Federal Reserve Issues Notice of Proposed Rulemaking Regarding Confidential Supervisory Information and FOIA Procedures

By Jean Veta and Lucille Bartholomew on Posted in Compliance Issues, Uncategorized

On June 14, 2019, the Federal Reserve Board (“Federal Reserve”) released a Notice of Proposed Rulemaking (“NPR”) requesting public comment on updates to its regulations governing the disclosure of confidential supervisory information (“CSI”) and its Freedom of Information Act (“FOIA”) procedures. Although the Federal Reserve classified many of the proposed revisions as “clarifications” or “technical updates,” the NPR includes several important changes to this rule. Comments must be received by August 16, 2019.

The Definition of “CSI”

The NPR proposes an amended definition of CSI to clarify that CSI includes any nonpublic information exempt from disclosure pursuant to 5 U.S.C. § 552(b)(8) (FOIA Exemption 8) “and includes information that is or was created or obtained in furtherance of the Board’s supervisory, investigatory, or enforcement activity. . . .” The current definition of CSI refers to information “gathered” by the Federal Reserve “in the course of any investigation, suspicious activity report, cease-and-desist orders, [and] civil money penalty enforcement orders,” among other things. The revised definition also makes clear that CSI includes portions of internal financial institution documents that contain, refer to, or would reveal CSI. In the NPR press release, the Federal Reserve indicated that the revised CSI definition does not expand or reduce the information covered by the definition, but rather is for “clarification purposes.”

Disclosure of CSI

If adopted, the new rule would allow a supervised financial institution to disclose CSI to the directors, officers, and employees of the institution’s “affiliates,” as defined in Regulation Y (12 C.F.R. § 225.2(a)), to the extent such individuals have a need for the CSI in the performance of their official duties. The current rule only allows institutions to disclose CSI to their parent holding company.

The proposed rule would also allow supervised financial institutions to disclose CSI directly to the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau (“CFPB”), and state financial supervisory agencies that supervise the institution, as long as the institution’s Federal Reserve CPC agrees that the other agencies have a legitimate supervisory or regulatory interest in the information. The proposed rule would also amend the regulations to clarify that the Federal Reserve may disclose CSI to the CFPB and state financial supervisory agencies.

Disclosures of CSI to Outside Legal Counsel and Auditors

The proposed rule would also modify the requirements governing disclosure of CSI to outside legal counsel and auditors by eliminating the requirement to view CSI on the premises of the supervised financial institution. The amendment would allow outside legal counsel and auditors to view CSI off-premises, subject to written agreements that, among other things, would require the electronic files to be returned, destroyed, or rendered effectively inaccessible through access control measures or other means at the conclusion of the engagement. The proposed rule would also permit disclosure only “so long as the disclosure is necessary to the legal counsel’s or auditor’s engagement.”

Procedures for Confidential Treatment Requests

The NPR would revise the procedures for confidential treatment requests by permitting such requests for “personal privacy information” and “proprietary commercial information.” The proposed revisions would require persons who submit confidential treatment requests to “state in reasonable detail the facts supporting the request, provide the legal justification, identify the specific information for which confidential treatment is requested, and include an affirmative statement that such information is not available publicly.” The proposed revision states that “[c]onclusory statements that release of the information would cause competitive harm generally will not be considered sufficient to justify confidential treatment . . . .”

The Effect of the Federal Reserve’s Disclosure of CSI on Privilege

The NPR proposes additional language stating that disclosures of CSI do not constitute a waiver by the Federal Reserve of any privileges. In the preamble to the proposed rule, the Federal Reserve indicates that the purpose of this language is to “make explicit” that the Federal Reserve’s disclosure of CSI “on a confidential and limited basis” does not constitute forfeiture of any privileges, including the bank examination privilege.

The Definition of “Supervised Financial Institution”

The proposed rule provides an amended definition of “supervised financial institution” to clarify that the term includes any entity or service subject to examination by the Federal Reserve, not just those institutions supervised by the Board.

In Major Blow To Its Opponents, SEC Pay-to-Play Rule Survives D.C. Circuit Challenge

By Zachary G. Parks on Posted in Uncategorized

The U.S. Court of Appeals for the D.C. Circuit yesterday issued a long-awaited opinion upholding, on the merits, a recent update to the SEC’s pay-to-play rule.  While the case involved only a narrow piece of the rule, the decision’s logic is worded more broadly and could apply to the SEC rule as a whole, making future challenges to the rule much more difficult, at least in the D.C. Circuit.

