CURRENT MONTH (February 2024)

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Antitrust Law

FTC Promotes Bayh-Dole Act’s Patent ‘March-In’ Rights to Lower Pharmaceutical Prices

By Barbara Sicalides, Julian Weiss, and Brett Broczkowski, Troutman, Pepper, Hamilton, Sanders, LLP

The U.S. Federal Trade Commission (FTC) recently took the next step in its long-standing effort to encourage lower prices and increase competition in the pharmaceutical industry. On February 6, the FTC announced its support for the National Institute of Standards and Technology (NIST) and the Interagency Working Group for Bayh-Dole on their Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights (“Draft”). The FTC described the Draft as an “effort[] to reactivate an important check on companies charging Americans high prices for drugs that taxpayers funded.”

According to U.S. Secretary of Commerce Gina Raimondo, “The Bayh-Dole Act is an important tool for fostering U.S. innovation and the commercialization of inventions that come from federally funded research and development,” and the Draft seeks to “maintain a balance between incentivizing companies to innovate and making sure those innovations serve the American people.” This newfound enthusiasm for march-in rights is a departure from the federal government’s track record, considering that march-in rights have never been exercised in their forty years of existence.

Under the Bayh-Dole Act, in exchange for private entities receiving federal funding and retaining ownership of resulting inventions, the federal agency funders reserve the right to march in on patents, that is, require patent holders to license certain patents to responsible applicants—including licensing a competitor to produce the taxpayer-funded invention. Under the Act, a funding agency may exercise march-in rights where: (1) “the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention”; (2) “health or safety needs . . . are not reasonably satisfied by the contractor, assignee, or their licensees”; (3) “requirements for public use specified by Federal regulations . . . are not reasonably satisfied by the contractor, assignee, or licensees”; or (4) the subject invention will not be manufactured in the United States.

The Draft provides that agencies should consider three overarching questions: (1) whether Bayh-Dole applies to the invention(s) at issue; (2) whether any of the four statutory criteria for exercising march-in rights (set forth above) apply; and (3) whether the exercise of march-in rights would support the policy and objectives of Bayh-Dole. Although neither the four statutory criteria nor the Draft focus directly on price, the Draft discusses several scenarios where price could be relevant to an agency’s march-in decision. For example, the Draft suggests that an unreasonably high price—or other unreasonably arduous terms of access to the product—may amount to “nonuse or unreasonable use” of the subject patent.

The agency praises the Draft for its more concrete guidance on when the government should exercise its march-in rights and argues that, under the Draft, price alone is an appropriate basis for marching in. The agency explains that, in prescription drug markets where pricing is buoyed by a sponsor with patent rights over a government-funded invention, exercising march-in rights and enabling additional licensees to access the inventions can foster competition. Specifically, the FTC asserts that march-in rights are “an essential check to ensure that taxpayer-funded inventions are affordable and accessible to the public.”

In addition to encouraging the exercise of march-in rights based on high prices, the agency’s comments argue that government-wide solutions are required to address pharmaceutical companies’ use of large patent portfolios—often described as a “patent thicket”—to protect a single treatment. The agency expressed concern that the effectiveness of march-in rights could be limited where publicly funded patents are included in unnecessary patent thickets.

Banking Law

FinCEN Issues Access Rule, Small Entity Compliance Guide for Beneficial Ownership Information

By Rachael Aspery and Douglas Charnas, McGlinchey Stafford PLLC

The Corporate Transparency Act (CTA) requires certain businesses to provide beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN). BOI received by FinCEN is not disclosed to the general public, but certain businesses may obtain access to it. In late December 2023, FinCEN issued a final rule (the Access Rule) that prescribes the circumstances under which BOI reported to FinCEN may be disclosed to authorized BOI recipients, and how it must be protected. Recently, FinCEN published a four-section Small Entity Compliance Guide (Guide) that provides an overview of the Access Rule’s requirements for small entities that obtain BOI from FinCEN.

