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§ 3.1. Supreme Court

Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024).

In a landmark 5–4 decision, the Supreme Court ruled that non-debtors can no longer use a debtor’s chapter 11 plan to secure for themselves non-consensual third-party releases.

Purdue Pharma is the maker of OxyContin, an opioid pain relief drug. Purdue was owned and controlled by the Sackler family, with members of that family serving as president and chief executive officer, dominating the board, and being heavily involved in the firm’s marketing strategy. In 2007, an affiliate of the company pled guilty to a federal felony for misbranding OxyContin. Thousands of lawsuits ensued. Following the plea agreement, the Sacklers began to take as much as 70% of the company’s revenue per year, with distributions between 2008 and 2016 totaling approximately $11 billion. These distributions left Purdue Pharma in a significantly weakened state.

In 2019, Purdue Pharma sought chapter 11 bankruptcy protection. In connection with this bankruptcy, the Sacklers proposed to return to the estate $4.325 billion of the $11 billion they had withdrawn from the company. This repayment was to be made over the course of a decade. In exchange for this prepayment, the Sacklers sought to end the lawsuits brought against them by opioid victims. This latter relief was termed by the Supreme Court as the “Sackler Discharge.” The Sackler Discharge included both a release and an injunction barring not just current claims, but future ones, whether or not the claimant participated in the bankruptcy proceeding. Purdue, as debtor in possession, agreed to these terms and included them in its proposed plan of reorganization. This plan sought to reorganize the company as a “public benefit” company, dedicated to opioid education and abatement. The plan also proposed payments of between $3,500.00 and $48,000.00 to those harmed by the company’s products.

While most of the creditors who returned ballots supported the plan, fewer than 20% of eligible creditors participated. The United States Trustee, along with eight states, the District of Columbia, the City of Seattle, and various Canadian municipalities and tribes joined with a number of opioid victims in opposing the plan. The bankruptcy court overruled these objections and confirmed the plan, including its provisions relating to the Sackler Discharge. The district court promptly vacated that decision, holding that nothing in the law authorized the bankruptcy court to extinguish claims against the Sacklers without the consent of the victims who brought those claims. The plan proponents and others appealed that decision to the Second Circuit.

While the appeal was pending, the plan proponents advised that the Sacklers were willing to contribute an additional sum if the eight states and the District of Columbia would be willing to withdraw their objections. Even with this additional sum, the Sacklers’ proposed contribution still fell short of the $11 billion amount they received pre-bankruptcy and would still be structured as installment payments. Nonetheless, the states and the District of Columbia agreed to drop their objections. However, a number of individual victims, the Canadian creditors, and the U.S. Trustee persisted with their objection. A divided panel of the Second Circuit reversed and revived the bankruptcy court’s order confirming the plan. The U.S. Trustee then filed an application for certiorari and the Supreme Court granted it to resolve a circuit split.

The Court began its analysis with section 1141 of the Bankruptcy Code. Section 1141(d)(1)(A) provides that a bankruptcy court’s order confirming a plan “discharges the debtor from any debt that arose before the date of [] confirmation.” 11 U.S.C. § 1141(d)(1)(A). In addition, section 524(e) of the Bankruptcy Code provides that a discharge “does not affect the liability of any other entity” beyond the debtor. 11 U.S.C. § 524(e). The Court noted that, “The Sacklers have not filed for bankruptcy and have not placed virtually all their assets on the table for distribution to creditors, yet they seek what essentially amounts to a discharge.” 603 U.S. at 215.

The Court framed the question before it as: “whether a court in bankruptcy may effectively extend to nondebtors the benefits of a [c]hapter 11 discharge usually reserved for debtors.” Id. (emphasis in original). To answer that question, the Court turned to section 1123 of the Bankruptcy Code, which addresses the contents of a plan, both mandatory and optional. No party argued that anything like the Sackler Discharge was required to be included in a plan. Instead, the plan proponents suggested that the Sackler Discharge was a provision that a debtor was allowed to include and that a bankruptcy court was permitted to approve under section 1123(b). The first five items addressed by section 1123(b), which simply addressed the scope of claims and property belonging to a debtor or its estate and the rights of creditors of such claims, were easily disregarded by the Court as potential sources of authority for the Sackler Discharge. Nothing in any of the first five paragraphs authorized the client to extinguish claims against third parties without the consent of the affected claimants.

The only possible source of authority for the Sackler Discharge in section 1123(b) would have to be found in subparagraph 6, which provides that a plan may “include any other appropriate provision not inconsistent with the applicable provisions of this title.” 11 U.S.C. § 1123(b)(6). It was that provision that the Second Circuit cited in support of its decision. Because the Bankruptcy Code does not expressly forbid a non-consensual non-debtor discharge, the plan proponents argued that the bankruptcy court was free to authorize such relief after finding it appropriate. The Court rejected this reasoning. First, subparagraph (6) “is a catchall phrase tacked on the end of a long and detailed list of specific directions. When faced with a catchall phrase like that, courts do not necessarily afford it the broadest possible construction it can bear.” 603 U.S. at 217 (citing Epic Sys. Corp. v. Lewis, 584 U.S. 497, 512 (2018)). Instead, such catchall provisions are generally “interpreted in light of its surrounding context and read to ‘embrace only objects similar in nature’ to the specific examples preceding it.” Id. (quoting Epic Sys. Corp., 584 U.S. at 512). With that principle in mind, the Court held that subparagraph (6) does not afford a bankruptcy court the blanket authority proposed by the plan proponents. In this case, the various plan provisions listed in the first five subparagraphs of section 1123(b) concerned the debtor, its rights, responsibilities, and relationship with creditors. While subparagraph (6) clearly operates to confer additional authority on bankruptcy courts, the Supreme Court held that “the catchall cannot be fairly read to endow a bankruptcy court with the ‘radically different’ power to discharge the debts of a nondebtor without the consent of affected nondebtor claimants.” Id. at 218 (quoting Epic Sys. Corp., 584 U.S. at 513). The majority decision then rejected the dissent’s argument that the purpose of bankruptcy law was to solve collective action problems. While the majority acknowledged that bankruptcy may serve to address some of those problems, it noted that the Bankruptcy Code does not provide a bankruptcy court “with a roving commission to resolve all such problems” that it happens to encounter. Id. at 220.

As further support for its conclusion that the Sackler Discharge was impermissible, the Court went beyond section 1123(b) and looked at other provisions of the Bankruptcy Code. It noted that the Code reserves the benefit of a discharge for the debtor that actually files for bankruptcy. Id. at 221 (citing 11 U.S.C. §§ 1141(d)(1)(A), 524(e), 727(a)-(b)). Moreover, the discharge afforded a debtor is not unlimited. Id. at 221–22 (citing 11 U.S.C. §§ 523(a)(2), (4), (6)). The Court emphasized that the Sacklers had not agreed to place anything approaching the entirety of their assets on the table, but nonetheless sought a judicial order arguably broader than that available in the form of a discharge.

The Court then noted that the Bankruptcy Code contains a significant exception to the foregoing rules. In the asbestos context, bankruptcy courts are expressly authorized to issue an injunction barring any action directed against a third party under certain specified circumstances. The fact that the Code “does authorize courts to enjoin claims against third parties without their consent, but does so in only one context, makes it all the more unlikely that [section] 1123(b)(6) is best read to afford courts that same authority in every context.” Id. at 222 (emphasis in original). The final nail in the coffin of the Sackler Discharge was pre-Code practice, which confirmed the Court’s reasoning. Every bankruptcy statute cited to the Court, ranging from 1800 to 1978, “generally reserved the benefits of discharge to the debtor who offered a ‘fair and full surrender of [its] property.’” Id. at 223–24 (quoting Sturges v. Crowninshield, 4 Wheat. 122, 176 (1819)).

Although both sides of the debate raised policy-based arguments, the Supreme Court held that it was “the wrong audience for them.” Id. at 226. “Congress may choose to add to the [B]ankruptcy [C]ode special rules for opioid-related bankruptcies as it has for asbestos-related cases. Or it may choose not to do so. Either way, if a policy decision like that is to be made, it is for Congress to make.” Id.

Finally, the Court noted the limits of its decision. “Nothing in what we have said should be construed to call into question consensual third-party releases offered in connection with a bankruptcy reorganization plan; those sorts of releases pose different questions and may rest on different legal grounds than the nonconsensual release at issue here.” Id. (citing In re Specialty Equip. Cos., 3 F.3d 1043, 1047 (7th Cir. 1993). Nor did the Court attempt to address what constitutes a consensual release or what is the full satisfaction of a claim against a third-party non-debtor. Chief Justice Kavanaugh dissented, in which the Chief Justice, Justice Sotomayor and Justice Kagan joined.

Truck Ins. Exch. v. Kaiser Gypsum Co., 602 U.S. 268 (2024).

Truck Insurance Exchange (“Truck”) was the primary insurer of companies that manufactured and sold products containing asbestos. Many of those companies sought chapter 11 bankruptcy protection after facing thousands of lawsuits. Truck objected to one such company’s bankruptcy plan. The Fourth Circuit Court of Appeals concluded that Truck was not a “party in interest” in accordance with section 1109(b) because the plan was “insurance neutral.” Truck sought review at the Supreme Court and the Supreme Court granted certiorari. The question before the Court was whether an insurer with financial responsibility for a bankruptcy claim was a “party in interest” within the meaning of section 1109(b).

Under the relevant insurance contracts, the debtors had an obligation to pay a $5,000 deductible per claim and to “assist and cooperate with Truck in defending against the claims.” Id. at 275. In confirming the plan, the bankruptcy court made a finding that the debtors’ conduct in the bankruptcy proceedings neither violated this duty to assist and cooperate nor breached any implied covenant of good faith and fair dealing. Further, the confirmed plan treated insured and uninsured claims differently. Insured claims were left to the tort system, where lawsuits would be filed and Truck would be compelled to defend. If the claimant prevailed, the trust created by the plan would pay the deductible and Truck would be left to pay up to $500,000 per claim. Uninsured claims, on the other hand, were submitted directly to the trust for resolution. As part of this latter process, claimants were required to identify all other related claims and file a release authorizing the trust to obtain documentation for other asbestos trusts that others submitted claims.

Truck was the only party before the bankruptcy court to object to the plan. Its objection was threefold: First, Truck contended that the plan was not proposed in good faith, as required by section 1129(a)(3) of the Bankruptcy Code, both because the plan was the result of a collusive agreement between the debtor and the claimants and because the plan did not require the same disclosures for insured and uninsured claims. Second, the finding required by the plan—that the debtors’ conduct during the bankruptcy did not violate its duty to assist and cooperate—impermissibly altered Truck’s rights under its policies by relieving the debtors of their assistance and cooperation obligations and by barring Truck from raising the debtors’ bankruptcy conduct as a defense to its own payment obligations. Third, Truck contended that the trust did not comply with various provisions of section 524(g) of the Bankruptcy Code. The district court, based on a recommendation by the bankruptcy court, confirmed the plan and held that Truck had limited standing to object solely on the grounds that the plan was not “insurance neutral.” Because the district court found that the plan was insurance neutral, it overruled all of Truck’s objections. The Fourth Circuit affirmed.

The Court began its analysis with the text of section 1109(b), which provides an illustrative, but not exhaustive, listing of parties in interest. The listed parties share a common thread in that each could be directly affected by a confirmed plan of reorganization, either because it had a financial interest in the estate’s assets, or it represented parties that do. In the Court’s view, these illustrations made clear that anyone holding a direct financial stake in the outcome of the case should have an opportunity to participate. This understanding aligned with the Court’s prior observation that the term “party in interest” is used when Congress intends a broad application of the term. Id. at 278 (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 7 (2000)). The Court then noted that this reading of the statute was also consistent with the ordinary meaning of the term “party in interest,” as well as the historical context and purpose of the statute. “Congress consistently has acted to promote greater participation in reorganization proceedings.” Id. at 279.

Given these broad principles, the Court held that insurers, such as Truck, with financial responsibility for bankruptcy claims are “parties in interest.” Put simply, “an insurer with financial responsibility for bankruptcy claims can be directly and adversely affected by the reorganization proceedings.” Id. at 281. The Supreme Court rejected the Fourth Circuit’s focus on whether the plan altered Truck’s contract rights or its quantum of liability, holding that such approach, known as the insurance neutrality doctrine, “is conceptually wrong and makes little practical sense.” Id. at 283. In essence, the Court said, the doctrine conflated the merits of an objection with the threshold “party in interest” inquiry. Section 1109(b) asks whether reorganization might affect a prospective party, not how a particular plan might affect that party. Section 1109(b), the Court held, could not depend on a plan-specific rule as it would be unusable given that the Bankruptcy Code authorizes a party in interest to request acts unrelated to a specific plan or before a plan is confirmed or even proposed. Accordingly, the judgment of the appellate court was reversed.

§ 3.2. First Circuit

Fin. Oversight & Mgmt. Bd. for P.R. v. U.S. Bank N.A. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 104 F.4th 367 (1st Cir. 2024).

Reversing the court (the “Title III Court”) overseeing the proceedings under Title III of the Puerto Rico Oversight Management and Economic Stability Act (“PROMESA”), the First Circuit delivered a partial win to certain holders of municipal bonds issued by the Puerto Rico Electric Power Authority (“PREPA”). In its June 2024 decision, the First Circuit ruled that PREPA’s obligation to repay the bonds was secured by the bondholders’ perfected, unavoidable security interests in PREPA’s net revenues. However, the court also reversed the Title III Court when it determined that the payment obligations were nonrecourse and that the bondholders were not entitled to recover an unsecured claim against other PREPA assets.

The facts of the case are simple. In 1941, Puerto Rico passed the Puerto Rico Electric Power Authority Act, which not only authorized the creation of PREPA, but also granted PREPA the authority to raise funds by issuing bonds secured by its “entire gross or net revenues and present or future income.” P.R. Laws Ann. tit. 22, § 206(e)(1). In 1974, PREPA entered into a Trust Agreement pursuant to which it exercised its authority under to raise funds by issuing bonds (“Revenue Bonds”) purportedly secured by “the revenues of [PREPA] . . . and other moneys to the extent provided in this [Trust] Agreement.” Id. at 382. Then, in 2017, in the midst of the Puerto Rican government-debt crisis, PREPA defaulted on its Revenue Bond payment obligations. Because of the enactment of PROMESA in 2016, the Financial Oversight and Management Board for Puerto Rico (the “Board”) was empowered to place PREPA into Title III proceedings following this default.

In the course of those proceedings, the Board commenced an adversary proceeding “to define the rights and remedies that bondholders had against PREPA.” Id. at 379. The Board asserted that: (i) the bondholders were secured by revenues only to the extent that such revenues had flowed into certain funds designated by the Trust Agreement; (ii) the bondholders had failed to perfect their security interest in certain of the designated funds, such that their security interests were voidable pursuant to 11 U.S.C. § 544(a); and (iii) the Revenue Bonds were nonrecourse such that the bondholders were not entitled to a deficiency claim to the extent that the value of their security interest was less than the face value of the Revenue Bonds. The Title III Court agreed with the Board that bondholders were secured only to the extent that revenues were actually deposited in the designated funds and that the bondholders’ security interest in certain of the designated funds were avoidable, but determined that the bondholders were entitled to an unsecured claim against PREPA in the amount of approximately $2.4 billion.

On appeal, the First Circuit largely reversed the Title III Court. Turning first to the question of whether the Trust Agreement itself in fact granted the bondholders a security interest, the court considered whether the granting language, which appeared in the Trust Agreement’s preamble, was merely prefatory. Disagreeing with the Title III Court, the First Circuit held that, under Puerto Rico law, there is no “magic language” required to grant a security interest. The language in the preamble evinced a clear intent to grant a security interest. Next, to determine the scope of the bondholders’ security interest, the First Circuit considered whether the bondholders’ lien extended to PREPA’s gross or net revenues. After analyzing the language of the Trust Agreement, the court concluded that the security interest must extend to PREPA’s net revenues only. However, the court noted that, even if the language of the Trust Agreement had not indicated that the bondholders’ interest extended only to net revenues, section 928(b) of the Bankruptcy Code subordinated the bondholders’ lien to PREPA’s reasonable and necessary postpetition operating expenses. Third, the First Circuit rejected the Board’s argument that the bondholders’ lien extended only to net revenues that had flowed into certain designated funds. Finding the language in the Trust Agreement ambiguous, the court instead determined that such a result would have misled a reasonable investor. Finally, the court considered whether the bondholders’ lien extended to future net revenues. Looking to both Puerto Rican law and the Bankruptcy Code, the First Circuit held that the pledge of net revenues made under the Trust Agreement included future net revenues that PREPA acquired.

After determining that the bondholders held a security interest in PREPA’s current and future net revenues, the First Circuit then considered whether the bondholders had perfected their security interest. Concluding that the bondholders’ interest in the net revenues was an interest in an “account” under the Uniform Commercial Code, rather than “money” or “deposit accounts,” the court held that the bondholders were properly perfected by filing of a financing statement. As a result, the Board could not avoid the bondholders’ lien under section 544(a) of the Bankruptcy Code.

Finally, the First Circuit examined the Title III Court’s estimation of the bondholders’ unsecured claim. The Title III Court had found that the bondholders were entitled to an unsecured claim as a result of the bondholders’ rights, under the Trust Agreement, to certain equitable remedies in the event PREPA breached its performance obligations. See 11 U.S.C. § 101(5)(B). The Title III Court then estimated the amount of the bondholders’ unsecured claim arising from such equitable remedies, in accordance with section 502(c)(2) of the Bankruptcy Code, to be approximately $2.4 billion. The First Circuit, however, disagreed that the bondholders’ right to payment arose from the equitable rights afforded to the bondholders under the Trust Agreement. Instead, the First Circuit held that, because the amount of the bondholders’ claim could be easily determined by the terms of the Trust Agreement, the claim was more similar to a liquidated claim, and thus could not be estimated under section 502(c). The First Circuit further held that, under section 927 of the Bankruptcy Code, the bondholders were not entitled any recourse from PREPA’s other assets. See 11 U.S.C. § 927.

Milk Indus. Regul. Off. of Commonwealth of P.R. v. Ruiz (In re Ruiz), 83 F.4th 68 (1st Cir. 2023).

In this case, the First Circuit addressed the applicability of the “capable of repetition” exception and the “collateral consequences” exception to the doctrine of constitutional mootness. Holding per curiam that neither exception applied at the time the case was decided by the Bankruptcy Appellate Panel for the First Circuit (the “BAP”), the First Circuit vacated the BAP’s decision, but left undisturbed the bankruptcy court’s orders underlying the appeal.

This case arises from the decision of the Milk Industry Regulatory Office of the Commonwealth of Puerto Rico (“ORIL”) to suspend the license of a chapter 12 debtor, Luis Manuel Ruiz Ruiz (“Ruiz”), to produce and sell a certain quota of milk. While Ruiz was appealing ORIL’s suspension of his license to the Puerto Rico Court of Appeals, Ruiz sought an order from the bankruptcy court authorizing Ruiz to lease a portion of his milk quota to a willing lessee for six months. Although ORIL received notice of Ruiz’s motion, ORIL failed to object to the relief sought. The bankruptcy court granted Ruiz’s motion and Ruiz executed the lease, which Ruiz then submitted to ORIL for registration. Twelve days after the bankruptcy court’s order approving the lease was granted, ORIL asked the bankruptcy court to reconsider. The bankruptcy court denied the reconsideration request. ORIL then appealed both the bankruptcy court’s order authorizing Ruiz to enter into the lease and the order denying reconsideration to the BAP. Notwithstanding the BAP’s request for supplemental briefing regarding mootness, the BAP affirmed both bankruptcy court orders on the merits.

The First Circuit, by contrast, considered the question of mootness to be a threshold question affecting the court’s jurisdiction over the appeal. But more than its own jurisdiction, the First Circuit examined as well whether the BAP had jurisdiction to issue a judgment on the merits. Because the original six-month term of the lease expired while the appeal was pending before the BAP, the First Circuit held that the bankruptcy court orders became moot prior to the BAP’s decision. The court then considered whether either of two exceptions to constitutional mootness applied. The first exception—the “capable of repetition” exception—permits a court to review an action without controversy where “(1) the challenged action is in its duration too short to be fully litigated prior to its cessation or expiration, and (2) there is a reasonable expectation that the same complaining party will be subjected to the same action again.” Id. at 74 (quoting United States v. Sanchez-Gomez, 584 U.S. 381, 391 (2018)). Because ORIL had not demonstrated that Ruiz, or any other milk producer, would seek approval of a short-term lease of its license, despite pending revocation of said license, the court held that the exception was inapplicable. The second exception—the “collateral consequences” exception—requires a party to demonstrate that it would suffer adverse consequences in another proceeding if a lower court’s decision were permitted to stand on grounds of mootness. Id. at 75–76 (quoting ConnectU LLC v. Zuckerberg, 522 F.3d 82, 88 (1st Cir. 2008)). The First Circuit held that ORIL had waived its argument under this exception by failing to brief it.

Having determined that ORIL’s appeal was moot at the time of the BAP’s decision, the First Circuit then considered the appropriate disposition of the appeal. “When a civil case becomes moot pending appeal, the ‘established practice . . . is to reverse or vacate the judgment below and remand with a direction to dismiss.’” Id. at 77 (quoting United States v. Munsingwear, 340 U.S. 36, 39 (1950)). While the First Circuit easily concluded that the BAP judgement should be vacated and the appeal dismissed, the decision as to whether the bankruptcy court’s orders should be vacated required more consideration. Ultimately, the court held that, because ORIL “‘slept on its rights’ in several respects throughout the course of th[e] litigation,” id. at 78 (quoting Munsingwear, 340 U.S. at 41), the balance of equities weighed against vacatur of the bankruptcy court’s orders.

§ 3.3. Second Circuit

In re Nine W. LBO Sec. Litig., 87 F.4th 130, 139 (2d Cir. 2023), cert. denied sub nom. Stafiniak v. Kirschner, 144 S. Ct. 2551 (2024).

Clarifying its decision in In re Tribune Co. Fraudulent Conv. Litig., 946 F.3d 66 (2d Cir. 2019) regarding the scope of the safe harbor outlined in section 546(e) of the Bankruptcy Code, the Second Circuit held that whether a bank customer may be considered a “financial institution” under section 101(22)(A) must be evaluated on a “transfer-by-transfer” basis rather than a “contract-by-contract” basis. As a result, the mere fact that a qualifying bank acts as agent on behalf of a customer in connection with one segment of a transaction does not imbue an entire consolidated transaction, such as the leveraged buyout at issue here, with the protections afforded under section 546(e).

In 2013, private equity firm Sycamore Partners (“Sycamore”) proposed to acquire Jones Group, Inc. (“Jones Group”), a footwear and apparel company, through a leveraged buyout (the “LBO”). Pursuant to the merger agreement, the former public shareholders of Jones Group would receive $15 per share of Jones Group, which payments would be effectuated by Wells Fargo, as paying agent. The merger agreement also provided for payments to former directors, officers and employees of Jones Group on account of their restricted shares in Jones Group, although Wells Fargo was not involved in such payments. Through the LBO, Jones Group was ultimately merged into a subsidiary of Sycamore, which was then renamed Nine West Holdings, Inc. (“Nine West”). Upon the closing of the LBO, Sycamore caused Nine West to sell three of its allegedly most valuable brands to Sycamore affiliates.