For years, opponents of the SEC pay-to-play rule have tried to obtain a court ruling declaring the rule unlawful or unconstitutional.  Until now, those challenges had been stymied on procedural grounds.  Yesterday, these opponents to the rule narrowly overcame these procedural obstacles only to be a dealt a substantive, precedent-setting defeat.

Background: 25 Years of Challenges To Pay-to-Play Rules

To understand the significance of yesterday’s opinion, we need to travel back to 1994, when the Municipal Securities Rulemaking Board (“MSRB”) adopted a “pay-to-play” rule to reduce the role of political contributions in the awarding of municipal securities business.  The rule effectively restricted broker-dealers and those affiliated with them from making certain political contributions.  The rule was challenged shortly thereafter but, in an important case called Blount v. MRSB, the D.C. Circuit rejected a constitutional challenge to this rule on the merits.

Having survived a constitutional challenge, the MSRB rule became the predicate for the well-known pay-to-play rule for investment advisers, adopted by the Securities & Exchange Commission (“SEC”) in 2010.  That rule, among other things, prohibits investment advisers from providing paid investment advisory services to a government entity within two years of a political contribution to certain government officials by the adviser and certain “covered associates” of the adviser.

In 2015, the Financial Industry Regulatory Authority (“FINRA”) adopted a similar pay-to-play rule for FINRA members.  Pursuant to the rule, FINRA members may not “engage in distribution or solicitation activities for compensation with a government entity on behalf of an investment adviser that provides or is seeking to provide investment advisory services to such government entity within two years after a contribution to an official of the government entity is made by a covered member or a covered associate” of the FINRA member.  The rule also prohibits FINRA members and their covered associates from “solicit[ing] or coordinat[ing] any person or political action committee” to make any contributions to a covered official or certain political parties.  As a result of the rule, certain individuals affiliated with FINRA members are effectively barred from making or soliciting certain political contributions, even if their motive for making the contribution or solicitation was purely ideological and unrelated to their work for FINRA members.

The SEC approved the FINRA rule in 2016 and two state Republican parties then challenged that SEC order in the 11th Circuit.  The 11th Circuit transferred the case to the D.C. Circuit.  In a consequential decision, instead of dropping the case, the parties decided to pursue the challenge in the D.C. Circuit, notwithstanding the bad, on-point precedent in Blount.

The D.C. Circuit’s Decision

Yesterday’s decision, authored by Judge Ginsburg, reached the merits of the challenge for the first time.  The court found that the political parties had standing because they had submitted an affidavit from a regulated placement agent stating that he would have solicited friends and family to donate to the parties but for the rule.  This possible loss of future contributions was sufficient to establish injury-in-fact and standing, in the court’s view.  (Judge Sentelle dissented, arguing that any such injury was too speculative and that parties had therefore not established standing.)

Turning to the merits, the court dismissed the parties’ legal arguments one-by-one.  First, the court concluded that the rule fell “within the authority of the SEC to reduce distortion in financial markets.”  It concluded that, notwithstanding Congress’s choice to set contribution limits directly in the Federal Election Campaign Act (“FECA”), Congress did not “reserve[] to itself the authority to determine when a political contribution poses a risk of corruption”: “In our view, that the Congress has increased the contribution limits to keep pace with inflation and that it has prohibited certain groups from making contributions is not evidence of a ‘clear congressional intention’ to preclude the SEC from limiting campaign contributions that distort financial markets.” The court also held that FECA and the SEC pay-to-play rules “can peacefully coexist” notwithstanding an earlier (and arguably later-superseded) D.C. Circuit opinion invalidating a postal regulation that imposed political mail disclosure requirements beyond those imposed by FECA.

The court next rejected the claim that the pay-to-play rule was arbitrary and capricious in violation of the Administrative Procedure Act because the rule was a reasonably-drawn “prophylactic” attempt to reduce corruption or its appearance.  Further, because the court concluded that the rule was “closely drawn to serve a sufficiently important governmental interest” — preventing corruption and its appearance — the parties’ First Amendment arguments also failed.  In reaching this constitutional decision, the Court relied heavily on Blount, which, as noted above, upheld the very-similar MSRB rule against constitutional challenge.

Recognizing that the pay-to-play rules impose another federal limit on contributions to candidates on top of the per-candidate limits, the parties argued that the Supreme Court undermined Blount in the McCutcheon case, a case in which the Court struck down aggregate contribution limits, criticizing the then-existing overlap between per candidate and aggregate limits as a “prophylaxis-upon-prophylaxis approach” to reducing corruption and its appearance.  The D.C. Circuit rejected this argument, concluding that Blount was still good law.

