On June 27, 2024 the US Supreme Court released its 6-3 decision in SEC v. Jarkesy, et al., ending the Securities and Exchange Commission’s (SEC) long-standing use of in-house Administrative Law Judge (ALJ) tribunals in cases involving allegations of fraud in which the SEC seeks civil penalties. The majority held that the Seventh Amendment entitles the defendant to trial by jury when the SEC seeks civil penalties for securities fraud, thus requiring that the action be brought in a court of law. This effectively closes one of the SEC’s key enforcement avenues for seeking financial penalties when it believes investors have been misled and forces the SEC to bring more of its actions in courts of law.
Click here to read the full article in The Investment Lawyer.
This article was originally published in The Legal Intelligencer on December 13, 2024 and is republished here with permission.
The lifeblood of any debtor operating in Chapter 11 is access to cash to maintain ongoing operations. This is particularly important in cases involving assisted living and skilled nursing facilities given the health, safety, and welfare concerns with respect to their residents. One of the most significant calls on cash involves post-petition rent obligations due on leased facilities. Under Section 365(d)(3) of the Bankruptcy Code, post-petition obligations with respect to leased “nonresidential real property” must be timely paid. While the code draws a distinction between residential and nonresidential real property, there is no explicit definition of “nonresidential,” thus creating difficult issues in certain health care cases.
In a recent decision, the U.S. Bankruptcy Court for the Western District of Pennsylvania tackled this problem in a Chapter 11 involving Guardian Elder Care at Johnstown, LLC, d/b/a Richland Healthcare and Rehabilitation Center. See In re Guardian Elder Care at Johnstown, No. 24-70299-JAD, 2024 WL 4799907 (Bankr. W.D. Pa. Nov. 15, 2024). At issue was whether a master lease to operate an occupied healthcare facility should be classified as “residential” or “nonresidential” real property under Section 365(d)(3). If the court determined that this was a lease for nonresidential real property, timely payment of post-petition rent would be required.
Guardian Care and its affiliates entered into a master lease agreement with a real estate investment trust involving several properties operated as personal care and nursing home facilities with approximately 1143 licensed beds and 950 residents. In July 2024, the debtors moved to either sell or otherwise transition their facilities to another buyer or operator without interrupting patient care. The debtors also sought authorization to use cash collateral and obtain debtor-in-possession financing to carry out the planned transactions. Although the landlords supported this plan and entered into new leases with the proposed buyers, they were concerned the DIP financing did not provide for the immediate payment of post-petition rent or other accrued charges under the master lease. The landlords argued that under Section 365(d)(3) those obligations should have been provided for in the DIP budget because their facilities were “nonresidential.”
During the DIP financing hearing, the court rejected the landlords’ objections as they had not filed a separate motion seeking immediate rent payment. The court approved the financing and suggested that the Section 365(d)(3) issue be addressed separately through a formal contested matter, which the landlords later did through a subsequent motion to compel.
Discussion
The Guardian Care court recognized that if a lease is deemed “nonresidential,” a trustee or debtor-in-possession must timely perform post-petition obligations under Section 365(d)(3). This also means that if the lease is found to be “residential,” although the rent will be an administrative claim, there is some flexibility as to the timing of payment which remains within the discretion of the bankruptcy court. See In re Colortex Industries, 19 F.3d 1371, 1384 (11th Cir.1994). In deciding such timing, a bankruptcy court has the goal of an orderly and equal distribution among creditors in order to prevent a race to the debtor’s assets. Distributions prior to plan confirmation are usually disallowed when the estate may not be able to pay the administrative expenses in full. See In re Standard Furniture, 3 B.R. 527, 532 (Bankr. S.D. Cal.1980).
To determine the type of property in question, the Guardian Care court looked first to the Bankruptcy Code, which does not provide a definition of “nonresidential” and then to Webster’s Third International Dictionary. In Websters, “nonresidential” is defined as “not residential” where “residence” is defined as “the place where one actually lives or has his home as distinguished from his technical domicile.”
