On April 11, the US Department of the Treasury announced a Notice of Proposed Rulemaking (NPRM) amending the regulations that govern the operations of the Committee on Foreign Investment in the United States (CFIUS, or the Committee). CFIUS is the US government body that reviews potential national security concerns resulting from foreign investments in and acquisitions of US businesses and certain real estate.

Intended to demonstrate the Committee’s “focus on monitoring, compliance, and enforcement,” the NPRM proposes to increase penalty amounts, expand CFIUS’s authority to request information, and tighten the time frame parties have to respond to mitigation agreement terms. (CFIUS sometimes conditions approval of a transaction on the parties accepting terms to mitigate perceived national security risk.)

The public comment period closed on May 15, and the proposed changes will not take effect until a final rule is issued. Regardless of the specifics of the final rule, the result will be a more robust CFIUS. US sellers, and foreign buyers and investors, need to plan accordingly.

Background on CFIUS

CFIUS is an interagency committee with the authority to review transactions involving foreign investment in the United States and in certain US real estate (covered transactions). Chaired by the Treasury Department Secretary, CFIUS includes representatives from the Departments of Commerce, Defense, Energy, Homeland Security, Justice, and State; the Office of the US Trade Representative; and the Office of Science & Technology Policy. Several White House offices also participate in the Committee.

CFIUS reviews the national security implications of covered transactions and has the authority to impose conditions on transactions to mitigate associated national security risks. Most submissions to CFIUS are made on a voluntary basis; however, certain circumstances require parties to submit a mandatory declaration. The Committee may also investigate non-notified transactions, which remain subject to potential CFIUS review indefinitely.

Transactions notified to the Committee can take two forms: a formal notice subject to a review period of forty-five days, or a shorter-form declaration subject to a thirty-day review period (though at the end of this period, CFIUS may request submission of a formal notice). At the conclusion of the forty-five-day review period, CFIUS may initiate a further investigation of another forty-five days. In rare cases, CFIUS may recommend that the president block a transaction. Parties must respond to requests for information from the Committee at any point in this process.

Increased Penalties

As described in the NPRM, CFIUS determined that the current maximum penalty for violations of CFIUS regulations—$250,000 or the value of the transaction (whichever is greater)—does not sufficiently deter certain violations. Given that the median value of covered transactions reviewed by CFIUS was $170 million in recent years and that the definition of “transaction” within the regulations can lead to substantial undervaluation of transactions, the US government understandably believes penalties should be increased.

In particular, the NPRM would increase maximum monetary penalties as follows:

• For violations related to submitting a declaration or notice with a material misstatement or omission, or making a false certification: from $250,000 to $5 million per violation.
• For violations related to failure to comply with the mandatory declarations regulations: from $250,000 to $5 million or the value of the transaction, whichever is greater. Note that these requirements do not apply to covered real estate transactions.
• For violations of a material provision of a mitigation agreement, a material condition, or an order: from $250,000 to the greatest of (i) $5 million, (ii) the value of the transaction, or (iii) the value of the violating party’s interest in the US business (or real estate) at the time of the transaction or violation. Because the value of the interest in the US business at the time of the transaction or violation may be greater than the value of the transaction itself, option (iii) provides enhanced deterrence for mitigation-related violations.

The NPRM also proposes that penalties may be imposed against a party that makes a material misstatement or omission to the Committee outside of a declaration or notice. Most notably, this would cover requests by CFIUS for information pertaining to non-notified transactions.

The maximum penalty will not be imposed in every case, and CFIUS maintains discretion to determine an appropriate penalty in accordance with the CFIUS Enforcement and Penalty Guidelines. Relatedly, the NPRM extends the deadlines from fifteen days to twenty days both for a party to submit a petition for reconsideration of a penalty and for the Committee to issue a final penalty determination.

Expansion of Authority to Request Information

The NPRM also proposes to expand CFIUS’s authority to collect relevant information, including from nonparties (those not directly party to a transaction), to enforce its regulations.

First, the NPRM would grant CFIUS broader authority to investigate non-notified transactions. CFIUS is currently able to request information to determine whether a non-notified transaction is subject to CFIUS jurisdiction (i.e., “covered”). Under the proposed changes, CFIUS would be able to request information not only from parties to the transaction but also from nonparties to determine “whether [the non-notified] transaction may raise national security considerations . . . [or] meets the criteria for a mandatory declaration.” Parties would be required to respond to such requests.

Second, the NPRM would require parties to respond when the Committee requests information to: (1) “monitor compliance with or enforce the terms of a mitigation agreement, order, or condition” and (2) determine whether a material misstatement or omission was made by a transaction party. The regulations currently do not require parties to respond to such requests, though in practice they are rarely ignored.

Finally, the NPRM relaxes the standard under which CFIUS may exercise its subpoena authority to compel information from parties.

CFIUS has increasingly prioritized the review of non-notified transactions. In September 2023, Assistant Secretary of the Treasury for Investment Security Paul Rosen called CFIUS’s “non-notified work . . . one of [its] most important functions.” According to CFIUS’s latest annual report (the Annual Report), the Committee continues to hire dedicated staff and implement training for this purpose. As stated in the NPRM, expanding information gathering on non-notified transactions will promote “efficiency in connection with filings for transactions that may present an extant risk” by “allow[ing] the Committee to prioritize transactions that parties were required to submit . . . or that, in its view, otherwise warrant formal review.”

Tightening Mitigation Negotiation Timelines

Where CFIUS identifies a national security concern in connection with a transaction, it can propose mitigation measures to address those concerns in exchange for allowing a transaction to proceed. Currently, there is no specified timeline for parties to respond to mitigation agreement terms proposed by CFIUS. The Department of the Treasury believes that this “can sometimes result in a protracted process where parties may take longer than is reasonable to respond to the Committee’s proposed terms.”

To address this concern, the NPRM would require a “substantive response” to any proposed mitigation agreement terms within three business days, absent an extension. (The NPRM does not detail how CFIUS will decide whether to grant an extension.) A “substantive response” is expected to consist of an acceptance, a counterproposal, or a “detailed statement of reasons” as to why the parties cannot comply with the terms.

Given the complexity and inherently international nature of a transaction subject to a mitigation agreement, three business days is a very short turnaround. Yet parties to a proposed mitigation agreement must understand the proposed terms and their impact on the business, including their ability to comply with the terms going forward. Most fundamentally, the parties need to understand the extent to which proposed mitigation terms change the underlying deal. Underlying agreements typically permit the buyer or investor to halt the transaction if CFIUS approval requires material changes to the terms of the transaction.

In addition, failure to appropriately shape and implement mitigation terms can lead to violations of the mitigation agreement itself.

The three-day timeline was the most frequently cited concern among the public comments to the NPRM. Several commenters recommended that the Committee instead impose an abbreviated timeline on a case-by-case basis. Commenters also proposed an extended general deadline of five business days.

While it remains to be seen how the final rule will address the three-day timeline, CFIUS has clearly signaled its focus on compliance with and enforcement of mitigation agreements. Parties must therefore have a well-defined strategy as to what remediation measures will be palatable. In this regard, the Annual Report’s description of past mitigation measures and conditions is a helpful tool for considering potential measures.

New Tool for Countering China?

Some believe the changes proposed in the NPRM are primarily meant to create additional tools to counter China. In a September 2022 Executive Order, the “first-ever presidential directive” providing factors for CFIUS to consider in its reviews, the White House targeted areas seen as priorities of Chinese industrial development, including supply chains in the microelectronics, artificial intelligence (AI), quantum computing, and agricultural spaces. The Annual Report also notes that “economic, industrial, and cyber espionage by foreign actors like China . . . continues to represent a significant threat to US prosperity, security, and competitive advantage.” The changes proposed by the NPRM come as ByteDance’s ownership of TikTok is subject to increased congressional and regulatory scrutiny and as the Treasury issues new rules to limit US outbound investment into specific Chinese sectors.

Going Forward

The NPRM will establish a more muscular CFIUS, with further beefing up likely. There continue to be calls to broaden the scope of CFIUS jurisdiction. For example, the US-China Economic and Security Review Commission recently recommended in its 2023 Report to Congress that Congress pass legislation that would view foreign research contracts with universities as covered transactions subject to CFIUS review. Further, bipartisan concern over foreign investment in US agricultural land led to the March 2024 inclusion of the Department of Agriculture as a case-by-case member of the Committee for certain agriculture-related transactions. Proposed legislation also seeks to require that “detailed and timely . . . transaction data relevant to foreign investments in agricultural land” be provided to the Committee to ensure proper review of such transactions by CFIUS.

In an environment in which the scope of the Committee’s review and enforcement efforts is expanding, nearly any transaction involving a foreign investor or acquirer should be reviewed for CFIUS implications. And in a transaction involving legitimate national security issues, the parties should proactively consider potential mitigation measures in light of a truncated timeline for reviewing and responding to proposed measures.

