumers’ purchasing behaviour. The Commission is concerned about possible self-preferencing/foreclosure.

The Commission will send requests for information (RFIs) to around 400 players from around the world, covering all levels of the supply chain (e.g. patent holders, software developers, smart device manufactures, and related service providers).

The RFIs should be circulated in the next days according to Commissioner Vestager (or weeks according to the Commission’s press release). Commission Vestager also indicated that the Commission is currently aiming at issuing a preliminary report in spring 2021.

The sector inquiry runs parallel to the other steps taken by the Commission in the context of its digital strategy, such as the consultation on the New Competition Instrument, the Digital Services Act (see https://ec.europa.eu/digital-single-market/en/digital-services-act-package), and other regulatory initiatives related to artificial intelligence, data and digital platforms (see https://ec.europa.eu/digital-single-market/en/content/european-digital-strategy).

Finally, Commissioner Vestager also indicated that this sector inquiry “sends an important message to powerful operators in these markets that we are watching them and that they need to do business in line with competition rules“.

What are sector inquiries

The Commission describes sector inquiries – https://ec.europa.eu/competition/antitrust/sector_inquiries.html – as:

“investigations that the European Commission carries out into sectors of the economy and into types of agreements across various sectors, when it believes that a market is not working as well as it should, and also believes that breaches of the competition rules might be a contributory factor.”

They typically take several years from initial inquiry to final report, so the Commission’s goal of issuing a preliminary report by the Spring of 2021 indicates that it will seek to expedite the inquiry; follow up investigations into specific companies, however, can start at any time and some will usually start before the sector inquiry as a whole is finalised.

What can companies expect

Imminently, around 400 companies at all levels of the value chain can expect to receive requests for information and documents, asking for some combination of opinion-type input to help identify issues, information on contracts and disputes, and other internal documents.

Although the Commission will already have an initial idea of the issues it wants to investigate, the replies to these requests for information and other contacts between the Commission and companies will help to shape the sector inquiry and the future cases that the Commission intends to take.

For example, with the e-commerce sector inquiry, Commission officials have said that they were surprised by the number of contracts they found that contained clauses that the Commission felt were well-established as unlawful, such as market partitioning clauses.

How Covington can help

With antitrust attorneys in Brussels, the US and China, Covington provides global expertise in handling major inquiries, as well as in-depth experience of relevant technology issues, including through our Internet of Things Task Force.

Our roster of ex regulators can provide detailed insight into how such inquiries work, and how companies can identify and pursue their business objectives in relation to the inquiries.

Contact

Johan Ysewyn                                 +32 2 549 52 54                     jysewyn@cov.com
Kevin Coates                                   +32 2 549 52 32                      kcoates@cov.com
Andrea Zulli                                    +32 2 549 52 80                     azulli@cov.com

Advocate General delivers Opinion on Novel Food Status of Insects

By Bart Van Vooren and Loïc Waty on July 16, 2020 Posted in EU Law and Regulatory, Food and Drug Law

On 9 July 2020, Advocate General Bobek delivered his opinion on the status of edible insects (e.g., mealworms, locusts, and crickets) under the EU novel foods rules. While insects fall under the scope of the new EU Novel Food Regulation 2015/2283, the opinion recommends the Court of Justice to deny novel food status to such ingredients under the old legal regime of now repealed Regulation 258/97.

The AG Opinion concerns a preliminary reference from the French Council of State. Entoma SAS argued that whole insects for human consumption did not fall under the scope of Regulation 258/97 and were thus not subject to a safety assessment before their placing on the market. Both France and Italy held that whole insects were covered by Regulation 258/97 and relied on the current scope of Regulation 2015/2283 to demonstrate this. AG Bobek disagreed with both governments.

According to the Advocate General, whole insects for human consumption cannot be considered as novel foods under Regulation 258/97 as they do not fulfill the substantive condition of “food ingredients isolated from animals” in Article 1(2). AG Bobek interpreted the definition as effectively requiring animal-based foods to go through a process of extraction from the animal before they can fall under the scope. On this point, he stated that “only specific parts or elements of animals used as an ingredient could be included.” Such a requirement substantially limits the scope of Regulation 258/97 for animal-based foods. The AG therefore concluded that whole insects intended to be consumed as such cannot qualify as novel food as they cannot be considered as isolates, nor as ingredients.

In contrast, AG Bobek pointed out that the new rules for novel foods provided by Regulation 2015/2283 now clearly includes whole insects in its scope. Under Article 3(2)(a)(v) of Regulation 2015/2238, “food consisting of, isolated from or produced from animals or their parts” can qualify as novel. The AG considered that this definition “is very clearly an amendment, considerably expanding the scope of that definition.” As whole insects for human consumption are clearly “food consisting of”, or “food produced from” animals, they now qualify as novel foods under Regulation 2015/2238. This view is also confirmed by recital 8 of Regulation 2015/2238, which explicitly states that “the categories of food which constitute novel foods […] should cover whole insects and their parts.”