In 2018, Nine West commenced bankruptcy proceedings. Following confirmation of Nine West’s plan of reorganization, certain creditors (the “Trustees”) brought suit against the former directors, officers, and shareholders of Jones Group, seeking to avoid the payments they had received in connection with the LBO as fraudulent conveyances. The cases were then consolidated in multidistrict proceedings before the Southern District of New York. Following the consolidation, the public shareholders, forming one group of defendants known as the “Public Shareholders,” moved to dismiss the fraudulent conveyance claims under section 546(e)’s safe harbor provision. The former directors, officers, and employees of Jones Group, forming a separate group of defendants known as the “Individual Shareholders,” joined the motions. The district court, relying in part on Tribune, granted the defendants’ motion to dismiss the fraudulent conveyance claims. It held that Nine West qualified as a “financial institution” within the meaning of section 101(22)(A) due to its retention of Wells Fargo as a paying agent with respect to the payments made to certain of the public shareholders. As a result, the district court found that all of the transfers in connection with the LBO were safe harbored by section 546(e). In doing so, the district court failed to consider whether Wells Fargo had a role in each of the transfers made to shareholders, including the Individual Shareholders.

On appeal, the Second Circuit determined that the district court erred by using a “contract-by-contract” interpretation of section 101(22)(A)’s definition of “financial institution” with respect to bank customers. Instead, the Second Circuit held that whether a bank customer qualifies as a “financial institution” within the meaning of section 101(22)(A) must be analyzed on a “transfer-by-transfer” basis for three reasons. First, the Second Circuit found that the plain language of section 101(22)(A) required a transfer-by-transfer analysis in order to afford meaning to the phrase “when any such [bank] . . . is acting as agent or custodian for a customer . . . in connection with a securities contract.” By contrast, a contract-by-contract approach would lead to an absurd result wherein every transfer made in connection with an LBO would be safe harbored as long as a bank served as agent for at least one component of the transfers. Second, the court looked to the structure of the Bankruptcy Code itself. Because the Bankruptcy Code grants to trustees the power to avoid certain transfers, it defied logic to conclude that the shield to such avoidance powers under section 546(e) was not similarly limited to a transfer-by-transfer limitation. Finally, the Second Circuit considered the legislative purpose behind section 546(e)’s safe harbor. In enacting the safe harbor, Congress sought to avoid triggering systemic risks in securities markets by precluding the trustee from unwinding certain qualifying transactions. To extend that protection to transfers that did not implicate those same concerns would likely exceed Congress’s intention in enacting the safe harbor.

In his dissent, Judge Richard J. Sullivan rejected the majority’s “transfer-by-transfer” approach. Adopting instead the “contract-by-contract” approach, Sullivan argued that the majority’s interpretation would render the inclusion of bank customers in the definition of “financial institution” superfluous. Accordingly, Sullivan would have affirmed the district court’s judgment in its entirety.

Worms v. Rozhkov (In re Markus), 78 F.4th 554 (2d Cir. 2023).

Adding to the corpus of case law surrounding a bankruptcy court’s inherent authority to impose sanctions, as articulated in Rosellini v. U.S. Bankr. Ct. (In re Sanchez), 941 F.3d 625 (2d Cir. 2019) (per curiam), the Second Circuit explicitly condoned a bankruptcy court’s imposition of non-nominal, civil contempt sanctions. In so doing, the court articulated the requirements for when such sanctions could be imposed.

In April 2016, the Moscow Arbitration Court commenced bankruptcy proceedings against Russian citizen Larisa Ivanovna Markus (“Markus”) and appointed Yuri Vladimirovich Rozhkov (the “Foreign Representative”) to liquidate Markus’ assets. Because Markus was alleged to have significant assets in the United States, in January 2019, the Foreign Representative filed a petition for recognition of the Russian bankruptcy proceedings against Markus pursuant to chapter 15 of the Bankruptcy Code. On April 1, 2019, the U.S. bankruptcy court granted the Foreign Representative’s request for recognition.

In the course of conducting discovery regarding Markus’ U.S.-based assets, the Foreign Representative soon encountered resistance from attorney Victor A. Worms (“Worms”), who appeared on Markus’ behalf. Worms had failed to respond to all efforts of the Foreign Representative to obtain discovery from Markus, arguing that the recognition of the Russian bankruptcy proceedings against Markus was null and void. Notwithstanding Markus’ motion to vacate the recognition order, the bankruptcy court issued multiple orders directing Worms, on Markus’ behalf, to comply with the discovery requests. After repeated failures to comply with the bankruptcy court’s orders, the bankruptcy court warned Worms that he was at risk for being sanctioned. On September 11, 2019, on the bankruptcy court’s advice, the Foreign Representative filed a motion for sanctions against Worms and Markus, seeking both (i) attorneys’ fees and costs and (ii) pursuant to the bankruptcy court’s inherent authority, civil contempt sanctions against Worms in the amount of $1,000 for each day until he produced documents responsive to the discovery requests. After a hearing, on October 8, 2019, the bankruptcy court issued an order, pursuant to its inherent authority, imposing sanctions on Worms for his repeated failure to comply with the discovery orders. The bankruptcy court also awarded the Foreign Representative attorneys’ fees against Worms personally. After multiple appeals to the district court, the amount of the contempt sanctions was fixed in the amount of $55,000 and the attorneys’ fees, in the amount of $36,600.

On appeal, Worms argued that the imposition of civil contempt sanctions was outside of the bankruptcy court’s inherent authority to issue sanctions, relying in part on the Second Circuit’s decision in Sanchez. The Second Circuit flatly rejected this argument.

Nowhere in Sanchez did the Court say, as Worms argues, that a bankruptcy court’s inherent sanctioning authority was limited to non-contempt sanctions. In fact, Sanchez suggests that the opposite is true by recognizing that bankruptcy courts, like Article III courts, possess inherent sanctioning powers, and it is beyond dispute that Article III courts have inherent contempt authority.

Id. at 565 (first citing Sanchez, 941 F.3d at 628; then Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991); and then Anderson v. Dunn, 19 U.S. 204, 227 (1821)).

Nonetheless, the Second Circuit continued to hold that, although a bankruptcy court’s inherent authority to impose sanctions extends beyond those sanctions at issue in Sanchez, such inherent authority was not unlimited. The court articulated a multi-prong framework for considering when sanctions issued pursuant to a bankruptcy court’s inherent authority are warranted: first, any express authority for imposing sanctions must be insufficient; second, the bankruptcy court cannot override statutory directives and prohibitions in imposing sanctions; third, the court must be explicit about its invocation of its inherent authority and must otherwise adhere to the principles of due process; fourth, a finding of bad faith may be required in certain circumstances, including when an attorney is acting in his or her capacity as an advocate, rather than an officer of the court; and finally, the imposition of civil contempt sanctions must comply with other established legal principals, such as the prohibition against punitive contempt sanctions under Gucci Am., Inc. v. Weixing Li, 768 F.3d 122, 144 (2d Cir. 2014) and the requirement for a movant to provide clear and convincing evidence that contempt sanctions are warranted as provided under King v. Allied Vision, Ltd., 65 F.3d 1051, 1058 (2d Cir. 1995). Because all of these requirements were met, the Second Circuit upheld both the bankruptcy court’s imposition of the contempt sanctions and the award of attorneys’ fees against Worms as proper exercises of the bankruptcy court’s inherent sanctioning authority.

§ 3.4.  Third Circuit

In re FTX Trading Ltd., 91 F.4th 148 (3d Cir. 2024).

In a precedential opinion, the Third Circuit reversed the ruling of the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) and held that the plain text and congressional intent of section 1104(c)(2) of the Bankruptcy Code mandate the appointment of an examiner in cases upon the request of a party where the debtor’s unsecured debts exceed $5 million.

In November 2022, FTX Trading Ltd. and its affiliates (collectively, the “Debtors”), a cryptocurrency exchange, suffered a rapid collapse as reports of numerous corporate failures came to light and customers scrambled to withdraw billions of dollars. Consequently, the Debtors filed voluntary petitions in the bankruptcy court seeking relief under chapter 11 of the Bankruptcy Code. The Debtors’ newly appointed CEO, John J. Ray, III, an experienced restructuring professional, reported that he had never “seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information.” Due to these failures, which included faulty regulatory oversight, cash management failures, and inadequate record keeping, the Debtors were only able to locate a fraction of the Debtors’ digital assets at the time of the filing.

In the wake of this disorganization, the Office of the United States Trustee (the “U.S. Trustee”) moved to appoint an examiner under section 1104(c) of the Bankruptcy Code. The U.S. Trustee asserted that an examiner would be better positioned to examine the implications of the Debtors’ collapse and would allow Mr. Ray to concentrate on stabilizing the Debtors’ business. The U.S. Trustee contended that the language in section 1104(c) is mandatory, requiring the appointment of an examiner if either condition within subsection (1) or (2) is met. The U.S. Trustee argued that because the Debtors’ unsecured debts substantially exceeded the $5 million threshold in section 1104(c)(2), appointment of an examiner was required.

The Debtors and other interested parties objected to the U.S. Trustee’s motion. They argued that the phrase “as is appropriate” within section 1104(c) left the decision of whether to appoint an examiner to the discretion of the Bankruptcy Court. The Bankruptcy Court agreed with the objectors and ruled that appointment of an examiner was discretionary under the Bankruptcy Code.

The U.S. Trustee appealed the Bankruptcy Court’s decision to the District Court and sought certification for direct appeal to the Third Circuit. The District Court granted, and the Third Circuit authorized, the direct appeal.

The Third Circuit acknowledged at the outset that question before it was primarily a question of statutory interpretation; accordingly, the Third Circuit looked to the plain language of section 1104(c). Section 1104(c) provides:

[O]n request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of an examiner to conduct such an investigation of the debtor as is appropriate . . . if

(1) such appointment is in the interests of creditors, any equity security holders, and other interests of the estate; or

(2) the debtor’s fixed, liquidated, unsecured debts . . . exceed $5,000,000.

11 U.S.C. § 1104(c). The Third Circuit noted that Congress’ use of the word “shall” is a word of command and serves as the equivalent of “must.” Regarding the objector-appellees’ argument that “as is appropriate” rendered the decision discretionary, the Third Circuit reasoned that under the last-antecedent rule of statutory interpretation, the qualifying phrase is read to apply to the immediately preceding term; here, the Third Circuit held that it modified the phrase “to conduct such an examination of the debtor.” Likewise, the Third Circuit noted that the language “as is appropriate” is not the same as “if appropriate,” with the latter providing a court discretion while the former only empowers a court to determine the scope of the examination.

The Third Circuit also relied on legislative history wherein Congress discussed the inclusion of an examiner in large cases to protect the interests of debtors, creditors, and the public. However, the Third Circuit noted that Congress had made the mandatory appointment of an examiner subject to some discretion: first, a party-in-interest or the U.S. Trustee must move for an examiner’s appointment; second, courts are left discretion to direct the scope, degree, duration, and cost of the examiner’s investigation. The court briefly explained that an examiner was required to be disinterested and to make its findings public, so an examiner’s investigation differs from one undertaken by a debtor or a creditors’ committee. The court concluded the Bankruptcy Court erred in denying the U.S. Trustee’s motion and remanded the proceeding to the Bankruptcy Court with instructions to enter an appropriate order.

In re LTL Mgmt. LLC, Nos. 23-2971, 23-2972, 2024 WL 3540467 (3d Cir. July 25, 2024).

In this non-precedential opinion, the Third Circuit affirmed the Bankruptcy Court for the District of New Jersey (the “Bankruptcy Court”), dismissing the LTL Management, LLC (“LTL”) bankruptcy case (for a second time) due to an absence of financial distress.

LTL, formed by Johnson & Johnson (“J&J”) through a two-step merger transaction to address its mass tort talc liabilities, filed for chapter 11 with a funding agreement from J&J in the amount of $61.5 billion to pay its talc liabilities and bankruptcy expenses. Its chapter 11 case was dismissed because the Third Circuit found that LTL lacked financial distress—principally, its funding agreement provided more than enough funds to address its liabilities. LTL filed a second chapter 11 hours later with a funding agreement from J&J in a substantially reduced amount of approximately $30 billion. The Third Circuit was called upon again to determine whether LTL’s bankruptcy case was filed in good faith—i.e., whether LTL was in financial distress. Three principal issues were raised on appeal.

First, the Third Circuit affirmed the Bankruptcy Court’s factual finding that LTL was not in financial distress. LTL’s own expert estimated a high-end liability not greater than $21 billion against a funding agreement well in excess of that amount.

Second, the Third Circuit affirmed the Bankruptcy Court’s application of its prior ruling on financial distress. The Third Circuit does not require insolvency before filing for bankruptcy, and can consider other factors that may make financial distress apparent—e.g., credit risk, liquidity issues, difficulties with employees, customers, and vendors, etc. However, LTL did not establish that it was suffering from any apparent financial distress and in its worst-case scenario, LTL’s assets exceeded its liabilities. While a solvent company confronted by mass-tort litigation can encounter financial distress that warrants bankruptcy, LTL did not meet its burden.

Finally, the Third Circuit held that section 1112(b)(2) of the Bankruptcy Code, which allows a court to decline to dismiss a bankruptcy case if unusual circumstances establish that it is not in the best interests of the creditors and the estate, did not provide an avenue to keep the cases in chapter 11. The Third Circuit affirmed the Bankruptcy Court in concluding that “lack of financial distress is not the type of ‘bad faith’ that could be subject to the [section] 1112(b) exception[.]” Id. at *4 (quoting In re LTL Mgmt., LLC, 652 B.R. 433, 451–54 (Bankr. D.N.J. 2023)).

Vertiv, Inc. v. Wayne Burt PTE, Ltd., 92 F.4th 169 (3d Cir. 2024).

In a precedential opinion, the Third Circuit vacated the order of the District Court for the District of New Jersey (the “District Court”) dismissing a complaint filed by plaintiffs Vertiv, Inc., Vertiv Capital, Inc., and Gnaritis, Inc. (collectively, “Vertiv”) against defendant Wayne Burt PTE, Ltd. (“Wayne Burt”) on grounds of international comity and remanded to apply a refreshed test for cases involving adjudicatory comity to a foreign bankruptcy proceeding.

Wayne Burt, a Singaporean corporation, was in liquidation proceedings in Singapore (the “Singaporean Liquidation Proceeding”). Prior to the Singaporean Liquidation Proceeding, Vertiv filed two suits alleging breach of contract against Wayne Burt in the District Court. The lawsuits were resolved by a consent judgment for $29 million. However, Wayne Burt, through the Singaporean liquidator, asserted lack of authority to consent to judgment and later moved to dismiss for failure to state a claim under Rule 12(b)(6) based on international comity grounds.

The District Court applied two tests in determining whether the action should be dismissed: the test articulated by the District Court in Austar International, Ltd. v. Austarpharma, LLC, 425 F. Supp. 3d 336 (D.N.J. 2019) and the test articulated by the Third Circuit in Philadelphia Gear Corp. v. Philadelphia Gear de Mexico, S.A., 44 F.3d 187 (3d Cir. 1994). The Austar test applies generally whenever a federal court seeks to determine whether to extend comity to a court of foreign jurisdiction, while the Philadelphia Gear test is specifically tailored to determine whether to extend comity to a foreign bankruptcy proceeding. Under both tests, the District Court determined that extending comity to the Singaporean Liquidation Proceeding was appropriate. Thus, the District Court granted Wayne Burt’s motion to dismiss. Vertiv timely appealed.

The Third Circuit noted that the category of comity at issue was adjudicatory comity, a discretionary act of deference towards a foreign court, so the Austar test was inapplicable. It further commented that it had been nearly three decades since the court addressed the topic in Philadelphia Gear and a “refreshed test” was warranted.

Under Philadelphia Gear, the first inquiry is whether the foreign bankruptcy proceeding is “parallel” to the civil action in the United States court. The foreign bankruptcy proceeding will be “parallel” when: (i) the foreign bankruptcy proceeding is ongoing in a duly authorized tribunal while the civil action is pending before the United States court; and (ii) the outcome of the United States action may affect the debtor’s estate. The court likened this inquiry to “related to” jurisdiction in a United States bankruptcy proceeding. Here, the court ruled that a $29 million judgment would affect the Singaporean Liquidation Proceeding and therefore, the proceedings were parallel.

The second inquiry from Philadelphia Gear is whether the party seeking the extension of comity makes a prima facie case by showing that “(1) ‘the foreign bankruptcy law shares our policy of equal distribution of assets,’ and (2) ‘the foreign law mandates the issuance or at least authorizes the request for the stay.’” Id. at 180 (quoting Phila. Gear, 44 F.3d at 193). The court then cited to a non-exhaustive list of factors that demonstrate principles of equality:

(1) whether creditors of the same class are treated equally in the distribution of assets; (2) whether the liquidators are considered fiduciaries and are held accountable to the court; (3) whether creditors have the right to submit claims which, if denied, can be submitted to a bankruptcy court for adjudication; (4) whether the liquidators are required to give notice to the debtors’ potential claimants; (5) whether there are provisions for creditors’ meetings; (6) whether a foreign country’s insolvency laws favor its own citizens; (7) whether all assets are marshaled before one body for centralized distribution; and (8) whether there are provisions for an automatic stay and for the lifting of such stays to facilitate the centralization of claims.

Id. at 181 (quoting Finanz AG Zurich v. Banco Economico S.A., 192 F.3d 240, 249 (2d Cir. 1999)). Here, the Third Circuit held that Singapore shares the United States’ policy of equal distribution of assets among similarly situated creditors and Singapore law authorizes a stay.

Finally, the last inquiry is the prejudice to the party opposing the extension of comity to the foreign bankruptcy proceeding. In essence, the United States court must assess whether the pending foreign bankruptcy proceedings provide due process protections for the party opposing the extension of comity, utilizing the non-exhaustive factors above. Because the District Court did not evaluate this last part of the test, the Third Circuit remanded to apply the refreshed test.

Wells Fargo Bank, N.A. v Hertz Corp. (In re Hertz Corp.), 117 F.4th 109 (3d Cir. 2024).

In a precedential opinion, the Third Circuit ruled not only that (i) make-whole fees (the “Applicable Premiums”), payable under Hertz’s unsecured bonds issued by The Hertz Corporation and certain of its affiliates (“Hertz” or the “Debtors”), constituted unmatured interest disallowed by section 502(b)(2) of the Bankruptcy Code, but also that (ii) because Hertz ultimately turned out to be solvent, the bondholders were entitled to postpetition interest at the contract rate, including payment of the Applicable Premiums, but not asserted early redemption fees.

The Debtors filed voluntary chapter 11 cases due to the pandemic, but were able to emerge from bankruptcy as solvent, with a plan of reorganization (the “Plan”) that nominally left all creditors unimpaired and provided a return to stockholders valued at approximately $1.1 billion. However, the Plan’s proposed treatment of unsecured bondholders provided for payment of postpetition interest at the federal judgment rate, while leaving the Applicable Premiums and early redemption fees, which were payable under the terms of the bonds, unpaid. Although the bondholders contested this treatment, the Debtors and the bondholders agreed to reserve such issues to resolution until after the Debtors’ emergence from bankruptcy. As a result, the Plan was confirmed. The bondholders later filed a complaint seeking payment of (i) postpetition interest at the contract rate, (ii) the Applicable Premiums, and (iii) the early redemption fees. The Bankruptcy Court dismissed the complaint, but ultimately certified the decision for direct appeal to the Third Circuit in light of intervening rulings from the Fifth and Ninth Circuits.

While the Third Circuit found that the Applicable Premiums constituted “interest” under both the standard “dictionary definition” and the “economic equivalent” approaches—and thus, must be disallowed under Bankruptcy Code section 502(b)(2) as unmatured interest—the Third Circuit also held that postpetition interest, including the Applicable Premiums, must be paid at the contract rate of interest because the Debtors were solvent. The Third Circuit explained that because the stockholders received value of over $1 billion, refusing to pay postpetition interest at the contract rate and the Applicable Premiums to the Noteholders, who were senior in priority to the stockholders, violated the absolute priority rule. Pointing to the Supreme Court’s decision in Czyzewski v. Jevic Holding Corp., 580 U.S. 451 (2017), the Third Circuit opined that “the Bankruptcy Code entitles every creditor—not just dissenting impaired creditors who can invoke [section] 1129(b) [of the Bankruptcy Code]—to treatment consistent with absolute priority absent a clear statement to the contrary.” 117 F.4th at 128 (citing Jevic, 580 U.S. at 465). Accordingly, the Third Circuit established this solvent debtor exception, relying on a long history of cases and codification in the Bankruptcy Code’s absolute priority rule.

Finally, the Third Circuit affirmed the bankruptcy court’s holding that the bondholders were not entitled to early redemption fees because the fee was never triggered as a matter of contract law and thus, not payable.

§ 3.5. Fourth Circuit

Blair v. Bestwall, LLC (In re Bestwall, LLC), 99 F.4th 679 (4th Cir. 2024).

Over the dissent of Circuit Judge Robert Bruce King, a Fourth Circuit panel declined to review a bankruptcy court’s orders (i) holding certain bankruptcy creditors, and their counsel, in contempt for violating a discovery order and (ii) imposing monetary sanctions, finding that both the order for contempt and the order for sanctions were nonfinal, interlocutory decisions for which neither the district court nor the Fourth Circuit had the jurisdiction to review.

In November 2017, Bestwall, LLC (“Bestwall”) commenced chapter 11 proceedings to address its asbestos-related liabilities. To aid Bestwall in estimating its liabilities, Bestwall sought, and was granted, an order directing all claimants asserting liabilities for mesothelioma against Bestwall to complete and submit a personal injury questionnaire (the “PIQ Order”). The Official Committee of Asbestos Claimants, along with various individual claimants, attempted to appeal the PIQ Order to the district court, but the appeal was dismissed for lack of jurisdiction. The district court concluded that the PIQ Order was not a final, appealable order and did not warrant interlocutory review. Thereafter, certain claimants (the “Illinois Plaintiffs”) sought to enjoin Bestwall from enforcing the PIQ Order by seeking an injunction before an Illinois federal district court. In response, Bestwall approached the bankruptcy court, seeking an order to enforce the PIQ Order. The bankruptcy court granted Bestwall’s enforcement motion and found all of the Illinois Plaintiffs and their counsel (together, “Appellants”) in contempt. Instead of sanctions, however, the bankruptcy court offered to purge Appellants’ contempt if the Illinois Plaintiffs dropped their injunction suit. When most of the Illinois Plaintiffs failed to drop their suit, the bankruptcy court imposed joint and several sanctions on Appellants in the amount of approximately $400,000, representing Bestwall’s fees and expenses incurred in defending the injunction action and enforcing the PIQ Order. Appellants appealed both the contempt and sanctions orders to the district court, which concluded that neither order was final and therefore dismissed the appeal for lack of jurisdiction. This appeal followed.

