Canadian M&A entered 2025 under pressure, tariffs on the horizon, inflation still biting, and the lowest deal count in two decades. Yet by mid-year, value had surged. Dealmakers describe a selective but busy market driven by a handful of large energy and infrastructure transactions.

M&A deal value in Canada increased sharply in the first half of 2025, reaching approximately CA$113.7 billion (a nearly 70 percent year-over-year increase). However, overall transaction volume remained flat at roughly 511 deals, reflecting a market focused on fewer, larger, and more strategic transactions.

Market confidence improved after a cautious first quarter. Dynamics early in the year were shaped by inflation, uncertainty surrounding foreign investment, and valuation friction. By late spring, these pressures eased, unlocking a series of new and previously delayed transactions.

This mix of concentrated value and cautious execution is shaping how buyers and sellers approach the rest of the year. Here’s where momentum is building for H2 2025, and the conditions that will separate winners from the pack.

Sector Trends

Energy was a leading sector by value in H1 2025, driven by both traditional and transition-focused assets. While traditional oil and gas consolidation continued, there was a notable shift toward infrastructure-aligned and transition-facing energy assets, such as storage, logistics, and grid-scale platforms. The sector attracted ongoing foreign investment due to predictable, long-term returns and stable regulatory regimes, though transactions in this sector can carry heavier regulatory requirements, Indigenous engagement, and approval risk allocation in the purchase agreement.

Technology remained the most active sector by volume, with transactions focused mainly on mid-market software-as-a-service (“SaaS”) and digital infrastructure companies. SaaS and digital infrastructure companies provide attractive opportunities to U.S. sponsors and corporates seeking steady revenue and scalable models. A limited IPO window reinforced private transactions as the preferred exit.

Mining M&A was subdued early in the year. Q2 saw larger transactions by deal size but fewer deals. Other sectors, including healthcare and logistics, saw continued interest in platform assets with high-margin, regulated, or repeatable revenue profiles.

Private Equity: Process, Structures, and Exits

Private-equity (“PE”) activity in H1 2025 mirrored the overall market pattern, with higher dollar volumes but fewer transactions. Sponsor-led buyouts totaled CA$18.1 billion, up 65 percent year-over-year, although the number of deals shrank substantially. While some firms paused new acquisitions early in the year, dealmakers report increased mid-market opportunities in a less competitive environment than the low-cost-capital years of 2021–2022.

With public markets subdued and limited IPO activity, some general partners prioritized sponsor-to-sponsor transactions and strategic exits for scaled assets. Continuation vehicles and secondaries provided flexibility in sectors where capital interest persisted, though fund-level liquidity constraints continued to slow exit timelines.

Deal activity was concentrated on transactions with clear integration pathways and durable EBITDA profiles. Fewer full auction processes were seen; many transactions occurred through bilateral outreach or preemptive approaches, especially where the buyer and seller were aligned.

Private credit played a key role in supporting private equity activity. Sponsors utilized unitranche, holding company, and hybrid capital structures to navigate tighter lending markets. In transactions for companies valued under CA$500 million, the ability to access and commit capital quickly often determined which bidder succeeded. Sellers prioritized buyers who could close with speed and certainty, making capital readiness a true differentiator.

Cross-Border Activity

Cross-border M&A accounted for close to 50 percent of Canadian deal activity in H1 2025. Inbound deal flow softened in Q1 due to trade-related tension and political developments abroad, but by Q2, buyer confidence largely returned, particularly in sectors offering long-term asset profiles.

Cross-border activity in H1 2025 reflected a more selective environment. Inbound deals from the United States fell below 100, with 97 transactions worth CA$24.8 billion. Trade-policy uncertainty, particularly proposed U.S. tariffs, has prompted Canadian counterparties to explore structures such as earnouts, spin-offs, and targeted divestitures to navigate cross-border execution risk.

Outbound activity increased, as Canadian funds and strategics sought acquisitions in the U.S. and Europe, motivated by valuation alignment and diversification. Some acquirers acted to build behind the tariff wall, anticipating long-term changes in trade and industrial policy. Foreign investment review remained a critical diligence factor, but proactive engagement and structural planning kept most cross-border processes on track.

Transaction Conditions and Process Dynamics

Market conditions for completing transactions improved in Q2. Valuation gaps narrowed across several sectors as interest rate expectations stabilized and capital availability became clearer. Transaction timelines remained tight, but deal teams operated with greater certainty than in 2023.

Private credit continued to support deal activity. With traditional lending still selective, sponsors and strategics turned to net asset value (“NAV”) credit facilities, multilender syndicates, and holdco debt to close transactions on tight timelines. Success often depended on the speed of the due diligence process and the availability of committed capital.

Limited auctions, preemptive outreach, and insider-led processes were common. Prepared sellers—with clean financials, ready diligence materials, and structural flexibility—were best positioned to transact.

Outlook for H2 2025

Canadian M&A is entering the second half of 2025 with strong momentum. Political headwinds have eased, interest rates are stable, and buyer-seller expectations are more closely aligned. For well-prepared participants, market conditions remain favorable.

Mining and critical minerals are expected to be more active as regulatory clarity improves and federal permitting frameworks mature. Technology and business services should continue to drive volume, with private equity and cross-border strategics focused on platform roll-ups and carve-outs.

Liquidity pressures will persist for private equity, but M&A remains the primary exit route. Secondary transactions, strategic divestitures, and sponsor-to-sponsor deals are expected to comprise the bulk of PE-led sell-side activity in H2.

Infrastructure and transition-aligned energy will remain central for buyers seeking long-duration assets and stable cost profiles. Early regulatory planning and capital certainty will be essential for success in cross-border deals.

Conclusion

As Canadian M&A enters the second half of 2025, the market is defined by competition for quality assets and a premium on speed, preparation, and certainty. Buyers who were deliberate and ready to transact were rewarded in H1.

The true competitive advantage will likely go to deal teams that are prepared to move quickly and manage complex cross-border diligence.

With the signing of the Guiding and Establishing National Innovation for U.S. Stablecoins Act, or the “GENIUS Act,” into law, the United States has officially established a first-of-its-kind regulatory framework for “payment stablecoins” and the entities that issue them.

The law introduces a clear gatekeeping model: Only entities recognized as “permitted payment stablecoin issuers” and qualifying foreign issuers may issue payment stablecoins in the United States once the law takes effect, which will be no later than January 2027. This change brings both clarity and constraints, particularly for nonbank companies looking to enter the space.

For companies formulating or evaluating their stablecoin strategy, the GENIUS Act presents an important decision point: how to enter the market compliantly, at what scale, and under which regulatory regime.

GENIUS Act Background

The GENIUS Act is a tailored measure aimed at regulating a specific slice of the digital asset market. The provisions of the GENIUS Act apply only to “payment stablecoins,” which are digital assets that meet the following criteria:

• used or designed for use in payments or settlement;
• where the issuer is obligated to convert, redeem, or repurchase the stablecoin for a fixed amount of monetary value; and
• where the issuer represents that the stablecoin will maintain, or creates the reasonable expectation that it will maintain, a stable value relative to a fixed amount of monetary value.

The GENIUS Act permits payment stablecoins to be issued in the United States only by “permitted payment stablecoin issuers.” This ability to issue payment stablecoins also comes with restrictions and obligations:

• Under the GENIUS Act, a permitted payment stablecoin issuer may engage only in the following activities: (i) issuing payment stablecoins; (ii) redeeming payment stablecoins; (iii) managing related services, such as purchasing, selling, holding reserve assets, or providing custodial services for reserve assets; and (iv) providing custodial services for payment stablecoins, required reserves, or private keys of stablecoins.
• The core GENIUS Act standards include requirements for a permitted stablecoin issuer to: (i) fully back payment stablecoins with reserves consisting of specified assets that are highly liquid, such as U.S. currency, funds held as demand deposits, and Treasuries; (ii) publicly disclose redemption policies; and (iii) publish the composition of reserves on a monthly basis.

Payment Stablecoin Issuance Paths

The following table outlines the three forward-looking payment stablecoin issuance paths available to nonbank companies under the GENIUS Act, each allowing issuers to remain outside the maximalist regulatory regime that applies to commercial banks.

• Path 1: Take the Federal-Qualified Path as a National Trust Bank
  Create a subsidiary that obtains a national trust bank charter from the Office of the Comptroller of the Currency (“OCC”) and, as an uninsured depository institution, applies for approval with the OCC to become a “federal qualified nonbank payment stablecoin issuer.”
• Path 2: Take the Federal-Qualified Path for Nonbank Companies
  Create a subsidiary that is a nonbank company and applies for approval with the OCC to become a “federal qualified nonbank payment stablecoin issuer.”
• Path 3: Take the State-Qualified Path
  Create a subsidiary that could be a nonbank company and applies for approval with a state regulator to become a “state qualified payment stablecoin issuer.”^[1]

The GENIUS Act specifies that payment stablecoins meeting its terms are excluded from the definition of a “security” under the federal securities laws and “commodity” under the Commodity Exchange Act, effectively removing them from regulation by the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”). This does not apply, however, to digital assets that are not payment stablecoins, such as those that pay yield or interest solely in connection with holding or using the stablecoin.^[2]

While the GENIUS Act provides a foundational framework, many key details—particularly with respect to regulatory implementation, state-federal coordination, and foreign stablecoin issuer eligibility to access the U.S. market—remain to be clarified. Prospective payment stablecoin issuers should plan with flexibility and monitor developments closely.

1. The state’s regulatory regime must be certified as “substantially similar” to the federal regulatory framework under the GENIUS Act by the Stablecoin Certification Review Committee, which is to be chaired by the secretary of the Treasury and includes the chair of the Federal Reserve Board and the chair of the Federal Deposit Insurance Corporation as members. ↑

2. The federal banking agencies, SEC, and CFTC are tasked with issuing a study of non-payment stablecoins. Congress is separately considering proposed legislation that would apply to certain other types of digital assets. ↑

Companies of all sizes, and especially e-commerce companies, have been hit by waves of demand letters and lawsuits over the past decade alleging that websites and (increasingly) mobile applications are inaccessible to individuals with disabilities. Most of these cases tend to result in early settlements and few go to trial because businesses tend to have limited affirmative defenses and the cost of litigating typically far outweighs the cost of settlement.

While digital accessibility litigation continues to proliferate, the U.S. Department of Justice (“DOJ”) has not yet promulgated a clear technical accessibility standard through regulations or regulatory guidance under Title III of the Americans with Disabilities Act (“ADA”), which applies to public accommodations (i.e., businesses that offer goods and services to the public). As a result, many businesses seek to comply with the Web Content Accessibility Guidelines (“WCAG”), which are an international standard that has been referenced in some of the DOJ’s consent decrees, as well as court orders. While companies could apply any technical accessibility standard that meets the “effective communication” requirement of Title III of the ADA, they have expressed a desire for certainty in knowing that the standard they use will meet the DOJ’s expectations, should they need to defend it in litigation. Certainty concerning a technical accessibility standard can only be achieved through the DOJ amending its Title III regulations or issuing regulatory guidance.

This article explains the current regulatory environment, the state of digital accessibility litigation, and potential legislative solutions to the challenges they pose, as well as steps that businesses can take to mitigate the risk of lawsuits.

Background

The ADA, which was enacted in 1990, was the first comprehensive federal civil rights law protecting the rights of individuals with disabilities. The ADA consists of several titles, and the law is enforced by the DOJ and private plaintiffs.^[1] Title III applies to “public accommodations,”^[2] which generally means businesses that offer products and services to the public. While twelve categories of businesses are specified under both the law and the DOJ’s regulations implementing Title III of the ADA,^[3] the term public accommodation is broadly construed.

Title III prohibits public accommodations from discriminating against individuals with disabilities in offering goods and services. Title III also requires public accommodations to ensure effective communications with individuals with disabilities, including providing auxiliary aids and services to them, if needed, in an accessible format and in a timely manner. Accessible electronic and information technologies, such as websites and mobile applications, are examples of auxiliary aids.

The DOJ and Judicial Enforcement of Title III

At the time the ADA was enacted, websites did not widely exist. However, in 1996, the DOJ issued an advisory opinion stating that public accommodations must make their websites accessible to individuals with disabilities in order to provide effective communication in compliance with Title III of the ADA.^[4] The DOJ then actively pursued enforcement of Title III against public accommodations, alleging inaccessible websites through litigation resulting in consent orders, and the agency also filed amicus briefs and statements of interest in other cases.

Subsequently, many federal and state courts have interpreted Title III of the ADA, as well as corollary state laws like California’s Unruh Civil Rights Act and New York’s Human Rights Law, to apply to websites. Although there are inconsistencies among judicial decisions concerning whether websites qualify as public accommodations under the ADA and applicable state laws, more federal and state courts than not have sided with plaintiffs in requiring businesses to make their websites accessible. Therefore, as a general matter, companies must make their websites—just like physical spaces—accessible to individuals with disabilities under Title III of the ADA.

Lack of a Uniform Technical Accessibility Standard

However, the DOJ has never established a uniform technical accessibility standard through either regulations or guidance for companies to follow to ensure that websites and other digital assets are accessible to individuals with disabilities, despite efforts by the agency to do so through two advance notices of proposed rulemaking issued during the 2010–2016 era. Nonetheless, the DOJ has undertaken enforcement actions against companies for inaccessible websites under the theory that the company failed to comply with the “effective communication” requirement of Title III of the ADA. In addition, over the past eight to ten years, private litigation alleging that business digital assets are inaccessible has proliferated. Plaintiffs’ attorneys frequently allege violations of both the ADA and corollary state laws, which often permit damages—unlike the ADA, which only permits injunctive relief.

As previously noted, in addition to the DOJ citing the WCAG, an international, voluntary technical standard, in some of its consent orders,^[5] court orders and settlements have cited the WCAG standard.^[6] As a result, companies have increasingly relied on the WCAG standard to make digital assets accessible. The current WCAG standard is 2.2, and that standard continues to evolve every few years, with WCAG 3.0 on the horizon.^[7] Most companies seek to comply with the intermediate conformance criteria AA, known as Level AA, although some companies are still complying with the prior version, WCAG 2.1 AA.

DOJ ADA Guidance and Enforcement Under Different Administrations

The DOJ has sought to enforce website accessibility under Title III of the ADA during Democratic administrations, and the agency was fairly active during the Biden era. Specifically, in 2022, the DOJ issued guidance on making websites accessible.^[8] However, the guidance did not contain any technical standard for accessibility, and it did not break any new ground in providing useful guidance for companies. Then, in 2024, the DOJ issued final regulations containing accessibility requirements for websites and mobile applications of state and local governments under Title II of the ADA, which cite WCAG 2.1 AA as the required technical standard.^[9] While experts expected that the DOJ likely would use the Title II rulemaking as a model for amending the agency’s Title III regulations to similarly specify WCAG 2.1 AA as the required technical accessibility standard for public accommodations, the Biden administration ran out of time to pursue that initiative.

In the current political environment, we do not expect the DOJ to amend its Title III regulations during the next four years. Furthermore, we do not expect much enforcement activity from the DOJ under Title III since enforcement of civil rights laws, such as the ADA, has been deprioritized by the current administration. Unfortunately, the lack of enforcement by the DOJ will continue to perpetuate and increase private litigation risk for businesses.

Litigation Risk

Of the top one million home pages on the internet, 95 percent have accessibility barriers that interfere with the ability of people with disabilities to use them, according to a 2025 report by WebAIM.^[10] These barriers have spawned a flood of litigation under Title III of the ADA since 2016, with nearly 2,500 federal lawsuits being filed across the United States in 2024, according to law firm Seyfarth Shaw.^[11] Based on the pace of filings this year, 2025 appears likely to top that number by nearly 20 percent, with 2,019 lawsuits already filed during the first half of 2025, according to UsableNet.^[12] Most cases are filed in New York and Florida, where plaintiffs can receive damages. California, where damages are also available, saw fewer federal lawsuits in 2024. But federal lawsuits were also filed in Illinois, Minnesota, and Pennsylvania. Plaintiffs also are filing more frequently in state courts, rather than federal courts, because state laws often permit damages, unlike the ADA, which only permits injunctive relief. In addition to websites, more cases are challenging the inaccessibility of mobile applications.

The main legal issue arising in litigation is whether online-only businesses without a physical “place of public accommodation” (i.e., a brick-and-mortar location) are covered by Title III of the ADA. Only the U.S. Court of Appeals for the Ninth Circuit has directly addressed the issue, finding that businesses’ websites are covered if they have a “nexus” with a physical place. But other circuits have foreshadowed their approaches, with the U.S. Court of Appeals for the First, Second, and Seventh Circuits indicating that Title III may cover the websites of online-only businesses, and the U.S. Court of Appeals for the Third and Sixth Circuits indicating that Title III only covers the websites of businesses with a nexus to a physical place.

There has been some question about which technical accessibility standard meets the “effective communication” obligation under Title III of the ADA. Courts, the DOJ, and other federal agencies have variously applied the WCAG 2.0 or 2.1 AA standard. As previously noted, in 2024, the DOJ released new regulations under Title II of the ADA, which require state and local governments to ensure that their websites comply with WCAG 2.1 AA. Courts in Title III cases may apply the same standard to business websites.

While most accessibility cases begin with a demand letter, some plaintiffs choose to go straight to court by filing a complaint. Some cases are styled as class actions, including nationwide class actions, which may be subject to the U.S. Supreme Court’s recent decision in Trump v. CASA casting doubt on the ability of lower courts to issue nationwide injunctions.^[13] The vast majority of cases result in settlements, often with the company agreeing to make its website and mobile application accessible within a certain period of time and paying the plaintiff’s attorney fees and damages.

Because businesses with inaccessible websites have few defenses and paying a relatively small amount to a plaintiff is much less costly than paying to defend the lawsuit (and potentially the plaintiff’s lawyers if the business loses), very few cases go to trial. The one defense that has been successful in a few cases is the assertion that the plaintiff does not have standing to challenge the inaccessibility of the website because they are ineligible to access the business, cannot demonstrate that the alleged barriers actually interfered with their use of the site, or cannot show that they intend to visit the website in the future.

Potential Federal Legislative Solutions

Over the past eight years, members of Congress have introduced multiple bills to address how businesses can fix accessibility barriers under Title III of the ADA without immediately being sued.

Notice and Opportunity to Cure Legislation

Several of the bills have created procedural steps for plaintiffs, such as providing notice to a business of the alleged accessibility issues and allowing time for the business to remediate those deficiencies before litigation can proceed, as a means of providing a “safe harbor” for businesses from litigation. This “notice and opportunity to cure” legislative model has been framed by bill sponsors and advocates as a potential way to encourage efficient and timely resolution by businesses of accessibility barriers while minimizing lawsuits. On the other hand, disability rights organizations have raised concerns that delaying enforcement could result in prolonged barriers for people with disabilities. However, bills containing the “notice and opportunity to cure” approach have not gained sufficient bipartisan support to proceed to a floor vote in previous sessions of Congress.

The Latest Federal Legislation: A National Digital Accessibility Standard

On May 14, 2025, Representative Pete Sessions (R-TX) introduced H.R. 3417, the Websites and Software Applications Accessibility Act of 2025, bipartisan legislation that seeks to establish uniform federal accessibility standards for websites and software applications.^[14] Supported by the National Federation of the Blind and other disability rights advocacy organizations, this bill aims to clarify digital accessibility standards for a wide range of entities, including employers, public accommodations, and commercial providers. Key features of the bill include:

• affirming that digital spaces, whether or not tied to physical locations, are covered under Title III of the ADA;
• directing the DOJ and the Equal Employment Opportunity Commission to develop specific, enforceable accessibility standards for websites and mobile applications (each federal agency must issue proposed rules within twelve months and final rules in twenty-four months; those federal agencies must then update the rules every three years to reflect evolving technology); and
• creating a framework for supporting small businesses through technical assistance and grant opportunities.

The primary emphasis of H.R. 3417 is on setting clear, enforceable standards to improve digital access for individuals with disabilities. The bill does not include provisions for a “notice and opportunity to cure” process or similar business-focused litigation protections, but instead permits individuals with disabilities to continue to file lawsuits against companies with inaccessible digital assets. While the introduction of H.R. 3417, if enacted, would mark a significant step toward national digital accessibility standards, the rulemaking process takes time, and it does not contain a safe harbor from litigation for businesses in the interim.

The Path Forward

Digital accessibility is widely recognized as a civil rights issue, and the evolving legislative landscape reflects ongoing efforts to balance accessibility, provide clarity concerning technical accessibility requirements, and ensure compliance with Title III of the ADA.

Regardless of the outcome for H.R. 3417 or other federal legislation, prioritizing inclusive digital design and following recognized standards such as WCAG remain best practices for businesses seeking to provide equitable digital experiences and reduce legal risk.

Best Practices for Digital Accessibility Risk Management

Despite the increasing risk of litigation, there are many steps that businesses can—and should—take now to make their websites and mobile applications fully accessible to individuals with disabilities, as well as to mitigate the risk of receiving a demand letter or lawsuit. Best practices to mitigate accessibility legal risks include the following:

• Ensure that digital assets are accessible through inclusive design and remediation. Businesses should build new websites or mobile applications by integrating appropriate programming code into the site/application that conforms with WCAG 2.2 AA to ensure accessibility. For existing websites and mobile applications, businesses should ensure that such digital assets are fully accessible to individuals with disabilities by hiring a qualified website accessibility consulting company to conduct an assessment. Reputable accessibility consultants use a three-prong approach consisting of an automated scan, review of programming code, and user testing by individuals with disabilities. If accessibility deficiencies are found, then they should be remediated to conform to the WCAG 2.2 AA standard. After digital assets are remediated, a monitoring routine should be implemented to ensure that accessibility is maintained—typically through the purchase of monitoring software.
• Develop an ADA risk management program. A comprehensive ADA risk management program is necessary for effectively managing Title III compliance risks and can serve as an affirmative defense if a company is sued. Key elements of an ADA risk management program to consider implementing include the following:
  • Post an accessibility statement on digital assets underscoring the business’s commitment to accessibility and providing appropriate contact information (e.g., 800 number and email address) where individuals with disabilities can seek assistance with technical barriers.
  • Develop and implement a digital assets compliance policy.
  • Appoint an accessibility coordinator to oversee digital asset accessibility compliance efforts across the business.
  • Establish a cross-functional committee, led by the accessibility coordinator, to coordinate accessibility efforts across the business. Accessibility committee members should include legal, compliance, marketing, product, and technology staff, at a minimum.
  • Ensure that employees receive appropriate training:
    • Provide technical training to developer staff to ensure that they understand how to properly code to ensure accessibility and remediate accessibility issues when identified.
    • Provide substantive compliance training on Title III of the ADA to legal and compliance, marketing, product, and technology staff.
    • Train customer service agents to identify key terms and promptly respond to individuals with disabilities’ requests for technical assistance when encountering barriers on websites or mobile applications.
  • Develop and implement procedures to ensure consistency in customer service processes for individuals with disabilities and provide warm handoffs to technical staff who can assist with any digital barriers that such individuals may encounter.

As a side note, we do not recommend using a widget or overlay to achieve compliance with Title III of the ADA. Widgets and overlays have become popular in recent years as a “quick fix” because they create an alternative, seemingly accessible version of a website and are relatively inexpensive. In our view, these tools do not comply with the letter or spirit of Title III of the ADA because they create a “separate but equal” experience for individuals with disabilities. Moreover, these tools do not correct code-level accessibility deficiencies and often create barriers with screen readers used by the blind. As a result, approximately 25 percent of lawsuits in 2024 were brought against companies that used widgets and overlays.^[15] Therefore, these types of tools often fall short of delivering true digital accessibility.^[16] Simply put, there is no “silver bullet” to avoid doing the hard work of evaluating the accessibility of websites and mobile applications, remediating any deficiencies, and then maintaining accessible digital assets to achieve compliance with Title III of the ADA and corollary state laws.

Doing the Right Thing—Legally and for Business Growth

While it is important for companies that offer goods and services to the public to comply with accessibility requirements under Title III of the ADA and reduce legal risk, it is even more important for businesses to do the right thing for individuals with disabilities by making digital assets fully accessible to them. Plus, it makes good business sense. According to the U.S. Centers for Disease Control and Prevention, 28.7 percent of adults, or more than one in four, in the United States have some type of disability.^[17] That translates to approximately 70 million adults who have disabilities. Therefore, when digital assets are inaccessible, over one-quarter of U.S. consumers, who could be potential customers, are excluded from access to a business’s goods and services.

This article is related to a CLE program that took place during the ABA Business Law Section’s 2025 Spring Meeting. To learn more about this topic, listen to a recording of the program, free for members.

1. 42 U.S.C. § 12101 et seq. Other titles of the ADA include Title I, which prohibits discrimination in employment and is enforced by the Equal Employment Opportunity Commission. Title II applies to state and local government entities, and it protects qualified individuals with disabilities from discrimination on the basis of disability in services, programs, and activities provided by state and local governments. ↑

2. 42 U.S.C. § 12181 et seq. ↑

3. Id. § 12181(7); 28 C.F.R. § 36.104. ↑

4. Letter from Deval Patrick, Assistant Att’y Gen., C.R. Div., U.S. Dep’t of Just., to Tom Harkin, U.S. Sen. (Sept. 9, 1996). ↑

5. See, e.g., Settlement Agreement Between the United States of Am. & Ahold U.S.A., Inc. & Peapod, LLC (Nov. 17, 2014) (citing need for online grocery store’s website and mobile application to conform to WCAG 2.0 AA); Settlement Agreement Under the Americans with Disabilities Act Between the United States of Am. & CVS Pharmacy, Inc. (Apr. 11, 2022) (citing need for pharmacy’s COVID-19 vaccine registration portal to conform to WCAG 2.1 AA). ↑

6. Payan v. L.A. Cmty. Coll. Dist., No. 2:17-cv-01697-SVW-SK (C.D. Cal. Feb. 29, 2024), ECF No. 613 (order regarding final injunction) (citing WCAG 2.1 Level AA); Andrews v. Blick Art Materials, LLC, 286 F. Supp. 3d 365 (E.D.N.Y. 2017) (citing WCAG 2.0 Level AA); Gil v. Winn-Dixie Stores, Inc., 257 F. Supp. 3d 1340 (S.D. Fla. 2017) (citing WCAG 2.0) (vacated on other grounds). ↑

7. The first public working draft of WCAG 3.0 was released on January 21, 2021. According to the Worldwide Web Consortium (“W3C”), which promulgates the WCAG standards, WCAG 3.0 remains in working draft form, and a release date has not yet been set. Therefore, W3C’s issuance of WCAG 3.0 is likely still several years away. ↑

8. U.S. Dep’t of Justice, Guidance on Web Accessibility and the ADA, ADA.gov (Mar. 18, 2022). ↑

9. Nondiscrimination on the Basis of Disability; Accessibility of Web Information and Services of State and Local Government Entities, 89 Fed. Reg. 31,320 (June 24, 2024) (U.S. Dep’t of Just. Final Rule). ↑

10. WebAIM, The WebAIM Million report (2025). ↑

11. Kristina M. Launey & Minh N. Vu, Lawsuit Filings Continue to Decrease in 2024, Seyfarth Shaw (Apr. 22, 2025). ↑

12. Jason Taylor, Usablenet, 2025 Midyear Digital Accessibility Lawsuit Report (July 9, 2025). The report covers all cases filed across the eleven federal circuit courts under Title III of the ADA, as well as cases filed in key state courts, including California, Florida, and New York. ↑

13. Trump v. CASA, 606 U.S. ___ (2025). ↑

14. H.R. 3417 is cosponsored by Representatives Steny Hoyer (D-MD), Darren Soto (D-FL), Randy Weber Sr. (R-TX), Shri Thanedar (D-MI), and Greg Landsman (D-OH). ↑

15. Jason Taylor, UsableNet, 2024 Year-End Digital Accessibility Lawsuit Report (Jan. 3, 2025). ↑

16. For a more detailed explanation of how widgets and overlays work and their shortcomings, see Melissa Morse, Accessibility Overlays: What They Are and Why They Fall Short, TPGi (updated Aug. 27, 2024) (blog post). ↑

17. Disability Impacts All of Us Infographic, U.S. Ctrs. for Disease Control & Prevention (Apr. 14, 2025). ↑

Editors

Contributors

§ I. Patent Cases

LKQ Corp. v. GM Global Tech. Ops. LLC, 102 F.4th 1280 (Fed. Cir. 2024)

Facts: This case addresses the standard for determining the obviousness for design patents.

LKQ Corporation challenged the validity of GM Global Technology Operations LLC’s design patent for a vehicle part, asserting that the patent was obvious under 35 U.S.C. § 103. The Patent Trial and Appeal Board (PTAB) upheld the patent’s validity, applying the Rosen-Durling test, which requires using a primary reference that is “basically the same” as the claimed design to establish obviousness as the start of the obviousness analysis. LKQ appealed, arguing that the Rosen-Durling test was incompatible with the Supreme Court’s flexible approach to obviousness set forth in KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007).

Held: Sitting en banc, the Federal Circuit overruled the Rosen-Durling test and adopted “a more flexible” approach for assessing design patent obviousness.

Reasoning: The Federal Circuit concluded that the Rosen-Durling test was at odds with 35 U.S.C. § 103’s “broad and flexible standard” and the Supreme Court’s precedent in KSR and Graham that provide “a more flexible approach” when determining obviousness. The court noted that the Rosen-Durling framework imposed unnecessary constraints by requiring a primary reference that is “basically the same” as the claimed design, potentially overlooking the broader context of the prior art.

The Federal Circuit determined that the framework for assessing obviousness in utility patents, as articulated in Graham v. John Deere Co., 383 U.S. 1 (1966), was equally applicable to design patents. The Federal Circuit then provided guidance for applying the Graham factors to design patents.

First, one “consider[s] the ‘scope and content of the prior art’ within the knowledge of an ordinary designer in the field of the design.” The Federal Circuit affirmed that for design patents, as for utility patents, a “reference qualifies as prior art for an obviousness determination only when it is analogous to the claimed invention.” However, the court declined to “delineate the full and precise contours of the analogous art test for design patents.” The court stated that “[p]rior art designs for the same field of endeavor as the article of manufacture will be analogous,” but did “not foreclose that other art could also be analogous.”

Second, one “determin[es] the differences between the prior art designs and the design claim at issue.” The Federal Circuit’s approach “casts aside a threshold ‘similarity’ requirement.” Instead, one “compare[s] the visual appearance of the claimed design with prior art designs . . . from the perspective of an ordinary designer in the field of the article of manufacture.”

Third, one determines “the level of ordinary skill in the pertinent art.” Fourth, as with utility patents, secondary considerations of non-obviousness, such as commercial success, industry praise, and copying, should also be evaluated.

The Federal Circuit reaffirmed that the obviousness analysis for design patents “focuses on the visual impression of the claimed design as a whole and not on selected individual features.” The court stated that “[t]he primary and secondary references need not be ‘so related’ such that features in one would suggest application of those features in the other, but they must both be analogous art to the patented design.” Finally, the court explained that “the motivation to combine these references need not come from the references themselves.”

Brumfield v. IBG LLC, 97 F.4th 854 (Fed. Cir. 2024)

Facts: This case addresses the potential for recovering damages based on foreign sales in U.S. patent infringement cases.

Brumfield sued IBG LLC for patent infringement related to software user interfaces used in commodity trading. At trial, Brumfield’s expert testified that royalties from IBG’s foreign sales were included in the damages calculation because these sales were a direct result of IBG’s domestic infringing activities. The district court excluded this testimony, agreeing with IBG that foreign sales were beyond the scope of recoverable damages under U.S. patent law. Brumfield appealed to the Federal Circuit.

Held: The Federal Circuit held that damages for foreign sales were not recoverable in this case because Brumfield had not identified a sufficient causal link to domestic infringement.

Reasoning: The Federal Circuit relied heavily on the Supreme Court’s reasoning in WesternGeco LLC v. ION Geophysical Corp., 585 U.S. 407 (2018), which allowed the recovery of lost profits for foreign sales stemming from domestic acts of infringement under 35 U.S.C. § 271(f)(2). Although WesternGeco specifically addressed lost profits and a statutory provision targeting components supplied abroad, the Federal Circuit found the case instructive for reasonable royalty damages for infringement under § 271(a). The Federal Circuit emphasized that the territoriality principle of U.S. patent law does not categorically preclude consideration of foreign sales if those sales are tied to domestic infringing activity.

The court explained that the patentee can show entitlement to damages for foreign conduct when the patentee establishes a “causal” connection between the foreign conduct and domestic infringement. To increase reasonable-royalty damages based on foreign, non-infringing conduct, the patentee must, at a minimum, show why that “foreign conduct increases the value of the domestic infringement itself.”

To attempt to establish such a causal connection between the foreign conduct and domestic infringement, Brumfield argued that IBG’s foreign sales of the accused software were directly enabled by allegedly infringing acts of designing, testing, and developing software in the U.S. However, the Federal Circuit found that the relevant patent claims were not directed to software. Rather, the claims were directed to the tangible computer readable medium (such as a flash drive) to which the software is encoded. Therefore, the Federal Circuit found that IBG’s designing, testing, and developing software in the U.S. were not acts of infringement, and, thus, were legally insufficient to establish the necessary causal connection to support damages calculations based on foreign conduct. Thus, the Federal Circuit affirmed the district court’s exclusion of IBG’s foreign sales from a calculation of damages.

EcoFactor, Inc. v. Google LLC, 104 F.4th 243 (Fed. Cir. 2024)

Facts: This case concerns the reliability and admissibility of expert testimony regarding patent damages. It is an important case to watch, as the Federal Circuit recently granted Google’s petition for rehearing en banc and vacated the panel decision, meaning that the full Federal Circuit will rehear the case and possibly reach a different result or use different reasoning than the panel decision discussed below.

Patent owner EcoFactor sued Google for patent infringement over Google’s smart thermostat products. At trial, the jury found that Google infringed and awarded EcoFactor damages.

EcoFactor’s damages expert, Mr. Kennedy, used a standard hypothetical negotiation approach for calculating reasonable royalty damages, where he analyzed the effect of three license agreements EcoFactor previously entered into with third-party smart thermostat manufacturers. Each of those prior agreements stated that the licensee would pay EcoFactor a lump sum amount “based on what EcoFactor believes is a reasonable royalty calculation of [$X] per-unit.” (The amount of the per-unit royalty is redacted from the opinion because it is confidential business information under a protective order.)

Google moved for a new trial on damages, arguing that Kennedy’s damages opinion should have been excluded from trial for being speculative and unreliable. The district court denied the motion. Google appealed to the Federal Circuit.

Held: Prior license agreements containing a lump sum payment “based on” a royalty rate may provide evidence of a reasonable royalty rate.

Reasoning: The Federal Circuit panel—affirming the district court’s decision to deny Google’s motion for a new damages trial—explained that while all damages approximations involve some degree of uncertainty, the admissibility inquiry centers on whether the methodology employed is reliable.

Google first argued that Kennedy’s proposed royalty rate was “plucked . . . out of nowhere.” The Federal Circuit panel disagreed, finding that Kennedy adequately based his proposed royalty rate on (1) the three existing license agreements and (2) the testimony of EcoFactor’s CEO that the lump sum in each of those three license agreements had been calculated using the $X royalty rate.