Although one might expect that a straightforward reading of Section 365(d)(3) should resolve the issue, Congress left a gap in the code due to the missing defined term. In addressing this gap some courts have analyzed the question through either a “property test” or an “economic test.” See In re PNW Healthcare Holdings, 617 B.R. 354 (Bankr. W.D. Wash. 2020); In re Passage Midland Meadows Operations, 578 B.R. 367 (Bankr. S.D. W. Va. 2017). The Guardian Care court noted that “the property test looks to the character of the property itself while the economic test looks to the contractual intent behind the lease, in other words, asking if the lease is for commercial purposes or noncommercial purposes.” While the court acknowledged that the property test was more persuasive as it highlights substance over form, it went on to find that a “totality of the circumstances” test would actually be much more fitting, as it relies on no one decisive factor. This test allows the court to consider the specific nature of the leased property as well as its purpose, use and intent. In this case, the court found that the debtors’ properties, due to their long-term occupancy, qualified as residential.
Coupled with the totality of the circumstances test, is the legislative history, which also supports a determination that the debtors’ properties were residential. In 1984, Congress passed amendments to the Bankruptcy Code which created the distinction between residential real property leases and nonresidential real property leases. H.R. Conf. Rep. 98-882 (1984), as reprinted in 1984 U.S.C.C.A.N. 576, 598-99 (titling the section “Shopping Center Bankruptcy Amendments). Congress created this divide to “remedy serious problems caused to shopping centers and their solvent tenants by the administration of the Bankruptcy Code.” The legislative history makes it clear that Congress sought to avoid the imposition of financial burdens against landlords, however, these protections were limited to landlords in shopping malls and centers. If Congress had intended these protections to include mixed-use properties like the debtors’ facilities, they would have stated that or even defined the term “nonresidential” more broadly. The Guardian Care court therefore found that to broadly interpret “nonresidential” to include these facilities runs counter to the Supreme Court’s precedential approach to statutory construction. See Harrington v. Purdue Pharma, 603 U.S. –, 144 S. Ct. 2071, 219 L.Ed.2d 721 (2024).
The Guardian Care court further noted that public policy supports interpreting the master lease as residential, especially in a bankruptcy context. These care facilities serve a variety of individuals, with many being extremely at-risk. Disrupting care would be detrimental to both society and public health. These residents are dependent on these facilities to maintain a stable home while also being treated with personalized care. The master lease supports this reading as well as it highlights the property’s identity as a place of residence throughout the agreement.
Characterizing these properties as residential also contributes to the debtors’ ability to restructure effectively. If the lease was classified as “nonresidential,” it would impose substantial cash flow pressures onto the debtors, which could impede their reorganization efforts as well as the operations of the facilities themselves, which would negatively impact resident care. When there are no immediate post-petition payment obligations on a debtor subject to a residential real property lease, there is more flexibility to maximize the value for all creditors and run the facilities.
It should be noted that even with a residential classification, the Bankruptcy Code still provides the landlords with protections. For example, Section 503(b) grants administrative expense priority for reasonable post-petition occupancy charges. The landlords can also seek stay relief pursuant to Section 362(d) if they suffer economic hardship because the debtor continues to use the facilities without making rental payments .
The Guardian Care decision joins several other courts around the country in attempting to clarify the question of what constitutes residential real property under Section 365(d)(3). By adhering to the goals of the Bankruptcy Code and following Supreme Courts statutory construction tenants, this court has created a commonsense approach supported by legislative history and public policy concerns.
Since the end of the pandemic, federal funds to support assisted living and skilled nursing facilities have been significantly reduced causing increased cash flow problems for many operators. As a result, when bankruptcy becomes the only option, the immediate payment of rent will be an important issue in these cases throughout the country.
On December 2, 2024, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) announced two interim final rules (collectively, the “December 2024 Rules”) (“Foreign-Produced Direct Product Rule Additions, and Refinements to Controls for Advanced Computing and Semiconductor Manufacturing Items” and “Additions and Modifications to the Entity List; Removals from the Validated End-User (VEU) Program” designed to further limit the People’s Republic of China’s (“PRC”) access to U.S. technology to further its development of advanced-node semiconductors and other technologies with significant military applications. By restricting access to U.S. tools and technologies, the BIS seeks to disrupt the PRC’s leveraging of U.S. technologies for military purposes.
Overview of the New Measures
The December 2024 Rules aim to limit the PRC’s access to critical technologies essential for advanced weapon systems, artificial intelligence (“AI”), and advanced computing. These efforts include:
- Semiconductor Manufacturing Equipment and Software Controls: BIS is imposing new controls on 24 types of semiconductor manufacturing equipment, three types of software tools used in semiconductor production, and high-bandwidth memory (“HBM”). These controls target U.S.-origin and certain foreign-produced items under the Export Administration Regulations (“EAR”).
