IRS Announces Major Change To Nonprofit Donor Disclosure Requirements

In a significant and unexpected development, the U.S. Treasury Department announced yesterday that certain nonprofits — including trade associations and 501(c)(4) social welfare organizations — would no longer be required to disclose the names and addresses of their donors on the annual “Form 990” they file with the Internal Revenue Service. Although the IRS already redacts this donor information before making a Form 990 public, these groups will now no longer need to disclose this information to the IRS in the first place. In this advisory, we discuss the background and implications of this development, which is an important one for trade associations, social welfare organizations, and major donors.

Why Did Treasury Make the Change?

In making the change, the Treasury Department emphasized that donor disclosure for organizations other than 501(c)(3) charities and 527 political organizations is not statutorily mandated. Further, in the press release announcing the change, the Treasury Department explained that the previous policy, which required the IRS to redact donor names and addresses, was not a prudent use of taxpayer dollars and that disclosure of donor names and addresses was not necessary because “the IRS makes no systematic use of Schedule B with respect to these organizations in administering the tax code.” In addition, the government emphasized that the “new policy will better protect taxpayers by reducing the risk of inadvertent disclosure or misuse of confidential information,” acknowledging that the IRS “has accidentally released confidential Schedule B information in the past” and that certain tax-exempt groups had previously received “inappropriate” government inquiries “related to donors.”

Which Groups Are Now Exempt From Disclosing Donor Names?

Once the policy becomes effective, “tax-exempt organizations required to file the Form 990 or Form 990-EZ, other than those described in 501(c)(3), will no longer be required to provide names and addresses of contributors on their Forms 990 or Forms 990-EZ and thus will not be required to complete these portions of their Schedules B.” Thus, the new policy exempts 501(c)(4) social welfare organizations, 501(c)(5) labor organizations, 501(c)(6) trade associations, and lesser-known nonprofits such as social clubs, volunteer fire departments, and fraternal benefit societies.

Which Groups Are Not Exempt From the Change?

As noted, 501(c)(3) charities are still required to disclose donor names and addresses on the Schedule B, unless they qualify for a separate exemption, such as the exemption available to churches. Similarly, 527 political organizations that file a Form 990 (such as the Democratic Governors Association and the Republican Governors Association) will still be required to disclose donor names and addresses.

Does This Change What the Public Sees?

No. Even under the current regulations, donor names and addresses on the “Schedule B’s” filed by the now-exempted nonprofits were redacted by the Internal Revenue Service or by the nonprofit before they were made public.

Is Schedule B Gone?

No. Even though many nonprofits will no longer be required to include donor names and addresses on the Schedule B, it appears they still must complete the Schedule B, itemizing the amounts of contributions from donors who give $5,000 or more in a year. But they would no longer be required to include the names and addresses of donors on this schedule.

When Does The Change Become Effective?

The revised reporting requirements apply to returns for taxable years ending on or after December 31, 2018.

Does This Mean That the IRS Will Never Be Able to See 501(c)(4) and 501(c)(6) Donor Information?

No. The new guidance makes clear that the IRS could conceivably still review this information in connection with an audit or enforcement proceeding: “Organizations relieved of the obligation to report contributors’ names and addresses must continue to keep this information in their books and records in order to permit the IRS to efficiently administer the internal revenue laws through examinations of specific taxpayers.”

Does This Mean That These Groups Will Not Be Required to Disclose Their Donors At The State Level?

It depends. There are several states, including New York and California, that require certain 501(c)(4) social welfare organizations to register as charitable organizations with the state and file detailed reports that include unredacted versions of the Form 990 donor list. Once this policy becomes effective, the Form 990s submitted by 501(c)(4) organizations in these states will no longer contain the names and addresses of donors, which represents a significant shift in those states. However, because this policy does not affect 501(c)(3) charities, similar state-level filings by these public charities will go unchanged.

In addition, we have highlighted in previous client advisories and on our Inside Political Law blog how states are increasing their efforts to compel nonprofits to disclose their donors. Whether it is the DISCLOSE Act in Washington or an Executive Order in Montana, states are finding innovative ways to obtain donor information from nonprofits. These targeted state-level efforts should not be affected by this policy change at the IRS. After this policy change, however, we expect that regulators in states that promote donor transparency will use the opportunity to occupy this space and push for new donor disclosure laws or regulations. Covington will continue to monitor the response at the state level.

