Congress Repeals the OCC’s True Lender Rule

On June 30, President Biden signed into law a joint resolution to repeal the Office of the Comptroller of the Currency’s (OCC) so-called true lender rule.  The rule was repealed under the Congressional Review Act (CRA), which allows Congress to repeal new federal regulations by passing a joint resolution of disapproval that must be later signed by the president.  Federal regulations repealed under the CRA are treated as if they had never gone into effect.

The true lender rule established a bright-line standard to identify the “true lender” in lending partnerships between national banks and third parties, including financial technology companies.  Uncertainty in this area had caused confusion because the identity of the lender determines which state’s interest-rate limits apply to a loan: if a national bank is the lender, then the interest-rate limits of the bank’s home state apply.  Under the rule, a national bank would have been considered the lender of a loan if, as of the date of origination, it (1) was named as the lender in the loan agreement or (2) funded the loan.  If one bank was named as the lender in the loan agreement and another bank funded the loan, the rule clarified that the bank that was named as the lender in the loan agreement was the lender.

The repeal of the true lender rule marks a return to a world of uncertainty caused by fact-intensive, multifactor tests that some courts have applied to determine which entity makes a loan.  In promulgating the true lender rule, the OCC recognized that this uncertainty “may discourage banks from entering into lending partnerships [with third parties], which, in turn, may limit competition, restrict access to affordable credit, and chill the innovation that can result from these relationships.”  The true lender rule was intended to provide a uniform and predictable standard to address this uncertainty.  Under the CRA, the OCC is prohibited from issuing a substantially similar rule, unless Congress authorizes the agency to do so in a subsequent law.

The End of CSP and PRC Requirements? — GSA’s TDR Pilot Program Faces Further Internal Criticism

As GSA Multiple Award Schedule contractors know all too well, Schedule contracting involves a complex web of customer-tracking, reporting, and price-adjustment requirements.  Those of us who navigate these often byzantine rules understand why many in the industry have called for the adoption of an alternative approach to verifying price reasonableness.

For the last several years, GSA has been piloting just such an alternative:  the Transactional Data Reporting (“TDR”) program, through which the government collects transaction-level data on products and services purchased through the Schedule to make data-driven decisions that save taxpayer dollars.  GSA has been running a TDR pilot program for several years to test the potential for a new regulatory regime, though the program sometimes has been the source of criticism and controversy.  Now that controversy has heightened further:  GSA’s Office of Inspector General published an audit report on June 24, 2021 that is sharply critical of the program, only to see GSA’s Federal Acquisition Service (“FAS”) Commissioner publicly reject the report’s conclusions and defend TDR’s effectiveness.

Time will tell whether the TDR rule becomes the new standard for GSA Schedule contracting.  But the latest round of controversy suggests that the current maze of requirements are not going away any time soon.

Background

Currently, prospective GSA Schedule contractors must provide GSA with a Commercial Sales Practices (“CSP”) disclosure that details the contractor’s discounting policies and practices.  Once the contractor is awarded a contract, the contractor is then subject to the requirements of the Price Reductions Clause (“PRC”).  The PRC requires a contractor to continually maintain the same price-discount relationship that existed between the awarded GSA Schedule price and the “Basis of Award” customer’s pricing at the time of the GSA Schedule award.  This relationship is known as the “discount ratio” or “tracking customer ratio.”[1]

The TDR rule takes a different approach.  Under the TDR rule, contractors would be required on a monthly basis to report various elements of transactional data (e.g., unit measure, quantity of item sold, universal product code, prices per unit, etc.).  This data would then be sorted and analyzed by expert “category managers,” with the resulting conclusions allowing government buyers — at least in theory — to “easily evaluate the relative competitiveness of prices between FSS vendors.”  Significantly, contractors would no longer be subject to the CSP and PRC requirements described above.

In April 2021, GSA’s Senior Procurement Executive, Office of Government-Wide Policy announced that its TDR pilot has had “great success.”  The announcement summarized TDR’s potential advantages over the use of CSP and PRC requirements:  “When TDR is used, government prices are lower, the reporting burden on contractors is reduced, and small businesses generate stronger sales growth.”

However, the TDR rule and pilot program have not proceeded without hiccups.  The proposed rule faced criticism from industry and government stakeholders alike.  And following the 2016 issuance of the final rule, the Coalition for Government Procurement saw the need to raise 65 different questions seeking clarification.  Then, two years into the pilot program, the GSA OIG publicly critiqued the program in a 2018 report.  Now, the GSA OIG has conducted yet another audit that raises yet more concerns about the functioning and effectiveness of the TDR regime.