While the Guide’s title and introductory paragraphs indicate the Guide is only directed at small entities or small financial institutions, the Guide summarizes the Access Rule’s requirements that apply to “financial institutions” (“FIs”) more broadly. FIs currently do not have access to BOI, and FinCEN is taking a phased approach to providing access.

The issuance of the Access Rule and the Guide do not create new regulatory requirements or supervisory expectations for banks or non-bank FIs to access BOI. FinCEN is required to revise the current Customer Due Diligence (CDD) Rule as directed by Section 6403(d)(1) of the CTA.

Section 1 – Use of BOI

FIs are permitted to use the BOI obtained from FinCEN to fulfill their CDD and other legal obligations under the Bank Secrecy Act. While the Guide provides an inexhaustive list of permissible uses for BOI, FIs are not permitted to use the BOI obtained for their general business or commercial activities, such as using the information in decisioning credit applications or for client development.

FIs are generally prohibited from disclosing BOI obtained from FinCEN. However, financial institutions are able to disclose in three limited circumstances: (1) to another director, officer, or other employee of the same FI for the particular purpose or activity for which the BOI was initially requested; (2) to the FI’s federal functional regulator, self-regulatory organization, or other appropriate regulatory agency; or (3) as authorized by FinCEN in a prior written authorization, or by protocols or guidance that FinCEN issues.

Section 2 – Security and Confidentiality Requirements

Under the Access Rule, FIs will be required to develop and implement administrative, technical, and physical safeguards designed to protect the security, confidentiality, and integrity of BOI. This includes restrictions on storing or disclosing BOI received from FinCEN in or from certain restricted geographies; implementing and applying procedures established to protect customers’ nonpublic personal information under section 501 of the Gramm-Leach Bliley Act; notifying FinCEN within three business days of receiving a subpoena demanding to disclose BOI from any foreign government; implementing geographic restrictions; and obtaining customers’/reporting companies’ consent prior to the initial request of BOI from FinCEN. Once BOI becomes available, the FI will need to make certain certifications through the online platform prior to its use.

Section 3 – Administration Requirements

FinCEN will reject any request by a FI if the request is not made in the form and manner prescribed by FinCEN. FinCEN may reject any request for BOI and also suspend or debar a FIs’ access from receiving or accessing BOI if the requester has failed to meet FinCEN’s requirements to access BOI, the information is being requested for an unlawful purpose, or for other good cause.

Section 4 – Violations

Unless expressly authorized by the CTA and implementing regulations, a person is prohibited from knowingly disclosing or knowingly using BOI obtained by the person, directly or indirectly, through a report submitted to FinCEN via BOI report or a disclosure made to FinCEN under the Access Rule. Violations include accessing BOI obtained from FinCEN without authorization or any violation of security and confidentiality under the Access Rule. The CTA provides both civil and criminal penalties for both unauthorized use and disclosure of BOI.

Business Crimes & Corporate Compliance

U.S. Enforcing Export Regulations: More Aggressively and for Good Reason

By Margaret M. Cassidy, Cassidy Law PLLC

Recent U.S. government announcements demonstrate why U.S. businesses must comply with U.S. export regulations, which are designed in part to protect national security.

The U.S. Department of Commerce Bureau of Industry and Security (“BIS”), an agency with responsibility for certain export-controlled items, advised on February 9 that it would pay up to $15 million for information on the sale of U.S. export-controlled defense items and technology that funds the Islamic Revolutionary Guard Corps (IRGC), a U.S.-designated terrorist organization. The reward is for information on Iranian businessman Hossein Hatefi Ardakani, whom the U.S. Department of Justice has charged with violating U.S. export control regulations for illegally obtaining controlled items and technology through a network of companies, then transferring the items and technology to the IRGC for its own use and to sell to prohibited countries and entities.

The U.S. government asserts that the IRGC sells the items and technology to fund its operations. The items and technologies are sold to Russia, which in turn uses them against Ukraine. Recent media articles have also reported that a British organization that evaluates weapons deployed in the Ukraine and elsewhere, Conflict Armament Research, claims it found evidence that Russia used a North Korean weapon in Ukraine that had components “linked to companies incorporated in the United States.”

