Morrison & Foerster’s Automotive Task Force represents automotive industry clients in their most significant legal matters. With Litigation and Investigations lawyers across offices in the United States, Europe, and Asia, we provide holistic solutions for compliance, internal investigation, civil litigation, and government enforcement issues around the globe. We have achieved favorable results in numerous criminal and civil matters. As the automotive industry continues to become more tech-focused, we will continue to leverage our deep experience in the technology industry to meet the needs of clients operating in this evolving space.
We have tapped our multidisciplinary Automotive Task Force to get their opinions on what is likely to happen in terms of litigation, investigations, and enforcement actions in the automotive industry in 2022. We hope these predictions will provoke conversations and thoughts on how to navigate the coming year.
The U.S. Securities and Exchange Commission (SEC) under the current administration has been hyper-focused on two areas that directly affect the automotive tech and transportation space: (1) the use of special purpose acquisition companies (SPACs) by startup and other companies to go public and (2) environmental, social, and governance (ESG) and climate change disclosures. SPACs have been especially active in the auto-tech and transportation space, particularly in electrification startups. The SEC has been scrutinizing disclosures of conflicts of interest that can arise between SPAC insiders and public shareholders, and will approach deSPAC disclosures like traditional initial public offering (IPO) disclosures. In December 2021, SEC was particularly active in pursuing companies operating in the automotive sphere which have gone public through the use of SPACs, which included subpoenaing an electric-vehicle (EV) company related to revenue projections and statements and entering into a US $125 million settlement with a zero emissions transportation system provider related to misleading statements to investors. We expect to see this enforcement trend continue into 2022. Turning to ESG and climate change disclosures, the SEC is conducting a large-scale inquiry into whether public companies, including in the automotive space, are following the agency’s 2010 climate change disclosure guidance, with a goal of updating that guidance based on its findings. ESG disclosures are also an SEC examination priority for 2022. Finally, as with any disclosures, the SEC will focus on whether ESG disclosures contain material omissions or misstatements concerning climate change and other issues.
With a renewed focus on white collar and environmental crimes, the U.S. Department of Justice (DOJ), and its various criminal and civil components, will increase its focus on the automotive industry. This will include the continuation of the types of cases we have seen in the recent past, including efforts to manipulate emissions controls and faulty or defective automotive parts. Along with those investigations, DOJ will likely increase its attention on the automotive industry’s role in climate change, and focus any failure to comply with the increased environmental regulations that the Biden administration is likely to put in place. In the EV space, this could translate into investigations into efforts to manipulate reported EV ranges and other forms of “greenwashing.” DOJ’s Foreign Corrupt Practices Act (FCPA) Unit, National Security Division, and Antitrust Division will also be on the lookout for transnational bribery cases, sanctions violations, and “no poach” agreements, as discussed below.
While EVs will likely mitigate climate risk, they pose a new kind of risk for automakers: the risk that they will be asked to pay bribes to obtain the raw materials used to power EV battery cells. A typical EV requires six times the mineral inputs of a conventional car. Extractive industries have historically faced high corruption risk, with one study finding that one in five cases of transnational bribery occurs in the extractive sector. There is no reason to believe that extracting minerals such as cobalt and lithium, which are critical to EV battery performance, will be any different. As much as 70 percent of the world’s cobalt supply is mined in the Democratic Republic of the Congo, which ranked 170 out of the 180 countries and territories surveyed for their perceived public sector corruption by Transparency International (TI). Most lithium is currently produced in less corruption-prone countries, such as Australia (TI rank 11) and Chile (TI rank 25) but, as demand for lithium skyrockets, automakers might find themselves turning to higher risk countries such as Argentina (TI rank 78) or Zimbabwe (TI rank 157) for their supplies. Bribery risk is present even if the automaker isn’t engaged in extracting the minerals itself. In an analogous case, in December 2016, a Brazilian chemical company resolved allegations with U.S. authorities that it had bribed Brazilian officials to obtain raw materials for its products from the country’s national oil company at a more favorable price. Especially as they turn to direct production of EV batteries, automakers should revisit and update their third-party due diligence procedures and other compliance measures to mitigate corruption risk in their battery supply chains.
U.S. sanctions and export controls targeting China continue to cripple the semiconductor industry and the auto manufacturers that rely on it. Dating back to the Obama administration, and reaching new heights in the Trump and Biden administrations, the national security measures that have been imposed against China have severely restricted global access to and development of semiconductors. And while the pandemic has exacerbated this shortage, and the Biden administration is pushing for increased investments and developments in U.S. semiconductor production, the ongoing shortage is the industry’s reality for the foreseeable future. The U.S. government’s deployment of export controls, sanctions, and other national security-related tools targeting China will further constrain the semiconductor industry, even after supply chain issues connected to the pandemic are resolved.
The DOJ Antitrust Division continues to prioritize criminal enforcement of anticompetitive conduct in labor markets, including investigating and prosecuting “no poach,” or non-solicit, agreements among companies that compete for labor. In October 2016, the FTC and DOJ announced a change in policy to criminally charge companies and executives that enter into standalone agreements not to hire or solicit employees from each other. Since that time, DOJ has opened several investigations and brought criminal charges against companies and individual executives for allegedly entering such agreements with competitors that effectively lower wages or divide the market. The Biden administration has reiterated its continued priority of antitrust enforcement in labor markets in its Executive Order on Promoting Competition in the American Economy and through policy statements and other public remarks by DOJ Antitrust Division leadership. While the criminal charges to date have been limited to healthcare and engineering services industries, no industry is immune. And, unlike other competition violations, companies do not need to compete in their sale of goods and services to be considered competitors for employees. The trend is expanding—antitrust enforcers across jurisdictions are pursuing anticompetitive conduct in labor markets as a priority.
U.S. patent holders can file a complaint with the U.S. International Trade Commission (ITC) to seek an exclusion order directing U.S. Customs and Border Patrol to stop infringing goods from entering the United States and a cease and desist order against the importers and U.S. sellers of the infringing goods. In 2021, the ITC received 82 new complaints, which was much higher than the annual average of 65 complaints in 2016–2020. About 10 percent of the complaints involved products in the automotive, manufacturing, and transportation technology area and 25 percent involved computer and telecommunications products, some of which are incorporated into vehicles. For example, recent complaints accused certain integrated circuits for vehicle components, navigation systems, and vehicle control systems of patent infringement. As vehicles become more equipped with computer and networking technology, we expect the number of ITC complaints against the automotive industry to increase. In particular, autonomous driving technology is likely to implicate a new generation of patent infringement allegations.