Google also argued that Kennedy’s damages testimony should have been excluded because the three licenses were not comparable to the hypothetically negotiated agreement between Google and EcoFactor. According to Google, the three license agreements were for EcoFactor’s entire patent portfolio, whereas EcoFactor asserted only one patent against Google. However, the Federal Circuit panel found that Kennedy accounted for such differences. Kennedy acknowledged at trial that Google would argue that the three license agreements included EcoFactor’s entire patent portfolio, and thus the $X royalty rate should be decreased. But Kennedy then explained another factor would have put upward pressure on the hypothetically negotiated rate. Specifically, while each of the three license agreements were settlements whose royalty rate reflected a risk that EcoFactor’s patents would be found not infringed or invalid, the hypothetical negotiation assumes that the asserted patent was infringed and valid. The Federal Circuit panel explained that the precise degree of comparability was a factual issue left for the jury—not a question of admissibility.

Dissent: Judge Prost dissented in part, specifically dissenting from the decision to affirm the district court’s denial of Google’s motion for a new trial. Judge Prost reasoned that the $X royalty rate rests on EcoFactor’s “self-serving” recitals in the three prior license agreements, Kennedy’s analysis is unreliable, and the $X royalty rate has no basis in the record and includes the value of unasserted patents.

Contour IP Holding LLC v. GoPro, Inc., 113 F.4th 1373 (Fed. Cir. 2024)

Facts: The Supreme Court has held that abstract ideas, natural laws, and phenomena of nature are ineligible for patenting under 35 U.S.C. § 101. This case applies the Supreme Court’s test in Alice Corp. Pty. v. CLS Bank Int’l, 573 U.S. 208 (2014) to determine whether the patent claims at issue recite merely a patent-ineligible abstract idea.

Contour sued GoPro, accusing several of GoPro’s point-of-view (“POV”) digital video cameras of infringing Contour’s patents. The asserted patents disclose a hands-free, POV video camera “configured for remote image acquisition control and viewing.” The patent specification explains that often in sports applications, such as skiing, a POV camera is “mounted in a location that does not permit the user to easily see the camera.” In these instances, the user is unable to review what is being recorded in real time or adjust recording settings, such as light level and audio settings. To address these problems, the patents describe implementing wireless technology in the POV camera that allows the camera to send real time information to a remote device, such as a cell phone. From this remote device, the user can see what is being recorded by the camera and make real time adjustments to the recording settings.

The patent specifications describe an example of the asserted claims called the “dual recording” embodiment. In that example, the patents disclose that the camera is configured to generate video recordings “in two formats, high quality and low quality, in which the lower quality file is streamed” to the remote device. This system achieves real time playback on the remote device without exceeding wireless connection bandwidth, while the higher quality version of the recording is saved on the camera for later viewing.

GoPro argued on summary judgment that the asserted claims were patent ineligible under Section 101 because they claim an abstract idea. The district court agreed with GoPro. In the first step of the Alice test, the court found that the representative claim was directed to the abstract idea of “creating and transmitting video (at two different resolutions) and adjusting the videos’ settings remotely.” In the second step, the court concluded that the claim recited only functional, results-oriented language with no indication that the physical components behave in any way other than their basic, generic tasks. Contour appealed to the Federal Circuit.

Held: Contour’s claims are patent eligible under Section 101 because the patent specification describes improving technology through specific technological means and the claims reflect that improvement.

Reasoning: Applying step one of the Alice test, the Federal Circuit characterized the scope of the asserted claims as “an improved POV camera.” The Federal Circuit explained that the asserted claims “require specific, technological means—parallel data stream recording with the low-quality recording wirelessly transferred to a remote device—that in turn provide a technological improvement to the real time viewing capabilities of a POV camera’s recordings on a remote device.”

The Federal Circuit explained that the district court’s Alice analysis “characterizes the claims at an impermissibly high level of generality.” This “generalized articulation” of the claims “all but ensured the incorrect conclusion that the claims were drawn to an abstract idea.” For example, the Federal Circuit rejected GoPro’s argument that Contour’s claims “are simply directed to the abstract idea of wireless network communication.” Instead, the claims enable the claimed POV camera to “operate differently than it otherwise could.”

The Federal Circuit also rejected GoPro’s argument that the claims “simply employ known or conventional components that existed in the prior art at the time of the invention.” Rather, the “dual embodiment” claimed by Contour was not “a long-known or fundamental practice supporting patent ineligibility.”

Because it concluded at Alice step one that the claims “are directed to a technological solution to a technological problem,” the Federal Circuit found that the claims are patent-eligible without needing to proceed to the second step of the Alice test.

Allergan USA, Inc. v. MSN Labs. Private Ltd., 111 F.4th 1358 (Fed. Cir. 2024)

Background: Patent applicants can file patent applications that have the same specification as, and claim priority to the filing date of, an earlier patent application. An earlier application to which a later application claims priority is called a parent and the later application is called a child. In prior cases, the courts developed a legal doctrine called “obviousness-type double patenting” to restrict patent applicants from extending their patent protection by obtaining obvious variants of patent claims in different patents with different expiration dates. Patent term adjustment extends the expiration date of a patent under certain circumstances when examination of the patent was delayed.

Facts: This case concerns whether obviousness-type double patenting can invalidate a first-filed, first-issued patent that expires earlier than a child patent due to patent term adjustment.

In 2019, Sun Pharmaceutical Industries (Sun) submitted an Abbreviated New Drug Application (ANDA) seeking FDA approval to market and sell a generic version of Viberzi®. Allergan then sued Sun, alleging that the filing of Sun’s ANDA directly infringed one of Allergan’s patents, which had over 1,000 days added to its expiration date because of patent term adjustment. While the litigation was pending, the Patent Office issued new patents that were continuation patent applications of the issued patent (child patents). Sun argued that the later-expiring parent patent was invalid for obviousness-type double patenting over the child patents. The district court found the parent patent invalid for obviousness-type double patenting. The district court concluded that the later expiration date from the patent term adjustment led to an unjust extension of patent term, violating the principles of obviousness-type double patenting. Allergan appealed.

Held: A first-filed, first-issued, later-expiring patent claim cannot be invalidated for obvious-type double patenting based on a later-filed, later-issued, earlier-expiring child patent when the patents share a common priority date.

Reasoning: The Federal Circuit explained that the purpose of obviousness-type double patenting is to prevent patentees from obtaining a second patent on a patentably indistinct invention to effectively extend the life of a first patent to that subject matter. The court further explained that the parent patent, in this case, is undoubtedly the first patent, whether measured by filing date or issuance date. Thus, the patent-term-adjusted term of the parent patent does not implicate obviousness-type double patenting because the parent patent is not a “second, later expiring patent for the same invention.”

The Federal Circuit noted the parent patent defined the initial scope of exclusivity for the invention, and the child patents derived from the same original application but were filed later. The Federal Circuit explained that the parent patent cannot be invalidated by the child patents merely because the parent patent had a longer term due to patent term adjustment. Invalidating earlier-filed patents in this scenario would undermine the purpose of patent term adjustment, which is to compensate for delays in patent prosecution, and would create an unjust scenario where a patent owner would lose the benefit of a duly awarded extension.

The Federal Circuit distinguished a prior case that held that a later-issued but earlier-expiring patent can qualify as an obviousness-type double patenting reference to invalidate an earlier-issued but later-expiring patent. The Federal Circuit explained that the case focused on issuance dates, not filing dates. In the earlier case, the challenged claims of the asserted patent were filed after, claimed a later priority date than, and expired after the reference claims, which resulted in an unwarranted extension of patent term for an invention that had already been the subject of an earlier-filed, earlier-expiring claim. In contrast, Allergan’s asserted claim was filed before, shared a priority date with, and issued before the reference claims of the patents asserted for obviousness-type double patenting. Thus, because Allergan’s asserted patent was the first patent in its family to be filed and to issue, it did not extend any period of exclusivity on the claimed subject matter.

Accordingly, the Federal Circuit reversed the district court’s finding of obviousness-type double patenting.

IOENGINE, LLC v. Ingenico Inc., 100 F.4th 1395 (Fed. Cir. 2024)

Facts: This case relates to the printed matter doctrine, under which a patent claim limitation is not afforded patentable weight when it claims the contents of information.

Ingenico filed petitions for inter partes review at the patent office challenging the validity of many claims in three of IOENGINE’s patents. Ingenico argued that several claim limitations requiring “encrypted communications” and “program code” were entitled to no patentable weight under the printed matter doctrine. The Board agreed with Ingenico, finding that these limitations were subject to the printed matter doctrine because they claimed the content of information being communicated. The Board relied on this finding to determine that claims reciting these limitations were anticipated by prior art. IOENGINE appealed.

Held: Claim limitations requiring encrypted communications or download of program code are not subject to the printed matter doctrine because they are directed to the act of communication itself, not the content of the communication.

Reasoning: The Federal Circuit applied a two-step test for whether the claim limitations at issue should be accorded patentable weight under the printed matter doctrine. The first step is determining whether a claim limitation is directed to printed matter. If the first step is not satisfied, the inquiry ends there. Only if the first step is satisfied should a court proceed to step two and consider whether the printed matter should nevertheless be afforded patentable weight.

The Federal Circuit first looked to whether the limitation reciting the “transmission of encrypted communications” claimed printed matter. The printed matter doctrine is implicated when a limitation “claims the content of information.” The Federal Circuit explained the “fact there is a communication itself is not content; content is what the communication actually says.” The Federal Circuit further explained that the form of communication, such as whether the communication is encrypted, is not content. The Federal Circuit concluded that the “transmission of encrypted communications” limitations did not claim the content of the communication, and, thus, were not directed to printed matter.

The Federal Circuit then analyzed the limitations reciting the download of “program code.” Similarly, the Federal Circuit reasoned these limitations claimed the act of communication itself, not the content of what is communicated in the program code. Thus, the “program code” limitations were not directed to printed matter.

Because the limitations reciting “encrypted communications” and “program code” were not “claimed . . . for the content they communicate, they are not printed matter.” Accordingly, the Federal Circuit did not need to proceed to the second step. Because Ingenico’s only ground of invalidity relied on their printed-matter argument, the Court reversed the Board’s invalidity determination as to the claims at issue.

Sanho Corp. v. Kaijet Tech. Int’l Ltd., Inc., 108 F.4th 1376 (Fed. Cir. 2024)

Facts: This case contrasts a 35 U.S.C. § 102(b)(2)(B) public disclosure by the inventor, which prevents some later disclosures of the same subject matter from being treated as prior art to invalidate a patent claim, from a 35 U.S.C. § 102(a)(1) public use, which generally is prior art.

Kaijet petitioned for inter partes review challenging claims of a patent owned by Sanho on grounds that the claims were obvious. Each obviousness combination included a U.S. patent application publication known as Kuo, which had an effective filing date before the Sanho patent.

Before the effective filing date of the Kuo reference, the inventor of the challenged patent had offered to sell a “HyperDrive” device to Sanho’s owner. Shortly thereafter, an agreement was reached to sell 15,000 HyperDrive devices to Sanho, but no sale was completed before the Kuo reference’s effective filing date. Sanho argued that, because the HyperDrive device embodied the invention of the challenged patent, it should qualify as a disclosure by the inventor under Section 102(b)(2)(B) thereby disqualifying the Kuo reference as prior art. The Board disagreed, holding that the sale was not a Section 102(b)(2)(B) public disclosure. Accordingly, the Board found all challenged claims invalid as obvious. Sanho appealed to the Federal Circuit.

Held: An invention is not “publicly disclosed” under 35 U.S.C. § 102(b)(2)(B) by the inventor’s private sale, even though a third party’s private sale may constitute an invalidating “public use” under 35 U.S.C. § 102(a)(1).

Reasoning: The Federal Circuit explained that placing a device that embodies an invention on sale does not necessarily publicly disclose the invention under Section 102(b)(2)(B). First, the Federal Circuit looked to the language of the relevant statute. The court reasoned that the distinct use of “disclosed” in one section and “publicly disclosed” in another “suggests that Congress intended the phrases to have different meanings” and that the narrower term, “publicly disclosed” should encompass a “narrower subset of ‘disclosures.’”

Second, the Federal Circuit looked to the purpose of the exception provided in Section 102(b)(2)(B). The court explained the purpose of this section is to protect an inventor “who discloses his invention to the public before filing a patent application” by making it available to the public. The exception is not intended to protect an inventor who, to the contrary, keeps the invention private. Sanho’s proposed interpretation that a private sale falls within this exception runs contrary to the “purposes of the statutory scheme” and is inconsistent with reading the statute “as a whole.”

The Federal Circuit then briefly turned to the legislative history which further supported that “‘public disclosure’ requires that the invention be made available to the public.”

Lastly, the Federal Circuit addressed Sanho’s argument that “‘publicly disclosed’ incorporates earlier judicial interpretation of the word ‘public’ in the context of invalidating ‘public use.’” The court reasoned that no evidence supports that Congress intended such an interpretation. Moreover, the distinct terms “publicly disclosed” and “public use” are found in distinct sections that “serve fundamentally different purposes.” Thus, although public disclosure could result from public use, the two are not equivalent.

Applying its reasoning to the facts of this case, the Court held that the sale of HyperDrive devices “did not ‘publicly disclose’ the relevant subject matter.” Rather, the sale constituted only a private sale to Sanho and “there was no teaching of the features of the invention to others beyond Sanho.” Therefore, the Federal Circuit affirmed the Board’s finding that Kuo is prior art and that the challenged claims would have been obvious.

§ II. Copyright Cases

Warner Chappell Music, Inc. v. Nealy, 601 U.S. 366 (2024)

Facts: This case resolves a circuit split regarding time limitations on monetary recovery for copyright infringement claims under the Copyright Act.

In 2018, plaintiff and copyright holder Nealy sued Warner Chappell for copyright infringement, claiming infringing activity dated back to 2008—ten years before he sued.

The Copyright Act’s statute of limitations provides that a copyright owner must bring an infringement claim within three years of its accrual. See 17 U.S.C. § 507(b). Thus, to show that his claims were timely, Nealy invoked the “discovery rule,” under which a claim accrues when the plaintiff discovers, or with due diligence, should have discovered, the infringing activity.

In the District Court, Warner Chappell accepted that the discovery rule governed the timeliness issue but argued that Nealy could only recover damages for infringing acts occurring in the last three years. The District Court agreed with Warner Chappell, relying on a Second Circuit case limiting monetary relief to three years prior to filing. The Eleventh Circuit reversed, rejecting the notion of a three-year damages bar on a timely claim.

Held: In a 6–3 decision, the Supreme Court held that the Copyright Act entitles a copyright owner to obtain monetary relief for any timely infringement claim, regardless of when the infringement occurred. For purposes of its decision, the Court assumed the discovery rule applied because Warner Chappell had not challenged the rule’s applicability. The majority declined to decide whether the discovery rule applies to copyright infringement claims generally.

Reasoning: The majority first analyzed the text of the Copyright Act. Finding that the Act’s remedial sections do not provide a time limit on monetary recovery, the majority held that a copyright owner possessing a timely claim is entitled to damages, no matter when the infringement occurred.

The majority next distinguished the Supreme Court’s earlier decision in Petrella v. Metro-Goldwyn-Mayer, Inc., 572 U.S. 663 (2014), which stated that the Copyright Act’s statute of limitations allows plaintiffs “to gain retrospective relief running only three years back from” the filing of suit. Id. at 672. However, in Petrella, the plaintiff had long known of the defendant’s infringement, and, thus, could not have relied on the discovery rule. Thus, the plaintiff in Petrella could not recover for infringements occurring more than three years prior because her claims were untimely, rather than due to a statutory bar.

Dissent: Justice Gorsuch dissented, joined by Justices Thomas and Alito. The dissent criticized the majority for “sidestep[ping] the logically antecedent question” of whether application of the discovery rule is proper. The dissent reasoned that traditionally, discovery rules were only applicable in cases of fraud or concealment, and thus should not be applied to run-of-the-mill copyright cases.

Philpot v. Independent Journal Review, 92 F.4th 252 (4th Cir. 2024); Griner v. King, 104 F.4th 1 (8th Cir. 2024); Hachette Book Grp., Inc. v. Internet Archive, 115 F.4th 163 (2d Cir. 2024); Keck v. Mix Creative Learning Ctr., LLC, 116 F.4th 448 (5th Cir. 2024)

Facts: In these cases, four different circuit courts apply the Supreme Court’s 2023 decision in Andy Warhol Foundation for the Visual Arts, Inc. v. Goldsmith, 598 U.S. 508 (2023) regarding transformative use, a component of fair use.

The plaintiffs in each case are copyright holders suing for unauthorized use of their copyrighted works. In Philpot, a photographer sued a news website for using his photograph of a famous musician in an online article. In Griner, the owner of an internet meme template photograph sued a former congressman’s campaign committee for posting a version of the meme on a campaign website and social media. In Hachette, book publishers sued a nonprofit digital library, challenging the library’s practice of scanning print copies of publishers’ books to create digital copies and lending those digital copies to users. In Keck, an artist sued an art studio for using his artworks in art kits for children.

Held: In Philpot, Griner, and Hachette, the courts held that defendants’ uses were not transformative and were not fair uses. In Keck, the Fifth Circuit held that the studio’s use was transformative in nature and constituted fair use.

Reasoning: Each of the circuit courts examined whether defendants’ use of the copyrighted work was “transformative” in light of Warhol.

In Philpot, the Fourth Circuit likened defendant IJR’s use of a photo of famous musician Ted Nugent to the magazine’s use of Orange Prince in Warhol. Referring to the Supreme Court’s reasoning that “[a] typical use of a celebrity photograph is to accompany stories about the celebrity,” the Fourth Circuit noted that IJR had less of a case for “transformative use” than in Warhol because unlike the orange drubbing in Warhol, IJR did not alter the Nugent photo beyond cropping the negative space.

In Griner, the Eight Circuit found that the campaign committee’s use of the “Success Kid” meme photograph was a commercial use without a further purpose, different character, or compelling justification. The court rejected the campaign committee’s stated justification—that creating and disseminating a meme on social media is a common occurrence—as non-compelling, especially in light of the commercial nature of the use.

In Hachette, the Second Circuit found that the defendant’s practice of digitizing print copies of books to lend was not transformative, because the underlying purpose of making the works available was still the same. The court found that the “digital copies do not provide criticism, commentary, or information about the originals,” or “add something new, with a further purpose or different character.”

In contrast, in Keck, the Fifth Circuit found that defendant Mix Creative’s use of an artist’s dog-theme artworks was transformative. The court rejected Keck’s framing of the issue as “the online, e-commerce sales of Keck’s entire works.” Instead, the court found that Mix Creative used the artworks for an educational purpose that was significantly different than the original, decorative purpose of Keck’s works. Mix Creative’s kits included not just prints of the artworks, but also lesson plans, PowerPoint slides, and materials for students to create their own art, inspired by Keck’s. Thus, Mix Creative used the art for what it and the additional materials could teach students, rather than for its inherent expressive value.

In each case, the party that won on the “transformative use” factor won on the overarching issue of fair use.

§ III. Trademark Cases

Vidal v. Elster, 602 U.S. 286 (2024)

Facts: This case concerns the protections of the First Amendment and the registrability of a trademark in contravention of section 2(c) of the Lanham Act.

Applicant Elster sought to register TRUMP TOO SMALL for use on shirts and hats. Elster indicated that this mark stemmed from an exchange between Donald Trump and Senator Marco Rubio during the 2016 presidential primary debate and aims to “convey[] that some features of President Trump and his policies are diminutive.” The Examining Attorney refused the application on two grounds: under Section 2(c) of the Lanham Act which prohibits registration of a mark that “comprises a name . . . identifying a particular living individual” without the individual’s “written consent”; and Section 2(a) of the Lanham Act, which bars registration of trademarks that “falsely suggest a connection with persons, living or dead.” Elster appealed the refusal, asserting that the mark was political commentary, so refusal infringed on his First Amendment rights as content-based discrimination.

The Trademark Trial and Appeal Board (“Board”) affirmed the Examining Attorney’s refusal solely on Section 2(c). The Board noted the government’s compelling interest to protect the named individual’s rights of privacy and publicity. Elster appealed.

The Federal Circuit overturned the Board’s decision, holding that the refusal to register Elster’s TRUMP TOO SMALL mark under Section 2(c) violated the First Amendment, in that such a refusal restricted the expression of criticism of a public official in the mark’s content.

The United States petitioned the Supreme Court to hear the case, and the Supreme Court granted certiorari on June 5, 2023.

Held: The Supreme Court held unanimously that the USPTO did not violate the First Amendment when it refused registration to the TRUMP TOO SMALL mark because prohibiting the registration of a trademark which contains a living person’s name, without their consent, is not a viewpoint-based regulation.

Reasoning: While content-based regulation of speech is generally presumed to be unconstitutional, the Court had not previously decided whether heightened scrutiny would extend to a content-based but viewpoint-neutral restriction such as a trademark registration. Writing the principal opinion, Justice Thomas noted that the “names clause has deep roots in our legal tradition” and that the decision sought to uphold the tradition of preventing trademark applicants, through the trademark register, from effectively precluding individuals from using their own names in commerce.

The separate opinions, amidst the unanimous decision, showed less deference to historical tradition. Justice Kavanaugh and Chief Justice Roberts joined most of Thomas’s opinion, but Kavanaugh specified that both considered the viable possibility of “a viewpoint-neutral, content-based trademark restriction” being found constitutional “even absent such historical pedigree.”

Justice Barrett, joined in large part by Justices Jackson, Kagan, and Sotomayor, stressed the misguided nature of relying on history and tradition as the major context for the decision, posing that any free speech restrictions within the trademark registration system should be permissible if such restrictions “are reasonable in light of the trademark system’s purpose of facilitating source identification.”

Justice Sotomayor found that the names clause is permissible and constitutional because it merely places reasonable conditions on additional government benefits, which are conferred through a trademark registration, based on the content of the speech. Sotomayor noted that the USPTO’s refusal to register Elster’s mark did not prevent Elster from communicating his message or restrict his mode of expression, it only prevented him from “registering a mark asserting exclusive rights in another person’s name without their written consent.”

Crocs v. Effervescent, 119 F.4th 1 (Fed. Cir. 2024)

Facts: This case concerns whether claiming that an unpatented product feature is “patented,” “proprietary,” or “exclusive” violates Section 43(a)(1)(B) of the Lanham Act, which primarily involves protections against false advertising.

Crocs sued U.S.A. Dawgs, Inc. and several other competitor shoe distributors (collectively, “Dawgs”) for patent infringement. Dawgs filed a counterclaim against Crocs alleging false advertising violations of Section 43(a) of the Lanham Act. The counterclaim alleged that Crocs advertised its footwear products as being made of a “patented,” “proprietary,” and “exclusive” material called “Croslite” without possessing a patent directed to that material. Dawgs alleged that Crocs’ statements deceived consumers into believing that competitor footwear products were made of inferior material compared to Crocs’ products. Crocs moved for summary judgement that Dawgs’ counterclaim was legally barred, and the district court granted Crocs’ motion. The district court concluded that the terms “patented,” “proprietary,” and “exclusive” were claims of inventorship or authorship and not claims regarding the nature, characteristics, or qualities of products as required by Section 43(a)(1)(B) of the Lanham Act. Dawgs appealed.

Held: A party may violate Section 43(a)(1)(B) of the Lanham Act when it falsely claims that it possesses a patent on a product feature and advertises that product feature in a manner than causes consumers to be misled about the nature, characteristics, or qualities of its product.

Reasoning: The Federal Circuit distinguished Supreme Court and Federal Circuit case law that held that mere claims of authorship (such as claiming to be the creator of a product) or inventorship (such as claiming a product is “innovative”) do not violate Section 43(a)(1)(B). The Federal Circuit explained that a claim that a product feature is “patented” is not solely an expression of innovation, and, thus, authorship. The Federal Circuit further explained that Crocs’ promotional materials included statements that its purportedly patented features had numerous tangible benefits found in all of Crocs’ shoe products. Further, Dawgs alleged that Crocs’ statements referring to the advantages of its purportedly patented features caused “consumers to believe that Crocs’ molded footwear is made of a material that is different than any other footwear,” and, thus, deceived “consumers into believing that all other molded footwear . . . is made of inferior material compared to Crocs’ molded footwear.”

Accordingly, the Federal Circuit found that Dawgs had “timely presented a theory under Section 43(a)(1)(B) of the Lanham Act linking Crocs’ alleged misrepresentations in commercial advertisements to the nature, characteristics, or qualities of Crocs’ shoes.” Thus finding that the district court erred in granting summary judgment against Dawgs’ Lanham Act counterclaim, the Federal Circuit reversed and remanded for further proceedings.

On July 24, the Department of Justice (“DOJ”) and Federal Trade Commission (“FTC”) held the second of three listening sessions focused on competition in the pharmaceutical marketplace.

FTC Chair Andrew Ferguson began the session by noting the agency’s aggressive approach to combating anticompetitive practices related to pharmaceuticals. Specifically, he pointed to FTC warning letters sent to pharmaceutical companies disputing the propriety of more than two hundred patent listings in the Orange Book of the Food and Drug Administration (“FDA”). He also made clear that the agency plans to complete its 6(b) study of pharmacy benefit managers (“PBMs”), which should inform potential legislative and future enforcement actions aimed at combating anticompetitive conduct in the prescription drug markets. Finally, Chair Ferguson stated that incumbent PBMs and manufacturers appear to use government laws and regulations designed to promote competition and reduce costs to shield themselves from competition, resulting in higher costs for consumers.

The two panels then discussed various structural issues affecting competition, including increased consolidation, lack of transparency, and overlapping regulatory structures.

Panel 1: “Benefit and Formulary Practices and Regulations that Harm Drug Competition”

The first panel discussed business relationships among pharmaceutical manufacturers, PBMs, group purchasing organizations (“GPOs”), and health care payors.

Many panelists voiced concerns about the lack of transparency in PBM pricing and negotiations, noting how PBMs may be incentivized to favor products with higher list prices and higher rebates. One panelist discussed PBMs’ use of offshore GPOs, contending that the GPOs do not comply with industry standards. Another panelist suggested that pharmacy reimbursements should be tied to acquisition costs. The panelists generally encouraged increased transparency at all levels of the supply chain, especially at the PBM level, and favored pass-through pricing models.

The session also addressed growing vertical consolidation in the pharmaceutical supply chain, with a focus on the vertical integration of PBMs with insurers, administrative services organizations, and GPOs. In recent years, all three of the largest PBMs have integrated with major health care insurers, administrative services providers, and pharmacies. Some panelists expressed concern that vertically integrated healthcare entities may disadvantage industry rivals by steering business to their integrated PBMs and pharmacies through exclusive contracting. They suggested that such steering should subject vertically integrated entities to antitrust scrutiny. Further, panelists expressed concerns that GPOs “engage in predatory practices” by overcharging and underpaying generic manufacturers.

Panel 2: “Improper Orange Book Listings and Other Regulatory Abuse by Pharmaceutical Companies to Impede Competition”

The second panel focused on the Hatch-Waxman regulatory scheme and how pharmaceutical manufacturers may exploit a complex regulatory system to delay or deter competition. One panelist focused on improper Orange Book listings, a hot topic in recent litigation and a focus of the FTC. She explained how improperly listed patents can harm competition by subjecting generic companies to an automatic thirty-month stay of regulatory approval.

The panelists also discussed so-called “patent thickets”—dense groups of overlapping patents used to cover a single product—especially in the biologic space. While one panelist argued that patents are no more prevalent in life sciences than in other industries, another highlighted that those other industries are distinguishable because of cross-licensing, and focused on the expense and delay that arise when a brand enforces multiple nearly identical patents for the same product. That panelist highlighted current legislation that would allow brands to assert only one patent per terminally disclaimed group.

Some panelists also asserted that branded drug manufacturers improperly use citizen petitions to the FDA to attempt to delay or deter generic competition. They expressed that, while citizen petitions can constitute constitutionally protected speech, and may be appropriate to raise legitimate safety concerns, sham petitioning can delay generic competition and usurp FDA time that would otherwise be devoted to helping generic products reach the market.

Throughout the session, panelists reflected on the many overlapping regulatory schemes and responsible agencies that govern pharmaceutical patenting, approval, and competition, and how manufacturers may be able to exploit areas of overlap due to knowledge gaps among agencies. They noted that, given the wealth of specialized agency knowledge in this field, overlapping regulatory schemes may be a strength—so long as the various agencies understand each other’s work and form strong inter-agency lines of communication.

Focus on Biologics

Participants across both panels were generally united on one issue: the need to reform the regulatory process and educate patients and providers to promote the use of biosimilars and interchangeable biosimilars as alternatives to expensive brand biologics. The panelists generally opined that the distinction between biosimilars and interchangeable biosimilars is unnecessary or counterintuitive. They called for a single regulatory pathway for biosimilars that would allow approved biosimilars to be automatically substituted by pharmacies, without prescriber intervention. Further, panelists emphasized the need to educate patients and prescribers about the safety and efficacy of biosimilars.

When an insured is pursuing a representation and warranty insurance (“RWI”) claim, a critical consideration is whether diminution in value damages (“DIV Damages”) can be asserted as Loss covered by the RWI policy.^[1] This article, being published in four parts, discusses Delaware mergers and acquisitions (“M&A”) damages law regarding DIV Damages and describes how an insured can pursue them as part of an RWI claim.

This is Part II of this article; it addresses the evolution of cases involving DIV Damages calculated using a discounted cash flow methodology (“DCF Methodology”) under Delaware M&A damages law. Part I of this article addressed (i) the principal differences between DIV Damages calculated using a multiple of EBITDA methodology (“MOE Methodology”) and DIV Damages calculated using a DCF Methodology and (ii) the evolution of cases involving DIV Damages calculated using an MOE Methodology under Delaware M&A damages law. Part III of this article will discuss the requirements for a DIV Damages award as part of an RWI claim. Part IV of this article will discuss the limitations on, and other matters regarding, a DIV Damages award as part of an RWI claim.

Each part of this article contains practice tips for attorneys for insureds seeking recovery of DIV Damages as part of an RWI claim.

Calculating DIV Damages Using a DCF Methodology Rather Than an MOE Methodology

Several different situations exist in which DIV Damages calculated using a DCF Methodology may be preferable to, or even required instead of, DIV Damages calculated using an MOE Methodology. These principally include the following:

• when the buyer used a DCF Methodology to calculate the purchase price it offered or paid for the target business
• when the buyer is trying to claim the loss of future profits, including future synergistic profits, of the target business through DIV Damages
• when the revenues or expenses impacted by the R&W Breach (or by the fraudulent misrepresentation or deceit, in the case of noncontractual representations^[2]) were not reflected in the Measurement Period EBITDA but were reflected in the projected financial results of the target business

A discounted cash flow methodology^[3] can also be used to calculate damages in other scenarios, such as (i) when a prospective seller jilts a prospective buyer by breaching one or more of its binding covenants in a letter of intent or an Acquisition Agreement, or (ii) when a prospective joint venturer or joint development party jilts its prospective counterparty by breaching one or more of its binding covenants in a letter of intent or a joint venture agreement or joint development agreement. However, in those scenarios, the discounted cash flow methodology is being used to calculate the jilted buyer’s or jilted counterparty’s damages in the form of lost anticipated profits resulting from such breach or breaches rather than DIV Damages, and RWI coverage is not implicated because of the absence of an R&W Breach covered by an RWI policy.^[4]

While there are differences between DIV Damages calculated using a DCF Methodology versus those calculated using an MOE Methodology, it is still important for attorneys for an insured that is pursuing DIV Damages calculated using either methodology to be familiar with the case law involving the other methodology.^[5]

Evolution of Cases Involving DIV Damages Calculated Using a DCF Methodology Under Delaware M&A Damages Law

The Case That Began the Line: Tam v. Spitzer

The seminal case involving DIV Damages calculated using a DCF Methodology under Delaware M&A damages law is the 1995 Delaware Chancery Court case of Tam v. Spitzer.^[6] Tam involved the sale of the assets of a business known as Data Works, a data processing company owned by Lisa A. Spitzer, to Tam Management, Inc., a corporation owned by Coretta C. Tam, for a purchase price of $103,500. The purchase price was calculated by Tam’s accountant, Robert L. Siegfried Jr., using a DCF Methodology and certain valuation data.^[7]

After finding that Spitzer had committed fraud with respect to the sale of Data Works to Tam by failing to disclose the erosion of the business and the impending loss of Data Works’ largest customer, St. Francis Hospital, Vice Chancellor Jacobs awarded Tam DIV Damages of $45,290, based on the difference between (i) the valuation of the Data Works business as represented to Tam, in the form of the purchase price paid by Tam to acquire the assets of the target business, and (ii) the valuation of the Data Works business without St. Francis Hospital as a customer, with the valuation in each case calculated using the same DCF Methodology and valuation data that Siegfried had used in calculating the purchase price paid by Tam for the target business, but excluding the St. Francis Hospital business in the latter calculation.^[8]

In support of the award of DIV Damages to Tam, Vice Chancellor Jacobs made a number of factual and legal findings, including the following:

• Tam was entitled to “damages measured by the ‘benefit of the bargain,’ i.e., the difference between the actual and the represented values of the object of the transaction.”^[9]
• “The only credible valuation of Data Works without St. Francis is that of Siegfried, who employed the same discounted cash flow methodology and valuation data he had previously used to arrive at the 1991 purchase price, but then deducted the revenue and expenses attributable to St. Francis. By that method, Siegfried arrived at an adjusted value for Data Works of $58,210.”^[10]
• “Spitzer offer[ed] no independent, alternative valuation of her own. Instead, she rest[ed] upon her challenges to certain of Siegfried’s valuation assumptions.”^[11]
• “Because Spitzer has offered no credible alternative to the valuation performed by Siegfried, and has not demonstrated that Siegfried’s valuation assumptions were either unreasonable or erroneous as a matter of law, I accept Siegfried’s valuation of $58,210 as the actual value of Data Works at the time of the sale to Tam. Because Tam overpaid for Data Works by $45,290 ($103,500 – $58,210), the $103,500 purchase price must be downwardly adjusted by that amount, to $58,210.”^[12]

Tam continues to stand as the preeminent Delaware M&A damages law case involving an award of DIV Damages calculated using a DCF Methodology.^[13]

The Case That Was Reversed on Other Grounds: S.C. Johnson v. DowBrands

A Delaware M&A damages law case involving DIV Damages calculated using a DCF Methodology and relying on Tam is the 2003 U.S. District Court for the District of Delaware case of S.C. Johnson & Son, Inc. v. DowBrands, Inc.^[14] S.C. Johnson involved the sale by DowBrands of a home products business (principally, plastic bags and wraps) to S.C. Johnson for an aggregate purchase price of $1.125 billion, which was calculated using a DCF Methodology.^[15] Judge Farnan held that (i) DowBrands had committed fraudulent misrepresentation with respect to diversion to the United States of Latin American revenues of the target business, notwithstanding (a) the inclusion in the Acquisition Agreement of an independent review provision with respect to S.C. Johnson’s due diligence of the target business and (b) DowBrands’ contentions with respect to S.C. Johnson’s lack of reasonable reliance on DowBrands’ purported noncontractual representations regarding such diversion; and (ii) as a result, S.C. Johnson was entitled to DIV Damages in the form of the difference between (a) the value of the target business as represented to S.C. Johnson, in the form of the purchase price it paid to acquire the target business, and (b) the value of the target business after “backing out” the value of the Latin American portion of the target business.^[16]

However, the U.S. Court of Appeals for the Third Circuit reversed Judge Farnan’s holding of justifiable reliance by S.C. Johnson on DowBrands’ purported noncontractual representations with respect to the Latin American portion of the target business, thereby reversing the holding that DowBrands had committed fraudulent misrepresentation with respect to the Latin American portion of the target business.^[17] As a result, Judge Farnan’s holding with respect to DIV Damages was rendered inapplicable.