The reward money and the news of North Korea and Russia obtaining U.S. products and technologies demonstrate why in March 2023, the U.S. Departments of Justice, Treasury, and Commerce issued a notice to U.S businesses that they must comply with export control regulations, including being alert for entities looking to evade these regulations, or face possible criminal, civil, or administrative penalties.

Cannabis Law

Another Brick in the Wall: New Hampshire House Passes Adult-Use Cannabis

By Jim Sandy, McGlinchey Stafford PLLC

With the passage of H.B. 1633, which would legalize, tax, and regulate cannabis, New Hampshire may be on its way to becoming the twenty-fifth state to legalize adult-use cannabis. Under H.B. 1633, adults aged twenty-one and over would be able to purchase and possess up to four ounces of cannabis flower, ten grams of cannabis concentrate, or up to 2,000 milligrams of THC from one of fifteen licensed dispensaries in the state.

While the bill was passed with bipartisan support in the House, it is uncertain whether the New Hampshire Senate will go along. Last year, the House passed similar legislation, only for it to be rejected quickly by their Senate counterparts. At that time, New Hampshire Governor Chris Sununu released a statement outlining conditions for adult-use cannabis necessary to win his support and avoid a veto. As the governor said: “with the right policy and framework in place, I stand ready to sign a legalization bill that puts the State of [New Hampshire] in the driver’s seat, focusing on harm reduction – not profits.” One of those restrictions was to limit the number of dispensaries in the state to fifteen, which H.B. 1633 does. Other restrictions the governor had proposed included a state-run model of the adult-use program, providing cities with the authority to permit or prohibit dispensaries in their towns, and keeping adult-use cannabis tax free to “undercut the cartels who continue to drive NH’s illicit drug market.”

In addition to the governor’s stated concerns, H.B. 1633 seeks to satisfy the concerns of the New Hampshire Senate by, among other things, (i) not automatically permitting medical cannabis dispensaries (called alternative treatment centers) to sell adult-use cannabis, and (ii) penalizing the public smoking of cannabis by subjecting first-time offenders to a civil violation and forfeiture, a second-time offender to a $500 fine and forfeiture, and further violations subject to a misdemeanor and, possibly, jail time. The latter addition to the House bill is in response to the Senate’s specific concerns about the impacts of public smoking of cannabis.

H.B. 1633 now heads to the Senate for consideration.

Consumer Finance Law

CFPB Publishes Order Establishing Supervisory Authority over Installment Lender

By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP

On February 23, the Consumer Financial Protection Bureau (“CFPB”) published an order establishing supervisory authority over World Acceptance, a consumer installment lender that operates over 1,000 offices across sixteen states in the Midwest, South, and Mountain West. The Bureau’s order is pursuant to its authority to subject to supervision “any [nonbank] covered person who . . . the Bureau has reasonable cause to determine, by order, after notice to the covered person . . . that such covered person is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.” 12 U.S.C. § 5514(a)(1)(C).

The Bureau’s determination—which was unsuccessfully contested by World Acceptance—is based on the Bureau’s assessment that three areas of World Acceptance’s business pose risk to consumers:

  • offering add-on insurance coverage without adequately explaining such coverage is optional;
  • excessive, harassing, or coercive collection practices; and
  • furnishing of inaccurate information to consumer reporting agencies or failing to adequately respond to consumer disputes of such information.

While the order is critical of World Acceptance’s business practices, it cautions that “the question of whether an entity poses such risks does not require a determination of whether the entity is violating laws or regulations.”

This is the Bureau’s first publicly released risk-based supervisory designation order in a contested matter, following the recent amendment of its procedural rules to allow the publication of such orders. In 2022, the Bureau announced that it intended to begin using this authority, and later that year the Bureau finalized changes to the procedural rules governing those determinations and the process by which they can be made public.