The web is rife with articles explaining the importance of protecting a business’s trademarks. These articles usually (and correctly) point out that, if someone is potentially infringing on your business’s trademark, it’s important to send a cease and desist letter or, if necessary, file a lawsuit, because if others start to use your mark (or something like it) and the business doesn’t protect it, eventually you can lose trademark protection.

However, sometimes it might be better not to start the legal ball rolling. I say this even though I’m a litigator and, yes, one of the ways I earn my living is by helping businesses sue for trademark infringement. Why? Well, a few recent cases highlight the importance of taking a step back and thinking things through before sending that cease and desist letter or filing a lawsuit.

Trademark Suits Should Not Be Used for Purposes Other than Addressing Trademark Infringement

One example is Trader Joe’s case against its employee union, Trader Joe’s United. The union, in its efforts to raise money for organizing locations throughout the supermarket chain, sells mugs, T-shirts, and other merchandise branded with its Trader Joe’s United logo. Trader Joe’s claimed trademark infringement and sued.

The district court granted the union’s motion to dismiss (see pages 3 and 4 of the linked order to compare Trader Joe’s marks and what the union used), writing that it felt “compelled to put legal formalisms to one side and point out the obvious. This action is undoubtedly related to an existing labor dispute, and it strains credulity to believe that the present lawsuit—which itself comes dangerously close to the line of Rule 11—would have been filed absent the ongoing organizing efforts that Trader Joe’s employees have mounted (successfully) in multiple locations across the country.” In other words, the court was saying that the real reason Trader Joe’s sued was to try and shut down the union, and, as it noted in a subsequent decision, that given the “extensive and ongoing legal battles over the Union’s organizing efforts at multiple stores, Trader Joe’s claim that it was genuinely concerned about the dilution of its brand resulting from [the Union’s] mugs and buttons cannot be taken seriously.” The court went on to hold that no reasonable consumer would think that the union’s merchandise originated with Trader Joe’s—the central inquiry in a trademark infringement case. The court also awarded the union its legal fees, noting in its decision that the case stood out “in terms of its lack of substantive merit.”

Think about What Happens If (When) a Cease and Desist Letter Becomes Public

Famed restaurateur David Chang and his company, Momofuku, also recently lost a trademark battle that they probably wish they hadn’t started. On the bright side for Chang and Momofuku, there was no lawsuit, and they weren’t unceremoniously kicked out of court like Trader Joe’s. However, they did have to issue an apology after sending cease and desist letters to several other businesses owned by Asian Americans demanding that they cease and desist using the term “chile crunch” or “chili crunch.” (For those of you who mostly stick to milder foods, Momofuku Chili Crunch is a packaged “spicy-crunchy chili oil that adds a flash of heat and texture to your favorite dishes.”) Momofuku owns the trademark rights to the first spelling and claims common law rights to the second; it applied to register a trademark for “chili crunch” with an i around the same time it sent out the cease and desist letters.

There was significant pushback on these letters from the recipients, who posted them to social media and shared them with mainstream media outlets, highlighting how Chang and Momofuku were trying to assert rights over a generic term frequently used in Asian and Asian American gastronomic offerings. The companies felt that Chang and Momofuku were trying to use their status and financial resources to unjustifiably attack other Asian-American-owned companies.

Don’t Threaten a Trademark Lawsuit If You Don’t Own the Trademark

And then, there’s the case of the Los Angeles Police Foundation (LAPF), a private group affiliated with the Los Angeles Police Department. It sent a cease and desist letter to a company selling T-shirts emblazoned with the words “Fuck the LAPD” on top of the Los Angeles Lakers logo.

In its letter, the LAPF asserted it is “one of two exclusive holders of intellectual property rights pertaining to trademarks, copyrights and other licensed indicia for (a) the Los Angeles Police Department Badge; (b) the Los Angeles Police Department Uniform; (c) the LAPD motto ‘To Protect and Serve’; and (d) the word ‘LAPD’ as an acronym/abbreviation for the Los Angeles Police Department.”

There are a lot of whiffs here for the LAPF. Strike one: Government agencies can’t get trademark protection for their names. Strike two: The LAPF isn’t the LAPD, so it has no basis for claiming infringement on something that doesn’t belong to it. Strike three (it’s a big one): Obviously, the logo on these shirts belongs to the Lakers, not the LAPF. Strike four: There’s an argument that the shirt is meant as a parody and/or political commentary and, therefore, protected under the First Amendment.

Worth noting here is the T-shirt manufacturer’s carefully crafted response to the LAPF after receiving the cease and desist letter: “LOL, no.” That was the entirety of the response. Points for clarity, concision, and all-around humor.

What does this all mean? Well, if you send a cease and desist letter or file suit to protect a trademark you don’t actually have (the LAPF), or if you’re trying to accomplish a goal that is not related to actually protecting your trademark (Trader Joe’s), you’re just going to be embarrassed. And while the Momofuku matter is more nuanced, it’s fair to say many companies use the term “chili crisp,” making Momofuku’s efforts to trademark it seem like the work of a bully.

The lesson here: Legal claims don’t exist in a vacuum. Examine the validity of your claims, but also think about the potential negative publicity and damage to your reputation before firing off cease and desist letters haphazardly or filing suit. Because even if you win in court, sometimes public opinion is the final judge. And no business wants to upset that judge.

On June 28, 2024, in a maximalist decision that went further than even the most ardent opponents of Chevron deference thought possible, the Supreme Court finally and emphatically overruled Chevron deference, the watershed rule that governed the level of deference afforded to administrative agency interpretation of ambiguous statutes for nearly forty years.

The Court’s decision will have an immediate and lasting impact on executive agency interpretations of ambiguous federal statutes, as well as potentially on hundreds, if not thousands, of prior decisions decided on Chevron deference grounds—and the future of the administrative state in America.

An Emphatic Rejection of Judicial Deference to Agency Interpretation

Chevron deference, established in 1984, required courts to defer to “permissible” agency interpretations of the statutes those agencies administer, even when a reviewing court reads the statute differently. This principle of deference to administrative agencies was a cornerstone of administrative law for nearly four decades and one that Chevron opponents had looked to overturn for years.

Enter Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce, a pair of cases that sought to overturn Chevron deference once and for all. As the Court’s questions at oral argument made clear, Chevron deference was on borrowed time. Even so, the majority opinion in Loper Bright and Relentless, Inc. represents an emphatic rejection of the agency deference ushered in by Chevron and its progeny.

Chief Justice Roberts’s majority opinion focused on not only the history of statutory interpretation in the United States, but also the creation of the Administrative Procedures Act (APA), as well as what the majority viewed as the unworkability of Chevron deference in its current form. The Chief Justice first noted that Article III was always interpreted to vest in the courts the power to interpret what a law means. Despite this, Chief Justice Roberts noted that courts have always understood that some deference was afforded to the Executive Branch’s interpretation of statutes. But, according to the Chief Justice, that deference was not unlimited. Rather, “[t]he views of the Executive Branch could inform the judgment of the Judiciary, but did not supersede it.” The majority opinion explained that this version of agency deference continued throughout the New Deal era, further noting that when deference was given to an agency, it was to fact-based inquiries, not questions of law.

The APA was enacted in 1946 “as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating their offices.” As Chief Justice Roberts noted, under the APA, courts utilize their own judgment in deciding questions of law, notwithstanding an agency’s interpretation of the particular law. In the majority’s view, the APA “makes clear that agency interpretations of statutes—like agency interpretations of the Constitution—are not entitled to deference. The APA’s history and the contemporaneous views of various respected commentators underscore the plain meaning of its text.” This reasoning, according to the majority, supports a de novo (i.e., no deference given) review standard of an ambiguity’s meaning in a particular statute.

Despite this, the Court did note that some degree of agency deference may still be appropriate in certain circumstances. As the Chief Justice explained:

Courts exercising independent judgment in determining the meaning of statutory provisions, consistent with the APA, may—as they have from the start—seek aid from the interpretations of those responsible for implementing particular statutes. And when the best reading of a statute is that it delegates discretionary authority to an agency, the role of the reviewing court under the APA is, as always, to independently interpret the statute and effectuate the will of Congress subject to constitutional limits. The court fulfills that role by recognizing constitutional delegations, fixing the boundaries of the delegated authority, and ensuring the agency has engaged in “ ‘reasoned decision making’ ” within those boundaries.

According to the majority, Chevron cannot be reconciled with the text and framework of the APA because it requires a court to “ignore, not follow” the reading of the text the court would have reached if it exercised its own independent judgment as the APA (and Article III) require. The Court further rejected the claim that statutory ambiguities are implicitly delegated to agencies as Chevron presupposes.