June 2021 Audit Report

According to the OIG’s latest audit report, “GSA’s TDR pilot is not meeting its intended purpose to improve value to the taxpayers.”  The OIG raised several reasons why — in its view — the pilot is falling short.

First, the OIG stated that the “TDR data is inaccurate and unreliable.”  The OIG asserted that GSA had not “maintain[ed] the integrity of the data” and pointed to a few examples of facially-inaccurate information found within the TDR data.  The OIG stated that industrial operations analysts (“IOAs”) are supposed to provide a check on the data, but the OIG contended that “the IOAs seem to be unaware that this is their responsibility.”  Accordingly, the OIG thought the data could not actually be useful to GSA customers.

Second, the OIG found that GSA customers were not actually using the data.  According to the OIG, “contracting personnel lacked access to and an understanding of the TDR data.”  Moreover, the trainings about TDR has warned that the data may be unreliable, making it less likely that contracting personnel would rely on the data.

Third, the OIG noticed that GSA customers were still relying on other pricing tools to make their purchasing decisions.  The OIG highlighted GSA Advantage!®, 4P, and Contract-Awarded Labor Category (“CALC”) as tools which were more likely to be used by contracting personnel.

The OIG concluded:

The TDR pilot has introduced additional risks associated with the potential use of inaccurate and unreliable TDR data and reliance on flawed pricing tools.  Accordingly, GSA should take immediate action to mitigate these risks and develop and implement an exit strategy for the TDR pilot.

Response to June 2021 Audit Report

Despite the OIG’s recent recommendations, GSA’s FAS Commissioner indicated it has no intention of exiting the TDR pilot.  In a response attached to the OIG’s audit report, the FAS Commissioner explained that the OIG’s findings were no longer up-to-date — and that “FAS has taken or intends to take the following actions to address [the OIG’s] concerns”:

  • “Additional training and policy guidance on how to properly use the transactional data that is collected with the understanding that a goal of FAS is to integrate this data into its pricing tools.”
  • “During 2020, FAS put together a tiger team to update the data management plan related to TDR. These updates led to wider access of the data to Government acquisition professionals.”
  • “FAS has integrated multiple types of pricing tools that the acquisition workforce can use to assist with pricing determinations. The goal is to add TDR data to these tools to further understand pricing at a purchasing level.”

The FAS Commissioner also defended the accuracy of TDR data, explaining that “FAS has integrated system-wide input validations to ensure data completeness and accuracy” and “will continue to build additional validations combined with proactive compliance reviews provided by the Industrial Operation Analysts (IOA) during contractor assessments.”

The FAS Commissioner concluded its response by rejecting the OIG’s recommendations.  However, the OIG now has formally requested that the FAS Commissioner reconsider that conclusion.

Conclusion

In light of this intra-agency dissension over the value and effectiveness of the TDR pilot, the future path and timeline for the TDR rule remains decidedly unclear.  We will continue to monitor these developments, but unless and until the TDR rule is fully implemented, GSA Schedule contractors will have to continue following the existing CSP and PRC requirements.  These requirements are often difficult to navigate given the realities of the commercial world, but there are certain best practices that contractors can employ to maximize their returns under the contract and mitigate risk of noncompliance.  Those with questions about ensuring CSP and/or PRC compliance — or responding to accusations of noncompliance — should reach out to our team to learn more.

 

[1] Note that this is distinct from a typical “most favored nation” clause – which simply requires that a customer receive the best price.  With the PRC, any “discount ratio” relative to the second-best price must also be preserved, unless an applicable regulatory exception applies.

The European Commission publishes the results of its evaluation of the horizontal block exemption regulations and guidelines

On 6 May 2021, the European Commission (“Commission”) published the findings of its evaluation of the horizontal block exemption regulations for Research & Development (“R&D BER”) and specialisation agreements (“Specialisation BER”, together “HBERs”), as well as the accompanying Horizontal Guidelines (“Evaluation”).

The Commission launched the Evaluation in 2019 to assess the future relevance of the HBERs and the Horizontal Guidelines, since their adoption in 2011 and 2012.  It gathered a variety of evidence on the functioning of the HBERs, which included:

  • findings of an open public consultation running from November 2019 to February 2020;
  • responses to the call for contributions on Competition Policy and the Green Deal launched in 2020; and
  • an external evaluation support study, which cross checked the public consultation and the responses received with the Commission’s and national competition authorities’ own experiences.