CFPB Blog Post Finds Credit Card Interest Rate Margins Are at an All-Time High

By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP

On February 22, the CFPB published a blog post arguing that “[b]y some measures, credit cards have never been this expensive.” The blog post explains that, over the decade ending in 2023, the average annual percentage rate (“APR”) on credit cards assessed interest increased from 12.9 percent to 22.8 percent. The blog post then argues that approximately half of this increase can be attributed to a premium above and beyond bank funding costs. The blog post maintains that this “APR margin” has increased from 9.6 percent in 2013 to 14.3 percent in 2023, and that it is largely profit, as there has not been a similar increase in charge-off rates. The blog post adds that these “excess APR margin costs” on consumers add up to billions of dollars annually.

The blog post adds that other Bureau research “has found high levels of concentration in the consumer credit card market and evidence of practices that inhibit consumers’ ability to find alternatives to expensive credit card products,” which the Bureau believes “may help explain why credit card issuers have been able to prop up high interest rates to fuel profits.”

Criticism of the blog post quickly emerged, with the Consumer Bankers Association noting that this APR growth reflected: 1) growth in credit cards issued to consumers with subprime credit scores; 2) growth in credit cards issues to consumers under twenty-five years old; and 3) a transition away from annual fees.

FFIEC Publishes Examination Principles Aimed at Reducing Discrimination and Bias in Residential Real Estate Valuations

By Eric Mogilnicki and Tyler Smith, Covington & Burling LLP

On February 12, the Federal Financial Institutions Examination Council (“FFIEC”), of which the CFPB is a member, released a statement that describes the principles banking examiners will use (in both consumer compliance exams and safety and soundness exams) to evaluate banks’ controls governing discrimination and bias in the residential valuation process. The statement encourages examiners to consider whether a regulated institution’s compliance management system and risk management practices are appropriate to identify and address discrimination or bias.

In the context of consumer compliance examinations, the statement encourages examiners to consider the extent to which the institution’s board and senior management oversee the bank’s consumer compliance management system, including risks posed by third parties involved in the residential real estate valuation process. The principles also include an evaluation of the strength of the institution’s consumer compliance program, including its policies and procedures, training, and complaint handling processes related to real estate valuation. In the context of safety and soundness exams, the statement encourages examiners to consider the strength of the institution’s risk assessment processes, governance, and collateral valuation program concerning residential valuation.

CFPB Report Compares Fees and Interest Rates Charged by Large Banks versus Small Banks and Credit Unions

By Eric Mogilnicki and Tyler Smith, Covington & Burling LLP

On February 16, the CFPB published the first set of results from its Terms of Credit Card Plans survey, which is part of the agency’s efforts to “increase competition throughout the credit card market.” The survey includes data on general-purpose credit cards issued by the twenty-five largest credit card issuers, as well as a representative sample of small- and medium-sized banks and credit unions, throughout the United States.

Among other things, the report found that:

  • Large banks charged cardholders higher rates of interest across credit score ranges. According to the report, the median interest rate for people with a credit score between 620 and 719 was 28.2 percent for large issuers and 18.15 percent for small issuers.
  • 27 percent of large issuers’ credit cards carried an annual fee, compared to 9.5 percent for small issuers.

The Bureau plans to release the next round of results later in the spring.

CFPB Revises Supervisory Appeals Process for Financial Institutions

By Eric Mogilnicki and Tyler Smith, Covington & Burling LLP

On February 16, the CFPB issued a procedural rule updating the process financial institutions use to appeal the agency’s supervisory findings. Among other changes, the rule:

  • requires the Supervision Director to assign three CFPB managers with relevant expertise, and who did not work on the matter subject to appeal, to the appeals committee;
  • permits the appeals committee to remand a matter to the supervisory team for consideration of a modified finding, whereas the prior rule only allowed the committee to uphold or rescind the finding; and
  • permits financial institutions to appeal any compliance rating or finding, whereas under the prior rule, an appeal could only be made in the context of an adverse rating.