Because the Third Circuit’s reversal of Judge Farnan’s fraudulent misrepresentation holding in S.C. Johnson means that his DIV Damages holding has no precedential import, S.C. Johnson may be overlooked in the line of cases beginning with Tam. Nevertheless, Judge Farnan’s factual and legal findings with respect to DIV Damages calculated using a DCF Methodology are still instructive for practitioners evaluating an RWI claim including such DIV Damages. Among such findings were the following:

• “[S.C. Johnson] was harmed as a result of DowBrands’ misrepresentations regarding the profitability of the Latin American business, and therefore, is entitled to the benefit of its bargain. . . . The . . . most commonly accepted measure [of damages for fraud or deceit under Delaware law] is the benefit of the bargain rule, [u]nder [which] the plaintiff recovers the difference between the actual and represented values of the object of the transaction.”^[18]
• S.C. Johnson calculated its damages by using the same DCF Methodology it had used in preparing its final bid for the target business, to arrive at a $23.6 million figure for the Latin American portion of the target business lost due to DowBrands’ fraudulent misrepresentations.^[19]
• However, because S.C. Johnson’s final bid of $1.125 billion was only 93 percent of the $1.2 billion valuation of the target business that S.C. Johnson had calculated in preparing its final bid, Judge Farnan proportionately reduced S.C. Johnson’s $23.6 million figure to $21.948 million as its DIV Damages (in other words, Judge Farnan proportionately reduced the DIV Damages award to correspond to the purchase price that S.C. Johnson paid DowBrands for the entire target business).^[20]
• The fact that S.C. Johnson did not make any sales of the target business products in Latin America in the five months, and sold less than $1 million of plastic bags and wraps in the seventeen months, after the Acquisition was considered persuasive evidence of the effect of diversion on the Latin American portion of the target business.^[21]
• None of the following contentions by DowBrands merited a reduction of the DIV Damages award to S.C. Johnson:
  • S.C. Johnson had “improperly assumed that the diverted sales were worth nothing at all”
  • S.C. Johnson would not have reduced its bid for the target business by $23.6 million had it known of the diversion because its bid already was $63.4 million below its calculated valuation for the entire target business and because the purchase price that S.C. Johnson paid was within the range of purchase prices authorized by its board of directors
  • the overall target business sales and operating profit reported in the first full calendar year after the Acquisition were $45 million and $14 million, respectively, above what S.C. Johnson had anticipated.^[22]

In summary, while the Third Circuit’s reversal of Judge Farnan’s holding regarding fraudulent misrepresentation rendered his DIV Damages holding of no precedential import, his findings described above may still be instructive to an insured that is evaluating the assertion of DIV Damages as part of an RWI claim, particularly if calculated using a DCF Methodology.

The Case in Which the Buyer’s Assertion of Synergistic Losses Was Rejected: NetApp v. Cinelli

This brings us to the 2023 Delaware Chancery Court case of NetApp, Inc. v. Cinelli.^[23] NetApp involved the sale by Albert E. Cinelli and other equity holders of Cloud Jumper, LLC, a company that provided virtual desktop infrastructure, storage, and data management across cloud-based programs, to NetApp, Inc., for a purchase price of $35 million.^[24]

After holding that the target Cloud Jumper had committed R&W Breaches and fraud with respect to a number of representations and warranties in the Acquisition Agreement, centered around Cloud Jumper’s failure to disclose that it had been recording internal software transactions as if they were sales to unrelated external customers, Vice Chancellor Will devoted the remainder of her opinion in NetApp to the appropriate measure and quantification of damages to NetApp with respect to the R&W Breaches and fraud.^[25]

Both NetApp and Cinelli proposed an award of DIV Damages based on the difference between the value of Cloud Jumper as represented and the value of Cloud Jumper after giving effect to the R&W Breaches and fraud. What makes the NetApp case unusual and therefore significant is that the buyer NetApp chose not to treat the purchase price it had paid to acquire Cloud Jumper as the value of Cloud Jumper as represented,^[26] but instead chose to treat a DCF Methodology valuation of the future synergistic value to NetApp of Cloud Jumper as the value of Cloud Jumper as represented.^[27] In essence, NetApp was contending that Cloud Jumper was worth more to NetApp than the purchase price NetApp paid to acquire Cloud Jumper because of the synergies that NetApp anticipated achieving in the future operation of Cloud Jumper as part of NetApp (discounted to present value by the application of a discount factor).

It is important to note that Vice Chancellor Will did not simply reject out of hand NetApp’s assertion that Cloud Jumper was worth more to NetApp than it had paid to acquire Cloud Jumper because of such synergies. Instead, Vice Chancellor Will found that NetApp’s synergistic DCF Methodology valuation of Cloud Jumper did not satisfy applicable Delaware M&A damages law, both because (i) the valuation was speculative, and thus did not meet the certainty limitation of applicable law,^[28] and because (ii) the loss of synergies that NetApp was asserting was not the proximate result of the R&W Breaches and fraud committed by Cloud Jumper, at least not in its entirety.^[29]

After rejecting NetApp’s assertion of synergistic DIV Damages of $37.7 million calculated using a DCF Methodology, Vice Chancellor Will did award NetApp DIV Damages of approximately $4.6 million, based on the difference between (i) the purchase price paid by NetApp to acquire Cloud Jumper, treating that as the as-represented value of Cloud Jumper, and (ii) the defendants’ expert’s calculation of the actual value of Cloud Jumper using a multiple of revenues methodology derived from guideline comparable public companies’ stock values and reported revenues.^[30]

NetApp continues to stand as the preeminent case under Delaware M&A damages law rejecting an assertion of lost synergies as DIV Damages.

Practice Tips for Attorneys for Insureds

In the policy arrangement and negotiation phase, consider the following:

• Ensure that “diminution in value,” “multiple of EBITDA,” “multiplier damages,” “lost profits,” or the like are not excluded by the definition of Loss in the policy or in an exclusion to the policy (whether or not set forth in the “Exclusions” clause of the policy).
• Ensure that any provision in the Acquisition Agreement that purports to disclaim or waive “diminution in value,” “multiple of EBITDA,” “multiplier damages,” ”lost profits,” or the like, or “consequential” or “indirect” damages or the like, is excluded from application under the policy (for example, as “Limitation Provisions” to be disregarded for purposes of the policy).
• Try to ensure that the mitigation provision of the policy only requires “mitigation to the extent required by law” or the like, and that reasonable costs and expenses incurred in pursuing mitigation efforts are treated as Loss under the policy.^[31]

This article is the second in the RWI Practice Insights series by John T. Capetta.

1. This article focuses on buyer-side RWI policies and U.S. law (principally Delaware case law). For purposes of this article:

   • DIV Damages are a form of expectation damages in which the amount of the damages is the difference between (i) the value of the target business as represented to the buyer, almost always the purchase price paid for the target business by the buyer, and (ii) the value of the target business after giving effect to the diminution in the target business resulting from a breach of the Acquisition Agreement representations and warranties (“R&W Breach”) or from fraudulent misrepresentation or deceit regarding the target business.
   • Although there are other methods to calculate DIV Damages, this article focuses on those calculated by using either (i) in the case of a multiple of EBITDA methodology (“MOE Methodology”), (a) an actual or deemed shortfall in the EBITDA of the target business for a specified measurement period (“Measurement Period EBITDA”) caused by the R&W Breach or the fraudulent misrepresentation or deceit, times (b) the multiple applied by the insured to the Measurement Period EBITDA in determining the purchase price to pay for the target business; or (ii) in the case of a discounted cash flow methodology (“DCF Methodology”), the loss of future cash flows and of terminal value over a specified period caused by the R&W Breach or the fraudulent misrepresentation or deceit, discounted to present value by the application of a discount factor.
   • As used in this article:
     • the term Loss has the definition set forth in the RWI policy;
     • the term Acquisition Agreement includes stock purchase agreements, merger agreements, asset purchase agreements, and other types of business combination agreements by which a buyer acquires a target business from a seller;
     • the term Acquisition refers to the business combination contemplated by the Acquisition Agreement;
     • the term the buyer and the term the insured are often used interchangeably;
     • the term target and the term target business are used interchangeably;
     • the term R&W Breach also includes a claim under an RWI policy with respect to a tax indemnification provision in the Acquisition Agreement; and
     • the phrase without required disclosure by the seller refers to a failure by the seller to make a disclosure to the buyer even though required to do so by a representation and warranty in the Acquisition Agreement.

   ↑

2. At least two of the leading Delaware M&A damages law cases involving DIV Damages calculated using a DCF Methodology concerned a holding of fraudulent misrepresentation or deceit with respect to noncontractual representations regarding the target business, with the court also holding that no breach of representation or warranty in the Acquisition Agreement had occurred relevant to DIV Damages. Although the M&A damages case law regarding DIV Damages applies to either a breach of representation and warranty in the Acquisition Agreement or to fraudulent misrepresentation or deceit with respect to a noncontractual representation regarding the target business, an RWI claim can only be made with respect to an R&W Breach covered by the RWI policy. ↑

3. The phrase “discounted cash flow methodology” is used here and subsequently in this Part II rather than the defined term “DCF Methodology” to differentiate the use of that methodology to calculate damages in contexts not involving the calculation of DIV Damages, such as the calculation of lost anticipated profits. ↑

4. This distinction between DIV Damages and lost profits damages can be critical in a situation in which the Acquisition Agreement contains a waiver by the buyer of “lost profits” or “consequential or indirect damages.” See, e.g., Powers v. Stanley Black & Decker, Inc., 137 F. Supp. 3d 358, 385–86 (S.D.N.Y. 2015) (under New York M&A damages law, DIV Damages are not “lost profits” or “consequential or indirect damages”). Note, however, if such a waiver is not applicable to recovery under an RWI policy, and the policy itself does not exclude such damages, this distinction may not be relevant to the insured. ↑

5. For example, as will be discussed in Part III and Part IV of this article, the requirements for and the limitations on DIV Damages are addressed in cases under Delaware M&A damages law involving DIV Damages calculated using either type of methodology, MOE or DCF. ↑

6. Tam v. Spitzer, No. 12538, 1995 WL 510043 (Del. Ch. Aug. 17, 1995). ↑

7. Id. at *12. ↑

8. Id. Forensic accountants often refer to this as running the DCF analysis “with” and “without” the revenues or expenses in question to ascertain the difference. ↑

9. Id. (citations omitted). ↑

10. Id. ↑

11. Id. ↑

12. Id. ↑

13. For an example of a recent case involving the use of a DCF Methodology to calculate DIV Damages, see Surf’s Up Legacy Partners, LLC v. Virgin Fest, LLC, No. N19C-11-092, 2024 WL 1596021 (Del. Super. Ct. Apr. 12, 2024). ↑

14. S.C. Johnson & Son, Inc. v. DowBrands, Inc., 294 F. Supp. 2d 568 (D. Del. 2003), rev’d on other grounds, 111 F. App’x 100 (3d Cir. 2004). ↑

15. S.C. Johnson, 294 F. Supp. 2d at 576–77, 594. ↑

16. Id. at 577. ↑

17. S.C. Johnson, 111 F. App’x 100, 108–10. ↑

18. S.C. Johnson, 294 F. Supp. 2d at 593–94 (citations omitted). ↑

19. Id. at 594. ↑

20. Id. at 595–96. ↑

21. Id. at 588. ↑

22. Id. at 594–95. ↑

23. NetApp, Inc. v. Cinelli, No. 2020-1000, 2023 WL 4925910 (Del. Ch. Aug. 2, 2023). ↑

24. Id. at *1, *5. The NetApp opinion did not identify one specific methodology by which the purchase price was calculated. ↑

25. Id. at *17. ↑

26. Id. Indeed, the buyer NetApp unsuccessfully argued that using the purchase price it paid to acquire Cloud Jumper as the as-represented value of Cloud Jumper would only measure NetApp’s out-of-pocket damages, not its expectation damages. Id. ↑

27. Id. at *17, *21. ↑

28. Id. at *23–26. ↑

29. Id. at *26–27. ↑

30. Id. at *29. Because Cloud Jumper was not profitable, an MOE Methodology could not be used. ↑

31. It is a judgment call whether or not to try to expressly include in the RWI policy’s mitigation provision the treatment of costs and expenses incurred in unsuccessfully attempting to mitigate losses as Loss covered by the policy. Particularly if applicable law may allow for the recovery of such costs and expenses, discretion may be the better part of valor in resisting trying for such an express inclusion since it may only cause the RWI carrier or its counsel to expressly exclude such costs and expenses. ↑

Editors

Senior Assistant Editor

Assistant Editor

Editorial Assistant

Contributors

Introduction

This year we have seen notable updates to trade secret and employee mobility laws, with a continued trend toward limiting noncompete agreements and expanding legislative efforts to regulate restrictive covenants across various industries. These changes highlight the ongoing development of trade secret and restrictive covenants laws in response to the continued shift towards a globalized market. To that end, 2024 saw updates to trade secret laws addressing key issues impacting the use of restrictive covenants with respect to healthcare professionals. While Rhode Island banned noncompete agreements for advanced practice registered nurses, other states clarified the enforcement of restrictive covenants in this industry.

Updates in this area have clarified the parameters of trade secret protection, particularly concerning the interstate application of state noncompete laws and the Federal Trade Commission’s April 2024 Final Rule. Various Circuits and courts have declined to uniformly restrict noncompete agreements, instead issuing rulings that reinforce state-specific approaches to enforceability, choice-of-law provisions, and geographic limitations.

As businesses navigate the increasing complexities of the marketplace, the evolving framework for trade secrets and employee mobility laws provides critical guidance for businesses in safeguarding their valuable assets. This Trade Secrets and Employee Mobility chapter provides an overview of the key developments for 2024, highlighting the implications for businesses and practitioners.

First Circuit

In 2024, two notable cases came out of the First Circuit. The first case resulted in the largest trade secret verdict to date under the Defend Trade Secrets Act (DTSA). The second case challenged California’s authority to invalidate noncompete agreements signed outside the state. On the legislative front, Rhode Island banned noncompete agreements for advanced practice registered nurses (see R.I. Gen. Laws § 5-34-50). However, the governor vetoed a bill that would have prohibited all noncompete agreements. Similarly, Maine’s governor vetoed legislation that would have significantly restricted the use of noncompete agreements.

In Insulet Corp. v EOFlow, Co. Ltd., No. 23-11780-FDS (D. Mass. 2024), a Massachusetts jury awarded $452 million in damages to Insulet in a trade secret misappropriation case. Insulet is the maker of a wearable insulin pump called OmniPod. In 2017, six employees left to join EOFlow, a maker of wearable drug delivery systems. EOFlow’s competing product, EOPatch 2, was released in South Korea in 2019, and Europe in 2022. Insulet inspected the EOPatch 2 in February 2023, concluded that its trade secrets related to OmniPod’s design history, CAD files, and occlusion detection algorithms were misappropriated, and promptly filed suit against its former employees and EOFlow.

Insulet faced a significant statute of limitations hurdle. In 2018, Insulet attended a conference where the EOPatch 2 was demonstrated. However, the jury found that the limitations clock did not start ticking until Insulet inspected the device in 2023.

The damages award is also notable for two reasons other than its dollar amount. First, it demonstrates the ability under the DTSA to recover damages based on sales of infringing products outside of the U.S. when “an act in furtherance” of misappropriation occurs in the U.S. Second, the jury was asked to provide an advisory opinion on the amount of punitive damages that should be awarded for willful and malicious misappropriation. While the decision to award punitive damages and their amount is often reserved for the judge, juries are increasingly being asked to provide advisory opinions on these matters.

California law’s ability to invalidate a noncompete agreement negotiated, performed, and governed by the law of another state was tested for the first time in Draft Kings, Inc. v. Hermalyn, 118 F. 4th 416 (1st Cir. 2024). Hermalyn, a DraftKings, Inc. executive, left for a similar position with rival Fanatics, Inc. that required him to live and work in Los Angeles. The Massachusetts federal district court found Hermalyn’s noncompete agreement with DraftKings was enforceable under Massachusetts law (the agreement had a Massachusetts choice of law provision) and enjoined him from competing against DraftKings. Hermalyn appealed, arguing that California law should apply because he had become a California resident. Unlike Massachusetts law, California bans noncompetes “regardless of where the contract with signed” and “whether . . . the employment was maintained outside of California.” See Cal. Bus. & Prof. Code §16600.5(a), (b). If applicable, California law would have invalidated Hermalyn’s noncompete. The First Circuit Court of Appeals affirmed the application of Massachusetts law, concluding that California did not have a materially greater interest in pursuing its noncompete public policy. This case raises questions about whether simply relocating an employee to California can effectively invalidate an otherwise enforceable noncompete agreement executed outside of California.

Second Circuit

In 2024, the Second Circuit did not significantly change how courts address noncompete and trade secret litigation. However, three New York cases stood out.

New York

Restrictive Covenants

Spotlight Ticket Management, Inc., et al. v. James Daigle, No. 23-CV-10035 (JPO), 2024 WL 3966900 (S.D.N.Y. Aug. 28, 2024). Spotlight Ticket Management (“Spotlight”) and SSSI Acquisition, Inc. (“SSSI”) sued James Daigle (“Daigle”), a former Spotlight employee, for breach of contract, breach of the implied warranty of good faith and fair dealing, and tortious interference with prospective business relations based on Daigle’s alleged violations of restrictive covenants that were part of a sale of business as well as an employee separation agreement. The Court granted in part and denied in part Daigle’s motion to dismiss. The Court reasoned that Daigle incorrectly interpreted BDO Seidman v. Hirschberg, 93 N.Y.2d 382 (1999) to “impose an affirmative pleading requirement, insisting that a plaintiff seeking to enforce a restrictive covenant ‘plead[ ] . . . an absence of overreaching [or] coercive use of dominant bargaining power[,] or show that it has in good faith sought to protect a legitimate business interest’ when BDO Seidman imposes no such rule.” (internal citation omitted).

Non-Recruitment Clause

St. Joseph’s Hospital Health Center v. American Anesthesiology of Syracuse, P.C., et al., No. 5:24-CV-276 (BKS/ML), 2024 WL 4930688 (N.D.N.Y. Dec. 2, 2024). St. Joseph’s Hospital Health Center (“St. Joseph’s”) sued American Anesthesiology of Syracuse, P.C., American Anesthesiology, Inc., NMSC II, LLC, and North American Partners in Anesthesiology, L.L.P. (collectively “NAPA”), asserting antitrust claims under the Sherman Act, 15 U.S.C. § 1 et seq. and the Donnelly Act, N.Y. Gen. Bus. Law § 340 as well as a breach of contract claim based on a non-recruitment clause in the parties’ business agreement. NAPA subsequently filed counterclaims alleging breach of contract, tortious interference with a contract, and claims for injunctive and declaratory relief. The Court granted in part and denied in part St. Joseph’s motion to dismiss counterclaims and denied NAPA’s partial motion to dismiss.

The Court explained that in the Second Circuit a “restrictive covenant preventing an employee from pursuing his livelihood” differs from an “anti-raiding provision in a commercial agreement between two sophisticated parties,” and that anti-raiding provisions/non-recruitment clauses are typically more reasonable. Omni Consulting Group, Inc. v. Pilgrim’s Pride Corp., 488 F. App’x 478, 480 (2d Cir. 2012). The Court concluded that the nonsolicitation clause at issue here posed a hardship and “[w]hether the non-solicitation clause at issue here was reasonable will rest ‘on the particular facts and circumstances giving context to the agreement.’” Reed Elsevier v. TransUnion Holding Co., Inc., No. 13-cv-8739, 2014 WL 97317, at *7, 2014 U.S. Dist. LEXIS 2640 (S.D.N.Y. Jan. 8, 2014) (quoting BDO Seidman).

Misappropriation of Trade Secrets

Rocket Pharmaceuticals., Inc. v. Lexeo Therapeutics, Inc., et al., No. 23-CV-9000, 2024 WL 3835264 (S.D.N.Y. Aug. 14, 2024). Rocket Pharmaceuticals, Inc. (“Rocket”) sued Lexeo Therapeutics, Inc. (“Lexeo”) and two employees that left Rocket to work at Lexeo. Rocket asserted trade secret misappropriation under the Defend Trade Secrets Act (“DTSA”), 18 U.S.C. § 1836(b)-(c), and New York law. Rocket also asserted breach of contract against the individuals, tortious interference with contractual relations against Lexeo, and unfair competition against all defendants. The Court denied Lexeo and the employees’ motion to dismiss. Although the Second Circuit has yet to define the required specificity for trade secret misappropriation claims, the Court found the complaint appropriately identified the purported trade secrets and related misappropriation by plausibly alleging the employees transferred thousands of emails and documents containing identified trade secrets to their personal computer, person email, and USB drives prior to leaving Rocket.

Third Circuit

Over the last year, the Third Circuit has seen two significant developments in the laws relating to employee mobility and restrictive covenants.

Beginning on January 1, 2025, Pennsylvania’s Fair Contracting for Health Care Practitioners Act went into effect. While limited in scope, the Act has a major impact: prohibiting most new noncompete covenants for “health care practitioners” after the Act’s effective date. As defined by the Act, covered “health care practitioners” includes medical doctors, osteopaths, certified registered nurse anesthetists, certified registered nurse practitioners, and physician assistants. However, the Act includes several exceptions, including most notably, a carveout allowing for enforcement of noncompete covenants covering health care practitioners so long as the noncompete does not last for more than one year and the health care practitioner was not fired by the employer.

Outside of the statutory realm, the Third Circuit saw a major decision regarding the enforceability of certain restrictive covenants. In January 2024, the Delaware Supreme Court issued its ruling in Cantor Fitzgerald, L.P. v. Ainslie, ultimately finding that “forfeiture for competition” clauses are enforceable. Cantor Fitzgerald, L.P. v. Ainslie, 312 A.3d 674, 692 (Del. 2024). The Court reasoned that such clauses are not actually a restraint of trade, and instead, they are actually a “condition precedent” which excuses the employer from future payment obligations. Cantor Fitzgerald, L.P., 312 A.3d at 687. The Court also noted that because forfeiture for competition clauses are not a restraint of trade, they do not need to meet Delaware’s regular standards for enforcing a restrictive covenant, which includes a review whether such restrictive covenants are “reasonable in geographic scope and temporal duration, advance legitimate economic interests of the party seeking enforcement, and survive a balancing of the equities.” Cantor Fitzgerald, L.P., 312 A.3d at 684.

Fourth Circuit

The Fourth Circuit has seen some developments relating to noncompetes in the last year. In 2023, Maryland prohibited noncompete and conflict of interest clauses in employment contracts for workers earning 150 percent or less of the minimum wage. In 2024, the state expanded these prohibitions through HB 1388, which targeted such provisions in employment contracts for licensed veterinary practitioners, veterinary technicians, and licensed health care professionals providing direct patient care. On June 1, 2024, the law voided any noncompete and conflict of interest provisions in employment contracts for licensed veterinary practitioners and technicians. Restrictions on such clauses for health care professionals providing direct patient care are divided by salary and apply to all contracts executed on or after July 1, 2025. These provisions will be unenforceable for such professionals earning salaries of $350,000 or less. For healthcare professionals earning salaries exceeding $350,000, these provisions will no longer be enforceable if they exceed one year from the last date of employment or have a geographic scope of greater than 10 miles from the professional’s primary place of employment. Finally, for healthcare professionals earning salaries exceeding $350,000, employers will be required to inform patients upon request of a former employee’s new place of practice.

The Fourth Circuit also had a notable case relating to the misappropriation of trade secrets. In Pegasystems Inc. v. Appian Corp., No. 1399-22-4 (July 30, 2024), a jury had found that Pegasystems, Inc. (“Pegasystems”) had used improper means to misappropriate trade secrets from Appian Corporation (“Appian”). The jury awarded over two billion dollars—the largest damages verdict in the history of the Commonwealth of Virginia. Pegasystems appealed, contending that as a matter of law, there was insufficient evidence that it had misappropriated any trade secrets. While the Court of Appeals of Virginia rejected Pegasystems’ argument that it was entitled to judgment as a matter of law, the appellate court found that “the trial court committed a series of errors that require [the court] to reverse the judgment as to Appian’s trade secret claims.” First, the appellate court noted that the trial court improperly instructed the jury as to Appian’s burden in demonstrating damages causation from the misappropriation by instructing the jury to apply a burden-shifting approach. This created a presumption that Appian’s trade secrets were the but-for cause of all of Pegasystems’ sales. Second, the appellate court found that the trial court erred in foreclosing Pegasystems from presenting its own damages evidence as to total sales, which was consequential given the burden-shifting instruction on damages. The appellate court concluded that this “exponentially increased the likelihood of a runaway damages verdict that had no correlation to proximate cause.” The appellate court remanded this matter for a new trial. While this case is under the Virginia Uniform Trade Secrets Act, it is instructive as to the use of jury instructions and evidentiary issues in trade secret cases.

Fifth Circuit

The Fifth Circuit was closely watched this past year for noncompete law because of the high-profile case Ryan, LLC v. Federal Trade Commission (FTC), No. 3:24-CV-00986 (N.D. Tex. Aug. 20, 2024). This case challenged the enforceability of the FTC’s April 2024 Final Rule, which sought to ban post-employment noncompete agreements nationwide. The U.S. District Court for the Northern District of Texas held that the FTC lacked statutory authority to promulgate such a rule and that the rule was arbitrary and capricious under the Administrative Procedure Act. The court enjoined enforcement of the Final Rule nationwide, but the FTC has appealed this ruling to the Fifth Circuit.

Two Louisiana Court of Appeal decisions provided further guidance on the enforceability of restrictive covenants in Louisiana. In Arthur J. Gallagher & Co. v. Annison, So.3d 1089 (La.App. 1 Cir., 2024), the court clarified that a prospective employee may sign a noncompete agreement if it expressly contains an effective date on or after the employee’s first day of work. In Brown & Root Industrial Services, LLC v. Farris, 392 So.3d 424 (La.App. 1 Cir., 2024), the court held that a nonsolicitation of employees provision is not subject to the Louisiana noncompete statute but must be reasonable in duration and scope to be enforceable. The court concluded that the nonsolicitation of employees covenant at issue was unenforceable because it lacked any durational limit.

Louisiana enacted new noncompete legislation (S.B. 165; Act 273, modifying La. Rev. Stat. § 23:921; eff. Jan. 1, 2025), which limits noncompetes for primary care physicians to three years from the effective date of the initial agreement and five years for all other physicians. Noncompetes also cannot exceed two years from the termination of employment and are limited to the parish of principal practice and two contiguous parishes where the employer carries on a similar business. Mississippi and Texas saw failed legislation that would have limited the use of noncompetes for healthcare providers and physicians, respectively, although the Texas legislation is expected to be reconsidered.

Two Texas federal district court cases showed the importance of secrecy efforts and ensuring clarity in settlement agreements to protect trade secrets. In Thompson Safety LLC v. Jones, No. 4:24-cv-2483 (S.D. Tex., Sept. 6, 2024) the court ruled against the plaintiff, a fire extinguisher servicing business, in its motion for a preliminary injunction. The court found that the alleged trade secrets, including pricing information and customer lists, were ascertainable through publicly available sources. Specifically, the customers freely disclosed prices they paid for plaintiff’s services, and the relationship between the plaintiff and customers must be disclosed on tags attached to fire extinguishers that the plaintiff installs or services. In MSHB Restaurant, LLC v. Nepal Business Investment, LLC, No. 4:24-cv-1973 (S.D. Tex., Nov. 15, 2024) the court allowed the plaintiff to amend its complaint to add a fraudulent concealment claim and denied the defendants’ motion to dismiss. The court found that the misappropriation of trade secrets claims were not time-barred because the alleged misappropriation occurred after a prior settlement agreement; thus there was no continuing misappropriation of settled claims. Additionally, the court rejected defendants’ argument that the settlement agreement’s broad release covered future claims, emphasizing that the agreement did not grant permission to use plaintiff’s trade secrets.

Sixth Circuit

Over the past year, the Sixth Circuit rendered notable verdicts pertaining to trade secret and employee noncompete statutes.

The Sixth Circuit recently addressed the interplay between the Ohio Uniform Trade Secrets Act (OUTSA) and breach of contract claims. A recurring issue of the Uniform Trade Secrets Act (UTSA) has been whether violations of the UTSA can be alleged alongside breach of contract claims or whether the UTSA preempts breach of contract claims, given that the statute is meant to provide an exclusive legal remedy for the misappropriation of trade secrets. In Metron Nutraceuticals, LLC. v. Cook, No. 23-3596, 2024 WL 3877388 (6th Cir. Aug. 20, 2024) the Sixth Circuit addressed this question when a nutritional supplement company sued defendants for both violating the OUTSA and breach of contract. The supplement company had developed a supplement, which it asserted to be a trade secret, then made various consultants sign a nondisclosure agreement before sharing details of the supplement with them. Metron alleged that one consultant, Cook, developed a product that appropriated its proprietary formula. The trial court dismissed the breach of contract claim on summary judgment because of preemption by OUTSA. But the Sixth Circuit reversed. The Sixth Circuit found that because the language of OUTSA allows for breach of contract remedies, it would be impractical and untenable for the statute to preempt breach of contract claims. The appellate court also took into consideration the primary aim of the UTSA as a means of creating consistency across states, and how the trial court’s interpretation would have made Ohio an outlier in this regard. The Sixth Circuit’s ruling reaffirmed the significance of breach of contract claims for protecting trade secrets.

Additionally, the Sixth Circuit made a long-awaited ruling upon the NLRB’s McLaren Macomb decision. Nat’l Lab. Rels. Bd. v. Macomb, No. 23-1335, 2024 WL 4240545 (6th Cir. Sept. 19, 2024). In June 2020, the McLaren Macomb hospital had furloughed 11 employees and directly discussed terms of severance agreements with them without first bargaining or consulting their union. While an Administrative Law Judge ruled that the broad confidentiality and nondisparagement provisions in these severance agreements were lawful, the NLRB ruled otherwise. The NLRB decided that nondisparagement clauses in severance agreements with nonsupervisory employees violate Section 7 of the National Labor Relations Act, which protects the right of employees to engage in concerted activity for their mutual aid and protection. The Sixth Circuit took up the review of the NLRB’s decision this year. The Sixth Circuit easily affirmed that the hospital’s actions were unlawful. But it decided this based on only violations of the employees’ Section 7 rights, without taking a stance on the pressing question of the case: the validity of the severance language itself. The Sixth Circuit did not resolve whether confidentiality and nondisparagement clauses in severance agreements are valid. This remains an uncertainty which employers will want to consider when drafting language in their severance agreements. The NLRB may continue to find broad confidentiality and nondisparagement clauses in severance agreements to nonsupervisory employees to be unlawful, given that the Sixth Circuit did not explicitly decide otherwise.

Seventh Circuit

Over the past year, the Seventh Circuit has seen expanded protections for employees against post-employment restrictive covenants through case law, as well as newly enacted laws. Illinois recently amended the Illinois Freedom to Work Act to include amendments that limit the enforceability of noncompetes and nonsolicits in specific industries. First, under Senate Bill 2737, noncompetes and nonsolicits for mental health professionals serving veterans and first responders are unenforceable if it “is likely to result in an increase in cost or difficulty for any veteran or first responder seeking mental health services.” Second, Senate Bill 2770 provides that noncompetes and nonsolicits are void with respect to individuals employed in construction, whether the individual is covered by a collective bargaining agreement or not. These amendments are effective as of January 1, 2025. Similarly, in 2023, Indiana enacted a law restricting the enforceability of both existing and future noncompetes for physicians that became effective July 1, 2023.

The Indiana Court of Appeals recently considered whether a former executive’s noncompete was enforceable where it prohibited her from working for any competitor in any capacity. In MED-1 Solutions, LLC. V. Taylor, No. 24A-PL-450, 2024 WL 4876906 (Ind. Ct. App. Nov. 25, 2024), the employer brought an action against a former COO alleging breach of the covenant not to compete. The noncompete agreement barred the former COO—in plain language, the court noted—from becoming employed in any role for a business that performs the same services as MED-1. The court rejected this language and found the covenant unenforceable because, inter alia, the scope of activity restricted was overly broad. Notably, the court emphasized, “We have found covenants not to compete prohibiting an employee from working for a competitor in any capacity or from competing with portions of the business with which the employee was never associated to be unreasonable because they extend beyond the scope of the employer’s legitimate interests.”

In Midwest Lending Corp v. Horton and PrimeLending Co. (220 N.E.3d 422, 468 Ill. Dec. 114), an Appellate Court of Illinois weighed in on the heavily litigated issue of what constitutes valid consideration for a post-employment restrictive covenant to be enforceable. In this case, the employer—Midwest—brought suit against a former employee for the breach of a confidentiality agreement and a nonsolicitation agreement. Midwest’s argument, inter alia, was that a pre-employment “signing bonus” constituted valid consideration for the nonsolicitation agreement. The court rejected this argument, finding that there was no consideration because the nonsolicitation agreement itself expressly limited the scope “to the subject matter hereof” instead of expressly mentioning and identifying the pre-employment payment as consideration.

In a recent case, Motorola Solutions, Inc. v. Hytera Communications Corporation Ltd, 108 F.4th 458 (7th Cir. July 2, 2024), the Seventh Circuit Court of Appeals held that the Defend Trade Secrets Act (“DTSA”) has extraterritorial reach and that the law applies to conduct occurring outside of the U.S. if “an act in furtherance of the offense was committed in the United States.” In this case, Motorola filed suit against Hytera, a Chinese competitor. Its claims, which included violations of the DTSA and the Illinois Trade Secrets Act, stemmed from Hytera’s hiring of multiple engineers from Motorola, who allegedly stole trade secrets and source code on their way out the door, and then used the stolen information and code to create competing products. At trial in the Northern District of Illinois, a jury awarded compensatory and punitive damages, which were subsequently reduced by the district court. Hytera appealed as to damages. The appellate court held, as a matter of first impression, that the DTSA does apply extraterritorially so long as “an act in furtherance of the offense was committed in the United States,” and allowed Motorola to recover Hytera’s foreign sales on that basis. In its ruling, the court noted that while an act in furtherance of the offense needed to be committed in the U.S. to allow for recovery of foreign sales, the act in furtherance need not be a “completed act of domestic misappropriation” and the rule did not “impose a specific causation requirement.”

Additionally, in My Fav Electronics, Inc. v. Currie, 24-c-1959, 2024 WL 4528330 (N.D. Ill. Oct. 18, 2024), a district court in Illinois complicated matters on the topic of whether inevitable disclosure relief is available under the DTSA. The inevitable disclosure doctrine seeks to protect trade secrets by providing a legal remedy—the court may prevent a former employee from working in a position where it is deemed inevitable that trade secrets from their previous employer will be revealed or used. In this case, the former employees joined a competitor, and strong evidence indicated the use of the previous company’s confidential information. The Court found that the inevitable disclosure doctrine supported granting a preliminary injunction on the defendant, even though the parties did not negotiate a noncompete agreement.

Eighth Circuit

Over the past year, the Eighth Circuit has seen expansion in statutory movements against noncompete and nonsolicitation laws. Yet, courts have stayed the course without rapidly increasing or decreasing the enforcement of such restrictive covenants.

In 2023, Iowa expanded its noncompete laws to cover mental health professionals. See Iowa Code § 135Q.1. In 2024, House File 2391, a bill proposing modifications of requirements for healthcare employment agencies, would have applied Iowa’s noncompete laws to health care technology platforms. Though it died in committee, the bill would have prohibited healthcare agencies that utilize technology platforms to deliver their services from restricting the employment opportunities of agency workers through noncompete clauses. H.F. 2391, 90th Gen. Assemb. (2024). In May 2024, Governor Walz of Minnesota approved S.F. 3852, which functions to ban service providers from restricting, restraining, or prohibiting customers from directly or indirectly soliciting or hiring an employee of the service provider. Minn. Stat. § 3852 (2024). The bill primarily targets staffing agencies and grants customers the ability to hire employees they were connected with through an agency.