According to the Commission, the results show that, while still relevant and useful to businesses, there is a need for the HBERs and Horizontal Guidelines to better reflect recent socio-economic developments like digitalisation and sustainability.  The Evaluation also identified that businesses perceive some rules as unnecessarily strict and unclear.

Points of revision

A key finding of the Evaluation is that the HBERs need to accommodate sustainability objectives.  In recent years, sustainability has increasingly come into focus of EU competition policy.  As a result, the Commission is seeking to ensure that the rules governing horizontal agreements, amongst others, align with the sustainability goals of the European Green Deal.  The revised HBERs will aim to clarify the scope of permissible “sustainability” cooperation between competitors.

Respondents also identified a number of issues concerning the conditions for exemption under the R&D BER.  They highlighted that the current R&D BER may be too narrow to encompass all procompetitive R&D agreements, especially in its requirements for access to the results of joint R&D and pre-existing know-how.  Another issue identified was that the R&D BER does not provide sufficient guidance as to the status of early stages of R&D (particularly basic research).  Further, the Evaluation found that the 7-year exemption for commercial non-competes can be too short where R&D costs are too high to be recuperated within 7 years.

Similarly, some stakeholders stressed the need to expand the scope of the Specialisation BER (e.g. to include tolling agreements), and to clarify some of its narrow definitions in more detail.  The Evaluation found a certain lack of clarity in the Specialisation BER concerning notions such as joint production and joint distribution.  Respondents noted that the application of those definitions in the current Specialisation BER to certain types of specialisation agreements was difficult.

The Evaluation identified a number of other issues in potential need of revision.  These issues generally concern the clarity of the rules and their ability to address new market developments:

  • Although stakeholders confirmed that market share thresholds indicating safe harbours ease the assessment of agreements, they noted that calculating market shares and defining markets can be complex. Some added that current market thresholds are too low to exempt all appropriate agreements.
  • Provisions concerning information exchange, production, commercialisation, and standardisation agreements are considered too strict and difficult to interpret by businesses.
  • Omission of some more recent phenomena entails significant legal uncertainty for agreements that often involve large investments. In particular, the HBERs provide limited guidance on many new cooperation models that appeared because of digitalisation, and there is no dedicated chapter for data sharing and pooling or network sharing agreements.

Conclusion

The Commission concluded that a revision of the rules affecting horizontal cooperation is necessary to improve legal certainty, facilitate administrative supervision by the EU and the relevant national authorities and improve compliance.  Even if business confirmed that the HBERs and Horizontal Guidelines are useful instruments and remain relevant for stakeholders, the Evaluation found that they require revisions for the digital age and to facilitate achievement of sustainability goals.

As a next step, the Commission will conduct an impact assessment on the policy options for the review.  This impact assessment will involve a new public consultation, coming later this year, through which stakeholders will be able to provide feedback and put forward their own views.  Stakeholders will also be able to comment on a draft of the revised rules that will be published at the beginning of 2022.

The revised rules will come into force after 31 December 2022, when the current rules are due to expire.

Emerging Trends in UK Competition Law Vlog Series – Part III: Digital Markets

Covington’s four-part video series offers snapshot briefings on key emerging trends in UK Competition Law. In part three, James Marshall and Sophie Albrighton discuss digital markets, one of the key areas of focus of competition authorities around the world today, including in the UK. They are joined by guest speaker Martin Hansen, Of Counsel in Covington’s Technology Regulatory and Policy practice based in London.

Pressed for time? Click here to download this session’s key takeaways.

The Week Ahead in the European Parliament – Friday, June 25, 2021

Next week will be a committee week in the European Parliament.  Members of the European Parliament (“MEPs”) will gather virtually and in person in Brussels.  Several interesting votes and debates are scheduled to take place.

On Monday, the Committee on the Environment, Public Health and Food Safety (“ENVI”) will vote to adopt proposed amendments to the draft opinion on critical raw materials (“CRM”).  The amendments can be found here.  The opinion is addressed to the Committee on Industry, Research and Energy (“ITRE”) and will contribute to a report on a European Strategy for Critical Raw Materials (see here).  The draft opinion, presented by Rapporteur MEP Sara Matthieu (Greens/ALE, BE), highlights the need for conditions regarding the extraction, processing, and use of CRM to be aligned closer with the EU’s sustainability targets.  The language of the proposed amendments aims to balance environmental concerns with industry’s ability to adjust to the new requirements.  It is widely expected to be adopted.  The European Commission brought the issue of CRMs to the forefront last year when it published its “Action Plan on Critical Raw Materials”.  The Action Plan intends to decrease the dependency of Europe’s industry on third-country suppliers, and, instead, develop the circular and sustainable use of resources and diversify mineral sourcing from third countries, thereby ultimately improving supply-chain resilience.  The Commission’s Action Plan can be found here.