- Entity List Updates: 140 new entities have been added to the BIS Entity List, along with 14 modifications, affecting PRC semiconductor fabrication facilities, equipment manufacturers, and investment companies supporting Beijing’s advanced technology goals.
- Foreign Direct Product (FDP) Rules and De Minimis Changes: Two new FDP rules extend U.S. jurisdiction over foreign-produced items when certain PRC-related end-uses or entities are involved. A de minimis rule extends U.S. jurisdiction over foreign-produced items containing any amount of U.S.-origin integrated circuits.
- Enhanced Red Flag Guidance: To address compliance concerns and diversion risks, BIS has introduced new red flag indicators for exporters and partners to identify potential misuse of U.S.-origin technology.
- Software and Technology Controls: New restrictions have been applied to software keys, Electronic Computer-Aided Design software, and other technologies associated with advanced-node semiconductor design.
- Updated License Exceptions: BIS has created a new License Exception HBM for eligible uses of high-bandwidth memory products.
Impact on the PRC’s Military-Civil Fusion Strategy
The PRC’s Military-Civil Fusion strategy presents a risk that advanced-node semiconductors and AI technologies could be repurposed for military end-uses. The December 2024 Rules build on prior BIS actions, including those in October 2022, October 2023, and April 2024, to address these threats.
Assistant Secretary of Commerce for Export Administration Thea D. Rozman Kendler emphasized the importance of these measures, stating, “The purpose of these Entity List actions is to stop PRC companies from leveraging U.S. technology to indigenously produce advanced semiconductors.”
Compliance and Public Feedback
The majority of the December 2024 Rules are effective immediately. Some of the December 2024 Rules will have a delayed compliance date of December 31, 2024. BIS has invited public comments on these rules to refine and enhance these regulatory measures.
Looking Ahead
The December 2024 Rules foretell a broader U.S. strategy to adopt a “small yard, high fence” approach to protecting advanced technologies. By collaborating with allies and leveraging innovative regulatory tools, BIS aims to stay ahead of evolving threats to U.S. national security.
For exporters, understanding and adhering to these new controls is critical. Companies must closely monitor updates to the EAR and ensure robust compliance programs to address the complexities of the modern geopolitical and technological landscape.
Conclusion
This paper is intended as a guide only and is not a substitute for specific legal or tax advice. Please reach out to the authors for any specific questions. We expect to continue to monitor the topics addressed in this paper and provide future client updates when useful.
Troutman Pepper’s Cannabis Practice helps clients throughout their business cycle enter or expand into the cannabis space. Our team combines the resources of attorneys in areas such as licensing and taxation, regulatory compliance, corporate and transactional, intellectual property, and real estate, among others, to provide comprehensive services.
Our Cannabis Practice provides advice on issues related to applicable federal and state law. Marijuana remains an illegal controlled substance under federal law.
TROUTMAN PEPPER SPOTLIGHT
12 Days of Regulatory Insights: Day 5 – Cannabis Chronicles
By Jean Smith-Gonnell and Nicholas Ramos
Our special holiday podcast series, “The 12 Days of Regulatory Insights,” part of our Regulatory Oversight podcast, featured an episode focused on regulatory updates in the cannabis industry from 2024 and the potential impacts of the recent election on the industry in 2025.
CANNABIS REGULATORY UPDATES
Getting Into the Weeds on Marijuana Excise Taxes: Trends and Outliers in the Largest Markets
By Jean Smith-Gonnell and Zie Alere
State and federal excise taxes are a critical element of the business environment for major “vice” industries in the United States, such as tobacco. While no federal excise tax applies to marijuana, state excise taxes (SET) are a significant economic consideration for the recreational marijuana industry in a given state.
Potential State-Centric Marijuana Policy in the 119th Congress
By Jean Smith-Gonnell and Zie Alere
With power changing hands in Washington, D.C., what can marijuana industry members expect from the 119th Congress? Two GOP proposals from the 118th Congress may foreshadow the likely path for federal marijuana legalization. These bills — the “States Reform Act of 2023” and the “Strengthening the Tenth Amendment Through Entrusting States (STATES) 2.0 Act” —would explicitly support states’ legal marijuana regimes, while leaving states with the ultimate decision of whether to establish such regimes.