Covington Artificial Intelligence Update: China’s Framework of AI Standards Moves Ahead

China has set out on an ambitious agenda of aiming to become the world leader in artificial intelligence by 2030. Policy experiments for a critical part of China’s AI development strategy, and to that end multiple government think tanks have set out formulating standards that may impact AI innovation in China.

The China Electronics Standardization Institute (“CESI”), the major think tank responsible for standardization work under the Ministry of Industry and Information Technology (“MIIT”), is one of the key players in AI standardization in China. On January 24, 2018, CESI released the Artificial Intelligence Standardization Whitepaper, which summarizes current developments in AI technology, standardization processes in other countries, China’s AI standardization framework and China’s plan for developing AI capabilities going forward.

Since the release of that whitepaper, CESI continued its standardization work on two parallel tracks.  As the lead agency for China, CESI has been actively engaged in developing international standards. It is an active member of the ISO/IEC JTC 1/SC 42 subcommittee that develops international standards for the AI industry.

To both support CESI’s international standard-setting work and to develop China’s domestic AI standardization framework, CESI has established three working groups: one working group aiming to produce guidelines for establishing the AI standardization system in China, one working group focusing on AI and open source, and another on AI and social ethics. The three working groups are due to produce papers that will guide China’s standardization efforts in the years to come by the end of this year.  CESI aims to leverage China’s domestic standardization work in the development of international standards, while at the same time to learn from international stakeholders when formulating its own standards.

Some of the national AI standards led by CESI have already been finalized, such as Specification of Programming Interfaces for Chinese Speech Recognition Internet Services. More standards are under development or slated for development in the near future.  These standards cover the categories of testing and evaluation, AI platforms, edge intelligent computing and chip, machine learning, computer vision, human-machine interaction, augmented reality, virtual reality, robotics, smart home, intelligent medicine and AI security.

In parallel, other government think tanks are also moving forward on developing industry standards for AI. The Artificial Intelligence Industry Alliance (AIIA), an industry alliance established by China’s regulators with about 200 members, is seeking to develop industry standards on assessment and certification industry systems for AI products and services. These standards will set out requirements and testing methods for AI hardware and AI platforms for services based on voice, language and images.

Interested stakeholders may wish to closely follow progress being made by CESI, AIIA, and other agencies.

Many thanks to Zhijing Yu and Runze Li for their contributions to this post.

China Issues New Foreign Investment Negative List, New Market Access Openings

Through a newly published foreign investment negative list, the Chinese government is offering incrementally greater market access to foreign investors in China. The 2018 Special Administrative Measures on Access to Foreign Investment (“2018 Foreign Investment Negative List” or “2018 FI Negative list”), issued by the Ministry of Commerce and the National Development and Reform Commission (“NDRC”) will replace the list of restrictions and prohibitions in the 2017 foreign investment negative list, which was part of the broader 2017 Catalogue for Guiding Foreign Investment. The “encouraged” section of that 2017 catalogue will remain in effect when the new negative list takes effect on July 28, 2017.

The introductory note to the 2018 Foreign Investment Negative List for the first time indicates that  “areas outside the negative list will be administered according to the principle of consistency between domestic and foreign investment.” However, the introduction later qualifies this statement by noting that existing rules remain in effect for unlisted sectors such as finance and culture, and those relating to administrative approvals, qualification conditions, and national security. Due to this ambiguous language, foreign investors should be cautious when relying on this negative list when making investment decisions. It may be used for quick reference purposes, but should not be seen as a substitute for careful legal research and analysis.

The new list ostensibly relaxes or removes restrictions or prohibitions on foreign investment in 22 areas. Some openings represent genuine market access opportunities for foreign investors, while others require further analysis to understand their full impact. (Note that some new restrictions were also added to the list, but they do not represent substantive change in practice, as mentioned below.)