Not only did the majority find that Chevron contradicts the mandates of the APA, but it also rejected the government’s (and dissents’) arguments in support of the continued viability of Chevron deference. For instance, the majority disagreed that agency experts are better suited to decide and interpret tough and complicated statutory questions. According to Chief Justice Roberts, “agencies have no special competence in resolving statutory ambiguities. Courts do,” and “even when an ambiguity happens to implicate a technical matter, it does not follow that Congress has taken the power to authoritatively interpret the statute from the courts and given it to the agency.” The Court further rejected the claim that such interpretations should be made by policymakers as opposed to unelected judges, noting that “[r]esolution of statutory ambiguities involves legal interpretation, and that task does not suddenly become policymaking just because a court has an ‘agency to fall back on.’ ”

What about Consistency?

What about the consistency that adherents claim comes with applying Chevron deference? According to the majority, it provides no such consistency at all. Rather, because Chevron deference is so indeterminate and sweeping, the Court has had to consistently amend and revise the test, “transforming the original two-step into a dizzying breakdance.” The Court was also not persuaded that its decision would have any impact on the more than 18,000 lower court cases decided on Chevron deference grounds. According to the majority, a party seeking to challenge one of those rulings must establish a “special justification” to do so, and the end of Chevron deference does not constitute such a justification.

Finally, the majority rejected the argument that stare decisis warranted saving Chevron from the chopping block, stating that Chevron is “unworkable”; that there has not been, according to the majority, a meaningful reliance on Chevron in recent years by the Court; and that it has been chipped away at over the years, which calls into question its continued validity and reliance by lower courts.

A Fiery Dissent

Justice Kagan pulled no punches in her dissent and took the majority to task for, in her opinion, giving “itself exclusive power over every open issue—no matter how expertise-driven or policy-laden—involving the meaning of regulatory law.” As Justice Kagan explained:

Its justification comes down, in the end, to this: Courts must have more say over regulation—over the provision of health care, the protection of the environment, the safety of consumer products, the efficacy of transportation systems, and so on. A longstanding precedent at the crux of administrative governance thus falls victim to a bald assertion of judicial authority. The majority disdains restraint, and grasps for power.

Justice Kagan also emphatically disagreed with both the majority’s rationale and its disregard, in her opinion, for what comes next with the end of Chevron deference. For instance, she disagreed with the majority that section 706 of the APA mandated a court to utilize a de novo standard when deciding an agency’s interpretation of an ambiguous statute. The dissent also vehemently disagreed with the majority’s contention that courts are in a better position to resolve statutory ambiguities than the so-called agency experts.

In addition, the dissent took the majority to task for not adhering to stare decisis, claiming that Chevron was entitled to a particularly strong form of reliance because (1) Congress has had opportunities to overrule it in the past but has declined to do so; and (2) the Court has continued to rely on Chevron deference in thousands of decisions, as have lower courts. And what about the justification that the Court had not relied on Chevron lately? According to Justice Kagan, that was all by design:

This Court has “avoided deferring under Chevron since 2016” (ante, at 32) because it has been preparing to overrule Chevron since around that time. That kind of self-help on the way to reversing precedent has become almost routine at this Court. Stop applying a decision where one should; “throw some gratuitous criticisms into a couple of opinions”; issue a few separate writings “question[ing the decision’s] premises” (ante, at 30); give the whole process a few years . . . and voila!—you have a justification for overruling the decision.”

Justice Kagan likewise found little comfort in the majority’s attempt to insulate prior Chevron-based decisions from being collaterally attacked, noting that finding a “special justification” to warrant overturning such precedent is a low burden to meet.

What Comes Next?

The decision is expected to impact a wide range of regulatory environments, from environmental protections and healthcare to maritime, securities, tax, and financial regulations, and a litany of other federally regulated areas. Federal agencies will now face closer scrutiny and potentially more frequent legal challenges when interpreting ambiguous statutes. Moreover, federal district and circuit courts do not always agree, and this will result in inconsistent application of regulations throughout the country. This, in turn, will result in more issues needing to be resolved by the Supreme Court.

Perhaps unsurprisingly, the Court did not replace Chevron deference with another test for courts to apply when confronted with an ambiguous statute and an agency’s interpretation of the same. Rather, it appears that when faced with ambiguity in a statute, pursuant to the APA, courts will utilize the normal tools of statutory interpretation to decide what the ambiguity means, and that no deference will ordinarily be given to an administrative agency’s interpretation of the ambiguity.

Notably, the majority did find that in some circumstances (like when Congress expressly authorizes it) deference may be appropriate to an administrative agency. Regardless, it is likely that the end of Chevron deference will turbocharge forum shopping. Plaintiffs hostile to an agency’s particular statutory interpretation or final rule will most likely seek out sympathetic courts, whereas those seeking to uphold an agency’s decision will look for courts traditionally more deferential to the Executive Branch.

And what about those 18,000-plus cases previously decided on Chevron deference grounds? While there certainly may be defenses the government can raise to a belated challenge (e.g., laches, statute of limitations), the dissent’s worry that a requirement of a “special justification” to overturn such precedent amounts to no justification at all is well-founded. Indeed, a court hostile to a particular agency or its interpretation can easily come up with a rationale it labels as a “special justification” to overturn an old Chevron-based decision, should it choose to do so. And as Solicitor General Elizabeth B. Prelogar stated at oral argument, litigants almost assuredly “will come out of the woodwork” to challenge Chevron-based decisions.

Further, Loper Bright and Relentless, Inc., at least on paper, represent a seismic shift in power in Washington. Under Chevron, the Executive Branch’s interpretation of statutory ambiguities was given heightened deference. Now that interpretation belongs almost exclusively to the judicial branch to, in the words of Justice Kagan, decide hyper-technical questions like “[w]hen does an alpha amino acid polymer qualify as such a ‘protein’ ” under the Public Health Service Act, or “[h]ow much noise is consistent with ‘the natural quiet’ ” that the Department of the Interior must regulate from aircraft flying over the Grand Canyon?

Finally, while this decision represents an emphatic rejection of agency deference, the majority did concede that agency deference is appropriate in certain circumstances. Indeed, Chief Justice Roberts made clear that Skidmore deference (in which courts grant a modicum of deference to an agency’s statutory interpretation “ ‘to the extent it rests on factual premises within [the agency’s] expertise’ . . . which may give an Executive Branch interpretation particular ‘power to persuade’ ”) remains alive and well. Moreover, the Court’s opinion makes clear that Congress is free to delegate authority to the Executive Branch to interpret the meaning of certain statutes. It remains to be seen how often courts will utilize Skidmore deference moving forward when confronted with agency interpretation of ambiguous statutes.

Regardless, Loper Bright and Relentless, Inc. mark a tectonic shift in administrative law and could reshape the landscape of American governance for years to come. Federal agencies will need to adapt to new judicial scrutiny, legislators may face increased pressure to craft more precise laws, and courts will brace for a heavier caseload as they take on a more prominent role in statutory interpretation.

India’s securities market regulator, the Securities and Exchange Board of India (“SEBI”), was established in 1988. Protecting the interests of investors is a core tenet enshrined in SEBI’s preamble. More recently, and in support of that core tenet, SEBI has become an example of successful alternative dispute resolution at work and, critically, of the importance of choice in dispute resolution.

A. SEBI’s historic mechanism for dispute resolution

SEBI has long recognized the need for an efficient resolution mechanism for the numerous investor grievances that arise, and the organization has evolved and adapted to changing trends in dispute resolution over the years.

From 2010 to 2012, SEBI launched the following initiatives:

1. Market Infrastructure Institution (“MII”)–administered arbitrations, which facilitated arbitration proceedings under the guidance of MIIs like stock exchanges and depositories;^[1]
2. SEBI Complaints Redress System (“SCORES”), a centralized web-based investor complaint redressal system;^[2] and
3. Investor Grievances Redressal Committee (“IGRC”), which facilitated conciliation and mediation for investor-intermediary disputes.^[3]

The MII-administered dispute resolution process covered only a few intermediaries—stockbrokers, commodity brokers, depository participants, listed companies, and share transfer agents.

B. SEBI’s current mechanism for dispute resolution

In recent years, the pandemic and the larger digitization trend in the dispute resolution arena have increased demand for fast, convenient, and cost-efficient Online Dispute Resolution (“ODR”) platforms. Recognizing this trend, in July 2023, SEBI created a comprehensive ODR mechanism—including mediation, conciliation, and arbitration—intended for all intermediaries to use in the securities market.^[4]

On July 31, 2023, SEBI published the specifics of its new ODR mechanism (the “ODR Circular”).^[5] This publication heralded a new era of streamlined dispute resolution under SEBI’s purview. Investors now have access to two distinct avenues for dispute resolution:

1. the legacy SCORES Platform; and
2. the newer ODR Portal.

Each avenue offers expedited pathways to investors seeking redressal for their grievances.