In a 2–1 decision, the Fourth Circuit affirmed the district court’s dismissal. On appeal, Appellants argued that the contempt and sanctions orders were final decisions in a discrete “proceeding” within the meaning of 28 U.S.C. § 158(a), and were therefore appropriate for appellate review by the district court. The Fourth Circuit majority disagreed. Because the contempt and sanctions orders arose from enforcement of the PIQ Order, which was an order for discovery in aid of the overarching goal of putting together a chapter 11 plan, neither the contempt order nor the sanctions order brought any sort of finality to the matter. Moreover, the majority held that construing the “proceeding” to be limited to the final determinations of whether the Illinois Plaintiffs violated the PIQ Order and whether sanctions were warranted would eviscerate the requirement for finality as a threshold for appellate review. “If we accepted Appellants’ formulation of finality, every ruling to enforce a discover order—and, likely, every discovery order itself—would be an appealable final decision supposedly terminating a bankruptcy ‘proceeding.’” Id. at 686 (citing Ritzen Grp., Inc. v. Jackson Masonry, LLC, 589 U.S. 35, 46–47 (2020)).

Judge King, however, agreed with Appellants. In his view, the discrete dispute regarding Appellants’ contempt had been raised by Bestwall in its motion to enforce the PIQ Order. Because the contempt and sanctions orders fully and finally resolved the issue of Appellants’ contempt, they were subject to appellate review pursuant to 28 U.S.C. § 158(a).

§ 3.6. Fifth Circuit

Briar Cap. Working Fund Cap., L.L.C. v. Remmert (In re S. Coast Supply Co.), 91 F.4th 376 (5th Cir. 2024).

The debtor was a distributor of industrial products. When the debtor encountered financial troubles, it borrowed $800,000 from its chief financial officer pursuant to a loan agreement. The debtor made forty-seven payments on that debt totaling in excess of $320,000. Ultimately, the debtor filed a voluntary chapter 11 petition in the Southern District of Texas. Briar Capital Working Fund Capital, L.L.C. (“Briar Capital”) was the debtor’s sole prepetition, secured lender. The debtor ultimately confirmed its plan, which provided, inter alia, for the transfer to Briar Capital of a pending preference action brought by the debtor against the former CFO. Shortly before trial in the preference action, the CFO filed a motion to dismiss pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure, arguing that Briar Capital lacked standing to prosecute the preference action. The district court agreed because a successful recovery would not benefit the debtor’s estate or its creditors.

The appellate court began its analysis by noting that the “appeal turns on whether preference claims—a type of avoidance action—may validly be sold.” Id. at 380. This question was novel for the Fifth Circuit. The court began its analysis with section 363 of the Bankruptcy Code, which provides that a debtor in possession “may use, sell, or lease . . . property of the estate.” 11 U.S.C. § 363(b)(1). “Property of the estate” is defined in section 541 of the Bankruptcy Code to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. 541(a)(1). The Fifth Circuit held that a preference action met this standard. Similarly, the court noted that section 541(a)(7) provides that “property of the estate” includes “any interest in property that the estate acquires after the commencement of the case.” 11 U.S.C. § 541(a)(7). Thus, the Fifth Circuit held that a preference action qualifies as property of the estate under that section as well. Beyond the statutory language, the Fifth Circuit also founds its decision to be in accord with those of other circuit courts. Notably, the Eighth and Ninth Circuits had held that preference claims are property of the estate that can be sold.

The CFO also argued that even if the avoidance actions were property of the estate that could be sold, Briar Capital lacked standing to pursue the claims because it was not a representative of the estate. The Fifth Circuit rejected this argument. Because it found that the preference claims could be sold, the court also held the secured creditor had standing to pursue the claim as a purchaser of the claim regardless of whether it was a representative of the estate.

Charitable DSF Fund, L.P. v. Highland Cap. Mgmt., L.P. (In re Highland Cap. Mgmt., L.P.), 98 F.4th 170 (5th Cir. 2024).

In 2019, litigation pushed the debtor, Highland Capital Management, L.P. (“Highland”), to seek chapter 11 protection. At the time of filing, Highland was controlled by co-founder James Dondero (“Mr. Dondero”). Ultimately, Mr. Dondero and Highland parted ways. Mr. Dondero relinquished control to three independent directors, one of whom was appointed by the bankruptcy court as Highland’s chief executive officer, chief restructuring officer, and foreign representative (the “CRO”). To protect the CRO from vexatious litigation, the bankruptcy court adopted a gatekeeping order, which essentially provided that no claim or cause of action could be brought against the CRO without prior approval of the bankruptcy court. The order specifically noted that the bankruptcy court would have the sole jurisdiction to adjudicate any claim for which approval to proceed had been granted.

Notwithstanding this order, entities controlled by Mr. Dondero, the Charitable DAF Foundation and its affiliate CLO Holdco (collectively “DAF”), brought litigation against Highland in district court, alleging that Highland, through its CRO, had withheld information and engaged in self-dealing. After filing the initial complaint, DAF moved for leave to amend its complaint to add the CRO as a named defendant without seeking bankruptcy court approval, as required by the gatekeeping order. DAF’s theory in so doing was that “the district court sitting over the bankruptcy court would obviate this defect.” Id. at 173. The district court dismissed the motion for leave on procedural grounds. As a result, DAF did not ever actually sue the CRO.

Highland then moved for an order requiring DAF, the persons who authorized the motion for leave, and their attorneys to show cause why they should not be held in civil contempt for violating the bankruptcy court’s gatekeeping order. The bankruptcy court granted that motion, and also required Mr. Dondero, individually, to show cause why he should not be sanctioned. Following extensive discovery and a lengthy evidentiary hearing, the bankruptcy court concluded that the filing of the motion for leave was a violation of the gatekeeping order. It held all of the parties involved in filing the motion, including Mr. Dondero, in contempt and ordered them to pay the debtor nearly $240,000. The bankruptcy court calculated the amount of sanction based on the expenses Highland actually incurred in connection with the contempt motion. The bankruptcy court concluded that Highland’s fee submissions were “conservative,” and added an additional $50,000 “based on mere guesswork.” Id. The bankruptcy court denied Highland’s request for treble damages but imposed, sua sponte, a sanction of $100,000 for failed appeals. On appeal to the district court, the sanctioned parties argued that the sanction was punitive and, therefore, exceeded the bankruptcy court’s civil contempt power. The district court vacated the bankruptcy court’s $100,000 per appeal sanction as excessive, but affirmed the remainder of the award, finding that the bankruptcy court’s award was designed to compensate Highland for costs incurred and was therefore compensatory and civil.

On appeal, the Fifth Circuit began by noting that bankruptcy courts are not Article III courts. As such they lack the inherent power to punish violations of their orders through criminal contempt. Instead, bankruptcy courts only have civil contempt powers. Because civil contempt proceedings are uniquely susceptible to abuse, “civil contempt sanctions may not have the ‘primary purpose’ of ‘punish[ing] the contemnor [or] vindicate[ing] the authority of the court.’” Id. at 174 (alterations in original) (quoting Lamar Fin. Corp. v. Adams, 918 F.2d 564, 566 (5th Cir. 1990)). Instead, civil contempt “must be ‘remedial and for the benefit of the complainant.’” Id. (quoting Int’l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821 (1994)). In other words, civil contempt sanctions must be calculated either to (1) coerce compliance with a court order or (2) compensate another party for the violation of that order. Civil contempt sanctions designed to coerce compliance are permissible only if they are conditional on the offending party’s conduct. In contrast, “contempt sanctions imposed for compensatory purposes are civil only if they are ‘based on evidence of the complainant’s actual loss.’” Id. at 175 (quoting United States v. United Mine Workers of Am., 330 U.S. 258, 304 (1947)). In the context of a fee-shifting sanction, there must be “‘a causal link[] between the litigant’s misbehavior and legal fees paid by the opposing party.’” Id. (alteration in original) (quoting Goodyear Tire & Rubber Co. v. Haeger, 581 U.S. 101, 108 (2017)). In other words, the bankruptcy court may only shift those fees incurred because of the misconduct. Without that causal link, the sanction is punitive and falls outside the bankruptcy court’s authority.

The Fifth Circuit noted that Highland “incurred virtually all its contempt-related expenses because the bankruptcy court permitted extensive discovery and conducted a marathon evidentiary hearing to unearth Dondero[’]s role in filing the [motion for leave].” Id. at 176. However, the Fifth Circuit determined that Mr. Dondero’s intentions were only relevant to criminal contempt, for which the bankruptcy court could not impose sanctions. The only question in a civil contempt proceeding would have been whether and to what extent Highland was harmed by the filing of the motion for leave. Attempting to justify the bankruptcy court’s sanction, Highland argued that the bankruptcy court had “every right and reason to vindicate its own authority by finding out who is responsible for violating its orders.” Id. (emphasis original). The Fifth Circuit found that argument to be outcome-determinative: if the purpose of the sanction was to vindicate the authority of the court, it was criminal and therefore beyond the bankruptcy court’s authority. Accordingly, the Fifth Circuit vacated the judgment of the district court and remanded the case to the bankruptcy court with instructions to limit any sanction award to the damages Highland suffered because the motion was filed in the wrong court. In other words, the sanction should be limited to the expenses Highland reasonably incurred in opposing the motion in the district court, less those it would have spent opposing the motion had it been filed in bankruptcy court.

Excluded Lenders v. Serta Simmons Bedding, L.L.C. (In re Serta Simmons Bedding, L.L.C.), Nos. 23-20181, 23-20450, 23-20363, 23-2041, 2024 WL 5250365 (5th Cir. Dec. 31, 2024).

Prior to filing its bankruptcy petition, the debtor, Serta Simmons Bedding, LLC (“Serta”), in 2016 and 2020 executed a variety of financing deals with multiple lenders. The 2016 transaction involved the refinance of Serta’s debt through a series of syndicated loans, including $1.95 billion of first-lien syndicated loans and $450 million of second-lien syndicated loans. The credit agreement governing the first lien loans (the “2016 Agreement”) specifically provided that all lenders would receive their pro rata share of any payment or recovery. In other words, Serta could not choose to pay its obligations to one lender while offering nothing to the others. Under the 2016 Agreement, the favored lender would be required to share the payment with the others. The 2016 Agreement further required unanimous consent to waive this provision. The 2016 Agreement contained one exception to the ratable-sharing provision that was relevant to the appeal. That section provided that any lender could assign all or a portion of its rights to Serta or certain of its affiliates on a non-pro rata basis.

In the years following the 2016 refinance, Serta struggled. To bolster its financial position, Serta chose to engage in an uptier transaction (the “2020 Uptier Transaction”). The Fifth Circuit described an uptier transaction as follows:

The borrower amends the terms of a credit facility to allow the issuance of new super-priority debt. Because a majority of lenders in the existing facility must typically consent to such an amendment, the borrower purchases consent by allowing these lenders to exchange their existing debt for new super-priority debt, often at an above-market price.

2024 WL 5250365, at *2 (citations omitted). If fewer than all lenders participate in the uptier, it is a non-pro rata transaction. That is exactly what Serta chose to do by engaging in an uptier transaction with some—but not all—of the lenders who were party to the 2016 transaction. As the appellate court described the transaction, Serta “gained cash and lowered its overall debt load, while the Prevailing Lenders slashed the nominal value of their holdings (which were trading far below par) to jump the creditor line and get paid before their erstwhile first- and second-lien comrades.” Id. at *4. Because the 2020 Uptier Transaction was controversial, Serta and the lenders involved in the uptier took a number of steps to protect themselves: first, they amended the 2016 Agreement to expressly allow the 2020 Uptier Transaction based on their bare majority of the first-lien debt; second, Serta and the participating lenders labeled the 2020 Uptier Transaction as an open-market purchase; and finally, Serta agreed to indemnify the participating lenders.

In 2023, Serta filed for bankruptcy protection under chapter 11. Serta and some of the participating lenders filed an adversary proceeding seeking declaratory relief blessing the 2020 Uptier Transaction as not violating the 2016 Agreement’s pro rata provisions. The defendants in this adversary proceeding had opposed the 2020 Uptier Transaction as “lender-on-lender violence.” The bankruptcy court held that the term open-market purchase, which was not defined in the 2016 Agreement to be clear and unambiguous. The bankruptcy court further held that the 2020 Uptier Transaction was a valid open-market purchase and, thus, an exception to the pro rata sharing required by the 2016 Agreement.

In the main bankruptcy case, Serta proposed a plan of reorganization that expressly provided for the survival of Serta’s indemnification obligations related to the 2020 Uptier Transaction, but only as to (i) those participating lenders who had not sold their super-priority debt and (ii) those who did not originally participate in the 2020 Uptier Transaction, but who had later purchased super-priority debt on the secondary market. The plan proponents argued that the original indemnity provided in the 2020 Uptier Transaction for all participating lenders, regardless of whether they still held the super-priority debt, should be disallowed, but that the modified indemnity in the final plan could be justified as part of a settlement. The bankruptcy court found the settlement indemnity to be a fair and equitable component of the plan and confirmed the plan with this new indemnity.

The issue was then appealed directly to the Fifth Circuit. The court began by addressing the open-market issues. Applying established rules of contract interpretation, the circuit held that the 2020 Uptier Transaction was not a permissible open-market purchase. First, an open market is one that is generally open to participation by various buyers and sellers. That market needs to be relevant to the purchased product. As such, the open market in this context would be the secondary market for syndicated loans. The court held that “the words ‘open market’ point to a specific ‘market,’ not merely a general context where private parties engage in non-coercive transactions with each other.” Id. at *13. While the latter might be an “open purchase,” it would not be an “open market purchase.” Competition does not suffice to establish an open market. Instead, an open market is one tied to a specific market and not merely the background concept of “free competition.” Because Serta chose to privately engage individual lenders outside of the established secondary market, it did not qualify for the open-market protection of the 2016 Agreement. The Fifth Circuit, thus, reversed the bankruptcy court’s ruling to the contrary.

Having concluded that the 2020 Uptier Transaction was not permitted under the open market exception, the court remarked that the lenders who had been excluded had a strong case that Serta and the participating lenders had breached the 2016 Agreement. Because there was little substantive discussion of the breach of contract issue in the appellate briefing, the Fifth Circuit remanded for reconsideration of the excluded lenders’ breach of contract counterclaims.

The court then turned to the plan indemnity issues. The court held that the plan improperly included indemnities relating to the 2020 Uptier Transaction. First, the court rejected the argument that the appeal of the settlement indemnity was equitably moot. Even though a stay of confirmation had not been obtained and the plan had been substantially consummated, the circuit held that issue was not equitably moot because excising the indemnity from the plan would not affect the rights of parties not before the court or the success of the plan. The court also forcefully rejected the argument made by the participating lenders that it would be unfair to consider an appeal that allowed the plan to remain confirmed, but excised a portion of the relief for which they bargained. The participating lenders contended that, if the court were to eliminate this bargained-for relief, the parties should be permitted to go back to the drawing board to revisit the entire plan. But the court determined that doing so would amount to a “judge-made, atextual doctrine of pseudo-abstention.” Id. at *20. The court wrote that, “to the extent equitable mootness exists at all, we affirm that it cannot be ‘a shield for sharp or unauthorized practices.’” Id. (quoting In re Pac. Lumber Co., 584 F.3d 229, 244 n.19 (5th Cir. 2009)).

The Fifth Circuit then held that the inclusion of the modified indemnity was “an impermissible end-run around the Bankruptcy Code.” Id. at *21. Section 502(e)(1)(B) requires a bankruptcy court to “disallow any contingent claim for reimbursement where the claiming entity is co-liable with the debtor.” Id. The indemnity claims asserted by the participating lenders were clearly contingent claims for reimbursement where the participating lenders were co-liable with Serta. All parties and the bankruptcy court agreed that section 502(e)(1)(B) disallowed the claims and invalidated the related prepetition indemnity (i.e., the first iteration of the indemnity that indemnified all participating lenders). But Serta and certain lenders attempted to obtain the modified indemnity by calling it a “settlement,” authorized by section 1123(b)(3)(A). While the bankruptcy court approved of this strategy, the Fifth Circuit did not. Section 1123 simply did not provide for the back-end resurrection of claims already disallowed and the bankruptcy court was wrong to approve of this strategy. The court further found that, even if section 1123(b)(3)(A) could have justified the settlement indemnity, section 1123(a)(4), which requires equal treatment of similarly situated creditors, would bar it. Accordingly, the Fifth Circuit chose to excise the offending indemnity from the plan and reversed the bankruptcy court’s final order confirming the plan only insofar as it approved the indemnity.

Finally, the court noted that the 2020 Uptier Transaction was the first major uptier, but was likely not the last. The court wrote that “there are doubtless still many contracts with open market purchase exceptions to ratable treatment.” Id. at *24 (citation omitted). While each such contract should be reviewed on its own terms, the court concluded its opinion by suggesting that such open market purchase exceptions would not often justify uptier transactions.

§ 3.7. Sixth Circuit

Cal. Palms Addiction Recovery Campus, Inc. v. Vara (In re Cal. Palms Addiction Recovery Campus, Inc.), 87 F.4th 734 (6th Cir. 2023).

Joining the Third, Seventh, and Ninth Circuits, the Sixth Circuit became the latest Court of Appeals to hold that a bankruptcy court’s order granting a motion to convert from chapter 11 to chapter 7 is a final, appealable order from which an appeal may arise under 28 U.S.C. § 158.

California Palms Addiction Recovery Campus, Inc. (“California Palms”) was a substance abuse treatment center located in Ohio. However, it was beset by legal problems, including (i) revocation of its operating license by the State of Ohio, (ii) seizure of nearly $600,000 by the U.S. Department of Justice (the “DOJ”), and (iii) a pending eviction action by its landlord. To resolve these issues, California Palms (a) sued the State of Ohio to reinstate its license, (b) sued the DOJ to recover the seized assets, and (c) commenced bankruptcy proceedings under subchapter V of chapter 11. The subchapter V trustee sought to convert the case to chapter 7 due to concerns that California Palms’ continued prosecution of its various litigations would “bleed the estate dry.” Id. at 738. Although the bankruptcy court initially put the subchapter V trustee’s motion on hold, later adverse developments in the DOJ suit and missed deadlines in the bankruptcy case caused the bankruptcy court to schedule a show-cause hearing as to why California Palms’ case should not be converted. Despite California Palms’ objection, the bankruptcy court made factual and legal findings to support conversion of California Palms’ case to chapter 7.

As a gating item, the Sixth Circuit first considered whether it had jurisdiction to review the bankruptcy court’s order converting the case based on the “finality” of the order. The Court of Appeals found that the bankruptcy court’s order converting the proceeding to a chapter 7 case was appealable as a final order because the conversion motion both resolved a “proceeding,” meaning a “‘discrete dispute’ with specific procedural steps.” Id. at 739 (quoting In re Jackson Masonry, LLC, 906 F.3d 494, 500 (6th Cir. 2018)). In addition, the granting of a motion to convert “terminates” the proceeding by eliminating the debtor’s right to reorganize pursuant to chapter 11. Id. at 740. Accordingly, the bankruptcy court’s order converting California Palms’ subchapter V case to chapter 7 was final and appealable, and therefore within the Sixth Circuit’s purview for appellate review. The Court of Appeals then easily concluded that the bankruptcy court had not abused its discretion in finding cause to convert based on the low likelihood of success for California Palms to successfully reorganize in the face of substantial, continuing losses.

§ 3.8. Seventh Circuit

In re Int’l Supply Co., 103 F.4th 478 (7th Cir. 2024).

The Seventh Circuit rejected a lender’s argument that the “sole legally permissible approach to defining solvency,” under the Illinois Uniform Fraudulent Transfer Act, is the balance sheet test. Id. at 481.

In August of 2013, Lee Hofmann (“Hofmann”) agreed to have one of his companies, International Supply Company (“International Supply”), pay Citizens Equity First Credit Union (the “Lender”) $1.72 million as part of a settlement. The settlement was related to the Lender’s judgment against Hofmann for failure to honor his personal guarantee of the debt of another one of his companies.

In 2015, International Supply commenced bankruptcy proceedings, and a trustee (the “Trustee”) was appointed to distribute the proceeds of the sale of its assets to creditors. In September of 2017, the Trustee brought a preference action against the Lender, asserting that International Supply was insolvent when it made the August 2013 payment to the Lender and that it had not received reasonably equivalent value for that payment.

At trial, the bankruptcy court heard expert testimony as to International Supply’s 2013 solvency using each of the balance sheet, cash flow, and adequate capital tests. Ultimately, the bankruptcy court concluded, and the district court affirmed, that International Supply was insolvent in August 2013 because it was unable to keep the business afloat and repay its debts. As a result, the settlement payment by International Supply to the Lender was voidable and the Lender was ordered to pay the estate $1.72 million, plus interest.

On appeal to the Seventh Circuit, the Lender argued that the bankruptcy court had erred when it looked beyond International Supply’s balance sheet in evaluating International Supply’s solvency as of August 2013. However, the Seventh Circuit held that the Illinois Uniform Fraudulent Transfer Act contained no express limitation as to the means of assessing a debtor’s solvency. In fact, the court held that the Illinois statute “set up multiple ways in which a business can be insolvent for the purpose of fraudulent-conveyance liability.” Id. at 482. In addition, the Lender failed to cite any caselaw to support its proposition that the balance sheet test alone was the appropriate method of assessing solvency under the Uniform Fraudulent Transfer Act.

Petr v. BMO Harris Bank N.A., 95 F.4th 1090 (7th Cir. 2024).

The Seventh Circuit made two definitive rulings that fortified the protections provided by Bankruptcy Code section 546(e)’s safe harbor: (i) transactions involving private securities that do not implicate the national securities market are protected by the statute, and (ii) section 546(e) preempts state law claims seeking relief that would be otherwise barred under the Bankruptcy Code.

BWGS, LLC (“BWGS” or the “Debtor”) was a privately held company with its outstanding stock in an Employee Stock Ownership Plan Trust (the “ESOP Trust”). To acquire BWGS, Sun Capital Partners VI, L.P. (“Sun Capital”) entered into a stock purchase agreement (the “SPA”) with the ESOP Trust through which a newly formed subsidiary of Sun Capital, BWGS Intermediate Holding, LLC (“Intermediate Holding”), would acquire the stock of BWGS for approximately $37.8 million. To finance the acquisition, Intermediate Holding borrowed $25.8 million (the “Bridge Loan”) from BMO Harris Bank N.A. (“BMO”), with Sun Capital guaranteeing the loan. The acquisition closed on December 30, 2016.

Subsequently, on January 27, 2017, Sun Capital caused BWGS to enter into two borrowing arrangements, along with Intermediate Holding: (i) a $20 million term loan from LBC Credit Agency Services, LLC (the “Term Loan”); and (ii) a revolving line of credit of up to $20 million from JP Morgan Chase Bank, N.A. (the “Revolver”). On the same day, Sun Capital caused BWGS to pay BMO approximately $20 million borrowed under the term loan, approximately $5 million borrowed under the Revolver, and approximately $400,000 of cash on hand (collectively, the “Transfer”). As a result of the Transfer, Intermediate Holding and Sun Capital were relieved of their obligations under the Bridge Loan, while BWGS, which was already struggling financially, received no value.