It also rejected perhaps the best argument of petitioners — that the pay-to-play rule has a “disparate impact … on candidates running for the same seat,” “where one candidate is a covered official and the incumbent (or another candidate) is not.”  The court simply concluded that, even though there is a disparate impact, it is justified by the interest in preventing corruption and its appearance.  Curiously, the court described this “disparate effect” “as a feature, not a flaw” of the rule.

What Comes Next?

So, what’s next for pay-to-play rule challenges?  While opponents of the pay-to-play rule have faced a string of defeats, this merits decision is the worst loss yet for the rule’s opponents as it rejects their substantive arguments and sets a precedent from a highly-regarded appellate court, in an opinion supported by judges appointed by Presidents from both parties.

As next steps, the political party committees may seek en banc review or petition the Supreme Court to take the case, but the absence of a circuit split and the composition of the D.C. Circuit panel may make both options difficult.  A challenge to the rule could be pursued in another circuit, although the likelihood of success for such a challenge has decreased with yesterday’s D.C. Circuit opinion.  Opponents might instead try a more targeted attack on the rule.  Instead of seeking the wholesale abandonment of the rule, opponents might decide to bring a tailored challenge to the most constitutionality vulnerable parts of the rule, such as the extremely broad definitions of covered “officials” and “covered associates,” the low de minimis thresholds, or the ban on solicitations, which restricts direct political speech.

Regardless of what happens next, for opponents of the SEC rule, the hill got much steeper yesterday.

Blowback From Mexican Tariff Negotiations

By Lila Abed on Posted in International Strategy, Trade Agreements, Uncategorized

Last week’s negotiations held in Washington between Mexico and the United States were successful in suspending indefinitely president Donald Trump’s threat to impose an immediate 5% tax on all Mexican imports. These were set to go into force June 10 and escalate to 25% over time. In a series of tweets, the White House claimed a major triumph over its neighbor, arguing that trade threats served to finally force the Mexican government to dramatically curb the wave of predominantly Central American migrants- this May marked the highest number of detentions in over a decade- flooding the southern border.

The Mexican delegation, headed by the Secretary of Foreign Relations, Marcelo Ebrard, promised to implement a variety of measures to stem the flow of immigrants in search of asylum in the United States, within the 45 day deadline set by their US counterpart. These include, sending 6,000 troops of the newly created National Guard to states bordering Guatemala, expanding Homeland Security’s Migrant Protection Protocol (MPP) to allow illegal aliens to await their asylum hearings in Mexico, and dismantling the transnational gangs that profit from the illegal flow of migrants.

Mexican president, Andres Manuel Lopez Obrador (AMLO), held a rally in the border city of Tijuana to applaud the outcome of the negotiations and assure his electoral base that all conditions set by the U.S. would be met. Although AMLO won the presidential election by a landslide this past July and his political party, Morena, holds a majority in Congress, he is facing a serious political pressure for having conceded too much on a migration issue with a threat to impose economic penalties.  The Speaker of the House of Deputies, Porfirio Munoz Ledo, publically denounced the agreement on the grounds that they violate Mexican national sovereignty. In addition, he stated that the absence of the Minister of the Interior, constitutionally responsible for immigration issues, from the Mexican delegation at the negotiating table undermines the terms of the agreement.

The Mexican president ran his campaign on the premise that in his government domestic issues would inform foreign policy. That is, the traditional principles of foreign policy, as stated in the constitution, would be upheld unconditionally, especially the concept of non-intervention. This became evident when the Mexican government maintained a neutral stance- one the of the few countries in the region to do so- on the humanitarian crisis in Venezuela.

AMLO’s accommodating and somewhat desperate reaction to the threat of tariffs threatened by Trump, has many of his supporters questioning why he succumbed so quickly to demands and pressure from the United States. The catastrophic economic consequences of the U.S. imposing tariffs on all Mexican imports are undeniable. Clearly, however, businesses on both sides of the border would have suffered greatly from a vast disruption of value and production changes in North America.  Many in Mexico had concluded that President Trump’s threat to impose tariffs to obtain concessions on migration was unlikely to be implemented because a growing number of Republican Senators appeared prepared to successfully override a presidential veto of legislation barring the President from imposing the tariffs.  It remains to be seen how the political and private sector’s disenchantment with the Mexican president’s negotiations will unfold.  AMLO’s government is now in the uncomfortable position of having to provide credible results in blocking migrants seeking asylum in the United States in a mere 45 days, or risk another round of tariff threats, while simultaneously risking a  loss of political support at home, which could also jeopardize the ratification by the Mexican Senate of the United States-Mexico-Canada Agreement (USMCA).