To use SEBI’s dispute resolution mechanism, an investor may initiate a complaint with listed companies, specified intermediaries, regulated entities, or other securities market participants. If the market participant does not redress the grievance satisfactorily, the investor has two choices:

1. SCORES: The investor may escalate the complaint through the legacy SCORES Platform; or
2. ODR Portal: The investor may initiate dispute resolution through the ODR Portal. Under this method, once the investor’s complaint is filed, the ODR Portal will robotically allocate (through a round-robin system) one of the impaneled ODR institutions to administer the dispute. SEBI has published detailed instructions regarding timelines, procedure, and fees for resolving disputes through the ODR Portal.

C. Amendment to ODR Circular introducing choice of multiple dispute resolution mechanisms

Just a few months after publishing the ODR Circular, SEBI amended it on December 20, 2023 (the “Amendment Circular”).^[6] The amendment provides investors and regulated entities with the option to elect one of the following dispute resolution mechanisms by contract:^[7]

Timeline for exercising the choice: For all new contractual arrangements, parties must choose their dispute resolution mechanism at the time of entering the contract. For existing contractual arrangements, investors and regulators are required to exercise this choice within a period of six months from the date of the Amendment Circular.^[8] If a party fails to make this selection, the party is presumed to have chosen the ODR Circular mechanism.

Matters outside purview of ODR Portal: SEBI has in the Amendment Circular also made an important clarification that all matters that are appealable before the Securities Appellate Tribunal in terms of Section 15T of SEBI Act, 1992 (other than matters escalated through the SCORES portal in accordance with the SEBI SCORES circular); Sections 22A and 23L of Securities Contracts (Regulation) Act, 1956; and Section 23A of Depositories Act, 1996 shall be outside the purview of the ODR Portal.

D. A careful choice requiring deliberation

The decision between independent arbitration institutions and the ODR Circular mechanism warrants careful consideration—and the decision must be made by contract, not once the dispute arises. Both choices offer compelling benefits.

On one hand, the route of the ODR Portal with an ODR institution impaneled by an MII offers expedited, time-bound, and cost-effective procedures that may be suitable for small claims.

However, it is a relatively new procedure. There may not be real visibility on the arbitrator’s and conciliator’s names and qualifications until they are appointed. Moreover, the quality or subject-matter expertise of the conciliators or arbitrators may vary, since appointments through the ODR Portal are, in some cases, algorithm based.

Although the ODR Circular mechanism is newer, it may be beneficial that it provides for significantly shorter timeframes compared to a regular arbitration process. For instance, upon issuance/pronouncement of an award in an arbitral proceeding through the ODR Portal, the aggrieved party has to convey its intention to challenge the award under Section 34 of India’s Arbitration and Conciliation Act, 1996 (the “Arbitration Act”) within seven calendar days. The Arbitration Act permits an aggrieved party up to 120 days to file an application to set aside an arbitration award. In matters involving significant stakes and a large volume of documents, the aggrieved party may need more than seven days to decide whether to challenge an award. Therefore, the feasibility of such a timeline remains to be seen.

On the other hand, opting for an independent arbitration institution in India may come with its own benefits. It may be possible to avail oneself of the services of an emergency arbitrator for urgent interim relief, if permitted under the chosen rules of the arbitration institution. The parties also have the right to nominate their own arbitrators. Unlike the round-robin system in the ODR Circular mechanism, which robotically allocates one of the impaneled ODR institutions, the parties have the option to select an independent arbitration institution in India of their choice and preference.

Ultimately, the choice between utilizing the ODR Circular mechanism or opting for independent arbitration institutions has to be on a case-by-case basis, considering the claim amount involved, the familiarity and comfort of the parties, the associated costs, and the need for flexibility in timelines or adherence to strict timelines.

Conclusion

SEBI’s proactive approach in enhancing dispute resolution mechanisms reflects its commitment to safeguarding investor interests and fostering confidence in the Indian securities market. By providing investors with a choice between the ODR Portal and independent mediation, conciliation, and arbitration institutions, SEBI has recognised party autonomy and at the same time taken a significant step towards ensuring efficient and equitable resolution of disputes in the securities market.

1. Securities and Exchange Board of India, Arbitration Mechanism in Stock Exchanges, CIR/MRD/DSA/29/2010 (Issued on August 31, 2010). ↑

2. Securities and Exchange Board of India, Processing of investor complaints against listed companies in SEBI Complaints Redress System (SCORES), CIR/OIAE/2/2011 (Issued on June 3, 2011). ↑

3. Securities and Exchange Board of India, Investor Grievance Redressal Mechanism at Stock Exchanges, CIR/MRD/DSA/03/2012 (Issued on January 20, 2012). ↑

4. Securities and Exchange Board of India (Alternative Dispute Resolution Mechanism) (Amendment) Regulations, 2023, SEBI/LAD–NRO/GN/2023/137. ↑

5. Securities and Exchange Board of India, Online Resolution of Disputes in the Indian Securities Market, SEBI/HO/OIAE/OIAE_IAD-1/P/CIR/2023/131 (Issued on July 31, 2023). ↑

6. Securities and Exchange Board of India, Amendment to Circular dated July 31, 2023 on Online Resolution of Disputes in the Indian Securities Market, SEBI/HO/OIAE/OIAE_IAD-3/P/CIR/2023/191 (Issued on December 20, 2023). ↑

7. This option is available to the investors and regulated entities mentioned in Schedule B of the ODR Circular. ↑

8. December 20, 2023. ↑

Exhilarated. Exhausted. Ecstatic. Emotional. Multiple superlatives described my feeling upon reaching the summit of Mount Kilimanjaro—Uhuru Peak, elevation 19,341 feet, highest point in Africa and highest freestanding mountain in the world.

I had dreamt of this achievement for a number of years. However, I thought I had “aged” out of reaching this bucket list item. After some research, I learned that the average age for successfully hiking Mount Kilimanjaro was thirty-seven; however, there were climbers over age seventy, with the oldest being eighty-nine. So began the quest of celebrating my sixty-fifth birthday by taking on this challenge in 2024. Plus, as a lawyer who has been practicing nearly forty years, I viewed this adventure as a great way to recharge and re-energize.

Heidi McNeil Staudenmaier, a University of Iowa alum, showed her school pride at the summit of Mount Kilimanjaro. Image courtesy of Heidi McNeil Staudenmaier.

After several years of planning and training, the dream commenced for real by traveling to Tanzania in late June. After two days of acclimating and participating in community service projects in the city of Arusha, our all-woman team (eight were age thirtyish, one age forty, and then me, the “old lady” of sixty-five) was ready to go. My nine new “daughters” immediately started calling me Trail Mama. Our US guide was a twenty-six-year-old guy undertaking his first solo guided trip up Kilimanjaro, although he had made numerous summits since his teenage years. Plus, we had four lead Tanzanian guides who touted hundreds of summits under their belts. We proved to be in excellent hands.

We start our seven-day trek at the Machame Gate (6,800 ft. elevation), trudging up a muddy and winding trail in the shambas and montane rainforest boasting monkeys and numerous songbirds. After six hours and 3,000 feet of elevation gain, we reach the Machame Campsite (9,840 ft. elevation). Our wonderful Tanzanian porters transported our tents, sleeping gear, clothes, food, water, and other necessities up the mountain so we could enjoy a hot dinner after a challenging first day.

On Day Two, we spend six hours hiking out of the rainforest up a steep ridge, then through open moorlands and across a large gorge to reach the Shira Campsite (elevation of 12,450 ft.—another gain of 3,000). We’re now about as high as Humphreys Peak, which is the highest mountain in my adopted state of Arizona. On Day Three, we have a long climb to Lava Tower Ridgeline to reach 14,800 feet of elevation, followed by up and down trekking for eight hours to settle at Barranco Campsite for the night. The nights are getting colder and colder as we climb higher, so I appreciate having a hot water bottle to put in my zero-degree sleeping bag while camping on the frozen tundra ground. The early morning hot tea in my tent literally brings tears of joy and thanks. Many members of our team (including me) have a sleepless night, worrying about what awaits the next morning.

Day Four begins with much trepidation of hiking across the Barranco Valley and then having to climb up the treacherous Barranco Wall. The best advice from our guides: Don’t look down, and just hug the wall. Yeah, right. Happily, we all successfully navigate the Wall and continue to climb into and above the clouds. After five or six hours of trekking across the Karanga River Valley, we arrive at the Karanga Campsite (13,400 ft. elevation).

Day Five involves only five hours of hiking (3,000 elevation gain) up the ridge to Kosovo Campsite (16,076 ft. elevation). Summit Day looms large, and we need to prepare both mentally and physically for an early morning push to the crowning achievement.