There are a couple of interesting cases that have been decided in 2024. In Cigna Corp. v. Bricker, 103 F.4th 1336 (8th Cir. 2024), the Eighth Circuit took on the question of whether businesses can be deemed to be in competition if they are serving virtually the same customers but have separate business models. Bricker, an accomplished executive, changed teams when she moved from Cigna Corporation to CVS Pharmacy, Inc. in 2023. Id. at 1341. Cigna immediately moved to block her transition, as she had signed a noncompete agreement during her time at Cigna. Id. at 1342. The fight was centered on the question of whether Cigna and CVS could actually be considered business competitors—Cigna focuses on home-delivery of prescription medications while CVS is a brick-and-mortar pharmacy. Id. The Eighth Circuit ultimately upheld the noncompete agreement, finding that even though there may have been an attempt to distinguish the types of customers that both businesses serve, the customers they were competing for were in fact drawn from the same base. Id. at 1345.

In Constructors, Inc. v. Butler, No. 4:22-CV-3217, 2024 U.S. Dist. LEXIS 57432, at *13 (D. Neb. Mar. 29, 2024), the District of Nebraska dismissed a Racketeer Influenced and Corrupt Organizations Act (“RICO”) claim based on allegations of trade secret theft. Plaintiffs, Constructors, Inc. and NEBCO Inc., filed suit against Ted Butler, a former corporate officer, and his alleged accomplices, accusing them of misappropriating confidential information. Id. at *3–6. After resigning from his position, Butler allegedly took confidential documents and proprietary information from plaintiffs to assist in the establishment of a new company he joined after his resignation. Id. at *3. Plaintiffs claimed that defendants, leveraging the stolen information, engaged in a series of fraudulent activities to divert business away from plaintiffs, thereby breaching their fiduciary duties and stealing corporate opportunities. Id. at *3–6. The central focus of the motion to dismiss was the plaintiffs’ RICO claim, which alleged that the defendants’ actions—specifically the theft of trade secrets and other fraudulent schemes—constituted a racketeering activity. Id. at *11–12. The court found that the plaintiffs’ RICO claim lacked sufficient allegations of continuity. Id. at *11. RICO plaintiffs must demonstrate not just isolated instances of illegal conduct, but either (1) a continuous and ongoing pattern of criminal activity over time or (2) a pattern of related criminal activity that occurred over a period of time lasting at least one year. Id. at *11. While plaintiffs argued that the defendants’ repeated misuse of stolen trade secrets qualified as this pattern, the court disagreed. Rather, the court found that plaintiffs’ vague allegations amounted to isolated acts that did not constitute criminal racketeering activity, let alone a pattern of criminal racketeering activity. Id. at *12. As a result, the RICO claim was dismissed.

Ninth Circuit

Case law in the Ninth Circuit remains largely unchanged with respect to matters regarding employee mobility, restrictive covenants, and trade secrets. That said, there were two matters of first impression around the awarding of damages in trade secret cases that were addressed by courts in the Ninth Circuit during 2024:

In Applied Medical Distribution Corp. v. Jarrells, 100 Cal.App.5th 556 (2024), the California Court of Appeal for the Fourth District addressed whether a plaintiff may recover the costs of stopping or mitigating the misappropriation of trade secrets under the California Uniform Trade Secrets Act. There, the defendant objected at trial to the plaintiff’s damages expert’s inclusion of $80,000 in fees the Plaintiff paid to its forensic computer expert in the calculation of the plaintiff’s damages. The trial court sustained the objection on the ground that “expert fees traditionally and typically are not an item of damage that is recoverable in litigation, but rather, it’s a cost of the litigation, which may or may not be recoverable at the end of the case by the prevailing party.” Id. at 587.

The Court of Appeal noted that “[n]o California case addresses whether ‘actual loss caused by misappropriation’” under California’s UTSA “includes the cost of investigating trade secret misappropriation,” and that the UTSA’s permitting of “an award of costs to include fees paid to retained experts to prepare for or testify at trial after a ‘willful and malicious’ finding” was a “strong indication that the Legislature did not intend such fees to be awarded as ‘actual loss[es]’ caused by misappropriation” under the California UTSA.

Additionally, the Court noted that there was a nationwide split on whether expert fees are awardable as “actual loss” damages: “A number of courts in other jurisdictions, applying the Uniform Act, have drawn a distinction between expenses incurred to investigate a possible misappropriation and expenses incurred to stop or mitigate the misappropriation, and have held only the latter are recoverable damages.” By contrast, “[o]ther jurisdictions have held that any expenses incurred to investigate potential misappropriation are recoverable as ‘actual loss’ damages.” Id. at 588–99.

Ultimately, the Court of Appeals adopted the narrower interpretation and held that “a plaintiff may recover, as damages on a claim of misappropriation under the California UTSA, the costs of stopping or mitigating the misappropriation, but not the costs of investigating to determine whether and how any misappropriation occurred.” Id. at 590.

In EchoSpan, Inc. v. Medallia, Inc., 2024 WL 3431337 (N.D. Cal. July 2, 2024), the U.S. District Court for the Northern District of California addressed whether plaintiff must apportion damages among trade secrets. According to the Court, this was an issue on which “[t]he Ninth Circuit has not ruled.” There, following an 8-day trial, EchoSpan proved that Medallia misappropriated one of EchoSpan’s trade secrets and the jury awarded EchoSpan over $25 million. The issue was that EchoSpan had sued over nine separate trade secrets (two of which never went to the jury) and sought damages for them all as one group. The Court concluded that the jury could not distill damages for the whole group of nine down to one because EchoSpan had failed to apportion those damages. Consequently, the Court granted Medallia’s motion for judgment as a matter of law on damages.

In reaching this conclusion, the Northern District embraced the ruling in O2 Micro Int’l Ltd. v. Monolithic Power Sys., Inc., 399 F.Supp.2d 1064 (N.D. Cal, 2005), aff’d, 221 F.App’x 996 (Fed. Cir. 2007)—calling it “a near-perfect bullseye”—and distinguished the matter from Caudill Seed & Warehouse Co. v. Jarrow Formulas, Inc., 53 F.4th 368 (6th Cir. 2022) on the grounds that the evidence submitted fell “far short of the ‘options’ presented” to the jury there. Id. at *9.

Outside of damages, courts also addressed the application of statutes in Washington and Oregon to noncompete provisions in employment agreements:

In Culver v. 3M Company, 2024 WL 2279293 (W.D. Was. May 20, 2024), the U.S. District Court for the Western District of Washington concluded that amendments to RCW §49.62.080 that went into effect in June 2024 do not appear to apply retroactively.

In Isosceles Holdings, LLC v. Alliance Environmental Group, LLC, 2024 WL 279008 (D. Or. Jan. 25, 2024) the U.S. District Court for the District of Oregon held that ORS § 15.360 was not designed to override a choice of law provision and apply to make all noncompetition agreements voidable.

Beyond these matters, however, the applicable law remained relatively unchanged.

Tenth Circuit

The Governor of Colorado signed House Bill 24-1324, titled “Attorney General Restrictive Employment Agreements,” putting into place a law to toughen protections for employees who are subject to unreasonable contracts that require repayment to employers for education and training expenses upon termination of employment (Training Repayment Agreement Provisions, or “TRAPs”). The new law, effective as of August 7, 2024, attempts to curb potential abuses by employers who use TRAPs to exact repayments or employ penalties that are not reasonably tethered to the actual training expenses incurred by the employer. Potentials for abuse typically occur when an employer attempts to collect amounts in excess for the investment cost in training the employee, seeks repayment well after the training was completed, demands repayment where training provided did not result in transferrable skills to another employer (no actual certification for the employee), or imposes burdensome repayment terms. The new law expands upon previous restrictions in the state of Colorado for TRAPs and increases penalties for violating agreements. Specifically, the new bill considers TRAPs to be a “consumer credit sale” under Colorado Consumer Credit Code (which imposes specific requirements and enforcement mechanisms), grants the Attorney General enforcement authority and the ability to promulgate rules to implement and enforce the new bill, and provides recovery that may be three times the amount of the attempted recovery by the employer.

A court in the Tenth Circuit state of Oklahoma underscored that plaintiffs must provide clarity when asserting a trade secret claim in the case of Double Eagle Alloys, Inc. v. Michael Hooper; Ace Alloys, LLC, 19-cv-243-JDR-CDL (N.D. Okla. June 25, 2024). Here, plaintiff filed against a former employee and a competitor, alleging that the employee’s notes from his time working for plaintiff, as well as over 2,600 digitally downloaded files, constituted trade secrets. Although litigation lasted for over five years, the Northern District of Oklahoma ultimately dismissed plaintiff’s lawsuit, citing decisions from several circuits (including the 1st, 7th and 10th Circuits) to assert that vague, overly inclusive “catchall” language to describe what constitutes a trade secret did not evidence the need for afforded protections. The Oklahoma court further reasoned that the lack of specificity would allow plaintiffs to “shift[] the goalposts (or fail[] to define them)” during litigation and would render defendants ineffective, as the ability to defend becomes virtually unbounded. The case is now on appeal before the U.S. Court of Appeals for the Tenth Circuit, whose review may very well set the tone for how meticulous trade secret claims will need to be moving forward.

Eleventh Circuit

Employment and Noncompete Agreements

In 2023, the Eleventh Circuit affirmed a Georgia district court’s decision to “blue pencil,” i.e., judicially rewrite, a noncompetition agreement by altering its geographic scope. Baldwin v. Express Oil Change, LLC, 584 F. Supp. 3d 1253, 1266 (N.D. Ga. 2022) aff’d in relevant part and vacated in part, 87 F.4th 1292 (11th Cir. 2023). A year later, in Acousti, a Georgia district court refused to blue-pencil a seemingly comparable noncompete to alter its geographic scope, averring that it had “inadequate information about the scope of Acousti’s business,” and that doing so “would require rewriting the [n]on-[c]ompete [c]lause or supplying additional material terms,” which the court was unwilling to do. Acousti Engr. of Fla. v. Jernigan, No. 1:23-CV-02917-VMC, 2024 WL 4535279, at *6 (N.D. Ga. Aug. 27, 2024). The Acousti opinion is thus at least somewhat at odds with the broad language the Eleventh Circuit used in affirming Baldwin in 2023, where it emphasized that “Georgia common law bolsters our conclusion that the district court’s blue-pencil authority authorized it to reduce the geographic scope of the covenant.”

On the state side, the Georgia Supreme Court determined, in a landmark ruling, that restrictive covenants can be “geographically reasonable” within the meaning of the Georgia Restrictive Covenants Act (“GRCA”) without explicit geographic limitations. North American Senior Benefits, LLC v. Wimmer, 319 Ga. 641 (2024). Previously, Georgia courts had interpreted that requirement of the GRCA to mean that boundary-less restrictive employment covenants were inherently unreasonable. See, e.g., CarpetCare Multiservices v. Carle, 347 Ga. App. 497, 819 S.E.2d 894 (2018) (holding as unenforceable a provision that did not have an express geographic restriction). In Wimmer, the Georgia Supreme Court unanimously applied a different standard for reasonableness of a geographic competition limitation. Specifically, the Court held that the question of whether a given covenant is reasonable in geographic area under the GRCA “is not dependent on whether its geographic scope is expressly stated,” but instead turns on the individual facts and circumstances of each case. Wimmer, 319 Ga. at 649. This decision meaningfully relaxes the restrictions on drafting an enforceable restrictive covenant under Georgia law.

Trade Secrets

In a long-running dispute between a life insurance software company and its competitors, the Eleventh Circuit affirmed the district court’s determination that the competitors misappropriated the company’s trade secret, its database of insurance quotes. In Compulife Software Inc. v. Newman, the Eleventh Circuit affirmed the district court’s conclusion that the misappropriators used improper means to acquire Compulife’s trade secret by “scraping,” i.e., using software to automatically extract data. 111 F.4th 1147 (11th Cir. 2024). The court explained that, although “scraping” (and its related concept “crawling”) are often used perfectly legitimately, the defendants improperly “copied the order of Compulife’s copyrighted code and used that code to commit a scraping attack,” thereby using improper means to acquire the trade secret. And although the exact number of stolen insurance quotes (and therefore the total percentage of the database stolen) could not be determined, the evidence of record showed that in the months after the scraping attack, Compulife’s revenue and number of recurring customers declined. This was enough, in the Court’s view, to affirm the district court’s finding that the defendants had indeed acquired Compulife’s trade secret. In a partial win for Compulife,^[1] the Eleventh Circuit therefore affirmed that the defendants were jointly and severally liable for their misappropriation of Compulife’s trade secret. Compulife’s win, however, was not without a drawback. Compulife had sought repayment from one of the defendant’s insurers under an agreement that required the insurer to indemnify the defendant for certain conduct. In a related case released the same day, the Eleventh Circuit explained that the relevant insurance agreement only obligated the insurer to indemnify the misappropriation defendant for negligent acts. But because the court had determined the defendant’s acts were intentional, Compulife could not seek payment from the defendant’s insurer under that agreement. Compulife Software Inc. v. Zurich Am. Ins. Co., No. 22-12909, 2024 WL 3618439 (11th Cir. Aug. 1, 2024).

DC Circuit

Key employee mobility cases over the past year in the District of Columbia could best be summed up as “back to the basics,” serving as a reminder of the importance of careful drafting when pleading claims in litigation based on trade secrets, noncompetes, and confidential information, as well as when crafting enforceable liquidated damages provisions related to restrictive covenants in employee contracts.

Litigation involving myriad legal claims related to employee mobility issues continued in Clevinger v. Advocacy Holdings, Inc., 2024 U.S. Dist. LEXIS 120712 (D.D.C. July 10, 2024), a case in which Advocacy’s CEO had resigned to join a competing company, resulting in Advocacy obtaining a TRO that was extended three times. In this decision, the court delivered a series of rulings on dueling motions to dismiss multiple noncompete and trade secret causes of action, providing reminders of key standards for setting forth viable claims that can withstand early dismissal. These include the following: (1) The D.C. Non-Compete Clarification Amendment Act of 2022 only regulates noncompetes executed “on or after October 1, 2022,” not before that date; (2) the two basic elements of trade secret misappropriation—the existence of trade secrets and their misappropriation—are identical under the federal Defend Trade Secrets Act and the D.C. Uniform Trade Secrets Act, and Advocacy properly alleged both by pleading that its former CEO took confidential plans to redesign an online platform and customer “contact lists” when he resigned and started a competitor company; (3) a claim specifically under subsection (a)(5)(A) of the federal Computer Fraud and Abuse Act does not turn on proper access to protected computers, but punishes intentionally causing damage without authorization as the CEO was alleged to have done by deleting multiple company user accounts and associated email, files, calendar entries and contacts; and (4) the D.C. Consumer Protection Procedures Act applies only to consumer-merchant relationships and authorizes suits only by consumers or organizations acting on their behalf, none of which was involved in this case.

In HIRECounsel DC, LLC v. Connolly, 2024 U.S. Dist. LEXIS 134835 * (D.D.C. July 31, 2024), the District Court granted summary judgment against HIRECounsel, a legal staffing firm, against its former Managing Director of Client Relations who had signed a one-year noncompete agreement, resigned, and days later began work with a competitor. Yet the court rejected the claim for liquidated damages based on breach of Connolly’s noncompete agreement as an unenforceable penalty. Liquidated damages clauses are enforceable under D.C. law if they are crafted to have a reasonable relation to any probable damage that would follow a breach—typically based on the former employer’s lost profits—as of the time the parties contracted. Yet HIRECounsel’s contract simply stated liquidated damages would be “significant and difficult to ascertain” and set forth the arbitrary amount of $40,000 per breach along with alternative calculations “unmoored” from any relationship to lost profits. Separately, no genuine issue of material fact existed as to whether HIRECounsel could establish actual damages on its claims for breach of noncompete and confidentiality provisions and for misappropriation of trade secrets under the D.C. Uniformed Trade Secrets Act. No proof existed to show that HIRECounsel suffered damages, including no showing that Connolly’s involvement at the competitor with certain HIRECounsel clients had impacted its business, or that such clients were exclusive to HIRECounsel, and no testimony that a client had stopped working with HIRECounsel and gone to Connolly’s new employer. All claims were dismissed, and the case closed.

1. Although the Eleventh Circuit affirmed the district court’s favorable determinations for Compulife related to the trade secret issues, the court remanded the case in part for the district court to further address issues of copyright infringement. ↑

Editor

Contributors

§ 5.1. Introduction

Laws and regulations relating to cannabis and the cannabis industry continue to evolve at a rapid pace. The current state of cannabis law is both confusing and complex. In order to put the latest developments in context, an explanation of the current state of the law regarding marijuana is in order.

The starting point is the Controlled Substances Act, 21 U.S.C. § 801 et. seq. (“CSA”), passed in 1970 to regulate the manufacture, use, and distribution of certain controlled substances for medical, scientific and industrial purposes and to prevent these substances from being used for illegal purposes. The CSA classified various drugs and chemicals into five categories, or schedules. Marijuana, along with heroin, cocaine, LSD and other substances, was placed on the most restrictive schedule, Schedule 1. The CSA prohibits the manufacture, distribution, sale possession or use of marijuana. The Drug Enforcement Agency has agreed to review the current scheduling of marijuana from Schedule 1 to less restrictive Schedule 3. Hearing on rescheduling originally slated to take place in December 2024 have been delayed until 2025. In the meantime, different groups have sued the DEA both to stop rescheduling and to challenge being excluded from the hearings.

The CSA also operates to prohibit the transportation of marijuana across state lines, even between states that have passed laws legalizing marijuana, as well as international borders, so the interstate and international transportation of marijuana remains illegal.

Despite the existence of the CSA, as of today, forty-one states plus the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands have laws legalizing marijuana for medical use, and twenty-four of those states, plus D.C. and Guam have legalized marijuana for recreational use, as well. According to one source, 54% of the US population lives in states with legal recreational adult use marijuana and 74% of the US population lives in states where marijuana is legal for either medial or recreational use. There have been some setbacks, however. In the 2024 election cycle, legislation to legalize adult use marijuana failed in Florida, North Dakota and South Dakota. Since the CSA is the law of the land, the question remains as to how states can “legalize” marijuana consistent with the preemption doctrine.

The laws relating to marijuana and hemp became very complicated at the end of 2018, with the passage of the Agricultural Improvement Act of 2018, also known as the Farm Bill. One provision of the Farm Bill legalized hemp at the federal level. It is important to understand that both hemp and marijuana come from the same species of plant, Cannabis sativa L., and both were included in the definition of marijuana in the CSA. Both marijuana and hemp contain a number of chemical compounds, the two most known of which are THC (the psychoactive compound) and CBD. The legal difference is that hemp contains less than 3% THC. Part of the confusion revolves around the other chemical compound, CBD, which is extremely popular and ubiquitous in the marketplace. CBD comes from both hemp and marijuana. Further complicating the situation is that there is no standard for measuring THC content in a cannabis plant, so what might be classified as hemp by one state might be classified as marijuana by a different state.

One development that has further complicated the laws regarding hemp is the emergence of intoxicating hemp, hemp from which psychoactive substances are derived to create a variety of intoxicating consumer products. Federal law on intoxicating hemp is unclear, and states are all over the place in how they deal with intoxicating hemp products.

While hemp is technically legal under federal law, the Food and Drug Administration maintains jurisdiction over hemp (and therefore CBD) to the extent it is marketed as a food or dietary supplement or as a drug. The FDA, however, declined to issue regulations on CBD as a food supplement due to what it referred to as “safety concerns.” Also, the state statutory and regulatory framework for hemp and CBD derived from hemp remains very confusing and is rapidly evolving.

This section will focus on recent case law developments in cannabis.

§ 5.2. Bankruptcy

In re Callaway, 663 B.R. 109 (Bankr. N.D. Cal. 2024)

Date: June 26, 2024

Facts: On February 12, 2024, an individual Debtor filed for chapter 7. The bankruptcy estate largely only included ownership of cannabis dispensaries and claims for distributions from one of the cannabis dispensaries. The bankruptcy estate did not list any tangible assets that bear a connection to marijuana that are covered by the CSA and does not include the Debtor’s post-petition income from the marijuana business. Creditor and United States Trustee for Region 17 filed Motions to Dismiss the case pursuant to 11 U.S.C. 707(a) alleging only that the chapter 7 trustee cannot lawfully administer assets in this case because the Debtor’s business involves cannabis and thus administration would violate the Controlled Substances Act.

Held: The Court denied the Dismissal Motions.

Reasoning: The Court finds there is no basis for dismissal from chapter 7 where the only cause asserted is that the Debtor owned interests in marijuana businesses when he filed and thus the chapter 7 trustee will have difficulty administering the bankruptcy estate. The Court further reasons that the possible sales of intangibles related to marijuana, but not directly referenced in the Controlled Substances Act, such as contractual rights, domain names relating to marijuana and ownership interests in LLCs, are not enough to bar the debtor from chapter 7 relief as they are not necessarily equivalent to administering marijuana assets. For the ownership interest in the marijuana businesses that Debtor holds singly, the Court reasons that since the Debtor is the named operator of the marijuana business, the trustee may cease operations. For the ownership interests where the Debtor is a minority owner, the Court reasons that (i) the potential sale of a membership interest in an LLC is just that rather than the proceeds of a marijuana business; and (ii) a claim for proceeds are a claim for entitlements owed to holder of ownership interests rather than a claim for proceeds of marijuana business. The Court buttresses this decision by explaining that under California law, shareholders only have an expectancy interest in corporate property and earnings. The Court also distinguishes this case from other chapter 7 cases by reasoning that (i) the Debtor does not receive rental income from the marijuana business; (ii) the Debtor does not cultivate marijuana; and (iii) the trustee would not have to administer tangible marijuana assets held by the businesses.

In re Blumsack, 657 B.R. 505 (B.A.P. 1st Cir. 2024)

Date: March 5, 2024

Facts: A United States Trustee (UST) objected to the confirmation of a Chapter 13 plan filed by a debtor who was a cannabis dispensary worker in Massachusetts. Particularly, the debtor’s filed plan proposed paying off creditors with funding sourced by his income from working at the dispensary. The UST moved to dismiss the case, arguing that the debtor was engaged in criminal activity proscribed by the federal Controlled Substances Act (CSA) by virtue of his employment in the marijuana industry. The United States Bankruptcy Court for the district of Massachusetts denied the confirmation and dismissed the case. The debtor appealed.

Held: Motion to Dismiss affirmed, but not for reasons based on the categorical prohibition of individuals employed in the cannabis industry seeking Chapter 13 relief.

Reasoning: The nature of a debtor’s employment in the cannabis industry, by itself, does not categorically render the debtor unable to file a Chapter 13 petition in good faith, for plan-confirmation purposes. This is because Congress has not articulated a “zero-tolerance” policy that requires dismissal of a bankruptcy case involving violation of the CSA. However, a Chapter 13 plan must be filed in good faith. Here, the debtor lacked good faith in his plan proposal, which consisted of paying creditors a certain amount every month that was funded by his income from his work at the dispensary. This proposal was not in good faith because the plan would have placed the UST in the untenable position of knowingly administering assets derived from illegal activity under federal criminal law. In fact, bankruptcy relief is generally unavailable where the trustee will be required to possess and administer assets that are illegal under the CSA or constitute proceeds of activity criminalized by the CSA.

Furthermore, when given the chance to re-file the proposal with a different means of funding the plan than his income from the dispensary, the debtor failed to provide alternative sources of funding. Thus, the plan proposal was not proposed in good faith and the bankruptcy court did not abuse its discretion in denying the debtor an opportunity to file a modified plan. In sum, although the bankruptcy court erred in fashioning a rule of law that categorically prohibits an individual employed in the cannabis industry from seeking Chapter 13 relief, this debtor’s case was properly dismissed for cause.

§ 5.3. Contracts

BRCC Enters. LLC v. Skie, 697 S.W.3d 417 (Tex. App. 14th 2024)

Date: August 13, 2024

Facts: Defendant orally agreed to pay Plaintiff a $100,000.00 bonus if Plaintiff harvested 1,400 pounds of dry cannabis crop. Defendant did not honor the agreement and Plaintiff sued for breach of contract. The trial Court found that Defendant breached the contract and ordered $100,000.00 in damages. On appeal, Defendant asserted the contract is void under the illegal contract defense.

Held: Trial court decision reversed.

Reasoning: The Court of Appeals of Texas found that the contract is illegal under federal law and is therefore unenforceable. The Court reasoned that the contract is illegal because the Plaintiff contracted to manufacture marijuana, an activity which is illegal under the Controlled Substances Act (CSA). The Court noted that the legality of manufacturing marijuana under Oregon law is irrelevant because Oregon law itself gives the Controlled Substances Act preemptive authority. This means the contract could not be performed legally and is therefore unenforceable in the absence of an exception. The pari delicto exception was found to be inapplicable because both parties knew that manufacturing marijuana was illegal when they entered into the contract.

The public policy exception was found to be inapplicable because Congress has a strong public policy underpinning the Controlled Substances Act. The public policy set forth by Congress is to protect general health and welfare by conquering drug abuse and controlling the traffic in controlled substances. Plaintiff alleges that the public policy exception should still apply because the difference between the federal government’s de jure and de facto public policy renders federal public policy ambiguous. The Court rejects Plaintiff’s assertion of ambiguity in the federal public policy for two reasons. First, Plaintiff incorrectly treats discretionary acts by members of the executive branch as alterations in public policy. The Court explains that Congress is the final authority as to public policy. Second, the acts of Congress that Plaintiff asserts establish ambiguity relate only to medical marijuana and thus do not apply to recreational marijuana cases like this one.

Plaintiff asserts that the illegality defense should be limited to cases where it is the remedy sought that requires a violation of law. The Court found this argument to be inconsistent with Texas law. In Texas, if the illegal act and contractual obligation to pay are inseparable, then they “must fall together.” As the Court explains, the right to payment here arose from the manufacture of marijuana. Furthermore, the Court rejected Plaintiff’s argument that the contract should be enforceable to prevent BRCC from obtaining a windfall. The reasoning is that Texas illegality law does not grant much weight to the windfall argument when the parties are in pari delicto.

Finally, Plaintiff cites cases where federal courts held that the illegality of the marijuana business is not a valid defense to a Fair Labor Standards Act (FLSA) claim. The Court distinguishes these cases by reasoning that this is not a FLSA claim and the FLSA does not require this bonus. Rather, the obligation to pay arises from a contract and the illegality defense does apply to contract cases.

HMLL LLC v. MJM Holdings Limited, 558 P.3d 1006 (Colo. Ct. App. 2024)

Date: August 8, 2024

Facts: Plaintiff set up a plan to avoid the residency requirement in the Colorado marijuana regulatory regime without changing its domicile. The plan was organized as follows: (i) a resident owner obtained the marijuana license; (ii) the resident owner owned and operated the business on paper; (iii) Plaintiffs (domiciled in Florida) provided the funding and actually ran the business; and (iv) the parties agreed that Plaintiff would buy the business if and when the Colorado Marijuana Enforcement Division (MED) approved them for their own licenses in Colorado. MED was only aware that Plaintiff was an unsecured creditor of the business. In 2018, Plaintiff replaced the resident owner with the Defendants who agreed to the same terms. The Defendant filed a change of ownership application that explained Plaintiff’s intent to acquire the company. The MED withheld approval until Plaintiff’s future ownership was removed. The approved application contained an unsecured promissory note for the purchase price. When the residency requirement was lifted, Defendants refused to transfer the business to Plaintiff. Lawsuits ensued. The trial court denied all relief to both parties. Plaintiff appealed the Trial Court’s decision to (i) apply the doctrine of unclean hands to preclude equitable relief and (ii) decline to enforce the promissory note on the basis of illegality.

Held: The decision of the trial court to deny relief is affirmed.

Reasoning: The Court upholds the Trial Court’s decision to deny equitable relief based on the doctrine of unclean hands. The Court rejected Plaintiff’s defense that they were relying on the advice of their counsel because their attorney advised them of the risks. Plaintiff also argued tha the doctrine of unclean hands is inapplicable because they were merely an unsecured creditor rather than an illegal undisclosed owner. The Court finds that Plaintiff was an undisclosed owner reasoning that (i) the Plaintiff acted as the owner in practice; (ii) the Plaintiff’s behavior falls under the relevant Colorado regulations’ definition of owner and (iii) the agreement of the parties entitled Plaintiff to ownership rather than repayment of the debt. Finally, Plaintiff argued that the Trial Court’s decision creates a substantial injustice because it grants the Defendants, who were also wrongdoers, a substantial windfall. The Court rejects this argument by reiterating that equitable remedy is not available to a party with unclean hands.

The Court upholds the decision of the trial court to deny enforcement of the promissory note. The Court applies the rule that agreements which violate the law or a regulatory scheme are unenforceable because their enforcement would violate public policy. The Court considers the promissory note to be such an agreement because it was essential in furthering the illegal arrangement that violated the Colorado regulatory scheme and therefore cannot be separated from it.

Bartch v. Barch, 111 F.4th 1043 (10th Cir. 2024)

Date: July 29, 2024

Facts: The Parties were partners in a marijuana business licensed to operate in Maryland. Creditor relinquished his ownership in the business after Debtor agreed Creditor would be able to rejoin later. Debtor did not uphold this agreement and blocked Creditor’s efforts to rejoin. Creditor sued for breach of contract. Debtor did not assert the defense of contract illegality and the district court found Debtor liable for breach of contract. Creditor was awarded a judgment of $6.4 million against Debtor.

When Debtor failed voluntarily to pay any of the damages, Creditor sought enforcement of the judgement in the District Courts for the District of Maryland and the District of Colorado. On May 9, 2023, the District Court of Colorado ordered Debtor to (i) sell their equity interests in the business; (ii) direct the proceeds to Debtor until the judgment is satisfied and (iii) not take any action that would undermine value. On June 29, 2023, Debtor appealed the District of Colorado’s judgment enforcement order.

On September 5, 2023, Debtor moved the district court to reconsider the judgment under Federal Rule of Civil Procedure 60(b)(4). The Court denied the motion. Debtor also appeals this judgment.

Held: The district court’s original judgment reconsideration order is upheld. The district court’s judgment enforcement order is remanded to district court.

Regarding the judgment enforcement order, the Court rejects Debtor’s arguments that Creditor lacks standing and the district court lacked authority. However, the Court vacates the order and remands for the district court to consider whether the order violates public policy.

Reasoning:

Original Judgment Reconsideration Order

Debtor argues that the Court should find the original judgment was void because Creditor lacked standing as the redress sought would violate the Controlled Substances Act. The Court rejects this argument and upholds the original judgment reasoning that finality relief is available only for a total want of jurisdiction or a violation of due process. The Court rules that Debtor’s argument is not actually a standing argument. Rather, Debtor is just trying to frame the contract illegality defense as a standing issue to make it fit as a lack of jurisdiction. The Court rules that Debtor’s failure to assert the contract illegality defense before is not a reason to reverse the district court’s decision. In addition, the Court reasons that the standing argument fails because: (i) Creditor had standing and (ii) the judgment does not require Debtor to violate the law because it does not specify the damages must be paid from a particular source.

Judgment Enforcement Order

Debtor argues the district court lacked authority to enter the judgment enforcement order under C.R.C.P. 69(g) for two reasons. The first is that a charging order is the exclusive remedy for applying LLC member’s equity interest to a judgment. The Court finds that the case law is unclear and decides that the Colorado Supreme Court would not find that a charging order is the exclusive remedy. The second argument Debtor makes is that they lacked sufficient control over the business’s equity for the court to order them to divest it since they cannot freely divest it. The Court finds that Debtor has sufficient possession as actual possession is not required under C.R.C.P. 69(g) and the order accounted for their limitations.

Debtor appeals from the judgment enforcement order arguing that Creditor lacked standing because the order would violate the Controlled Substances Act. The Court rules that the Creditor meets the test for standing and notes that the property specified in the order does not affect standing.

The Court rejects Debtor’s argument that Creditor lacked standing because the order would violate the Controlled Substances Act by reasoning that the Creditor meets the test for standing. The Court notes that the property specified in the order does not affect standing.

Debtor also alleges that the order violates the CSA and therefore would violate public policy. The Court decides that while the order does not specifically require the Debtor to cultivate, sell or process marijuana in violation of the CSA, more information is needed to decide if the order would effectively require them to do so. The Court acknowledges that the order would be invalid if the district court finds the order violates public policy. The Court notes that the requirement not to undermine value of the equity may require Debtors to cultivate, process or sell marijuana.

Subsequent Developments: As of January 2025, the remand is still under consideration by the Colorado Trial Court. At present, the Colorado trial court has taken these actions to resolve the case: (i) held a status conference that ended with an order requiring the parties to submit briefs; (ii) ordered that if Debtor liquidates any of his interests or the business’ holdings then the proceeds from that liquidation must be given to Creditor and (iii) ordered Debtor not to encumber their interests in the business. On December 17, 2024, the United States District Court for the District of Maryland granted the Creditor’s motion for release of funds held in Court’s registry and denied Creditor’s request for a rehearing as moot.

Bartch v. Barch, 721 F.Supp.3d 380 (D. Md. 2024)

Date: March 5, 2024

Facts: The facts are the same as above. When Debtor failed to make voluntary payments for the damages, Creditor sought enforcement of the judgement in the District of Maryland. The Court granted Creditor a charging order against Debtor’s membership interests in the business on May 16, 2023. Debtor moved to vacate the charging order.

Held: Debtor’s motion is denied.

Reasoning: Debtor argues that the Court lacked subject matter jurisdiction to enter the charging order directing the business to give Debtor’s payments to Creditor because those payments come from the sale of a federally illegal substance. The Court rejects this argument because (i) Debtor’s cited case law is not applicable; (ii) Creditor has standing and (iii) even if Courts could not enforced a contract based on a cannabis business, the fact that the order is related to cannabis does not preclude the court from enforcing a valid judgment of another court.

The Court rejects Debtor’s claim that the charging order is an extraordinary circumstance that merits relief under 60(b)(b) because it facilitates ongoing violations of the CSA and thus relief is necessary to accomplish justice. Their reasoning is that the lack of agreement among courts on how to treat cases concerning marijuana businesses that are legal in their states does not rise to the level of an extraordinary circumstance.

§ 5.4. Federal vs. State Law

Fejes v. Fed. Aviation Administration, 98 F.4th 1156 (9th Cir. 2024)

Date: April 22, 2024

Facts: Fejes, a Federal Aviation Administration (FAA) licensed pilot and owner of an Alaskan marijuana cultivation facility, transported marijuana by aircraft within Alaska. The consumption and sale of marijuana is legal in Alaska. However, marijuana is still a controlled substance under federal law. In some remote parts of Alaska, aircraft are the only mode of delivering goods, including marijuana. Nonetheless, the FAA revoked Fejes’s pilot certificate under 49 U.S.C.A. § 44710(b)(2), which mandates that the FAA Administrator “shall” revoke a certificate when a pilot knowingly uses an aircraft for an activity punishable by more than a year’s imprisonment under a federal or state controlled substance law. Correspondingly, distributing marijuana via aircraft is a federal crime under 21 U.S.C. § 841(a), punishable by a term of imprisonment for more than one year. Fejes appealed the Administrator’s order to an Administrative Law Judge and the National Transportation Safety Board, admitting that he piloted an aircraft to distribute marijuana within Alaska, but argued that his conduct fell outside of § 44710(b)(2)’s reach. Both respectively affirmed the revocation. Fejes petitioned the ninth circuit court for review.

Held: Petition for Review denied.