Beyond The FCPA: New U.S. Regulator Enforcing Against Foreign Corruption

By Laura Brookover, Jennifer Saperstein and Benjamin Haley on Posted in Africa, Compliance Issues, International Strategy, Uncategorized

Yet another U.S. regulator is entering the foreign corruption space.  The Commodity Futures Trading Commission is a civil agency that oversees commodity and derivatives markets in the United States.  It enforces the Commodity Exchange Act, a set of statutes that are enforced criminally by the U.S. Department of Justice.  The CFTC has authority to impose financial penalties in the many millions of dollars, and it has broad investigatory powers.

Earlier this year, the CFTC announced that, for the first time in its history, it is looking at foreign corruption that impacts commodity and derivatives markets in the United States.  No charges have been brought so far, but the agency appears to be ramping up its enforcement efforts.  As one indication, the agency recently issued an advisory directed at would-be corporate whistleblowers, explaining that individuals who report foreign corruption may qualify for financial awards.

In the initial announcement, the CFTC’s Director of Enforcement referred to multiple “open investigations” into foreign corruption.  So far, only one has been publicly confirmed.  Brazil’s state-owned oil company, Petrobras, revealed that the CFTC requested information relating to several companies’ involvement with “Operation Car Wash,” which involved the alleged payment of bribes to employees in Petrobras’ trading division.

The CFTC’s new focus has important implications for companies with international operations, particularly in the commodity-rich regions that span much of the African continent.

Drawing on our recent experience serving in the CFTC’s enforcement division and expertise counseling companies on anti-corruption compliance, we find the following points salient:

  • The CFTC has authority to investigate and bring enforcement actions in cases involving fraud, manipulation, and false price reporting, among other things, but not bribery itself. Foreign corruption is not explicitly illegal under the CEA.  Thus, foreign bribes will be an aspect of these cases, but the CFTC will still need to prove all elements of a traditional fraud, manipulation, or false reporting charge.  However, the CFTC will not need to establish an actual violation of the FCPA to support a bribery-based CEA charge.
  • The CFTC and DOJ are coordinating their efforts in this area. (The Acting head of the Fraud Section of DOJ’s Criminal Division even said that the CFTC’s new focus is “great news.”)  This means that companies and individuals active in the extractives and commodities industries should expect that, in some instances, there will be overlapping civil and criminal investigations and enforcement actions, and the agencies will share information and coordinate investigative efforts.
  • The CFTC has promised to avoid “piling on.” The Director of Enforcement has said that, where the CFTC is investigating foreign corruption, it is the only U.S. civil regulator with jurisdiction—meaning that the CFTC is choosing to investigate cases where the SEC lacks jurisdiction under the FCPA.  Unless that policy changes, the SEC and CFTC will not be bringing overlapping charges.
  • The CFTC’s international jurisdiction is broad, but it is not unlimited. The agency’s new overseas focus will undoubtedly present important and novel questions of the limits of its reach, and provide grounds for potential legal defenses.

As part of a comprehensive anti-corruption compliance program, companies that have involvement in U.S. commodities markets will want to take note of the CFTC’s new focus in this area.  Understanding the reach—and limits—of the CFTC’s authority under the Commodity Exchange Act will be important in preparing for this new legal risk.

If you have questions about the CFTC and foreign corruption, please contact Laura Brookover at lbrookover@cov.com, Ben Haley at bhaley@cov.com, or Jennifer Saperstein at jsaperstein@cov.com.  This article is intended to provide general information.  It does not constitute legal advice.

 

The Butch Lewis Act Takes Important Step Forward

By Holly Fechner and Peter Rechter on Posted in Congressional Action

This week, Congress took an important step forward to protect the benefits of retirees in multiemployer pension plans facing insolvency.  On Tuesday, June 11, 2019, the House Committee on Education and Labor marked-up the Rehabilitation for Multiemployer Pensions Act (H.R. 397), better known as the “Butch Lewis Act.”  Among other things, the bill would create a federal loan program within the Department of Treasury authorized to finance loans to certain multiemployer plans facing insolvency.  At the conclusion of the mark-up, members voted along party lines to move the bill out of Committee.

The Butch Lewis Act was introduced during the first week of the 116th Congress by Rep. Richard Neal (D-MA), Chairman of the House Ways and Means Committee, and Rep. Peter King (R-NY).  Proponents of the bill—which has bipartisan support and over 170 co-sponsors—seek to prevent the insolvency of certain plans in critical and declining status, thereby protecting retirees’ benefits without requiring cuts.  Opponents, however, have criticized the bill for not addressing structural problems in the multiemployer pension system.