Overall, the changes between the 2017 and 2018 foreign investment negative lists fall into one or more of the following categories:

  • Genuine market access openings. See, e.g., the removal of Chinese control requirements on crop breeding and seed production (except for wheat and corn).
  • Roadmaps/timelines for future market access openings. See, e.g., roadmaps for openings in the automobile manufacturing sector and the financial services industry.
  • Negative List Restructuring. In some areas, the removal of a restriction or prohibition does not represent an actual legal opening, but rather a restructuring of investment-related legal documents. The foreign investment negative list is supposed to contain restrictions and prohibitions that apply to foreign investment in addition to those that already apply to private domestic investment—i.e., a negative list that represents exceptions from national treatment (equal treatment for foreign and domestic investment). Some restrictions and prohibitions, such as the prohibition on foreign investment in the manufacturing of weapons and ammunition, were removed as they were already off limits to domestic private investment.Note also that the new negative list also includes some newly added items. Those items to not represent new restrictions. Instead, they appear to represent an effort to ensure that the foreign investment negative list more comprehensively captures restrictions and prohibitions on foreign investment in one place. As the next item suggests, progress towards this goal has been uneven.
  • Unlisted Constraints. Investments for which restrictions or prohibitions appear to have been lifted or relaxed may still be constrained in practice through the operation of (1) unlisted measures (see second paragraph of this article); and (2) discretion granted to officials in administering often opaque approval processes.
  • Lack of opportunity in practice. This category represents openings in areas so dominated by state-owned enterprises that the relaxation of a restriction may not translate into an actual opportunity – see, e.g., the removal of Chinese control requirements in the construction and operation of power grids and railroads.

Foreign investors with interests in China are encouraged to examine the changes to the foreign investment negative list and conduct a deeper analysis of related laws and regulations to determine whether they offer new business opportunities.

Christopher Chen of Covington & Burling LLP assisted with the research and preparation of this article.

Covington Publishes Update on Recent FEC Enforcement Activity

After a surprisingly active 2017, the Federal Election Commission’s enforcement efforts have slowed noticeably in the early months of 2018. In February, former Commission Lee Goodman’s departure from the agency left the Commission with only four members. While the remaining Commissioners can still form a quorum, unanimity is required for all official agency action. Perhaps unsurprisingly, then, the Commission’s enforcement activities have declined during the first half of 2018. Still, while it may be tempting to conclude that the FEC has gone entirely idle, the Commission has pursued a number of recent cases that point to continued areas of enforcement risk. In a newly published client alert, Covington provides an overview of recent FEC enforcement trends and identifies areas of active enforcement at the four-member Commission.

Developments in modern slavery regulation: U.K., Hong Kong and Australia

The UK’s anti-slavery commissioner resigns

On 17 May 2018, the UK’s Independent Anti-Slavery Commissioner, Kevin Hyland OBE, announced his imminent resignation. While praising the Prime Minister’s leadership in the fight against modern slavery, he expressed concern about Home Office interference with the role, and the hope that any future Commissioner would be assured of independence.

Mr Highland’s term has spanned a critical period of UK actions aiming to tackle modern slavery. He was appointed in November 2014 as a ‘designate’ Commissioner ahead of the introduction of the UK’s Modern Slavery Act 2015 (“the UK Act”), and has since worked to advise other countries in their efforts to develop similar legislation as part of this role.

Following the UK’s recent leadership, other jurisdictions are now exploring legal mechanisms and options for enforcement with the aim of encouraging businesses to take steps to minimise slavery risks in their global operations and supply chains.

Emerging modern slavery legislation in: 

(1) Australia 

Australia’s government plans to introduce new modern slavery legislation during the next few months which – similar to the U.K. legislation (about which see here) would require 3,000 commercial organisations to report on slavery, trafficking, servitude, forced labour and forced marriage. Statements would be stored in an accessible public repository, and the government has also promised to establish an Anti-Slavery Business Engagement Unit and to lead by example by publishing its own annual Commonwealth procurement statement.

A new regional bill was also passed by the New South Wales parliament in June 2018. This bill also contains company reporting requirements, introduces certain public modern slavery functions and procedures, and establishes preventative enforcement powers and penalties for various slavery and reporting offences.

(2) Hong Kong

Hong Kong Legislative Council members recently proposed a draft modern slavery bill, arguing that Hong Kong’s laws fail to “meet the minimum global standard” for addressing modern slavery, and that legislative action should be taken to diminish the risk of being “shamed or even sanctioned”.