Reasoning: The court held that the intrastate transportation of marijuana had sufficient effect on interstate commerce to fall within scope of Congress’ power under the Commerce Clause. This is because the Commerce Clause covers: (1) “the use of the channels of interstate commerce,” (2) the protection of “instrumentalities of interstate commerce,” and (3) “activities having a substantial relation to interstate commerce.” The court finds that “the interstate transportation routes through which persons and goods move” are “channels of commerce.” Similarly, navigable airspace is an interstate route through which goods move. Aircraft is also an instrumentality of interstate commerce. Furthermore, growing marijuana for personal use had a substantial effect on interstate commerce. Thus, this case fell within the scope of § 44710(b)(2)’s reach.

Additionally, Fejes argued that: (1) the FAA abused its discretion by revoking his pilot certificate when his conduct did not fall into enforcement priority categories identified in a memorandum from the then-Deputy Attorney General, on marijuana-related prosecutions; (2) § 44710(b)(2) requires a conviction before the FAA can revoke a certificate; and (3) § 44710(b)(2) requires the individual to know that his or her activity was punishable under the law.

The court found clear fault in all of those arguments. Fejes’s first argument failed because an agency’s enforcement discretion is generally not judicially reviewable. In fact, the court found agencies have enforcement discretion because an agency generally cannot act against each technical violation of the statute it is charged with enforcing. Essentially, an agency is far better equipped than the courts to deal with variables involved in the proper ordering of its priorities; and even upon review of the agency’s actions, the court finds that the FAA did not exceed its statutory power by revoking the pilot license. The second argument failed because the court found that an actual conviction of an activity punishable by more than a year’s imprisonment under federal controlled substances law is unnecessary for certificate revocation. Lastly, the third argument failed because the court concluded that Fejes was not required to know his activity was punishable by law, only that he knowingly engaged in the activity that is punishable. Fejes admitted to knowingly engaging in his act. Accordingly, the FAA’s revocation was not an abuse of discretion.

Cocroft v. Graham, 122 F.4th 176 (5th Cir. 2024)

Date: November 22, 2024

Facts: The owner of a medical-marijuana dispensary and the dispensary itself brought a § 1983 action against the Commissioner of the Mississippi Department of Revenue, the Mississippi Alcoholic Beverage Control Bureau, and the Mississippi Department of Health, in their official capacities. The plaintiffs alleged that Mississippi’s near-total restriction on the advertising of medical marijuana violated the plaintiffs’ First Amendment free speech rights. The plaintiffs claim that Mississippi’s rules prevent them from effectively reaching new customers, informing the public about Mississippi’s medical marijuana program, and informing the public about the dispensary’s location, product, and prices. The plaintiffs revealed that if it were not for the restriction, they would advertise through print, broadcast, and other media. The United States District Court for the Northern District of Mississippi granted the defendants’ Motion to Dismiss. The plaintiffs appealed.

Held: Motion to Dismiss affirmed.

Reasoning: Speech that is commercial receives no First Amendment protection if the underlying commercial conduct is illegal. The court recognized that under Mississippi state law, the sale and use of marijuana for certain medical purposes is authorized. However, the advertisement of medical marijuana is strictly regulated to listings in business directories, appropriate signage on dispensary property, advertisements on the dispensary website, and sponsorship for advocacy events and non-profit charity. However, the plaintiffs took issue with the fact that the state law prohibited dispensaries from advertising and marketing in any broadcast, electronic, and print media. The prohibition against distributing mass text and email communications, displaying medical cannabis products in public view, paying for reviews, and endorsements were also parts of state legislation that the plaintiffs took issue with.

By contrast, the federal Controlled Substances Act (CSA), prohibits the sale of marijuana altogether. Consequently, the Supremacy Clause establishes that federal law supersedes state law. Thus, the CSA is the reigning law in Mississippi, regardless of state law. Therefore, marijuana is illegal in Mississippi, and the state will not face a constitutional obstacle for restricting commercial speech relating to all unlawful transactions concerning the sale of it. In conclusion, the state is authorized to prevent the advertisement of medical marijuana under the Supremacy Clause.

§ 5.5. Patents

§ 5.5.1. Staying Overlapping Patent Claims and Trade Dress Claims

Sunshine Enclosures LLC v. Final Bell Corp., 2:23-cv-08466-CAS (AGRx) (C.D. Cal. Oct. 18, 2024)

Date: October 18, 2024

Facts: Sunshine Enclosures specializes in innovative packaging, and it filed suit against Final Bell for patent infringement of its ’604 design patent, and for trade dress infringement over the same design. Final Bell offers outsourcing services for packaging and finishing cannabis-infused products using “state-of-the-art hardware and child-resistant packaging.” Final Bell filed for reexamination of the ’604 design patent at the U.S. Patent and Trademark Office (USPTO) based on prior art references not considered before. Final Bell then sought to stay proceedings on all claims in the lawsuit, pending the reexamination of the ’604 patent by the PTO. The parties agreed that the claim for patent infringement should be stayed, but they disagreed about the remaining claims, including those relating to trade dress infringement.

Held: Stay was granted for all claims in the lawsuit because the design patent reexamination would simplify the remaining issues in the case. Trade dress protection requires that the trade dress be unique, which would be addressed by the reexamination of the ’604 design patent.

Reasoning: The Court weighed all of the factors regarding staying litigation: (1) stage of litigation, (2) simplification of issues, and (3) undue prejudice to the non-moving party. In discussing the “simplification of the issues” factor, the Court considered whether the patent claim and the other claims have overlapping issues. The defendant argued that plaintiff’s trade dress claims “arise from the allegedly patented products that are covered under its patent claim” and are thus “intertwined.” In opposition, the plaintiff argued that most of its claims are non-patent related and thus “‘will be completely unaffected by the patent reexamination proceedings.’”

The defendant argued that because the trade dress claims require that the packaging at issue has “acquired distinctiveness, meaning it serves to identify the source of the product,” an invalidation of the patent due to prior art “implies that the design was already known and in use before the patent was filed.” Plaintiff argued the defendant was conflating novelty and obviousness, and that obviousness does not undermine the distinctiveness required for a trade dress claim, as a finding that the design was not novel might. The court found that because the ’604 design patent is for the same packaging that is at issue for the trade dress claims, the patent infringement and trade dress claims are sufficiently related. The Court contrasted the facts of this case with Mophie, Inc. v. uNu Elecs. Inc., 8:13-cv-01705-CAS (JCGx) (C.D. Cal. Dec. 1, 2014), which found that it was “unclear how claims relating to nonfunctional trade dress design elements, packaging, and naming of products [were] ‘intertwined’ with the patents in suit,” which were utility patents, not design patents. Mophie, 2014 U.S. Dist. LEXIS 166930, 2014 WL 6775768, at *7.

§ 5.5.2. Judgement as a Matter of Law and Apportionment by Activities Inside versus Outside the United States

Shopify Inc. v. Express Mobile, Inc., No. 19-439-RGA (D. Del. May 17, 2024)

Date: May 17, 2024

Facts: After a five-day trial, the jury found that Shopify infringed all of the asserted claims and awarded Express Mobile $40 million in damages. Shopify sought judgement as a matter of law (JMOL) for non-infringement of the asserted patent claims and a new trial. The asserted claims related to technology that allows merchants to build their own online websites. While Shopify’s servers are generally in the U.S., Shopify’s servers and stores for Canadian cannabis stores are hosted outside of the United States.

Held:

JMOL motion: Shopify’s JMOL motion was granted. The evidence the jury heard with regard to infringement was unclear, and the Court found that there was insufficient evidence to support a finding of infringement. The Court found that there was insufficient evidence for the jury to find infringement because the evidence did not show that Shopify’s system has a singular UI object that both receives input values and displays output values.

Damages: The revenue from Canadian cannabis stores could be included in the calculation of the $40 million dollar damage award, as the jury could reasonably conclude that Canadian cannabis servers led to a de minimis contribution to Shopify’s total revenues.

Reasoning:

JMOL motion: At the core of the parties’ disagreement is whether a “defined UI object,” as claimed, can include multiple UI objects. “A defined UI object” was not interpreted prior to the trial or raised at the trial, so any argument based on its interpretation was considered moot. Without testimony identifying Shopify’s product pages as “defined UI objects,” the jury had no basis to find that there were any defined UI objects that both received input values and produced output values.

Damages: Since only infringing activities inside the United States are actionable, Shopify argues that the royalty base included revenues from non-infringing conduct, and therefore the damages award was too high. The jury heard evidence that the servers outside of the U.S. were only for restricted goods sold in Canada, so the Court found that they could conclude that if there was any error, and if a proper objection was preserved, the error was de minimis and had no impact on the amount of damages awarded.

§ 5.5.3. Attorney Fees

Townsend v. Brooks Sports, Inc., No. 2:17-cv-01322-LK (W.D. Wash. Mar. 31, 2024)

Date: March 31, 2024

Facts: Herbert E. Townsend sued Brooks Sports, Inc. for infringing claim 1 of his U.S. Patent No. 7,490,416 (the ’416 Patent), which covers a running shoe with a midsole containing a dilatant compound for improved cushioning and energy return. Brooks Sports counterclaimed for a declaratory judgment of noninfringement and invalidity. The case was initially filed in the Middle District of Florida but was transferred to the Western District of Washington. Brooks Sports successfully petitioned for inter partes review (IPR) of the ’416 Patent, and the Patent Trial and Appeal Board (PTAB) found claim 1 unpatentable. The Federal Circuit affirmed this decision.

Held: The court denied Brooks Sports’ motion for over $1 million in attorney fees under Section 285 of the Patent Act. The court found that Townsend’s conduct did not make the case exceptional, which is required for awarding attorney fees.

Reasoning:

Pre-Suit Investigation: The court found that Townsend conducted an adequate pre-suit investigation. His patent counsel performed a good faith infringement analysis based on Brooks Sports’ advertisements and marketing materials, which described the Brooks DNA material in a manner consistent with the ’416 Patent’s dilatant compound.

Strength of Claim 1: Although the PTAB found claim 1 unpatentable, the court noted that not all of Brooks Sports’ challenges to the claim were successful. The court emphasized that the reasonableness of Townsend’s position, not the ultimate outcome, is what matters for determining exceptionality.

Litigation Conduct: The court did not find Townsend’s litigation conduct to be unreasonable. His opposition to the motion to transfer venue was based on a legitimate interpretation of the law, and his actions during discovery were typical of litigation disputes.

Overall, the court concluded that the case did not stand out from other patent infringement cases in a way that would justify awarding attorney fees to Brooks Sports.

United Cannabis Corp. v. Pure Hemp Collective Inc., 66 F. 4th 1362 (Fed. Cir. 2023)

Date: May 8, 2023

Facts: United Cannabis Corp. (“UCANN”) sued Pure Hemp Collective Inc. (“Pure Hemp”) for infringement of its U.S. Patent ’9,730,911 (the “’911 Patent”). The ’911 Patent claims specific formulations of cannabis extracts including THC, defined during claim construction as the decarboxylated form of tetrahydrocannabinolic acid (THCa). Pure Hemp sought an early dismissal on the basis that the asserted claims were invalid under 35 U.S.C. § 101. Pure Hemp argued that the ’911 Patent claimed the natural phenomenon of cannabinoids, terpenes, and flavonoids included in the cannabis plant, and was therefore invalid. However, the District Court denied the motion, finding the ’911 Patent was directed to a non-naturally occurring delivery method of naturally occurring chemicals in non-naturally occurring proportions and concentrations.

The District Court held a Markman hearing and construed the disputed terms of the ’911 Patent’s asserted claims. UCANN filed for bankruptcy shortly after the Markman Order issued. A joint Stipulation of Dismissal, which was silent regarding attorney’s fees, was filed and granted. Pure Hemp then sought attorney’s fees, which were denied. Pure Hemp appealed, seeking reversal on the grounds that the District Court did not find: (1) Pure Hemp to be the prevailing party; (2) the undisputed facts established inequitable conduct; and (3) UCANN’s attorneys had a conflict of interest meriting sanctions.

Held: The Court found that while Pure Hemp was the prevailing party, the case was not exceptional. The District Court was affirmed, and attorney’s fees were denied.

Reasoning: Pure Hemp was found to be the prevailing party because UCANN’s efforts to impose liability on Pure Hemp failed. Pure Hemp rebuffed UCANN’s lawsuit and successfully had the infringement claims dismissed with prejudice. The Court found that dismissal with prejudice has sufficient judicial imprimatur to make Pure Hemp a prevailing party. Because Pure Hemp successfully argued it was the prevailing party, the Court found the appeal was not frivolous. Therefore, UCANN’s request for sanctions was denied. However, the District Court’s mistake in finding Pure Hemp was not a prevailing party was harmless as the case was affirmed as unexceptional.

Pure Hemp explicitly did not ask for any evidentiary hearings on its counterclaim of inequitable conduct—even informing the District Court that Pure Hemp did not seek a hearing. Instead, Pure Hemp pointed to the undisputed facts in an attempt to satisfy its burden. However, the Court identified genuine disputes of facts regarding both elements needed to establish inequitable conduct. The Court of Appeals declined Pure Hemp’s invitation to make its own findings of fact. And so, Pure Hemp’s argument failed.

Pure Hemp’s final argument for reversal was found to be waived because Pure Hemp failed to cite the Rule on which its conflict contention was based before the District Court. Therefore, the Court found the argument was waived. Nevertheless, the Court found the predominant feature of Pure Hemp’s argument was the lack of evidence and noted the argument would have been rejected on the merits.

§ 5.6. Real Estate

Aldot Holding Corp. v. Ninth Ave. Organic Deli & Convenience Corp., 83 Misc. 3d 1269(A) (Civ. Ct. N.Y. Cnty., Aug. 9, 2024)

Date: August 9, 2024

Facts: In this case the court addressed a dispute over the illegal use of leased premises for the unlicensed retail sale of cannabis. Aldot Holding Corporation, the petitioner and landlord (the “Landlord”), sought to recover possession of the premises located at 852 9th Avenue, New York, NY 10019, from the respondent, Ninth Avenue Organic Deli & Convenience Corp. d/b/a Herbal House (the “Tenant”). The Landlord filed a holdover petition on April 22, 2024, alleging that the respondent was using the premises for the unlicensed sale of cannabis. The Tenant filed an answer with counterclaims on May 10, 2024. Both parties moved for summary judgment. The Landlord provided evidence, including affidavits, lease agreements, and photographs, to support its claim of illegal use. The Tenant argued that it had not received proper notice and that the Landlord had waived any default by accepting rent.

Held: The court granted the Landlord’s cross motion for summary judgment, awarding a final judgment of possession of the premises to the Landlord and issuing a warrant of eviction. The Tenant’s motion for summary judgment was denied. The court also dismissed the Tenant’s counterclaims based on a lease provision that waived the right to interpose counterclaims in a summary proceeding for possession. The Landlord’s request for a money judgment was denied without prejudice due to lack of supporting documentation.

Reasoning: The court found that the Landlord had made a prima facie case of illegal use of the premises by providing sufficient evidence, including affidavits and photographs, showing that the Tenant was selling cannabis products without a license. The Tenant failed to produce sufficient evidence to rebut the Landlord’s prima facie case. The court determined that a termination notice was not required for an illegal use proceeding unless a governing regulatory scheme required it, which was not the case here. The Tenant’s argument regarding improper service was rejected due to lack of evidence. The court also rejected the Tenant’s argument that the Landlord waived any default by accepting rent, as the only rent paid was for March 2024. The court found that the Tenant’s illegal use of the premises violated the lease agreement, which required compliance with all laws and regulations, and granted a final judgement of possession of the premises to Landlord and ordered an eviction of the Tenant.

Lasa Extract, LLC v. Town of Suffield Zoning Bd. of Appeals, No. HHD-CV-236166972-S (Conn. Super Ct., Apr. 10, 2024)

Date: April 10, 2024

Facts: In the case the court examined whether the cultivation and processing of cannabis could be considered a lawful continuation of a nonconforming use of property previously used for cultivating and processing hemp. Here, Lasa Extract, LLC and The Crosswalk, LLC (the “Plaintiffs”) owned and operated a property in Suffield, Connecticut, used for cultivating and processing hemp. The property, located in an R-45 residential zone, had been used for manufacturing tobacco products since the 1920s, which was deemed a nonconforming use. In 2019, the town’s zoning enforcement officer (the “ZEO”) determined that processing hemp was similar enough to tobacco processing to be allowed as a continuation of the nonconforming use. Plaintiff then used the property to grow Cannabis sativa L. plants and process them into hemp oil, which initially contained THC levels above 0.3 percent. The THC concentration was then reduced by adding coconut oil to comply with legal limits for hemp. In 2021, Connecticut legalized the adult recreational use of marijuana and established a regulatory regime for licensing the micro-cultivation of cannabis. In 2022, Plaintiff sought to expand its operations to include cannabis cultivation and processing, arguing that it was a continuation of the existing nonconforming use. The ZEO denied this request, and the Zoning Board of Appeals (the “ZBA”) upheld the decision, leading to the Plaintiffs’ appeal.

Held: The court reversed the ZBA’s decision, allowing the plaintiffs to cultivate and process cannabis on the property as a lawful continuation of the existing nonconforming use. The court found that the ZBA acted unreasonably and contrary to law in affirming the ZEO’s determination.

Reasoning: The court’s reasoning focused on whether the cultivation and processing of cannabis would change the character of the property’s use. The court noted that both hemp and cannabis come from the same plant, Cannabis sativa L., and that the only difference between them is the concentration of THC. The court found that the existing process of extracting hemp oil already involved producing cannabis-level THC concentrations, which were then diluted to legal hemp levels. Therefore, the proposed use of the property for cannabis cultivation and processing did not fundamentally change the character of the use. The court decision specifically distinguishes this case from the legal precedent cited by the ZBA, including Salerni v. Scheuy (finding that the permitted sale of beer only in a restaurant does not permit expansion to the sale of all liquors, as they are two kinds of business), Macaluso v. Zoning Board of Appeals (held that the sale of liquor in a package store is an enterprise of substantially greater magnitude than the sale of liquor in a drug store), and Helicopter Associates, Inc. v. Stamford (finding that expansion of a helipad from the unlicensed maximum of 36 flights per year to an unlimited use was deemed a fundamental change to the character of the existing use), but determined that those cases did not support the ZBA’s broad interpretation that differing statutory treatment alone (here, hemp vs. cannabis) constituted a change in character. The court concluded that the administrative record did not contain substantial evidence that cultivating and processing cannabis for wholesale and mail order sales (specifically providing that retail sales would not be permitted) would change the character of the existing nonconforming use and that the ZBA’s decision was unreasonable and contrary to law.

§ 5.7. State Law

Peridot Tree WA Inc. v. Washington State Liquor and Cannabis Control Bd., No. 3:23-cv-06111-TMC (W.D. Wash., Jan. 5, 2024)

Date: January 5, 2024

Facts: Washington established a social equity program designed to award retail cannabis licenses to parties who experienced detrimental impacts when cannabis was illegal in the state. This program assessed candidates based on a set of eligibility criteria and a scoring rubric. To qualify, candidates also needed to have resided in Washington for at least six months. Plaintiff’s application was rejected because he did not meet the residency requirement despite the fact that he was otherwise an ideal candidate for the program. Plaintiff (i) claims the program’s residency program violates the dormant commerce clause because it discriminates against out of state applicants and (ii) moved for injunctive relief to enjoin the Cannabis board from issuing licenses to successful applicants.

Held: Plaintiff’s motion for a preliminary injunction denied.

Reasoning: The Court rejects Plaintiff’s motion for preliminary injunction finding that Plaintiff’s possibility of irreparable harm does not outweigh the hardship to the Defendants, the public and interested parties if the injunction were to pass. First, the Court ruled that it is possible, but not likely that Plaintiff would suffer irreparable harm without the injunction. The only irreparable harm here that might be sufficient is Plaintiff’s argument that a constitutional violation is de facto an irreparable harm. However, the constitutional violation alleged here is that the residency requirement violates the CC. The Court ruled that Plaintiff likely cannot use the dormant Commerce Clause (CC) to assert a constitutional right to participate in the cannabis market because the CC does not protect a right to participate in a federally illegal interstate market. The Court found that the injunction would impose significant harms on the selected applicants of the program.

Cocroft v. Graham, 122 F.4th 176 (5th Cir. 2024)

Date: November 22, 2024

Facts: Plaintiff, a medical-marijuana dispensary, appealed the trial court’s decision to dismiss their First Amendment challenge to the near complete ban on medical marijuana advertisements.

Held: Judgment of dismissal is affirmed.

Reasoning: The Court finds that the Mississippi commercial speech restrictions do not violate the First Amendment because: (i) the First Amendment does not protect commercial speech where the underlying commercial conduct is illegal; (ii) medical marihuana is illegal under federal law and (iii) an activity is not a “lawful activity” for purposes of commercial speech if it violates federal law even where the activity is legal under the applicable state law. The Court rejects Plaintiff’s argument that the First Amendment does not authorize states to exercise its concomitant power to regulate commercial speech related to federally regulated transactions when that state itself has not also independently prohibited the transaction. Their reasoning is that this argument is unsupported by law and that the distinction Plaintiff attempts to draw is constitutionally irrelevant.

§ 5.8. Tax

Robust Missouri Dispensary 3, LLC v. St. Louis County, No. ED112642 (Mo. Ct. App. E.D, Nov. 12, 2024)

Date: November 12, 2024

Facts: The Missouri Constitution provides that “the governing body of any local government is authorized to impose, by ordinance or order, an additional sales tax in an amount not to exceed three percent on all tangible personal property retail sales of adult use marijuana sold in such political subdivision.” In 2023, Plaintiff paid the 3% retail sales tax imposed by the City of Florissant (an incorporated city). Then Plaintiff received a tax change notification letter requiring them to also pay a 3% retail sales tax to St. Louis County. Plaintiff filed a declaratory judgment suit alleging that the Missouri Constitution (i) does not authorize a county to declare an additional sales tax on a dispensary within an incorporated town, city or village and (ii) only allows counties to install retail taxes in unincorporated regions. Defendants filed motions for summary judgment. Plaintiff appealed the circuit court’s ruling that St. Louis County and St. Charles Counties impositions of 3 percent retail sales taxes on marijuana dispensaries in their counties are constitutional under Article XIV of the Missouri Constitution.

Held: The Court reverses the circuit court’s ruling, sustaining the Counties’ motions for summary judgment and overruling Plaintiff’s motion for summary judgment. The Court enjoins the practice of collecting retail sales taxes by multiple local governments.

Reasoning: The Court reverses the circuit court’s judgment, reasoning that “local government” as used in Article XIV of the Missouri Constitution means the village, town or city in an incorporated area and the county in an unincorporated area. The Court further rejects the Defendants’ arguments that the Missouri Constitution makes not only incorporated cities, towns and villages but also counties the local government in incorporated areas and that a county’s ability to tax unincorporated areas should mean that they are able to tax anywhere in their geographical boundaries. The reasoning is that these arguments do not align with the plain language of the section.

Patients Mut. Assistance Collective Corp. v. Comm’r, T.C. Memo. 2024-98 (2024)

Date: October 21, 2024

Facts: Petitioner is a medical cannabis dispensary in the state of California that would have received deductions on its 2016 tax return if not for Section 280E. Petitioner filed a petition for redetermination of its tax deficiency on the basis that (i) Section 280E is not constitutional because it is an unapportioned direct tax or an excessive fine in violation of the Eighth Amendment; and (ii) the Controlled Substances Act is not constitutional when applied to intrastate cultivation and distribution of cannabis that is legal in that state.

Held: The Internal Revenue Commissioner’s motion for summary judgment was granted, and the taxpayer’s motion for summary judgment was denied.

Reasoning: The Court rejected Petitioner’s arguments that 280E and the Controlled Substances Act are unconstitutional based on precedent.

§ 5.9. Trademarks

§ 5.9.1. Unlawful Use and Invalidating Trademark Applications

Ashh Inc. v. DJ Imp. Inc., No. 4:21-cv-03169 (S.D. Tex. Dec. 21, 2022)

Date: December 21, 2022

Facts: Ashh Inc. (“Ashh”) distributes vaporizer pens and batteries under its OOZE trademark. Ashh alleged that DJ Import Inc. (“DJ”) infringed its trademark by offering counterfeit vaporizer batteries and chargers under the trademark OOZE. DJ moved for summary judgment on the grounds that Ashh’s trademark rights were invalid because the goods are used in connection with unlawful products.

The court recognized that the Fifth Circuit has not adopted the “unlawful use” doctrine for trademarks. The doctrine stems from the recognition that trademarks are invalid under the Lanham Act if used in commerce in connection with unlawful goods. And so, the issue was whether Ashh’s goods are illegal under federal law.

The parties disagreed whether Ashh’s goods are “drug paraphernalia” as defined in 21 U.S. Code § 863 (“Section 863”). Drug paraphernalia are illegal goods under federal law.

Held: Motion for summary judgement denied because fact issue existed as to whether Ashh’s goods are drug paraphernalia.

Reasoning: Subsection (d) of Section 863 defines drug paraphernalia as products “primarily intended or designed for use” in manufacturing, ingesting, or inhaling illicit drugs, including marijuana. Subsection (e) of Section 863 lists several factors to determine whether goods are drug paraphernalia including instructions and descriptive materials on the item; advertising concerning the item’s use; the existence and scope of legitimate uses of the item; and expert testimony concerning the item’s use.

The court considered evidence showing Ashh’s OOZE goods are primarily used for ingesting marijuana, including: articles and social media posts showing a connection between OOZE goods and the marijuana industry; the statement of an expert that concluded Ashh’s OOZE goods are primarily used with marijuana; and the fact that Customs and Border Patrol had seized Ashh’s OOZE goods as drug paraphernalia. Ashh alleged that its OOZE goods may be used to consume marijuana. But offered manuals and webpages showing the goods may be used for lawful purposes, e.g., ingesting essential oils and hemp derived CBD. Because an issue of material fact existed as to whether OOZE vaporizers are drug paraphernalia, the court denied DJ’s motion for summary judgment.

§ 5.9.2. Analogous Trademark Use

Cosmic Crusaders LLC v. Andrusiek, No. 2023-1150 (Fed. Cir. Oct. 19, 2023)

Date: October 19, 2023

Facts: Cosmic Crusaders, LLC, and Lewis Davidson (collectively “Appellants”) appealed the final order of the Trademark Trial and Appeal Board (the “Board”) granting Laverne J. Andrusiek’s (“Andrusiek”) petition to cancel Appellants registration for the CAPTAIN CANNABIS trademark for comic books. Appellants argued that the Board erred in determining that the parties had tried the issue of Andrusiek’s analogous trademark use to establish priority in the CAPTAIN CANNABIS mark and the evidence did not support that Andrusiek established priority.

Both parties use the CAPTAIN CANNABIS mark in connection with comic books. Lewis Davidson filed an application for the CAPTAIN CANNABIS mark with the United States Patent and Trademark Office on April 2, 2014, based on intent to use. This allowed Appellants to use the filing date as its constructive first use date, i.e., priority date, of the mark. Conversely, Andrusiek could establish priority as early as 2006 based on analogous trademark use and engaged in actual trademark use in 2017.

Held: The court affirmed the Board’s decision because it found that the Board did not abuse its discretion by considering the analogous trademark use issue and the record supported the findings regarding analogous trademark use.

Reasoning: The court noted that a party may rely on analogous trademark use to establish priority if the uses create an association in the minds of consumers between the mark and the goods despite the absence of “technical” or “actual” trademark use. Andrusiek’s petition to cancel Appellants’ registration included claims of marketing activities, i.e., analogous trademark use, on the one hand and bona fide commercial trade, i.e., technical trademark use, on the other. The Board also read Andrusiek’s reference to “common-law usage” in the petition to encompass both technical and analogous use. Taking the petition as a whole, the court held that Appellants were provided fair notice of the claims at issue. And so, the Board did not abuse its discretion when considering Andrusiek’s analogous use to establish priority.

Appellants also argued that the analogous use was not sufficient to impact the purchasing public and Andrusiek did not engage in actual trademark use within a reasonable time of the analogous use. Regarding the first argument, Appellants relied on Federal Circuit precedent that held a mark displayed to seven customers for a handful of print articles was insufficient to establish analogous use. T.A.B. Sys. v. Pactel Teletrac, 77 F.3d 1372 (Fed. Cir. 1996). But the court noted that T.A.B. emphasizes that direct evidence of a public association is not required and indirect evidence regarding a mark’s use in advertisements, brochures, newspapers, and trade publications may be sufficient to establish analogous trademark use. As to the second argument, Appellants argued that use of the CAPTAIN CANNABIS mark as the title of a single comic book was insufficient for actual trademark use. This is because trademark rights are typically not provided for the title of a single creative work.

The Board had relied on Andrusiek’s use of the CAPTAIN CANNABIS mark at trade shows, in social media posts, and in news and magazine articles associating the mark with Andrusiek to support analogous use. The court determined that the record was amply greater than that in T.A.B. Also, the Board relied on Andrusiek’s use of the CAPTAIN CANNABIS mark on a series of creative works namely, a movie, a screenplay, and a comic book. This led to the conclusion that the mark was used as more than a title of a single creative work and supported actual trademark use. And so, the court held that the Board did not abuse its discretion and affirmed the appeal.

§ 5.9.3. Attorney’s Fees and Non-Exceptional Trademark Claims

Edible IP, LLC v. MC Brands, LLC, No. 20-cv-05840 (N.D. Ill. Sept. 28, 2023)

Date: September 28, 2023

Facts: Edible IP, LLC, and Edible Arrangements (collectively, “Edible”) brought an action for trademark infringement and unfair competition under the Lanham Act against MC Brands, LLC, and Green Thumb Industries Inc. (collectively “GTI”) alleging the GTI infringed Edible’s rights in its EDIBLE and INCREDIBLE EDIBLES trademarks. GTI filed counterclaims requesting a declaration that Edible’s marks were generic and not entitled to trademark protection, its use of edibles was descriptive and therefore non-infringing, and there was no likelihood of confusion between GTI’s use of EDIBLES or INCREDIBLES and Edibles’ marks. The parties entered into a stipulation of dismissal of the case whereby Edible agreed to dismissal with prejudice and GTI agreed to dismissal of its counterclaims without prejudice. Subsequently, GTI moved for an award of attorney’s fees under 15 U.S.C. § 1117(a) (“Section 1117(a)”).

Edible owns several registrations for its EDIBLE mark for fruit, flowers, and candy, and arrangements thereof. It also registered its INCREDIBLE EDIBLES mark for similar arrangements as well as dietary and nutritional supplements. The additional goods were an attempt to enter a new market for CBD. Edibles first applied to register the INCREDIBLE EDIBLES mark in 2015. GTI uses its INCREDIBLES mark in connection with chocolates and candies that contain marijuana. And it alleged to have done so since 2010.

After dismissal, GTI moved for an award of attorney’s fees alleging that Edible’s choice to litigate the matter was objectively unreasonable and Edible’s litigation conduct made the case exceptional.

Held: The motion for attorney’s fees was denied because Edible’s claims were not objectively unreasonable, and its litigation conduct did not make the case exceptional.

Reasoning: Section 1117(a) allows a court to award attorney’s fees to a prevailing party in exceptional cases. The court noted that an exceptional case is one that stands out from others with respect to the substantive strength of a party’s litigation position or the unreasonable manner in which the case was litigated.

GTI argued that Edible’s litigation position was objectively unreasonable because Edible: did not have rights in the cannabis industry at the time of filing of the lawsuit, knew the term “edible” was generic in the cannabis industry, did little to promote its goods between 2010 and 2019, and did not provide credible evidence of likelihood of confusion. The court noted that Edible intended to expand to the CBD market by way of its application to register INCREDIBLE EDIBLES for CBD-related goods. Edible relied on its rights in both EDIBLE and INCREDIBLE EDIBLES as the basis for its claims. The former could arguably be generic in the cannabis industry while the inclusion of the term INCREDIBLE would perhaps make the INCREDIBLE EDIBLES mark at least descriptive. The court determined that Edible’s delay in promoting CBD products was in part because CBD remained a controlled substance until the enactment of the 2018 Farm Bill. Finally, the court determined that Edible’s inability to produce evidence of a likelihood of confusion did not make the case so weak as to label it frivolous or objectively unreasonable.

GTI also argued that Edible’s litigation conduct made the case exceptional because it delayed key discovery. Edible sought extensions of fact discovery six times, GTI filed five motions to compel Edible to produce discovery, Edible failed to disclose relevant witnesses in its Rule 26 disclosures, and allegedly sought deposition of GTI’s CEO for an improper purpose. Nevertheless, GTI admitted that it had obtained over one hundred thousand pages of documents during discovery. The court did not side with GTI on all of its motions to compel, which suggests that Edible did not have unreasonable positions on all discovery disputes. The court also found that Edible set forth a sufficient basis to depose GTI’s CEO.

In sum, the court did not find the case exceptional based on Edibles litigation position or conduct. And so, the court denied GTI’s motion to award attorney’s fees.

Ak Futures LLC v. TBH Supply LLC, No. 8:23-cv-01030-JVS-ADS (C.D. Cal. Oct. 11, 2023)

Date: October 11, 2023

Facts: Delta-9 Tetrahydrocannabinol (“THC”) is the primary psychoactive cannabinoid responsible for the “high” associated with marijuana. But other cannabinoids, like Delta-8 THC also have psychoactive effects. The 2018 Farm Bill kept marijuana illegal and defined it based on its Delta-9 THC concentration: “the plant Cannabis sativa L. and any part of that plant, including . . . all derivatives, extracts, cannabinoids, . . . with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”

Ak Futures, LLC (“Futures”) began selling disposable vaporizers for Delta-8 THC under its CAKE trademark in October 2020. TBH Supply LLC (“TBH”) began selling cannabis products, including vaporizers, under its CAKE SHE HITS DIFFERENTLY trademark on September 15, 2020. Futures brought this action for false designation of origin and unfair competition under the Lanham Act and moved for a preliminary injunction. Both parties provided competing declarations concerning the lawfulness of the goods offered under the respective marks. And so, each party alleged that the other had not established trademark rights in their respective marks because the goods offered under the marks are unlawful.

Held: The motion for preliminary injunction was denied because Futures did not establish a likelihood of success on the merits.

Reasoning: Futures argued that TBH’s goods are unlawful because of the high potency of up to 84% THC included in its goods. But it did not rely specifically on the Delta-9 THC concentration of TBH’s goods. Futures also argued that TBH’s distribution of its products is unlawful because it is not licensed by the California Department of Cannabis Control (“CDCC”). But TBH alleged that it sells its CAKE SHE HITS DIFFERENT branded goods to its sister company, which is licensed by the CDCC, and that its goods are in total compliance with the CDCC’s regulations.

TBH obtained samples of Futures’ CAKE products and had them tested by third parties for their Delta-9 THC concentration. These tests disclosed that the CAKE branded goods included Delta-9 THC concentrations above 0.3%, which would make them unlawful under the Farm Bill. However, Futures’ independent testing disclosed that its goods were in compliance with the Farm Bill. Also, Futures argued that TBH did not use laboratories that comply with the USDA’S rules for Hemp Analytical Testing. And so, the results were therefore unreliable.

The court determined that Futures would only be successful if TBH’s goods are unlawful, and its CAKE goods are in compliance with the Farm Bill. Because a credibility determination concerning the parties’ competing declarations was not proper on a motion for preliminary injunction, the court denied Futures’ motion.