On Thursday, the Special Committee on Beating Cancer (“BECA”) will have a debate on a Pharmaceutical Strategy for Europe.  The Strategy is largely a response to the COVID-19 pandemic, but also contributes to the wider ambition of creating a European Health Union.  The Strategy should ensure patient access to affordable medicine, improve crisis preparedness, and promote the competitiveness, innovation, and sustainability of the EU pharmaceutical industry.  Rapporteur MEP Montserrat (EPP, ES) has emphasized that the new Pharmaceutical Strategy, if fully implemented, must strengthen and innovate the pharmaceutical industry and contribute to European strategic autonomy.  The European Health Union was proposed by the European Commission last year and intends to coordinate the EU’s national healthcare systems, in order to provide a more resilient and effective crisis response.  An overview of the Pharmaceutical Strategy can be found here.  As part of the European Health Union, the Pharmaceutical Strategy could provide new opportunities for pharmaceutical companies to expand their research and production efforts within the Internal Market and commit to sustainable production.  The draft report can be found here.

On the same day, the Committee on Economic and Monetary Affairs (“ECON”) and the Special Committee on Artificial Intelligence in a Digital Age (“AIDA”) will hold a public hearing on artificial intelligence (“AI”) and financial services.  Representatives from the European Commission, the European Central Bank, the European Supervisory Authorities, and the private sector will come together to share their views on the benefits and potential limits of AI use in financial services.  This exchange of views is likely to complement the findings of a paper on the same topic, published by AIDA last month, which can be found here.  The paper makes policy recommendations for new legislative proposals, largely aimed at mitigating any risks and negative impact that a broader application of AI could have on the financial market.  The hearing will be led by MEP Tudorache (RE, RO), chair of AIDA and MEP Tinagli (S&D, IT), chair of ECON.  The program for the event can be found here.

For the complete agenda and overview of the meetings, please see here.

Transatlantic Summits: Main Takeaways for Tech and Defense

Three summits last week—G-7, NATO, and U.S.-EU—launched a wide range of transatlantic initiatives to coordinate policy, particularly on trade, technology, and defense. These new formats and dialogues can ensure a much deeper level of regulatory cooperation between the United States and Europe by exchanging perspectives, briefing materials, and in some cases, staff. For companies on both sides of the Atlantic, these emerging policy trends also open up new opportunities to engage decision-makers both in Washington and European capitals.

U.S.-EU Trade and Technology Council

In what is perhaps the most significant transatlantic institutional innovation in decades, the two sides established a new format of structured meetings through the U.S.-EU Trade and Technology Council (TTC), as previewed six months ago. Its standing members are the U.S. Secretary of State, Secretary of Commerce, and Trade Representative, as well as the European Commissioners for Trade and for Competition. Other European Commissioners and U.S. Cabinet members may also be invited as appropriate. It appears to have broad industry support among firms and associations. And given the slew of legislative proposals in the EU aimed at the technology sector, including the Digital Services Act, the Digital Markets Act, and the Artificial Intelligence regulation, there will be much for both sides to discuss.

The TTC will initially include ten working groups: on technology standards cooperation (including on AI, Internet of Things, and other emerging technologies); climate and green tech; secure supply chains, including semiconductors; ICT security and competitiveness; data governance and technology platforms; the misuse of technology threatening security and human rights; export controls; investment screening, promoting SMEs access to, and use of, digital technologies; and global trade challenges.

The Council’s goals are “to grow the bilateral trade and investment relationship; to avoid new unnecessary technical barriers to trade; to coordinate, seek common ground, and strengthen global cooperation on technology, digital issues, and supply chains; to support collaborative research and exchanges; to cooperate on compatible and international standards development; to facilitate regulatory policy and enforcement cooperation and, where possible, convergence; to promote innovation and leadership by U.S. and European firms; and to strengthen other areas of cooperation.”

One way to understand this new initiative is as a meta-interagency process to analyze the underlying issues, generate policy options, build consensus, communicate guidance, and take decisions. The TTC is explicit about preserving the “regulatory autonomy” of the U.S. and the EU. But inherently, it will nonetheless shape policy outcomes and regulatory approaches.