During the mark-up, Education and Labor Committee Chairman Bobby Scott (D-VA) emphasized that the collapse of the multiemployer pension system would cost far more in taxpayer dollars than congressional intervention, as retirees who lose their benefits would be forced to rely on social safety net programs and employers would be pushed to cut jobs.  According to a fact sheet issued by the Committee, the cost of congressional inaction, in terms of lost tax revenue and increased social safety net spending, would be between $170.3 billion and $241.3 billion over a 10-year budget window—and between $332 billion and $479 billion over a 30-year time horizon.  The Congressional Budget Office has not yet scored the cost of H.R. 397, but the office issued preliminary estimates for versions of the bill last year that ranged from $34 billion to $100 billion.

Although the Butch Lewis Act advanced out of Committee, the mark-up evidenced the difficult path the bill will face if it is to become law.  Ranking Member Virginia Foxx (R-NC) strongly criticized H.R. 397 as a political “ploy” by Democratic members on the Committee, and opined that it would “meet certain death” if it reaches the Senate.  This sentiment was echoed by Rep. Tim Walberg (R-MI), the Ranking Member of the Subcommittee on Health, Employment, Labor, and Pensions.  The Republican response to H.R. 397 likely stems, in part, from the fact that a draft proposal by the Joint Select Committee on Solvency of Multiemployer Pension Plans—a special bipartisan Committee convened last year—did not include a loan program, indicating a lack of bipartisan consensus around such an option.

The Butch Lewis Act cleared an important procedural hurdle this week, but the process revealed the challenging road ahead—both for the bill, and for other proposals to reform the multiemployer pension system.  In the near term, the House Ways and Means Committee likely will hold its own mark-up of H.R. 397 in the coming weeks.  Covington will continue to monitor these developments closely.

Senate Committee Holds Hearings on New Bipartisan, Bicameral Proposal to Reform Section 101 of the Patent Act

By Holly Fechner, Ashley Kwon and Matthew Shapanka on Posted in Congressional Action, Intellectual Property Protection

This week, the Senate Judiciary Subcommittee on Intellectual Property held the first two of a three-part series of hearings on “The State of Patent Eligibility in America.”  The hearings are part of an ongoing bipartisan congressional effort to reform section 101 of the Patent Act to address confusion over patent eligibility wrought by more than a decade of Supreme Court decisions. Each hearing includes three panels of five witnesses, for an impressive total of 45 witnesses over three days.

The first hearing, held on June 4th, featured former government officials and academics, including former Federal Circuit Chief Judge Paul Michel, former USPTO directors Q. Todd Dickinson and David Kappos, and Mark Lemley of Stanford University.  The second hearing, held on June 5th, included testimony from a number of trade associations and coalitions, such as AIPLA, IPO, Innovation Alliance, and Pharmaceutical Research and Manufacturers of America (PhRMA). A third hearing is scheduled for June 11th.

For the past decade, there has been a rising chorus of stakeholders concerned with the Supreme Court’s decade-long narrowing of patent eligible subject matter under section 101, and the resulting unpredictability and confusion.  The scope of judicially created exceptions to patent eligible subject matter has grown, causing uncertainty as to what inventions are, and are not, eligible for patent protections.

Five years after the Court’s Alice v. CLS Bank decision, a bipartisan, bicameral group of senators and representatives recently unveiled a draft bill to reform section 101.

Senators Thom Tillis (R-NC) and Chris Coons (D-DE), Chair and Ranking Member of the Senate IP Subcommittee, along with Representatives Doug Collins (R-GA), Hank Johnson (D-GA), and Steve Stivers (R-OH), released the draft bill this spring in an effort to “restore predictability and stability to the patent eligible subject matter inquiry.”  This draft legislation comes after months of roundtable discussions and feedback from dozens of stakeholders, including industry representatives, inventors, and academics.

The draft text creates a presumption in favor of patent eligibility,  by providing that “provisions of section 101 shall be construed in favor of eligibility.”  It maintains the current categories of patent eligible subject matter (“any useful process, machine, manufacture, or composition of matter”) and eliminates all judicially created exceptions, including abstract ideas, laws of nature, or natural phenomena.  It also explicitly requires that patent eligible subject matter have utility through human intervention.

The draft bill specifically addresses a number of challenges with the way section 101 is currently applied, clarifying that (1) the claimed invention should be considered as a whole, not as discrete pieces, and (2) subject matter eligibility under section 101 is a distinct inquiry that should not be conflated with the other requirements for patentability under the Patent Act, including sections 102 (novelty), 103 (non-obviousness), and 112 (written description, enablement, and definiteness), all which of must be met for a valid patent.  Finally, the draft bill proposes an amendment to a different statutory provision—section 112(f)—that would broaden the scope of the application of section 112(f), which governs when structural limitations from the patent specification may be imported to the claimed invention.

