A Texas federal court dismissed the lawsuit of the Federal Trade Commission (FTC) against private equity (PE) firm Welsh, Carson, Anderson & Stowe (Welsh Carson), while allowing to proceed the agency’s challenge against U.S. Anesthesia Partners (USAP), in a case challenging a series of acquisitions of anesthesia providers.[1]
Background
Rather than directly employ anesthesiologists, many hospitals contract with outside anesthesiologists or anesthesia groups to ensure around-the-clock access to anesthesia services. In 2012, Welsh Carson created USAP, which began to buy other anesthesia practices in Texas, eventually owning at least fifteen practices. According to the FTC’s complaint, USAP would add each acquired practice to its existing insurance contracts and thereby raise the rates of the newly acquired practices’ services to match its own higher reimbursement rates.[2] Today, USAP “handles nearly half of all hospital-only anesthesia cases in Texas, and earns almost 60% of all hospital anesthesia revenue paid by Texas insurers, employers, and patients.”[3]
When Welsh Carson formed USAP, it owned 50.2 percent of the company and chose company leadership. In 2017, the firm sold half of its stake in USAP.[4] Since then, one of the firm’s funds has owned 23 percent of USAP and had the right to appoint two of USAP’s fourteen board members.[5]
In September 2023, the FTC sued Welsh Carson and USAP, claiming that they engaged in anticompetitive practices to monopolize Texas’ anesthesiology.[6] Allegedly, “Welsh Carson masterminded the plan for USAP to roll up markets across Texas and inflate prices,” with the FTC pointing to internal communications at Welsh Carson where the firm allegedly bragged about being USAP’s “primary architect.”[7] From the FTC’s perspective, Welsh Carson’s minority ownership in USAP was no shield from liability because there is nothing to “prevent Welsh Carson from re-upping its investment in USAP, retaking formal control of the company, and directing yet more anticompetitive acquisitions.”[8] The FTC also pointed to Welsh Carson’s duplication of its anesthesiology consolidation strategy in the radiology market as evidence the firm would continue its anticompetitive practices.
The FTC claimed that it was entitled to an injunction under Section 13(b) of the FTC Act. Section 13(b) provides that when the FTC has reason to believe “that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the [FTC],” it may sue in federal district court to enjoin those practices.[9] Welsh Carson and USAP each moved to dismiss the claims against them.
The Court’s Decision
First, in granting the motion to dismiss for Welsh Carson, the court ruled that the FTC did not adequately allege that Welsh Carson is currentlyviolating antitrust laws. The court acknowledged that an acquisition of assets in a company may subject one to liability for monopolization or an unlawful transaction that may substantially lessen competition.[10] Welsh Carson, however, owns only 23 percent of USAP, and the FTC did not “cite[] a case in which a minority, noncontrolling investor—[regardless of how] hands-on—is liable under Section 13(b) because the company it partially owned made anticompetitive acquisitions.”[11] In contrast, in denying the motion to dismiss for USAP, the court stated that USAP’s alleged continued acquisitions and dominance in the state’s anesthesiology market “constitute ongoing activity and plausibly contribute to the monopoly power and unfair competition that the FTC’s complaint alleges.”[12]
Second, the court ruled that the FTC did not adequately allege that Welsh Carson is about to violate antitrust laws. As stated, the FTC argued that nothing prevents Welsh Carson from again becoming a controlling investor in USAP and directing anticompetitive acquisitions. The court disposed of this by pointing out that “the mere capacity to do something does not meet the requirement that the thing is likely to recur.”[13] And the fact that USAP is continuing its alleged anticompetitive practices “goes to USAP’s violations, not Welsh Carson’s.”[14] The court also acknowledged that Welsh Carson seeks to replicate its strategy in other health care markets, but “comments from Welsh Carson executives indicating a desire to consolidate other healthcare markets do not show that Welsh Carson is about to violate antitrust laws.”[15]
Takeaways
Governance separation matters. Welsh Carson was a minority, noncontrolling investor. It controlled only two of USAP’s fourteen board seats. This gave the firm the meaningful separation from USAP it needed. Firms should be mindful that courts will examine the extent of board control no matter how “hands-on” or “hands-off” the investor is regarding operations.
The FTC is concerned about serial acquisitions. The agency’s December 2023 merger guidelines provide that the agency will “examin[e] both the firm’s history and current or future strategic incentives” by evaluating “documents and testimony reflecting [the firm’s] plans and strategic incentives both for the individual acquisitions and for its position in the industry broadly.”[16] In the FTC’s press release after filing the lawsuit, FTC Chair Lina M. Khan remarked that the “FTC will continue to scrutinize and challenge serial acquisitions, roll-ups, and other stealth consolidation schemes.”[17] Firms should ensure that procompetitive effects from or reasons for strategies are spelled out in their business development and strategy documents. Firms should assume that that their informal and formal comments will be interpreted skeptically by antitrust authorities. Accordingly, documents discussing the acquisition pipeline or strategy, for example, should be factual and not overstate the plan as one to roll-up, control, or own an entire market or geography.
Consult an expert. Commercial arrangements with competitors that, in any way, implicate rates, prices, production levels, or information regarding same should be carefully reviewed with antitrust counsel.
Acquisitions in health care put agencies on heightened alert. The FTC’s complaint is replete with references to Welsh Carson’s involvement in health care. This concern extends to the states as well. For instance, in February 2024, USAP reached an agreement with Colorado Attorney General Phil Weiser that required it to divest and pay monetary relief.[18] Weiser remarked that “[w]hen private equity gets involved in health care with a focus on raising prices to make a quick buck, bad things happen for consumers.”[19] Firms investing in markets related to health care should be aware that federal and state agencies are looking out for serial acquisitions in the sector.
On May 17, 2024, Colorado enacted SB 205, broadly regulating the use of high-risk artificial intelligence systems to protect consumers from unfavorable and unlawful differential treatment. The bill, which requires compliance on or after February 1, 2026, declares that both developers and users of high-risk artificial intelligence systems must comply with extensive monitoring and reporting requirements to demonstrate reasonable care has been taken to prevent algorithmic discrimination. A violation of the requirements set forth in Colorado SB 205 constitutes an unfair trade practice under Colorado’s Consumer Protection Act.
What Is an Artificial Intelligence System?
Colorado SB 205 defines “artificial intelligence system” as “any machine-based system that, for any explicit or implicit objective, infers from the inputs the system receives how to generate outputs, including content, decisions, predictions, or recommendations, that can influence physical or virtual environments.”
The artificial intelligence system becomes “high risk” when it is deployed to make, or is a substantial factor in making, a consequential decision that has a material legal or similarly significant effect on the provision or denial to any consumer of, or the cost or terms of: (a) education enrollment or an education opportunity; (b) employment or an employment opportunity; (c) a financial or lending service; (d) an essential government service; (e) health-care services; (f) housing; (g) insurance; or (h) a legal service.
A high-risk artificial intelligence system does not include, among others, technology that communicates with consumers in natural language for the purpose of providing users with information, making referrals or recommendations, and answering questions and is subject to an accepted use policy that prohibits generating content that is discriminatory or harmful.
Affirmative Obligations for Developers
Colorado SB 205 requires a developer of a high-risk artificial intelligence system to make available to the deployer, or user of the artificial intelligence system:
A general statement describing the reasonably foreseeable uses and known harmful or inappropriate uses of the high-risk artificial intelligence system;
Documentation disclosing:
High-level summaries of the type of data used to train the high-risk artificial intelligence system;
Known or reasonably foreseeable limitations of the high-risk artificial intelligence system, including known or reasonably foreseeable risks of algorithmic discrimination arising from the intended uses of the high-risk artificial intelligence system;
The purpose of the high-risk artificial intelligence system;
The intended benefits and uses of the high-risk artificial intelligence system; and
All other information necessary to allow the deployer to comply with the requirements of Section 6-1-1703 [Deployer Duty to Avoid Algorithmic Discrimination];
Documentation describing:
How the high-risk artificial intelligence system was evaluated for performance and mitigation of algorithmic discrimination before the high-risk artificial intelligence system was offered, sold, leased, licensed, given, or otherwise made available to the deployer;
The data governance measures used to cover the training datasets and the measures used to examine the suitability of data sources, possible biases, and appropriate mitigation;
The intended outputs of the high-risk artificial intelligence system;
The measures the developer has taken to mitigate known or reasonably foreseeable risks of algorithmic discrimination that may arise from the reasonably foreseeable deployment of the high-risk artificial intelligence system; and
How the high-risk artificial intelligence system should be used, not be used, and be monitored by an individual when the high-risk artificial intelligence system is used to make, or is a substantial factor in making, a consequential decision; and
Any additional documentation that is reasonably necessary to assist the deployer in understanding the outputs and monitor the performance of the high-risk artificial intelligence system for risks of algorithmic discrimination.