On December 6, 2024, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) released a report (the “Report”) highlighting significant risks associated with the use of mature-node semiconductor chips, also known as legacy chips, in U.S. critical infrastructure supply chains; legacy chips are generally low value and generic utility. The Report, based on data collected under the Defense Production Act, underscores challenges posed by the reliance on legacy chips manufactured in the People’s Republic of China (“PRC”). Rather than posing a dependency risk, these chips benefit from PRC government subsidies that can drive over-supply and low prices resulting in forcing non- PRC competition out of business.
Background
In January 2024, BIS issued surveys to a representative sample of U.S. industry to better understand the production and use of mature-node semiconductors sourced from PRC-based foundries. The survey aimed to identify how U.S. companies are sourcing these legacy chips, which are used in critical industries and U.S. Government supply chains. The analysis will inform U.S. policy to strengthen the semiconductor supply chain, promote a level playing field for legacy chip production, and reduce national security risks posed by the PRC.
Implications for U.S. Supply Chains
BIS officials emphasized the urgency to address growing use of low-cost chips:
- Under Secretary Alan F. Estevez called for actions to build diverse and resilient semiconductor supply chains, warning of challenges posed by PRC overproduction.
- Assistant Secretary Thea D. Rozman Kendler stressed the importance of using the findings to secure critical industries, including telecommunications, automotive, medical devices, and the defense industrial base.
While PRC-manufactured chips currently represent a small percentage of chips by count and value, low pricing and availability could drive overreliance on PRC semiconductors, creating significant economic and national security risks.
Low prices could increase use and build vulnerabilities in critical infrastructure supply chains. Moreover, subsidies for PRC foundries and pressure to use PRC-origin components in China continue to challenge the competitive landscape for U.S. suppliers. During the COVID-19 pandemic, PRC production shutdowns caused disruptions to chip supply chains, including legacy chips, that dominoed into supply chain disruptions and price spikes in a wide variety of products, including automobiles, consumer appliances, and medical devices. These disruptions highlight the risks of overreliance on cheap PRC chips for critical components.
U.S. Resilience and Proposed Actions
Below are a few of the actions and proposals that the U.S. has and proposes to take to reduce semiconductor supply chain disruptions.
- The CHIPS and Science Act provides more than $50 billion of incentives to invest in domestic semiconductor manufacturing capacity, research, and innovation, and the semiconductor workforce.
- The U.S. Government proposes to implement Section 5949 of the James M. Inhofe National Defense Authorization Act for Fiscal Year 2023, which will prohibit, starting in December 2027, U.S. Government departments and agencies from procuring products and services that include semiconductors products or services from certain PRC firms.
- President Biden announced a suite of tariffs to counteract PRC’s unfair trade practices regarding technology transfer, intellectual property, and innovation across a variety of strategic sectors such as steel and aluminum, semiconductors, electric vehicles, batteries, and critical minerals. As part of that effort, the tariff rate on semiconductors is increasing from 25% to 50% by 2025.
- Lastly, the United States has coordinated with its trading partners to take a coordinated approach to protect against PRC’s non-market overcapacity and economic coercion. The U.S. and the European Union have joined to (i) collect and share non-confidential information and market intelligence about non-market policies and practices, (ii) consult proposed retaliatory actions, and (iii) cooperate to implement measures to protect the legacy chip supply chain from unfair competition.
Conclusion
This paper is intended as a guide only and is not a substitute for specific legal or tax advice. Please reach out to the authors for any specific questions. We expect to continue to monitor the topics addressed in this paper and provide future client updates when useful.
State and federal excise taxes are a critical element of the business environment for major “vice” industries in the United States, such as tobacco. While no federal excise tax applies to marijuana, state excise taxes (SET) are a significant economic consideration for the recreational marijuana industry in a given state.
Read the full article on Reuters.
U.S. sanctions laws present complex conflicts with state insurance laws. While state laws govern the timely payment of claims and other insurance practices, U.S. sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) supersede state laws pursuant to the Commerce Clause of the U.S. Constitution.
If U.S. sanctions laws require an insurance company to withhold payment from a policyholder or claimant due to concerns about violating OFAC sanctions, the insurance company is unlikely to face penalties from a state insurance regulator for non-compliance with state insurance laws and regulations. While state insurance departments, including the New York Department of Financial Services (“NYDFS”), may ordinarily impose fines for non-payment, they, along with state and federal courts, have recognized that adherence to OFAC sanctions preempt state insurance laws and regulations. This QuickStudy explores how OFAC sanctions preempt state insurance laws, the implications for insurers, and the importance of compliance with U.S. sanctions programs.