The drafted Modern Slavery Bill 2017 would also require certain companies to publish annual slavery and human trafficking statements. It would also introduce new ‘indictable’ criminal offences related to slavery, enabling money laundering prosecutions to be brought against offenders, and would empower courts to make special preventative orders. In addition, the bill would empower victims to bring civil claims against perpetrators or others who benefitted financially, or received anything of value, through involvement in a venture that they knew, or should have known, would involve slavery.

The Modern Slavery Bill was discussed at a meeting of the Panel of Security of the Legislative Council on 5 June 2018, but the parties did not reach a consensus regarding the Bill. The discussion will continue at a later date. The Legislative Council has not confirmed the timetable for this discussion at this stage.

Implications

Although the UK was one of the first countries to introduce modern slavery legislation, it appears unlikely to be the last. Global businesses should continue to monitor emerging laws and enforcement measures around the world in connection with modern slavery risks in their international supply chains.

The 2018 AGOA Forum: A turning point for US-Africa commercial relations?

The 2018 AGOA Forum—named for the African Growth and Opportunity Act passed in 2000 and extended three years ago to 2025—could be a turning point in U.S.-African commercial relations. AGOA abolished import duties on more than 1,800 products manufactured in eligible countries sub-Saharan Africa (those with established or making continuous progress with market-based economy, rule of law and pluralism, elimination of trade and investment barriers to the U.S., human rights, labor standards, fight against corruption, and economic policy to reduce poverty among others). Another 5,000 products are eligible for duty-free access under the Generalized System of Preferences program. As of today, 40 African countries are AGOA-eligible.

REGIONALISM VS SINGLE COUNTRY TRADE AGREEMENTS

Africa’s trade ministers will be coming to Washington the week of July 9, riding the momentum of having adopted the African Continental Free Trade Agreement in March. Once fully implemented, the AfCFTA, as it is known, requires members to remove tariffs on 90 percent of goods and to allow free access to goods, services, and commodities. The AfCFTA is central to accelerated regional integration and economic development across the region.

While Africa is forging new trade relations internally, the Trump administration has a new proposal for future U.S.-Africa trade relations, and wants to establish “a free trade agreement that could serve as a model for developing countries.” Kenya, Côte d’Ivoire, and Ghana are under consideration as partners for developing the first model according to sources in the Trump administration.

The question for this AGOA Forum is whether it can forge a common vision between Trump administration officials and Africa’s trade ministers on how to structure a post-AGOA trade relationship. Specifically, can Africa’s continental free trade ambitions, embedded in the AfCFTA, be harmonized with the Trump administration’s model free trade agreement based on a single country?

The AfCFTA should be the ideal tool to foster U.S.-Africa commercial relations, with an agreement between Africa at the continental level and the United States. American corporations benefit from a continental approach versus a country-specific one. In fact, by 2030, Africa will be home to 1.7 billion people and $6.7 trillion of combined customer and business spending. The AfCFTA presents the opportunity for a single point of entry, reduced cost of doing business, economies of scale, lower tariffs, and increased commercial transaction—which could contribute to job creation in the U.S. However, the AfCFTA still has to come into force, and some African countries, including economic powerhouses like Nigeria, have not yet joined the initiative. It is therefore critical for the African Union to adopt a more proactive strategy for its relations with the U.S. and propose an attractive continental partnership to the U.S. to advance mutual interests.

The task will not be easy for the African Union and the AfCFTA and, on the surface, it is hard to see where compatibility will be found in the differing approaches to the future of U.S.-African trade relations. In fact, the U.S. tried to forge a free trade agreement with South Africa and the Southern African Customs Union more than a decade ago and was unsuccessful. Moreover, U.S. free trade agreements are comprehensive, complex, and take time to negotiate. Given the rapid rise of China’s trade with the continent and the European Union’s Economic Partnership Agreements—which increasingly puts American goods at a significant tariff disadvantage in a growing number of African markets—a singular model trade agreement could do little to bolster the U.S. trade and investment position across an African continent working to fully integrate into the global economy. Moreover, Africa is seeking a regional approach to its trading relationships and not a country-by-country process.