Affirmative Obligations for Deployers
Colorado SB 205 requires deployers of a high-risk artificial intelligence system to use reasonable care to protect consumers from any known or reasonably foreseeable risks of algorithmic discrimination. Reasonable care is demonstrated by the deployer’s implementation of a risk management policy and program governing the deployment of the high-risk artificial intelligence system, completion of an annual impact assessment, and disclosure to consumers when they are interacting with an artificial intelligence system or when the system has made a decision adverse to the consumer’s interests.
Risk Management Policy and Program
The risk management policy and program must be “an iterative process planned, implemented, and regularly and systematically reviewed and updated over the life cycle of a high-risk artificial intelligence system, requiring regular, systematic review and updates.” It must incorporate the principles, processes, and personnel that the deployer uses to identify, document, and mitigate known or reasonably foreseeable risks of algorithmic discrimination.
The risk management policy and program must be reasonable considering:
(a) The guidance and standards set forth in the latest version of the “Artificial Intelligence Risk Management Framework” published by the National Institute of Standards and Technology in the United States Department of Commerce, Standard ISO/IEC 42001 of the International Organization for Standardization, or another nationally or internationally recognized risk management framework for artificial intelligence systems, if the standards are substantially equivalent to or more stringent than the requirements of [the bill]; or (b) Any risk management framework for artificial intelligence systems that the Attorney General, in the Attorney General’s discretion, may designate;
The size and complexity of the deployer;
The nature and scope of the high-risk artificial intelligence systems deployed by the deployer, including the intended uses of the high-risk artificial intelligence systems; and
The sensitivity and volume of data processed in connection with the high-risk artificial intelligence systems deployed by the deployer.
Impact Assessment
An impact assessment must be completed annually and within ninety days after any intentional and substantial modification to the high-risk artificial intelligence system is made available. The impact assessment must include, at a minimum, and to the extent reasonably known by or available to the deployer:
A statement by the deployer disclosing the purpose, intended use cases, and deployment context of, and benefits afforded by, the high-risk artificial intelligence system;
An analysis of whether the deployment of the high-risk artificial intelligence system poses any known or reasonably foreseeable risks of algorithmic discrimination and, if so, the nature of the algorithmic discrimination and the steps that have been taken to mitigate the risks;
A description of the categories of data the high-risk artificial intelligence system processes as inputs and the outputs the high-risk artificial intelligence system produces;
If the deployer used data to customize the high-risk artificial intelligence system, an overview of the categories of data the deployer used to customize the high-risk artificial intelligence system;
Any metrics used to evaluate the performance and known limitations of the high-risk artificial intelligence system;
A description of any transparency measures taken concerning the high-risk artificial intelligence system, including any measures taken to disclose to a consumer that the high-risk artificial intelligence system is in use when the high-risk artificial intelligence system is in use; and
A description of the post-deployment monitoring and user safeguards provided concerning the high-risk artificial intelligence system, including the oversight, use, and learning process established by the deployer to address issues arising from the deployment of the high-risk artificial intelligence system.
The impact assessment must also include a statement disclosing the extent to which the high-risk artificial intelligence system was used in a manner that was consistent with or varied from the developer’s intended uses of the high-risk artificial intelligence system. A deployer must maintain the most recently completed impact assessment, all records concerning each impact assessment, and all prior impact assessments, if any, for at least three years following the final deployment of the high-risk artificial intelligence system.
Notice to Consumer
On and after February 1, 2026, and no later than the time that a deployer deploys a high-risk artificial intelligence system to make, or be a substantial factor in making, a consequential decision concerning a consumer, the deployer must:
Notify the consumer that the deployer has deployed a high-risk artificial intelligence system to make, or be a substantial factor in making, a consequential decision before the decision is made;
Provide to the consumer a statement disclosing the purpose of the high-risk artificial intelligence system and the nature of the consequential decision; the contact information for the deployer; a description, in plain language, of the high-risk artificial intelligence system; and instructions on how to access the statement . . . ; and
Provide to the consumer information, if applicable, regarding the consumer’s right to opt out of the processing of personal data concerning the consumer for purposes of profiling in furtherance of decisions that produce legal or similarly significant effects concerning the consumer. . . .
The deployer must also comply with substantial notice requirements if the high-risk artificial intelligence system makes a consequential decision that is adverse to the consumer and allow the consumer to appeal or correct any incorrect personal data that the high-risk artificial intelligence system processed in making the decision.
If a deployer deploys a high-risk artificial intelligence system and subsequently discovers that the high-risk artificial intelligence system has caused algorithmic discrimination, the deployer, without unreasonable delay, but no later than ninety days after the date of the discovery, must send to the Attorney General, in a form and manner prescribed by the Attorney General, a notice disclosing the discovery.
A deployer who uses a high-risk artificial intelligence system that is intended to interact with consumers must ensure it discloses to each consumer who interacts with the artificial intelligence system that the consumer is interacting with an artificial intelligence system. Disclosure is not required under circumstances in which it would be obvious to a reasonable person that the person is interacting with an artificial intelligence system.
Website Disclosures
A developer must make available, in a manner that is clear and readily available on the developer’s website or in a public use case inventory, a statement summarizing:
The types of high-risk artificial intelligence systems that the developer has developed or intentionally and substantially modified and currently makes available to a deployer or other developer; and
How the developer manages known or reasonably foreseeable risks of algorithmic discrimination that may arise from the development or intentional and substantial modification of the types of high-risk artificial intelligence systems described in accordance with [the above].
Similarly, a deployer must also make available on its website a statement summarizing:
The types of high-risk artificial intelligence systems that are currently deployed by the deployer;
How the deployer manages known or reasonably foreseeable risks of algorithmic discrimination that may arise from the deployment of each high-risk artificial intelligence system . . . ; and
In detail, the nature, source, and extent of the information collected and used by the deployer.
Exemptions
These requirements do not apply to a deployer if, at the time the deployer deploys a high-risk artificial intelligence system and at all times while the high-risk artificial intelligence system is deployed,
The deployer:
Employs fewer than 50 full-time equivalent employees; and
Does not use the deployer’s own data to train the high-risk artificial intelligence system;
The high-risk artificial intelligence system:
Is used for the intended uses that are disclosed to the deployer as required by [the developer]; and
Continues learning based on data derived from sources other than the deployer’s own data; and
The deployer makes available to consumers an impact assessment that:
The developer of the high-risk artificial intelligence system has completed and provided to the deployer; and
Includes information that is substantially similar to the information in the impact assessment required [to be submitted by the deployer pursuant to the requirements of the bill].
The European Union’s Corporate Sustainability Due Diligence Directive (the “CSDDD” or “Directive”) was published on July 5, 2024. It must be transposed into national laws by July 26, 2026, and phased in over the coming several years. The national laws adopted pursuant to the Directive will ultimately apply to all companies that have annual group-wide net turnover (i.e., sales net of rebates, value-added tax, and similar taxes) in the EU of over €450 million (and, in the case of EU companies, also at least one thousand employees); to EU companies with annual franchising fees and/or royalties of at least €22.5 million and net turnover above €80 million; and to non-EU companies with those levels of franchising/royalty revenue in the EU.
Nearly all large U.S. multinational enterprises (“MNEs”) will be subject to these laws, because their European subsidiaries exceed the revenue thresholds, and/or because their global sales in and exports to the EU exceed €450 million. The largest MNEs will become subject to the laws beginning in 2027.
Because the due diligence review mandated by the Directive extends to in-scope MNEs’ supply chains, distribution channels, and other “business partners,” the human rights, environmental, and climate change requirements of the Directive will also indirectly impact many smaller companies (including U.S. companies that are not otherwise covered). Many of those companies will, however, be in a position to respond to the due diligence requests of in-scope companies because of their own obligations under the EU’s Corporate Sustainability Reporting Directive, which will apply to a much larger number of U.S. companies.
The Directive’s significance should not, however, be understated. It will cause the rights articulated in a variety of international agreements, all of which until now have been binding only on state parties (except to the extent enacted into domestic law by state parties), to become legally binding obligations enforceable against in-scope MNEs under the laws of all twenty-seven of the member states of the EU. Those agreements include three international human rights treaties—the International Covenant on Civil and Political Rights (“ICCPR”), the International Covenant on Economic, Social and Cultural Rights (“ICESCR”), and the Convention on the Rights of the Child—eight core/fundamental conventions of the International Labour Organization (“ILO”),[1] the core climate change mitigation objective of the Paris Agreement, and eleven environmental conventions. The U.S. has signed but not ratified the ICESCR and the Convention on the Rights of the Child; it has only signed two of the eight ILO conventions, and it has signed but not ratified three of the environmental conventions.