Summary
Several different federal statutes, first among them, the International Emergency Economic Powers Act and Trading with the Enemy Act, authorize OFAC to administer and enforce economic sanctions. OFAC operates under executive orders issued by the President of the United States that implement sanctions programs, which are codified in Title 31 of the Code of Federal Regulations, Part 500. OFAC has taken the position that OFAC sanctions regulations preempt state insurance laws. State insurance statutes regulate an insurer’s ability to withhold claim payments, cancel policies or to decline to enter into policies. However, OFAC has recognized that while insurance companies must abide by state insurance laws, they must also sometimes “commit an ostensible violation of state insurance regulations to comply with OFAC regulations.”
OFAC Role in Insurance Industry
An insurer is prohibited from engaging in transactions or providing services, including the payment of insurance claims, that violate OFAC sanctions. The federal government does not provide exceptions for state insurance law obligations. If an insurer receives an insurance application from a person on OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”), the insurer is under an obligation not to issue the policy and must report it to OFAC. An insurer violates OFAC sanctions if it issues a policy, receives premiums, pays claims, facilitates a transaction, or otherwise deals with a person or entity on the SDN List. OFAC has provided the following examples of transactions which would be prohibited without an authorized license: (i) an aviation insurance policy, issued to a non-blocked foreign airline company, which names a Specially Designated National (“SDN”) bank as an additional insured because the bank holds a mortgage on the aircraft; (ii) a liability insurance policy covering the pharmaceutical operations of a company in Columbia, which has been named as a Specially Designated Narcotics Trafficker; (iii) a reinsurance contract for insurance policies underwritten in whole or in part by a SDN insurer; (iv) a property insurance policy written for an international hotel chain which covers hotels in Iran; (v) a liability insurance policy covering a private oil exploration company’s operations in a sanctioned country or territory; (vi) the return of a premium overpayment to a Cuban resident in France; and (vii) the payment to a non-SDN claimant, if the claim is connected to an insurance policy that was issued to a SDN and is now blocked.
An insurer who violates OFAC sanctions may be subject to significant penalties, including civil fines and criminal prosecution. OFAC enforces most sanctions programs based on strict liability, which means that a person can be held civilly liable for violating sanctions regulations even if they were unaware of the violation. Civil and criminal penalties vary by sanctions program and depend on the type of violation. To decide on the type of enforcement action to take, if any, OFAC evaluates a range of “General Factors” outlined in its Enforcement Guidelines (e.g., willful or reckless violation of law, awareness of conduct at issue, harm to sanctions program objectives, individual characteristics of a person subject to OFAC sanctions programs, compliance programs, and remedial responses). According to these guidelines, OFAC may consider some or all of these factors when determining the appropriate administrative response to an apparent violation of U.S. sanctions. The nature and severity of penalties depend on the specific law or regulation that OFAC alleges has been violated. For example, the maximum civil monetary penalty for a violation of the International Emergency Economic Powers Act is the greater of either $368,136 or twice the amount of the transaction. Criminal penalties for willful violations of, or willful attempts to violate the International Emergency Economic Powers Act carry up to a million dollars in fines and/or imprisonment of up to twenty years.
Federal Preemption of State Insurance Laws
The Supremacy Clause of the U.S. Constitution ensures that federal law preempts state law when there is a conflict. When OFAC sanctions prevent an insurer from paying a claim, this creates a direct conflict between federal laws and state insurance laws, which typically require insurers to pay valid claims in a timely manner.
While direct cases specifically about insurance companies lawfully withholding payment of insurance claims in order to comply with OFAC sanctions may be limited, broader preemption principles are well-established. Courts have generally found that state laws that conflict with federal law are without effect. In particular, courts have held that federal law will preempt a state law if it is physically impossible to comply with both laws. Based on this, courts are likely to support the view that if state law requires payment or action on insurance claims that conflicts with OFAC sanctions, the federal regulations administered by OFAC would typically prevail. In a 2014 Second Circuit Court of Appeals case, the court held that OFAC’s blocking order preempted New York state law claims. The court ruled that the funds held in a blocked account by a financial institution regulated by the NYDFS could not be released to a claimant, even though New York state law might have required payment in the absence of OFAC sanctions.