Summit Day begins at 3:30 AM, with hot breakfast and final instructions/encouragement from our guides. We’re wearing literally every piece of warm clothing we brought along as we don our headlamps and cautiously make our way up the steep trail. We welcome the breathtaking sunrise at 6:30 AM, as well as the warmth accompanying the sun. There are many moments where I can’t catch my breath, or my heart is racing, or my headache is splitting from the high altitude. But I’m Iowa Stubborn and keep telling myself, “If you think you can, you can. If you think you can’t, you’re right” (something instilled by my junior high social studies teacher). We hit the first official summit (Stella, elevation 18,885 ft.) after nearly five hours. We celebrate and take countless photos. The crown jewel—Uhuru Summit—awaits at an elevation of 19,341 feet. An hour or less to go.

A recent snowstorm requires us to don micro-spikes on our hiking boots to traverse the ice and snow on the final ascent. Then, in a blink, we’re at the summit. We did it. It truly was an unreal feeling, and it took me several days to fully realize my accomplishment and that of my team. Only 60–65 percent of those who start the Kilimanjaro climb ultimately reach the summit. (Unfortunately, one of our team members had uncontrollable headaches and shortness of breath, and was unable to reach the summit.)

Staudenmaier (second from left, in yellow hat) made the trek to Uhuru Peak with an all-woman team, plus their guides and porters. Image courtesy of Heidi McNeil Staudenmaier.

After our summit accomplishment, we quickly descend nearly 7,000 feet, reaching Millennium Campsite (12,700 ft. elevation). Our descent off the mountain takes a different route than our ascent. Summit Day, although providing great elation, lasted twelve hours and expended most of our mental and physical energies. We complete the final descent on Day Seven, slogging through the muddy rainforest to exit through Mweka Park Gate. Our Tanzanian guides and porters celebrate our happy descent with lots of food, dance, and song.

Was it worth all the training, physical and mental “torture” of seven days on the mountain? Absolutely. Would I do it again? No way—unless perhaps I were age thirty again. But at age sixty-five, I’ll rest on my laurels and bask in the glow of my Kilimanjaro Official Summit Certificate. And I can enthusiastically state that I was indeed re-energized to get back into the practice of law again after recovering from the adventure.

This article is adapted from chapter 5 of Unjust Debts: How Our Bankruptcy System Makes America More Unequal by Melissa B. Jacoby (New Press, 2024).

Bankruptcy court is the busiest part of the federal judiciary. In theory, bankruptcy exists to cancel or restructure debts—a safety valve designed to provide a mechanism to restart lives and businesses that have experienced financial distress. Unjust Debts explores how an expansive interpretation of the national bankruptcy power falls short on its core functions while also unduly encroaching on other laws and policies, and calls for a more limited and effective bankruptcy system going forward.

On December 14, 2012, Adam Lanza killed twenty children and six adults at Sandy Hook Elementary School and then killed himself—all in a matter of minutes with a semiautomatic rifle made for military combat. Grieving families sued gun and ammunition maker Remington Outdoor Company. In pursuing wrongful death claims, coupled with punitive damage requests, representatives of the families told the press their goals were not remunerative: they wanted to publicize information about the marketing of deadly weapons and to prevent future harms.

Having overcome many hurdles, the Sandy Hook families were preparing for trial when Remington filed for Chapter 11. In its first bankruptcy a few years earlier, the company emerged having flushed over $600 million of debt. This time around, Remington had a different agenda: to sell itself, and fast.

When Congress passed the Bankruptcy Code in 1978, drafters envisioned a multistep process to sell an operating company through Chapter 11. That process gave control and governance rights to claimants of many kinds to help chart the company’s future and allocate its value. Remington, its lenders, and potential buyers preferred to follow a different script that has developed through practice, one that allows consequential decisions about the company to happen without creditor governance and voting or the raft of statutory requirements in the Bankruptcy Code. Buyers demand sale orders insulating them from responsibility for the seller’s alleged wrongdoing, no matter how profitable the company becomes under new ownership.

Remington is not an outlier. Today, powerful parties regularly use Chapter 11 for games of chicken. Dismantling the statutory package of benefits and obligations allows powerful parties to extract and divert the benefits of Chapter 11 for themselves, overriding many other laws in the process.

In 1978, when Congress enacted the Bankruptcy Code, giving companies latitude to reorganize was said to foster competition and preserve jobs, as well as promote equal treatment of similarly situated creditors. Because the new Bankruptcy Code defined “debt” broadly, Chapter 11 would sweep in liabilities arising from diverse legal doctrines far beyond contract law, including tort and statutory, regulatory, and constitutional law, and it could change claimants’ rights without their consent.

This power came with trade-offs. Creditors of all kinds would collaborate with the company on a restructuring plan. In addition to shared governance and creditor voting, the Chapter 11 package included responsibilities to investigate and potentially remedy wrongdoing. The threat and reality of these checks and balances, including the possibility of displacing management, were designed to make the system operate fairly for everyone.

Chapter 11 puts a thumb on the scale in favor of reorganization through provisions that boost the odds a troubled company will recover. Lenders that offer new financing to a financially distressed company can get legal protection unavailable in private transactions. The bankrupt company also gets to make decisions (subject to court review) about its ongoing contracts without counterparty consent.

Particularly if separated from the package deal, these Chapter 11 “boosters” create tension with federalism. If powerful parties can dislodge the perks of bankruptcy law from the checks and balances, a wide range of people are at risk of losing important legal protections, and other non-bankruptcy policies may be shortchanged. Quick sales risk overriding a wide range of state laws and initiatives, and expanding the reach of national law and federal courts.

If the Chapter 11 package is so important, why is that package unbundled on a regular basis? Money.

Section 364 of the Bankruptcy Code provides incentives for lenders to extend credit to a troubled company. The lender gets more assets of the bankruptcy estate as collateral to secure the loan and higher priority repayment rights. Backed by an enforceable federal court order, these loans involve government intervention that private credit markets value greatly. Section 364 was meant to attract lenders to compete to fund distressed but viable companies. Studies consistently show that these loans are profitable and extremely low risk.

Unfortunately, these loans too often are also financially extractive, reallocating value away from other creditors. What’s more, however, lenders frequently use the leverage of their position to unbundle the Chapter 11 package deal meant to protect all stakeholders, including refusing to fund investigations and other elements that promote the integrity of the process.

As noted earlier, Bankruptcy Code drafters envisioned sales of entire companies happening through a Chapter 11 plan approval process, with creditor voting. Yet, lenders commonly insist that the company sell itself quickly without voting or satisfying the requirements of a Chapter 11 plan. That dynamic is captured in a Wall Street Journal quotation: “More companies that wind up in bankruptcy court are facing a stark demand from their banks: sell yourself now.” Appellate courts have tolerated these practices if the company can articulate a good business reason. That approach invites sale advocates to recite a parade of horribles if their request is opposed or denied: value destroyed, jobs lost.

A purchaser in a quick Chapter 11 sale gets significant benefits because even the truncated process delivers what ordinary mergers and acquisitions do not: a federal court order blessing terms and offering finality. Under section 363(m) of the Bankruptcy Code, if the court has approved the sale and the transaction has closed, an appellate court cannot unwind the sale if it later finds it flawed.

That finality has broader ramifications for creditors, particularly when these sales generate few cash proceeds to satisfy their claims. The doctrine of successor liability in non-bankruptcy law typically determines when a buyer should be on the hook for obligations of the seller. The Bankruptcy Code does not say that quick going-concern sales override successor liability. Section 363(f) of the Bankruptcy Code identifies circumstances under which a buyer can take the assets free and clear of interests held by others in those assets. In bankruptcy law, the interest typically means property interest, such as a mortgage on a building, or equity interest, but not a claim held by a creditor. Yet, some appellate courts have adopted an expansive interpretation, overriding successor liability doctrine. The U.S. Court of Appeals for the Fourth Circuit relieved the buyer of a coal company from retired coal miners’ pension and health care benefits mandated by the federal Coal Act because the sale happened in bankruptcy. In TWA’s third bankruptcy, the airline aimed to sell itself quickly to American Airlines, which did not want to honor a settlement TWA had reached with flight attendants for pregnancy discrimination. In its objection, the federal government explained that the Bankruptcy Code did not authorize bankruptcy sales overriding federal antidiscrimination laws. The U.S. Court of Appeals for the Third Circuit blessed the sale and cited job saving and future employee benefits as rationales.

There are no guarantees that these sales save jobs, of course. Consider the Weinstein Company, the entertainment firm. It already was low on employees by the time it filed for Chapter 11 to sell itself quickly to a private equity firm. The company said the sale would save jobs, but the buyer made no binding commitment to keep the remaining employees. Indeed, seemingly at the buyer’s request, the company laid off more employees before the sale was finalized. Although one of the buyers of Remington, the gun and ammunition company, promised to rehire two hundred workers, the Wall Street Journal reported that it fired them in the interim, such that the workers lost their health benefits during the COVID-19 pandemic. Unbundled bankruptcies, which deviate from the package deal Congress prescribed, are themselves a gamble.