These international agreements articulate a lengthy list of rights and obligations and, if national authorities and courts in the EU enforce the provisions of the Directive as written, the potential impact will be significant. In-scope companies will be required (among other things):
to ensure that their global operations and those of their supply chain comply with international standards in relation to workers’ rights, equal pay, union activities, etc., even when those standards go beyond the requirements of domestic law in the country of employment;
to adopt and implement a transition plan to reduce their global greenhouse gas emissions in line with the Paris Agreement’s objective of limiting the temperature increase to 1.5°C above preindustrial levels and with the EU’s “net zero” targets;
to avoid causing any measurable environmental degradation that has any one of a range of negative effects, anywhere in their global operations;
to avoid violating others’ right to freedom of expression or interfering with persons’ privacy and correspondence; and
to ensure that any land or other natural resources to be used by the companies is not taken from, and does not result in evictions of, persons or communities who thereby lose their ability to subsist or their means of livelihood.
Although styled as a “due diligence” directive, the name is somewhat misleading. If violations of rights are identified through the due diligence process (or by the parallel efforts of trade unions, NGOs, or other interested parties), the in-scope MNE will be required to eliminate or, if that is not possible, mitigate them.
The CSDDD raises many critically important questions, to which at present there are no clear answers. Among other aspects of the Directive, U.S. MNEs will need to focus on their own compliance, and the compliance of their supply chain and other business partners, with at least seven sets of rights and obligations set forth in the Directive.
Conditions of work
Among the rights listed in the Directive is the “right to enjoy just and favourable conditions of work,” including:
a fair wage and an adequate living wage for employed workers,
a decent living,
safe and healthy working conditions, and
reasonable limitation of working hours,
interpreted in line with Article 7 and 11 of the ICESCR, which clarify that the right to an adequate living wage and a decent living is intended to provide the worker and the worker’s family “an adequate standard of living for himself and his family, including adequate food, clothing and housing.”
Although over 170 countries have minimum wage laws,[2] and MNEs tend to pay above the going rate in most countries, enforcement of minimum wage laws differs significantly across countries. Categories of workers (e.g., agricultural, domestic, and younger) are often excluded from minimum wage laws,[3] and there is often a significant gap between the minimum wage and a living wage, as that term is defined by the ILO.
In-scope companies will need to conduct due diligence into these matters, both in their own global operations and in their supply chains, to determine whether their subsidiaries and their key suppliers meet the higher standard. According to data collected by the World Economic Forum, at present only 24 percent of employers currently pay a living wage globally.[4] The CSDDD will make this obligatory for in-scope companies.
Laws in many countries set maximum working hours, but enforcement varies, and there are significant exceptions.[5] Similarly, many countries have laws regulating the health and safety of workplaces, but in some countries there is little enforcement.
It appears that workers in non-EU countries, or an NGO or trade union acting on their behalf, will be able to lodge complaints with EU enforcement authorities or to bring suit in EU courts for a non-EU company’s alleged failure to pay a living wage or limit working hours. While in-scope companies will be required to seek contractual assurances from direct business partners that they will ensure compliance with these requirements as well, and verify compliance with those undertakings, it is not clear what an in-scope MNE is supposed to do, and what its liability may be, if the counterparty refuses to do so or if the MNE knows that the counterparty is not complying. The Directive provides some guidance on these matters, but further clarity in the transposed laws would be useful.
Equal pay and nondiscrimination
The Directive requires the transposed laws to prohibit unequal treatment in terms of employment, unless this is justified by the requirements of the employment. Unequal treatment includes, in particular:
the payment of unequal remuneration for work of equal value; and
discrimination on grounds of national extraction or social origin, race, color, sex, religion, or political opinion.
This right is to be interpreted in line with Article 7 of the ICESCR, which requires “equal remuneration for work of equal value without distinction of any kind, in particular women being guaranteed conditions of work not inferior to those enjoyed by men, with equal pay for equal work.”
Equal pay for equal work, and nondiscrimination in employment, are established legal principles in the EU,[6] U.S.,[7] and U.K.[8] and in several other countries, but legal protections for women and racial and ethnic minorities in many countries are nonexistent or weak.[9] Will the Directive result in the EU courts becoming the venue of choice for forcing MNEs to end unequal pay in all their subsidiaries? Will there be a requirement that plaintiffs first seek remedies in their own country, if an effective remedy is available there? Again, the implementing legislation may provide clarity.
Rights to form unions and to strike
The Directive also requires in-scope companies to ensure their workers are entitled to freedom of association, assembly, the right to organize, and collective bargaining. This includes the following rights:
workers are free to form or join trade unions;
the formation, joining and membership of a trade union must not be used as a reason for unjustified discrimination or retaliation;
trade unions are free to operate in line with their constitutions and rules, without interference from the authorities; and
the right to strike and the right to collective bargaining.[10]
Many countries in the world do not—at least in practice—allow workers the freedom to form unions (except, in some cases, those established by the government), to strike, and to engage in collective bargaining. According to the International Trade Union Confederation, 87 percent of countries have violated the right to strike, and 79 percent have violated the right to collective bargaining.[11]
In countries where there is no right to form labor unions, right to strike, and/or right to collective bargaining, but also no prohibition, the Directive may require in-scope companies (and their suppliers) to afford their workers these rights, as a matter of EU law. But what will this mean in practice? Will workers in non-EU countries be able to bring their unionization and collective bargaining disputes to EU courts, demanding the rights articulated in the relevant international conventions, even if those go beyond what they are entitled to under their own country’s laws? And what will the Directive’s requirements mean as applied to countries where independent labor unions are not permitted to exist, or where strikes are banned? Guidance on these points will be needed.
Climate change transition plans
The Directive will require in-scope companies to adopt and put into effect a “transition plan” that aims to ensure, through best efforts, that the business model and strategy of the company are compatible with the Paris Agreement’s objective of limiting global warming to 1.5°C and the EU regulation establishing the objective of achieving “climate neutrality,” including its intermediate and 2050 targets. The transition plans will be required:
to cover the entire group’s operations, and include its suppliers and other business partners;
to contain time-bound targets related to climate change for 2030, then in five-year incremental steps up to 2050;
to include absolute emission reduction targets for Scope 1, Scope 2, and Scope 3 greenhouse gas emissions,[12] as well as the key actions planned to reach those targets,
to explain and quantify the investments and funding supporting the transition plan; and
to be updated every twelve months, together with a report on the progress made towards achieving the plan’s targets.
The Directive contemplates that the national supervisory authorities charged with implementing its provisions shall be required “to supervise the adoption and design of the plan.”
While many MNEs have adopted action plans relating to the reduction of greenhouse gases, in most cases these initiatives have been voluntary, have not been based on governmentally mandated targets, have not extended to their supply chain and distributors, and have not been subject to governmental oversight. The Directive proposes to change all that, for in-scope MNEs and, indirectly, their business partners.
As the Paris Agreement’s objective of limiting climate change to a 1.5°C increase is, at this point, ambitious (if not, according to some, impossible), to have the desired impact, transition plans will have to be similarly ambitious. It is not clear whether there will continue to be political support within the EU for the radical reductions in greenhouse gas emissions that companies will need to implement to meet the plans’ stated objectives. But if the EU is willing to exert maximum pressure on its own companies to convert rapidly to renewable energy sources and energy-efficient modes of production and transportation, the EU may be particularly insistent on forcing non-EU MNEs to take the same bold (and, in the short run, costly) steps.
The activities of NGOs are likely to be relevant in this context. Within the EU there have been several high-profile lawsuits designed to force companies[13] to act more aggressively to reduce greenhouse gas emissions. NGOs sense an opportunity to use the Directive to force both EU and non-EU companies into faster and bolder action. They may also use the transposed laws to seek damages and/or remediation for the adverse impacts allegedly caused by the failure to implement efficacious transition plans in line with the Directive’s requirements.
Environmental degradation
The Directive will require in-scope companies to avoid causing any measurable environmental degradation, such as harmful soil change, water or air pollution, harmful emissions, excessive water consumption, degradation of land, or other impact on natural resources (such as deforestation) that has any one of a range of adverse environmental impacts. It will also require in-scope companies to avoid or minimize adverse impacts on biological diversity.