BWGS’s creditors ultimately filed an involuntary chapter 7 bankruptcy petition against BWGS. In the bankruptcy proceedings, the chapter 7 trustee (the “Trustee”) filed a complaint against BMO, Sun Capital, and others to (i) avoid the Transfer as a constructively fraudulent transfer pursuant to the Indiana Uniform Voidable Transactions Act (the “IUVTA”) and section 544(b)(1) of the Bankruptcy Code and (ii) recover the value of the Transfer from Sun Capital pursuant to section 550(a) of the Bankruptcy Code and its IUVTA analog, section 18(b)(1), by virtue of the Trustee’s “strong arm” power under section 544(a). BMO and Sun Capital (together, the “Defendants”) moved to dismiss the Trustee’s complaint, arguing that the Transfer fell within section 546(e)’s safe harbor. The bankruptcy court denied the Defendants’ motion, finding that only the SPA was a “securities contract” under section 546(e) and that the Transfer was not made “in connection with” the SPA. The bankruptcy court also held, sua sponte, that the Trustee’s claim to recover the value of the Transfer from the Defendants under the IUVTA did not implicate section 546(e)’s safe harbor and was permissible. The district court reversed, finding that (i) the SPA, the Bridge Loan agreement, and Sun Capital’s guaranty of the Bridge Loan all qualified as “securities contracts” within the meaning of section 546(e) and that the Transfer was made “in connection with” such securities contracts, meaning section 546(e) barred the Trustee’s claims, and (ii) section 546(e) preempted claims brought under section 18(b)(1) of the IUVTA, by virtue of section 544(a). The Trustee appealed.

Affirming the district court entirely, the Seventh Circuit first rejected the Trustee’s argument that section 546(e) only applied to “transactions that implicate the national system for the clearance and settlement of publicly held securities” because Congress intended “to insulate the nation’s financial markets from instability generated by the avoidance of public securities transactions.” Id. at 1097. Because both the terms “securities contract” and “in connection with,” as used in section 546(e), were unambiguous, the Court of Appeals determined that there was no need to turn to legislative history or Congressional intent of section 546(e). Rather, it was plain on the face of the statute that section 546(e) could reach transactions involving privately held securities.

The Seventh Circuit then addressed whether the Trustee could evade the implications of section 546(e)’s safe harbor by using section 544(a) to recover the value of a claim that was avoidable under state law. The Court of Appeals rejected this argument, holding that section 546(e) preempted state law claims seeking to recover the value of transfers that would otherwise be shielded from avoidance by the safe harbor. Joining the Second and Eighth Circuits in so holding, the court said, “[T]o allow a bankruptcy trustee to recover the otherwise-unavoidable payments ‘would render the [section] 546(e) exemption meaningless, and would wholly frustrate the purpose behind that section.’” Id. at 1103 (quoting Contemp. Indus. Corp. v. Frost, 564 F.3d 981, 988 (8th Cir. 2009)).

§ 3.9. Eighth Circuit

Kelley v. BMO Harris Bank N.A., 115 F.4th 901 (8th Cir. 2024).

Aligning with the Second Circuit’s analysis of the in pari delicto doctrine under New York law, the Eighth Circuit concluded that, although Minnesota law may permit a receiver to avoid the defense of in pari delicto, a bankruptcy trustee inherits the right of the debtor corporation subject to any equitable or legal defenses that could have been raised against the debtor.

In 2008, Thomas Petter (“Petter”) was arrested for fraud in connection with a multibillion-dollar Ponzi scheme perpetrated through his company, Petters Company, Inc. (“PCI”). A federal district court subsequently placed PCI into a receivership and appointed Douglas Kelley (“Kelley”) as receiver. As receiver, Kelley then commenced bankruptcy proceedings on behalf of PCI. Kelley was then appointed trustee of the bankruptcy estate.

As the trustee, Kelley filed an adversary proceeding in bankruptcy court against BMO Harris Bank (“BMO”), as successor-in-interest to M&I Bank (“M&I”), alleging that M&I aided and abetted the Ponzi scheme by ignoring signs of the fraud. BMO moved for summary judgment, arguing that the doctrine of in pari delicto barred the PCI estate from recovering against BMO for M&I’s alleged wrongdoing because PCI was equally, if not more, culpable. The bankruptcy court ruled that the doctrine did not apply because, under Minnesota law, PCI was no longer bound by its officers’ previous fraudulent acts when it entered receivership. As the case headed to trial, the district court, at several different points, likewise denied BMO relief based on the doctrine of in pari delicto.

On appeal, the parties disputed whether the placement of PCI into receivership “cleansed” Kelley of PCI’s wrongdoing. Kelley argued that, under Minnesota law, a receiver “is not bound by the fraudulent acts of a former officer of the corporation.” Id. at 905 (quoting Magnusson v. Am. Allied Ins., 290 Minn. 465 (1971)). However, a bankruptcy trustee “steps into the shoes of the debtor and is subject to any defenses that could be raised against the debtor, including the defense of in pari delicto.” Id. (citing Grassmueck v. Am. Shorthorn Ass’n, 402 F.3d 833, 836 (8th Cir. 2005)). The Eighth Circuit held that Minnesota law did not “cleanse” PCI of its wrongdoing, but merely liberated the receiver from such wrongdoing while acting in the capacity of receiver. Accordingly, the in pari delicto defense was not “extinguished” under Minnesota law. When Kelley shifted from receiver to bankruptcy trustee, “the custodian of the claims [against BMO] changed, but the claims did not. The claims entered the bankruptcy estate subject to a defense based on PCI’s previous fraudulent acts.” Id. at 906. As such, the Eighth Circuit distinguished between the rights and obligations of the corporation, which pass into bankruptcy subject to the in pari delicto defense, and the rights and obligations of the receiver, to whom Minnesota law offers a shield. In addition, the court notes the consistency of its ruling with that of the Second Circuit in Picard v. JPMorgan Chase & Co. (In re Bernard L. Madoff Inv. Sec. LLC), 721 F.3d 54 (2d Cir. 2013).

§ 3.10. Ninth Circuit

Mont. Dep’t of Revenue v. Blixseth (In re Blixseth), 112 F.4th 837 (9th Cir. 2024).

In this case, the Ninth Circuit reviewed both the application of the “collateral order doctrine” and the parameters of sovereign immunity in the context of an adversary proceeding against the Montana Department of Revenue (“MDOR”) for damages arising under section 303(i) of the Bankruptcy Code for a dismissed involuntary bankruptcy petition.

Following an audit of the debtor, Timothy Blixseth, and his business entities, three state taxing authorities, including MDOR, commenced an involuntary bankruptcy proceeding against Blixseth for unpaid taxes. After the other two state taxing authorities withdrew as petitioning creditors after settling with Blixseth, the bankruptcy court ultimately dismissed the involuntary petition for lack of the requisite number of petitioning creditors. Blixseth then brought an adversary proceeding against MDOR, seeking attorney’s fees and costs, damages, and sanctions against counsel pursuant to section 303(i) of the Bankruptcy Code. MDOR moved to dismiss on grounds of sovereign immunity. The bankruptcy court denied MDOR’s motion, finding that (i) MDOR had “voluntarily invoked the jurisdiction of [the bankruptcy] court by filing the [i]nvoluntary [p]etition,” id. at 842 (alterations in the original); (ii) MDOR’s counsel had “clear[ly] and unequivocal[ly] waive[d] [the State’s] sovereign immunity under the Eleventh Amendment regarding any future Section 303(i) claims,” id.; and (iii) MDOR’s sovereign immunity was explicitly waived under section 106(a)(1) of the Bankruptcy Code because the section 303(i) action was “ancillary to the bankruptcy court’s in rem jurisdiction,” id. When MDOR appealed to the Bankruptcy Appellate Panel (the “BAP”), the BAP dismissed the appeal for want of jurisdiction, finding that the “collateral order doctrine” did not apply.

On appeal, the Ninth Circuit first analyzed whether it had jurisdiction under the “collateral order doctrine.” Pursuant to the collateral order doctrine, an appellate court may review a non-final order addressing claims collateral to the underlying action if “the collateral claims are ‘too important to be denied review and too independent of the cause itself to require that appellate consideration be deferred until the whole case is adjudicated.” Id. at 843 (quoting Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 546 (1949)). Because both the Supreme Court and the Ninth Circuit had found that denials of sovereign immunity were immediately appealable under the collateral order doctrine, id. (first citing P.R. Aqueduct & Sewer Auth. v. Metcalf & Eddy, Inc., 506 U.S. 139, 144 (1993); and then Childs v. San Diego Family Hous. LLC, 22 F.4th 1092, 1095–96, 1096 n.2 (9th Cir. 2022)), the Ninth Circuit determined that the BAP had erred in failing to consider the merits of MDOR’s appeal.

Turning to the merits of the appeal, the Ninth Circuit found that the bankruptcy court had likewise erred when it concluded that MDOR was precluded from asserting sovereign immunity. First, the Ninth Circuit determined that MDOR only voluntarily invoked the jurisdiction of the bankruptcy court if it asserted a claim against the res of the debtor’s estate. Here, MDOR had not filed a proof of claim, and so a voluntary waiver of immunity could only be found if Blixseth’s section 303(i) claim arose from the same operative facts as MDOR’s filing of an involuntary petition under section 303(b). Because MDOR’s involuntary petition was based on Blixseth’s unpaid taxes, while Blixseth’s section 303(i) claim arose from the fact of the filing of the involuntary petition, the Ninth Circuit determined that the claims did not arise from the same operative facts, and thus, were insufficient to justify a waiver of sovereign immunity.

Next, the Court of Appeals considered MDOR’s supposed unequivocal waiver, made in a statement by MDOR’s counsel in a hearing before the bankruptcy court. The Ninth Circuit determined that an “unequivocal” consent to suit must be statutory, citing United States v. Nordic Vill., Inc., 503 U.S. 30, 37 (1992). Accordingly, MDOR’s counsel was not capable of waiving MDOR’s sovereign immunity through in-court statements.

Finally, the Ninth Circuit considered whether the section 303(i) claim was “ancillary” to the bankruptcy court’s in rem jurisdiction to justify a waiver of MDOR’s sovereign immunity. In so doing, the Ninth Circuit first noted that the bankruptcy court had erred in relying on section 106(a)(1)’s abrogation of sovereign immunity, based on earlier precedent determining that section 106(a) was “an unconstitutional assertion of Congress’s power.” Id. at 845 (quoting Mitchell v. Cal. Franchise Tax Bd. (In re Mitchell), 209 F.3d 1111, 1120 (9th Cir. 2000)). The Ninth Circuit panel then went on to consider whether the adversary proceeding brought by Blixseth, seeking section 303(i) damages, was “necessary to effectuate the in rem jurisdiction of the bankruptcy courts,” as delineated in Central Virginia. Community College v. Katz, 546 U.S. 356 (2006). 112 F.4th at 847 (quoting State of Fla. Dept. of Revenue v. Diaz (In re Diaz), 647 F.3d 1073, 1086 (11th Cir. 2011)). Because an adversary proceeding under section 303(i) did not concern the res of the bankruptcy estate and did not further the debtor’s “fresh start,” the Ninth Circuit held that waiving MDOR’s right to sovereign immunity solely on the basis of filing an involuntary bankruptcy petition was an impermissible expansion of the limited waiver of sovereign immunity. Accordingly, the Ninth Circuit reversed the bankruptcy court, finding that MDOR had properly invoked sovereign immunity.

In re PG&E Corp. Sec. Litig. (Pub. Emps. Ret. Ass’n of N.M. v. Earley), 100 F.4th 1076 (9th Cir. 2024).

In this interlocutory appeal, the Ninth Circuit determined that the district court had abused its discretion when it extended the automatic stay, sua sponte, to certain individual co-defendants of PG&E Corporation and Pacific Gas & Electric Company (together, “PG&E”) to halt a pending putative securities class action.

In the wake of the 2017 and 2018 Northern California wildfires, certain shareholders of PG&E (the “Plaintiffs”) brought a putative class action (the “Class Action”) in district court against PG&E and certain of its current and former officers, directors, and bond underwriters (collectively, the “Individual Defendants”), alleging false or misleading statements pertaining to PG&E’s wildfire-safety policies and regulatory oversight. When PG&E commenced bankruptcy proceedings in January 2019, the Class Action was automatically stayed as to PG&E pursuant to section 362 of the Bankruptcy Code. However, the Class Action continued as to the Individual Defendants, who filed motions to dismiss in October 2019. Despite briefing being completed by January 2020, the district court did not take any further action until April 2021, when it, sua sponte, issued a Notice of Intent to Stay the Class Action pending completion of the claims process established pursuant to PG&E’s plan of reorganization, which had become effective in July 2020. Although the Plaintiffs objected, the district court issued an order in September 2022 staying the Class Action in the name of judicial efficiency, citing the overlap between the securities claims brought in the PG&E bankruptcy proceedings and the claims at issue in the Class Action. The Plaintiffs timely appealed.

As a preliminary matter, the Ninth Circuit first addressed the issue of appellate jurisdiction over an interlocutory appeal. Although appellate jurisdiction typically depends on entry of a final order—which a stay order is not—the Ninth Circuit considered the precedent established in Moses H. Cone Memorial Hosp. v. Mercury Construction Corp., 460 U.S. 1 (1983), which held that “a stay order is appealable as a final decision under 28 U.S.C. § 1291 if the order places the plaintiff ‘effectively out of court.’” 100 F.4th at 1084 (citing Moses H. Cone, 460 U.S. at 9). Here, because the stay was imposed until the PG&E claims process was fully resolved—a process that expert testimony established would take years—the stay was both sufficiently lengthy and indefinite to afford the Ninth Circuit appellate jurisdiction under the Moses H. Cone doctrine.

Having determined that the Ninth Circuit had jurisdiction to review the merits of the district court’s stay order, the Ninth Circuit then turned to the question of whether the district court had abused its discretion by staying the Class Action pending resolution of the PG&E bankruptcy proceedings. Although the district court cited judicial efficiency in its order, the Plaintiffs and the Individual Defendants disputed whether there were any judicial efficiencies to be gained by staying the Class Action. The Ninth Circuit ultimately concluded that, while there were efficiencies in allowing the bankruptcy process to proceed first, the district court was also obligated to analyze any prejudice caused by the imposition of the stay. Because the district court failed to consider the prejudice to the Plaintiffs in delaying their opportunity to litigate the Class Action until the PG&E bankruptcy had been resolved, the Ninth Circuit vacated the stay and remanded for further consideration of the prejudice to the Plaintiffs from imposition of the stay.

§ 3.11. Tenth Circuit

Montoya v. Goldstein (In re Chuza Oil Co.), 88 F.4th 849 (10th Cir. 2023).

Affirming the bankruptcy court and reversing the Bankruptcy Appellate Panel (the “BAP”), the Tenth Circuit analyzed the doctrine of earmarking as a defense to certain avoidance actions brought by the chapter 7 trustee.

The debtor, Chuza Oil Co. (“Chuza”), was a New Mexico petroleum company that was operated by an individual named Bobby Goldstein. In 2012, Goldstein’s father loaned Chuza $500,000 under a promissory note (the “Note”), guaranteed by Goldstein and another of Goldstein’s companies, Bobby Goldstein Productions, Inc. (“BGPI”). After Goldstein’s father passed away, Goldstein’s mother, Paula, held the Note.

In 2014, Chuza filed for protection under chapter 11 of the Bankruptcy Code. The bankruptcy court confirmed a plan of reorganization in March 2016, which provided for the subordination of insider unsecured creditors, like Paula. However, Chuza’s financial situation did not improve after exiting chapter 11. Between September 2016 and December 2017, Goldstein, Paula, and BGPI loaned nearly $500,000 to Chuza to keep the business in operation. Chuza then transferred approximately $50,000 to Paula as payment on the Note, even though it had not paid all remaining claims with higher priorities under the chapter 11 plan. Goldstein later testified that the $50,000 was only loaned to Chuza on the condition that it was used to repay the Note.

In July 2018, Chuza was pushed into an involuntary chapter 7 bankruptcy. The chapter 7 trustee (the “Trustee”) initiated an adversary proceeding to avoid the transfers to Paula as preferential transfers under Bankruptcy Code section 547(b), intentionally fraudulent transfers under Bankruptcy Code section 548(a)(1)(A), and constructively fraudulent transfers under Bankruptcy Code section 548(a)(1)(B). The bankruptcy court ruled against the Trustee, holding, in the first instance, that Chuza did not have an interest in the funds transferred since they were earmarked to repay Paula; and, in the second instance, that (i) the transfers were not preferences because they were part of an contemporaneous exchange for new value; (ii) there was no intent to commit fraud, as require to assert an intentionally fraudulent transfer claim; and (iii) Chuza had received reasonably equivalent value for the transfers, and thus the transfers could not be constructively fraudulent. The Trustee appealed to the BAP, which reversed the bankruptcy court’s ruling, finding that the transfers diminished Chuza’s estate by replacing debt subordinated under the plan with unsubordinated debt. The BAP also found that there was never an “exchange” of value, as required for both the contemporaneous exchange defense to a preferential transfer claim and the reasonably equivalent defense to a constructively fraudulent transfer claim.

On appeal, the Tenth Circuit first analyzed the earmarking doctrine, through which a court analyzes whether a debtor has an “interest” in property it transferred away from itself. Under Tenth Circuit precedent, a debtor must establish that it did not have an interest in the transferred property under both (i) the “dominion and control” test and (ii) the “diminution of the estate” test to establish that the debtor did not have an interest in the property that might be avoidable. Under the “dominion and control” test, the Tenth Circuit found that the bankruptcy court had not erred when it accepted Goldstein’s testimony that the funds loaned to Chuza were loaned on the condition that some of the money would be used to repay Paula. As a result of this condition, Chuza did not have “control” of the funds.

As to the “diminution of the estate” test, the Court of Appeals noted two plausible interpretations of the transfers at issue: either the payments harmed other unsecured creditors because the transfers had the net effect of exchanging Paula’s subordinated debt for non-subordinated debt owed to Goldstein and BGPI, or the payments net benefitted creditors the estate received approximately $450,000 which was not earmarked. The bankruptcy court accepted the latter explanation, and the Tenth Circuit could not find error in such determination.

Finally, the Tenth Circuit considered whether the bankruptcy court erred in finding that there was both a contemporaneous exchange of value and a reasonably equivalent exchange of value for purposes of the statutory exceptions to the preference and constructive fraudulent transfer claims. Again, the Tenth Circuit found that there were two plausible interpretations—that Goldstein loaned the entirety of the borrowed amount to Chuza on the condition that only a portion was paid to Paula versus that Goldstein loaned only the specific amounts that were ultimately earmarked for Paula to Chuza for that purpose. If the former interpretation prevailed, the statutory exceptions applied to the transfers; but not if the latter interpretation prevailed. Determining that both were plausible, the Tenth Circuit found no error in the bankruptcy court’s conclusion that the first interpretation applied.

§ 3.12. Eleventh Circuit

Bay Point Cap. Partners II LP v. Thomas Switch Holding, LLC (In re Virtual Citadel, Inc.), 113 F.4th 1304 (11th Cir. 2024).

In this case, the Eleventh Circuit was confronted with the issue of how to properly value crypto mining assets. In affirming the bankruptcy court’s findings, the Eleventh Circuit held that a property with certain enhancements designed to facilitate the massive energy consumption required attendant to bitcoin mining can qualify as a “special purpose property.”

The debtors were two related crypto businesses that were located on two adjacent properties. One property housed a bitcoin mining operation and the other housed a data storage center. Following the owner’s death, the businesses commenced chapter 11 proceedings, pursuant to which the businesses, including the properties, were sold together for $4.9 million. A transfer tax of $2,450 on each property supported an equal split between the properties of $2.45 million each. The purchaser who had bought the properties specifically intended to make use of the existing bitcoin mining infrastructure.

Pursuant to the sale order, the bankruptcy court ordered the escrow of $700,000 of the sale proceeds, pending determination of the value of the liens of secured creditor, Thomas Switch Holding (“Switch”). If the bitcoin mining property was valued at $700,000 or higher, then Switch would receive the full escrow amount; otherwise, Switch would receive the valuation amount and another creditor, Bay Point Capital (“Bay Point”), would receive the remaining escrow amount.

After a bench trial, which included expert testimony from both Switch and Bay Point, the bankruptcy court determined that the value of the mining property exceeded $700,000, based on a cost approach. This result largely adopted the testimony from Switch’s expert, which the bankruptcy court found was the most reliable because it accounted for improvements to the property that allowed the property to be used for bitcoin mining. Because the highest and best use for the property was as a bitcoin mining operation, the bankruptcy court also determined that the property was a “special purpose property.” The bankruptcy court likewise found that, although the tax stamp valuation was not deserving of much weight, a $2.45 million estimated value militated in favor of a total valuation for the mining property in excess of $700,000. By contrast, Bay Point’s expert valued the mining property at $48,000, based on comparisons to other properties of comparable size that could be put to “light industrial use.” Bay Point appealed to the district court, which affirmed the bankruptcy court’s decision.

On appeal to the Eleventh Circuit, Bay Point argued: (i) the bankruptcy court erred in determining that property was a special purpose property with the highest and best use of bitcoin mining; (ii) the bankruptcy court erred as a matter of law when it selected the cost approach, instead of the sales comparison approach, to value the mining property; and (iii) the bankruptcy court clearly erred when, as part of its valuation, it considered the tax stamp value of the property. First, the Eleventh Circuit found that the mining property was a special purpose property because, among other things, the improvements to the property allowed it to be used for bitcoin mining. While the property could be used for other purposes, valuing the property for generalized “light industrial use” would be a waste of the infrastructure investments to the property. Next, having determined that the property was a special purpose property, the Eleventh Circuit concluded that the bankruptcy court correctly used the cost approach in arriving at its valuation. A comparison approach was disfavored for unique assets. Finally, the Eleventh Circuit found that the bankruptcy court appropriately weighed the evidence concerning the tax stamp value.

Editor

Contributors

§ 2.1. Introduction

Antitrust litigation in 2024 included a number of cases addressing a wide variety of topics, including among other things, the validity of the Merger Guidelines issued jointly by the United States Department of Justice, Antitrust Division, and the Federal Trade Commission, the standard applicable to hybrid arrangements, the anticompetitive effects requirement, reverse payment settlements, and exclusionary conduct. Each of these and other significant antitrust decisions are discussed in this chapter of Recent Developments in Business and Corporate Litigation.

§ 2.2. Sherman Act Developments, Section 1

§ 2.2.1. Overview

The Sherman Act, under Section 1, prohibits “every contract, combination, in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce.” 15 U.S.C. § 1 (2004). The main purpose of the section is to prevent conduct that unreasonably restrains competition. Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 723 (1988). Accordingly, the principal issues often are whether an agreement exists or has been pled adequately, whether a restraint should be examined under the rule of reason or the per se rule, and, if subject to the rule of reason, whether the restraints there are reasonable.