While the U.S. Trade Representative works to develop a future U.S.-trade relationship with Africa, a positive Trump Africa legacy could revolve around its support for the bipartisan BUILD Act (Better Utilization of Investments Leading to Development Act), which is making its way through Congress and, if passed, would create the U.S. International Development Finance Corporation (USIDFC). The new agency would transform the existing Overseas Private Investment Corporation by doubling its size and enabling it to make equity investments of up to 20 percent in U.S. projects, among other new capabilities. As Africa is the largest part of OPIC’s current investment portfolio, the proposed USIDFC promises to be a key part of any enhanced U.S. commercial engagement in Africa.

WORKING TOWARD COMMON GROUND

The 2018 AGOA Forum could be a turning point for U.S.-Africa commercial relations. The African Union has already made important progress by organizing an annual AGOA mid-term review, along with its partner organizations (the United Nations Economic Commission for Africa and the regional economic communities), to help organize the AGOA Forum. However, if Africans do not succeed at putting a continental approach on the agenda during the forum, they should quickly follow up with an evidence-based comprehensive strategy that will provide options to the U.S. to best serve mutual interests, advance the continental perspective and Agenda 2063, and make America more competitive in a context where China and the European Union are winning. A win-win strategy is the way forward from both sides.

Post contributed by guest blogger Landry Signe, a David M. Rubenstein Fellow at Brookings’ Africa Growth Initiative and is not affiliated with Covington & Burling LLP. This piece was also cross-posted on Brookings’ Africa in Focus blog.

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

GAO Testimony Before Congress Regarding Emerging Opportunities, Challenges, and Implications for Policy and Research with Artificial Intelligence

Timothy M. Persons, GAO Chief Scientist Applied Research and Methods, recently provided testimony on artificial intelligence (“AI”) before the House of Representatives’ Subcommittees on Research and Technology and Energy, Committee on Science, Space, and Technology.  Specifically, his testimony summarized a prior GAO technological assessment on AI from March 2018.  Persons’ statement addressed three areas:  (1) AI has evolved over time; (2) the opportunities and future promise of AI, as well as its principal challenges and risks; and (3) the policy implications and research priorities resulting from advances in AI.  This statement by a GAO official is instructive for how the government is thinking about the future of AI, and how government contractors can, too.

The Evolution and Characteristics of AI

Persons stated that AI can be defined as either “narrow,” meaning “applications that provide domain-specific expertise or task completion,” or “general,” meaning an “application that exhibits intelligence comparable to a human, or beyond.”  Although AI has evolved since the 1950s, Persons cited today’s “increased data availability, storage, and processing power” as explanations for why AI occupies such a central role in today’s discourse.  And while we see many instances of narrow AI, general AI is still in its formative stages.

Persons described “three waves” of AI.  The first wave is characterized by “expert knowledge or criteria developed in law or other authoritative sources and encoded into a computer algorithm,” such as tax preparation services.  The second wave is characterized by machine learning and perception, and includes many technologies recognizable today such as voice-activated digital assistants and self-driving cars.  The third wave is characterized by “the strengths of first- and second-wave AI . . . capable of contextual sophistication, abstraction, and explanation”; an example cited in his testimony was a ship navigating the seas without human intervention.  This third wave is just in its beginning stages.

Benefits of Artificial Intelligence and Challenges to Its Development

In his testimony, Persons summarized a number of benefits from the increased prevalence of AI, including “improved economic outcomes and increased levels of productivity” for workers and companies, “improved or augmented human decision making” through AI’s faster processing of greater quantities of data, and even providing “insights into complex and pressing problems.”  However, a number of challenges to further developing AI technology, such as the “barriers to collecting and sharing data” that researchers and manufacturers face, the “lack of access to adequate computing resources and requisite human capital” for AI researchers, the inadequacy of current laws and regulations to address AI, and the need for an “ethical framework for and explainability and acceptance of AI.”

In its report, GAO identified “four high-consequence sectors” for the further development of AI:  cybersecurity, automated vehicles, criminal justice, and financial services.  In each of these sectors, AI may be used as a valuable tool that could enhance that specific industry’s capabilities, but AI also presents concerns in that given industry, such as to safety, fairness, and civil rights, among other areas.