§ 5.9.4. Unlawful Use and Invalidating Trademark Applications

BBK Tobacco & Foods LLP v. Cent. Coast Agric., Inc., 97 F.4th 668 (9th Cir. 2024)

Date: April 1, 2024

Facts: BBK Tobacco & Foods LLP (“BBK”) distributes rolling papers and other smoking-related products under its RAW trademark. Central Coast Agriculture, Inc. (“Central”) began selling cannabis products under its RAW GARDEN trademark and sought to register the mark with the United States Patent and Trademark Office (“USPTO”). BBK alleged that Central’s use of the RAW GARDEN mark infringed on BBK’s rights in its RAW trademark and brought several claims against Central, including trademark infringement. BBK also sought to cancel four of Central’s trademark applications for the RAW GARDEN mark based on a lack of bona fide intent to use the RAW GARDEN mark. Central filed counterclaims and sought to cancel BBK’s registrations for its RAW mark based on unlawful use. The district court entered summary judgement in favor of BBK on its claim to invalidate Central’s applications.

Held: The Ninth Circuit affirmed the district’s court grant of summary judgement.

Reasoning: The court held that that when an action involves a registered trademark, a district court has jurisdiction to consider challenges to trademark applications of parties to the action. The court cited 15 U.S.C. § 1119, which states that “any action involving a registered mark the court may determine the right to registration, order the cancelation of registrations, in whole or in part, restore canceled registrations, and otherwise rectify the register with respect to the registrations of any party to the action.”

The court found that “determine the right to registration” and “rectify the register” includes the power to determine disputes over trademark applications because a challenge to an application affects the applicant’s right to a registration. Accordingly, the plain language of § 1119 grants a district court jurisdiction to consider challenges to the trademark applications of a party to the action if the action involves a registered mark.

Because the action involved BBK’s registered mark, the district court had jurisdiction to “determine the right to registration” of Central’s applications.

The district court determined that Central lacked a bone fide intent to use its mark in commerce because its goods were illegal under federal law. Therefore, it ordered invalidation of the applications at the USPTO. Because the district court had jurisdiction pursuant to § 1119, the Ninth Circuit affirmed.

§ 5.9.5. Fraud and Goods Related to Cannabis

TIW Holdings LLC v. Hotbox Farms LLC, No. 3:24-cv-00126-AN (D. Or. Sep. 30, 2024)

Date: September 30, 2024

Facts: TIW Holdings LLC (“TIW”) began using the trademarks HOTBOX, HOTBOX 7500, and PUFF HOTBOX 7500 (“TIW Marks”) in connection with e-cigarettes and e-liquid products. TIW licenses the TIW Marks to Puff Labs, LLC (“Puff”), which is a wholesaler, distributor, and retailer of the goods offered under the TIW Marks. TIW and Puff Labs (“Plaintiffs”) alleged that use of the TIW Marks commenced in June 2022.

Hotbox Farms LLC (“Hotbox”) sells marijuana and non-marijuana goods under its HOTBOX trademark. Hotbox registered its HOTBOX mark with the USPTO for among other things, stickers, clothing, buttons, lighters, and corresponding retail services. Hotbox’s constructive use date of its HOTBOX mark was the filing date included in its intent to use based application, October 28, 2020.

Plaintiffs brought the action alleging that Hotbox committed fraud on the USPTO during the registration process of its HOTBOX mark and sought a declaratory judgement that the TIW Marks did not infringe Hotbox’s mark. Plaintiffs alleged that Hotbox purposefully withheld from the USPTO that it sells cannabis goods. Plaintiffs also alleged that Hotbox applied stickers to BIC branded lighters to obtain the HOTBOX registration and USPTO records established that Hotbox stated the HOTBOX mark was “printed” on each lighter.

Hotbox filed counterclaims alleging federal trademark and unfair competition and common law trademark infringement. Plaintiffs moved to dismiss the counterclaims because of Hotbox’s alleged fraud.

Held: The court denied Plaintiffs’ motion to dismiss because the heavy burden of demonstrating fraud was not met and Hotbox sufficiently plead likelihood of confusion.

Reasoning: The court held that the evidence regarding the stickers affixed to lighters was insufficient to meet the “heavy burden” of demonstrating fraud. The court noted that Hotbox alleged that its business includes the sale of marijuana and non-marijuana products. Further, the non-marijuana products are sold in Oregon to customers that include Idaho residents that travel over the nearby border. The court held that these allegations were sufficient to plausibly plead use in commerce.

The court noted that it was evident from the pleadings that the TIW Marks and the HOTBOX mark were similar. Moreover, Hotbox alleged that its lighters were “substantially related” to Plaintiffs’ e-cigarettes and the parties target consumers include smokers and vapers. The pleadings therefore addressed several of the factors to determine a likelihood of confusion, including similarity of the marks, relatedness of the goods, and target consumers.

Accordingly, the court held that Hotbox sufficiently plead that it had a valid and protectable trademark registration and a claim of likelihood of confusion.

§ 5.9.6. Establishing Valid Trademark Rights

Ak Futures LLC v. TBH Supply LLC, No. 8:23-cv-01030-JVS-ADS (C.D. Cal. Jan. 19, 2024)

Date: January 19, 2024

Facts: AK Futures, LLC (“AK”) sells vaporizes containing the cannabinoid Delta-8 THC under its CAKE mark. TBH Supply LLC (“TBH”) sells cannabis products under its CAKE SHE HITS DIFFERENT mark. TBH allegedly licenses its mark to third parties to distribute and sell CAKE SHE HITS DIFFERENT goods in California and Arizona in state-licensed retail shops. AK brought this action alleging that TBH infringed its rights in its CAKE mark. In its first amended complaint, TBH brought four counterclaims including California and Arizona trademark infringement. AK filed a motion to dismiss TBH’s counterclaims.

Held: The court granted AK’s motion because TBH could not establish trademark rights in its CAKE SHE HITS DIFFERENT mark.

Reasoning: TBH did not own federal or state registrations or applications for its CAKE SHE HITS DIFFERENT mark. Therefore, TBH would have to rely on unregistered common law trademark rights to succeed on its counterclaims.

In TBH’s initial complaint, it alleged that it manufactured and distributed CAKE SHE HITS DIFFERENT goods that contain Delta-9 THC. In its amended complaint TBH sought to clarify its original allegations. TBH subsequently alleged that it sells empty CAKE SHE HITS DIFFERENT vaporizers to licensed third parties that fill the goods with Delta-9 THC. The court found the amended counterclaims implausible because TBH’s amended allegations directly contradicted its unambiguous admissions in the first complaint that its goods contain Delta-9 THC. The court concluded that TBH’s CAKE SHE HITS mark is used in connection with Delta-9 THC goods.

Delta-9 THC is illegal under federal law. Because TBH’s CAKE SHE HITS DIFFERENT goods are used with a federally illegal substance, it could not lawfully use its mark in federal commerce. Further, public records established that TBH did not hold state-required licenses to manufacture or distribute cannabis goods in California or Arizona. Accordingly, the court held that TBH could not establish federal or state trademark rights in its CAKE SHE HITS DIFFERENT mark and granted AK’s motion to dismiss.

Many aspects of the work of a United States federal judge are profoundly gratifying. Sometimes, they are almost overwhelmingly so. I became a United States bankruptcy judge, sitting in the Eastern District of New York, in Brooklyn, more than twenty years ago, and in that time, I have presided over more than 56,000 cases filed in our court, from no-asset Chapter 7 bankruptcy cases to multibillion-dollar global corporate Chapter 11 restructurings. Many cases are filed by large or middle market businesses that need the restructuring toolkit to get through a bumpy patch. Others are filed by small and even micro businesses, and entrepreneurs, for the same reasons. And still others—many others—are filed by individuals or couples who are seeking a fresh start, or to save their home through a Chapter 13 repayment plan. When these cases succeed, everyone wins. Homes and jobs are saved, and creditors get paid.

But as satisfying as that work is, if you ask me—or most any federal judge—what they find to be the most gratifying aspect of their work, the answer may surprise you: For me, and for many of my colleagues, the judicial work that may move us to tears of joy is presiding at a naturalization ceremony.

A naturalization ceremony is the final step on the path to becoming a United States citizen. That path is a long one, and it requires hard work and determination. An immigration lawyer could explain what is involved; and an immigration judge may well have a role. But in many federal judicial districts, and certainly here in the Brooklyn courthouse of the Eastern District of New York—encompassing Brooklyn and Queens, two of the most diverse counties in the country, as well as Staten Island—that last step is an oath administered in a federal courthouse, by a federal judge. And we hold these ceremonies four days a week, fifty-two weeks of the year.

There might be fifty new citizens in the courtroom—or more than two hundred and fifty. It’s the rule of law in action—working for individuals, families, communities, and the country. I have been privileged to swear in thousands of new citizens, from sixty or more countries of origin. And every time, it’s special.

When I enter the ceremonial courtroom, a court officer calls out, “All rise!” Usually, when I take the bench, I smile, greet the parties, and say, “Please be seated”—but not on this occasion. Instead, the citizenship candidates remain standing, and the ceremony begins with the Oath of Allegiance. This Oath includes a promise made by each new citizen, to “support and defend the Constitution and laws of the United States of America against all enemies, foreign and domestic.” At the close of the Oath, the new citizen declares that they “take this obligation freely, without any mental reservation or purpose of evasion.” Then, we clap, and maybe we cry a little bit, and as the newest United States citizens, we recite together the Pledge of Allegiance.

Many years ago, when I first presided at a naturalization ceremony, I decided that I had three things I wanted to say—and over the nearly twenty years since then, these have three things have not changed. They are congratulations, and thank you, and welcome.

I begin with congratulations, and I say, “Congratulations, my brothers and sisters, my fellow American citizens, on the great honor that you have achieved today by becoming citizens of the United States of America. You have worked hard for this honor—you have earned it—and you deserve it. This is your day—enjoy it! This is your country—cherish it!—as your newly adopted country cherishes you.”

Next is, thank you! “Thank you, my brothers and sisters, my fellow American citizens, for your gift to our country of your citizenship. What do I mean by your gift? My country is now our country. Your culture is now part of our culture. Your history, your traditions, now enrich America’s history and traditions. We are all richer together as a country because of you. Each of you. All of you.”

And then I reflect on the promises kept that each one of those new American citizens represents: “You are the fulfillment of a very important promise that another group of immigrants made more than 200 years ago in the United States Constitution. What promise was that? The promise made in Article I of the Constitution that Congress would establish a uniform rule of naturalization, so that anyone who wished, and wanted, and worked, to become an American citizen could do so, and have a day for themselves like today is for you. That promise means that every person who arrives on these shores has the opportunity to become as much an American as the person whose parents, or grandparents, or great-grandparents were born here. So you are the measure and the fulfillment of the promise made by the founders of our country, immigrants themselves. By your oath of allegiance today, you keep that promise in the Constitution alive.”

Finally, the heart and soul of a naturalization ceremony is not only the promises kept, but the promises made. I remind them that “today, you also made a promise—you pledged allegiance to these United States. You promised to be outspoken advocates of liberty, and justice—not just for some, but for all. Not only when it is easy, but when it is hard. To be a full citizen in our democracy, you must embrace it. Do not let others make decisions for you! Study the issues, and vote! When you care deeply about an issue, write the mayor, your city council person, your representative, your senator. Write the president! Serve on a jury, maybe in this very building. Your voice counts—but only if you use it. Your voice can make a difference—but only when it can be heard.”

At my very first naturalization ceremonies, there were often children—and even grandchildren—in attendance. Sometimes I have invited them to join me on the big bench in the ceremonial courtroom. Always, whether they are in the courtroom or just in the thoughts of the new citizens, I speak to them too: “Finally, a special word to the children: could you please stand? You are the future. You are the love, and the light, and the energy, and the enthusiasm, of our country. You inspire your families, your teachers, your neighbors. Today, you inspire me. To your parents, you are the best part of every day. You are the beacon and the promise of peace, and of better days ahead. I welcome you especially, and I have great hopes for you in your adopted country.”

And then I welcome them, with all of the warmth that I can muster, and maybe again a tear or two. “So, from my head and from my heart, on behalf of all of the citizens who you join today in these United States, congratulations, and thank you, and welcome. You will be wonderful and wise citizens, and I am so proud and happy to share this day with you.”

Finally, I want them to know that they have left nothing behind—but instead, they have brought everything that makes them who they are to our neighborhoods and communities as the newest citizens of the United States. So, I read out the names of their countries of origin in alphabetical order, beginning with Afghanistan, Albania, Angola, and Australia, all the way to Venezuela, Yemen, Yugoslavia, and Zimbabwe. As I read the name of each citizen’s home country, they rise. And when I finish, I say one more country’s name—their adopted country, our shared country, the United States of America. More tears, maybe. And when everyone in the courtroom is standing, we sing together, loudly if not well, our national anthem.

This article is part of a series on the rule of law and its importance for business lawyers created by the American Bar Association Business Law Section’s Rule of Law Working Group. Read more articles in the series.

Editor

Byeongsook Seo is a member of Snell & Wilmer L.L.P.’s commercial litigation practice. He represents clients in handling complex and, often, heated disputes related to failed business ventures and disputes among business partners, executives, owners, and directors. Byeongsook is a member and Vice-Chair of the Business Divorce Subcommittee of the ABA Business Law Section Committee on Business and Corporate Litigation. His honors include Colorado Super Lawyers, Litigation Counsel of America Fellow, and The Best Lawyers in America. Byeongsook graduated from the United States Air Force Academy and obtained his law degree from the University of Denver, Sturm College of Law.

Contributors

Yitzchak L. Besser

Yitzchak L. Besser is a member of Stevens & Lee’s Litigation Department, assisting its teams with a range of due diligence, trial, and research matters. He has handled case analysis and draft opinions in an array of federal criminal and civil matters at both the appellate and trial court levels. Prior to joining Stevens & Lee, Yitzchak served as a staff attorney with the U.S. Court of Appeals for the Third Circuit. He also served as a judicial law clerk for the Hon. Glen H. Davidson of the U.S. District Court for the Northern District of Mississippi. He graduated magna cum laude from the University of Baltimore School of Law and received his undergraduate degree from New York University.

Kyle A. Cooper

Kyle Cooper is a business litigation partner at Tabet DiVito & Rothstein in Chicago, Illinois, where he focuses on complex business disputes and commercial litigation. He is a highly skilled and dedicated litigator with extensive experience in both federal and state courts. Since 2021, he has been recognized annually as a Super Lawyers Rising Star. Beyond his litigation practice, Kyle serves as outside general counsel for several businesses, providing strategic legal and business advice on a variety of matters. He is also actively engaged in civic matters and currently serves as the president of the Chicago Police Board.

Melissa Donimirski

Melissa N. Donimirski is a partner with Stevens & Lee in Wilmington, Delaware. She concentrates her practice in the area of corporate and commercial litigation in the Delaware Court of Chancery and has been involved with many of the leading business divorce cases in that Court. Melissa is a Co-Vice-Chair of the Business Divorce Subcommittee of the ABA Business Law Section, Business and Corporate Litigation Committee. She received her undergraduate degree from Bryn Mawr College and her law degree from the Delaware Law School of Widener University. Melissa has also co-edited and co-authored a treatise on business divorce, Litigating the Business Divorce, which is published by Bloomberg BNA.

Janel M. Dressen

Janel Dressen has over twenty-three years of experience as a business trial lawyer and is the CEO of her business litigation boutique law firm in Minneapolis, Minnesota. Ms. Dressen’s clients, co-workers, colleagues and competitors remark that she is a tenacious business litigator who will advocate tirelessly and creatively to resolve her client’s business disputes. She has been named as one of the “Top 50 Women Minnesota Super Lawyers” since 2019. Janel has an impressive list of significant victories for her clients, both plaintiffs and defendants. While she represents business owners and businesses in all types of complex business disputes, her “sweet spot” involves shareholder, ownership, fiduciary duty, owner/executive employment and business valuation disputes, i.e., “business divorces” for closely held and private businesses, business owners and executives.

Jennifer Hadley Catero

Jennifer Hadley Catero is based in Snell & Wilmer’s Phoenix office where she serves as Co-Chair of the firm’s Corporate Governance Litigation Group. Jennifer handles complex commercial litigation with an emphasis on corporate governance litigation, banking, consumer financial services and securities litigation, shareholder derivative litigation, D&O litigation, class actions and internal investigations. Jennifer also advises clients on compliance issues regarding consumer financial products and services. Jennifer has been named one of the top 100 Lawyers in Arizona and repeatedly named to The Best Lawyers in America for Commercial Litigation.

Brian C. Haussmann

Brian C. Haussmann is a partner at Tabet DiVito & Rothstein, LLC, a litigation boutique in Chicago, Illinois. Brian is a trial lawyer and business litigator who focuses on disputes between owners and other stakeholders in privately held businesses. He often litigates and resolves disputes involving the dissolution of private companies (sometimes referred to as “business divorces”), partner, owner, and shareholder rights, fiduciary duty claims, corporate governance, fraud and other business torts, and contracts. Brian is also active in his community and the legal profession generally. He currently serves on the Board of Managers for the Chicago Bar Association (CBA) and is Co-Chair of the Business Divorce and Complex Ownership Disputes Committee of the CBA. Brian also serves on the governing board of Legal Aid Chicago, the largest provider in Chicago of free legal services to those living in poverty.

Eric C. Milby

Eric Milby is a shareholder at Lundy Beldecos and Milby with offices in the Philadelphia area. For more than 25 years, he has focused his practice on Business Divorce, regularly handling direct and derivative disputes between business owners including control disputes, minority oppression, information demands, misappropriation, withholding distributions/phantom income, usurpation of corporate opportunities and other contractual and fiduciary duties. Eric regularly speaks on Business Divorce topics, is rated AV Preeminent by Martindale-Hubbel and has been selected by SuperLawyers annually since 2012. Eric is the immediate past chair of the Philadelphia Business Litigation committee and the incoming co-Chair of the ABA Business Divorce subcommittee.

Oderah C. Nwaeze

Oderah C. Nwaeze is an experienced trial attorney who helps clients resolve complex corporate and commercial disputes. For over a decade, he has led or worked on matters involving shareholder rights; actions arising under Delaware General Corporation Law and Delaware common law; lawsuits stemming from mergers, acquisitions and other corporate transactions; business divorces; and breach-of-contract matters. To be specific, Oderah has experience with “books-and-records” demands and litigation, actions to compel an annual meeting, stockholder appraisal litigation, derivative lawsuits, and judicial dissolution of an entity.

Tyson Prisbrey

Tyson Prisbrey is based in Snell & Wilmer L.L.P.’s Salt Lake City, Utah office and is a member of the firm’s commercial litigation practice group. He focuses his practice in complex commercial and corporate litigation, including litigation in corporate governance and general contractual disputes. He has experience advising public and private companies in disputes stemming from mergers and acquisitions, corporate financing, corporate control, and alternative entity dissolutions. Prior to joining Snell & Wilmer, Tyson gained significant experience in representing clients in the Delaware Court of Chancery litigating commercial and corporate governance matters.

Emma Sander

Emma is an Associate in Aronberg Goldgehn’s Business Litigation and Insurance Coverage practice groups. She represents clients, from individuals to large businesses, in breach of contract cases, fraud cases, regulatory matters, and other disputes.

John C. Sciaccotta

John C. Sciaccotta, Esq., Sr., Partner at Aronberg Goldgehn in Chicago serves on the firm’s executive management committee. John has litigated and resolved numerous complex business divorce cases. He is the President Elect of the Chicago Bar Association (will be installed as President in June of 2024). John is also an Arbitrator and Mediator of complex commercial disputes.

Victor Vital

Victor Vital is the Global Chair of Haynes Boone’s Trials Practice Group. Clients turn to Victor to handle high-stakes trials of all kinds, matters that are consequential such as cases involving significant dollar amounts and cases with the potential to damage major reputations or brands. Because of his broad trial experience, clients and lawyers turn to Victor regardless of the subject matter when they need a trial lawyer for their important cases. Victor is ranked in Band 1 by Chambers USA, Chambers and Partners, for Litigation: Trial Lawyers, 2024. Clients report to Chambers that Victor is “very versatile and can handle a lot of types of cases.” Victor’s trials and verdicts have been nationally recognized. For instance, he secured a jury verdict in a business dispute that was listed in the National Law Journal Top 100 list. Another one of his jury verdicts was listed in the Courtroom View Network’s list of Top 10 Most Impressive Defense Verdicts of 2022.

§ 4.1. Introduction

The term “business divorce” includes disputes that cause business partners/investors to end their partnership, situations that require owners to separate, or circumstances where a business partner/investor wishes to change the composition of management. This chapter provides summaries of developments related to such business divorce matters that arose from October 1, 2023, to September 30, 2024, from thirteen states.

Contributors to this chapter used their best judgment in selecting business divorce cases to summarize. We then organized the summaries, first by subject matter, then by jurisdiction. This chapter, however, is not meant to be comprehensive.

The reader should be mindful of how any case in this chapter is cited. Some jurisdictions prohibit courts and parties from citing or relying on opinions not certified for publication. To the extent unpublished cases are summarized, the reader should always consult local rules and authority to ensure the unpublished cases can serve as relevant and permissible precedent. The reader should also be mindful that this chapter provides a “snapshot” of developments within a single year. Any development in a particular year covered by this chapter may be altered by legislation or cases in subsequent years.

We hope this chapter assists the reader in understanding recent developments in business divorces.

§ 4.2. Access to Books and Records

§ 4.2.1. Pennsylvania

SWRP, LLC, v. Westwood Condominium Association Inc., 2024 WL 4601603. In an unreported opinion, the Pennsylvania Commonwealth Court reversed the trial court’s order permitting SWRP, LLC (“SWRP”), a member of the nonprofit Westwood Condominium Association (“Westwood”), to inspect redacted records of Westwood. SWRP sought the records that Westwood was required to maintain for the stated purpose to “unveil any mismanagement of [Westwood’s] operations.” Under the Pennsylvania Nonprofit Corporation Law, “[e]very nonprofit corporation shall keep minutes of the proceedings of the incorporators, members, the directors and any other body, and a membership register. The corporation shall also keep appropriate, complete and accurate books or records of account.” The trial court, directed Westwood to release the W-2 forms of all employees with “all information except name, address, title and gross/net incomes redacted.” The trial court did not order the release of the names of all members in good standing. Westwood did not challenge SWRP’s stated purpose for the inspection so the only issues on appeal were whether email addresses and phone numbers constitute part of the member register that is subject to inspection and whether a member is in good standing is subject to inspection under the Nonprofit Corporation Law. The Court remanded for the trial court to consider whether (i) Westwood could place limits or conditions on the inspections based on the members right to privacy and (ii) disclosing whether a member is in good standing is limited by considerations of privacy, privilege, or confidentiality or by the Fair Debt Collection Practices Act, and the Fair Credit Extension Uniformity Act.

Edenfield v. ECM Energy Services Inc., 300 A.3d 506 (Pa. Super. 2023). Plaintiff Edenfield appealed from an order denying his demand to inspect the records of ECM Energy Services, Inc. (“ECM”) and AdTrak 360 LLC (“AdTrak”). As to ECM, the court rejected Edenfield’s argument that the language of the statue permitting a shareholder to inspect the books and records did not preclude access by former shareholders and found that the plain language of the statute, defining shareholder as “record owner of shares of a corporation” meant only current shareholders. As such, Edenfield lacked standing to demand inspection of the books and records of ECM. As for AdTrak, a Delaware corporation, it was dormant and had closed its offices in Pennsylvania. At the trial court level, AdTrak had given a Pennsylvania accountant access to the QuickBooks records and permitted the accountant to access and supply records accessible from Pennsylvania to Edenfield. The court, however, did not require AdTrak to collect and produce records from Delaware. The Superior Court balanced public policies explaining that “while our courts will not take jurisdiction for the purpose of a regulating or interfering with the internal affairs of a foreign corporation, it is equally well settled that the granting of a right to inspect a foreign corporation’s books and records, which are within the jurisdiction, does not so offend.” Because the court concluded that AdTrak was neither operating nor storing records in Pennsylvania, it affirmed the trial court’s decision not to compel additional records finding that Pennsylvania lacked jurisdiction to do more.

§ 4.2.2. Texas

Gilbreath v. Horan, 682 S.W.3d 454 (Tex. App.—Houston [1st Dist.] 2023, pet. denied), reh’g denied (Apr. 20, 2023). In 1964, Wesley Gilbreath, Sr., the patriarch of the Gilbreath family, founded an advertising company focused on constructing, owning, and leasing billboards throughout Texas and parts of Louisiana. The company was first a sole proprietorship, but was later incorporated, and then converted into a family limited partnership. In 2000, a Texas limited liability company was formed in connection with the corporate conversion to act as the general partner. Over the years, Wesley Gilbreath transferred his original ownership interests in the business in equal parts to his six children through nearly identical irrevocable trusts. The Gilbreath family business then consisted of nine Texas limited partnerships, each with a general partner organized as a Texas limited liability company. The general partner LLCs were managed by a Board of Managers, consisting of four of Wesley’s children, each serving a lifetime appointment. The various trusts were each limited partners in the limited partnerships, each owning a one-sixth interest.

Shortly after Wesley’s passing, his daughter Lisa began asking questions about her father’s will, the various trusts, and the business overall. Lisa expressed concerns that one of the business entities had been paying for personal and nonbusiness expenses. Lisa accused her siblings of taking “millions of dollars,” informed her siblings that she would hold them to the highest fiduciary responsibility and made various requests to inspect company books and records. The situation deteriorated, and eventually prolonged litigation ensued.

In the trial court, Lisa pleaded in part for a declaration of her rights to access company books and records and for prospective injunctive relief. She also sought declarations that her siblings had failed to provide her with access to the relevant records in the past and pleaded for costs and damages resulting from those breaches. The trial court entered a declaratory judgment in Lisa’s favor and granted injunctive relief based on Lisa’s contractual and statutory claims for access to the books and records.

On appeal, the defendants articulated several challenges to the trial court’s adjudication of the books and records issues. First, defendants argued that because Lisa received the requested books and records before trial, the trial court lacked subject matter jurisdiction to enter the declaratory judgment because there was no justiciable controversy among the parties. Second, defendants argued that there was no evidence that Lisa had not been provided with the books and records to which she was entitled. Third, defendants argued that the jury questions concerning books and records were submitted with respect to a breach of contract claim and that the jury’s answers were “immaterial” because they were not tied to any damage question. Fourth, defendants argued that Lisa was not entitled to declaratory relief because she “couched her books and records claims, in part, in terms of a breach of the limited partnership agreements” and her claims for declaratory relief were based on the same theories. And fifth, defendants argued that various limitation-of-liability clauses in the limited partnership agreements precluded any finding of wrongdoing against the general partners—and further that Lisa never “properly pleaded any of those legal theories.”

The court of appeals was not persuaded by any of these arguments, and so overruled defendants’ challenge to the books and records claims. As to the first issue, the court of appeals reasoned that Lisa’s request for declaratory relief was not moot because it was—at least in part—prospective. Lisa requested a declaration that she had the right to access the books and records under the partnership agreements and Texas law prior to the litigation, but also in the future. As to the second issue, the court of appeals determined that there was some testimonial evidence that Lisa’s access to the pertinent books and records had been restricted. As to the third issue, the court of appeals determined that the jury questions in dispute “were material because the jury’s answers to those questions formed the basis of the injunctive relief the trial court granted, specifically the questions of imminent harm.” As to the fourth issue, the court of appeals concluded that Lisa’s claims that the defendants violated her statutory rights would not have been the proper subject of a breach of contract claim, and did not encompass issues already before the court. Moreover, Lisa did not seek damages for a breach of contract claim. Lastly, as to the fifth issue, the court of appeals reasoned that because the theories of “fraud, deceit, or a wrongful taking” and “gross negligence, bad faith, [and] willful breach” were pleaded by the general partners as part of their affirmative defenses and presented to the jury at their request, it was not necessary for Lisa to plead these affirmative defenses or any exceptions to the same. Additionally, according to the court of appeals, to the extent that the defendants contended that the limitation-of-liability clauses precluded Lisa’s declaratory judgment action, nothing in the clauses precluded such relief.

§ 4.3. Business Judgment Rule

§ 4.3.1. Pennsylvania

Matthew Serota, Derivatively on Behalf of London Towne Homeowners Association v. Matthew J. Mager, 304 A.3d 828 (Pa. Commw. Ct. 2023). Receiver appointed for homeowners’ association was entitled to deference under the Business Judgment Rule where receiver was disinterested, prepared written report, was independent, conducted adequate investigation and rationally believed his decision was in the HOA’s best interest. The court’s decision was based, in part, on a determination that any potential benefit would be negligible. The court reasoned that the receiver should be entitled to the same deference as the non-functioning executive board that the receiver was appointed to replace.

§ 4.4. Dissolution

§ 4.4.1. Delaware

Walter v. McManus, C.A. No. 2024-0412-NAC (Del. Ch. June 7, 2024) (ORDER). The Court of Chancery held that Petitioner Andrew C. Walter sufficiently pleaded the existence of convincing factors for judicial dissolution, and therefore denied Respondent Geraldine F. McManus’s Motion to Dismiss Walter’s Verified Petition for Judicial Dissolution.

Walter and McManus each owned a 50% interest in Class A Membership Interest of Granger Management Holdings LLC (“Granger” or “the Company”). Citing Fisk Ventures, LLC v. Segal, 2009 WL 73957 (Del. Ch.), aff’d, 984 A.2d 124 (Del. 2009), the Court noted that “convincing factors” for judicial dissolution include circumstances in which there is a board-level voting deadlock and the operating agreement gives no means of navigating around said deadlock. The Court found that Walter had well-pleaded such circumstances.

It further stated that a deadlocked LLC need not be “metaphorically ablaze” and that a deadlock over “serious managerial issues, such as strategic visions,” is sufficient for pleading a judicial dissolution claim. The Court also rejected McManus’s arguments that (1) Walter needed to allege additional deadlocked votes and (2) dismissal of his Petition was warranted because he could sell his interest to a third party.

Gibson v. Konick, 2024 WL 3370927 (Del. Ch. Jul. 10, 2024). The Court of Chancery ordered the dissolution of 23 West Bayard Street, LLC (the “Company”) under 6 Del. C. § 18-802 and appointed a liquidating trustee. The Court also ruled on various issues related to the membership interests and claims for indemnification and advancement.

The Company was formed in August 2020 to own residential property in Fenwick Island, Delaware. Plaintiff and Defendant are the Company’s only members, and Defendant is the Company’s sole manager. At some point the parties’ personal relationship deteriorated, leading to increased hostility. Plaintiff asserted that Defendant excluded her from management, failed to provide annual reports, and did not maintain proper financial transparency. And although she contributed significantly to property improvements and loan payments, Plaintiff was denied access to property and financial records. Plaintiff further claimed that Defendant failed to maintain the property or complete agreed-upon improvements, impacting its market value.

Because the Company’s LLC Agreement lacked a mechanism for resolving disputes or allowing Plaintiff to withdraw or transfer her interest, Plaintiff filed suit, seeking: (a) judicial dissolution of the Company; (b) declaratory judgment that Plaintiff was entitled to a 50% interest in the Company; (c) a decision as to Plaintiff’s entitlement to indemnification or advancement; and (d) specific performance of fiduciary duties.

The Court found that the LLC was deadlocked, with the two members unable to agree on critical management and operational decisions, justifying judicial dissolution under 6 Del. C. § 18-802. Accordingly, the Court ordered the dissolution of the LLC and appointed a liquidating trustee to manage the process. Plaintiff originally claimed that she and Defendant held equal 50% interests in the LLC, but based on the parties’ conduct and respective contributions, the Court of Chancery concluded that Plaintiff’s and Defendant’s membership interests were 39.49% and 60.51%, respectively. The Court denied Plaintiff’s request for declaratory judgment on indemnification or advancement because the LLC Agreement did not provide for such entitlements. Consistent with that, Defendant was not authorized to indemnify himself or advance his legal fees using LLC funds because that would be a misuse of the Company’s financial resources. The Court of Chancery found that neither party was entitled to recover for personal or renovation-related services rendered to the Company.

Benoliel v. Bombard, 2024 WL 3044641 (Del. Ch. Jun 15, 2024) (Order). The Court of Chancery granted the motion to dismiss the Verified Petition for Judicial Dissolution under 6 Del. C. § 18-802. The Court found that Petitioner failed to state a claim upon which relief could be granted.

GH Channel Holding LLC (“HoldCo”) was created as a passive holding company with its primary purpose being ownership and oversight of its subsidiary, OpCo. OpCo was responsible for the actual business operations, including managing agreements and financial transactions. HoldCo is equally owned by two families: the Franco Family and the Bombard brothers. HoldCo’s board of directors is comprised of two directors, one appointed by each family, requiring consensus for any action.

Due in part to distrust of Respondent’s family, Petitioner sought judicial dissolution of HoldCo, alleging that the company was in a deadlock and lacked an equitable exit mechanism, making it impracticable for the company to continue its business in conformity with its operating agreement. Petitioner highlighted three main areas of disagreement: (1) keeping minutes; (2) retaining an accountant for evaluating transactions; and (3) whether to amend OpCo’s operating agreement.

The Court analyzed whether the actions that cannot be carried out due to deadlock are essential to the company’s business purpose. In doing so, it emphasized that HoldCo’s purpose was limited and primarily passive, with governance and operational matters being the responsibility of OpCo’s board. Ultimately, the Court found that Petitioner’s claims did not sufficiently demonstrate that HoldCo could not carry out its business because of the stalemate. In particular, the Court of Chancery concluded that:

1. The failure to keep minutes did not frustrate HoldCo’s business purpose;
2. the retention of an accountant was beyond HoldCo’s purpose and pertained to OpCo; and
3. the potential to amend OpCo’s operating agreement eliminated likelihood of actual deadlock.

The Court also noted that because Petitioner’s allegations regarding governance and operational issues were mainly related to OpCo, those issues did not justify the dissolution of HoldCo. Without factual allegations sufficient to establish that the alleged deadlock impeded HoldCo’s ability to carry out its business, the Court dismissed, with prejudice, Petitioner’s request for judicial dissolution.

§ 4.4.2. Massachusetts

Clarke v. Murphy, 104 Mass. App. Ct. 1118 (2024), review denied, 494 Mass. 1108 (2024). This case arose from the dissolution of a partnership between two individuals who co-owned a property through a trust and operated a catering business on the premises. The partnership agreement stipulated that one partner provided the initial capital investment for the trust, while the other partner’s contributions would increase over time through rent payments made by the catering business.

Over the years, disputes emerged regarding financial management, unpaid rent and ownership interests. One partner alleged breaches of fiduciary duties, failure to meet financial obligations and misuse of partnership assets. The other partner sought dissolution of the partnership and an equitable division of proceeds from the property sale.

The trial court ruled in favor of the partner seeking dissolution, finding that they had fulfilled their financial obligations under the partnership agreement. Specifically, the court determined that the partner had met their role as a guarantor for the trust’s promissory note and mortgage. It also rejected claims regarding unpaid rent, as the parties had orally agreed to waive certain payments during periods of financial difficulty. Furthermore, the court concluded that the sale of catering equipment and fixtures did not harm the partnership, as the proceeds were properly accounted. The court dissolved the partnership, ordered the sale of the property and directed that the proceeds be equally divided.

On appeal, the Massachusetts Appeals Court affirmed these findings. It emphasized that the partnership agreements were correctly interpreted and that the partner’s actions complied with their obligations. The appellate court also dismissed additional claims for damages, concluding that they were unsupported or resolved by the terms of the dissolution.

§ 4.4.3. New Jersey

AC Ocean Walk, LLC v. Blue Ocean Waters, LLC, 478 N.J. Super. 515, 316 A.3d 955 (App. Div. 2024). In this interlocutory appeal, the Appellate Court addressed several matters of first impression in New Jersey: (1) whether a failure to respond warranted dissociation from a partnership under the Uniform Partnership Act and (2) what the proper effective date of dissolution of a partnership is.