Although insulation from successor liability should lead to higher sale prices in theory, many scholars and commentators worry that this does not happen in reality, potentially undercompensating claimants for the protections they have lost in the process. Claimants may receive smaller recoveries from quick going-concern sales—either because the sale did not maximize value, or because the privately negotiated sale procedures distorted the distribution of the sale proceeds, or both. Lenders setting the timeline may not need or be seeking top dollar for the company in order to be fully compensated.

The unbundling of Chapter 11 also greatly affects ongoing contract rights. Chapter 11 gives companies considerable discretion over what to do with pending contracts, to maximize the benefits to the bankruptcy estate. The company can even assign some contracts to a third party without counterparty consent. The catch is that doing so is supposed to increase the feasibility of a business restructuring, or at least maximize the value of the bankruptcy estate. That’s why Congress gave a bankrupt company the right to override state contract law.

This rationale for this federal law of contracts, already rightly controversial, loses steam when a non-bankrupt private party can co-opt this power for its own benefit. And that’s very much a risk in these unbundled bankruptcy cases. Here’s an example: the Weinstein Company was a party to tens of thousands of contracts, many relating to intellectual property from films and television. To have a qualifying bid to compete with the stalking horse bidder to buy the company, other bidders were required to identify on a short timeline which contracts they wanted and how they would cure defaults. The stalking horse bidder, a private equity firm, was given a long period of time to decide, after the sale to it had been approved, which contracts it wanted and how much it was willing to pay. This process not only reduced the ability of others to submit competitive bids, but it also made it impossible to determine whether the contract decisions were in the best interest of The Weinstein Company bankruptcy estate as the law requires.

* * *

Congress built Chapter 11 to enable an overindebted company to stay in business if a company could persuade enough creditors to support its vision, reflected through voting and plan confirmation. The rights and obligations in the integrated Chapter 11 package were not intended to be frictionless; they were gateways to significant legal privileges. Dismantling Chapter 11 to facilitate a quick sale turns this federal law into a platform for dealmaking among the most powerful parties, allowing them to extract the law’s extraordinary perks without fulfilling federal law objectives.

The Mendes Hershman Student Writing Contest is a highly regarded legal writing competition that encourages and rewards law students for their outstanding writing on business law topics. Papers are judged on research and analysis, choice of topic, writing style, originality, and contribution to the literature available on the topic. The distinguished former Business Law Section Chair Mendes Hershman (1974–1975) lends his name to this legacy. Read the abstract of this year’s second-place winner, Samuel H. Hirsch of University of Miami School of Law, Class of 2025, below.

Over sixty years ago, the Supreme Court of Delaware suggested that absent suspicion of wrongdoing, directors of a Delaware corporation have no duty to set up procedures for gathering and responding to information about compliance with regulations. But over time, Delaware courts clarified that directors cannot simply turn a blind eye—they must keep themselves informed through systems designed to oversee regulated business activities. Recently, in the two-part decision In re McDonald’s Corp. Stockholder Derivative Litigation,^[1] the Delaware Chancery Court expanded the duty of oversight to officers but reinforced that these suits are difficult to win a judgment on. The expansion of oversight duties to officers will result in better corporate management as the risk of personal liability to directors and officers increases. Also, the decision clarified that the mission-critical standard for Caremark claims established in Marchand v. Barnhill^[2] is no longer the baseline; if directors and/or officers receive notice of any red flag, regardless of its mission-critical status, they are obligated to respond. Finally, a high hurdle to succeed on a Caremark claim will ensure corporate assets are not wasted.

1. In re McDonald’s Corp. S’holder Deriv. Litig. (McDonald’s I), 289 A.3d 343 (Del. Ch. 2023); In re McDonald’s Corp. S’holder Deriv. Litig. (McDonald’s II), 291 A.3d 652 (Del. Ch. 2023). ↑

2. Marchand v. Barnhill, 212 A.3d 805, 824 (Del. 2019). ↑

While the recent proliferation of comprehensive privacy laws enacted by at least eighteen states has dominated the news in the US, another development threatens to further impact companies operating websites accessed by California consumers—the recent wave of lawsuits and arbitration demands under the California Invasion of Privacy Act (CIPA).

Both large and small companies that operate websites California consumers visit have been receiving letters threatening litigation or arbitration. In many instances, these threats have materialized into actual lawsuits (including putative class actions) and arbitration proceedings. The CIPA allows for statutory damages of $5,000 per violation, which could pose significant financial risk to companies where claims of alleged violations are asserted on behalf of a class.

Why Are These Claims Being Filed Now?

The California Consumer Privacy Act (CCPA), amended by the California Privacy Rights Act (CPRA), pioneered broad privacy rights for consumers in the United States. Following California’s lead, more than a dozen states have enacted similar comprehensive privacy laws. However, most of these state laws, including California’s, do not provide a private right of action for violations except for data breaches under the CCPA. Critics argue that without a private right of action, these laws lack the necessary enforcement mechanisms to ensure compliance. In response, plaintiffs’ attorneys in California have sought alternative legal strategies.

One such strategy involves invoking the CIPA, a decades-old criminal statute enacted in 1967 to prevent eavesdropping on telephone calls. This approach represents a novel attempt to bypass the limitations of the CCPA by leveraging a law designed for different circumstances, thus giving it a modern application in the digital age. A significant issue underlying these lawsuits is whether the use of cookies and other website tracking technologies by companies constitutes a violation of individuals’ privacy rights.

What Is the Basis for These Claims?

The new CIPA cases focus on the alleged unlawful use of website tracking technologies, such as cookies, pixels, tags, and beacons, to collect and use personal information of people who visit these websites. Many of the lawsuits and arbitration demands center around a few key arguments.

Website tracking technologies are alleged to be unlawful “pen registers.” Plaintiffs allege that tracking technologies are used to “record” a user’s interactions with websites, which amounts to the use of a “pen register” or “trap and trace” device (although the bulk of the claims and related court decisions have focused on the definition of pen register rather than trap and trace). These technologies capture information, such as IP addresses, when users visit or leave a website, thereby recording “dialing, routing, addressing, or signaling information” transmitted from a device but not the content of the communication.^[1] Such activities, plaintiffs argue, amount to illegal pen registers under the CIPA.

Using tracking technologies without consent allegedly violates users’ right to privacy. Under California law, it is prohibited to use a pen register or trap and trace device without either a court order or explicit consent from the person being tracked.^[2] Plaintiffs allege that when websites deploy tracking technologies without obtaining consent beforehand, it constitutes a violation of the CIPA.

A frequently cited case in these lawsuits is Greenley v. Kochava.^[3] In this case, the court denied the defendant’s motion to dismiss and rejected the argument that a privacy company’s surreptitiously embedded software did not constitute a “pen register.”^[4] The court sided with the plaintiff, asserting that when software identifies consumers, gathers data, and correlates that data through unique “fingerprinting,” it constitutes a “process” through which a pen register can be deployed.^[5]

Despite many plaintiffs’ heavy reliance on Greenley, it is important to note that this case is still pending and has not yet set a definitive precedent on these legal points. Moreover, the specifics of Greenley distinguish it from many other claims. Defendant Kochava, a data broker, provided software development kits (SDKs) to its customers, meaning the data in question was not collected directly through Kochava’s own website but through software deployed on customers’ websites. Consequently, users who visited these websites were arguably unaware of the Kochava SDK’s presence, differentiating these circumstances from those involving direct website tracking.

This distinction is critical: it suggests that recent claims against website operators may not be directly analogous to Greenley. The indirect nature of data collection in Greenley, compared to direct website tracking claims, underscores how much each CIPA case may turn on its specific facts.

Recent Case Developments

Some companies have opted to settle these CIPA claims rather than litigate them. However, it is crucial to understand that settling early with one claimant does not shield a company from subsequent similar claims and could have the unintended consequence of inviting future lawsuits by plaintiffs’ counsel. For those who have chosen to fight, preliminary rulings have been mixed, and no claim has yet been fully litigated to final judgment.

Two significant cases in this area are Licea v. Hickory Farms^[6] and Levings v. Choice Hotels,^[7] both in the Los Angeles County Superior Court and involving nearly identical claims regarding defendants’ use of website tracking technologies. These cases, filed by the same law firm, have seen divergent outcomes in their initial rulings.

In Licea, the court sustained Hickory Farms’ demurrer, concluding that the plaintiff failed to demonstrate the use of a “pen register.”^[8] The court distinguished this case from Greenley partly by disagreeing that tracking IP addresses was analogous to the unique digital “fingerprinting” involved in Greenley.