To establish a violation of Section 1, a plaintiff must prove that (1) there is an agreement, (2) the agreement is an unreasonable restraint of trade, and (3) there is an effect on interstate commerce.

To prove an agreement, a plaintiff must also show concerted action. The Supreme Court defined concerted action as a conscious commitment to a common scheme or objective. Monsanto Co. v. Spray-Rite Serv. Co., 465 U.S. 752, 764 (1984). The agreement need not be express, but can be tacit, signified with a wink and nod or handshake, or inferred from circumstantial evidence. Accordingly, plaintiffs may establish concerted action using either direct evidence or indirect evidence.

The Department of Justice, the Federal Trade Commission, state attorneys general, and private plaintiffs may enforce Section 1. Courts routinely examine the issues presented by Section 1 and 2024 was no exception.

§ 2.2.2. United States v. American Airlines Group Inc., 121 F.4th 209 (1st Cir. 2024).

Although an injunction was entered after a bench trial and one of the two airlines involved exited the challenged joint venture, the U.S. Court of Appeals for the First Circuit retained and decided the appeal pursued by the remaining airline. The joint venture at issue dubbed the “Northeast Alliance” (“NEA”) was formed by American Airlines Group, Inc. (“American”) and JetBlue Airways Corporation (“JetBlue”). The First Circuit affirmed the decision of the trial court finding that the NEA arrangement was anticompetitive under Section 1 of the Sherman Act. United States v. Am. Airlines Grp. Inc., 121 F.4th 209, 214 (1st Cir. 2024).

The U.S. Department of Justice (“DOJ”), the District of Columbia, Arizona, California, Florida, Massachusetts, Pennsylvania, and Virginia brought an antitrust action. United States v. Am. Airlines Grp. Inc., 675 F.Supp.3d 65, 74 (D. Mass. 2023), aff’d, 121 F.4th 209 (1st Cir. 2024).

American is arguably the largest airline in the world and, along with three other airlines, controls approximately eighty percent of U.S. air travel. 121 F.4th at 215. JetBlue is the sixth-largest domestic airline and uses a “lower-cost business model” to compete with its comparatively larger competitors. Id. The court observed that the two airlines are “two of the four largest carriers” in New York and “two of the largest three in Boston.” Id. Once direct competitors, American and JetBlue formed the NEA in early 2020, agreeing to operate as one airline for most of their flights in and out of New York City and Boston. Id. at 216–217. The First Circuit affirmed the district court’s finding that the NEA involved substantial coordination by two competitors. Id. at 217. Specifically, the airlines jointly determine and coordinate routes, schedules, and other details and share their revenues within the Northeast region. Id.

“[I]t is beyond dispute that the NEA constitutes an agreement between two separate entities (American and JetBlue) and that it impacts interstate commerce (travel from one state to another).” 675 F.Supp.3d. at 72–73. The court’s Section 1 analysis therefore turned on whether the NEA is an “unreasonable” restraint on trade. 121 F.4th at 219.

In determining which mode of analysis to employ, the district court observed that “[r]estraints arising in the context of joint ventures ordinarily are subject to the rule of reason, which involves some form of burden shifting but is not a rigid framework.” 675 F.Supp.3d at 110. However, “where ‘an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect,’ a more abbreviated [or ‘quick-look’] analysis suffices.” Id. at 111–12 (Cal. Dental Ass’n v. F.T.C., 526 U.S. 756, 770 (1999)). The district court therefore concluded that although “the parties’ presentation of [the] case places it within the realm of the rule of reason[,] . . . no deep and searching analysis is required in order to discern [the NEA’s] unlawfulness.” Id. at 112.

On appeal the First Circuit rejected American Airline’s contention that the district court incorrectly applied a “quick-look” rather than a rule of reason analysis. 121 F.4th at 221–22. Instead, the court explained that even though the lower court wrote that the analysis need not be deep and searching, the district court made “extensive and reasoned findings” regarding the NEA’s impact. Id. at 222. The First Circuit explained a “joint venture” label was not sufficient to rule out application of the per se or quick-look framework:

Our inquiry therefore trains not on American’s label, but rather on the terms and effects of the parties’ agreement. Here, the district court found as fact that this venture reduced output while garnering no competitive benefits that could not otherwise be achieved . . . . The label of “joint venture” does not itself change the analysis, which is “aimed at substance rather than form.” And while it is fair to say that “most joint venture restrictions” are subject to the rule of reason, the level of scrutiny required under that standard exists along a “competitive spectrum.”

Id. at 221–22. Having decided to apply the rule of reason, the appellate court next considered whether the NEA provided sufficient evidence of anticompetitive effects. The First Circuit rejected the notion that “the only way to prove actual anticompetitive harm to consumers in the relevant market is with empirical evidence ‘that tends to prove that output was restricted or prices were above a competitive level.’” Id. at 222 (quoting Ohio v. Am. Express Co., 585 U.S. 529, 549, 138 S.Ct. 2274, 201 L.Ed.2d 678 (2018) (quoting Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 237, 113 S.Ct. 2578, 125 L.Ed.2d 168 (1993)).

Not only did the court conclude that the joint venture negatively impacted competition, but it also found the harms to be “considerable and obvious.” 675 F.Supp.3d at 112. With respect to direct evidence of actual harm, the district court found that (1) the NEA eliminated any competition between American and JetBlue in the northeast and replaced it with “broad cooperation in pursuit of their partnership” Id. at 113; (2) the NEA diminished JetBlue’s role as an independent and low-cost competitor in a concentrated market Id. at 95; and (3) the airlines engaged in horizontal market division by assigning routes whenever possible to one airline or the other to “optimize” the combined NEA network. Id. at 117.

The First Circuit reviewed the district court’s findings. It took note of the finding that the NEA “‘led to decreased capacity, lower frequencies, or reduced consumer choices on multiple routes, including some that are heavily traveled.’” Id. at 222 (quoting 675 F. Supp. 3d at 92). The district court also found that the NEA’s “spirit of partnership” undermined any claim that the carriers would continue to compete on the routes the NEA carved out from its joint schedule. 121 F.4^th at 223. Further, the First Circuit noted that the district court concluded that the NEA reduced the total frequency or capacity in certain NEA markets. Consequently, even assuming arguendo that a showing of reduced capacity was required to find anticompetitive harm, the district court made the requisite findings. Id.

The First Circuit also examined the lower court’s assessment of the alleged procompetitive benefits or efficiencies generated by the NEA. Although the district court concluded that the NEA violated Section 1 based on the first two steps of the test, the court briefly discussed whether any of the NEA’s procompetitive efficiencies could have been reasonably achieved through less anticompetitive means. The court noted that American and JetBlue could have entered a relationship similar to the West Coast International Alliance that American formed with Alaska. Id. at 227. Such an arrangement would include codesharing and loyalty reciprocity enabling the airlines to leverage their networks’ complementary features and better compete with relevant competitors while not requiring the level of anticompetitive coordination seen under the NEA. Id.

The First Circuit cited to the 2000 Antitrust Guidelines for Collaborations Among Competitors (“Collaboration Guidelines”). Id. at 225; 675 F.Supp.3d at 108. In December 2024, the FTC and U.S. Department of Justice jointly withdrew those Collaboration Guidelines. The FTC’s vote to withdraw the Collaboration Guidelines was three-two, with all three Democratic commissioners in favor of the withdrawal. The dissenting Republican FTC commissioners objected to the withdrawal because of the imminent change in administration. The Division and FTC issued a joint statement announcing the withdrawal and asserted, as they had with the three earlier withdrawals, that the Collaboration Guidelines were withdrawn because they were outdated. According to the agencies’ statement, the Collaboration Guidelines:

• do not reflect recent federal appellate case law;
• rely in part on other outdated and withdrawn policy statements, including certain safe harbors that they allege are not based in federal antitrust statutes;
• do not capture advances in computer science, business strategy, and economic disciplines that help enforcers assess, as a factual matter, the competitive implications of corporate collaborations; and
• fail to address the competitive implications of modern business combinations and rapidly changing technologies such as artificial intelligence, algorithmic pricing models, vertical integration, and roll ups.

The majority statement of the FTC refers to the First Circuit’s decision here as “evolving” the analysis that should be applied to competitor collaborations.

§ 2.2.3. Tesla, Inc. v. Louisiana Automobile Dealers Association, 113 F.4th 511 (5th Cir. 2024).

A divided three-judge panel of the U.S. Court of Appeals of the Fifth Circuit reinstated a motor vehicle manufacturer’s complaint alleging antitrust and constitutional claims. Tesla, Inc. v. Louisiana Automobile Dealers Association, 113 F.4th 511, 518 (5th Cir. 2024). The focus of the majority decision was an element frequently contested in Sherman Act litigation—the antitrust injury requirement.

Three Tesla entities sued the Commissioners of the Louisiana Motor Vehicle Commission (“Commission”) and the Louisiana Automobile Dealers’ Association (collectively “defendants”), alleging violations of the Sherman Act, the Due Process Clause, and the Equal Protection Clause. Id. The Commission is charged with enforcing the state law governing the distribution and sale of motor vehicles, and it is composed mainly of members who are direct competitors of Tesla. Id.

Tesla exclusively markets, sells, and leases its cars directly to consumers through its own network of stores, bypassing third-party dealers. Id. In 2017 Louisiana amended its motor vehicle laws to prohibit all sales by manufacturers to consumers in Louisiana, unless made by an independent in-state dealer. Id. Before 2017, state law, as interpreted by Tesla, only prohibited franchising manufacturers from competing with their own franchise dealers. Id. Tesla alleged that the amendment was passed “at the behest of [Tesla’s] competitors.” Id. Defendants argued that even under the pre-2017 law, Tesla was never permitted to sell vehicles directly to Louisiana end-users.

Tesla, concerned that defendants would force it to stop providing warranty services from its New Orleans service center as a putative “fleet owner,” filed the instant litigation. Id. at 519. Tesla alleged that the loss of its ability to perform warranty repairs in the state would make it unable to compete in that market and contends that the 2017 restrictions on direct sales are an example of interference by competitors. Tesla further asserted that its competitors in Louisiana co-opted the Commission. Id.

Tesla alleged that its competitors “pursued every avenue to bar [it] from the market.” Id. Shortly after Tesla opened a service center in 2018, the Commission began investigating Tesla’s operations and issued multiple subpoenas to the service center, which Tesla argued were part of an effort to exclude it from the market. Id. at 520. On numerous occasions, the defendants allegedly met to revise their interpretation of the Louisiana law in a way that was unfavorable to Tesla. Id. Tesla also presented emails from the Executive Director of the Commission to Tesla’s competitors assuring them that Tesla’s entry into the market would be dealt with. See id.

The district court dismissed each of Tesla’s claims. Id. at 522. As for the antitrust claim, the district court reasoned that private defendants were immune from liability under the Sherman Act, and that Tesla failed to plausibly plead a Sherman Act violation. Id. Tesla appealed to the Fifth Circuit. Id.

The Fifth Circuit began its analysis of the antitrust claim by explaining that, to bring suit, an antitrust plaintiff must show (1) injury to Tesla proximately caused by the defendant’s conduct, (2) antitrust injury, and (3) proper plaintiff status. Id. at 528 (citing Sanger Ins. Agency v. HUB Int’l Ltd., 802 F.3d 732, 737 (5th Cir. 2015)). The parties here only contested the second element, antitrust injury, which requires a showing of injury to a plaintiff’s business or property. Id. (quoting Hawaii v. Stand Oil Co., 405 U.S. 251, 261 (1972)).

The Fifth Circuit explained:

The Supreme Court has defined antitrust injury as an injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful. . . . The injury should reflect the anticompetitive effect either of the violation or of the anticompetitive acts made possible by the violation. Typical anticompetitive effects include increased prices and decreased output. This circuit has narrowly interpreted the meaning of antitrust injury, excluding from it the threat of decreased competition.

Tesla, 111 F.4th at 528 (quoting Anago, Inc. v. Tecnol Med. Prods., 976 F.2d 248, 249 (5th Cir. 1992)). 

Tesla’s alleged antitrust injury was based on a pending investigation by the Commission. Id. Tesla alleged that this investigation would (1) exclude Tesla from Louisiana by eliminating its leasing and warranty-services activities, and (2) deter other direct-to-consumer manufacturers from entering Louisiana. Id. at 528–29. The defendants argued that Telsa cannot base an antitrust injury allegation on solely pending investigations because no adverse action was rendered. The Fifth Circuit disagreed, explaining that there is not a per se bar against antitrust injury based on a pending inquiry and competitors are able to prove antitrust injury before a firm is driven from a market. Id. (citing Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 n.14 (1977)).

The investigation pending against Tesla, however, was declared unlawful by the Fifth Circuit under the Due Process Clause because the Commission’s bias was predictable, and the Commission would always be incentivized to exclude new business models from entering the market. Id. at 527. Because the court found that Tesla had set forth enough to plead plausibly actual bias, the Fifth Circuit’s ruling substantially altered the grounds on which Tesla pled its antitrust injury, the district court’s dismissal decision was vacated and the case remanded. Id. at 529.

One member of the Fifth Circuit panel dissented, in part, including with respect to Tesla’s due process challenge to the composition of the Commission and alleged antitrust injury. The concurrence disagreed with the majority’s analysis of the due process claim and concluded that it contravened well-settled precedent. Because the majority’s antitrust injury analysis was based largely on its due process finding, the concurrence also disagreed with reinstating the antitrust claims. 

§ 2.2.4. Shields v. World Aquatics, No. 23-15092, No. 23-15156, 2024 WL 4211477 (9th Cir. Sept. 17, 2024).

The United States Court of Appeals for the Ninth Circuit considered when conduct should be analyzed under the in-depth rule of reason framework or could be declared automatically illegal. It held that the per se rule could apply to a sports league’s restrictions impacting a competing league. Plaintiffs, a group of professional swimmers and a swimming league, sued the defendant, World Aquatics, formerly known as the Federation Internationale de Natation (“FINA”), alleging violations of Sections 1 and 2 of the Sherman Act, as well as several state tortious interference laws. Shields v. World Aquatics, No. 23-15092, No. 23-15156, 2024 WL 4211477, at *1 (9th Cir. Sept. 17, 2024).

FINA is a Swiss organization that governs international and Olympic aquatic sports, including swimming, diving, and water polo. Shields v. Federation Internationale de Natation, 649 F.Supp.3d 904, 912 (N.D. Ca. 2023). It sets rules, maintains world records, and manages Olympic aquatic competitions. Id. FINA’s members include 209 national federations, which must comply with FINA rules and enforce penalties. Id. Member federations can hold international competitions with FINA’s approval, which allows results to be used for Olympic qualification. Id. at 913.

In 2017, the International Swimming League (“ISL”) sought to enter the market for international swimming competitions. Id. It failed, however, to reach an agreement with FINA, which issued a memo stating that ISL competitions were not recognized and emphasizing the rule that FINA’s approval was required before member federations established any kind of relationship with a non-affiliated or suspended body (the “unauthorized relations rule”). Id. at 913–14. If member federations failed to obtain approval from FINA, they would be suspended anywhere from one to two years. Id. at 914. The rule and memo led to some federations ceasing negotiations with ISL, which in turn led to the Sherman Act and tort claims against FINA.

At the district court, the parties filed cross-motions for summary judgment, and plaintiffs moved for class certification. Id. at 915–16. The district court granted defendant’s summary judgment motion on the Section 1 claims. Id. at 926. The court found that a reasonable trier of fact could conclude that a conspiracy or contract existed among FINA and its member organizations, and that the unauthorized relations rule was a horizontal restraint of trade, which are two elements of a Section 1 violation. Id. However, using the rule of reason approach, the court concluded that no reasonable trier of fact could find the restraint unreasonable because plaintiffs did not offer enough evidence to define the relevant market and show the anticompetitive effects. Id. at 925–26.

The lower court found that because plaintiffs did not present sufficient evidence of a relevant market, which is also an element of a Section 2 claim, no reasonable trier of fact could find in the plaintiffs’ favor on the monopoly and monopsony power element of their Section 2 claims. Id. at 927.

The district court also denied plaintiffs’ motion for class certification, explaining that they did not offer a method to determine individual damages in a way that would be fair to all class members. See Shields v. Federation Internationale de Natation, No. 18-cv-07393-JSC, 2022 WL 425359, at *7 (N.D. Ca. Feb. 11, 2022). As a result, plaintiffs failed to meet their burdens to establish that they and their counsel could adequately represent a Rule 23(b)(3) damages class, and that a class action was superior to individual litigation. Id. at *12.

The lower court therefore granted summary judgment to the defendant and denied class certification, and plaintiffs appealed to the Ninth Circuit. Id. at *18.

The Ninth Circuit explained that there are three ways to analyze whether restraints on trade are unreasonable: (1) the per se approach, which generally applies where competitors allegedly entered into a horizontal agreement with no purpose other than disadvantaging the target, (2) the rule of reason approach, where the court assesses the restraint’s effect on competition through factors such as reduced output, increased prices, and decreased quality in the relevant market, and (3) the quick look approach, which requires a showing of a naked restraint on price and output. Shields, 2024 WL 4211477, at *1.

The Ninth Circuit first held that plaintiffs created a genuine dispute of material fact as to whether the unauthorized relations rule constituted a per se unlawful group boycott by preventing federations and swimmers from doing business with ISL without risking draconian sanctions. Id. at *2. A rational trier of fact could conclude that the rule had no purpose other than to disadvantage defendant’s competitors because the plaintiffs presented evidence that the rule had been applied in the context of third parties that sought to replace FINA as the international governing body, and FINA executives discussed plans to thwart future ISL events by punishing member federations for engaging with other organizations. Id. at *2.

The Ninth Circuit also held that the plaintiffs created a genuine dispute of material fact under the quick look standard. Id. A rational trier of fact could conclude that the rule reduced output in the market for swimming competitions by suppressing the number of competitions in 2018, reducing the total pool of price money, and reducing appearance fees. Id.

Defendant argued that the Ninth Circuit should apply the rule of reason approach, like the district court, because sports leagues and joint venture restrictions are unique contexts that are generally analyzed under this approach. Id. However, the Ninth Circuit disagreed, explaining that defendant is not a joint venture sports league, but rather an association of independent national federations. Id. Also, “the likelihood that horizontal price and output restrictions are anticompetitive is generally sufficient to justify application of the per se rule.” Id. Still, even under this approach, a rational trier of fact could conclude that, by threatening to sanction swimmers, the rule prevented ISL from holding events in 2018 and thereby reduced output and wages. Id. at *3.

As for the issue of class certification, the Ninth Circuit held that the district court’s denial was an abuse of discretion. Id. Defendant argued that, since swimmers competed for shares of a fixed pot, a damages formula would disfavor some swimmers. Id. However, the Ninth Circuit explained that “[m]ere speculation as to conflicts that may develop” during the damage calculation is not an appropriate reason to deny certification. Id. The Ninth Circuit also explained that, contrary to the lower court’s holding, a class action was superior to individual actions due to the prohibitive costs of individual prosecution. Id. at *4.

Therefore, the Ninth Circuit reversed and remanded the District Court’s grant of summary judgment to the defendant and denial of class certification. Id. Defendant filed a petition for hearing, which was denied on November 25, 2024. See Shields v. World Aquatics, No. 23-15092, No. 23-15156, 2024 U.S. App. LEXIS 29939 (9th Cir. Nov. 25, 2024). The case will therefore return to the district court, where it will be set for trial in 2025.

§ 2.2.5. United States v. Brewbaker, 87 F.4^th 563 (4^th Cir. 2023), cert. denied, 2024 WL 4743085 (Nov. 12, 2024).

The United States Supreme Court denied the certiorari petition for the United States Court of Appeals Fourth Circuit decision in United States v. Brewbaker, 87 F.4^th 563 (4^th Cir. 2023), cert. denied, 2024 WL 4743085 (Nov. 12, 2024), leaving undisturbed the ruling that heightens the burden on antitrust prosecutors when the target companies have a hybrid horizontal-vertical relationship. The Fourth Circuit’s decision diverges from other circuits.

In Brewbaker, the Fourth Circuit concluded that the rule of reason, not the per se rule, applies when the restraint involves a “hybrid” relationship that contains both vertical and horizontal components. A hybrid relationship might involve, for instance, companies that simultaneously bid on the same contracts and have a manufacturer-distributer relationship with each other. 87 F.4th at 576.

Courts and the government have long distinguished between horizontal and vertical restraints of trade under Section 1 of the Sherman Act. Vertical restraints are agreements between firms at different levels of distribution and are subject to the rule of reason. Courts applying the fact-intensive rule of reason must evaluate “surrounding circumstances” to determine whether the restraint at issue harms competition. See Standard Oil Co. of N.J. v. United States, 221 U.S. 1, 58 (1911). Horizontal restraints, on the other hand, are agreements between firms competing at the same level to fix prices, divide markets, or rig bids. Horizontal restraints are generally subject to the per se rule, meaning they are “necessarily illegal” without inquiry into the specific anticompetitive effects of an action. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 886 (2007). The government generally reserves criminal prosecutions for per se violations, leaving other restraints of trade for civil enforcement. See U.S. Dep’t of Justice, Justice Manual § 7-2.200.

Brewbaker stemmed from an alleged scheme to rig bids for construction contracts awarded by a state agency. The agency paid contracted firms to build aluminum structures to prevent flooding, and Pomona Pipe Products and Contech Engineered Solutions regularly bid for those contracts as direct competitors. A federal grand jury indicted Contech and its sales manager, Brent Brewbaker, on one count of committing a per se violation of Section 1 of the Sherman Act by conspiring to rig bids. Prosecutors alleged that Pomona would share its planned bid price with Contech, and Contech would then submit a higher bid. Contech’s inflated submission helped ensure that Pomona would win the contract. Pomona would then complete the construction projects, in part, using aluminum it purchased from Contech in a vertical supply relationship.

The Fourth Circuit explained that “the relationship of the parties, not just the nature of the limitation imposed” matters when determining whether a restraint is horizontal or vertical. Id. at 577. The court reasoned that a price-fixing agreement between two competing companies “produces different effects on competition” than one between companies that “simultaneously compete and collaborate.” Id. The court applied the rule of reason because the restraint alleged in the indictment “would not invariably lead to anticompetitive effects.” Id. at 582. The court reasoned that if the restraint boosted Contech’s sales of aluminum to Pomona, it could theoretically increase competition between Contech and other aluminum manufacturers.

The Justice Department had urged the Supreme Court to grant certiorari, noting the ubiquity of hybrid relationships in today’s economy. It also pointed to the growing circuit split on the issue; the Second and Seventh Circuits have applied the per se rule to competing firms that agree on how they will compete, even when they simultaneously had vertical relationships. See, e.g., United States v. Apple, Inc., 791 F.3d 290 (2d Cir. 2015); Deslandes v. McDonald’s USA, LLC, 81 F.4th 699 (7th Cir. 2023). Until the Supreme Court resolves the conflict, the Fourth Circuit’s approach will be “far more accommodating to antitrust defendants,” the Justice Department warned. Petition for Writ of Certiorari at 18, United States v. Brewbaker (No. 23-1365).