The TTC’s structured, systematic, and detailed framework suggests that it will be much more than a mere exchange of talking points. Instead, it signals genuine consultation and collaboration with the aim of common decisions on the underlying topics. The universalization of video-conferencing over the past eighteen months may further facilitate this ambitious level of transatlantic coordination. And cooperation within the TTC is intended to drive efforts within broader institutions such as the G-7’s and OECD’s Future Tech Forum, with the goal of “promoting a democratic model of digital governance.”

Technology Competition Policy Dialogue

In parallel with the TTC, the U.S. and EU also launched a Joint Technology Competition Policy Dialogue to discuss antitrust policy and enforcement and increased cooperation in relation to technology-related issues. Notably, the two sides committed to establish a staff exchange program between their research funding agencies. They also singled out cybersecurity information sharing and situational awareness as an area of focus, and planned to explore developing a new research initiative on biotechnology and genomics.

Further details need to be determined regarding the participants and topics for discussion. But, in the spirit of the TTC and the overall commitment to renew the transatlantic partnership, it is likely to become an active space for collaboration, particularly given recent U.S. legislative proposals such as Trust-Busting for the Twenty-First Century Act (S.1074), Platform Competition and Opportunity Act (H.R. 3826), and Ending Platform Monopolies Act (H.R. 3825).

Dialogue on Security and Defense

Technology issues are also likely to feature as part of the new U.S.-EU Dialogue on Security and Defense, on the model of similar formats with Norway, Canada, Japan, and Korea. The initiative aims to provide a framework for enhanced consultations, which will bring together the respective institutions responsible for foreign affairs, defense, and national security on both sides of the Atlantic. Its broad scope builds on recent U.S.-EU defense cooperation initiatives, such as the U.S. participation in PESCO project on military mobility. The two sides also committed to work towards an “Administrative Arrangement” for the U.S. with the European Defence Agency to facilitate further collaboration on defense.

In addition to the U.S.-EU format, technology is also prominent on NATO’s agenda, which launched a civil-military Defence Innovation Accelerator for the North Atlantic as well as a NATO Innovation Fund to “support start-ups working on dual-use emerging and disruptive technologies.” Given that the EU’s proposed regulation on AI explicitly carved out from its scope AI systems “developed or used exclusively for military purposes,” this could be an active area for defense and technology firms.

Finally, technology concerns will intersect with other transatlantic dialogues launched on Russia, particularly on threats from criminal ransomware networks, as well as on China. Indeed, the U.S. Innovation and Competition Act (S. 1260) recently passed by the Senate—$250 billion to spur American manufacturing and technology, including $52 billion for the U.S. semiconductor industry—is widely viewed as part of the “long-term strategic competition with China.”

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The team at Covington is well placed to advise you on these policy developments, and how to engage with the relevant decision-makers in these areas.

EU Courts extend the doctrine of “undertaking” to private claims for damages

Introduction

The wide understanding of the notion of “undertaking” affords the European Commission (“Commission”) broad discretion when identifying the entities liable for competition law infringements, enabling it to attribute liability to all companies that constitute a single economic unit, such that a parent company can be liable for the wrongdoings of its subsidiary. The Commission also relies on the principle of economic continuity to establish liability when corporate groups are reconstructed.

With the increase of private competition law enforcement, the question arises whether individuals may rely on these concepts when establishing liability in private lawsuits. The recent Sumal and Skanska  cases confirm that EU Courts are in favour of extending the doctrine of “undertaking” to private damages claims. In his opinion of 15 April 2021 in Sumal, Advocate General (“AG”) Pitruzzella  proposes that a national court can order a subsidiary to pay compensation for the harm caused by anticompetitive conduct of its parent company. In March, the CJEU decided, in Skanska, that the principle of economic continuity applies in the context of follow-on damages claims.

Sumal

The case concerned Sumal’s claim against Mercedes Benz Trucks España SL (“MBTE”), part of the Daimler AG Group (“Daimler”), for damages of EUR 22,204.35 arising from an infringement of Article 101 TFEU. The damages claim was a follow on to the Commission’s decision establishing that MAN, Volvo/Renault, Daimler, Iveco, and DAF participated in a cartel for medium and heavy trucks, colluding on truck pricing and passing on the costs of compliance with stricter emission rules required by the Euro III to Euro VI environmental standards.