It is not clear what this will mean in practice. One possibility is that the Directive will create a set of environmental laws applicable to all large MNEs, to be enforced by European governmental authorities and courts. If that is the intent, the EU or national EU governments will—one hopes—provide more detailed guidance on what is (and is not) considered a violation of the CSDDD’s general rules.[14]
Freedom of expression, privacy, and correspondence
The Directive prohibits arbitrary or unlawful interference with a person’s privacy, family, home, or correspondence, interpreted in line with Article 17 of the ICCPR. Article 19 of the ICCPR, also covered by the CSDDD, includes the right to hold opinions without interference, and the right to freedom of expression, regardless of frontiers, orally, in writing or in print, or through any other media. Protecting these rights may prove challenging for telecommunications and social media companies (among others) operating in repressive countries.
Governments often request personal information from social media and telecom companies, in the course of criminal investigations or for other legitimate reasons. Repressive regimes will, however, often demand access to customer information in order to track down individuals who have criticized the government, or who support the political opposition. Those governments may use that information to detain, interrogate, and/or incarcerate dissidents and political opponents. Companies are regularly compelled by repressive regimes to block websites and shut down services to suppress political criticism or prevent reporting of human rights abuses.
When faced with a governmental demand for access to an email account or telephone line, even when it knows or guesses that the reason may lead to a violation of human rights, a telcom may often have no choice but to comply, as to refuse will be a criminal offense and may result in its subsidiary’s employees being arrested and prosecuted. To accede to the government’s demand may, however, result in the company’s customer(s) being arrested and prosecuted (or jailed without charges), in violation of their human rights. This is not a new dilemma. But under the laws contemplated by the Directive, it may evolve from being an ethical dilemma to being a conflict between diametrically opposed legal requirements.[15]
Evictions and takings
The Directive will also require in-scope companies to respect “the right of individuals, groupings and communities to lands and resources and the right not to be deprived of means of subsistence, which entails the prohibition to unlawfully evict or take land, forests and waters when acquiring, developing or otherwise using land, forests and waters, including by deforestation, the use of which secures the livelihood of a person.”
This requirement will impose on in-scope companies an obligation to ensure, when acquiring land or water rights, etc. (e.g., for the construction of a new factory or other asset), that the land is not occupied or in use as farm or grazing land by individuals who will be adversely affected by their dispossession of the land, unless adequate arrangements have been made to compensate them and protect their interests. The Directive’s interpretive guidance[16] makes clear that particular attention must be paid to situations in which the people being dispossessed are individuals from disadvantaged minority groups, low-caste individuals, indigenous peoples, or others who may be particularly vulnerable.
It is not uncommon, in large-scale development projects, for there to be complaints regarding the displacement of indigenous, minority, low-caste, or otherwise marginalized peoples, whose claim to the land is often undocumented. Similarly, there are often complaints regarding a project’s likely adverse impact on drinking water, fish, or other resources, and the adverse impact that will have on local people.
NGOs often champion the rights of the affected people in local courts, but particularly in cases where there is significant government backing for the project, local courts may be unsympathetic, or grant only nominal compensation. The CSDDD seems to offer alternative, potentially more sympathetic, venues for NGOs to pursue these claims.
Next steps
Particularly if not implemented with clarity, practicality, and nuance, the laws promulgated pursuant to the CSDDD will present significant challenges for in-scope MNEs, including even those that already strive to comply with the U.N. Guiding Principles and the OECD Guidelines for Multinational Enterprises. It is important that the EU, and the twenty-seven national governments that will be transposing the Directive into national law and then enforcing it, implement the Directive in a manner that is realistic and responsive to the practical realities faced by MNEs in complex business environments.
U.S. companies should assess the potential impact of the Directive on their global operations, follow closely further developments as the CSDDD is transposed into national laws, and use the time before these laws become applicable to prepare to meet the compliance challenges they present.
Freedom of Association and Protection of the Right to Organise Convention, 1948 (No. 87); Right to Organise and Collective Bargaining Convention, 1949 (No. 98); Forced Labour Convention, 1930 (No. 29) and its 2014 Protocol; Abolition of Forced Labour Convention, 1957 (No. 105); Minimum Age Convention, 1973 (No. 138); Worst Forms of Child Labour Convention, 1999 (No. 182); Equal Remuneration Convention, 1951 (No. 100); and Discrimination (Employment and Occupation) Convention, 1958 (No. 111). ↑
“Living Wage,” U.N. Global Compact, accessed July 11, 2024. ↑
See Sangheon Lee, Deirdre McCann, and Jon C. Messenger, Working Time Around the World: Trends in working hours, laws and policies in a global comparative perspective (London: Routledge, 2007). ↑
These rights are to be interpreted in line with Articles 21 and 22 of the ICCPR, Article 8 of the ICESCR, the ILO Freedom of Association and Protection of the Right to Organise Convention, 1948 (No. 87), and the ILO Right to Organise and Collective Bargaining Convention, 1949 (No. 98). ↑
Scope 1 greenhouse gas emissions are those that are produced from sources that are owned or controlled by the corporate group. Scope 2 emissions are those that result from the production of electricity, and heating and cooling purchased by the corporate group. Scope 3 emissions are those emitted by the company’s value chain, including those produced by suppliers, distributors, and product usage, to the extent not included in Scope 2. ↑
See, e.g., Milieudefensie v. Royal Dutch Shell plc, Case No. C/09/571932 (May 26, 2021). Shell has appealed the decision. ↑
The CSDDD will also require covered companies to comply with the terms of about ten international environmental treaties. Because most of these conventions make clear what is prohibited or required, companies with operations that may be covered by their provisions will have greater clarity on what is required. ↑
The word “unlawful” will not resolve the legal conflict. The U.N. Human Rights Committee has clarified that the word “unlawful” means that no interference can take place except in cases envisaged by the law, and that the law must comply with the provisions, aims, and objectives of the Covenant. ICCPR General Comment No. 16 (1988). ↑
These rights are to be interpreted in line with Article 1 and 27 of the ICCPR and Article 1, 2, and 11 of the ICESCR. Article 27 of the ICCPR provides that where ethnic, religious, or linguistic minorities exist, persons belonging to such minorities shall not be denied the right, in community with the other members of their group, to enjoy their own culture, to profess and practice their own religion, or to use their own language. Article 2 of the ICESCR includes a requirement that rights be exercisable without discrimination of any kind as to race, color, sex, language, religion, political or other opinion, national or social origin, property, birth, or other status. ↑
On June 18, 2024, in NAIB v. Weiser, the United States District Court for the District of Colorado granted the motion for preliminary injunction filed by plaintiffs—the National Association of Industrial Bankers (NAIB), American Financial Services Association (AFSA), and American Fintech Council (AFC) (collectively, “Trade Associations”)—against the Colorado Attorney General and Administrator of the Colorado Uniform Consumer Credit Code (Colorado), which challenges Colorado’s opt-out of Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and its interpretation of Colo. Rev. Stat. § 5-13-106, which was set to take effect on July 1, 2024.
Background on DIDMCA and Legal Challenge by Trade Associations
As discussed in our prior articles, Sections 521–523 of DIDMCA granted federal authority to insured, state-chartered banks and credit unions, authorizing them to contract for the interest rate permitted by the state where the bank is located and export that interest rate into other states. In June 2023, Colorado signed into law legislation exercising its right under Section 525 to opt out of DIDMCA, which it believes will require state-chartered banks and credit unions to adhere to Colorado laws regarding interest rate and fee limitations.
The preliminary injunction filed by the court follows the original complaint filed by the Trade Associations on behalf of their members on March 24, 2024, which challenged the interpretation of Colo. Rev. Stat. § 5-13-106 and the opt-out. Colorado filed a motion to dismiss on May 13, 2024.
Amicus Curiae Briefs in Support
In a unique turn of events, the Federal Deposit Insurance Corporation (FDIC) filed an amicus curiae brief in support of Colorado’s position and asserted that loan transactions between parties in different states are made in the state where the borrower enters into the transaction. The FDIC’s position in the brief contradicted its long-standing position on this topic that loans are made in the state where the contractual choice-of-law and the location where certain nonministerial lending functions are performed, such as where the credit decision is made, where the decision to grant credit is communicated from, and where the funds are disbursed.
The American Bankers Association and Consumer Bankers Association also filed an amicus curiae brief in support of the Trade Associations and noted that the position the FDIC took was the first time it had ever argued that the loan is made where the borrower is located.
Court’s Interpretation and Ruling
The preliminary injunction issued by the court in NAIB v. Weiser provides that Colorado is enjoined preliminarily from enforcing the rate and fee limitations “with respect to any loan made by the [Trade Associations’] members, to the extent the loan is not ‘made in’ Colorado and the applicable interest rate in Section 1831d(a) exceeds the rate that would otherwise be permitted.” The court found strong support in the interpretation of where a loan is “made” in the plain language of Section 521 when viewing the statutory scheme holistically and when coupled with the Federal Deposit Insurance Act and Title 12 of the United States Code, containing the National Bank Act.