The IP Subcommittee plans to hold a third hearing next Tuesday, June 11.  That hearing will feature company representatives.

Chairman Tillis and Ranking Member Coons have clarified that the proposal is subject to additional discussion and revision.  However, the bipartisan group of members has devoted significant time engaging stakeholders in an attempt to restore predictability and clarity to patent eligibility law.  How, and if, Congress reforms section 101 in this Congress remains to be seen, and Covington will continue to monitor the deliberations on this issue.

Florida FARA Case Leaves Troubling Precedent

By Brian D. Smith and Robert Kelner on Posted in International Strategy, Uncategorized

On May 7, 2019, a federal District Court in the Southern District of Florida ruled that an American company, RM Broadcasting, must register as a foreign agent under the Foreign Agents Registration Act (“FARA”) for its agreement to broadcast radio programming from Rossiya Segodnya (meaning “Russia Today”), a Russian state-owned news agency.  Although the decision has received some attention because it is the latest victory in the Department of Justice’s efforts to force Russian state-owned media organizations and their agents to register under FARA, it has much broader implications.  The FARA legal analysis underpinning the Court’s decision has significant shortcomings, reflecting RM Broadcasting’s failure to assert and brief perhaps its strongest legal defenses.

RM Broadcasting buys and sells radio airtime, including from WZHF 1390 AM in Washington, D.C.  In late 2017, RM entered into a services agreement to provide for the broadcasting and transmission of Rossiya Segodnya’s radio programs over WZHF.  Notably, RM agreed to sell essentially the entire broadcast schedule on WZHF, except for hourly station identifications, and to transmit Rossiya Segodnya’s programming in whole and unaltered.  In June 2018, the FARA Unit informed RM that the government concluded the company was required to register under FARA.  RM disagreed and brought an action for a declaratory judgment that it was not required to register.

RM raised a number of arguments that the Court found inapplicable or unpersuasive.  For example, RM argued that its services agreement did not give rise to an agency relationship under common law principal-agent theories.  Unfortunately, there is very clear precedent that FARA’s “agent of a foreign principal” is a statutory test that is wholly distinct from common law agency.  RM also argued that it was not broadcasting radio programs because the FCC licensee – from which RM bought airtime – did the actual broadcasting.  FARA, however, covers actions of an agent taken “directly or indirectly,” and the agreement required RM to provide broadcasting services to Rossiya Segodnya, which it did.

From a FARA perspective, RM failed to raise directly perhaps its strongest argument: the commercial exemptions to FARA.  Although RM made arguments that alluded to the commercial exemptions, such as stating that it simply buys and sells radio airtime in “an arms-length commercial business transaction,” it raised these issues in the context of its alleged agency relationship with Rossiya Segodnya, rather than as an exemption to registration.  RM never specifically cited and explained the commercial exemptions to FARA, their history and purpose, or the reasons that the exemptions could preclude registration.  The Department of Justice, which had no incentive to help RM strengthen its case, also failed to address the commercial exemptions in its briefs.  As a result, the Court’s opinion did not address these critically important issues. Continue Reading

Ranking the U.S. Economy:  “New Normal” or Room for Improvement?

By Constance Anne Pence on Posted in Uncategorized

For decades, the U.S. economy was the envy of the world.  With few, notable exceptions the U.S. economy was a consistent model for growth, innovation, diversification and job creation. The US economic engine, and the optimistic middle class it enabled, also has been a testament to the value of our democratic, rule-of-law-based governance system.

Unfortunately, the confidence of our middle-class, of young Americans, and of the international community, in the U.S. economic system – and by extension our political system –is weaker and more fractured than once it was.  For most, despite today’s historically low unemployment levels, real wages have stagnated since the 1970’s, even when productivity grew substantially.  And the rising costs of education and health care, which are core to U.S. progress, have far outpaced inflation (and trends in other high-income countries) even as technology created whole new industries and services.  U.S. economic and productivity growth have leveled off, and social mobility has seized up, compared to what it was and relative to other countries.

Recent reports find that 70 percent of all U.S. wealth is held by the top 10% of the population. The price of housing (a key middle class asset) in the U.S. just fell for the first time in seven years.  The U.S. population overall is aging and young people are marrying later and having fewer kids, creating demographic headwinds against higher growth and undercutting the power of consumer spending to drive growth.