State Insurance Laws and Penalties for Non-Payment
State insurance laws, regulated primarily by individual state insurance departments, generally impose penalties on insurers for the failure to pay legitimate claims in bad faith or in violation of state insurance codes. Under New York’s insurance law, insurers are prohibited from engaging in unfair claims settlement practices, including unreasonably delaying or denying payments. Violations of this statute can result in penalties, including fines.
The refusal to pay a claim due to OFAC sanctions could lead to allegations of bad faith under state law. New York courts generally allow policyholders and claimants to pursue bad faith claims under state law. However, if an insurer can demonstrate that making the payment would violate federal law, this has served as a defense against state penalties. In such cases, New York courts have acknowledged that state law may be preempted by federal regulations promulgated pursuant to Congressional delegation of discretionary quasi-legislative authority, such as regulations administered by OFAC. Furthermore, the NYDFS has been granted broad authority to enforce state insurance laws, including investigating claims practices and imposing penalties for violations. However, where OFAC sanctions are involved, the NYDFS has generally acknowledged the supremacy of federal law, limiting its enforcement actions against insurers who refuse to make payments based on OFAC compliance. In 2022, the NYDFS stated, “U.S. persons (including, without limitation, banks, virtual currency businesses, insurers and other financial institutions as well as insurance producers and third-party administrators) are prohibited from engaging in any financial transactions with persons on the SDN List, unless OFAC has authorized otherwise, through licenses listed on the OFAC website, or by obtaining a separate license for a particular transaction.”
Challenges and Risks for Insurers
While federal preemption shields insurers from state law liability in cases of OFAC compliance, insurers still face challenges, including:
- Bad Faith Claims: Policyholders may still file bad faith lawsuits under state law. While federal preemption generally protects insurers from liability, the litigation itself can be costly and time-consuming.
- Reputational Risks: Insurers that refuse to pay claims due to OFAC sanctions may suffer reputational harm, particularly if the refusal is perceived as an attempt to avoid legitimate claims.
Conclusion
Insurers operating in New York and other states must navigate a complex legal environment where OFAC sanctions can conflict with state insurance law. Although federal law preempts state insurance regulations, insurers must remain diligent in their compliance efforts. State courts, like their federal counterparts, have consistently ruled in favor of federal preemption. Nevertheless, insurers must be prepared for potential legal challenges, including bad faith claims, even if such claims are ultimately preempted by OFAC sanctions.
This paper is intended as a guide only and is not a substitute for specific legal or tax advice. Please reach out to the authors for any specific questions. We expect to continue to monitor the topics addressed in this paper and provide further client updates when useful.
Within hours of each other, an Oregon federal district court followed by a Washington state court enjoined the $24.6 billion merger of the Kroger and Albertsons grocery chains. The Oregon court adopted the controversial 2023 Merger Guidelines’ market concentration presumption and largely accepted the Federal Trade Commission’s (FTC) and its expert’s arguments for a narrow grocery market. In a loss for the FTC, the Oregon court declined to find that the proposed transaction was likely to substantially harm competition in the labor market alleged.
The Washington court similarly relied on structural presumptions based on market concentration calculations, though it did not expressly adopt or reject the 2023 Merger Guidelines. The Washington attorney general (AG) did not assert harm to any labor market, and accordingly, that court did not address the proposed transaction’s impact on labor.
While the decisions are notable for their narrow market definition limited to traditional grocery stores, they are most noteworthy for their embrace of a post-merger market share as low as 30% as “unacceptable” or a “threat,” the Oregon court’s express acceptance of the 2023 Merger Guidelines’ market concentration presumption, and the Oregon court’s rejection of the FTC’s labor market harm theory because of the lack of the type of economic evidence used in the evaluation of traditional sell-side markets. Also potentially problematic were the courts’ skeptical approaches to the merging parties’ proposed divestiture package and buyer.
Market One: Traditional Grocery Stores
Both courts held the enforcement agencies established their prima facie case that the Kroger/Albertsons merger would substantially lessen competition or tend to create a monopoly in the submarket limited to traditional grocery stores.
The courts defined the traditional grocery submarket as stores with a large footprint, a large number of grocery products, and a large number of services like deli and gas — essentially a one-stop shop. Excluded from the market were value stores, which have low prices and limited services and SKUs; club stores, which have a membership model, larger size products, and limited service and SKUs; dollar stores, which are generally smaller and lack fresh foods, service, and many SKUs; and natural, gourmet or limited assortment stores, which are generally smaller and focus on differentiated and organic brands. Embracing the 2023 Merger Guidelines’ approach, the courts applied the 1962 Brown Shoe Co. v. United States factors. According to the two courts, the fact that certain retailers may draw some customers away from and that they may compete in some sense with the merging parties does not suggest that the retailers should be in the same relevant market because those retailers also differ generally in terms of price, customers preferences, and format.