Further, the court provided that “the plain and ordinary answer to the question of who ‘makes’ a loan is the bank, not the borrower. It follows, then, that the answer to the question of where a loan is ‘made’ depends on the location of the bank, and where the bank takes certain actions, but not on the location of the borrower who ‘obtains’ or ‘receives’ the loan.”
Implications and Potential Impact of the Injunction
While the court found that the requirements for a preliminary injunction were satisfied, it is certainly worth noting that if the Trade Associations were not granted the injunction, the products their members offer could no longer be offered to Colorado customers. As a result, “those customers—and their goodwill along with that of the banks’ business partners—may be gone forever.” Even if the Trade Association members were able to recover monetary damages from Colorado, the “loss of customers, loss of goodwill, and erosion of a competitive position in the marketplace are the types of intangible damages that may be incalculable, and for which a monetary award cannot be adequate compensation.”
Additionally, the court determined that the balance of the harms weighed in favor of the Trade Associations because national banks would be able to continue making consumer loans to Colorado residents irrespective of the interest rate and fee limitations under Colorado law and placing the Trade Associations’ members at a disadvantage, all for only providing marginally more protections from higher interest rates. Further, the court determined that the public interest favors enjoining enforcement of “likely invalid provisions of state law.”
Colorado has thirty days to appeal the preliminary injunction, and an appeal is very likely. However, the outcome of such an appeal is uncertain. Assuming the District Court decision is upheld on appeal, the rate and fee limitations would no longer be applicable to out-of-state, state-chartered banks that make consumer loans to Colorado residents. If the decision is overturned, these parties would need to adhere to the prescribed rate caps and fee limitations as prescribed by Colorado law.
The Takeaway
Even though this injunctive relief is limited to the Trade Association’s members, we still recommend that financial services companies operating in the fintech and nondepository space remain mindful that Colorado has previously used true lender theories to challenge loan charges assessed by out-of-state depository institutions in the context of bank partnership programs, resulting in a prior Assurance of Discontinuance (AOD) that sets forth guidelines for true lender determinations in Colorado.
As workers were leaving their offices for the Fourth of July holiday, the Northern District of Texas issued its much-anticipated order preliminarily enjoining the effective date of the controversial noncompete ban rule issued by the Federal Trade Commission (FTC). The court’s decision, however, is limited to the named plaintiffs in the case—a tax accounting firm and several business groups. Although the stay is temporary pending the court’s final decision on the merits of the case and applies only to the movants in the case, it signals that a permanent and nationwide injunction is likely.
The FTC’s noncompete rule, if it becomes effective, will apply to any written or oral employment term or policy that penalizes or prevents a worker from (a) seeking or accepting work in the U.S. with a different employer, or (b) operating a business in the U.S. after the conclusion of the employment that includes the term or condition. The rule prohibits entering into new noncompete agreements on or after the effective date with any worker. The rule also prohibits enforcing or attempting to enforce a noncompete clause that existed before the effective date for any worker except for those who qualify as senior executives. The ban does not apply to customer or employee nonsolicitation agreements.
The central issue before the Texas court was whether the FTC Act gives the FTC the authority to promulgate substantive rules in general, and the broad, sweeping noncompete ban in particular. The court rejected the FTC’s interpretation of the FTC Act and ruled that a “plain reading” of Section 6(g) of the FTC Act “does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition.” Further, the court cited a 1979 Supreme Court case that referred to Section 6(g) as a “housekeeping statute,” authorizing rules related to “procedure or practice,” not “substantive rules.” Ultimately, the court found that “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g).” The court also determined that the FTC noncompete rule is likely “arbitrary and capricious.”
Notably, the Texas court limited its preliminary ruling to the parties and declined to enter an order enjoining enforcement of the FTC noncompete rule nationwide. As a result, the court’s preliminary injunction order does not invalidate the rule for any nonparty.
The court’s ruling on the preliminary injunction is not a final judgment in the case. However, its approach to the preliminary injunction and finding that the plaintiffs demonstrated a “substantial likelihood of success on the merits” strongly suggest that it will strike down the rule on the merits. The court committed to issuing its decision on the merits by August 30. In the interim, the parties will further brief the merits issues and the narrow scope of the court’s order, including whether the injunction should be expanded to be national.
A separate case brought by ATS Tree Services LLC is proceeding in a Pennsylvania federal court; that case currently has a preliminary injunction hearing scheduled for July 10. The ATS court anticipated that it would publish its opinion by or before July 23. The ATS court is not bound by the Texas court’s reasoning or decision, but it will doubtless be taken into consideration.
What’s Next?
Because the Texas court limited its preliminary injunction ruling to only the plaintiffs and rejected a request to issue a nationwide preliminary injunction, companies should continue to plan for implementation of the rule on September 4.
A few things employers can do to be prepared include:
Assess existing agreements imposing post-employment restrictions, including noncompetition agreements that would be banned under the FTC noncompete rule and confidentiality and nonsolicitation agreements that are not.
Consider improvements and clarifications that could strengthen your nonsolicitation and confidentiality agreements regardless of the noncompete ban’s future. Clear and precise drafting is essential, and employers with workers in multiple states must account in their agreements for the many different and evolving state laws.
Prepare to provide the required notice under the final rule, because it could take time to identify the workers who are subject to oral or written noncompetes or equivalent employee policies, compile the relevant worker address information, and draft the notices. If the rule becomes effective, the notification must be made by the effective date.
On June 6, the U.S. Department of the Treasury issued a request for information (“RFI”) seeking information and public input on the use of artificial intelligence in the financial services sector. The RFI asks that written comments and information be submitted on or before August 12, 2024.
Through this RFI, the Treasury Department seeks to increase its understanding of how AI is being used within the financial services sector and the opportunities and risks presented by the development and applications of AI. The Treasury Department is relying on the definition of AI utilized in President Biden’s Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence and the National Artificial Intelligence Initiative: “a machine-based system that can, for a given set of human-defined objectives, make predictions, recommendations, or decisions influencing real or virtual environments. Artificial intelligence systems use machine and human-based inputs to perceive real and virtual environments; abstract such perceptions into models through analysis in an automated manner; and use model inference to formulate options for information or action.” It is worth noting that the first question asked by the Treasury Department, however, is whether this definition is appropriate for financial institutions.
The focus of the RFI is on the following uses of AI by financial institutions:
Provision of products and services (e.g., how is AI being used to offer financial products or services? How is AI being used for financial forecasting products and pattern recognition tools?)
Risk management (e.g., how is AI being used to manage risk and asset liability?)
Capital markets (e.g., how is AI being used to identify investment opportunities and provide financial advisory services?)
Internal operations (e.g., how is AI being used to manage payroll, HR functions, training, and software development?)
Customer service (e.g., how is AI being used to help handle complaints or manage a website?)
Regulatory compliance (e.g., how is AI being used to assist with regulatory reporting or disclosure requirements?)
Marketing (e.g., how is AI being used to market to consumers?)
As part of the RFI, the Treasury Department has posed a series of questions geared toward a broad set of stakeholders in the financial services ecosystem (including consumer and small business advocates, nonprofits, academics, and others) to understand the benefits and risks of AI. These questions are use-case focused and seek to ferret out how AI could benefit or pose risks to stakeholders. In addition, the Treasury Department is seeking specific information on how financial institutions are protecting against “dark patterns” and predatory targeting, which could lead to bias and fair lending issues; mimicry of biometric data (e.g., a consumer’s voice), which could affect fraud detection and prevention tools such as multi-factor authentication; and unfair or deceptive acts or practices. The Treasury Department also asks about the privacy impact of AI, noting that AI can enable a firm’s ability to infer attributes and behavior about an individual that could “undermine privacy (including the privacy of others) and dilute the power of existing ‘opt-out’ privacy protections.”
The Treasury Department’s RFI is one of several requests for information on AI. Various other federal agencies are seeking or have sought information on AI, including the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau, and the National Credit Union Administration, which issued an interagency RFI in 2021 on financial institutions’ use of AI. This most recent RFI is a reminder that this is a hot topic for regulators, and the heat does not appear to be dissipating any time soon.
Is a single-member limited liability company (“SMLLC”) that is taxed as a “disregarded entity” and has to date not had its own employer identification number (“EIN”) required to apply for an EIN in anticipation of filing beneficial ownership information reports as required by the Corporate Transparency Act (“CTA”)?[1] And even if not required, should it?
Short answers: no and yes.