§ 2.2.6. Winn-Dixie Stores Inc. v. E. Mushroom Mktg. Coop., Inc., 89 F.4th 430 (3d Cir. 2023).

At the end of 2023, an en banc panel of the United States Court of Appeals for the Third Circuit similarly addressed the applicable standard, in the civil context, with respect to an alleged hybrid arrangement, neither purely horizontal nor purely vertical. Winn-Dixie Stores Inc. v. E. Mushroom Mktg. Coop., Inc., 89 F.4th 430 (3d Cir. 2023).

The en banc court reheard a case affirming a jury verdict applying the rule of reason to a “hybrid” agreement with horizontal and vertical components. Id. at 435. After losing the jury verdict, plaintiff grocery store Winn-Dixie appealed arguing that the agreement should have been given “quick-look” treatment. Id. at 438. The agreement involved a cooperative of mushroom growers who agreed to a minimum price at which the members hoped they could coerce distributors to go to market, notably not at which to sell their mushrooms. Id. at 437. The cooperative historically held 90% of mushroom growers, but that figure dropped to 17% by 2010. Id. at 435. Some members were growers only, while others more commonly had exclusive relationships with specific downstream distributors of mushrooms. Id. at 436. Distributors were barred from joining the cooperative. Id.

The quick-look standard is an intermediate standard between the rule of reason and per se treatment, and applies “where per se condemnation is inappropriate, but where no elaborate industry analysis is required to demonstrate the anticompetitive character of an inherently suspect restraint.” Id. at 438 (quoting United States v. Brown Univ., 5 F.3d 548, 659 (3d Cir. 1993)). Thus a court should not use quick look analysis where “the contours of the market . . . are not sufficiently well known or defined to permit the court to ascertain without the aid of extensive market analysis whether the challenged practice impairs competition.” Id. at 439. The court likened the approach to “I know it when I see it,” and cited a Supreme Court warning against giving appropriate cases detailed treatment. Id.

The Third Circuit reviewed precedent analyzing when to apply quick look treatment to hybrid agreements and held that rule of reason analysis applied in this case. Id. at 439–41. In Toledo Mack Sales & Serv. Inc. v. Mack Trucks, Inc., the court bifurcated illegal horizontal agreements from vertical agreements, and as to the vertical agreements held that “rule of reason analysis applies even when . . . the purpose of the vertical agreement between a manufacturer and its dealers is to support illegal horizontal agreements between multiple dealers.” Id. at 439–40. And in a later case, In re Insurance Brokerage Antitrust Litig., quick-look treatment was used to analyze a “hub-and-spoke” conspiracy. Id. at 440.

The court held that it could not bifurcate the vertical agreements in this case because “the ‘complex business arrangements’ in this case preclude such clean line drawing,” nor did the agreements resemble a hub-and-spoke conspiracy. Id. at 440–41. The agreements were in some way similar to the vertical agreements in Toledo and Leegin Creative Leather Products, Inc. v. PSKS, Inc. which “facilitate” or “support” allegedly illegally horizontal agreements. Id. Thus, they were subject to the rule of reason. The court pointed to the jury verdict finding that the agreement did not cause anticompetitive harm to support its reasoning. Id. at 441.

§ 2.2.7. In re January 2021 Short Squeeze Trading Litigation, 105 F.4th 1346 (11th Cir. 2024).

The U.S. Court of Appeals for the Eleventh Circuit examined the question of the required anticompetitive effects of a Sherman, Section 1 violation in In re January 2021 Short Squeeze Trading Litigation, 105 F.4th 1346 (11th Cir. 2024).

Plaintiffs were retail investors who allegedly sold securities at deflated prices due to temporary trading restrictions imposed by Robinhood Markets, Inc. (“Robinhood”) and its affiliates during a period of market volatility. Id. at 1349. Robinhood is a large retail brokerage firm in the United States that derives most of its revenue from market makers, including Citadel LLC (“Citadel”) through payment for order flow (“PFOF”). Id. at *1349–51. In January 2021, the stock prices of certain securities surged due to increased demand from retail investors. Id. at *1349. Robinhood and other brokerage firms suspended retail investors from using their platforms to buy the relevant securities. Id. Sales were not restricted.

Plaintiffs sued Robinhood and Citadel (collectively “defendants”) under Section 1 of the Sherman Act, alleging that Robinhood’s trading restrictions were part of a conspiracy with Citadel to reduce stock prices and protect Citadel’s short positions. Id. After the district court dismissed the original complaint, the plaintiffs filed an amended complaint, and defendants filed a motion to dismiss. Id. at *1350.

The district court held that, even if defendants had an economic motive to conspire, that motive was insufficient to advance the alleged conspiracy from possible to plausible. Id. at *1354. The court also held that, even if plaintiffs plausibly alleged a conspiracy, they failed to plausibly allege an unreasonable restraint of trade. Id. The alleged anticompetitive harm did not occur in the relevant markets the plaintiffs defined, which were the PFOF and No-Fee Brokerage markets. Id. Therefore, the district court granted the defendants’ motion to dismiss, and plaintiffs appealed to the Eleventh Circuit. Id.

The Eleventh Circuit began its analysis by explaining that Section 1 of the Sherman Act outlaws only unreasonable restraints of trade, and that there are two approaches to determining whether restraints are unreasonable. Id. at *1355. Under the per se approach, courts find restraints unreasonable if they always or almost always restrict competition and reduce output. Id. (citing Ohio v. Am. Express Co., 585 U.S. 529, 540 (2018)). Courts typically only use this approach if the restraints are horizontal between competitors. Id. (citing Ohio, 585 U.S. at 540–41). Under the rule of reason approach, courts find restraints unreasonable if the plaintiff has shown that the alleged restraint has an anticompetitive effect on the relevant market. Id. (citing Procaps S.A. v. Patheon, Inc., 845 F.3d 1072, 1084 (2016)).

The Eleventh Circuit applied the rule of reason approach because the defendants operated at two levels within the distribution of securities trading and therefore had a vertical relationship. Id. at *1356. Using this approach, the Eleventh Circuit held that the plaintiffs failed to plausibly allege an unreasonable restraint of trade because they had not alleged anticompetitive effects in a relevant market. Id. Plaintiffs alleged that the conspiracy led to reductions in stock price and supply of relevant securities, but the Eleventh Circuit explained that these allegations point to anticompetitive effects in the stock market, not the PFOF or No-Fee Brokerage markets as defined by the plaintiffs. Id. at *1357. Plaintiffs failed to allege anticompetitive effects among Robinhood’s competitors, restrictions in outputs of services, or reductions in quality of services in the No-Fee Brokerage market. Id. at *1356–57. This was fatal to their Section 1 claim.

Plaintiffs argued that they sustained a foreseeable injury, a reduction in stock price, as a result of the alleged conspiracy, but the Eleventh Circuit explained that this showing is distinct from the required showing that the injury was caused by anticompetitive effects in a relevant market. Id. at *1357–58 (citing Amey, Inc. v. Gulf Abstract & Title, Inc., 758 F.2d 1486, 1493 (11th Cir. 1985)). The court held that plaintiffs must allege, not only an injury to themselves, but also an injury to the relevant market, and they failed to do the latter. Id. at *1358 (citing SD3, LLC v. Black & Decker Inc., 801 F.3d 412, 432 (4th Cir. 2015)). Therefore, the Eleventh Circuit held that plaintiffs failed to state a claim under Section 1 of the Sherman Act, and it affirmed the lower court’s dismissal of the Amended Complaint against Robinhood and Citadel.

§ 2.3. Sherman Act Developments, Section 2

§ 2.3.1. Overview

The statutory language of Section 2 makes unlawful “monopolization,” “attempts to monopolize,” or “conspiracies to monopolize.” The statute itself, however, does not define any of these offenses or explain the importance of key issues such as “relevant market,” “market power,” or “anticompetitive conduct.” Consequently, Section 2 has in recent years been the subject of a number of high-profile antitrust cases.

Section 2 of the Sherman Act makes it unlawful for a firm to “monopolize.” 15 U.S.C. §2. The offense of monopolization has two elements: “(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” United States v. Microsoft Corp., 253 F.3d 34, 50 (D.C. Cir. 2001).

Merely possessing monopoly power is not itself an antitrust violation, but it is a necessary element. Id. at 51. The Supreme Court defines monopoly power as “the power to control prices or exclude competition.” United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391, 76 S.Ct. 994, 100 L.Ed. 1264 (1956). In other words, a firm is a monopolist if it can profitably raise prices substantially above the competitive level. Microsoft at 51. Direct proof of monopoly is rare, so courts typically examine market structure in search of circumstantial evidence. Id.

Even though the Supreme Court appears to have moved the line of scrimmage for Section 2 claims, particularly in the area of certain unilateral pricing conduct, fertile ground remains for Section 2 litigation. Without empirical evidence that the dangers of false positives outweigh the dangers of false negatives, courts and juries will continue to find Section 2 a useful tool for reining in firms with monopoly power.

The courts and government enforcement agencies continue to apply Section 2 flexibly which can present challenges for private businesses. A number of the 2024 Section 2 included are against “Big Tech.” These cases apply equally to all industries.

§ 2.3.2. United States v. Google LLC, No. 20-cv-3010 (APM), No. 20-cv-3715 (APM), 2024 WL 3647498 (D.D.C. Aug. 5, 2024).

After a lengthy bench trial, the U.S. District Court for the District of Columbia issued its decision in the 2020 lawsuit filed by the U.S. Department of Justice, Antitrust Division and a number of State Attorney Generals, against Google, LLC. Although the trial on the merits concluded, the court has yet to issue its ruling on the appropriate remedy or remedies.

On October 20, 2020, the Department of Justice, along with the Attorney Generals representing 11 states Arkansas, Florida, Georgia, Indiana, Kentucky, Louisiana, Mississippi, Missouri, Montana, South Carolina, and Texas. On January 15, 2021, DOJ and state plaintiffs filed an amended complaint adding California, Michigan, and Wisconsin as plaintiffs. (hereafter collectively referred to as “DOJ”), brought this action under Section 2 of the Sherman Act, alleging that Google unlawfully maintained monopolies in the markets for general search services, search advertising, and general search text advertising in the United States through anticompetitive and exclusionary practices. United States v. Google LLC, No. 20-cv-3010 (APM), No. 20-cv-3715 (APM), 2024 WL 3647498, at *4 (D.D.C. Aug. 5, 2024). Two months later, the Attorney Generals of 38 states and territories, Colorado, Nebraska, Arizona, Iowa, New York, North Carolina, Tennessee, Utah, Alaska, Connecticut, Delaware, the District of Columbia, Guam, Hawaii, Idaho, Illinois, Kansas, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Dakota, Vermont, Virginia, Washington, West Virginia, and Wyoming, led by Colorado (hereafter collectively referred to as “Colorado plaintiffs”), filed a separate Complaint alleging unlawful monopoly maintenance in the markets for general search services, general search text advertising, and general search advertising in the United States. Google LLC, 2024 WL 3647498, at *4. On January 7, 2021, the court consolidated both cases under FRCP 42(a). Id. at *5.

The DOJ’s first claim is that Google unlawfully maintained monopolies in several relevant markets through various exclusionary agreements. Id. at *4. The first relevant market, the general search services market, allows consumers to search the internet for a wide range of queries. Id. at *68. General search engines are allegedly distinct from Specialized Vertical Providers (“SVPs”), which are online companies like Expedia or Amazon that provide specialized search services for niche markets, such as travel or shopping. Id. at *69.

The second relevant market, the general search text market, is a subset of general search advertising. Search text advertisements are advertisements sold by general search engines that typically appear just above or below the organic search results on the Search Engine Results Page (“SERP”). See id. at *89.

The third relevant market, the search advertising market, is the broadest alleged advertiser-side market. It includes all advertisements shown in response to a query—whether entered on a general search engine, an SVP, or a social media platform. See id. at *81. Excluded from this market are display ads, retargeted display ads, and non-search social media ads (i.e., those that are integrated into a social media feed). Id. The DOJ claims that the unique level of real-time, expressed intent reflected in a user’s query is what sets search advertisements apart from non-search advertisements. Id.

The DOJ alleged that Google’s exclusionary agreements foreclosed a substantial portion of the relevant markets and harmed competition. Id. at *95. The first type of alleged exclusionary agreements, browser agreements, are between Google and web browser developers and set Google as the default search engine in exchange for monthly payments from Google. Id. at *98. The second type of alleged exclusionary agreements, “Android agreements,” consist of two separate types of agreements: (1) Mobile Application Distribution Agreements (“MADAs”), which require original equipment manufacturers (“OEMs”) who preinstall any of Google’s proprietary apps on their device to also install a complete suite of 11 Google apps and to place the search widget and app suite on their home screen by default, and (2) Revenue Share Agreements (“RSAs”), which prohibit OEMs from preinstalling or promoting alternative search engines on their devices in exchange for a portion of Google’s revenue. See id. at *101–03.

The DOJ alleged that these agreements made Google the default search engine on a range of products in exchange for a share of advertising revenue generated through Google searches. Id. at *128. Nothing in these agreements prevents users from changing their search engine if they desire, but the DOJ contended that because users are so unlikely to change their default search engine, these agreements are de facto exclusive. Id. at *15. The DOJ also argued that occupying the default search engine position on these products is exclusionary conduct that unlawfully prevents other search engines from effectively competing in the relevant markets. Id. at *95.

The Colorado plaintiffs also alleged that Google harmed SVPs by limiting the visibility of SVPs on Google’s SERP and by demanding that SVPs make their data available to Google on terms no less favorable than it does for others. See id. at *11–21. For example, on Google’s SERP, Google’s own search universals (specialized search results organized around a specific query) are increasingly placed above the unpaid general search text results, and Google requires certain SVPs to provide access to their data (which Google then uses for its own purposes). See id. The Colorado plaintiffs also alleged that Google harmed competition by delaying the implementation of various features for Microsoft Ads, thereby harming Microsoft’s ability to compete. Id. at *129.

Although the weight of the DOJ’s claims went to trial, the court granted summary judgment in Google’s favor on some issues. For conduct to be deemed exclusionary, a monopolist’s act must have an anticompetitive effect. United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001) (per curiam). The burden of proof rests on the plaintiff, who must demonstrate that the monopolist’s conduct has the requisite anticompetitive effects. Id. at 58–59. The court agreed with Google that, under Microsoft, courts must evaluate whether each type of alleged exclusionary practice has the requisite anticompetitive effect. United States v. Google LLC, 687 F.Supp.3d 48, 68 (D.D.C. 2023) (citing Microsoft Corp., 253 F.3d at 58–59). “In other words, when determining whether plaintiffs have met their prima facie burden, courts can only aggregate conduct that is itself deemed anticompetitive (even if only minimally so).” Id. The court found that the claims against Google were based on three different types of monopolistic conduct, not merely one type of conduct as in Microsoft. Id. at 69. These types of monopolistic conduct were (1) exclusive distribution agreements, (2) denied or delayed functionality of SA360, Google’s search engine management tool, and (3) the suppression and exploitation of SVPs—not merely one type of conduct as in Microsoft. Id. The court disaggregated the conduct and found that there was a genuine dispute of material fact as to whether Google’s browser and Android agreements were exclusive contracts that substantially foreclosed competition. See id. at 78. As far as the Colorado plaintiffs’ claims regarding Google’s treatment of SVPs and its development of SA360, the court found that there was no genuine dispute of material fact with regards to the former, but that there was a genuine dispute of material fact with regards to the latter. See id. at 83. Therefore, the court denied summary judgment on the claims regarding the browser agreements, Android agreements, and Google’s development of SA360, and granted summary judgment on the claims regarding Google’s conduct directed at SVPs. See id. at 87.

The DOJ presented the following evidence at the bench trial. By 2020, approximately 89% of all general search queries, whether entered on a desktop computer or mobile device, flowed through Google, with mobile devices even higher at 94.9% and desktop devices at 84%. Google LLC, 2024 WL 3647498, at *8. Google also allegedly entered into search distribution contracts with (1) the two major browser developers, Apple and Mozilla, (2) all major OEMs of Android devices, including Samsung, Motorola, and Sony, and (3) the major wireless carriers, including AT&T, Verizon, and T-Mobile in the United States. Id. at *50. In 2021, Google paid $26.3 billion in revenue share or “traffic acquisition costs” under these contracts, which was Google’s greatest expense at almost four times more than all other search-related costs in the aggregate. Id. In exchange for its exclusive and non-exclusive default placements, Google’s revenue share payment to Apple was also an estimated $20 billion, which was then equivalent to 17.5% of Apple’s operating profit. Id. Google also had MADAs with the Android OEMs, including Motorola, Samsung and Sony, all of which were required to preload and prominently place certain Google applications. Id. at *58. Google documents described the Company’s revenue share payments for exclusivity as an important strategy to deter or prevent competition from gaining traction. Id. at *60–63.

In analyzing the remaining claims, the court used the D.C. Circuit’s decision in Microsoft:

The first element—“monopoly power in the relevant market”—consists of two inquiries: (1) market definition, both product and geographic, and (2) power within the relevant market. The plaintiff bears the burden of proof on both. The second element—“willful acquisition or maintenance” of monopoly power—involves a burden-shifting inquiry. The plaintiff bears the initial burden of establishing a prima facie case of anticompetitive effects resulting from the challenged conduct. If the plaintiff makes out its prima facie case, the burden shifts to the defendant to “proffer a ‘procompetitive justification’ for its conduct,” that is, “a nonpretextual claim that its conduct is indeed a form of competition on the merits because it involves, for example, greater efficiency or enhanced consumer appeal[.]” Finally, “[i]f the monopolist asserts a procompetitive justification . . . then the burden shifts back to the plaintiff to rebut that claim.” “[I]f the monopolist’s procompetitive justification stands unrebutted, then the plaintiff must demonstrate that the anticompetitive harm of the conduct outweighs the procompetitive benefit.” Id. at *65 (quoting Microsoft, 253 F.3d at 51, 58, 59).

The court’s decision largely, but not entirely, ruled against Google. The court found that the DOJ had established two relevant markets: (1) search advertising and (2) general search text advertising. Id. at *81, *89. However, the court found that Google possessed monopoly power only in the narrower market for general search text advertising. Id. at *91. Despite its high market share, Google did not have the requisite power in search advertising because of the relative ease of competitive entry. Id. at *89. Specifically, the recent history of new entrants, the strength of those entrants, and their growth showed that barriers to entry are not so high as to compel the conclusion that Google had monopoly power in the market for search advertising. Id. With respect to the search text advertising market, however, Google controlled key inputs to the auctions that influenced the ultimate price that advertisers paid and made changes to its text ads auctions without considering its rivals’ prices because it was able to do so. Id. at *92.

The court then considered whether Google engaged in exclusionary conduct in the general search services and general search text advertising markets. It determined that Google’s agreements with browser developers, OEMs, and carriers were exclusive and contributed to Google’s maintenance of its monopoly power in two relevant markets: (1) general search services and (2) general search text advertising. Id. at *95. The court concluded that the DOJ had demonstrated that Google’s exclusive distribution agreements foreclosed 50% of the general search services market by query volume. Id. at *107. The court further found that Google’s agreements denied rivals access to the user queries, or scale, needed to effectively compete, and the agreements reduced the rivals’ incentives to invest and innovate. Id. at *109. The court considered Google’s proffered procompetitive justifications for its agreements, which were to (1) enhance the user experience, quality, and output in the market for general search services, (2) incentivize competition in related markets that redounds to the benefit of the search market, and (3) produce consumer benefits within the related markets. Id. at *120. However, the court concluded that the record did not support any of these justifications. Id. at *125.

The court accepted the DOJ’s calculations that the challenged agreements foreclosed 45% of the general search text ads market and that a 45% market foreclosure was significant in that market. Id. Google’s monopoly power, maintained by the exclusive distribution agreements, enabled Google to increase text ads prices without any meaningful competitive constraint. Id. at *126–28. The agreements also enabled Google to degrade its text ads by providing advertisers with less information in search query reports and preventing advertisers from opting out of keyword matching. Id.

With respect to the Colorado plaintiffs’ additional theory of exclusionary conduct, that Google caused anticompetitive effects in the proposed markets by purposely advantaging its own advertising platform over Microsoft’s on Google’s SA360, the court found that Google’s SA360-related conduct did not give rise to antitrust liability for two reasons: (1) Google has no duty to deal with Microsoft, and (2) the Colorado plaintiffs did not provide proof of anticompetitive effects. Id. at *130–31. The court declined to analyze whether Google had anticompetitive intent. Id. at *134.

The court has yet to impose a remedy. In October 2024, the DOJ filed a proposed remedy framework for the court to ensure that Google’s alleged violations of antitrust laws are addressed and remedied. See Pls.’ Proposed Remedy Framework, United States v. Google LLC, No. 20-cv-3010 (APM), 2024 WL 3547498 (D.D.C. Oct. 8, 2024). Specifically, the DOJ sought a remedy that would (1) unfetter relevant markets from Google’s exclusionary conduct, (2) remove barriers to competition, (3) deny Google the fruits of its statutory violations, and (4) prevent Google from monopolization of these markets and related markets in the future. See id. at 2–3. In November 2024, the DOJ filed its proposed final judgment, which recommended a list of remedies. Those suggested remedies included (among others) prohibiting Google from entering into exclusionary agreements, requiring Google to divest Chrome, limiting Google’s investments in and acquisitions of competitors, and requiring Google to make its search index available to competitors. See Pls.’ Initial Proposed Final J., United States v. Google LLC, No. 20-cv-3010 (APM), 2024 WL 3547498 (D.D.C. Nov. 20, 2024).

§ 2.3.3. United States, et al. v. Google LLC (the “Google Ad Tech” Case), No. 1:23-cv-00108-LMB-JFA.

During the summer of 2024, the U.S. District Court for the Eastern District of Virginia ruled on two significant motions in an antitrust case filed by the U.S. Department of Justice, Antitrust Division (“DOJ”) and a number of states against Google, LLC, known as the “Google Ad Tech” case.

In January 2023, the DOJ filed a Complaint alleging that Google, through anticompetitive and exclusionary practices, monopolized key digital advertising technologies (referred to as the “ad tech stack”) in violation of Sections 1 and 2 of the Sherman Act. Complaint, United States. v. Google LLC, No. 1:23-cv-00108-LMB-JFA, 2023 WL 398189 (E.D. Va. Jan. 24, 2023). The DOJ identified three relevant product markets: (1) the publisher ad server market, which allows publishers to sell ads on their webpages; (2) the ad exchange market, which acts as an intermediary between sell-side and buy-side advertisers; and (3) the advertiser ad network market, which small and large advertisers use to buy advertisements on the open web. Id. at 124–29. According to the DOJ, Google’s publisher ad server called DoubleClick for Publishers (“DFP”) achieved a 90% share of the alleged publisher ad server market. Id. at 125. The DOJ also alleged that Google’s ad exchange (“AdX”) held approximately 50% of the ad exchange market, and that Google Ads held approximately 80% of the advertiser ad network market. Id. at 127, 130. The DOJ further alleged illegal tying because Google’s acquisition of AdX compelled publishers to use Google’s DFP. Id. at 138–39. The DOJ sought damages and demanded a jury trial, which was an unusual move by the government. Id. at 140. The DOJ also sought a divestiture, at minimum, of the Google Ad Manager suite. Id.