Since the scope of the EU novel foods framework has been clarified in Regulation 2015/2238, several novel foods applications concerning edible insects have been submitted to the Commission for a safety assessment. The Commission’s website lists the submitted summaries of applications and includes applications concerning insects, such as mealworms, crickets, locusts, and grasshoppers (see here).

The AG opinion is non-binding. It will now be for the Court of Justice to assess the case.

The opinion is available here.

Look Before You Release — ASBCA Enforces Release of Claims to Contractor’s Detriment

By Kayleigh Scalzo, Kevin Barnett and Carl Wiersum on July 16, 2020 Posted in COVID-19, Uncategorized

A recent Armed Services Board of Contract Appeals decision serves as a timely reminder for contractors to carefully read and consider any release of claims before signing — especially when you may have otherwise-recoverable coronavirus-related cost increases.

The decision, Appeal of Horton Construction Co., Inc., ASBCA No. 61085 (June 2, 2020), concerned Horton Construction’s contract with the Army. The contract had one CLIN that covered two separate activities — “concrete crushing and erosion control projects.” Based on language in the contract (among other things), Horton Construction believed that there would be a certain volume of “concrete crushing” and based its pricing on that assumed volume. During performance, the volume of “concrete crushing” ended up being much lower — which provided ground for a potential claim.

When Horton Construction pursued its claim, however, it ran into an obstacle. Throughout the performance of the contract, Horton Construction signed several modifications, a “CERTIFICATION OF FINAL PAYMENT,” and a “CONTRACTOR RELEASE OF CLAIMS.” Each of these contained claims release language, such as:

[T]he contractor, upon payment of the said sum by the United States of America . . . does remise, release, and discharge the Government, its officers, agents, and employees, of and from all liabilities[,] obligations, claims, and demands whatsoever under or arising from the said contract, other than claims in stated amounts as listed below.

Based on those releases, the ASBCA concluded that Horton Construction was barred from seeking any further payment. As the ASBCA explained:

When a release is clear, unequivocal, and unconditional, the release must be given its plain meaning and effect. When such a release exists, it bars any and all claims for additional compensation based upon events occurring prior to the execution of the release. (citations removed.)

Horton also argued that the individual who signed the releases lacked the authority to do so, but the Board rejected this theory based on the facts. Because the company held out the individual as the offeror, signatory, acting vice president, and an official “point of contact,” the ASBCA concluded that he had actual authority. The Board also found in the alternative that the individual had apparent authority because the government reasonably interpreted the individual to have the authority based on the company’s actions. Thus, the individual could bind the company.

What should contractors take away from Horton Construction? Although the question of whether a contractor has released a claim is a fact-specific one, recent decisions have generally tilted toward reading waivers broadly in favor of the government. That is particularly true following the Federal Circuit’s decision in Bell BCI Co. v. United States, 570 F.3d 1337 (Fed. Cir. 2009), which held that generic release language in a contract modification could bar a contractor’s claims.

As a result, here are some key takeaways for contractors to consider:

Read the Waiver. Read everything in full before you sign — including any waivers or releases.
Understand the Waiver. Fully understand the scope and breadth of the waiver or release before you sign, and be aware that certain phrases may have nuanced legal meaning.
Identify Potential Claims. Before you sign any release or waiver, identify any potential claims that you may be giving up.
Get a Carve-Out. If there are potential claims that you do not want to waive, consider negotiating a specific reservation in the waiver.

Our series on earlier key decisions on waivers and releases includes Orr; Supply & Service Team and ServiTodo; MBD Maintenance; Ahtna Environmental; and Perry Bartsch. We will continue to monitor cases in the area.

The revision of the Vertical Block Exemption Regulation – What is likely to change?

By Johan Ysewyn and Daniel Muheme on July 14, 2020 Posted in Antitrust, Competition, EU Law and Regulatory

Introduction

On 25 May 2020, the European Commission (“Commission”) has published its Final Report of the support studies for the evaluation of its Vertical Block Exemption Regulation (“VBER”) and the accompanying Guidelines on Vertical Restraints (the “Final Report”). The Final Report was published following a public consultation from 4 February to 27 May 2019 to gather views on the VBER’s functioning in the digital age. This was inspired by the growing importance of e-commerce and the interest in various online companies. This evolution has affected distribution and pricing strategies for both manufacturers and retailers, which the Commission decided warranted an evaluation of some of the current rules.

The purpose of the evaluation

The VBER and its accompanying Guidelines exempt certain vertical agreements from the prohibition under Article 101(1) TFEU and contains certain “hardcore” restrictions against certain vertical conduct.

As reflected by the Final Report, online trade has expanded rapidly over the past decade, both on a business-to-business and on a business-to-customer level, and distribution models have changed to cater to new trends and market realities, leading to changing customer behaviour. E-commerce and online platforms have made searching for information easier and cheaper for consumers, increasing transparency thus making it easier for customers to compare prices and for suppliers to monitor competitors’ prices. This has led to intensified competition and enabled undertakings to reach a wider set of customers.