Policy Considerations to AI and Areas Requiring More Research 

Relying on the GAO report and the views of subject-matter experts, Persons’ testimony highlights a number of policy considerations and areas that require more research to improve AI.  One area is how to “incentiviz[e] data sharing.”  Persons highlighted that private actors need to better share data while still finding ways to safeguard intellectual property and proprietary information.  Similarly, federal agencies can share data that would otherwise not be accessible to researchers.  Another area was “improving safety and security,” as the costs from cybersecurity breaches are not necessarily borne equally between manufacturers and users.

One of the more significant policy considerations that will accompany increased usage of AI is “updating the regulatory approach.”  As an example, “the manufacturer of the automated vehicle bears all responsibility for crashes” under the regulatory structure as currently formulated.  Persons noted that regulators may need “to be proactive” in areas like this to “improve overall public safety.”  Relatedly, laws may have to adapt or evolve to allocate liability more appropriately, as “humans may not always be behind decisions that are made by automated systems.”  Without appropriate regulatory guidance, who bears responsibility for problems caused by AI remains unclear.  There is also a possibility for “establishing regulatory sandboxes,” which would enable regulators “to begin experimenting on a small scale and empirically test[] new ideas.”

Finally, Persons highlighted the importance of understanding “AI’s effects on employment and reimagining training and education.”  The data on this subject is currently incomplete, but Persons stated that it is believed job losses and gains will be sector specific.  With the increased prevalence of AI will also come the need to “reevaluate and reimagine training and education” to offset any possible job losses.

China Seeks Public Comments for Draft Cybersecurity Regulations

On June 27, 2018, China’s Ministry of Public Security (“MPS”) released for public comment a draft of the Regulations on Cybersecurity Multi-level Protection Scheme (“the Draft Regulation”). The highly anticipated Draft Regulation sets out the details of an updated Multi-level Protection Scheme, whereby network operators (defined below) are required to comply with different levels of protections according to the level of risk involved with their networks. The comment period ends on July 27, 2018.

China’s Cybersecurity Law (“CSL”), which took effect on June 1, 2017, requires the government to implement a Multi-level Protection Scheme (“MLPS”) for cybersecurity (Article 21). The Draft Regulation, a binding regulation once finalized, echoes this requirement and provides guidance for network operators to comply with the Cybersecurity Law.The Draft Regulation updates the existing MLPS, which is a framework dating back to 2007 that classifies information systems physically located in China according to their relative impact on national security, social order, and economic interests if the system is damaged or attacked. The classification levels range from one to five, one being the least critical and five being the most critical. Information systems that are classified (initially self-assessed and proposed by operators and then confirmed by MPS) at level 3 or above are subject to enhanced security requirements.

Obligations for network operators

The obligations set out apply to network operators, which Article 21 of the CSL broadly defines  to include all entities using a network (including the Internet) to operate or provide services.  Network operators will be subject to different cybersecurity requirements corresponding to their MLPS classification level.

  • Self-assessment of security level. All network operators are responsible for determining the appropriate security level for their networks at the design and planning stage, taking into account the functions of the network, scope and targets of service, and the types of data being processed.  When network functions, services scope and types of data processed are significantly changed, network operators are required to re-assess their classification level.In addition, operators of networks classified level 2 or above are required to arrange for “expert review” of the classification level and may also be required to obtain approval from industry regulators and the MPS.
  • Cybersecurity requirements.
    • All network operators. The Draft Regulation sets out requirements generally applicable to all network operators regardless of classification level, which largely track the requirements under Article 21 of the CSL. All network operators are required to conduct a self-review on their implementation of the cybersecurity MLPS system and the status of their cybersecurity at least once per year and should timely rectify identified risks and report such risks and remediation plans to MPS with which the operator is registered.
    • Operators of networks classified level 3 and above. Additional requirements apply for operators of networks classified level 3 and above—some of them are repetitive or overlap with general requirements above. New level 3 networks must be tested by MLPS testing agencies accredited by MPS (a list of accredited testing agencies available here) before they can come online. (By way of comparison, network operators of networks level 2 and below can test their own new network before it comes online.) Operators of networks classified level 3 and above are also required to formulate cybersecurity emergency plans and regularly carry out cybersecurity emergency response drills (e.g., table top exercises).
  • Security incident reporting. The Draft Regulation briefly mentions that network operators are required to report incidents within 24 hours to MPS. Although the Draft Regulation does not elaborate the reporting process or the information required for such notifications, this requirement imposes a new reporting timeline on network operators because the CSL, itself, does not have a specific time frame for reporting.