The courts held that the enforcement agencies met their prima facie burden of showing the merger would substantially lessen competition. The courts sided with the agencies’ experts and methods and found unpersuasive the defendant experts’ critiques. The Oregon court expressly accepted the 2023 Merger Guidelines’ market concentration thresholds for triggering a presumption of illegality, while the Washington court remained uncommitted because it found that the presumption applied under either the 2010 or 2023 guidelines. Both courts relied on the 1963 Philadelphia National Bank case’s 30% market share as a competitive threat.
The courts viewed Kroger and Albertsons as particularly close competitors to each other based largely on their internal documents and rejected their rebuttal arguments. For example, the courts were not persuaded that the merger would (1) allow the retailers to better compete against larger competitors like Wal-Mart or (2) generate substantial efficiencies that would be passed on to consumers. Both courts rigorously reviewed and found the proposed divestitures inadequate to restore the competition that would be lost, accepting the agencies’ arguments that the selected buyer was not sufficiently experienced or prepared.
Therefore, the courts held that the FTC and Washington AG were likely to succeed on the merits and granted the injunction.
Market Two: Union Grocery Store Labor
The Oregon court rejected the FTC’s standalone argument that an injunction should be issued based on harm in the union grocery store labor market.
Unlike the Tapestry/Capri court, which declined to reach the labor market arguments in connection with that transaction, the Oregon court carefully reviewed the agency’s labor market theory. Although the court, in dicta, was willing to accept a labor market limited to only unionized grocery workers, in the end it rejected the FTC’s request for an injunction because the agency was unable to provide sufficient economic evidence of the type used in the sell-side grocery market.
Although the parties have abandoned the proposed transaction, with Albertsons suing Kroger in Delaware Chancery Court, the Oregon and Washington courts’ decisions are a significant win for the Biden administration, at a minimum, with respect to its approach to defining the narrowest market possible and the burden of establishing an appropriate divestiture remedy. When considered along with the Tapestry/Capri court’s embrace of the 2023 Merger Guidelines’ market concentration presumptions, there is an increased risk of future courts applying the 2023 standard. These two wins, however, may also act as additional impetus to growing calls for the withdrawal or revision of the 2023 Merger Guidelines.
And while the court ultimately did not grant an injunction on the basis of a labor theory, the Oregon court’s labor market discussion confirms the concerns raised by commentors regarding the 2023 Merger Guidelines’ emphasis on the theory.
The Troutman Pepper antitrust team closely monitors developments at the federal and state antitrust enforcement agencies and provides the legal guidance necessary to identify potential risks and efficiently realize the benefits of client transactions.
On November 7, 2024, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued General License (“GL”) 5Q (“Authorizing Certain Transactions Related to the Petróleos de Venezuela, S.A. 2020 8.5 Percent Bond on or After March 7, 2025”), GL 😯 (“Authorizing Transactions Involving Petróleos de Venezuela, S.A. (PdVSA) Necessary for the Limited Maintenance of Essential Operations in Venezuela or the Wind Down of Operations in Venezuela for Certain Entities”), and amended Venezuela-related Frequently Asked Question (“FAQ”) 595.
GLs
GL 5Q continues to restrict U.S. persons until March 7, 2025, from enforcing bondholder rights to CITGO shares, which serve as collateral for the defaulted Petróleos de Venezuela, S.A. (“PdVSA”) 2020 8.5% bonds. This new deadline replaces the previous expiration of November 12, 2024, further delaying bondholders’ ability to act on these assets.
GL 8O, which replaces GL 8N, now extends through May 9, 2025, the authorization for transactions and activities that are ordinarily incident and necessary for maintaining essential operations, contracts, or agreements that were in place before July 26, 2019, and that involve PdVSA or entities in which PdVSA holds a 50% or greater interest (“PdVSA Entities”). Specifically, this authorization applies to certain companies and their subsidiaries, including but not limited to Schlumberger Limited, Baker Hughes Holdings LLC, and Weatherford International, Public Limited Company (collectively, “Covered Entities”). GL 😯 allows the Covered Entities to engage in essential transactions and activities needed for the safety and preservation of their assets in Venezuela, including (i) actions necessary to protect the safety of personnel and the integrity of operations; (ii) participation in shareholder and board meetings; (iii) payments for authorized transactions incurred before April 21, 2020; (iv) payments for local taxes and utility services; and (v) payment of salaries for local employees and contractors. Additionally, GL 😯 extends the deadline for Covered Entities to wind down operations, contracts, or other agreements in Venezuela involving PdVSA Entities, allowing them until May 9, 2025 to complete this process. GL 8N was set to expire on November 15, 2024.