In 2018, Plaintiff, AC Ocean Walk partnered with Defendants to operate clubs, sharing ownership and financial responsibilities, including renovation costs, pre-opening expenses, and covering revenue shortfalls for lease payments. Disputes arose over renovation costs, financial contributions, recordkeeping, and control. In 2020, Plaintiff sent a breach notice alleging that Defendants failed to meet financial obligations, owed over $2.4 million, and warned of termination if the breaches were not cured. After receiving no response, Plaintiffs filed a complaint in February of 2021 seeking judicial dissociation and damages. In January 2023, the court granted judicial dissociation and dissolution, citing the Defendants’ silence as evidence of their inability to meet partnership obligations.

Defendant partner’s conduct in not responding to plaintiff partner’s notice of breach of partnership agreement warranted dissociation from the partnership under the Uniform Partnership Act (UPA), although trial court did not find that defendant breached partnership agreement; defendant’s refusal to respond to notice of breach after two years of unquestionable discord in partnership prejudicially affected business and made it impracticable for partnership to continue, and defendant’s conduct evinced irreparable deterioration of the partnership relationship and impasse regarding important business because of lack of communication between partners.

Further, judicial dissolution is also allowed under the same “not reasonably practicable standard” that applies to the dissociation of individual partners. However, the Court did find that the dissolution effective date was incorrect. The “presumptive” dissolution date is the date it is ordered by a court according to the UPA. There was no New Jersey precedent addressing this matter, so again the Court looked to other jurisdictions. Case law indicated there is nothing in the statute that permits retroactive dissociation, and dissociation occurs when a partner is “actually expelled.” Even though Defendants enjoyed no powers, they were “formally” still a partner until the date of dissolution. This confirmed the effective date should be the date of the dissociation order and should not be backdated.

§ 4.4.4. Pennsylvania

Estate of Caruso v. Caruso, 322 A.3d 885, 897–98 (Pa. 2024). Widow of partner in general partnership sought to enforce buy-out provision in the partnership agreement requiring a surviving partner to buy out the interest of a decedent partner within 90 days after death. Husband died in 2003, and the remaining partner did not seek to buy his share of the partnership, nor did widow, as executrix, seek to enforce it. The estate was finalized in 2006. Widow remained a 50% owner but became dissatisfied and, in 2013, she filed a lawsuit to compel access to information and participation in the operation of the partnership. But, in 2015 the surviving partner died, and widow sought to exercise the buy-out provision against the surviving partners estate, tendering a check for the book value of his interest. The estate of the surviving partner refused the check arguing that the partnership dissolved when the first partner died, and the current partnership was not bound by the partnership agreement. The court agreed and rejected the lower courts’ conclusion that widow acquired her husband’s rights under the Partnership Agreement, or put another way, that she “stepped into his shoes.” Rather, the court found that caselaw does not support the argument that a party steps into the shoes of an existing partner unless that party has been explicitly assigned the rights under the partnership agreement. Here, widow could not force a buyout upon the death of the remaining shareholder.

Toth v. Toth, 324 A.3d 469 (Pa. Super. 2024). In Toth, the court granted dissolution and ordered a detailed plan of dissolution under the court’s statutory authority to fashion equitable relief where the management of the company was hopelessly deadlocked. The court declined Appellant’s request that the court use its equitable power to force a buyout of Appellee because Appellants had engaged in considerable wrongful conduct, including trying to reorganize the company as a Florida entity with them in control, locking Appellee out of the company offices, email and computers, and spreading rumors within the company that Appellee was mentally unwell. The court found that granting the Appellant’s request for a forced buyout would have effectively given them the result they sought to achieve through their wrongful conduct.

§ 4.4.5. Texas

Holdridge v. Wallace Ryne, O.D., P.C., No. 02-23-00420-CV, 2024 WL 3455838 (Tex. App.—Fort Worth July 18, 2024, no pet.). Lyons and Ryne co-owned an eyecare partnership where Holdridge worked. Lyons also owned a related surgical center that worked together with the eyecare partnership, transferred its income to that partnership, and relied on it for administrative functions. As Ryne’s retirement neared, he, Lyons, and Holdridge entered a contract which provided for Lyons’s purchase of Ryne’s 50% interest in the eyecare partnership for the “partnership fair market value” and for Lyons’s subsequent sale of half of that interest to Holdridge. The parties later disputed the meaning of “partnership fair market value” and things deteriorated from there. Following a bench trial, the court—among taking other actions and making other declarations—dissolved the eyecare partnership.

The court of appeals, among other actions, reversed the trial court’s order of dissolution. The trial court originally dissolved the partnership in large part due to the actions of one partner that were alleged to have created a “toxic” or “poisonous” workplace. The court of appeals determined that, while “‘[t]oxic’ workplaces are no doubt unpleasant . . . they do not warrant the extraordinarily harsh remedy of judicial dissolution. See Nerium SkinCare, Inc. v. Nerium Int’l, LLC, No. 3:16-CV-1217-B, 2018 WL 2323243, at *7 (recognizing that ‘[S]ection 11.314 requires more than just a disagreement between owners’ and holding ‘strained relationship’ did not conclusively establish grounds for dissolution when owners disagreed regarding scope of products sold by company).”

The court of appeals further articulated that, “[g]iven Texas’s longstanding commitment to the promotion of economic development and the freedom of contract, courts are loath to shut down profitable, contract-governed businesses by judicial fiat.” In the court’s view, the Texas Legislature had provided limited grounds on which such involuntary dissolution is permitted, and, in this case, there was no evidence to satisfy any of those grounds. See Tex. Bus. Orgs. Code Ann. § 11.314. Hence, the evidence was legally insufficient to support the trial court’s dissolution of the partnership.

Jafar v. Beach & Beaches, Inc., No. 01-22-00412-CV, 2024 WL 3107684 (Tex. App.—Houston [1st Dist.] June 25, 2024, no pet.). Two partners jointly purchased a gas station and convenience store business but later had a falling out which resulted in litigation. At the end of the trial court proceedings, the court judicially dissolved the partnership and ordered that the business as well as the land on which the business sat be equitably partitioned. The trial court then determined that one partner owned 49% of the business and 15% of the land, while the other partner owned 51% of the business and 85% of the land. After concluding that an order “compelling the sale of the property would be futile,” the trial court ordered that the partner with greater interest in the business and land could purchase the interests of the other partner. The trial court also allowed the “total amount of all judgments” awarded to the purchasing partner to offset the purchase price.

On appeal, the parties focused on two statutory bases for the dissolution and subsequent compulsory sale—the Texas Property Code and the Texas Business Organizations Code. The court of appeals first determined that the trial court’s order of partition and compulsory sale were not supported by Tex. Prop. Code § 23.001, which contemplates partition by sale. See also Tex. R. Civ. P. 770. The court of appeals then determined that Tex. Bus. Org. Code § 11.314 and § 11.054 similarly did not support the trial court’s order of partition and compulsory sale because “construing Section 11.054 to permit the trial court to force a sale of [one partner’s] interests to [another partner] would directly conflict with the requirements of a winding up process under Section 11.052.” Lastly, the court of appeals held that the purchasing partner in this case could not rely on Tex. Bus. Org. Code § 152.602 (providing that a partnership has an automatic right to redeem a partner’s interest if a partner wrongfully withdraws) because the purchasing partner made no claim to expel his partner from the partnership. Instead, quite to the contrary, his counterclaim was for “dissolution.” Accordingly, the court of appeals reversed and remanded in part.

§ 4.5. Special Litigation Committee

§ 4.5.1. Pennsylvania

MBA Development, LP v. Miller, 316 A.3d 51 (Pa. 2024). Statute permitted judicial review of the decisions of a special litigation committee (“SLC”). Limited partner could not compel mandatory arbitration of his challenges to the SLC determination under the partnership agreement’s arbitration clause because the partnership agreement incorporated the provisions of the Pennsylvania Uniform Limited Partnership Act that clearly and unambiguously calls for “judicial” review of SLC determinations.

§ 4.6. Jurisdiction, Venue, and Standing

§ 4.6.1. California

Lew-Williams v. Petrosian, 320 Cal. Rptr. 3d 59 (2024). Physician’s surviving spouse and physician’s professional corporation filed suit against physician’s former business partner and others, arising out of defendants’ alleged embezzlement of physician’s and corporation’s funds. The trial court granted defendants’ motion to compel arbitration, and then subsequently issued order to show cause after plaintiffs failed to initiate arbitration and dismissed complaint for plaintiffs’ failure to arbitrate. Plaintiffs appealed. The appellate court reversed the dismissal because once the trial court issued order compelling arbitration of plaintiffs’ claims, it lacked jurisdiction to dismiss for failure to prosecute. If a party fails to diligently prosecute an arbitration, the appropriate remedy is for the opposing party to seek relief in the arbitration proceeding (and, if necessary, the opposing party may need to initiate the arbitration for this purpose).

§ 4.6.2. Pennsylvania

Larikov, LLC v. Cao, 314 A.3d 1283 (Pa. Super. 2024). In Larikov, the court dismissed the appellant’s fourth amended complaint finding that appellant, a purchaser of the LLC’s interests, did not have standing under the Pennsylvania Uniform Limited Liability Company Act. First the court found that because the LLC operating Agreement had no provisions governing the transfer of membership interests; therefore, statutory provisions apply. The court then noted that “one of the most fundamental characteristics of limited liability company law [is] its fidelity to the ‘pick your partner’ principle.” Under that principle, an LLC member cannot transfer membership rights and obligations to a third party other than the statutory defined “transferable interest” unless expressly provided for in the operating agreement. A transferable interest entitles the member to distributions but not to participate in company management.

§ 4.6.3. Texas

Wendt v. Moore, No. 01-23-00128-CV, 2024 WL 3528437 (Tex. App.—Houston [1st Dist.] July 25, 2024, no pet.). This case arose from a dispute among four sisters over management of a family partnership and ownership of land used for farming. Laurel sued her sisters—Evalyn, Amilee, and Jackie—for breach of fiduciary duty, fraud, embezzlement/theft, and breach of contract. Evalyn, Amilee, and Jackie moved for summary judgment, arguing that Laurel’s claims were barred by res judicata because they were, or could have been, litigated in a prior suit between the parties in Fort Bend County. Shortly before the summary judgment hearing, Laurel amended her petition to raise new factual allegations and claims. The trial court granted summary judgment and dismissed Laurel’s claims with prejudice.

On appeal, Laurel contended that (1) the trial court’s judgment, which was based on res judicata, improperly failed to reflect that it was “subservient to any final decision” made by another appellate court in its review of the Fort Bend County judgment; (2) the trial court erred by granting summary judgment and dismissing Laurel’s claims because her amended petition raised factual allegations and claims that were not addressed by the summary judgment motion; and (3) the trial court erroneously failed to recognize that Laurel’s breach of contract claim could not have been litigated in the Fort Bend County suit because that claim was not ripe until after the Fort Bend County court rendered its judgment against Laurel.

The court of appeals overruled Laurel’s first and third issues but agreed with Laurel that her second amended petition raised new factual allegations and claims that were not raised in her first amended petition and were not addressed in her sisters’ summary judgment motion. Accordingly, the court of appeals held that the trial court erred to the extent that it granted summary judgment on Laurel’s breach of fiduciary duty and embezzlement/theft claims based on certain allegations.

§ 4.6.4. Utah

Reed v. Tintic Consolidated Metals, LLC, 2024 WL 3952760 (D. Utah Aug. 27, 2024). The court found that the law of the forum state governed whether a cancelled LLC could be sued for tort liability, not the law of the state under which the LLC was originally organized.

In a claim resulting from a workplace injury, the plaintiff sued the former operators of a mine located in Utah in state court. The former operators of the mine were Delaware LLCs. Months before the plaintiff brought suit, the two Delaware LLCs were acquired by a Canadian corporation. The defendant, the Canadian corporation, removed the lawsuit to federal court, asserting diversity jurisdiction. The plaintiff moved to remand the case because the defendant failed to assert the citizenship of the Delaware LLCs. The defendant contended that it could satisfy the diversity jurisdiction requirement without alleging the citizenship of the Delaware LLCs because those entities were cancelled a few months before plaintiff initiated the lawsuit. Indeed, defendant claimed, under Delaware law, a plaintiff cannot establish a cause of action against a cancelled LLC. The court disagreed because the defendant failed to demonstrate that under Utah law a cancelled LLC is immune from suit. A cancelled LLC’s tort liability to a third party is not an internal affair. Just as Delaware could not confer nationwide tort immunity to LLCs formed under Delaware law, it may not eliminate liability for a cancelled LLC or set the conditions for bringing a lawsuit for a tort committed in another state. While Delaware law governs the procedure for cancelling a Delaware LLC, the effect that cancellation has on third-party plaintiffs asserting tort claims against the cancelled LLC is controlled by the law of the forum state.

§ 4.7. Claims and Issues in Business Divorce Cases

§ 4.7.1. Alternative Entities

§ 4.7.1.1. Delaware

Gurney-Goldman v. Goldman, 321 A.3d 559 (Del. Ch. 2024). In a matter of first impression, the Court of Chancery determined that under 6 Del. C. § 18-705: (1) the estate of a deceased member of an LLC does not automatically become a member and instead only holds an assignee interest, and (2) the executor of the estate can, for the purpose of administering and settling the estate, exercise the member rights associated with the member interest. The Court stated that, as interpreted above, § 18-705 reflects a compromise between two policies: the non-mandatory pick-your-partner principle and a desire to treat an LLC member fairly after an adverse life event.

The case relates to the estate of billionaire real estate mogul Sol Goldman, who left behind four children: Jane, Diane, Amy, and Allan. Each child ended up with a 25% member interest in the two LLCs managing the Goldman family empire’s real estate holdings. Sol chose Jane and Allan to serve as co-executors, and the two eventually transitioned into ongoing roles managing the family business. When Allan died, he appointed his son Steven as executor of his estate. Steven sought to step into his father’s position with the business, but Jane rebuffed his efforts and viewed herself as the sole, remaining decisionmaker.

Amy and Stephen subsequently sought to exercise put rights that they held under the operating agreement for one of the LLCs managing the family’s property. After securing a third-party appraisal, Jane offered to redeem 5% of Amy and Steven’s equity for $91 million. Amy and Steven considered this figure to be facially inadequate, and attempts to settle the dispute foundered. Amy and Steven brought a lawsuit in New York state court against Jane and Diane, and then initiated the instant case in Delaware seeking declaratory relief as to the above-referenced issues.

To solve the question of whether the estate was a member or an assignee, the Court noted that an LLC member interest is personal property that transfers by operation of law to the estate. Thus, under the Delaware Limited Liability Company Act (the “LLC Act”), the recipient of a member interest only receives the rights of an assignee. In seeking to interpret the language of § 18-705 of the LLC Act, the Court turned to the history of analogous limited partnership law, and revealed a steady expansion of the scenarios in which a personal representative could exercise rights.

This statutory progression supported a plain-language reading of § 18-705 that authorizes a personal representative to exercise full governance for a proper purpose. The Court discussed the possibility that this statutory interpretation may clash with the pick-your-partner principle—which states that one is generally entitled to choose their own business associates in a closely held enterprise like an LLC—and held that, to the extent § 18-705 conflicts with this principle, the statute controls. Consequently, even where an estate remains an assignee, the executor of the estate can nevertheless exercise the governance rights that a member possessed, so long as the executor acts for the proper purpose of settling the estate or administering its affairs.

§ 4.7.2. Breach of Contract

§ 4.7.2.1. Colorado

Bartch v. Barch, 111 F.4th 1043 (10th Cir. 2024). Former co-owner of limited liability company (“LLC”), a marijuana business licensed to operate under Maryland law, brought action against LLC’s president and president’s corporation, which owned minority membership share in LLC, for breach of contract and other claims. President and his company never raised illegality as an affirmative defense. The trial court entered judgment in favor of co-owner on contract claim, awarding him $6.4 million in damages. The president and president’s corporation never appealed this judgement or paid the judgment. Co-owner sought to enforce judgment, and the trial court granted relief, ordering defendants to use best efforts to sell corporation’s equity interest in LLC, to turn over proceeds from any such sale, and to avoid devaluing equity until sale (“Judgment Enforcement Order”). Defendants appealed, and pending appeal, moved for relief from judgment on ground that it was void, arguing district court lacked subject matter jurisdiction to enter original judgment which compelled violation of Controlled Substances Act (“CSA”). The trial court denied motion, and defendants appealed. Appeals were consolidated.

This case presented a question about the nature and extent to which a federal court may act to resolve a dispute related to a marijuana business that operates legally under state law. The Circuit Court first determined that an illegality defense goes to whether co-owner had a meritorious contract claim, not whether co-owner has standing. President and his company, therefore, did not properly challenge jurisdiction of the original jurisdiction.

Under Colorado state law, C.R.C.P. 69(g), a creditor may request that a court order a debtor “to apply [certain] property . . . towards satisfaction of [a] judgment.” Since federal courts follow state procedures when enforcing a federal money judgment, the Circuit Court ruled that the trial court had authority to enter the Judgment Enforcement Order. However, the Circuit Court remanded the question of whether compliance of the Judgment Enforcement Order can be accomplished without violating the CSA because the Judgment Enforcement Order is a form of injunctive relief which is subject to equitable considerations, including public policy concerns about violating the CSA, which makes it a crime “to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance.” 21 U.S.C. § 841(a)(1). Marijuana is a Schedule I controlled substance.

§ 4.7.2.2. Delaware

Sunder Energy, LLC v. Jackson, 305 A.3d 723 (Del. Ch. 2023). The Court of Chancery refused to enter a preliminary injunction against Sunder Energy, LLC’s (“Sunder”) co-founder and former head of sales, Tyler Jackson, enjoining him from breaching the restrictive covenants contained in Sunder’s LLC Agreement.

In Fall 2019, two of Sunder’s co-founders had a law firm draft an LLC agreement that included broad restrictive covenants without involving the other co-founders in the process. The operating agreement contained restrictive covenants prohibiting Jackson from: (1) engaging in competitive activities; (2) soliciting Sunder’s current and former employees and contractors; (3) engaging with Sunder’s customers; and (4) influencing Sunder stakeholders to terminate their relationship with Sunder (together, the “Restrictive Covenants”). The LLC agreement was presented to the minority members on New Year’s Eve without proper disclosures noting that the LLC agreement would alter their rights and internal governance dramatically. Nevertheless, Sunder sought to enjoin Jackson pursuant to the LLC agreement’s terms.

The Court denied Sunder’s motion for a preliminary injunction, finding that Sunder did not demonstrate a reasonable probability of success on the merits due to the overbreadth and unreasonable nature of the restrictive covenants and the breach of fiduciary duty by Sunder’s co-founders. Delaware courts do not automatically enforce restrictive covenants. Instead, such covenants are scrutinized to determine whether they are reasonable in geographic scope and temporal duration, advance a legitimate economic interest, and balance the equities involved.

In this case, the Court of Chancery found the Restrictive Covenants to be overly broad and unreasonable because, among other things, the noncompete and non-solicitation provisions purported to restrict Jackson from working in the entire door-to-door sales industry without regard to whether Sunder markets or sells similar product. The LLC Agreement also purported to prohibit Jackson from working with any current or former Sunder employee or independent contractor irrespective of why the person left Sunder’s employ or the industry in which Jackson might work with such person. In addition, the Restrictive Covenants as written may apply in perpetuity. Worse yet, the Restrictive Covenants were embedded in the LLC agreement without proper disclosure or explanation to the minority members, constituting a breach of fiduciary duty by Sunder’s majority members.

Davis v. Tristar Claims Management Services, Inc., 2024 WL 885440 (Del. Super. Ct. Feb. 29, 2024). In this case, the Delaware Court of Chancery ruled in favor of Tristar Claims Management Services, Inc. (“Tristar”), granting its motion for judgment on the pleadings, finding that Tristar did not breach what was essentially an earn-out provision in the subject Asset Purchase Agreement.

In 2017, James Paul Davis and Thomas Williams (referred to as “Sellers”) sold the assets of their insurance business (“PCS”) to Matrix Absence Management, Inc. (“Matrix”) through an Asset Purchase Agreement (the “APA”). Under the APA, Sellers received cash consideration of $10,000, and each signed five-year Employment Agreement with Matrix. The Employment Agreement entitled Sellers to salary, benefits, bonuses, and performance payments based on revenue growth and operating profit growth during a five-year period. For the performance payments to be triggered, operating profit growth must exceed 8%. PCS did not produce any profits until the fifth year after it was sold to Matrix. In 2021, Tristar acquired Matrix, assuming the latter’s obligations to Sellers under the APA.

Sellers sued Tristar for breach of contract, asserting that they were entitled to $3,195,896 after achieving the operating profit growth required under the APA in the fifth year following PCS’s sale to Matrix. Tristar, Matrix successor-in-interest, disagreed, arguing that there could be no recognizable increase in profit in a year following one where there were no profits. Sellers also claimed that Tristar violated the Delaware Wage Payment and Collection Act by withholding the same performance payments.

The Court of Chancery construed the APA’s definition of Operating Profit Growth to be an increase in operating profit made in one year in relation to the operating profit of the next, presupposing that profits must have been recorded in each year in order for an increase to be considered Operating Profit Growth. The Court additionally took judicial notice of the commonly accepted method of calculating percentage increase, where 0% profit in the preceding year results in a 0% profit increase in the following year, even where a net profit is posted. Accordingly, the Court ruled in Tristar’s favor, finding that the operation profit growth condition was not satisfied because PCS did not have profit in the fourth year.

§ 4.7.2.3. Florida

N. Bay Green Investments, LLC v. Cold Pressed Raw Holdings, LLC, 388 So. 3d 266 (Fla. Dist. Ct. App. 2024). In case, the Florida Third District Court of Appeal affirmed the trial court’s final judgment in favor of Cold Pressed Raw Holdings, LLC (“CPR Holdings”), which included awarding damages and attorneys’ fees. The appellate court also addressed a cross-appeal regarding the trial court’s decisions on the election of remedies and the dismissal of certain counterclaims. This case involves a dispute between LLC members who agreed to dissolve their business, after one of the members failed to satisfy the terms of the dissolution.

In this case, CPR Holdings and Defendants/Appellants North Bay Green Investments, LLC (“North Bay”) entered into a joint venture agreement involving the operation of a business manufacturing organic juices—Green Holdings, LLC (“Green Holdings”). The joint venture faced operational challenges due to various disputes over management of and financial obligations to the joint venture. As a result, the parties later decided to end the joint venture, executing a Settlement Agreement that included terms for payments and the transfer of ownership interests. Under the Settlement Agreement, CPR Holdings transferred its 50% ownership interest in Green Holdings to North Bay, and in return, North Bay agreed to pay CPR Holdings $200,000 in installments pursuant to a promissory note.

North Bay, however, failed to make the first payment under the Promissory Note, so CPR Holdings filed a breach of contract claim. In turn, North Bay filed a fraudulent inducement counterclaim seeking recission of the Settlement Agreement because CPR Holdings allegedly failed to transfer certain of its assets to North Bay. Based on the same alleged conduct, North Bay also asserted that CPR Holdings breached its fiduciary duties and the implied covenant of good faith and fair dealing.

The trial court found in CPR Holding’s favor on several counts, after concluding that North Bay breached the Settlement Agreement and the Promissory Note because it failed to make certain payments required by those agreements. That court also found that North Bay was not entitled to money damages because it elected to sue for recission of contract, therefore waiving the right to money damages. And North Bay’s counterclaims for fraudulent inducement and breach of fiduciary duty were dismissed because they were not adequately supported by the evidence. Finally, because CPR Holdings prevailed on its claims, the trial court awarded attorneys’ fees, as contemplated by the Settlement Agreement. The appellate court affirmed each of the foregoing holdings.

§ 4.7.2.4. Massachusetts

Basani v. Cygilant, Inc., 104 Mass. App. Ct. 1109 (2024). This case concerned a protracted conflict between two minority shareholders and the cybersecurity company they founded. In 2019, the shareholders stepped down from operational roles but retained a 28.14% interest in the company’s preferred stock and contractual rights designed to protect their interests. These rights included veto powers over certain equity financing transactions and provisions to prevent stock dilution.

In 2020, the company sought additional operating capital through equity financing, which required the consent of its minority shareholders. The shareholders refused to grant their consent or waive their anti-dilution rights, citing inadequate financial disclosures and claiming that the proposed financing would harm their interests. Instead, they demanded that the company buy out their shares. When the company rejected the buyout proposal, it pursued alternative financing at a higher cost. As a result, the shareholders filed a breach of contract lawsuit against the company. The company filed counterclaims, accusing the shareholders of acting in bad faith by withholding their consent to the equity financing.

The Massachusetts Appeals Court affirmed the dismissal of the company’s counterclaims. It held that under applicable Delaware law, fiduciary duties arise only for shareholders who exercise actual control over the corporation’s affairs. As minority shareholders, the individuals lacked control over the company’s board or strategic decisions. The court also determined that the shareholders’ actions—refusing to waive contractual rights and requesting further disclosures—were a proper exercise of the protections provided to them under their stock agreements.

§ 4.7.2.5. New York

Behler v. Kai-Shing Tao, 227 A.D.3d 121 (2024). Plaintiff and defendant entered into an oral agreement in which plaintiff would invest $3 million in an LLC with the opportunity to cash out of his investment upon certain conditions being met. When a condition was met, plaintiff demanded he be cashed out, but defendant refused. After the oral agreement was executed and before plaintiff’s demand, the LLC agreement was amended, which included membership interest and distribution clauses. The amended LLC agreement also contained an integration and merger clause. The court held that, pursuant to Delaware law, the amended LLC agreement, by virtue of the merger clause, superseded the oral agreement. The plaintiff, as a member, was bound by the LLC agreement. The court also denied the plaintiff’s claim for promissory estoppel because the LLC agreement governed.

§ 4.7.3. Breach of Fiduciary Duty

§ 4.7.3.1. Delaware

In re Sears Hometown and Outlet Stores, Inc. Stockholder Litig., 309 A.3d 474 (Del. Ch. 2024). The Court of Chancery held that a majority shareholder did not breach his fiduciary duties as a controlling stockholder where he believed in good faith that his actions were in the best interests of the subject company. The Court further held, however, that the transaction pushed through by the majority stockholder was not entirely fair and therefore awarded damages to the minority stockholders.

Sears Hometown and Outlet Stores, Inc. (“SHOS” or “the Company”) conducted business through two segments: (1) the Sears Hometown and Hardware Segment (“Hometown”) and (2) the Sears Outlet Segment (“Outlet”). A committee of independent directors sought to liquidate Hometown and continue operating Outlet. The Company’s controlling stockholder, believing that the liquidation plan would destroy the Company’s value, used his voting power as the controlling stockholder to adopt a bylaw that required that any Hometown liquidation plan receive approval from 90% of the Board at two separate votes taken at least thirty business days apart.

The controller also removed two members of the Board—thereby removing them from the committee as well—and replaced them with two individuals that would likely support his plan even though there were no direct ties between them and the controller. The sole remaining member of the committee and the controller subsequently agreed to an end-stage transaction that eliminated the minority stockholders’ interests in the Company.

A group of minority stockholders filed a complaint against the controller arguing that he breached his fiduciary duties by blocking the liquidation plan. The Court of Chancery held that when exercising stockholder-level voting power, a controller owes (1) a duty of good faith that demands that the controller not intentionally harm the corporation or its minority stockholders and (2) a duty of care that demands that the controller not harm the corporation or its minority stockholders through grossly negligent action. However, a controller is not required to meet the higher standards demanded of directors, who must act affirmatively to promote the best interests of the corporation and must subjectively believe that the actions they take further that objective.

The Court also established that enhanced scrutiny is the appropriate standard of review in cases where “the controller took actions that invaded the space typically reserved for the board of directors.” The Court then held that the controller acted consistent with his fiduciary duties by blocking the liquidation plan, since he (1) believed in good faith that the plan was fundamentally flawed and (2) had sufficient information to make an assessment that was not grossly negligent.

But the Court found that the end-stage transaction failed to meet the requirements of the entire fairness standard, even though the controller sincerely believed that the transaction was fair. The Court noted that when a conflict transaction is not entirely fair, a self-dealing fiduciary is liable without regard to his or her mental state. It therefore awarded damages to the minority stockholders equal to the difference between what they received through the transaction and the fair value of the Company.

Lebanon Cty. Employees’ Retirement Fund v. Collis, 311 A.3d 773 (Del. 2023). The Supreme Court of Delaware reversed and remanded a decision by the Court of Chancery in which the lower court found that the plaintiffs had sufficiently articulated a claim under In re Caremark Intern. Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996), but nevertheless dismissed their complaint after concluding that demand would not have been futile, and the plaintiffs therefore lacked standing.

After AmerisourceBergen Corporation (“AmerisourceBergen” or “the Company”) incurred liability for over $6 billion in a 2021 global settlement related to the Company’s role in the opioid epidemic, the stockholder plaintiffs filed a derivative suit in the Court of Chancery alleging that the company’s directors and officers failed to adopt oversight measures and reasonable policies for preventing the unlawful distribution of opioids. Plaintiffs did not serve a demand on the board prior to filing suit.

The Court of Chancery found that the plaintiffs had sufficiently articulated a claim under Caremark, but dismissed their complaint having determined that demand would not have been futile due to a holding by the United States District Court for the Southern District of West Virginia in opioid-related multidistrict litigation in which that court found that AmerisourceBergen had complied with the law on preventing the diversion of controlled substances. As a result, the Court of Chancery reasoned that the Board did not face a substantial likelihood of liability under the pleaded claims. The West Virginia decision was issued after the plaintiffs had filed their complaint.

On appeal, the Delaware Supreme Court determined that the Court of Chancery had erred by using D.R.E. 202—which provides for judicial notice of law—to effectively adopt the factual findings of another court adjudicating another case, and thereby accept a contradictory version of the well-pleaded facts in the plaintiffs’ complaint, which are presumed to be true under Delaware’s rules of procedure. Furthermore, the Supreme Court found that the Court of Chancery’s reliance on the West Virginia Decision changed the date at which demand futility should be considered to a date six months after the filing of the complaint. Such a change impermissibly deviated from the precedent established in Rales v. Blasband, 634 A.2d 927 (Del. 1993), that demand futility is evaluated as of the time the complaint is filed.

§ 4.7.3.2. Florida

Kinchla v. Ran Investments, LLC, 2024 WL 4096229 (Fla. App. 6 Dist. Sept. 6, 2024). The District Court of Appeal of Florida, Sixth District, affirmed in part and reversed in part the trial court’s decision regarding claims of breach of fiduciary duty, breach of the operating agreement, and indemnification. The appellate court remanded for entry of a revised damages award. This case arose after an LLC member failed to make the capital contributions required and interfered with the LLC’s business opportunity.

Kilgore Properties, LLC (“Kilgore”) was formed to develop and sell real property. Its members were Mark 48, LLC (“Mark 48”), who held a 35% ownership interest, and Nanlann, Inc. (“Nanlann”), which held a 65% ownership interest. Under Kilgore’s operating agreement, Mark 48 was obligated to make a $350,000 capital contribution, but it failed to do so.

Kilgore obtained a mortgage loan to acquire property to be developed and sold. But when Kilgore attempted to sell the property to Saibaba of Orlando, Inc. (“Saibaba”) for $1.6 million, but Mark 48 objected. Mark 48’s alleged conduct caused the sale to fall through, resulting in financial losses for Kilgore when it could not pay its mortgage and defaulted on the loan. Nanlann then filed an action to dissolve Kilgore and force the sale of its property. During litigation, Kilgore’s property was sold to LG 2121 S. Orange, LLC (“LG”) for $1.75 million, and the amounts owned on the mortgage were paid from the proceeds. Having to delay the property’s sale caused Kilgore to pay an additional $173,927 to the bank.

Based on the foregoing facts, Nanlann asserted three claims against Mark 48 and its sole member, Mark Kinchla: (1) breached its fiduciary duty by objecting to the sale of Kilgore’s property to Saibaba; (2) breached the Operating Agreement by failing to make the required $350,000 capital contribution; and (3) failed to make its capital contribution, entitling Nanlann to indemnification. The trial court found in Nanlann’s favor with respect to all three claims, entering judgment against Mark 48 and awarding damages to Nanlann for its breach of contract and fiduciary duty. The trial court also pierced the corporate veil, holding Kinchla personally liable for Mark 48’s misconduct.

The Florida appellate court affirmed the trial court’s rulings on Nanlann’s breach of fiduciary duty and contract claims, but the appellate court reversed the indemnification decision, after finding that Nanlann’s claim was time-barred. The appellate court also found that the trial court was right to pierce the corporate veil and hold Kinchla personably liable for Mark 48’s wrongdoing.

§ 4.7.3.3. Massachusetts

Barr v. Swenson, 104 Mass. App. Ct. 1117 (2024), review denied, 494 Mass. 1108 (2024). This case involved a dispute among shareholders of a closely held family corporation that operates a motel. The plaintiff, a minority shareholder, alleged that her uncles, who served as the corporation’s only board members, breached their fiduciary duties.

The conflict arose when one of the uncle’s children decided to sell shares in the company. Under the corporation’s bylaws, shareholders were required to first offer their shares to the corporation before selling them to another party. However, the company’s bylaws also provided that the board could waive this requirement, which the board routinely did.

In keeping with this practice, the company’s board waived this requirement with respect to the child’s sale of shares. This enabled one of the uncle’s children to sell their shares to the other uncle’s family members, who were also shareholders of the corporation, at $85,000 per share. The plaintiff had previously expressed interest in purchasing shares and claimed she was willing to pay $100,000 per share. She argued that the board’s decision deprived the corporation of a potential profit and accused her uncles of breaching their fiduciary duties. She also alleged that one of the uncles diverted corporate resources to other motels owned by his family.

The Massachusetts Appeals Court upheld the dismissal of the plaintiff’s claims. In doing so, it ruled that the plaintiff failed to establish actionable harm. Her theory, that the company could have profited by buying the shares at an artificially low price and reselling them at a higher price, was, according to the appellate court, speculative and unsupported by corporate law. The court emphasized that fiduciary duties require directors to act in the best interests of the corporation and shareholders but do not obligate them to design transactions that exploit shareholders for corporate gain. Additionally, the court found no evidence to support the plaintiff’s allegations of resource diversion.

§ 4.7.3.4. Minnesota

Absolute Sports Cards, LLC v. Thornton, 2024 WL 4260268 (Minn. Ct. App. Sept. 23, 2024). In considering the duty of loyalty, including the duty not to compete that members owe to one another in a limited liability company, the Minnesota Court of Appeals found that a term of the parties’ Operating Agreement was “manifestly unreasonable” and therefore it was unenforceable and void in Absolute Sports Cards, LLC v. Thornton, 2024 WL 4260268 (Minn. Ct. App. Sept. 23, 2024). The three members of the LLC, which was formed to trade sports cards and other sports memorabilia, agreed to the terms of an Operating Agreement that both prohibited the members from competing with the company while members and for two years thereafter and provided that the noncompetition obligations did not “apply to or be binding upon any Member’s same or similar business in existence at the time of the execution of this Agreement.” Id. at 1. Following formation of the company, two of the three members ended their individual sports- collectibles businesses and transferred their inventory and the proceeds from the final sales to the company. The third member, the defendant in the action, did not stop his individual sports collectible business. The two members ultimately removed the defendant member from the company primarily because he would not discontinue operating his individual competing business.