Additional requirements for operators of networks classified level 3 and above

Operators of networks classified level 3 and above are also subject to other requirements, including relating to procurement of products and services, technical maintenance performed overseas, and the use and testing of encryption measures.  In addition, the Draft Regulation restricts the ability of certain personnel to attend “offensive and defensive activities organized by foreign organizations” without authorization.

Enforcement and Liability

The Draft Regulation stipulates a wide array of investigative powers for MPS and sanctions for non-compliant companies, ranging from on-site inspection, investigation, and “summoning for consultation” to monetary fines and criminal liability.

* * * * *

While the meanings of certain terms in these requirements are still not clear and may require further interpretation, multinational companies operating in China may wish to closely follow developments relating to the Draft Regulation and understand how recent developments may affect their business operations. Companies have until July 28 to provide feedback to the Chinese government on possible amendments.

For a more in-depth analysis of the Draft Regulation, please refer to our recent client alert here.

Stronger patents dominate IP agenda in 115th Congress

Patents have been mainstay of the Judiciary Committee agenda in both chambers for more than a decade, but never before has the debate seemed so firmly focused on strengthening patent rights.  Significant patent bills are pending in both chambers, and the House and Senate Judiciary Committees have summoned Andrei Iancu, the new director of the U.S. Patent and Trademark Office (USPTO), to testify at oversight hearings early in his tenure at the agency.  Notably, unlike previous Congresses, none of the introduced bills restrict patent owners’ access to the federal courts.  For his part, Iancu has been outspoken about shifting the Administration to a new “pro-patent, pro-innovation dialogue.” In addition, the House Small Business Committee held its own hearing dedicated to intellectual property issues.  While the prospects of passing significant legislation in this Congress are slim, the patent debate has clearly shifted, and we can expect even more activity in the next Congress.

In March, 2018, Representatives. Steve Stivers (R-OH) and Bill Foster (D-IL) introduced the bipartisan Support Technology and Research for Our Nation’s Growth and Economic Resilience (STRONGER) Patents Act (H.R. 5340).   The STRONGER Patents Act amends the inter partes and post-grant review procedures at the USPTO’s Patent Trial and Appeal Board (PTAB) to ensure fairness for both patent owners and challengers.  Created by the America Invents Act (AIA) in 2011 as an “alternative” to district court litigation for adjudicating patent validity, the PTAB in practice has invalidated patents at a much higher rate than federal courts.  The STRONGER Patents Act would, among other things, ensure that PTAB petitioners have an interest in the patents they challenge; harmonize the claim construction standards and burden of proof between federal district court and the PTAB; and permit patent owners to amend their claims during the proceeding to preserve their patent’s validity.

The STRONGER Patents Act would also clarify the authority of the Federal Trade Commission and state attorneys general to take action against senders of abusive patent demand letters, and ensure the USPTO has the resources it needs to issue strong patents and trademarks by ending the practice of “fee diversion” and granting the director the authority to spend all patent and trademark fees collected by the agency.  Senators Chris Coons (D-DE) and Tom Cotton (R-AR) introduced the Senate STRONGER Act in June, 2017.

Just last week, Representatives Thomas Massie (R-KY) and Marcy Kaptur (D-OH) introduced the bipartisan Restoring America’s Leadership in Innovation Act (“RALIA”) (H.R. 6264).  The act codifies that “a patent is a private property right . . . that shall only be revoked by a court ruling in a judicial proceeding“ without the consent of the patent owner.  The bill would also reverse the Supreme Court’s decision in eBay v. MercExchange, restoring the ability of patent owners to obtain injunctive relief for patents found valid and infringed; repeal the provisions of the AIA that create the PTAB and inter partes review; repeal the AIA’s provisions converting the United States to a first-to-file patent system; create a strong presumption of patent validity in any judicial or administrative proceeding; and toll a patent term during validity challenges.