Members of Congress Pen Clashing Letters on CFPB Nonbank Payments Supervision Proposal

By Eric Mogilnicki and Graves Lee, Covington & Burling LLP

On January 30, Republican Congressmen Patrick McHenry, French Hill, and Mike Flood issued a letter to CFPB Director Rohit Chopra that was sharply critical of the November 2023 proposal that would impose Bureau supervision over certain nonbank payment and digital wallet providers. Under the proposal, the Bureau would exercise its supervisory authority over “larger participant[s] of the general-use digital payment market,” which it estimates would encompass approximately seventeen entities. In their letter, these representatives argue that the proposal is based on “flawed Bureau precedent” and “fails to analyze the costs, the impact on competition, and inevitably how the proposal hurts consumers.” They also point to ambiguity regarding whether the proposal would cover third-party service providers and how it would impact digital assets payments. As a result, “[a]bsent [further] justification, the CFPB should forgo finalizing the rule” and in any event, that the proposal’s comment period, which closed January 8, 2024, “should be reopened for an additional 60 days.”

On January 31, Democratic Senators Jack Reed, Sherrod Brown, and Elizabeth Warren issued their own letter to Director Chopra praising the proposal. They argue that the proposal would address fraud and scams that are “rampant on consumer payment applications.” According to the senators, the Bureau’s ability to conduct on-site examination of the largest payments providers “will permit evaluation of whether companies are complying with consumer protection laws or engaging in any unfair or deceptive practices.”

In addition, the senators urged the Bureau to engage in further notice-and-comment rulemaking to “limit discretion of consumer payment app[s] to classify disputed payments as ‘authorized’” under Regulation E. They argue such a rule would “be a simple, appropriate, and transparent way to make sure consumers receive the full protections that Congress provided in the Electronic Fund Transfer Act” and would “provide powerful incentives for consumer payment apps to take more seriously their anti-money laundering obligations to know their customers, screen out stolen or synthetic identities, and monitor accounts for unlawful use.”

CFPB Blog Post Recaps 2023 Enforcement Activity

By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP

On January 29, the CFPB published a blog post recapping its enforcement activities in 2023 and highlighting certain “key actions.” The blog post notes that the Bureau filed twenty-nine enforcement actions and resolved six previously filed actions in 2023, and that “[t]hose orders require lawbreakers to pay approximately $3.07 billion to compensate harmed consumers and pay approximately $498 million in civil money penalties.” The Bureau did not note that $2.7 billion of that ordered compensation (or about 88 percent of the total) derives from an August 2023 settlement with a group of credit repair companies that are financially insolvent.

The blog post also notes that in 2023 the Bureau’s Office of Enforcement brought on a team of technologists to “increase[] the Bureau’s capacity to enforce the law when emerging technologies harm consumers.” Looking ahead, the Bureau states that it will be hiring and “significantly expanding” its enforcement capacity in 2024.

Gaming Law

Class III IGRA Gaming Procedures Issued from U.S. Department of the Interior for Five Tribes in California

By Amanda Z. Weaver, Ph.D., Snell & Wilmer

On January 31, 2024, the United States Department of the Interior issued Class III gaming procedures under the federal Indian Gaming Regulatory Act (“IGRA”) for five Tribes located in California with no authority or role for the state of California. The five Tribes are the Blue Lake Rancheria, Chemehuevi Indian Tribe of the Chemehuevi Reservation, Chicken Ranch Rancheria of Me-Wuk Indians of California, Hopland Band of Pomo Indians, and Robinson Rancheria (collectively, the “Tribes”). These gaming procedures provide for the Tribes to regulate their own Class III gaming under the IGRA with the oversight of the National Indian Gaming Commission (“NIGC”), but without any role or authority for the state of California to regulate or oversee the Tribes’ Class III gaming.

Class III gaming pursuant to the IGRA is also referred to as “Las Vegas–style gaming” and includes, for example, slot machines and casino games like roulette. Generally, tribes offer Class III games under the IGRA pursuant to Tribal-State Gaming Compacts negotiated with the state where a tribe’s land is located. These compacts typically include provisions governing regulatory and other oversight of tribal gaming operations.