Sumal’s claim was not against Daimler, which was found liable by the Commission for the violation, but against its Spanish subsidiary, MBTE, which marketed Daimler trucks in Spain.  Sumal claimed that MBTE constituted a single undertaking with Daimler, such that it was jointly and severally liable for Daimler’s violation of EU competition law, and the lawsuit could be pursued in Spain. It was unclear to the Barcelona Provincial Court whether the doctrine of “undertaking” applies in the context of private claims or whether a subsidiary could be liable for infringement by its parent company.

In the context of the Barcelona Provincial Court’s request for a preliminary ruling, AG Pitruzzella’s opinion stated that claims for damages are an integral part of effective enforcement of EU competition law. Consequently, the “undertaking” concept applies in both public and private enforcement. Once the boundaries of an undertaking are established, they apply consistently in the Commission’s decision and private claims. The more entities that are within the scope of a single economic unit, the easier it is for victims of anticompetitive conduct to pursue claims in their own jurisdiction and increase their chances of receiving compensation.

AG Pitruzzella proposed that a subsidiary can be held liable for harm caused by the anticompetitive conduct of its parent company (so-called “top-down” liability). He stated that two key elements are necessary to establish top-down liability. First is the requirement that the parent company exercise decisive influence over its subsidiary, such that the latter simply executes the instructions of the former. Second is the requirement that the two entities constitute a single economic unit and therefore act jointly on the market, irrespective of corporate law principles pertaining to separate legal personality.

Skanska

The CJEU’s reasoning concerning the principle of economic continuity in Skanska was very similar to that of AG Pitruzzella in Sumal. Skanska concerned a cartel in the asphalt market in Finland, in which, among others, Lemminkäinen Oyi, Sata-Asfaltti Oy, Interasfaltti Oy, Asfalttineliö Oy and Asfaltti-Tekra Oy (which later became Skanska) were found to have participated. Towards the end of the cartel period, significant market consolidation occurred, in which three of the asphalt cartel participants each acquired another cartel participant.

In 2009, following an investigation by the Finnish Competition and Consumer Authority (“FCCA”), the Finnish Supreme Administrative Court applied the principle of economic continuity and imposed fines totalling EUR 82.5 million on the three acquiring companies, fining Skanska EUR 4.5 million. Vantaa, one of the cartel victims, subsequently claimed compensation from Skanska. It sought to rely on the principle of economic continuity to hold Skanska liable for the harm caused by its dissolved subsidiary. Skanska’s position was that it could not be held liable for the alleged harm because the principle of economic continuity does not exist in Finnish law. The Finnish Supreme Court commenced a preliminary reference procedure.

The CJEU established that EU competition law requires the principle of economic continuity to be applied in private claims for damages, regardless of the position in national law. According to the CJEU,  “the concept of ‘undertaking’, within the meaning of Article 101 TFEU, […] cannot have a different scope with regard to the imposition of fines by the Commission under Article 23(2) of Regulation No 1/2003 as compared with actions for damages for infringement of EU competition rules.”.

The CJEU also stated that the right to claim damages is a fundamental aspect of EU competition law given its deterrent effect on companies engaging in such conduct. The importance of this principle would be significantly undermined if companies could escape liability simply by restructuring.

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Recent Developments Shed Further Light on Congressional Subpoena Authority

Throughout recent months, we have closely monitored important developments in the courts and on Capitol Hill related to Congress’s power to issue and enforce subpoenas for documents or witness testimony.  As members of the 117th Congress continue to develop legislative and oversight priorities, a number of recent events signal continued uncertainty in congressional subpoena authority and interest in Congress in clarifying and strengthening that authority.  As discussed below, these recent developments hold significant implications for Congress’s ability to compel cooperation with their investigations.

Back to Square One in the Courts

Historically, investigators on Capitol Hill have relied on civil enforcement proceedings to enforce their subpoenas and compel the production of sought-after documents or testimony.  As we detailed in November, however, the D.C. Circuit cast doubt on the ability of investigators in the House to pursue this common avenue for enforcing its subpoenas.

The case, Committee on the Judiciary v. McGahn, arose from the House Judiciary Committee’s effort to seek civil enforcement of a subpoena issued to former White House Counsel Don McGahn for testimony in the Committee’s impeachment inquiry of President Trump.  Last August, a three-judge panel of the D.C. Circuit concluded that federal law provides no cause of action for House committees seeking civil enforcement of subpoenas, even when authorized by a House resolution.  On its face, this ruling would strip the House—but presumably not the Senate, which has separate statutory subpoena enforcement authority—of its ability to obtain a court order to enforce its subpoenas.  This in turn could have significant implications for parties responding to House oversight requests.