FAQs
FAQ 595 – FAQ 595 was amended to reflect the extended moratorium set under GL 5Q. If an agreement is reached to restructure or refinance payments owed to holders of the PdVSA 2020 8.5% bond, OFAC may require additional licensing and encourages parties to apply for a specific license, with a generally favorable view toward approving such arrangements.
Conclusion
We anticipate that a returning Trump administration may introduce changes to the OFAC Venezuela sanctions program, potentially intensifying restrictions on financial and trade activities with Venezuela. We are closely monitoring developments.
This paper is intended as a guide only and is not a substitute for specific legal or tax advice. Please reach out to the authors for any specific questions. We expect to continue to monitor the topics addressed in this paper and provide future client updates when useful.
On December 5, 2024 the California Air Resources Board (CARB) issued an Enforcement Notice regarding the Climate Corporate Data Accountability Act (SB 253), which will require companies “doing business” in California to report their Scope 1, 2, and 3 greenhouse gas emissions (GHG), with reporting for 2025 Scope 1 and 2 emissions beginning in 2026 (see our previous discussion of the law’s requirements here).
The Enforcement Notice does not extend any compliance deadlines under SB 253 or impact any of the law’s requirements, but indicates that CARB “has decided to exercise its enforcement discretion” in recognition of the lead time some companies may need “to implement new data collection processes to allow for fully complete scope 1 and scope 2 emissions reporting, to the extent they do not currently possess or collect the relevant information.”
Specifically, the Enforcement Notice provides that:
For the first report due in 2026, reporting entities may submit scope 1 and scope 2 emissions from ‘the reporting entity’s prior fiscal year’ that can be determined from information the reporting entity already possesses or is already collecting at the time this [Enforcement] Notice was issued. CARB will exercise enforcement discretion for the first reporting cycle, on the condition that entities demonstrate good faith efforts to comply with the requirements of the law.
The Enforcement Notice will be welcome news to companies that may have to report their 2025 Scope 1 and 2 emissions beginning in 2026, given that CARB is not required to finalize implementing regulations detailing how companies should comply with the law until July 2025 (see our report on SB 219, which delayed the rulemaking deadline here). As of the date of this alert, CARB still has not announced when it will issue draft regulations for public review and comment. As such, companies potentially subject to the law have yet to see any rules that would allow them to further assess the law’s applicability and reporting requirements and may have just six months to collect highly technical information and prepare reports detailing GHG emissions for the entire calendar year.
In response to CARB’s Enforcement Notice, State Senator Scott Wiener (SB 253’s legislative sponsor) and Senator Henry Stern wrote a letter to CARB on December 11, 2024, expressing their dismay and frustration with the lack of progress CARB has made to implement the legislation. The senators noted that CARB has yet to hire staff to craft the implementing regulations, leaving the regulated community to wonder whether CARB can realistically adopt implementing regulations by the extended July 1, 2025, deadline. Additionally, the senators cited the importance of the law in preserving “California’s role as a leader and backstop in the fight against the climate crisis” in the face of “a new federal Administration that has expressed open hostility to climate action in general and corporate emissions disclosure requirements specifically,” and threatened legislative hearings if CARB does not make expeditious progress on the new regulations.
While the 2024 elections will surely bring a shift away from climate policy and ESG matters at the federal level, CARB’s Enforcement Notice indicates the state is moving full speed ahead with its own climate and ESG-related requirements, even while providing companies affected by SB 253 some breathing room to develop more robust processes to account for their GHG emissions, at least for the first reporting cycle. (The Enforcement Notice does not mention SB 261, which will require affected companies to begin disclosing climate-related financial risks beginning in 2026). Given these upcoming requirements and the complexity of climate-related disclosures, we continue to recommend that companies prepare to comply with California’s climate-related reporting and disclosure obligations (see a list of recommended steps here), while closely monitoring developments with the CARB rulemaking process and the ongoing legal challenge to SB 253 and 261.