Conversely, in Levings, the court overruled Choice Hotels’ demurrer, finding that the defendant had “‘deployed a software device and process’ which first recorded the information transmitted by Plaintiff’s device, and then used that information to install tracking code on Plaintiff’s device.” ^[9] The court found this sufficient to describe the use of a pen register as defined under California law.^[10]

A key difference between these cases is their treatment of consent and the argument that voluntarily visiting a website implies consent to the use of website tracking technologies, even if such technologies are considered pen registers.

In Licea, the court indicated that even if the tool used to capture user information qualified as a pen register, the argument that users implied consent by visiting the website—where an IP address may be voluntarily disclosed—was persuasive. The court referenced prior cases such as Heeger v. Facebook, Inc.^[11] and U.S. v. Forrester^[12] to support this view.^[13]

In contrast, the court in Levings rejected the notion that simply visiting a website constitutes implied consent to collection of information. The court stated that accepting this argument “would allow the exception to swallow the rule whole.”^[14]

Given that neither case has progressed to a final judgment, defendants in other suits face potentially contradictory rulings on two critical issues:

• whether internet tracking tools qualify as pen registers
• whether visiting a website constitutes consent for the collection of user information

In Licea, the court expressed concern about the broader implications of interpreting web tracking technologies as pen registers, which could render nearly every online entity a potential criminal violator. The court noted that “public policy strongly disputes Plaintiff’s potential interpretation of privacy laws as one rendering every single entity voluntarily visited by a potential plaintiff, thereby providing an IP address for purposes of connecting the website, as a violator. Such broad-based interpretation would potentially disrupt a large swath of internet commerce without further refinement as [to] the precise basis of liability.”^[15] This point is potentially a harbinger of the debate that will escalate as more restrictions on website data gathering are considered by the courts and legislatures.

The preliminary rulings in Licea and Levings highlight the complex and evolving nature of privacy litigation in California. Companies must stay informed and be proactive in managing their compliance with privacy laws to mitigate risks associated with these legal challenges.

What Can Companies Do Now, Even If They Haven’t Yet Received a Complaint or Arbitration Demand?

As courts continue to grapple with whether website tracking technologies qualify as pen registers and whether visiting a website implies consent for data collection, companies must proactively review their technology and compliance practices.

Many US state laws, starting with California, include specific rules regarding the notices companies must provide on their websites, how they can use consumers’ information, and how such information can lawfully be shared with third parties. Companies should begin by ensuring that their websites and notices (e.g., website privacy policies) comply with the various states’ data protection laws.

Beyond legal compliance, companies should assess whether they are truly transparent about their website tracking technologies. For instance, does the company’s privacy notice include comprehensive information about cookies and tracking technologies, including which ones are used and how users can block them or opt out?

If possible, companies should consider deploying an opt-in mechanism for tracking technologies for California users. One of the key considerations in the cited cases is whether visiting a website constitutes consent for data collection. By asking for explicit consent (i.e., an opt-in for tracking technologies like cookies), companies could potentially provide an affirmative defense against allegations that an unlawful pen register was deployed, as consent is an exception to the prohibition on the use of pen registers.

Regardless, companies should remain vigilant for threatening letters, demands for arbitration, and service of claims related to the CIPA. Plaintiffs’ firms do not appear to discriminate based on company size or industry. If a company operates a website in the US and California consumers visit it, it is a potential target.

1. Ca. Pen. Code § 638.50. ↑

2. Ca. Pen. Code § 638.51. ↑

3. 684 F. Supp. 3d 1024 (S.D. Cal. 2023). ↑

4. Id. at 1050. ↑

5. Id. ↑

6. No. 23STCV26148, 2024 WL 1698147 (Cal. Super. L.A. Cnty. Mar. 13, 2024). ↑

7. No. 23STCV28359, 2024 WL 1481189 (Cal. Super. Ct. L.A. Cnty. Apr. 3, 2024). ↑

8. Licea, 2024 WL 1698147, at *4. ↑

9. Levings, 2024 WL 1481189, at *2. ↑

10. Id. ↑

11. 509 F. Supp. 3d 1182, 1190 (N.D. Cal. 2020). ↑

12. 512 F.3d 500, 510 (9th Cir. 2008). ↑

13. Licea, 2024 WL 1698147, at *4. ↑

14. Levings, 2024 WL 1481189, at *2. ↑

15. Licea, 2024 WL 1698147, at *4. ↑

Historically, blue-collar businesses, ranging from heating and cooling companies to porta-potty rentals, have been owned by workers who already knew their industries well. However, amid a looming recession and an abundance of layoffs in the tech and finance industries, there are new players purchasing (and running) these businesses: MBA-educated, former Wall Street, and former private equity professionals. This new trend, referred to as “Entrepreneurship Through Acquisition” (ETA), allows these graduates from top business school programs to become their own bosses with lower risk, gaining back valuable time and autonomy.

Many M&A attorneys are accustomed to large corporate clients or private equity firms purchasing businesses, so working with this new “independent searcher” buyer demographic can come with its own set of challenges. As this demographic continues to grow, here’s what M&A attorneys should know.

What’s Driving the Shift in the Small Business M&A Market?

Given the volatile nature of the job market, many white-collar professionals are ditching the traditional track of climbing the corporate ladder in favor of becoming small business owners instead. Customers may cut back on tech services during a recession, after all, but a burst water pipe will always require a plumber regardless of economic conditions.

While many of these workers are attracted to seemingly more stable career opportunities and the allure of becoming their own bosses, they also see significant opportunity in the upcoming “Great Wealth Transfer” from baby boomers to subsequent generations. As Walker Deibel highlights in Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game, $7 billion worth of small and medium businesses currently held by baby boomers will be available for purchase by 2030—meaning that there’s huge market potential.

How Firms Can Best Attract and Serve ETA Buyers

Billing Considerations

A significant part of attracting and serving ETA buyers comes down to understanding their financial situation, including budgetary constraints. That’s why, when it comes to catering to the unique needs of ETA buyers, offering alternative billing and fee arrangements can be essential. Unlike the traditional buyer, ETA buyers are often “self-funded searchers.” That means they’re actively looking for a business to purchase without the help of an investor, while simultaneously covering the costs of their own living expenses. As a result, they may be strapped for cash.

To better accommodate ETA buyers with tight budgets, creative billing structures like fixed-fee or delayed-fee billing can help by giving buyers a better sense of how to budget their legal expenses—without worrying about unexpected bills piling up.

Rules and Regulations

Attorneys should also be aware of common rules and regulations that pertain specifically to ETA buyers. Many ETA buyers, for example, choose to pursue Small Business Administration (SBA) loans, leveraging a combination of debt and equity for business acquisitions. A 2023 study found 58 percent of all self-funded searchers received funding through the SBA’s 7(a) loan. These loans often come with strict regulations and requirements.

One of the most critical regulations attorneys should consider pertains to personal guarantees. Individuals with 20 percent or more ownership in a business must sign an unconditional personal guarantee, which allows the lender to recover a loan’s full outstanding balance from the borrower. Self-funded searchers also must provide minimum equity injections to both mitigate risk and demonstrate dedication to the project. These minimum equity injections are often up to 10 percent of the total project cost.

In addition to regulations specific to self-funded searchers, the SBA’s standard eligibility requirements are applicable. There may be restrictions on business size, the nature of the business, and more. Attorneys can help advise ETA buyers on funding eligibility, proactively discussing any requirements that may impact risks or costs incurred by the borrower.

Due Diligence

With much less industry and business ownership experience, it’s essential that attorneys provide thorough third-party due diligence for ETA clients. This may involve a more rigorous review of financial statements, as well as important documents that M&A lawyers may not be accustomed to with their larger clients.

Due diligence is particularly important because ETA buyers are funding their own search. Without a robust financial safety net, unforeseen risks and liabilities could be detrimental. That’s where a great attorney comes in!

Common Pitfalls Attorneys Should Consider

There are risks involved when working with ETA buyers that attorneys can both monitor for and warn their clients about.

Loss of Key Relationships

The first common pitfall is the potential loss of clients or suppliers following a business purchase. Supplier or client loss is particularly common in small businesses that are deeply involved in their local communities, where personal relationships carry significant weight. Working closely with the seller to transition client and supplier relationships may help prevent this, especially when facilitated with proactive communication, early introductions, and joint meetings.

Seller Competition

Some sellers will aid in creating a smooth transition, but ETA buyers and their attorneys should also consider the risk of seller competition. The seller has already built one thriving business worth purchasing, and they’re walking away with extensive industry knowledge, experience, and contracts. They could take their post-sale cash reserves and start a new competing business. To prevent this, attorneys should advise their clients to put a noncompete agreement in the sale contract.

***

Working with ETA buyers can come with a learning curve, especially for attorneys accustomed to working with large corporate buyers or search funds. Attorneys looking to cater to this new business buyer demographic should be aware of their unique needs and adapt their practice accordingly. While this may seem like more effort is involved, I’ve found that it’s well worth it: helping business buyers break out of the corporate cycle to become their own bosses can be incredibly rewarding work.