Is this really a “new normal” as some argue, or is there still potential to unleash a U.S. economy that delivers measurably better living standards to a broad swath of America?  It is a crucially important question, especially at this time of deep economic uncertainty. To answer it, we might best start by asking how the U.S. economy stands up to others, and what are its strengths and weaknesses.  It is especially useful to be clear-eyed about where the U.S. economy falls short, as it points to opportunities for tangible improvement.  And based upon some useful indicators and analyses, there appears to be considerable upside potential for U.S. economic revitalization.  Realizing that potential, however, may require a broader understanding of and willingness to face concrete realities about the large and complex U.S. economy.

In results just released, the IMD Competitiveness Center reports that the U.S. has fallen from the first to the world’s third most competitive economy by its account, behind Singapore and Hong Kong.  Singapore, they say, benefits from advanced technological infrastructure, skilled labor, favorable immigration laws, and efficient ways to establish new businesses.  In the Heritage Foundation’s Index of Economic Freedom, the U.S. is currently ranked 12th, and is characterized as “mostly free,” in part because trade freedom and fiscal health have measurably declined.  Economic freedom is a hallmark of the U.S. system, and an approach we might expect to lead easily.  Not only do Canada, New Zealand and the UK do better, so too does the UAE. Continue Reading

Elections and Appointments in the European Union

By Jean De Ruyt, Sebastian Vos and Atli Stannard on Posted in EU Law and Regulatory

The EU elections began on Thursday, May 23, and run to Sunday, May 26.  These are likely to see a significant change in the make-up of the European Parliament, with the main center-left and center-right parties losing overall control.  It will also kick off formally the process for appointing a new European Commission – which, this year, comes alongside the appointment of a number of other senior European figures.

Indeed, the five most important institutional leaders of the EU – the presidents of the European Commission, the European Parliament, the European Council and the European Central Bank, as well as the High Representative for Foreign Policy – will be replaced in the months to come.  None of the current incumbents will remain in post.

This change of guard will shape the future of the continent for years to come.  The main player in the appointment process, which will start at the end of May 2019, is the European Council made up of Heads of State and Governments.  The 28 EU leaders will have appoint four of the five most senior EU positions almost simultaneously.  As usual, they will need to respect a subtle balance between political groups, larger and smaller countries, Eastern and Western, Northern and Southern candidates, and a gender balance.

A dinner of the European Council has been planned for May 28, just after the Parliamentary elections.  The Council’s president, Donald Tusk, hopes to arrive at a “package deal” in the regular European Council on June 20-21.  Considering the difficulty of the task, as outlined below, this objective is ambitious.  But the EU leaders have a clear interest in not postponing the decision until after the summer, when other challenges will await them – notably, the decision on the new seven-year financial framework, and Brexit.

After a brief overview of the likely results of the European Parliament election, we will examine what is at stake for each of the five positions to fill.

The Election of the European Parliament

Elections take place simultaneously in the 28 Member States between May 23 and 26.  The turnout is expected, as previously, to be lower than for national elections – for the 2014 elections, it was an average of 42,54%.

In the European elections, fringe and populist parties tend to get more votes than at the national level, this election being seen by many as an opportunity to cast a protest vote with fewer consequences.  In the current political context, this phenomenon will probably be amplified.

It is thus expected that, this year, the two main political groups combined (the center-right Christian Democrats of the EPP and the center-left Socialists of the S&D), will no longer have the absolute majority.  They will therefore lose control of Parliamentary proceedings and major committee appointments.  This time, they will have to take into account the centrist Liberals, who will likely be boosted by the arrival of Emmanuel Macron’s party, “La République en Marche” (campaigning for the European elections as “Renaissance”), which will want to reproduce in the Parliament the influence their leader exerts on the European Council.

Contrary to what some believe, the “Eurosceptic” wing is unlikely to dominate the Parliament and will almost certainly not be able to influence the appointment of the leaders of the institutions.  But if some of the larger populist parties manage to assemble in one political group, they might have a sizeable “nuisance” value.  Indeed, it is expected that Salvini’s Lega, Le Pen’s “Rassemblement National” and the “Alternative für Deutschland” (perhaps joined by UKIP or Farage’s Brexit party) will assemble in a new right-wing block, dubbed the “European Alliance of Peoples and Nations” political group, which could secure more than 80 seats (out of 751). Continue Reading