However, the IGRA also provides a framework for tribes when a state may not be able or willing to participate in the regulatory requirements—namely, for the federal government to step in, in place of the state.

At the end of 2022, for example, the Rincon Band of Luiseño Indians (“Rincon”), also located in California, withdrew from California’s oversight of its tribal gaming operations. As a result, Rincon will be cooperating only with NIGC going forward when performing regulatory activities that otherwise were reserved for the state.

For this situation in California with the five Tribes, the Class III gaming procedures for each Tribe (available at the Federal Office of Indian Gaming’s website) include, for example, provisions allowing the gaming procedures to remain perpetually in effect, subject only to revocation agreed upon mutually by the Secretary of the Interior and the consent of the Tribe, or by the Tribe’s resolving to revoke authority for conducting Class III gaming on its lands pursuant to the IGRA. The procedures also include provisions allowing each of the Tribes to determine the number of Gaming Facilities and Gaming Devices that each of the Tribes, in its discretion, considers appropriate for its market conditions and economic needs.

Health & Life Sciences

States Poised to Take Action on Hemp-Derived Cannabinoids in 2024

By Heidi Urness and Brittany Adikes, McGlinchey Stafford PLLC

Over the last several years, there has been a dramatic increase in retail and online sales of products containing hemp-derived and synthetically created cannabinoids. As a result, an increasing number of states are poised to take legislative action this year to regulate and curb sales of these novel products. Below is a brief overview of legislation that has been introduced on the state level this year.

California: On February 7, 2024, Assembly Bill 2223 (AB 2223) was introduced in the California Assembly by Assembly member Cecilia Aguiar-Curry (D). Among other changes, the bill seeks to add a new term—“synthetically derived cannabinoid”—to California law, which would be defined as a substance that is derived from a chemical reaction that changes the molecular structure of any substance separated or extracted from the plant Cannabis sativa L. (excluding decarboxylation from a naturally occurring cannabinoid acid). The bill also amends the definition of “industrial hemp” to clarify that no product may contain “any synthetically derived cannabinoid.” The bill would strengthen California’s existing regulation of these substances, such as delta-8-THC, delta-10-THC, and THCA.

Nebraska: Nebraska Legislative Bill 999 (LB 999), introduced by Senator Teresa Ibach (R) on January 5, 2024, seeks to clarify that CBD products that contain THC above legal limits, especially synthetic delta-8-THC and similar delta compounds, are illegal under Nebraska law. The bill would also turn over regulation of hemp cultivation from the Nebraska Department of Agriculture (NDA) to the U.S. Department of Agriculture (USDA). If LB 999 does pass, the NDA director will send a formal letter to USDA rescinding the state hemp plan, and Nebraska hemp producers would then be required to apply for a license to produce hemp under the USDA production program.

Florida: Senate Bill 1698 (SB 1698), filed January 5, 2023, and House Bill 1613 (HB 1613), filed January 9, 2024, seek to, among other things, limit the amount of delta-9-THC in hemp products to 2 mg per serving or 10 mg per container, whichever is less. These bills also create a new term, “Total delta-9-tetrahydrocannabinol concentration,” defined as a concentration calculated as follows: [delta-9-tetrahydrocannabinol] + (0.877 x [delta-9-tetrahydrocannabinolic acid]). To be considered legal “hemp” under the proposed law, products in Florida may not contain more than 0.3 percent total delta-9-THC, effectively banning products with high amounts of THCA. Under the legislation, legal “hemp” extract also may not include any “synthetic or naturally occurring versions” of controlled substances “such as delta-8-tetrahydrocannabinol, delta-10-tetrahydrocannabinol, hexahydrocannabinol, tetrahydrocannabinol acetate, tetrahydrocannabiphorol, and tetrahydrocannabivarin.” The bills would also expand restrictions on advertising and packaging for hemp products.