In defense of his competition, defendant-member argued that the Operating Agreement allowed him to compete. The company argued that the competition exception provided in the Operating Agreement, which they also agreed to, was “manifestly unreasonable” under Minn. Stat. § 322C.0110, subd. 4(1)(iii), which allows members of an LLC to restrict or eliminate the duty to refrain from competing with the company so long as the restriction or limitation is not “manifestly unreasonable.” Ultimately, the Minnesota Court of Appeals held that the “purported agreement to eliminate the members’ duty not to compete with ASC is manifestly unreasonable and, therefore, void” reasoning that the scope of the non-competition obligations in the Operating Agreement were “comprehensive” and the exception to the competition restrictions created an “irreconcilable conflict.” Id. at *3.

For further discussion of Absolute Sports Cards, LLC. v. Thornton, see also sections herein relating to damages.

§ 4.7.4. Civil Theft/Conversion

§ 4.7.4.1. Delaware

Gulf Aviation Services Group WLL D/B/A/ United Aviation v. Wilmington Trust Company, C.A. No. N20C-05-128 AML CCLD, 2023 WL 9118772 (Del. Super. Ct. Dec. 29, 2023). The Delaware Superior Court found that Plaintiff Gulf Aviation Services (“Gulf”) satisfied its burden with respect to its conversion claim, in that Defendant Wilmington Trust Company (“WTC”) had wrongfully sold Gulf’s helicopter after the legal title was passed to WTC through a Trust Agreement.

Gulf had placed its air ambulance helicopter in a trust with WTC as trustee so that Gulf could operate the helicopter under an FAA registration overseas. After the relationship between Gulf and WTC fell apart, the trust agreement was terminated. Subsequently, WTC transferred the helicopter to a third party, who claimed to have an ownership interest in the helicopter pursuant to a foreign court’s order, without investigation of the third party’s claim or notice to Gulf.

The Court held that Gulf’s conversion claim was not a breach of contract claim improperly bootstrapped onto a tort claim because (1) WTC’s powers under the Trust Agreement terminated before it sold the helicopter and (2) Gulf’s claim arose from general common law tort principles independent of any contractual relationship between the parties. The Court also noted that demand for the return of the property is not required before pursuing a conversion claim when the claim arises from the disposal of the property through a lease, pledge, or sale. After articulating these principles, the Court found that WTC was liable for converting the helicopter through a wrongful sale following WTC’s resignation from its position as the Owner Trustee and the termination of its rights to sell the helicopter under the Trust Agreement.

With respect to valuation, the Court noted that the ruling in Segovia v. Equities First Holdings, LLC, 2008 WL 2251218 (Del. Supr. May 30, 2008), “does not stand for the broader proposition that the amount of any encumbrance must be subtracted from the converted property’s fair market value.” It then rejected WTC’s argument that the amount of any third-party encumbrance must be subtracted from the property’s fair market value and noted that Segovia was distinguishable because it related to a loan made by the defendant in that case.

The Court also found that, with respect to WTC’s counterclaim for breach of contract, (1) Gulf had failed to plead the statute of limitations as an affirmative defense under 10 Del. C. § 8106, and (2) was liable for breaching the Trust Agreement by failing to pay WTC’s fees from 2010 to 2015.

Lastly, the Court held that WTC’s indemnification claim for costs and attorneys’ fees failed because (1) litigants in Delaware are generally responsible for their own litigation costs and (2) the relevant section of the Trust Agreement did not explicitly and unequivocally operate as a fee-shifting provision for litigation.

§ 4.7.5. Declaratory/Equitable/Statutory Relief

§ 4.7.5.1. California

Samuelian et al. v. Life Generations Healthcare, LLC, et al., 104 Cal. App. 5th 331 (Cal. Ct. App. 2024). The California Court of Appeals held that a noncompetition provision included in an operating agreement adopted after the sale of a partial business interest cannot be considered inherently anticompetitive under Cal. Bus. & Prof. Code, § 16600, subd. (a) and must be scrutinized under the reasonableness standard to determine whether it has any procompetitive benefits, in light of the selling owner’s continuing connection to the business. When applying this standard, courts can assess the reasonableness of any contractual fiduciary duties imposed on a member in a member-managed or manager-managed company through the adoption of an operating agreement.

The Court’s ruling here does not nullify the rule, articulated in Ixchel Pharma, LLC v. Biogen, Inc., 9 Cal. 5th 1130 (Cal. 2020), that noncompetition restraints following the sale of a business interest are invalid per se. Instead, the Court concluded that this rule related to circumstances in which noncompetition restraints following the sale of an entire business do not contain any goodwill, such as where the seller did not own a substantial interest in the company or where goodwill was not included in the sale price.

§ 4.7.5.2. Delaware

In re Triple S Minerals Resources Corporation, C.A. No. 2024-0262-JTL (Del. Ch. Mar. 20, 2024) (Order). The Court of Chancery denied the petition by Tronox LLC (“Tronox”), the sole stockholder of Triple S Minerals Resources Corporation (“Triple S”), for the appointment of a limited purpose receiver for the dissolved Delaware corporation, Triple S.

Even after it was allegedly dissolved, Triple S still held assets, specifically a royalty interest in Canadian mineral exploration properties originally acquired in 1997. Tronox executed a royalty purchase agreement to sell its royalty interest and claimed that appointing a receiver was necessary to meet certain closing conditions of the purchase agreement. Accordingly, Tronox filed a verified petition seeking the appointment of a receiver under Section 279 of the Delaware General Corporation Law (“DGCL”) to manage Triple S’s dissolution and transfer its remaining assets, including a royalty interest in Canadian mineral exploration properties. Tronox also moved to expedite the proceeding because of deadlines associated with the royalty purchase agreement and proposed a Tronox officer as the receiver.

The Court denied Tronox’s petition, finding that the petition and the affidavit of Tronox’s officer did not provide sufficient factual information about the proposed receiver to assess their suitability. Among other failings, the petition failed to identify an agent for service of process in Delaware and did not comply with Court of Chancery Rule 150, requiring the receiver to be a Delaware resident or seek an exemption under Rule 148. The petition also failed to address whether service of process on other potentially interested parties, such as B2Gold Corp., was warranted.

The Court of Chancery ordered Tronox to supplement the record with the needed detail about the proposed receiver and to identify all assets that the receiver would transfer.

§ 4.7.5.3. Florida

Ganiban v. McManus, 372 So. 3d 319 (Fla. Dist. Ct. App. 2023). The District Court of Appeal of Florida, Fifth District, dismissed the petition for certiorari review as moot and held that the motion for reconsideration did not toll the deadline to file the petition. This case involves a dispute among physicians in an optometry practice over their respective ownership interests in entities related to their practice and investments.

Plaintiff/Respondent Dr. James N. McManus initially sued Defendants/Petitioners Dr. Gary J. Ganiban, Dr. Michael N. Mandese, Dr. Jason K. Darlington, Dr. Eric Straut, and Dr. Hetal Vaishnav to resolve disputes over (1) their respective ownership interests in corporate entities formed to manage and operate their optometry practices and related investments and (2) Defendants/Petitioners’ alleged breaches of fiduciary duty. Plaintiff/Respondent also sought to enjoin Defendants/Petitioners’ allegedly improper efforts to dissolve and wind down the entities in which the parties share ownership.

While Plaintiff/Respondent’s motion for injunctive relief was pending, the parties agreed to a court order to maintain the “status quo” for a period of 100 days to allow for a potential resolution or until the court could hear the preliminary injunction motion. The trial court granted Plaintiff/Respondent’s motion to preserve the status quo, and the related order prevented Defendants/Petitioners from terminating or not renewing Plaintiff/Respondent’s employment contract so that he could continue to see patients and run his practice. The trial court also held Defendants/Petitioners in contempt for violating a prior court order related to preserving the status quo.

Defendants/Petitioners filed a petition for certiorari to review the trial court’s rulings. The appellate court found that the petition for certiorari was moot because the 180-day extension period in the status quo order had expired, and the trial court had denied Plaintiff/Respondent’s renewed motion for a preliminary injunction. The appellate court further held that Defendants/Petitioners’ motion for reconsideration of the contempt order did not toll the 30-day deadline to file a petition for writ of certiorari. Since the petition for certiorari was not filed within this timeframe, the appellate court dismissed the petition for lack of jurisdiction.

Haskell v. PCP Grp., LLC, 386 So. 3d 644 (Fla. Dist. Ct. App. 2024). The District Court of Appeal of Florida, Second District, reversed the trial court’s summary judgment in favor of PCP Group, LLC, and remanded with instructions to enter final summary judgment in favor of Unni Haskell. This case arose after the plaintiff received ownership interests in an LLC as part of her divorce settlement, and the LLC attempted to force her to sell the ownership interest back to the company.

In this case, Unni Haskell was awarded membership units in PCP Group, LLC (“PCP”), as part of the resolution of divorce proceedings with John Haskell, her former husband. John Haskell initially failed to transfer his PCP units to Unni Haskell, attempting to sell those units to another member of PCP. The divorce court invalidated that sale, and Unni Haskell was declared the rightful owner of the units.

PCP responded by filing a declaratory judgment action against Unni Haskell, arguing that PCP’s operating agreement required Unni Haskell to sell her units back to PCP under its “Deemed Offers to Sell” (“DOTS”) provision. That provision states that “[n]otwithstanding anything in [the operating agreement] . . . the Company and the Non-Selling Class A Members shall have the right to purchase” all of a member’s units, even if the member or his or her spouse are transferring units pursuant to a court-ordered property settlement agreement, after a divorce. The DOTS provision also required the member to give written notice to PCP and the non-selling Class A members in the event of a divorce, or other triggering event.

The trial court granted summary judgment in favor of PCP, requiring Unni Haskell to sell her units back to the company. Unni Haskell appealed, and applying de novo review, the appellate court concluded that the DOTS provision did not apply to Unni Haskell’s situation since the transfer of ownership had already been completed through the divorce judgment. That court found that the DOTS provision language imposed obligations on a member seeking to transfer his units, not on the transferee, after the transfer has been completed. Because Unni Haskell was the undisputed owner of the membership units at issue, the DOTS provision did not impose a burden on her to sell the units back to PCP. The appellate court further concluded that interpreting the DOTS provision to require Unni Haskell to sell her units to PCP would rewrite the operating agreement, which was not permissible.

The appellate court reversed the summary judgment in favor of PCP and remanded the case with instructions for the trial court to enter final summary judgment in favor of Unni Haskell.

§ 4.7.5.4. Illinois

Machnicki v. Nowobilski, 2024 IL App (3d) 230306-U (Feb. 29, 2024). Plaintiff Richard Machnicki and defendant John Nowobilski each owned 50% of the shares of Northstar Foods, Inc., a meat processing business. The corporation had three directors—Richard, John, and John’s wife Donna. John and Donna were the corporation’s only officers and were primarily responsible for its operations.

While the business was quite successful, the relationship between Richard and John deteriorated. Disputes arose as to, among other things, director and officer compensation and certain real estate-related matters. Richard requested books and records pursuant to section 7.75 of the Business Corporation Act of 1983, but John refused to provide the requested records.

Richard filed suit, claiming misuse of corporate funds and seeking books and records. Among other claims, he asserted a derivative claim for oppression under section 12.56 of the Business Corporation Act. John filed a counterclaim. He, too, asserted oppression under section 12.56 of the Business Corporation Act, and he sought an order valuing the company and requiring a buyout.

During the litigation, the company received a letter of intent (LOI) from a third-party to purchase the company’s assets for $30 million. John refused to share the LOI with Richard, however, and Richard refused to agree to the proposed sale.

John thereafter filed a motion for a preliminary injunction. He argued the shareholders were deadlocked and sought an order forcing a company sale or a buyout of shares.

Following an evidentiary hearing, the circuit court granted John’s motion for a preliminary injunction. In its order, the court found that the fair value of the company was $35 million and ordered John to buy out Richard’s interest for $17.5 million. Richard filed an interlocutory appeal.

On appeal, Richard argued that the preliminary injunction order was improper because it altered the status quo and because the parties did not have the opportunity for full discovery or a trial regarding the fair value of the company.

The appellate court agreed. It reversed the circuit court’s preliminary injunction order. The appellate court noted that a preliminary injunction should ordinarily preserve the status quo pending a final resolution on the merits of the case. The court noted that a preliminary injunction may alter the status quo in rare circumstances where maintaining it would cause irreparable harm to the company. In this case, however, it found that the company was performing well and that John was free to sell his 50% interest to any third party. It therefore held that there was no compelling reason to change the parties’ relationship by forcing a buyout without conducting a full trial regarding the fair value of the company.

Casas v. Ferrarini, 2024 IL App (1st) 220511-U (Mar. 29, 2024). Plaintiff Christopher Casas and defendant Marco Ferrarini operated multiple businesses together, including a restaurant, a coffee shop, and a vintage motorcycle dealership. The businesses were conducted through FerCas, LLC, an Illinois limited liability company. Casas owned his interest in FerCas through KS&T, a sole proprietorship that was later registered as an LLC. Ferrarini owned his interest through MLL, Ltd., an Illinois corporation. Both companies were identified in FerCas’s founding documents as members of FerCas.

Eventually, MLL purported to notify KS&T that it was dissociated from FerCas because KS&T had never been legally formed as an Illinois LLC, as the parties had intended when they began the business. Ferrarini used this as a basis to exclude Casas from the business.

Casas brought suit, individually and derivatively on behalf of FerCas. He sought a declaratory judgment as to his ownership in FerCas through KS&T, judicial supervision of the windup of FerCas pursuant to section 35-4 of the Illinois Limited Liability Company Act, an accounting, and damages for alleged breaches of contract, breaches of fiduciary duty, and unjust enrichment.

The circuit court granted summary judgment on standing. It found that although KS&T was not a registered entity at the beginning of the parties’ relationship, it could be considered a sole proprietorship, and that Casas was entitled to exercise KS&T’s rights and receive its benefits as a member of FerCas. The circuit court further found that by excluding Casas from the business on this basis, Ferrarini had violated his fiduciary and other legal obligations to Casas.

The case proceeded to trial on damages. The circuit court awarded compensatory damages of approximately $1.6 million and punitive damages of double that amount.

The appellate court affirmed the circuit court’s judgment. After addressing a number of purported procedural errors, the court turned to the damages award. Defendant argued that the award of compensatory damages was against the manifest weight of evidence because it failed to account for certain expenses of the business. The circuit court, however, relied on the fact that defendant withheld documents in discovery and that plaintiff deducted the expenses to which he had access from his proposed award. The appellate court affirmed, holding that the award was sufficiently based on the available evidence.

The appellate court also affirmed the circuit court’s award of punitive damages. The appellate court relied on the circuit court’s findings that Ferrarini’s exclusion of Casas from the business was “willful and outrageous” and that it was done so that Ferrarini could use the business as his personal “piggy bank.”

Kodryan v. Lukaszewicz, 2023 IL App (1st) 231280-U (Nov. 9, 2023). Plaintiff Edward Kodryan and defendant Daniel Lukaszewicz were each 50% owners and the sole members and managers of NorthShore Car Center, LLC. Formed in 2017, NorthShore offered automotive repair and car wash services.

By 2020, the members’ relationship had deteriorated. In his complaint, Kodryan alleged that Lukaszewicz denied Kodryan access to the company’s bank accounts and financial information, that he obtained a loan without Kodryan’s consent and the Lukaszewicz was making personal use of company assets. Kodryan asserted a claim for breach of fiduciary. He sought dissolution of the company and an accounting.

Lukaszewicz counterclaimed, alleging that Kodryan withdrew company funds for personal use and otherwise wasted company resources. He also sought dissolution and an accounting.

During the litigation, the appellate court permitted Kodryan to amend his complaint to add allegations that Lukaszewicz withdrew company funds from its accounts, that certain assets were unaccounted for, and that Lukaszewicz had begun operating a separate business at the same location under the name “NorthShore Car Care.”

Kodryan sought appointment of a receiver. Following briefing and argument, the appellate court granted the motion to appoint a receiver. Thereafter, the parties suggested potential receivers and the Court entered an order appointing one. Lukaszewicz thereafter filed a notice of interlocutory appeal.

The appellate court first determined that the appeal was timely because the time within which to appeal ran from the order appointing a specific receiver, rather than the earlier order granting the motion to appoint a receiver.

The appellate court next turned to the merits. It noted that a motion to appoint a receiver is a drastic remedy, available only in cases of “urgent necessity.” Lukaszewicz argued that the circuit court abused its discretion in appointing a receiver because (1) it failed to make detailed findings in its written order, and (2) it did not conduct an evidentiary hearing.

The appellate court rejected these arguments and affirmed the circuit court. It held that because there was no transcript of the hearing at which the receiver was appointed, it could not determine the circuit court had failed to make the requisite findings. The court also rejected the argument that an evidentiary hearing was required. It found it significant that Kodryan had attached affidavits and documents showing that Lukaszewicz was running a competing business out of their facility. This, the court held, was sufficient to support the circuit court’s order.

§ 4.7.5.5. New Jersey

Patel v. New Jersey Dep’t of Treasury, Div. of Revenue & Enter. Servs., 479 N.J. Super. 26, 318 A.3d 685 (App. Div. 2024). This case resolved a matter of first impression in New Jersey: the proper way to rescind a certificate of dissolution and termination of a New Jersey LLC filed erroneously and without authorization. In this action, a sole member of an LLC filed a complaint against the Division of Revenue and Enterprise Services to compel it to reinstate the LLC. The Department terminated the LLC in response to a former member’s filing of a certificate of dissolution and termination. The remaining member alleged this was done without authorization and asked that the LLC be reinstated to prevent loss of its business licenses.

New Jersey has no statutory authority on LLCs to resolve the issue or authorize the Department of Treasury to perform a recission. Despite the silence on the matter in the LLC statutory scheme, the Court reasoned the longstanding principle of statutory interpretation is to construe laws in a “sensible manner,” which at times may mean interpreting “literal contents of a statute in a manner that advances its manifest purposes.” Here, the Court found that the manifest purpose of the RULLCA “is to assure that the filings with the Division concerning the status of an LLC are up-to-date and duly authorized,” which imposes an obligation to correct erroneous information. All counsel in this matter agreed there should be a clear avenue to pursue rescission of a dissolution and termination on equitable grounds in the instance, such as this one, where the certificate is filed improperly. The Court held that the appropriate mechanism to do so is through civil action in trial court. Accordingly, this matter was remanded to the trial court for further proceedings and findings of fact.

§ 4.7.5.6. New York

Weinstein v. Wallace, 219 N.Y.S.3d 172 (2024). The plaintiff and his siblings executed an operating agreement for a funeral services business. The operating agreement designated the plaintiff’s brother as the manager of the company. The plaintiff and his brother eventually each owned 50% of the membership interest in the company. The plaintiff instituted this action after his brother died to be declared the sole voting member and manager of the company. The court held that the operating agreement unambiguously provided that a deceased member’s estate shall have all of the rights of the member, which would include voting rights. Therefore, the deceased’s estate became a voting member of the company. Plaintiff also did not become the manager of the company upon his brother’s death as the operating agreement required a manager be elected by the members.

§ 4.7.5.7. Pennsylvania

In re Mt. Vernon Tenants Association, Inc., 322 A.3d 1002 (Pa. Commw. Ct. 2024). A board member, Lundy, filed a Complaint for Dissolution and applied for the appointment of a receiver. The trial court granted the application for appointment of a receiver on grounds not included in the application and the association appealed. The Commonwealth Court held that the trial court was not limited to considering only the grounds raised in the application and affirmed the appointment of the receiver.

§ 4.7.5.8. Texas

Multi-Hous. Tax Credit Partners XXXI v. White Settlement Senior Living, LLC, No. 05-22-00721-CV, 2024 WL 301916 (Tex. App.—Dallas Jan. 26, 2024, pet. denied). The partnership was formed and organized to construct, own, operate, and sell residential units in a housing property to qualify for federal tax credits pursuant to the low-income housing tax credit program. The governing document—the limited partnership agreement—included an option provision for White Settlement Senior Living, LLC to purchase Multi-Housing Tax Credit Partners XXXI’s interest in the partnership. The partnership agreement also included an arbitration provision. White Settlement exercised its option, a valuation dispute ensued, the parties engaged in contested arbitration, and an appeal followed.

On appeal, Multi-Housing Tax Credit Partners argued in part that White Settlement Senior Living, LLC’s “unclean hands” supported a conclusion that it breached its fiduciary duties. The court of appeals, however, noted that the arbitrator’s award included findings that there was no evidence that the parties had a special relationship establishing a fiduciary duty. Instead, “[b]oth sides [were] sophisticated business entities represented by numerous attorneys and experts in the field. The industry involved here [was] one where sharp dealing is the norm and no expectation arises that good faith and fair dealing is the standard when it comes to compliance with contractual obligations.”

Chow v. McIntyre, No. 01-21-00658-CV, 2023 WL 7778602 (Tex. App.—Houston [1st Dist.] Nov. 16, 2023, no pet.). The parties were members and managers of two companies that own and operate a business park. The parties settled an internal business dispute by executing an agreement under which one group of parties had the right to buy out another group at a specified price within 60 days. If the first group failed to do so, the second group was obligated to buy the first group out at a specified price. A buyout never occurred by either group. The first group then filed a suit in which they alleged that the second group breached the settlement agreement by unreasonably refusing to cooperate in settlement—thwarting their attempted buyout. The second group countersued alleging that the first group had breached the agreement by refusing to be bought out after failing to complete a timely buyout themselves.

The parties’ breach-of-contract claims were tried to a jury, which sided with the second group. The parties did not submit a question on damages to the jury. Instead, based on the jury’s finding, the second group asked the court to enforce the settlement agreement through the equitable remedy of specific performance (i.e., they requested a judgment compelling the first group to sell their interests at the specified price). The first group opposed specific performance by arguing that the second group had not complied with the terms of the agreement and also by arguing that the second group’s “unclean hands” precluded them from invoking or obtaining equitable relief of any kind. The trial court rendered judgment that both parties take nothing on their respective claims. The trial court also denied all requests for attorney’s fees and all other requested relief. Both sides appealed.

The court of appeals upheld the jury’s findings after determining that the evidence was factually sufficient to support the jury’s verdict. As to the “unclean hands” argument, the court of appeals determined that, reduced to its essence, the first group’s position was that the trial court could deny specific performance to the second group because they breached the settlement agreement, even though the jury found otherwise. However, even an admitted breach of contract—in and of itself—will not generally support an invocation of the unclean hands doctrine. E.g., Stewart Beach Condo. Homeowners Ass’n, Inc. v. Gili N Prop Invs., LLC, 481 S.W.3d 336, 351–52; LDF Constr. v. Bryan, 324 S.W.3d 137, 149–50 (Tex. App.—Waco 2010, no pet.). Here, in stark contrast, the jury found that the second group did not breach the settlement agreement, and the court of appeals separately affirmed that verdict. Hence, the court of appeals determined, the “the trial court could not rely on the doctrine of unclean hands to deny [the second group] specific performance without abusing its discretion.” Accordingly, the court of appeals reversed and rendered in part.

§ 4.7.6. Statute of Limitations

§ 4.7.6.1. Nevada

Urb. Outfitters, Inc. v. Dermody Operating Co., LLC, 705 F. Supp. 3d 1174, 1177 (D. Nev. 2023). The federal district court declined to read into the statute of limitations on post-dissolution actions the “discovery rule”—wherein the three-year limitation commenced only after discovery of the claim—and found that the three-year limitation commenced the day of the corporation’s dissolution.

In a breach of contract action involving the construction of a distribution center, which was completed in 2012, plaintiff brought claims against the developer and the general contractor in 2021. The developer brought third-party claims against a subcontractor for indemnification and contribution. The subcontractor, however, dissolved as a corporation in 2014. In response to the third-party claim, the subcontractor filed a motion to dismiss contending that the three-year statute of limitations commenced the date of the subcontractor’s dissolution and therefore the claims were time barred. The subcontractor argued that the plain language of the statute requires any cause of action against a dissolved corporation be commenced within three years of its dissolution. In response, the developer claimed that because it did not learn of any alleged harm until it was sued, the applicable statute of limitation did not begin to run until the developer “discovered” the facts giving rise to the claims. The court agreed with the subcontractor and found that the third-party claims were time barred. While other statutes of limitation apply the discovery rule, i.e., the clock begins when plaintiff learns or should have learned about the claim, such language is notably absent in the statute of limitation on post-dissolution actions. Had the legislature intended for the deadline to bring post-dissolution claims well beyond three years, as the developer advocates, the statute would have included the discovery rule. Moreover, the legislative minutes provided helpful insight wherein the stated goal was to have an absolute stop-date on when claims may be brought post-dissolution.

§ 4.7.6.2. Pennsylvania

Matthew Serota, Derivatively on Behalf of London Towne Homeowners Association v. Matthew J. Mager, 304 A.3d 828 (Pa. Commw. Ct. 2023). Two-year statute of limitations for interference with contractual relations against member of a homeowner’s association was tolled by the derivative demand letter.

§ 4.8. Valuation and Damages

§ 4.8.1.1. California

Shah v. Skillz Inc., 320 Cal. Rptr. 3d 175 (2024). Former employee brought action against employer, a startup, for breach of contract, retaliation, and wrongful termination, alleging employer lacked cause to terminate him two years before its initial public offering (“IPO”) and thereby wrongfully prevented him from exercising stock options. Following trial and grant of employer’s motion for directed verdict as to claims for retaliation and wrongful termination, the trial court entered judgment on jury’s verdict awarding employee $11,557,173 for breach of contract, then denied employer’s motion for judgment notwithstanding the verdict (“JNOV”), denied its motion for new trial on condition that employee accept remittitur in the amount opined by the company’s expert witness or $4,358,358, and after employee did so, entered amended judgment for employee in such amount. Employee appealed and employer cross-appealed on several grounds, including the appropriate measure of damages. Employer appealed the damages awarded as being contrary to law because they were not measured as of the date of breach. While the employee contended that the jury verdict in excess of $11.5 million should be reinstated because of errors in the trial court’s new trial orders and remittitur, which predicated on the opinion of employee’s expert who opined that value is based on employee holding on to shares from his option until after the IPO.

The Court of Appeals ruled that damages for lost stock options in a breach of contract action may be measured from a date other than the date of breach based on equitable considerations, including whether a reasonably available market for the stock exists at the time of breach. The appellate court found that at the time of the employee’s termination, the shares in the company, a private company, could not be sold on the open market. There was no public market for those shares until the IPO. Meanwhile, the record showed that the employee joined the company with hopes that the company goes public. The trial court using the price of company stock after the IPO is essentially the equivalent of the benefits of bargain the employee agreed to and deemed proper. A contrary ruling under these circumstances would allow a private startup company to take away stock options earned by a terminated employee with relative impunity before the company has been sold or goes public because the financial consequences of doing so would be negligible. The appellate court was aware of no California case law that contemplates such an inequitable result solely because the employee is limited to breach of contract damages.

§ 4.8.1.2. Illinois

Schultz v. Sinav Ltd., 2024 IL (4th) 230366 (Apr. 5, 2024). Plaintiffs were the minority owners in a Delaware limited liability company, Illinois River Energy Holdings, LLC (IREIH or the “company”), which was formed to operate an ethanol plan in Rochelle, Illinois. Plaintiffs brought suit against the majority owner, GTL Resources USA (GTL USA) following a cash-out merger in which GTL USA acquired all interests in the company. Following the merger, GTL sold the company to a third-party.

Plaintiff also sued four individual members of the company’s board of managers appointed by GTL USA, together with certain investors and merger-related entities that facilitated the two corporate transactions. Plaintiffs did not seek to unwind the transactions. Rather, they sought only damages.

Following two bench trials, the circuit court found that the majority owner and board members breached their fiduciary duties to the plaintiffs in approving the cash-out merger. The circuit court held that the appropriate remedy was compensatory damages, which were computed by determining the fair value of the shares before the merger ($2.78 per share) and subtracting the price obtained in the merger ($1.10 per share). This resulted in a damages award of approximately $11.9 million.

The circuit court also held that the investor and merger-related defendants were not liable for tortious interference, among other claims. Both plaintiffs and certain defendants appealed.

On appeal, the appellate court focused on four issues: (1) the contractual and common law duties owed to plaintiffs by the defendants; (2) whether liability was established; (3) the appropriate remedy; and (4) the valuation of the company as it related to plaintiffs’ remedy.

The appellate court held that GTL USA controlled the cash-out merger and that while it owed no express contractual duty to the minority under the company’s operating agreement, it owed common law fiduciary duties. Relying on decisions of the Delaware Supreme Court and Delaware Court of Chancery, the appellate court applied the “entire fairness” doctrine, under which the majority owner in a cash-out merger bears the burden of demonstrating that the merger was the result of a fair process and that it obtained a fair price for the company’s shares. The court affirmed the circuit court’s decision that GTL USA failed to meet this burden, and it affirmed judgment on liability against it.

Likewise, the appellate court affirmed the circuit court’s finding that GTL USA’s individually appointed board members violated their legal duties to the minority owners. However, the court remanded for a determination of whether the individual defendants were excused from paying damages under exculpatory language in the company’s operating agreement.

As to the measure of damages, the appellate court remanded for the circuit court to consider whether rescissory damages were appropriate or whether such damages—in the form of an increased price of the stock after the merger—should be taken into account in assessing the compensatory damages to be awarded to the plaintiffs.

On valuation, the appellate court rejected plaintiffs’ argument that the circuit court was required to appoint an independent appraiser. Although the rulings were moot because the court ordered a new trial on damages, the appellate court also noted that the circuit court’s reliance on a discounted cash flow method of valuing the company’s shares, and its calculation of the weighted cost of capital rate, were not per se unreasonable.

Finally, the appellate court held that because certain investor-defendants and merger-related defendants were not party to the company’s operating agreement, which contained a jury-trial waiver, the circuit erred in striking plaintiffs’ jury demand against those defendants. It therefore reversed the circuit court’s judgment in favor of those defendants on plaintiffs’ claim for tortious interference with contract, and it remanded the case for a jury trial on that claim.

§ 4.8.1.3. Minnesota

Absolute Sports Cards, LLC v. Thornton, 2024 WL 4260268 (Minn. Ct. App. Sept. 23, 2024). Appellant and two other men formed Absolute Sports Cards, LLC (“ASC”) for the purpose of trading sports cards and other sports collectibles in 2016. They executed an Operating Agreement that included a broad prohibition against competing with ASC while a member and for the following two years after membership ends. However, a separate provision in the Operating Agreement stated that the competition prohibition would not be applicable to any member’s “same or similar business in existence at the time of the execution of the Agreement.”

After executing the Operating Agreement, the other two members concluded their sports-collectibles businesses and transferred inventory to ASC. Appellant did not do so and continued to operate his own business without transferring any of his sales to ASC. In 2018, the other two members voted to remove Appellant because of his competition with ASC.

ASC initiated an action against the competing member alleging competition in violation of the Operating Agreement, seeking expulsion, damages, and an injunction. The competing member argued that the district court abused its discretion in awarding lost profits as damages. Appellant also disputed the district court’s valuation of his share on the effective date of his expulsion.

The Minnesota Court of Appeals rejected the competing member’s arguments. ASC did not need to use the exact phrase “lost profits” in the pleadings. Because ASC alleged the competing member breached the Operating Agreement and requested the amount “equal to the amount [the competing member] derived by competing with the Company,” the Court found this sufficient to put the competing member on notice. The competing member also disputed the calculation of the award because it was based on his competing company’s sales. The district court found that the causal link was sufficient, because he otherwise would have sold those cards through ASC as his fellow ASC members did.

The competing member also contended that the district court erred in its choice of valuation date for his membership interest as of the effective date the other members voted to remove him from the company arguing that he was still a member at that point until there was a judicial order removing him. The Court found no error because the competing member did not contribute to the growth from the date he was voted out by the other members until the court-ordered expulsion. The Court reasoned that the competing member “should not be able to capitalize upon gains and value realized during [the] lawsuit.”

For further discussion of Absolute Sports Cards, LLC v. Thornton, see also sections herein relating to breach of fiduciary duty.

§ 4.8.1.4. Texas

Hernandez v. Ayala, No. 05-23-00549-CV, 2024 WL 3040409 (Tex. App.—Dallas June 18, 2024, no pet.). Hernandez and Ayala purchased a farm together in 2014. According to Hernandez, the farm belonged to Hernandez. Hernandez believed that Ayala was just a cosigner and had no idea Ayala’s name was on the deed, or that he owned fifty percent of the farm, until the underlying dispute arose in 2021. According to Ayala, they intended to purchase the farm together, as Hernandez was helping him with cattle on his land nearby and they thought it would be a good investment.

Following a dispute in 2021, the parties discussed Hernandez purchasing the farm from Ayala, but Ayala believed the offers were too low and communication stopped between them. Ayala went out to the farm to discuss the matter, but the gates were locked, and he could not enter the property. He retained counsel, and counsel sent a demand letter stating that Ayala was offering to sell his one-half interest in the farm for $250,000 in lieu of pursuing litigation. Hernandez did not accept Ayala’s offer and filed suit to recover the farm.

Ayala filed a separate suit against Hernandez, alleging claims for breach of fiduciary duty, conversion, and theft of property. Specifically, Ayala alleged that Hernandez breached his fiduciary duties by seizing partnership property, locking Ayala out of partnership assets, taking partnership funds for personal use, and seeking to deny the partnership after openly participating and benefiting from the partnership. Ayala further alleged that the breach injured him by depriving him of the benefits of the partnership, which resulted in lost revenues and opportunities of at least $250,000. Ayala also sought to partition the partnership property by sale, as the buildings and improvements could not be physically divided, and for expulsion of Hernandez from the partnership or the dissolution of the partnership. Hernandez answered, generally denying all allegations asserted by Ayala and specifically denying that a partnership existed between the parties.

The jury found that a partnership, as well as a relationship of trust, existed between the parties and that Ayala complied with his fiduciary duty to Hernandez, but that Hernandez did not comply with his duties owed to both Ayala and the partnership. The jury found that $104,000 would fairly and reasonably compensate Ayala for his damages that were proximately caused by the conduct of Hernandez. The jury further found that Hernandez was liable for theft and conversion; however, found $0 in damages for each of those causes of action. The trial court ordered the partnership to be dissolved and appointed a receiver to dispose of the real and personal property in dispute.

The court of appeals held that the evidence was legally insufficient to support the award of damages—and so reversed and rendered. During the trial, Ayala was asked to list the partnership assets he believed remained on the property when he was locked out, and counsel asked him how much he thought each item was worth. He listed many items—and estimated each item’s value—but provided no basis for nearly all the valuations.

The court explained that, generally, market value is established through expert testimony. See Reid Rd. Mun. Util. Dist. No. 2 v. Speedy Stop Food Stores, Ltd., 337 S.W.3d 846, 851–52 (Tex. 2011). However, a property owner may testify to property value if certain requirements are met. The Supreme Court of Texas has explained:

Because property owner testimony is the functional equivalent of expert testimony, it must be judged by the same standards. Thus, as with expert testimony, property valuations may not be based solely on a property owner’s ipse dixit. An owner may not simply echo the phrase “market value” and state a number to substantiate his diminished value claim; he must provide the factual basis on which his opinion rests. This burden is not onerous, particularly in light of the resources available today. Evidence of price paid, nearby sales, tax valuations, appraisals, online resources, and any other relevant factors may be offered to support the claim.

Nat. Gas Pipeline Co. of Am. v. Justiss, 397 S.W.3d 150, 159 (Tex. 2012). This requirement is typically met if the property owner testifies that he is familiar with the market value of his property. Id. at 155–56. However, failure to meet this standard renders the evidence of value legally insufficient, even when unchallenged by the opposing party, because it amounts to no evidence at all. Id. at 156–58. Because Ayala provided no basis for his valuations, and because he did not testify that he was familiar with the market value of the property or otherwise explain how he determined the value of each item, his testimony was insufficient to support the award of damages.