In October, the D.C. Circuit agreed to rehear the case en banc. With that said, as we noted in the fall, the Court appeared to be laying the groundwork for disposing of the case without offering a definitive ruling on the scope of Congress’s subpoena enforcement authority.  Since then, the parties have repeatedly sought to delay oral argument in the case, while they continued to negotiate the conditions under which McGahn would testify.  Those negotiations culminated in McGahn appearing before the Committee in a closed-door transcribed interview earlier this month.  And, sure enough, the parties late last week jointly moved to dismiss the pending appeal and vacate the underlying panel decision.

Assuming the Court agrees, the decision will leave unresolved the question of whether House committees may seek enforcement of their subpoenas in federal court.  Nonetheless, though the panel decision would no longer be binding on lower courts, lingering uncertainty regarding the ability of the House to enforce its subpoenas will continue to be an important consideration for parties responding to congressional oversight investigations.

Frustration Mounting on the Hill

While the question of congressional subpoena authority is stymied in the courts, congressional investigators are actively considering legislative angles to strengthen the congressional subpoena power.  In particular, in the last week, two separate hearings highlighted growing frustration among congressional investigators on both sides of the aisle.

First, perhaps unsurprisingly, the topic of congressional subpoena authority arose repeatedly during the House Judiciary Committee’s closed-door interview of McGahn, which resolved the case above.  Although the resulting testimony largely focused on the substance of the Committee’s underlying investigation, the 241-page transcript reveals congressional investigators’ repeated frustration about their lack of subpoena enforcement authority.  For instance, the hearing began with Committee staff highlighting that they first issued a subpoena for McGahn’s testimony on April 22, 2019, then reissued its subpoena in January 11, 2021, and finally reached an agreement to compel testimony over two years after the initial subpoena.

Second, on June 8, the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet held a hearing about civil enforcement of congressional authorities.  The hearing focused on testimony from four witnesses who proposed ways to strengthen the congressional subpoena and impose penalties for both government officials and private parties who do not comply.  The bipartisan consensus of the witnesses and Subcommittee members was that the House’s subpoena power is largely toothless, but a number of proposals could change that reality.  Democrats and Republicans both cited examples of ignored subpoenas during the Trump and Obama administrations, with House Judiciary Committee Chairman Jerry Nadler (D-NY) expressly noting that addressing Congress’s interest in ensuring that its subpoenas are enforced “transcends partisanship.”

Space for Bipartisan Action?

As frustrations mount, congressional investigators are increasingly considering legislative options to strengthen Congress’s ability to enforce its subpoenas.  Regardless of the ultimate outcome, the McGahn case highlights the tenuous statutory authority underlying enforcement of congressional subpoenas.  With this in mind, rather than relying on case law and risk a potentially unfavorable ruling in the courts, there is increasing interest on the Hill to codify and strengthen Congress’s subpoena enforcement authority.

Last June, Representative Ted Lieu (D-CA) led a group of House Democrats in introducing a resolution that would amend the House rules to formalize and expand the chamber’s “inherent contempt” authority.  In particular, the resolution would create a process by which individuals who refuse to comply with subpoenas would be subject to a hearing to determine if they should be held in contempt of Congress.  A party found to be in contempt would have 20 days to comply with the subpoena, or else be subject to an initial fine of no more than $25,000.  The fine would then increase incrementally to a maximum of $100,000 if the party still continues to ignore the subpoena.

After it stalled in the House last Congress, Lieu reintroduced the resolution in April. Although it remains to be seen whether the proposal will draw additional support in the current Congress, there is some reason to believe that proposals to strengthen congressional subpoena authority could be an area of rare bipartisan agreement.  In particular, in October 2017, the Republican-led House passed a bill that would have formalized the civil enforcement process for congressional subpoenas.  During the recent House Judiciary Subcommittee hearing addressing civil enforcement of congressional authorities, all four witnesses cited the bill and called for legislation to authorize Congress to file civil actions in federal court to enforce subpoenas.

Largely, these proposals have arisen out of frustration with uncooperative executive branch officials and focused on separation-of-powers concerns in an era of aggrandized executive power.  Nonetheless, proposals to bolster congressional oversight authority also hold important implications for private parties who find themselves subject to congressional investigations.  For that reason, parties that are or may be subject to congressional investigations would do well to monitor these proposals and potential rule changes.

This post was written with research assistance from Summer Associate Josh Schenk.