ABSCA Confirms Contractors May Challenge Unfavorable CPARS Ratings

By Alex Sarria and Kevin Barnett on Posted in Compliance Issues, Uncategorized

While you might not be able to fight City Hall, you can fight your CPARS rating. In a short opinion published last week, the ASBCA confirmed it has jurisdiction to annul an inaccurate and unfair government evaluation of a contractor’s performance. Cameron Bell Corporation d/b/a Government Solutions Group, ASBCA No. 61856 (May 1, 2019).  Though the ASBCA cannot require the government to issue a specific rating, it can remand the matter to the contracting officer with instructions to redo the evaluation ─ a perhaps imperfect, yet still potent form of relief available to contractors who believe the government has improperly rated their contract performance.By regulation, contractors are entitled to rebut a negative evaluation of their performance in the Contractor Performance Assessment Reporting System, or CPARS. FAR 42.1503(d).  A contractor’s rebuttal submission typically is due within 14 calendar days of the date the agency invites the contractor to respond. See id. If this proves unsuccessful, a contractor may challenge the CPARS rating by submitting a claim with the contracting officer under the Contract Disputes Act (CDA).  See, e.g., Cameron Bell, ASBCA No. 61856, 2019 WL 2067642 (May 1, 2019).  Then, if the contracting officer denies the claim, the contractor can appeal the decision to an appropriate Board of Contract Appeals or the United States Court of Federal Claims.

That is precisely what the contractor did in Cameron Bell.  There, a contractor challenged a less-than “Satisfactory” rating of its performance in a CDA claim.  After the contracting officer denied the claim, the contractor appealed to the ASBCA seeking various forms of injunctive relief.  The government moved to dismiss the appeal for lack of jurisdiction.  But the Board denied the government’s motion in part, finding that the ASBCA has jurisdiction to “assess whether the contracting officer acted reasonably in rendering the disputed performance rating or was arbitrary and capricious and abused his discretion.”  Id. The Board also noted, that while it lacks authority to “order the government to revise a CPARS rating,” the ASBCA “may remand to require the contracting officer to follow applicable regulations and provide [a contractor] a fair and accurate performance evaluation.” Id.

The Cameron Bell decision provides a few helpful reminders to contractors who are considering whether to challenge a negative CPARS rating.  First, the governing regulations provide contractors a basis for establishing that the government has issued a CPARS rating in an arbitrary and capricious manner.  The FAR includes definitions of each rating (i.e., Exceptional, Very Good, Satisfactory, Marginal, Unsatisfactory) and outlines the information the government must provide to justify the rating it assigns.  See FAR 42.1503 and Table 42-1 (Evaluation Ratings Definitions).  These objective guidelines allow contractors to challenge a negative CPARS rating if, for example, the government’s determination is based upon inaccurate, incomplete, inconsistent or otherwise unsupported information or statements.

Second, contractors should be aware that, while the ASBCA cannot order an agency to issue a higher CPARS rating, the Board can direct the government to conduct a “fair and accurate” evaluation of the contractor’s performance in accordance with law and regulation. In many cases, an order remanding a CPARS rating for reevaluation will result in only partial relief for the contractor ─ e.g., where the agency must simply do a better job of explaining why it assigned a low rating. But in other cases, such an order will require the agency to meaningfully reexamine the rating in light of the contractor’s record of performance, the objective guidelines in FAR Subpart 42.15 and the particular challenges raised by the contractor on appeal.  See, e.g., DOD OIG, “Summary of Audits on Assessing Contractor Performance: Additional Guidance and System Enhancements Needed,” (May 9, 2017) at 11 (criticizing the assignment of a “marginal” rating where the agency did not explain the contractor’s purportedly “significant” performance failure and where the evidence showed the alleged failure had no impact on the agency).

Third, contractors also should keep in mind that, in certain circumstances, they may be entitled to recover monetary damages if they can show the government’s arbitrary and capricious performance evaluation “constituted bad faith and a breach of the [agency’s] duty of good faith and fair dealing.”  See, e.g., Government Services Corp., ASBCA No. 60367, 16-1 BCA ¶ 36,411.   Though it can be challenging to prevail on a claim for breach of the duty of good faith and fair dealing, it undoubtedly is a viable theory of recovery in many CPARS rating cases, particularly those where there is clear evidence of government bias or overreach that can be developed further through discovery.  Cameron Bell, 2019 WL 2067642 (“We also have jurisdiction to determine whether the government breached the implied contractual duty of good faith and fair dealing, an issue that [the contractor] raised in its claim to the contracting officer”).

 At bottom, the ASBCA’s decision in Cameron Bell is a helpful reminder that contractors have recourse when they are assigned a less-than positive CPARS rating. Contractors should familiarize themselves with the CPARS process ahead of time so that they can quickly identify the evidence needed to rebut a negative rating and, if necessary, challenge the rating in a CDA claim.

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