South Dakota: House Bill 1125 (HB 1125), introduced in the South Dakota legislature on January 22, 2024, seeks to ban the sale of hemp-derived products that have been chemically modified or converted, which would include compounds such as delta-8-THC and delta-10-THC. HB 1125 introduces a new term—“chemically derived cannabinoid”—defined as “a chemical substance created by a chemical reaction that changes the molecular structure of any chemical substance derived from the cannabis plant.” (This new term “does not include cannabinoids produced by decarboxylation from a naturally occurring cannabinoid acid without the use of a chemical catalyst.”) Although compounds such as delta-8-THC and delta-10-THC are naturally occurring in the cannabis plant, they occur in such low amounts that marketable products containing usable amounts of these compounds are usually created by converting one or more other cannabinoids into delta-8- or delta-10-THC through a process called isomerization. Thus, South Dakota’s new law, if passed, would make these “chemically derived” cannabinoids illegal in the state.

Intellectual Property Law

AI & Copyright: What’s ‘Fair’ Game?

By Emily Poler, Poler Legal, LLC

A handful of cases related to AI are already pending in the courts with plenty more to come. Court decisions favoring copyright owners could heavily impact the profitability of AI platforms. Conversely, findings in favor of the AI platforms would likely mean that copyright owners would lose leverage to require the platforms to license their content. As a result of these risks, many cases may settle.

To the extent that parties do litigate these cases, many defendants seem poised to argue that their use of copyrighted materials is “fair use.” For example, in a statement in response to the New York Times Company’s lawsuit against Microsoft and OpenAI entities, OpenAI claimed that “[t]raining AI models using publicly available internet materials is fair use, as supported by long-standing and widely accepted precedents.” (For what it’s worth, this statement by OpenAI is pretty misleading. Just because materials are available on the internet, doesn’t mean that they are free for anyone to use without permission.)

Fair use balances the rights of copyright owners to protect original works and make derivative works based on them against the rights of others to engage in research, criticism, scholarship, and the like without copyright infringement liability. In deciding whether a use is fair, courts consider (1) the nature and character of the use, including whether it’s for educational purposes; (2) whether the work at issue is close to the core protections of copyright law; (3) the amount of copyrighted material used; and (4) the impact of the use on the market for the original work. In the cases involving AI platforms and copyright owners, the parties will focus their attention on the first and fourth factors.

On the first factor, AI platforms will likely argue their large language models (LLMs), which synthesize large amounts of information to enable computers to recognize patterns, are different “in nature and character” than the copyrighted work they incorporated. In response, the copyright owners will probably argue that the AI platforms are merely translating copyrighted works into another form, which falls outside the protections of fair use. At this stage, it’s difficult to predict how courts will resolve this factor because, to reach a decision, courts will have to wrestle with what exactly AI platforms are doing with copyrighted work.

On the fourth factor, copyright owners will probably argue that there is a clear-cut harm to the market for their original works, which weighs heavily against a finding of fair use. The AI platforms will respond that they’re creating new markets and are not directly competing with the copyright owners. At least at this stage, it seems likely this factor will weigh against a finding of fair use. Again, courts will have to look at how specific AI platforms operate to reach a decision here.

In other words, it’s too soon to tell.

Labor & Employment Law

Department of Labor Publishes New Rule on Independent Contractor Classification

By Steven Garrett, Boulette Golden & Marin L.L.P.

On January 10, the Department of Labor (“DOL”) published a new rule on worker classification (29 C.F.R. § 795), purporting to restore a status quo ante that existed prior to the 2021 rule it replaces. The 2021 rule sought to streamline an employer’s independent contractor or employee classification by singling out two “core” factors—the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit and loss—above three other factors: the amount of skill required for the work, degree of permanence of the working relationship between the worker and employer, and whether the work is part of an integrated unit of production. The 2021 rule also focused on the employer’s actual practices, rather than the contractual or theoretical possibilities.