Both chambers have also taken steps to ensure that the USPTO has appropriate authority to set its own user fees.  Senators Coons and Orrin Hatch (R-UT) introduced the Building Innovation Growth through Data for Intellectual Property (BIG Data for IP) Act (S. 2601).  In his testimony before the House Judiciary Committee in May, Director Iancu endorsed the House companion to the BIG Data for IP Act (H.R. 5887), sponsored by Representatives Steve Chabot (R-OH) and Hank Johnson (D-GA).

In the oversight hearings, Director Iancu promoted strong patent rights, emphasizing the need for the USPTO to review the PTAB proceedings from top to bottom.  Under questioning from House Judiciary Committee members, Director Iancu defended his office’s recent notice of proposed rulemaking to harmonize claim construction standards used at the PTAB with those used in federal court.  Representative  Johnson, Ranking Member of the House Intellectual Property Subcommittee, asked Director Iancu how he planned to address high invalidation rates at the PTAB, and the Director emphasized his commitment to a complete review of the process. Although Representatives Zoe Lofgren (D-CA) and Darrell Issa (R-CA) assailed the proposed rule as contrary to Congress’s intent in the AIA, Director Iancu stated that the proposed rule is an appropriate use of the discretion afforded to the USPTO in the AIA.

Recent Developments in the Joint Select Committee on Solvency of Multiemployer Pension Plans

The solvency crisis bearing down on the multiemployer pension plan system has captured the attention of Capitol Hill.  Since March, the Joint Select Committee on Solvency of Multiemployer Pension Plans (the “Committee”) has held a series of hearings examining the multiemployer pension system.  Although it is unclear whether the bipartisan Committee ultimately will agree on legislation, the hearings represent the most significant focus on multiemployer pension plans since Congress passed the Pension Protection Act in 2006.

The Committee was established by the Bipartisan Budget Act of 2018 (P.L. 115-123) and  is comprised of 16 members—8 from the House, and 8 from the Senate.  Committee members are tasked with devising recommendations and legislative language that will “significantly improve the solvency of multiemployer pension plans and the Pension Benefit Guaranty Corporation” (PBGC).  In furtherance of this mission, the Committee has held hearings exploring the inner workings of the multiemployer pension system, the role of the PBGC, and the ways in which contributing employers are affected.

At the Committee’s inaugural session on March 14th, members expressed hope that a bipartisan solution could be reached—yet the potential for a partisan divide was evident.  The Committee held its first substantive hearing on April 18th, at which members received a primer on multiemployer plan issues from experts from the Joint Committee on Taxation and the American Academy of Actuaries.

The Committee’s May 17th hearing focused on the impending solvency crisis facing the PBGC.  PBGC Director W. Thomas Reeder cautioned the Committee that the PBGC multiemployer insurance program is headed toward insolvency.  According its projections, the PBGC needs $16 billion over the next ten years to stay afloat.  Director Reeder emphasized that if the multiemployer insurance program becomes insolvent, the PBGC will be able to fund only a small fraction of the benefits it currently guarantees—which, in many cases, are already significantly less than the amount promised in a pension.  Committee members inquired into the structure underlying the broader multiemployer pension system, and examined the primary controls available to Congress—a loan program and PBGC premium increases—that could help remedy the PBGC’s looming insolvency.

In June, the Committee shifted its attention to contributing employers’ perspectives on multiemployer plans.  Most of the witnesses agreed that a long-term, low-interest-rate federal loan program for troubled plans would be a significant step in the right direction.  Some Republican Committee members expressed precedential concerns about creating a loan program, as well as misgivings over Congress’ ability to ensure that loans would be repaid.  Some Democratic members indicated that a loan program—such as that proposed in the Butch Lewis Act (S. 2147, H.R. 4444) sponsored by Sen. Brown (D-OH) and Rep. Neal (D-MA)—should be part of a legislative solution.

The Committee is anticipated to hold additional hearings, including a field hearing in Columbus, Ohio, on July 13, and a hearing featuring participants and retirees in late July in Washington, DC.  November 30 is the Committee’s deadline to vote on a report, which, if approved, will be submitted along with legislative language to the President, Vice President, and congressional leadership.  As the Committee accelerates its negotiations over final recommendations and advances toward its statutory deadline, Covington will continue to monitor these developments closely.

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