It takes a village to prepare and file a customs entry. Importers rely on information they receive from vendors and their attorneys, licensed customs brokers, and consultants to ensure that reasonable care is exercised and their goods are properly entered. This multifaceted approach to compliance is a reflection of the very nature of the international transaction. The customs broker combines information from the transportation documents, commercial invoice, packing list, origin declarations, product specifications, etc., into its automated systems to transmit the entry information to U.S. Customs and Border Protection (CBP). This village is now electronic, with parties along the supply chain submitting electronic records that are ultimately processed by the customs broker’s systems to prepare and file an entry. This village is also regulated: no person or entity may conduct “customs business” on behalf of another without a valid customs broker’s license.^[1] CBP’s current interpretation of “customs business,” however, throws into confusion whether the preparation and transmission of the information associated with ordinary international trade activities could be considered unlawful.

As the U.S. Court of International Trade observed in a 2008 case, the “definition of ‘Customs business’ is very broad.”^[2] First, customs business includes “transactions with the Customs Service” as well as “activities involving transactions with the Customs Service.”^[3] Second, customs business includes preparing documents intended to be filed with the Customs Service, as well as any activities related to preparing documents to be filed with the Customs Service.

In interpreting the term “customs business,” however, CBP has applied a logic that, if taken to its logical conclusion, would threaten the legality of the collaboration many importers use to assure compliance and to create efficiencies in the international supply chain. This does not seem to serve the interests of the companies involved in international trade, the customs brokers who facilitate these activities, or CBP. The compliance-oriented interpretation of “customs business” that CBP developed for large corporations in its rules on “corporate compliance activities,” however, presents an alternative that could be applied to the activities of smaller businesses.

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CBP has seemingly departed from the statutory requirement that the definition of customs business is focused on the preparation of the information or documentation that is to be filed with CBP. For example, in preparing a customs entry, the imported goods must be classified under the correct provision of the Harmonized Tariff Schedule of the United States (HTSUS), an exercise that requires some training and skill. Generally, it is the manufacturer of the goods that has the knowledge of the detailed information required to arrive at the correct tariff classification. CBP has determined, however, that the provision of an HTSUS classification is “customs business” if a “possibility exists that the . . . classification information . . . will end up on the entry.”^[4] CBP relied on this concept in a 2022 customs ruling to determine that it would be unlawful for a supplier—the party arguably in the best position to determine the classification of an item under the HTSUS—to provide its customers with the classification for its merchandise.^[5] In the ruling, CBP appears to suggest that providing a tariff classification is tantamount to preparing documents intended to be filed with CBP on the basis that the provision of a tariff classification is “giving advice about how to classify a good,” which is a “necessary part” of preparing documents that will be filed with CBP.^[6] This determination subjects the supplier to penalty for engaging in those activities.

This raises the question as to whether to merely print the tariff classification on the invoice—a common practice in international trade—would be the unlawful practice of customs business. Similarly, since “activities involving . . . valuation” are included in the definition of customs business,^[7] and since the price paid or payable for the merchandise when sold for export to the United States is generally the value stated on the invoice, would placing a value on an invoice also be customs business?^[8] In fact, since the commercial invoice is prepared with intent that it be filed with CBP, then CBP’s recent interpretation of “customs business” would seem to suggest that the generation of a commercial invoice for a customer may be considered customs business. Since customs entries include information about the transportation that was involved in bringing the goods to the United States, would the preparation of these documents also be customs business?

CBP has already determined that the gathering of some of this information by an unlicensed person is “customs business.” In a December 2023 customs ruling, CBP determined that using foreign persons to enter information from the various commercial invoices, packing lists, shipping documents, and other documents used in international transactions into an Automated Broker Interface (ABI) system constituted unlicensed customs business activities.^[9] While this decision is reasonably supported by the fact that using an ABI system—a system that is specifically designed for the preparation and filing of customs entries—is directly related to preparing “documents” and the related information for transmission to CBP, this interpretation raises questions that may need to be resolved in separate rulings. For example, as mentioned above, preparing new entry documents involves accumulating information from different sources. CBP could determine that using EDI (electronic data interchange) to transmit the invoice or bill of lading information to a customs broker for use in the preparation of the customs entry is customs business, as it is known that the information will later be transmitted to CBP. What if an unlicensed service provider receives those transmissions and consolidates the information for transmission to the customs broker?

For large corporations, CBP has developed a regulatory framework that resolves many of these problems. Importers are obligated to exercise “reasonable care” in the preparation of a customs entry. The responsibility of “reasonable care” includes seeking the advice of parties with specific, or expert, knowledge, including consultation with unlicensed persons.^[10] The types of “unlicensed persons” an entity can consult with to ensure it has undertaken “reasonable care” in describing and/or classifying merchandise are “experts,” such as attorneys, licensed customs brokers, or customs consultants. In 2002 and 2003, large corporations approached CBP about centralizing their compliance activities. After several rulings that found it to be the unlicensed practice of customs business when one corporation performed compliance activities for other corporations within the corporate group, CBP crafted a rule that removed “corporate compliance activities” from the definition of “customs business,” drawing on the “reasonable care” concept.^[11] “Corporate compliance activity” is defined as:

[an] activity performed by a business entity to ensure that documents for a related business entity or entities are prepared and filed with CBP using “reasonable care”, but such activity does not extend to the actual preparation or filing of the documents or their electronic equivalents.^[12]

In other words, “corporate compliance activity” allows one company in a corporate group to conduct some customs business for other businesses within the group, even if the company providing those service is not licensed. In the words of CBP, the company providing these “corporate compliance activities” may “conduct any activities mentioned in the definition of ‘customs business,’ other than the actual preparation and filing of documents, so long as those activities fall within the definition of ‘corporate compliance activity.’”^[13]

This description of “corporate compliance activity” allows these companies to do nearly anything that is considered to be “customs business” when performed by an unrelated party. Only those activities that involve the actual preparation and filing of documents with CBP are excluded from corporate compliance activities. The final rule on “corporate compliance activity” states the following:

The proposed definition of “corporate compliance activity,” which precludes the “actual preparation or filing of the documents or their electronic equivalents,” . . . is intended to emphasize that the documents in question are those that will be filed with CBP. Therefore, any work performed in anticipation of document preparation, including the gathering and organizing of information and its recordation on background paperwork, will be allowed under this provision.^[14]

There is no statutory reason to adopt these requirements when the importing entity is part of a corporate group but not when the importer is an independent business. Yet CBP’s rulings draw this distinction, placing independent importers at a disadvantage as compared to competing importers that are part of a group of companies and may use unlicensed persons from one company to provide advice to the importing entity.

CBP has made significant investments in technology to gain visibility in the movement of goods through supply chains and their importation into the U.S. The international trade community is attempting to adjust to this reality by developing mechanisms to electronically bring together information from the various parties involved in the supply chain. CBP’s interpretation of “customs business” threatens to stifle these innovations in a manner that is not in the interest of CBP or the international trade community, nor does this interpretation serve the purpose of the customs broker statute. Expanding the concept of “corporate compliance activities” to include all such activities, regardless of the relationships between the parties, could go a long way toward recognizing modern business practices and encouraging compliance, while also serving the purpose of the customs broker statute.

1. “Customs business” is defined as “those activities involving transactions with U.S. Customs and Border Protection concerning . . . classification and valuation. . . . It also includes the preparation of documents or forms in any format and the electronic transmission of documents, invoices, bills, or parts thereof, intended to be filed with U.S. Customs and Border Protection . . . [of merchandise] or activities relating to such preparation, but does not include the mere electronic transmission of data received for transmission to Customs. No person may conduct customs business on behalf of another unless they hold a valid customs broker’s license.” 19 U.S.C. § 1641(a)(2) (emphasis added). ↑

2. Delgado v. United States, 581 F. Supp. 2d 1326 (Ct. Int’l Trade 2008) (examining, in dicta, the definition of “customs business” in the context of a proceeding to revoke a broker’s license). ↑

3. Id. ↑

4. HQ 115248 (Aug. 28, 2001). ↑

5. HQ H290535 (Sept. 29, 2022). ↑

6. Id. citing HQ 115278. ↑

7. 19 U.S.C. § 1641(a)(2). ↑

8. Id. ↑

9. HQ H326926 (Dec. 19, 2023). ↑

10. CBP, What Every Member of the Trade Community Should Know: Reasonable Care—An Informed Compliance Publication (Sept. 2017), last visited Jul. 29, 2024. ↑

11. 68 Fed. Reg. 47455 (Aug. 11, 2003). ↑

12. 19 C.F.R. §111.1 (emphasis added). ↑

13. 68 Fed. Reg. at 47456. ↑

14. Id. at 47457. ↑