The final rule published on January 10, 2024, purports to restore on equal footing the six factor “economic realities” test, does away with the 2021 rule’s emphasis on core factors, and attempts to clarify application of some of the factors. The six factors set out in the final 2024 rule are: (1) opportunity for profit and loss dependent on managerial skill; (2) the relative investments between worker and employer; (3) degree of permanence in employment relationship; (4) the nature and degree of control over work; (5) the extent to which a worker’s function is critical or central to the employer’s principal business; (6) the skill and initiative exhibited by the worker. The DOL frames the overarching inquiry as whether a worker is in business for themselves or instead “economically dependent” on the employer.

The final version differs somewhat from the earlier proposed rule released by the DOL in 2022 regarding relative investment, degree of control, and skill and initiative. First, the 2022 proposed rule appeared to suggest the department would weigh the relative investments between worker and employer and in part determine employee status based on amounts invested, whereas the 2024 final rule softens this requirement, with the DOL noting relative investments need not be equal—instead focusing on whether investments support an independent business function. Additionally, the DOL will consider the ability of an employee to increase profits or incur losses. Second, the 2022 proposed rule could be read to suggest an employer who exercised control over a worker to comply with applicable laws could stray into employee status, but the 2024 final rule clarifies an employer exerting the minimally necessary level of control to comply with applicable law will not automatically convert an independent contractor into an employee. Third, the final 2024 rule clarifies that the skill factor focuses on independent, entrepreneurial skill rather than the core skills needed to do a given job. Though litigation challenging the rule is already underway, the rule goes into effect on March 11, 2024.

Sports Law

Banning Online Sports Betting Ads: Table for One?

By Megan Carrasco, Snell & Wilmer L.L.P.

On Wednesday, January 31, 2024, the Kansas legislature introduced a bipartisan bill, SB 432, titled “Prohibiting advertising of sports wagering through internet websites and electronic device applications.” The premise of the bill is simple—the bill’s sponsors contend that online ads are more likely to reach (1) minors, (2) persons who are ineligible to participate in sports betting, or (3) other “vulnerable persons.” Kansas’s current sports wagering regime is run through the State Lottery. At the helm is the “executive director,” who is responsible for all administrative duties in lottery and event wagering, including financial reporting, marketing, and funding. See K.S.A. § 74-8706. The proposed amendments in SB 432 would keep in place the requirement that the executive director adopt rules that govern the “form, content, quantity, timing and location of such advertisements” to avoid enticing these groups to participate in sports betting.

The big change to the existing Kansas statute,Advertisement of sports wagering; limitations and restrictions; rules and regulations” (K.S.A. § 74-8785), is the new subsection (5), which would outright ban sports betting advertisements on any “internet website, other online medium or electronic device application,” with a sole exception for ads on interactive sports wagering platforms that were “affirmatively accessed by an individual holding an account with such platform.”

By all accounts, this bill could have sweeping implications for the sports betting sector even outside of Kansas because its broad scope will require websites and apps to institute compliance measures, that, although specific to comply with this bill, would reach beyond Kansas given the borderless construct of the internet, much like the California Consumer Privacy Act.

If SB 432 passes successfully, other states may follow suit, especially given the stall on the United States Congress’s Betting on Our Future Act, which was introduced in 2023.

As of February 26, 2024, SB 432 was referred to the Kansas Senate’s Committee on Federal and State Affairs.



Washington, DC

Margaret M. Cassidy

Executive Editor for Business Crimes & Corporate Compliance, Gaming Law, Government Affairs Practice, and Sports Law, Business Regulation & Regulated Industries

Dredeir Roberts

Executive Editor for Antitrust Law, Intellectual Property, and Energy Law, Business Regulation & Regulated Industries
Seattle, WA

Perry Salzhauer

Executive Editor for Cannabis Law, Environmental Law, Health & Life Sciences, and Insurance Law, Business Regulation & Regulated Industries
Hanover, MD

Latif Zaman

Executive Editor for Banking Law, Consumer Finance Law, Labor & Employment Law, and Tax Law, Business Regulation & Regulated Industries

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