CTA Reporting Regulations
Under the CTA, a limited liability company (“LLC”) is a “reporting company”[2] that, absent the availability of any of twenty-three exemptions,[3] must file a beneficial ownership information report identifying itself and its “beneficial owners” and, if formed on or after January 1, 2024, its “company applicant(s).” Those reports will be filed with the Financial Crimes Enforcement Network (“FinCEN”) office of the Department of the Treasury via the Beneficial Ownership Secure System (“BOSS”) interface and database. In identifying itself on its BOSS report, a reporting company must provide its EIN.[4]
Many SMLLCs, being for tax purposes “disregarded entities,”[5] do not have their own EIN but rather use, where the sole member is a natural person, the sole member’s Social Security number[6] or, where the sole member is a business entity, the sole member’s EIN.
The Internal Revenue Service (“IRS”) has made all of this, as considered from the perspective of CTA compliance, unintelligible, writing:
For federal income tax purposes, a single-member LLC classified as a disregarded entity generally must use the owner’s social security number (SSN) or employer identification number (EIN) for all information returns and reporting related to income tax. For example, if a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number (TIN) and Certification, the W-9 should provide the owner’s SSN or EIN, not the LLC’s EIN.
For certain Employment Tax and Excise Tax requirements discussed below, the EIN of the LLC must be used. An LLC will need an EIN if it has any employees or if it will be required to file any of the excise tax forms listed below. Most new single-member LLCs classified as disregarded entities will need to obtain an EIN. An LLC applies for an EIN by filing Form SS-4, Application for Employer Identification Number. See Form SS-4 for information on applying for an EIN.
A single-member LLC that is a disregarded entity that does not have employees and does not have an excise tax liability does not need an EIN. It should use the name and TIN of the single member owner for federal tax purposes. However, if a single-member LLC, whose taxable income and loss will be reported by the single member owner needs an EIN to open a bank account or if state tax law requires the single-member LLC to have a federal EIN, then the LLC can apply for and obtain an EIN.[7]
This IRS guidance both predates the January 1, 2024, effective date of the CTA reporting regulations and is focused upon compliance under the Internal Revenue Code. Meanwhile, the release accompanying the CTA reporting regulations,[8] in discussing the requirement that a reporting company provide its EIN, did not address the issue of disregarded entity LLCs and wrote as well that “the vast majority of reporting companies will have a TIN or will easily be able to obtain one.”[9] Not helpful is the IRS’s suggestion that a Form SS-4 should be filed only when the SMLLC wants a tax classification other than as a disregarded entity,[10] especially when there are numerous situations already recognized by the IRS where an SMLLC will desire disregarded entity classification even as an EIN is either desired or necessary.
Neither the Beneficial Ownership Information Reporting FAQs[11] nor the Small Entity Compliance Guide,[12] each issued by FinCEN, shed any additional guidance on the issue, and certainly there is nothing in the CTA or the reporting regulations that mandates that an SMLLC that is a reporting company apply for its own EIN.
So, is the EIN of the sole member of a disregarded entity LLC, whether a Social Security number of the sole natural person member or the EIN of the sole business entity member, appropriate for the SMLLC’s CTA beneficial ownership information report? And even if the answer is yes, is it better practice for an SMLLC owned by a natural person to apply for its own EIN for inclusion in its CTA filings?
Short answers: yes and yes.
Benefits of an SMLLC Having Its Own EIN
For an SMLLC that is taxed as a disregarded entity and does not already have its own EIN, it may file its CTA beneficial ownership information report using the sole member’s EIN, which in the case of a natural person sole member will be the person’s Social Security number. But it is entirely permissible for that LLC to request from the IRS its own EIN and file the CTA report using that number.[13]
This approach may be seen as better in that it will not require submitting on behalf of the reporting company the beneficial owner’s Social Security number. True, if the BOSS database is hacked, the beneficial owner’s personal identifying information[14] may be divulged, but at least her or his Social Security number will not be part of the information leaked or stolen.[15] That said, this implicit expectation to use a federal EIN will oft have unacknowledged costs such as updating of tax filings, updating of information at the bank or other financial institution at which funds are transacted, differentials in treatment of employment tax remissions, and a parallel obligation to then apply for a state taxpayer identification number.
In addition, it may be that multiple SMLLCs filing BOSS reports with FinCEN, all using the same EIN, will encounter problems or, at minimum, additional unwanted scrutiny. In promulgating the reporting regulations, FinCEN wrote that “FinCEN believes that a single identification number for reporting companies is necessary to ensure that the beneficial ownership registry is administrable and useful for law enforcement, to limit opportunities for evasion or avoidance, and to ensure that users of the database are able to reliably distinguish between reporting companies.”[16] Furthermore, in characterizing its determination of the deadline for filing an initial beneficial ownership information report, FinCEN said that the final rule “provide[s] more time to reporting companies to acquire TINs and other identifying information, which is critical to the ability of FinCEN to distinguish reporting companies from one another, which in turn is necessary to create a highly useful database.”[17] So, it may well be that there is going to be a problem with using a sole member’s EIN to make BOSS filings for multiple SMLLCs—an issue that may arise regardless of whether the sole member is an individual or an entity. Until the end of June the BOSS system would at least some of the time not accept an initial filing with the same EIN as a prior filing (updates and corrections were not so affected). This was not a feature of BOSS intended to prevent multiple initial BOIRs from being filed under the same EIN, but rather a programming bug that has now been remedied.[18]
Conclusion
So, must an SMLLC get its own EIN before filing its initial beneficial ownership information report with FinCEN? Probably not. But, in order to avoid potential problems and as a concession to the brevity of life, should an SMLLC get its own EIN before filing its initial beneficial ownership information report with FinCEN? Almost certainly yes.
The CTA was adopted as part of the Anti–Money Laundering Act of 2020, which was part of the 2021 National Defense Authorization Act for Fiscal Year 2021 (“NDAA”). The full name of the NDAA is the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021. Pub. L. No. 116-283 (H.R. 6395), 134 Stat. 338 (116th Cong., 2d Sess.). Congress’s override of the president’s veto was taken in Record Vote No. 292 (Jan. 1, 2021). The anti–money laundering provisions are found in sections 6001–6511 of the NDAA. The CTA consists of sections 6401–6403 of the NDAA. Section 6402 of the NDAA sets forth Congress’s findings and objectives in passing the Corporate Transparency Act, and section 6403 contains its substantive provisions, primarily adding § 5336 to title 31 of the U.S. Code. ↑
CTA, 31 U.S.C.A. § 5336(a)(11)(A); 31 C.F.R. § 1010.380(c)(1)(i)(B). While there are slightly separate treatments under the CTA for LLCs formed in the U.S. and those formed in other countries, this discussion is focused upon U.S.-organized LLCs. ↑
31 C.F.R. § 1010.380(b)(1)(i)(F) (requiring “[t]he Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) of the reporting company”). ↑
It bears noting that the definitions of who is a member for state law and tax purposes are different, so it is possible that an LLC can be a single-member LLC from a state law perspective and a multiple-member LLC for tax purposes, and vice versa. See generally Thomas E. Rutledge, When a Single-Member LLC Isn’t and When a Multiple-Member LLC Is, J. Passthrough Entities, July/Aug. 2015, at 49. Here, we are referring to an SMLLC from the tax perspective. ↑
Instructions for Form SS-4 (12/2023), IRS.gov (reviewed/updated Jan. 17, 2024) (“Don’t file Form 8832 if the LLC accepts the default classifications above.”). ↑
As business transaction or litigation counsel, you will be the initial line of contact in a patent dispute. You will have the first conversations with the client, and probably opposing counsel. When the dispute involves accused products sold through Amazon, you will want to keep the APEX program, and its potential drawbacks, in mind as an early, less expensive alternative to drawn-out patent litigation.
Under Amazon’s Patent Evaluation Express (APEX) program, a patent owner initiates its claim against a seller on Amazon’s platform by submitting an APEX agreement form identifying the seller and a claim of one patent, which may be asserted against as many as twenty Amazon-listed products. Amazon sends the agreement to the accused seller, who has three alternatives: (1) agree to continue in the APEX proceeding and have a neutral evaluator make a decision; (2) informally resolve the claim directly with the patent owner; or—significantly here—(3) file a lawsuit for declaratory judgment of patent invalidity and noninfringement against the patent owner. Failure to respond is not an option. If a seller does not act within twenty-one days, Amazon will simply remove the seller’s product listing, thus ending its sales through Amazon.
The APEX program, formally launched in 2022, is a new weapon for patent owners. It provides a low-cost, expedited option for patent owners to prevent infringing sales on Amazon’s platform. For clients who think they can’t afford patent litigation, that’s the good news.
However, here’s the bad news: Sometimes, patent owners wind up in the decisively “wrong” court anyway because they invoked APEX, which the owners could have avoided.
So, what’s the rub? It’s the third, “declaratory relief” option.