Twelve Things to Know About the Upcoming EU Carbon Border Adjustment Mechanism

The European Commission is currently discussing a draft of a proposal for a Carbon Border Adjustment Mechanism (“CBAM”) Regulation that it is expected to present on July 14, 2021.  A CBAM was already announced in the European Commission’s Communication for a Green Deal  and is intended to protect the EU’s domestic industry that is at risk of carbon leakage—to create a level playing field—and to serve as a policy tool to encourage third countries to reduce their greenhouse gas (“GHG”) emissions.

The CBAM draft proposal is subject to intense negotiations among the different Directorates-General of the European Commission, and it is likely that it will be amended several times before the Commission finally presents it on July 14.  Nevertheless, the draft already suggests that the CBAM proposal will require importers of covered goods into the EU to purchase and surrender a number of CBAM certificates that reflect the goods’ embedded emissions.  In line with the European Parliament’s resolution, the CBAM would be linked to the EU Emissions Trading System (“EU ETS”) as the price of the CBAM certificates would reflect the average price of the ETS allowances.

The CBAM proposal is likely to have the following elements:

  1. Geographical Scope: The CBAM is expected to apply to a limited category of goods that are imported from all third non-EU countries except those of the EEA. The European Commission would be empowered to adopt delegated acts excluding particular countries from the CBAM if they are fully integrated into the EU ETS or they conclude an agreement with the EU linking the third country’s emissions cap-and-trade system to the EU ETS.
  1. Product Scope: Initially, the CBAM is expected to cover only imported goods of certain sectors that in the EU are among those determined to be at high risk of carbon leakage: cement, certain fertilizers, iron and steel, and aluminum. In addition, the CBAM would cover electricity. The Commission would have the power to increase or reduce the sectors covered.  For example, it could later include paper, glass, and chemicals, as the European Parliament requested in its resolution.

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The UK, EU and the Northern Ireland Protocol

The Good Friday Agreement

The Troubles, which began in 1968 and lasted until the Good Friday Agreement (GFA) in 1998, left more than 3,700 people dead. The GFA introduced a new power-sharing N Ireland Government structure; decommissioned paramilitary weapons; established a number of joint committees between the UK, N and S Ireland to oversee the implementation of the GFA and address any possible tensions between the N and S Ireland or between communities in the North; created the ‘all-Ireland economy’; and protected the Common Travel Area.  But perhaps the most totemic and visible sign of the GFA’s success was the removal of the physical border infrastructure between N and S Ireland.

N Ireland & Brexit

When the UK left the EU, so too did N Ireland. Once the UK was no longer in the EU, an international border between the EU and the UK was inevitable. The only shared land border is the N/S Ireland frontier. The tensions between preserving the UK’s territorial integrity; protecting the GFA; and preserving the EU’s Single Market create a circle which cannot be squared – putting the border back between N/S Ireland would please the Unionists/Loyalists, but breach the GFA; putting it between GB and N Ireland would please the Nationalists, but jeopardise the UK’s territorial integrity.  Theresa May sought to square this circle by means of the Backstop, which would have left the UK in the EU’s Customs Union.  This option was replaced by the NIP when Boris Johnson became the PM.

The Northern Ireland Protocol

The Northern Ireland Protocol (the NIP) was the answer to this Brexit conundrum.  Under the NIP, N Ireland remains in the EU Single Market for trading purposes, but remains in the UK for customs, legal and administrative purposes. To protect the GFA, the administrative border between the UK and the EU was placed ‘in’ the Irish Sea, meaning goods travelling from GB to N Ireland are inspected on arrival in N Ireland by N Irish inspectors who apply EU customs rules. No customs duties are payable on goods moved from GB to N Ireland, unless those goods are ‘at risk of making their way onwards into the EU.

Checks on Goods moving from GB to N Ireland

The NIP staggered the introduction of border checks to help companies adapt to the new trading arrangements. Some goods were subject to checks from 1 February 2021.  Others only after the expiry of a grace period at the end of March, designed hip.  A second grace period (which covers the import of chilled meats, including chicken nuggets, sausages and minced beef into the EU) expires at the end of June.  A third grace period expires in October.

Impact of the NIP on N Ireland

A Joint Committee, set up to oversee the implementation of the NIP, has made progress on some issues including the supply of medicines to Northern Ireland from GB; the movement of guide dogs between Great Britain and Northern Ireland; VAT on second-hand vehicles; the provision by the UK of provided interim; and long-term plans for the EU’s access to Britain’s customs IT systems and databases.

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