The first product market the DOJ identified was publisher ad servers for open web display advertising, which publishers use to manage the display of ads on their webpages. Id. at 124. Publisher ad servers are responsible for evaluating the potential sources of advertising demand and are the final arbiters of which ads are selected to fill the advertising slots on the publishers’ webpages. Id. The DOJ alleged that Google’s monopoly power in this market is protected by significant barriers to entry, including the prohibitive cost to build a publisher ad server. Id. at 126. The DOJ also alleged that these barriers were reinforced by Google’s anticompetitive conduct, such as its acquisition of publisher ad servers DFP and AdX. Id. Google also allegedly used a series of exclusive deals and features to ensure that competitors could not compete in the market, such as restricting real time access to AdX exclusively to DFP, limiting dynamic allocation bidding exclusively to AdX, and providing a “last look” auction advantage to AdX. Id. at 133.

The second product market the DOJ identified was ad exchanges, which allow publishers to auction display ad inventory to advertisers. Id. at 126. Google’s AdX, which is part of the Google Ad Manager suite, is the largest ad exchange on the market, with a share of over 50% of ad impressions and revenue. Id. at 127. According to the DOJ, Google’s AdX had sufficient market power to coerce publishers to use DFP and thereby unlawfully harm competition. Id. at 138. The DOJ also alleged that Google excluded rivals from the ad exchange market by reducing payouts to publishers, burdening advertisers and publishers with lower quality ad matching, and inhibiting choice and innovation across the tech stack. Id.

The third market the DOJ identified was advertiser ad networks, which provide self-service bidding tools that facilitate ad placement on open web display ad inventory. Id. at 129. Advertiser ad networks typically charge advertisers based on how many users click on the ad, and they are typically used by smaller, less sophisticated advertisers. Id. Larger advertisers typically use demand side platforms, which charge based on how many users see the ad. Id. Google allegedly held approximately 80% of the market share of the advertiser ad network market, and approximately 40% of the demand side platform market. Id. at 130.

Google filed a motion for summary judgment in April 2024. Google argued that it was entitled to summary judgment because the conduct challenged by the DOJ was essentially that Google did not give its ad exchange rivals the same access and features that it provides to its own products. Google LLC’s Mem. of Law in Supp. of its Mot. for Summ. J. at 2, United States v. Google LLC, No. 1:23-cv-00108-LMB-JFA, 2024 WL 3534884 (E.D. Va. Apr. 26, 2024). In response, the DOJ asserted that the case was based primarily on Google’s (1) restricting publishers’ and advertisers’ choice of ad tech providers and (2) manipulating ad tech auctions to favor its own products, thereby shielding Google from competition. Pl.’s Opp’n to Def.’s Mot. for Summ. J. at 19, United States v. Google LLC, No. 1:23-cv-00108-LMB-JFA, 2024 WL 3583978 (E.D. Va. May 17, 2024).

Merely possessing monopoly power is not itself an antitrust violation, but it is a necessary element. United States v. Microsoft Corp., 253 F.3d 34, 51 (D.C. Cir. 2001). A firm violates Section 2 only when it acquires or maintains, or attempts to acquire or maintain, a monopoly by engaging in exclusionary conduct “as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” Id. at 58.

The Supreme Court defines monopoly power as “the power to control prices or exclude competition.” United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391, 76 S.Ct. 994, 100 L.Ed. 1264 (1956). In other words, a firm is a monopolist if it can profitably raise prices substantially above the competitive level. Microsoft, 253 F.3d at 51. Direct proof of monopoly is rare, so courts often examine market structure in search of circumstantial evidence. Id.

The relevant market includes all products reasonably interchangeable by consumers for the same purposes. Id. at 52. Looking solely to current market share can be misleading, so the court looks to the structural barriers that protect the company’s future position. Id. at 55. The court analyzes the alleged monopolist’s efforts to maintain its position through means other than competition on the merits. Id. at 56.

The relevant product markets, as defined by the DOJ, did not include mobile advertisements, video streaming advertisements, smart TV advertisements, advertisements on websites that have their own ad placement services (which includes major social media platforms such as Twitter and Facebook), traditional advertisements such as TV, print, radio, and billboards, or DSPs, which likely encompass a large number of digital advertisements. Complaint at 124–30, United States, et al. v. Google LLC, No. 1:23-cv-00108-LMB-JFA, 2023 WL 398189 (E.D. Va. Jan. 24, 2023). The DOJ argued that their relevant product markets are defined correctly because open web digital advertisements cannot be substituted with these other forms of advertising. Pl.’s Opp’n to Def.’s Mot. for Summ. J. at 3, United States, et al. v. Google LLC, No. 1:23-cv-00108-LMB-JFA, 2024 WL 3583978 (E.D. Va. May 17, 2024). Google, on the other hand, argued that there was no evidence to support the DOJ’s proposed markets, and even if there was, Google did not have monopoly power in those markets. Google LLC’s Mem. of Law in Supp. of its Mot. for Summ. J. at 28–29, United States, et al. v. Google LLC, No. 1:23-cv-00108-LMB-JFA, 2024 WL 3534884 (E.D. Va. Apr. 26, 2024). Because of the conflict in the parties’ expert reports with respect to the relevant product market definition, the court denied Google’s motion for summary judgment. Transcript of Motions Hearing at 20, United States, et al. v. Google LLC, No. 1:23-cv-00108-LMB-JFA (E.D. Va. June 14, 2024).

Despite the DOJ’s claim for monetary damages, Google also moved to strike the government’s jury demand. Google argued that the DOJ failed to demonstrate (1) an adequate nexus between Google’s acts and the government’s alleged injury and (2) that the government had ever even purchased advertisements in the alleged relevant markets. Google LLC’s Mem. in Supp. of its Mot. to Dismiss the United States’ Damages Claim as Moot and to Strike the Jury Demand at 3–4, United States, et al. v. Google LLC, No. 1:23-cv-00108-LMB-JFA, 2024 WL 3534886 (E.D. Va. May 16, 2024). In an effort to thwart the government’s jury demand, Google paid $4 million to cover the total amount of damages sought, including treble damages. The court agreed with Google that the payment mooted the government’s damages claim, and accordingly, dismissed the jury demand. See United States, et al. v. Google LLC, No. 1:23-cv-00108-LMB-JFA (E.D. Va. June 11, 2024).

A bench trial took place in the fall and the parties are awaiting the court’s ruling.

§ 2.3.4. Watson Laboratories, Inc. v. Forest Laboratories Inc., 101 F.4th 223 (2d Cir. 2024).

In Watson Laboratories, the Second Circuit rejected antitrust claims alleging that a drug patent holder unlawfully paid off generic manufacturers to delay their market entry. Watson Lab’ys, Inc. v. Forest Lab’ys Inc., 101 F.4th 223, 250 (2d Cir. 2024). The decision, published in May 2024, marked the first time the Second Circuit applied the Supreme Court’s 2013 Actavis decision. F.T.C. v. Actavis, Inc., 570 U.S. 136 (2013).

Watson Laboratories arose out of litigation under the Hatch-Waxman Act, which provides an approval regime to streamline the manufacture of generic drugs while maintaining patent protections to incentivize the development of new drugs. Id. at 229. Forest Laboratories, the brand manufacturer of a high blood pressure drug called Bystolic, settled Hatch-Waxman patent infringement litigation with seven manufacturers that wanted to make generic versions of Bystolic. Id. at 230. The settlement agreements were accompanied by deals in which Forest paid the generic manufacturers for goods and services, such as pharmaceutical ingredients and product development. Id. As part of the settlement agreements, the generic manufacturers agreed to wait several years—until three months before Forest’s Bystolic patent was due to expire—before they could begin marketing their products. Id. Purchasers of Bystolic, including retail companies and health benefit plans, sued Forest and the seven generic manufacturers under Sections 1 and 2 of the Sherman Act, among other counts. Id. at 234. The Federal Trade Commission supported plaintiffs as amicus. Id. at 231.

In a “reverse payment,” the patent-holding plaintiff pays the alleged infringer, rather than the other way around. Id. at 230. The Supreme Court held in Actavis that courts must analyze reverse payments under the rule of reason; they violate antitrust laws only if they are both “large” and “unjustified.” FTC v. Actavis, Inc., 570 U.S. 136, 158 (2013). The court noted in Actavis that settlements allowing earlier launch of generics “bring about competition” and benefit consumers, but a reverse payment made solely to delay generic market entry “simply keeps prices at patentee-set levels” and divides monopoly profits between the patent holder and challenger. Id. at 154. A reverse payment, therefore, may provide evidence that the patentee seeks to “induce the generic challenger to abandon its claim with a share of its monopoly profits that would otherwise be lost in the competitive market.” Id. But reverse payments may be entirely legitimate, representing saved litigation expenses or fair compensation “for other services that the generic has promised to perform—such as distributing the patented item or helping to develop a market for that item.” Id. at 156. In those circumstances, “there is not the same concern that a patentee is using its monopoly profits to avoid the risk of patent invalidation or a finding of noninfringement.” Id.

Applying Actavis, the Second Circuit concluded that plaintiffs failed to plausibly allege that Forest’s reverse payments to the generic manufacturers were “unjustified,” so the court did not reach the issue of whether they were too “large.” Watson Lab’ys, 101 F.4th at 240 & n.8. The court reasoned that the reverse payments, even as alleged, reflected “traditional settlement considerations.” Id. at 240. The court examined each of the reverse payments and accompanying transactions and found they did not raise plausible antitrust claims. Id. at 241–50. For example, one of the generics agreed to manufacture Bystolic to meet part of Forest’s requirements for sales in the United States and Canada. Id. at 244. Plaintiffs pointed to this deal as suspiciously pretextual because Forest was already producing enough Bystolic to meet market demand. Id. The court called that allegation “speculation and conjecture” and noted it was reasonable for Forest to seek additional manufacturing sources to avoid potential supply issues in the future since Forest at the time exclusively relied on its Ireland facilities to make the finished drug product. Id. The court ultimately concluded that all the transactions “reflect[ed] bona fide business considerations,” affirming the district court’s dismissal. Id. at 241.

§ 2.3.5. Duke Energy Carolinas, LLC v. NTE Carolinas II, LLC, 111 F.4th 337 (4th Cir. 2024).

On August 5, 2024, the U.S. Court of Appeals for the Fourth Circuit vacated a district court’s grant of summary judgment to Duke Energy Corporation (“Duke”) in a dispute over Duke’s alleged monopoly over the energy market in the Carolinas. Duke Energy Carolinas, LLC v. NTE Carolinas II, LLC, 111 F.4th 337, 343 (4th Cir. 2024). NTE Carolinas II, LLC (“NTE”), a power company based in St. Augustine, Florida, brought the suit, claiming that Duke, a Charlotte, North Carolina, based power company “willfully maintained that [monopoly] power through anticompetitive conduct to exclude NTE from the market, in violation of Section 2 of the Sherman Act.” Id. at 342–43.

Specifically, NTE claimed that Duke schemed to prevent NTE, “its only serious competitor,” from competing for the business of Fayetteville, North Carolina. Id. at 343. The city was the only one of Duke’s customers whose long-term contract was nearing its expiration, and NTE hoped to compete for its business. Id.

Before the district court, Duke argued that its summary judgment motion should be granted because the conduct NTE accused it of merely constituted legitimate competition to retain Fayetteville’s business, rather than unlawful actions. Id. The lower court found that there was a question of fact as to whether Duke has monopoly power in the Carolinas, but ultimately granted Duke’s motion because it found that the company’s conduct was legitimate competition rather than anticompetitive conduct. Id.

NTE appealed the decision to the 4th Circuit, which vacated the district court’s summary judgment grant and remanded the case for further proceedings. Id. The appellate court held that there existed genuine disputes of material fact, from which a jury could conclude that Duke’s conduct was unlawfully anticompetitive. Id. (The 4th Circuit also ordered that the case be assigned to a different judge on remand. The original district court judge had recused himself because one of his former law partners entered an appearance on behalf of Duke. He was later reassigned the case after the “conflict” abated and he determined that his earlier recusal had not been necessary. The 4th Circuit held “that once a judge recuses himself from a case, he should remain recused from that case, even though his recusal may not have originally been required.”).

In its decision, the 4th Circuit first recounted a significant summary of the facts between the two parties, as the record before the district court was voluminous. Id. at 344. It noted that while Duke is a “vertically integrated power company, meaning that it owns both power plants and transmission lines and serves both wholesale and retail customers,” NTE merely produces power. Id. It has no transmission lines of its own, and therefore must rely on other companies’ transmission networks to serve its customers. Id. Thus, when NTE began constructing a power facility in North Carolina in 2013, it entered into a standard interconnection agreement with Duke, which holds more than 90% of the wholesale power market in the region. Id.

When NTE first entered the picture, Duke executives apparently had little worry that the newcomer would cut into Duke’s business. Id. (“Duke’s Vice President of Wholesale Power Sales remarked at the time that he ‘[thought] it [was] very doubtful that the threat [of Duke customers switching to NTE] [was] real.’”). That quickly changed, however, as NTE began pulling customers away from Duke. Duke eventually lost nine customers to NTE, and only lost one to another competitor. Id. Despite the threat of NTE’s attraction to customers, Duke believed it had an advantage in its long-term power supply contracts, which generally lasted 20 years and required several years of notice to terminate. Id. at 345. (“As a consequence, such contracts limited opportunities for new entrants such as NTE to compete for customers and thus to gain economies of scale.”). The only such contract that was expiring soon, and thus opened an opportunity for NTE to take the customer’s business, was with the city of Fayetteville. Id.

Internally, Duke executives recognized NTE as a threat to its business with Fayetteville, noting that NTEs rates were lower than Duke’s. Id. At the same time, NTE was attempting to expand in the Carolina’s and saw the chance to capture Fayetteville’s business as a key to doing so. Id. at 346. It announced plans to open a second power plant in Reidsville, North Carolina, with the intention of using it to serve Fayetteville. Id. To convey power from this second plant, NTE again entered into an interconnection contract to use Duke’s transmission lines, and in the meantime, persuaded three more of Duke’s customers to move their service over to NTE. Id.

In light of NTE’s growing strength in the market and expansion plans, Duke’s concern about NTE’s power grew. It referred to the fight for Fayetteville’s continued business as Duke’s “biggest upcoming battle.” Id. After offering Fayetteville a temporary discount on rates in exchange for a long-term commitment in an “blend-and-extend” strategy, Duke ultimately won the city’s business once again, even though NTE offered lower rates in the long-term. Id. at 347. Around the same time, Duke also terminated the Reidsville interconnection contract with NTE after some dispute over payments that ended in a lawsuit against NTE for breach of contract, without first notifying FERC, as required. Id. at 349. NTE also claimed that Duke wrongfully interfered with NTE’s application to the North Carolina Utilities Commission. Id. at 358. NTE later alleged that these actions were unlawfully anticompetitive.

In assessing these facts and the district court’s findings, the 4th Circuit first discussed the applicable legal standards. Id. at 353. It noted that for a plaintiff to success on a Section 2 of the Sherman Act claim, they must satisfy two elements: “(1) that the defendant ‘possess[ed] . . . monopoly power in the relevant market,’ and (2) that the defendant willfully acquired or maintained that power through anticompetitive conduct, as opposed to gaining its monopoly status ‘as a consequence of a superior product, business acumen, or historic accident.’” Id. (internal citations omitted).

The first element was not at issue in the appeal, because Duke did not dispute the finding that it holds monopoly power over the relevant market, considering its market share was “at or approaching 90%” at the time of litigation. Id.

In addressing the second element, the court first discussed the parties’ opposing views on the lower court’s choice to analyze Duke’s actions all independently of one another, rather than analyzing them together as a cohesive campaign. Id. The district court applied separate tests to each of NTE’s claims, finding that each was an acceptable form of competition and declined to view them as a single course of conduct. Id. at 352. NTE claimed that the court should have looked at all of Duke’s conduct “holistically” to determine its anticompetitive effect on the market, arguing that when viewed as a whole, Duke effectively denied customers the option of purchasing power from anyone else. Id. at 353. Duke argued that the district court used the correct piecemeal approach, because the U.S. Supreme Court has set forth specific tests for the various types of conduct NTE alleged. Id.

Ultimately, the 4th Circuit agreed with NTE, noting that “it is foundational that anticompetitive conduct must be considered as a whole” when alleged conduct does not all fall clearly into well-defined categories. Id. at 354. The court wrote that “when a plaintiff alleges that a scheme or course of conduct was anticompetitive, the scheme or conduct must be considered as alleged, not in manufactured subcategories.” Id. at 355. With that approach in mind, it held that the evidence of Duke’s alleged anticompetitive conduct should be “based on the combined effect of two main components—Duke’s interference with NTE’s efforts to obtain Fayetteville’s business and Duke’s disruption of NTE’s interconnection efforts.” Id. at 356.

Regarding Duke’s influence over Fayetteville, NTE claimed that Duke’s offer to Fayetteville was “designed only to exclude NTE from competition.” Id. at 356. Duke argued that it was engaged in nothing but “healthy competition” by lowering its prices to retain a customer. Id. The court noted that the district court completely ignored an important part of NTE’s allegations on this point: that the entire structure of Duke’s offer to Fayetteville was exclusionary. Id.

Specifically, NTE argued that Duke’s “blend-and-extend” strategy “hindered a new entrant’s ability to compete on the basis of efficiency with Duke for Fayetteville’s business” after a certain point. Id. at 357. It also claimed that Duke’s strategy was designed to foreclose any new entrant from competing with it, and that it was designed to shift the costs of the temporary discount from the company back onto the customer. Id. at 358. The court compared Duke’s “blend-and-extend” strategy to a traditional predatory pricing framework in which “the monopolist waits to recoup the losses it incurred by pricing a particular product below cost by raising its prices after the monopolist succeeds at excluding its rival from competing on the same product.” Id. Ultimately, it rejected Duke’s suggested standard for analyzing this predatory pricing allegation and held that there were disputed facts as to whether the structure of Duke’s offer was exclusionary. Id. at 360.

Regarding Duke’s alleged interference with NTE’s interconnection efforts, the court analyzed the issue as it would a refusal to deal dispute. Id. at 361. Citing established principles of refusals to deal, Duke argued that NTE failed “to show (1) that both NTE and Duke, as competitors, were engaged in a voluntary course of dealing, and (2) that Duke refused to sell its goods or services to NTE on the same terms as it would to others,” and that failure means NTE could not prove antitrust liability. Id. NTE claimed that while those elements would have been sufficient to establish antitrust liability, they are not necessary. Id.

Rather, NTE argued, the applicable refusal to deal test to assess antitrust liability comes from Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), which held that a party must be able to persuade a jury that a refusal to continue a business agreement is “justified by any normal business purpose,” rather than an unlawful refusal to deal. Duke, 111 F.4^th at 362. The court agreed, holding that there was sufficient evidence for a jury to find that “Duke sought out an opportunity to terminate its [interconnection] agreement with NTE in order to keep NTE from bringing the Reidsville plant online and to avoid having to compete with NTE on the merits,” satisfying the Aspen Skiing standard. Id. at 365. The court noted that NTE further strengthened its case by presenting evidence that Duke deliberately sought to exclude NTE from the market in Carolinas, and that Duke’s mens rea in doing so amounted to “anticompetitive malice.”

§ 2.3.6. Federal Trade Commission v. Amazon, Inc., No. 2:23-cv-01495-JHC (W.D. Wash. Sept. 30, 2024).

In 2024, the Federal Trade Commission (“FTC”) and seventeen state attorneys general (collectively, “plaintiffs”) submitted an Amended Complaint alleging that Amazon, Inc. (“Amazon”) was a monopolist that used anticompetitive and unfair strategies to illegally maintain monopoly power in two markets: (1) the online superstore market used by consumers, and (2) the online marketplace services market used by sellers. Amended Complaint at ¶ 7, Federal Trade Commission v. Amazon.com, Inc., No. 2:23-cv-01495-JHC, 2024 WL 4101978 (W.D. Wash. Mar. 14, 2024).

The first alleged market, the online superstore market, offered reduced time and effort for online shoppers by housing thousands of varied products in one location. Am. Compl. at ¶ 124. Amazon allegedly recognized the importance of the online superstore market in 1998 because its unlimited shelf space allowed Amazon to bring “much more selection than was possible in a physical store . . . and presented it in a useful, easy-to-search, and easy-to-browse format in a store open 365 days a year, 24 hours a day.” Id. at ¶ 145. Plaintiffs asserted that there were no reasonable substitute markets because of Amazon’s breadth (range of product offerings) and depth (product selection within a product category). Id. at ¶¶ 126, 150–59. Plaintiffs argued that Amazon had a dominant share of the market because Amazon’s share of the overall value of goods sold by online stores exceeded 60%. Id. at ¶ 168. Plaintiffs supported their argument using metrics like the Gross Merchandise Value (“GMV”), which measures the total sales value of goods sold to customers during a given period. Id. at ¶ 170. Since 2015, the plaintiffs alleged that Amazon maintained a GMV of at least 69%. Id. at ¶ 172. Plaintiffs asserted that Amazon kept an internal list of potential competitors, but even that list demonstrated that Amazon had a market share of 72.5%. Id. at ¶ 174.

The next alleged market, the online marketplace services market used by sellers, includes (1) access to a substantial customer base, (2) an interface for customer search that supports the discovery of sellers’ products, (3) the ability of sellers to set their own prices, (4) the ability of sellers to create and maintain detailed product pages, and (5) the ability of sellers to display ratings and reviews to potential customers. Id. at ¶ 187. Plaintiffs asserted that Amazon maintained a market share of at least 66% GMV. Id. at ¶ 207.

For both markets, the plaintiffs argued that Amazon protected its dominant position through significant barriers to entry, including scale and network effects (where the value of the service increases as more people use it). Id. at ¶¶ 178, 180, 208–226. plaintiffs alleged that, based on Amazon’s scale, Amazon created a self-reinforcing dynamic where its shoppers leave helpful ratings and reviews, a process that drew in new customers. Id. at ¶ 181. Plaintiffs also claimed that Amazon suppressed its rivals’ abilities to gain scale by bundling its Prime subscription service (“Prime”) with fulfillment services. Id. at ¶ 220. Specifically, regarding Prime, Amazon recognized that decoupling Prime’s offerings “would make it easier for customers to substitute components of a bundle outside Amazon.” Id. at ¶ 228.

Plaintiffs alleged that Amazon illegally maintained its monopolies through two interrelated courses of conduct: (1) Amazon suppressed price competition and pushed prices higher through artificial price floors and penalized sellers that offered lower prices on Amazon’s website, and (2) Amazon coerced sellers to use its fulfilment service to access Prime. Id. at ¶ 259. Plaintiffs also asserted that Amazon’s anticompetitive conduct prevented competition scaling, thereby allowing Amazon to maintain its monopolies. Id. at ¶ 259.