What usually happens in declaratory judgment actions?
Outside the APEX system, the rules for patent infringement cases in federal court are well established. Suppose the seller is located in my home district, Northern California, and the patent owner is a Delaware corporation, doing business there. The patent owner must sue the accused infringer in the latter’s state of California.[1] If the accused infringer chooses to initiate suit instead, in order to request declaratory relief that it is not infringing, it must generally sue the declaratory defendant patent owner in Delaware, the owner’s state of incorporation.[2] The rationale is that the patent owner must purposefully have availed itself of the benefits of the seller’s jurisdiction, which is not satisfied by its sending a mere cease-and-desist letter. In other words, under the established pattern, the initiating party does not get to sue in its own home district, in either case.
The SnapRays decision.
The APEX procedure likely changes that result. In the May 2024 decision of SnapRays v. Lighting Defense Group, No. 2023-1184 (Fed. Cir. May 2, 2024), a Delaware-based patent owner initiated an APEX enforcement proceeding against a Utah-based alleged infringer. The seller opted for “door number three”: It filed a declaratory relief action of noninfringement. Contrary to usual practice, however, the seller did not file suit in the patent owner’s home state of Delaware. Instead, the accused infringer filed in its own home state of Utah. After appeal, the Federal Circuit Court of Appeals upheld this forum choice.
The court reasoned that, by initiating an APEX proceeding, the patent owner had purposefully directed its enforcement activities at the accused infringer in Utah by affecting its sales and marketing in Utah through the Amazon platform. Foreseeably, Amazon would notify the accused infringer and inform it of its options, and the accused infringer’s Amazon listings could be removed, injuring its marketing, sales, and other activities within Utah.
So, under APEX, the patent owner loses its right to be sued only in its home state in a declaratory relief action. As in other distant litigation matters, some inconvenience is incurred. The patent owner will have to hire remote counsel to defend its patent in the distant district court. It must bring its witnesses to that forum. It must accept any “home court” advantage the suing party may have with a sympathetic judge or jury.
If the standards for proceeding ahead with a patent infringement case were the same in each federal district, that would be no big deal. But what if the standards differ? What if it’s easier to knock out a patent infringement case in one’s home district than that of the patent owner?
The APEX program changes the declaratory judgment landscape after SnapRays.
APEX poses a potentially more significant disadvantage for the patent owner. In our example, the Northern District Court of California would be the forum chosen by the accused infringer, rather than submitting to Delaware. The Northern District of California is significantly more likely to grant motions to dismiss patent infringement cases than one would face in most other active districts. Defendants, in other words, can sometimes wield a unique “knockout” weapon there.
In the old days of required “Form 18” pleading, motions to dismiss patent infringement cases were virtually nonexistent. In 2015, that gave way to current fact pleading requirements. Under the Twombly/Iqbal standards,[3] a plaintiff must plead facts that plausibly could entitle it to relief, rather than mere recitation of the elements of infringement. In patent cases, motions to dismiss arise based on arguments that either there is no subject matter eligibility (an Alice challenge)[4] or a critical element of the asserted patent claim is not alleged and cannot be. Different district courts apply the standards differently, at least statistically.
In a 2020 study, for example, the difference was stark. A motion to dismiss on eligible subject matter succeeded 86 percent of the time in the Northern District of California, but only 48 percent of the time in the District of Delaware and zero percent in the Eastern District of Texas. This no doubt is due not simply to a given judge’s predilections but also to emerging case law developing in each district for such pleading standards.[5]
Similarly, rulings have diverged on how much must be pleaded to satisfy the Twombly/Iqbal standard. A Northern District of California patent complaint may be dismissed based on intense scrutiny of the allegations of a key element.[6] This evolved from the district’s dismissal practice, requiring “factual allegations that the accused product practices every element of at least one exemplary claim.”[7]In the Eastern District of Texas, it may be sufficient simply to identify the accused product and to give merely “fair notice” of the nature of the factual issue.[8] Likewise, in the District of Delaware, recent cases have not been overly demanding of the allegations.[9] The dilemma for patent owners is, sometimes the greater specificity required in pleading is more than a “do-over” nuisance. Instead, the more specific pleadings invite greater scrutiny into whether a particular patent claim element really exists in the accused product, thus leading to increased dismissals at the earliest stages of patent litigation.
So, the takeaway for both patent owners and accused infringers is clear: While patent owners and accused infringers should consider resolving their dispute through the APEX program, a pitfall looms for the former and an opportunity may appear for the latter. If the accused seller sits in a district that robustly dismisses poorly pleaded infringement claims, plaintiff’s counsel must tread carefully, and defense counsel should think boldly. This is especially so if the patent infringement case is weak: Then the choice of district may make a considerable difference, in both case viability and settlement value.
TC Heartland LLC v. Kraft Foods Grp., 581 U.S. 258, 137 S.Ct. 1514 (2017). ↑
Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc., 148 F.3d 1355 (Fed. Cir. 1998). ↑
Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955 (2007). ↑
Alice Corp. v. CLS Bank Int’l, 573 U.S. 208, 134 S.Ct. 2347 (2014). ↑
Coop. Ent. Inc., v. Kollective Tech., Inc., No. 5:20-cv-07273-EJD, Dkt. 51, at *7 (N.D. Cal. Feb. 5, 2024) (no plausibility despite defendant’s admission of segmentation); Viavi Sols., Inc. v. Platinum Optics Tech., Inc., No. 21-cv-06655-EJD, Dkt. 146, at *6 (N.D. Cal. Feb. 23, 2024) (alleged same design and filter stack as in previous complaint); Cyph, Inc. v. Zoom Video Comm., 642 F.Supp.3d 1034, 1044 (N.D. Cal. 2022) (use of “social media service channel” not plausibly pleaded by “social accounts” of user); Cyboenergy, Inc. v. No. Electric Pwr. Tech., Inc., No. 23-cv-06121-JST, Dkt. 21, at 4–5 (N.D. Cal. Mar. 6, 2024). ↑
Novitaz, Inc. v. inMarket Media, LLC, No. 16-CV-06795-EJD, 2017 WL 2311407, at *3 (N.D. Cal. May 26, 2017). ↑
Plano Encryption Techs., LLC v. Alkami Tech., Inc., No. 2:16-CV-1032-JRG, 2017 WL 8727249, at *3–4 (E.D. Tex. Sept. 22, 2017); Headwater Rsch. LLC v. Samsung Elecs. Co., No. 2:23-CV-00103-JRG-RSP (Mar. 5, 2024); STA Grp. v. Motorola Sols., Inc., No. 2:22-CV-0381-JRG-RSP (July 7, 2023). ↑
Robocast, Inc. v. Netflix, Inc., 640 F.Supp.3d 367 (D. Del. 2022); Cleveland Med. Devices, Inc. v. Resmed, Inc., No. 22-794-GBW (D. Del. Oct. 2, 2023). ↑
Federal and state antitrust enforcement agencies, as well as private plaintiffs, are actively investigating and challenging companies within the same industry using common pricing algorithms, along with the software vendors or the data analytics firms that provide pricing recommendations or industry reports related to pricing. The challenges are industry-agnostic, thus far covering algorithms used in multifamily rental housing, health insurance, and hotels, as well as agricultural data reporting. Most recently Assistant Attorney General Jonathan Kanter told the New York Times, “If your A.I. fixes prices, you’re just as responsible. If anything, the use of A.I. or algorithmic-based technologies should concern us more because it’s much easier to price-fix when you’re outsourcing it to an algorithm versus when you’re sharing manila envelopes in a smoke-filled room.”
Recently, a Nevada federal court dismissed a private class action alleging that several Las Vegas hotel operators violated Section 1 of the Sherman Act by agreeing to set hotel room prices using pricing algorithms from the same vendor. The latest decision contrasts with a federal court’s decision late last year in the multifamily rental cases, where the private plaintiffs’ allegations were allowed to proceed. The Las Vegas hotel operators’ decision also adds to the ongoing debate over algorithmic price fixing and whether, without more, antitrust law prohibits competitors from using the same price-related data reporting company or price recommendation software vendor.
The court’s dismissal hinged on several key findings.
The hotel operators had signed up for the pricing software services at different times, undermining the plaintiffs’ allegations of a coordinated effort to fix prices.
There was no evidence that the defendants had exchanged confidential information, which was inconsistent with the plaintiffs’ need to prove a concerted arrangement.
The defendants had not agreed to be bound by the software’s pricing recommendations, suggesting that they maintained independent control over their pricing decisions.
The Nevada court also rejected the plaintiffs’ theory that they “need not allege the exchange of non-public information” so long as the algorithmic pricing software was trained using machine learning on defendants’ nonpublic information. The court found that the rate information “exchanged” was instead publicly available and that the defendants often rejected the vendor’s algorithmic price recommendations, further suggesting that the hotel operators maintained independent control over their pricing decisions.