In response to these digital changes, companies have also used vertical agreements differently over time. Although the essence of the agreements covered by the VBER and the Guidelines has remained the same, certain agreements – such as online sales restrictions and most-favoured nation (“MFN”) clauses – have become more widespread. As a result, the Commission considers that the VBER and the Guidelines might no longer sufficiently cover the latest developments. The Final Report stated that National Competition Authorities (“NCAs”) and national courts identified vertical restraints most frequently in relation to price restrictions, selective distribution, exclusive distribution and MFN or parity clauses over the past decade. This highlights some of the areas within the current framework the Commission may be considering for potential revision.

Findings from the Final Report

Selective distribution

Selective distribution agreements are popular in a wide range of sectors, especially in relation to cosmetics, sports goods and household appliances. The restraints most commonly reported by NCAs in this context include restrictions on internet sales, sales on marketplaces/platforms, price comparison tools, keyword bidding, dual pricing, sales to retailers, and cross-selling. The public consultation found that stakeholders generally think selective distribution agreements should continue to be block-exempted, as these agreements protect brand value, stakeholder investments, and the development of additional sales services.

Most-favoured nation clauses

The consultation distinguished between wholesale MFNs – most common in the ‘mass market’ segment – and retail MFNs – most prevalent in the online world. The responses received by the Commission identified reduction of frequent price negotiations between manufacturers and suppliers as one of main benefits of block-exempting MFN clauses. In the context of retail MFNs, some stakeholders expressed concern about the use of MFNs by travel agencies in the hotel sector. The Commission expressed that view that, based on the information collected during the evaluation, both narrow MFNs (i.e. where better terms cannot be offered via certain channels or to certain parties) and wide MFNs (i.e. where better terms cannot be offered to any channel or party) have generated anticompetitive effects in the hotel booking sector.

More generally, the report observed that determining the effects of MFN clauses requires a case-by-case analysis that looks to the specific facts and that, outside the hotel sector, the information collected in the study did not indicate that either narrow or wide MFN clauses have produced any widespread anti-competitive effects.

Resale price restrictions

Resale price maintenance (“RPM”) is considered as a hardcore restriction under the VBER, so it is illegal unless the party employing it can establish an adequate efficiency justification. As a result, stakeholders confirmed that the use of RPM has decreased over the past decade, but minimum resale prices and minimum advertised prices are still used to an extent. The consultation found that the Guidelines are not sufficiently clear on the rules surrounding RPM. As it is a mechanism to prevent price competition on the intra-brand level, RPM can be used both to strengthen brands and promote competition as well as to support anti-competitive practices. The theoretical and empirical literature, as well as the Commission’s consultation, also suggest that RPM can have both pro- and anti-competitive effects.

The report indicates that recommended resale prices, which are not deemed to be hard-core restrictions by the VBER, are fairly widespread and do not seem problematic. Therefore, most complaints before NCAs were dismissed due to insufficient evidence, which means those recommended resale prices did not operate as fixed or minimum prices. Finally, the Final Report found that maximum resale price restrictions, which also are not hard-core restrictions under the VBER and which are often used to keep consumer prices lower to allow manufacturers’ brand labels to compete with private labels, are less common.

Cumulative effects of vertical restrictions

Cumulative effects refer to situations in which access to a market is significantly restricted by the cumulative effect of parallel networks of similar vertical agreements used by competitors. The literature reviewed during the course of the Commission’s consultation suggests that the cumulative effects of vertical restraints could harm competition more than their isolated use by individual players.

Efficiency

The Final Report concludes that, without the existence of the VBER and the Guidelines, the legal costs for undertakings would be much higher, and legal certainty relating to the assessment of vertical agreements would be reduced. However, some stakeholders have indicated that the current VBER increases compliance costs for certain undertakings as they do not sufficiently reflect the growth of digital commerce over the past decade.

Conclusion

Until fairly recently, the vast majority of case law related to vertical restrictions was at the level of the NCAs and national courts. The Commission’s final report on the e-commerce sector inquiry represented a turning point. Since its publication in May 2017 the Commission has showed renewed interest in vertical restrictions and fined several undertakings for RPM and cross-sales restrictions in 2018. It fined Nike and Guess for restricting cross-border sales in 2019. The Coty judgment of the European Court of Justice (“ECJ”) also brought the question of online marketplace sales to the forefront, as the ECJ ruled that a platform ban within a selective distribution system is permissible under certain circumstances. These recent decisions demonstrate that vertical agreements are likely to remain a topic of interest, including at the level of the EU authorities. Therefore, the current evaluation on the effectiveness, efficiency and relevance of the VBER and its Guidelines is important in light of the digital developments affecting vertical relations. Although the Final Report provides a first glance of likely focus, the Commission still has to carry out a detailed impact assessment, which means that no new rules are to be expected before the expiry of the VBER in May 2022.