The Nevada court’s decision is unlikely to deter the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) from their recent efforts to persuade courts that the existing antitrust laws are flexible enough to reach the independent decisions of competing firms to use a common price-related data or algorithm vendor. For example, the agencies have submitted statements of interest in support of class action plaintiffs in three separate lawsuits challenging the use of software to assist in pricing decisions. The agencies argue that even if the defendants did not wholly delegate pricing decisions to the algorithm or agree to accept the algorithm’s recommendations, the use of this common technology alone constitutes a per se illegal tacit agreement. The agencies also highlight that competitors do not need to communicate directly with each other, particularly when the competitors are allegedly working in concert with a single vendor. The focus of this approach is on one “concerted action”—the decision to use the same software or vendor that is also used by your competitors—rather than an agreement or contract to raise, fix, or maintain prices.
Key Takeaways
State attorneys general, the DOJ, and the FTC will continue to advocate against price-related algorithms and for interpretations of the antitrust laws that deem them automatically illegal.
Whether or not the antitrust agencies are effective in those efforts, Congress will also look for legislative solutions, such as Senate Bill 3686, the Preventing Algorithmic Collusion Act of 2024.
Companies considering third-party sourced price-related algorithms should consider conducting diligence around the potential antitrust risks, including a review of the company’s antitrust compliance training/policies.
Counsel should review the vendor’s marketing materials and public statements regarding its role in the industry, the objectives of its services, or any impact its products might have on price.
Companies should consider revising and supplementing their antitrust compliance programs and training to address the increased risk associated with price-related vendors.
Commitments to adhere to vendor price or output recommendations should be avoided.
It is important for companies to understand how the algorithm or recommendations work, whether the company has the ability to and will customize the product, and whether the use of the vendor will diminish the company’s independent decision-making.
Companies should not consult with their competitors or use competitors as references for the vendor, product, or service.
After a vendor selection has been made and the service implemented, companies should conduct routine legal audits of the relationship and the impact of the product.
The results of diligence and audits should not be ignored, particularly if those results raise antitrust concerns.
As the legal landscape continues to evolve, it is crucial for businesses to stay informed and adapt their practices accordingly.
The legal profession is undergoing a significant transformation. Traditionally, lawyers honed their skills and built their careers within the confines of a single office, surrounded by colleagues and mentors. Today, the landscape is markedly different. Law firms are increasingly global, with attorneys collaborating across multiple offices and often working in hybrid environments. This shift necessitates a new approach to professional development, one that extends beyond the traditional office setting.
Board service provides a unique avenue for lawyers to expand their professional horizons. Through roles that demand strategic decision-making, leadership, and governance, lawyers acquire skills that enhance their legal practice. Participation in board activities fosters improved team leadership and conflict resolution capabilities, which are crucial for managing legal teams and client relationships. Board leadership opens doors to greater visibility and extensive networking opportunities, essential for both career advancement and business growth. By aligning with corporations or organizations that reflect their personal values, lawyers can enhance their reputations as committed and thoughtful leaders. This involvement not only polishes their professional image but also imbues a sense of personal fulfillment, allowing them to contribute positively to societal causes and enrich their professional lives.
Professional Development Benefits of Board Service
Serving on a board offers lawyers a wealth of professional development opportunities that are difficult to replicate in a traditional legal setting. Attorneys on boards are often involved in high-level planning processes that require a long-term perspective. This experience sharpens their ability to foresee potential challenges and opportunities, a skill that is directly transferable to their legal practice.
Exposure to different organizational structures is another key benefit of board service. Lawyers gain firsthand experience with nonprofit and corporate governance, enriching their understanding of diverse operational models and strategies. By understanding how different organizations operate in practice, lawyers can offer more informed and strategic advice in their work.
Decision-making is another critical skill honed through board service. Lawyers are accustomed to making decisions based on legal precedents and statutes, but board roles often require a more nuanced approach. Decisions must balance legal considerations with business, ethical, and community factors. By navigating complex board decisions, attorneys become adept at weighing various factors and making informed choices that benefit their clients and their practice.
Team leadership is also significantly enhanced through board participation. Working with a diverse group of board members, each with their own expertise and viewpoints, in the effort of steering an organization involves collective leadership and strategic collaboration. This team environment fosters a dynamic approach to governance and decision-making. Additionally, board membership usually offers opportunities to lead committees and task forces, providing even more avenues for developing leadership capabilities. Lawyers learn to motivate and manage teams effectively, fostering collaboration and resolving conflicts. These leadership skills are invaluable when managing legal teams and coordinating with clients.
My board experience has been instrumental in my development, and I am sure in ways I may not fully recognize. I now feel a sense of confidence that I understand how board meetings should be run, the rules that generally apply to board meetings (e.g., Robert’s Rules of Order), [and] how to properly prepare agendas, call for votes, and use bylaws or policies as guidance for decisions.
Career and Business Development Advantages of Board Service
Board service offers substantial career and business development advantages for lawyers. One of the most immediate benefits is increased visibility within the professional community. Serving on a board places lawyers in the spotlight, showcasing their leadership and strategic capabilities to a broader audience. This visibility can lead to new opportunities, such as speaking engagements, media features, and invitations to join other prestigious boards.
Alejandro Moreno, San Diego office managing partner at Sheppard Mullin, noted, “Legal periodicals are always looking for stories of lawyers doing ‘good.’ Board service is a good platform to promote stories about the board and your own service to the community, which can increase a lawyer’s visibility and profile in the community.”
Networking opportunities are another significant advantage of board service. Lawyers on boards interact with a diverse group of professionals, including business leaders, other attorneys, and community advocates. These interactions can lead to valuable connections that might not occur within the confines of a traditional legal practice.
Moreno emphasized the importance of these relationships:
One of the best features of professional board service is that it brings together many different types of lawyers. Our board includes everything from consumer advocates to corporate defense counsel. Having these various cross-sections of the legal community sit on the same board promotes good relationships between counsel and civility.
These connections can result in referrals, collaborations, and new client relationships, enhancing a lawyer’s professional network and reputation.
Aligning with an organization whose mission resonates personally is crucial for successful board service. Lawyers should choose to serve organizations that align with their values and passions, fostering genuine commitment and effectiveness. When attorneys serve on boards of organizations they care about, their contributions have a greater impact, and the experience is more fulfilling.
Lawyers can select board roles that highlight their existing expertise, allowing them to share unique skills and demonstrate their professional capabilities. This visibility enables more professionals to see what it is like to work with these attorneys. Additionally, they can choose roles to develop new skills, such as finance or marketing, broadening their knowledge and enhancing their business acumen.
Personal Growth and Broader Perspective from Board Service
Board service also offers lawyers a broader perspective and significant personal growth. Engaging with people from various industries and backgrounds exposes practitioners to new viewpoints and problem-solving approaches. This diversity of thought enhances their empathy and cultural competence.
Brian Condon, senior counsel at Arnold & Porter, shared, “Serving on the board of a nonprofit providing pro bono legal services allows me to understand the unmet legal needs in our community, and what resources there are to provide representation.”
This exposure to societal issues is both eye-opening and rewarding, providing lawyers with a deeper understanding of the challenges faced by a range of communities.
Additionally, serving on boards facilitates connections with like-minded professionals who often become mentors, mentees, and friends. These relationships are invaluable, providing personal and professional support, fostering collaboration, and enhancing the sense of community within the profession. The friendships formed through board service add a layer of fulfillment and camaraderie that enriches the professional journey of a lawyer.
Conclusion: The Importance of Board Service for Lawyers
Board service is a powerful tool for attorneys seeking to enhance their professional and personal development. It offers a unique platform to develop strategic thinking, decision-making, and leadership skills, all of which are directly transferable to legal practice. Lawyers gain increased visibility and networking opportunities, which can lead to new career and business prospects. By aligning with organizations whose missions resonate with their personal values, lawyers can not only enhance their professional image but also find personal fulfillment in contributing to meaningful causes.
Board service can also enhance lawyers’ commitment to equity and access to legal services for underserved communities. Michael Geibelson, California managing partner at Robins Kaplan, LLP, underscored this point: “As professionals, we have a duty to ensure access to legal services for those who cannot afford them. As a complement to pro bono work on individual cases, board work for legal service organizations is a powerful way to fulfill that duty.”
By supporting board service, law firms can foster a culture of leadership and community engagement, ultimately benefiting their clients and the broader community. Encouraging board participation is an investment not just in individual lawyers but also in the firm’s long-term success and the societal contribution of its attorneys.
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