Amazon supposedly maintained a price-surveillance group called the Competitive Monitoring Team, which searched the internet for prices and punished sellers who offered lower prices elsewhere. Id. at ¶ 265. Plaintiffs alleged that Amazon’s CEO of Worldwide Stores stated that the policy was necessary “so Amazon can maintain a reputation of having lower prices, [it] is ‘a dirty job, but we need to do it.’” Id. at ¶ 270. Amazon punished sellers who sold products for a lower price on other online stores by (1) disqualifying those sellers from accessing Amazon’s Buy Box (“Buy Box”), a feature that allowed consumers to add products to their shopping cart, and (2) imposing contractual obligations on sellers, including potential total banishment. Id. at ¶ 271. Plaintiffs contended that losing the Buy Box is an existential threat for many sellers. Id. at ¶ 271. Plaintiffs argued that after a European investigation and a 2018 public letter from U.S. Senator Richard Blumenthal, Amazon stopped using a particular price parity contractual obligation, which hindered sellers from selling their products for lower costs elsewhere without breaching their Amazon contracts. Id. at ¶¶ 275–76. However, Amazon allegedly continued using an algorithm called “Select Competitor—Featured Offer Disqualification” (“SC-FOD”) to enforce its price parity contract provisions. Id. at ¶¶ 277–79. The SC-FOD disqualified sellers who offered lower prices, “even by a penny,” from using Amazon’s Buy Box. Id. at ¶ 279.

Amazon used restrictions to further inhibit sellers through its “Amazon’s Standards for Brands” (“ASB”) program, which designated certain sellers as being Amazon preferred. Id. at ¶ 289. ASB sellers accounted for 55% of all sales in 2021. Id. at ¶ 290. ASB sellers are subject to special controls to ensure that their products are priced higher on other stores than on Amazon’s website. Id. at ¶ 292. Amazon allegedly threatened to revoke ASB sellers’ “privileged” status if any of the sellers violated the ASB agreement, and this revocation included loss of access to the Buy Box. Id. at ¶ 298. Amazon allegedly sanctioned some ASB sellers because “customers considering [their] products could have easily found [the] products cheaper at another major retailer and may have chosen to shop elsewhere.” Id. at ¶ 299. Amazon restored ASB sellers’ privileges, but only if the sellers raised their “Off Amazon” prices at least 95% of the time. Id. In 2021, an ASB seller allegedly told Amazon that ASB is a “Brand Killer” because the program required sellers to keep their prices higher than they would have. Id. at ¶ 302.

Amazon allegedly had another program called “Customer Experience Ambassadors” (“CXA”), which imposed stricter requirements, including a 98% price parity, on sellers. Id. at ¶ 304. CXA sellers did not have a choice of whether to join or not. Id. Plaintiffs asserted that Amazon’s anti-discounting policies forced consumers to purchase goods from Amazon because the price is at least as much as it would be elsewhere. Id. at ¶ 308. Amazon internally recognized that “any seller dependent on Amazon ‘would not have an incentive to lower prices in one of its [less important] outlet[s]/channel[s] because the financial impact would be multiplied’ across sales they also make on Amazon.” Id. at ¶ 313. Plaintiffs, in redacted portions, argued that Amazon’s conduct reverberated through the relevant markets, including that one competitor created a program to ensure that sellers abided by Amazon’s requirements even though the program hurt the rival’s operations. Id. at ¶ 324.

Amazon also allegedly created a similar algorithm to ensure that its products were perceived as being lower in price despite not actually being lower. Id. at ¶ 329. The algorithm allegedly automatically copied any rival’s increase in prices to the penny and applied that price to Amazon’s website offerings, which deterred rivals from competing with Amazon’s products. Id. at ¶¶ 331, 332. Plaintiffs alleged that the combined algorithms compounded the effect that each had on the markets. Id. at ¶ 341.

Plaintiffs pointed to Jet.com (“Jet”), an alleged online superstore rival that would have provided consumers with 10–15% lower priced items than on Amazon. Id. at ¶ 342. In 2016, Amazon allegedly stunted Jet by removing Jet sellers from the Buy Box and deploying its product algorithm against Jet’s popular products. Id. at ¶ 343. Plaintiffs argued that Amazon’s strategy worked; Jet was required to match other online prices and was a bought a year later by Walmart. Id. at ¶ 344. Plaintiffs also argued that Zulily (“Zulily”), a potential entrant, attempted to show lower prices between its prices, Amazon’s prices, and Walmart’s prices during flash sales on steeply discounted products. Id. at ¶ 345. Amazon used similar conduct against Zulily as it did against Jet. Id. at ¶¶ 347–50. Amazon observed dwindling shoppers on Zulily, but Amazon’s Vice President of Pricing allegedly stated: “keep going . . . [e]ven though their traffic is trending down.” Id. at ¶ 350.

Amazon also allegedly used its Prime fulfillment services to force sellers to abide by its policies. Id. at ¶ 354. Amazon’s fulfillment services required sellers to maintain two different fulfillment services—one for Amazon customers and one for non-Amazon customers. Id. at ¶ 357. This allegedly raised costs for sellers and foreclosed the development of an independent fulfillment services provider. Id. Plaintiffs argued that Prime products are more easily discoverable, are brought more frequently, and triple a seller’s sales on Amazon. Id. at ¶¶ 361, 362. A former head of Amazon’s fulfillment services allegedly stated: “‘[s]ellers may not have wanted to buy fulfillment [from Amazon] but they did so in order to ‘buy increased sales’ that come with Prime eligibility.” Id. at ¶ 365. Plaintiffs argued that the combination of Prime and fulfillment services raises sellers’ costs because it requires the sellers to split inventory between Amazon customers and non-Amazon customers. Id. at ¶ 370. Amazon allegedly created a “Seller Fulfilled Prime” (“SFP”) program that allowed sellers to fulfill their own shipments as they wished. Id. at ¶ 400. However, Amazon shuttered SFP after it realized that it allowed other fulfillment services like UPS to fulfill orders. Id. at ¶ 405. Amazon allegedly knew closing SFP would harm consumers, but the plaintiffs argued that Amazon “prioritized excluding rivals and foreclosing competition.” Id. at ¶ 406.

Finally, the plaintiffs alleged that Amazon created a secretive scheme called “Project Nessie” to manipulate other online stores’ prices. Id. at ¶ 418. Amazon allegedly extracted more than a billion dollars using Project Nessie, which is an algorithm that allowed Amazon to raise prices. Id. at ¶¶ 418, 419. Plaintiffs alleged that in April 2018 alone, Amazon used Project Nessie to set prices for more than 8 million products, collectively costing approximately $194 million. Id. at ¶ 424. Plaintiffs asserted that Amazon paused Project Nessie, but that in January 2022, Doug Herrington, CEO of World Amazon Stores, “asked about turning on ‘[o]ur old friend Nessie, perhaps with some new targeting logic’ to juice profits for Amazon’s Retail arm.” Id. at ¶ 433. Plaintiffs alleged that this conduct resulted in Amazon suppressing competition and boosting its own products. Id. at ¶¶ 435–57.

Plaintiffs asserted twenty counts against Amazon. They alleged that Amazon maintained a monopoly of the online superstore and marketplace markets in violation of Section 5(a) of the Federal Trade Commission Act (“FTC Act”) and Section 2 of the Sherman Act (“Section 2”). Id. at ¶¶ 129–130. Plaintiffs also alleged unfair methods of competition through Amazon’s use of Prime and Project Nessie, in violation of Section 5(a) of the FTC Act. Id. at ¶¶ 457, 464. To establish a Section 5(a) claim, the FTC must show three elements: “[1] a representation, omission, or practice, that [2] is likely to mislead consumers acting reasonably under the circumstances, and [3], the representation, omission, or practice is material.” In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 165 (1984). A Section 2 violation requires a plaintiff to prove (1) “the possession of monopoly power” and (2) “the willful . . . maintenance of that power” through “exclusionary conduct as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” United States v. Microsoft Corp., 253 F.3d 34, 50 (D.C. Cir. 2001) (en banc) (quoting United States v. Grinnell Corp., 384 U.S. 563, 570–71 (1966)).

Plaintiffs also asserted several state law antitrust claims, which largely mirror the elements that the plaintiffs were required to prove under Section 2, but the state law claims were restricted to Amazon’s conduct within each state. Plaintiffs alleged violations of Connecticut, Maine, Maryland, Michigan, Nevada, New Jersey, New York, Oklahoma, Oregon, Pennsylvania, Rhode Island, and Wisconsin’s antitrust laws. See Am. Compl. at ¶¶ 134–152.

Amazon filed a motion to dismiss, arguing that the plaintiffs failed to allege anticompetitive conduct and anticompetitive effects. Federal Trade Commission v. Amazon.com, Inc., No. 2:23-cv-01495-JHC, 2024 WL 4448815, at *3 (W.D. Wash. Sept. 30, 2024). For the Section 2 claims, Amazon argued that its conduct was facially procompetitive, and that the plaintiffs’ efforts to obstruct Amazon’s conduct would chill competition and harm consumers. Id. at *5. However, the court found that it was improper to consider Amazon’s procompetitive justifications at the motion to dismiss stage, and it held that the plaintiffs stated a plausible claim for relief under Section 2 since Amazon’s alleged anti-discounting, fulfillment, and Prime practices plausibly impaired competition. Id. at *10.

Amazon argued that the FTC Act claims should be dismissed for the same reasons as the Section 2 claims. Id. at *11. Amazon also argued that the FTC Act claims require the court to “become an administrative policy-maker for the FTC by defining new meanings of ‘unfair’ competition.” Id. Because the court had already determined that the plaintiffs adequately stated a claim for relief under Section 2, it declined to dismiss the FTC Act claims on that basis. Id. The court also declined to dismiss the FTC Act claims on Amazon’s second basis since other courts have laid out standards by which the court could determine whether Amazon’s conduct constituted unfair competition. Id. at *13–14. For example, under E.I. du Pont de Nemours & Co. v. FTC (Ethyl), to state a claim for an “unfair method of competition,” a plaintiff must allege “evidence of anticompetitive intent or purpose.” Id. at *14. The court held that the plaintiffs adequately alleged evidence of anticompetitive intent or purpose by alleging that Amazon charged its shoppers higher prices while minimizing the chance that shoppers would catch on. Id.

The court, however, granted Amazon’s motion to dismiss on some of the state law claims, including Pennsylvania, New Jersey, Oklahoma, and Maryland, for reasons related to the specific elements of the state claims. See id. at *26. The majority of the case will nevertheless proceed.

§ 2.3.7. Federal Trade Commission v. Facebook, Inc., 581 F.Supp.3d 34 (D.D.C. 2022).

In 2021, Meta was sued in two separate lawsuits alleging its policies and acquisitions constituted conduct violative of antitrust law. One suit, FTC v. Facebook, was brought by the Federal Trade Commission (“FTC”) after a 3–2 vote in favor of filing for injunctive relief. Federal Trade Commission v. Facebook, Inc., 560 F.Supp.3d 1 (D.D.C. 2021). The other, New York v. Facebook, was brought by a contingent of forty-six states, the District of Columbia, and Guam. New York v. Facebook, Inc., 549 F.Supp.3d 6 (D.D.C. Jun. 28, 2021).

Facebook is one of the first social networking platforms that has grown—and continues to grow—to be one of the most popular businesses in the digital space. Federal Trade Commission, 560 F.Supp.3d at 6. In 2012, Facebook expanded its reach by purchasing Instagram, a popular photo-sharing app, and in 2014, it purchased WhatsApp, an app for mobile-messaging. Id. at 7–9. In addition to these acquisitions, Facebook announced a series of policies that withheld access to its application programming interface (“API”) from competitors dating back to 2011 (the “interoperability allegations”). Id. at 9. Both the FTC and the state plaintiffs alleged that Facebook’s acquisitions and policies were examples of actions taken to maintain its monopoly in the personal social networking services (“PSN services”) market in violation of Section 2 of the Sherman Act. Id. at 11. The states further alleged that Facebook violated Section 7 of the Clayton Act in its decision to purchase Instagram and WhatsApp. Id. Facebook moved to dismiss in both cases. Id.

The court in the FTC action focused on the lack of monopoly power, and the court in the states’ action focused on the lack of timeliness. To prevail on a monopoly maintenance claim, as outlined in the FTC case, a claimant must show the defendant (1) possesses monopoly power in the relevant market and (2) willfully maintains that power. Id. at 12 (citing United States v. Microsoft Corp., 253 F.3d 34, 50 (D.C. Cir. 2011)). Courts typically infer the existence of a monopoly when there exists “(1) a relevant antitrust market, in which the defendant holds (2) a dominant market share, protected by (3) barriers to the entry of rivals.” Federal Trade Commission v. Meta Platforms, Inc., No. 20-3590, 2024 WL 4772423, at *7 (D.D.C. Nov. 13, 2024) (citing Microsoft, 253 F.3d at 51).

The court narrowly accepted the FTC’s argument that the relevant market could be defined as PSN services, which are online services possessing the core functionality of maintaining relationships and sharing with friends and family. Federal Trade Commission, 560 F.Supp.3d. at 17. The court also accepted the FTC’s argument that Facebook’s services were unique and could not be substituted with other internet services such as LinkedIn, YouTube, and Netflix. Id. Though the FTC’s explanation of the relevant market was plausible, its monopoly power argument failed because it offered no evidence of Facebook’s alleged dominant market share. Id. at 18. Instead, it estimated that Facebook has maintained more than 60% of the PSN services market since 2011, with no explanation of how the FTC reached that calculation. Id. The court noted that while the FTC is not required to explain its calculations, it must provide more than a mere number. Id. at 18.

The court ended its discussion of the FTC’s monopoly maintenance claim after deciding it failed to prove Facebook’s monopoly power, and the court granted Facebook’s motion to dismiss the Complaint. Id. at 20. The court still analyzed the claim that Facebook’s API policies—which revoked access to its interface from competitors—reflected unlawful refusals to deal. It held that Facebook had a right to refuse to deal with its competitors. Id. at 24. The court relied on the same legal framework in both opinions, with heavy emphasis on the Supreme Court’s ruling in Aspen Skiing Co. v. Aspen Highlands Skiing Corp. Id. at 22–24; 472 U.S. 601 (1985). There, the Supreme Court carved an exception for the general no-duty-to-deal rule, which is determined by the following test: (1) a preexisting voluntary course of dealing between the monopolist and rival, (2) products that the defendant already sells in the existing market to other similarly situated customers, and (3) a willingness for the monopolist to forsake short-term profits to achieve its anticompetitive end. Id. at 22–24. As the court determined in both suits, Facebook did not have prior dealings with the excluded competitors—as required by Aspen Skiing—and the company took no overt acts aside from merely announcing the policies. Id. at 24–25; New York, 549 F.Supp.3d, at 27–28. The court also relied on the fact that Facebook revoked the allegedly unlawful policies in 2018 and has yet to reinstate them. Id. at 27.

The court in the states’ action emphasized the doctrine of laches. Facebook purchased Instagram in 2012 and WhatsApp in 2014, and the states’ lawsuit was not filed until 2020. Thus, the court granted Facebook’s motion to dismiss in its entirety. New York, 549 F.Supp.3d, at 49. The D.C. Circuit affirmed dismissal of the states’ lawsuit and ruled that the states are not exempt from laches in suits under the Clayton Act. See generally State of New York, et al v. Meta Platforms, Inc., 66 F.4th 288 (D.C. Cir. 2023). The court suggested a maximum four-year period for the claims seeking unwinding of mergers or else they become subject to laches. Id. at 299, 300 n.11 (“A leading antitrust treatise concludes that when a plaintiff seeks divestiture . . . the four-year time limit derived from the statute of limitations ‘should be absolute.’” (quoting 2 Areeda & Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application ¶ 320g, at 392 (5th ed. 2021)).

The FTC submitted an Amended Complaint in August 2021, again alleging unlawful monopoly maintenance in violation of Section 2 of the Sherman Act. Federal Trade Commission v. Facebook, Inc., 581 F.Supp.3d 34, 42 (D.D.C. 2022). This time, however, the FTC included two counts: Count I, which encompassed only the acquisition-based allegations, and Count II, which incorporated those allegations into the FTC’s interoperability allegations. Id. Facebook sought dismissal on the grounds that the FTC did not allege facts plausibly establishing a monopoly power or legally cognizable exclusionary conduct. Id. at 40.

With regards to Facebook’s monopoly power, the court analyzed whether the FTC adequately alleged (1) a relevant market, (2) that Facebook had a dominant share of that market, and (3) that Facebook’s dominance was protected by barriers to entry. Id. at 44.

The court had already determined in the preceding FTC action that the FTC plausibly alleged PSN services as a relevant market. Id. Facebook’s market share, however, was a point that the FDC did not sufficiently allege in its previous Complaint. Id. at 46. Thus, the FDC included in its Amended Complaint substantial allegations about Facebook’s market share, including average daily and monthly PSN services users, and users’ average time spent on PSN services, all of which exceeded 60% of the market share. Id. Finally, for barriers to entry, which was not a point addressed in the prior FTC proceeding, the FTC included in its Amended Complaint allegations of network effects and high switching costs. Id. at 50. The FTC plausibly alleged network effects through its showing that Meta users come to the platform to connect with friends and family, so as the members of the platform grow, so do the benefits to users. Id. The FTC plausibly alleged switching costs through its showing that users invest time and energy into building their pages and networks on their Meta platforms and would therefore be burdened by rebuilding from scratch on a new platform. Id. at 51. The court found these allegations to be plausible enough to survive a motion to dismiss. Id. at 52.

The court then turned to the second element of the FTC’s Section 2 claim, that Facebook willfully maintained its monopoly power. The key question here was whether the FTC plausibly alleged that Facebook engaged in such anticompetitive conduct by acquiring competitors, harming the competitive process, and harming consumers. Id. at 52. The court first focused on the allegations in Count I, which were centered on Facebook’s acquisitions. The FTC alleged that internal communications of Facebook’s leaders, including Mark Zuckerberg, demonstrate that they viewed Instagram and WhatsApp as threats to Facebook’s dominance. Id. at 54. The FTC also alleged decreased quality and privacy on Facebook since the acquisitions. Id. at 55. The court found the allegations in Count I to be plausible and denied the motion to dismiss. Id. at 57.

The court then turned to the allegations in Count II, the interoperability allegations. The FTC’s allegations in Count II focused on Facebook’s past conduct of adopting and enforcing anticompetitive policies. Id. at 58. The FTC, however, did not plead any ongoing or imminent Section 2 violations in Count II, and the FTC lacks statutory authority to seek an injunction based on long-past conduct. Id. at 58–59. Therefore, the court found issue with the plausibility of the allegations in Count II. Id. at 59. Nevertheless, the court denied the motion to dismiss Count II because the Count encompassed some of the allegations of Count I, which were already held to be plausible. Id. at 60. The court indicated that the interoperability arguments should be “sliced out at summary judgment” instead. Id.

Indeed, Facebook (“Meta”) moved for summary judgment about two years later. Federal Trade Commission v. Meta Platforms, Inc., No. 20-3590, 2024 WL 4772423 at *7 (D.D.C. Nov. 13, 2024). The FTC filed a cross-motion for partial summary judgment on Meta’s asserted procompetitive justifications for the acquisitions. Id.

The crux of the dispute surrounding the FTC’s allegation that Meta possessed monopoly power centered on whether the FTC adequately defined a relevant product market. Id. at *9. The FTC defined that market as PSN services, but Meta argued that no such market exists. Id. The court analyzed the following Brown Shoe factors to determine whether the FTC defined a proper product market: (1) the product’s peculiar characteristics and uses, (2) industry or public recognition of the submarket as a separate economic entity, (3) unique production facilities, (4) distinct customers, distinct prices, and sensitivity to price changes, and (5) specialized vendors. Id. at *10.

The court found that the FTC presented sufficient evidence that PSN services have peculiar characteristics and uses because, unlike other platforms, these services focus on friends-and-family sharing, have tools to foster building connections, and have a shared social space. Id. at *11. The court also found that the FTC presented sufficient evidence of industry and public recognition because it set forth statements from industry executives, ordinary users, and experts showing that market participants understand their products to serve a distinct demand for friends-and-family sharing. Id. at *12. Finally, the court found that the FTC presented sufficient evidence of distinct prices and sensitivity to price changes. Although Meta’s products are free to use, Meta degrades the quality of its platforms for those who use it for friends-and-family sharing by increasing advertisements and decreasing privacy. See id. at *14. The court did not address the third or fifth Brown Shoe factors. Because the FTC presented evidence that PSN services serve a demand for friends-and-family sharing, the court found that other services are not reasonable substitutes, and a reasonable factfinder could therefore find that PSN services is a relevant product market. Id. at *16.

As far as dominant market share, which is the second element of proving monopoly power, the court found sufficient the FTC’s evidence that, between 2011 and 2022, Meta had a market share ranging between 62% and 100% in the PSN services market (a range that exceeds the level typically associated with monopoly power). Id. at *19. Therefore, a reasonable factfinder could find that Meta dominated the relevant product market. Id. at *20.

Finally, for barriers to entry, which is the third and final element of proving monopoly power, the FTC presented evidence of network effects and switching costs, as well as unwillingness to invest in PSN services due to their high capital costs. Id. The court found that this was sufficient evidence of entry barriers, and that the FTC presented enough evidence of the existence of a monopoly, such that a reasonable factfinder could find in its favor at trial. Id. at *22.

The FTC was also required to present evidence that Meta engaged in anticompetitive conduct in order to invoke Section 2 of the Sherman Act. Id. at *23 (citing Microsoft, 253 F.3d at 51, 58). The court explained that there is no better conduct that fits within this term than a monopolist buying out its rivals, and such conduct raises a rebuttable presumption that the conduct is anticompetitive. Id. at *25. The court found sufficient evidence that Instagram was a competitive threat to Meta at the time of its acquisition because it was praised for its speed, reliability, and simplicity, and it was growing faster than Facebook. See id. at *29. The court found sufficient evidence that WhatsApp was a nascent competitor, or one with the potential to expand into the PSN service, at the time of its acquisition because it outperformed Facebook Messenger, especially with message notifications. Id. at *32. Therefore, a reasonable factfinder could conclude that Meta’s conduct was presumptively anticompetitive. Id. at *33.

The burden shifted to Meta to present procompetitive justifications for its acquisitions that (1) were not pretextual and (2) could not have been achieved without the acquisitions in question. See id. at *34. Meta’s procompetitive justifications for its acquisitions included 120 discrete benefits related to Instagram, WhatsApp, and Meta’s strategic position against Apple and Google. Id. at *37. Given Meta’s evidence that its platform was struggling with scaling operations to match its growth, the court found that a reasonable trier of fact could find that the justifications were not pretextual and could not have been achieved without the acquisition. See id. The court, however, was not persuaded by Meta’s justification that its acquisition of WhatsApp was part of a broader strategy to prevent Apple or Google from de-platforming Meta’s applications. Id. at *40. This justification served no purpose other than protecting Meta’s monopoly, and Meta presented no evidence to the contrary. Id.

Because the FTC presented sufficient evidence that Meta’s acquisitions of Instagram and WhatsApp were aimed at maintaining the monopoly in the PSN services market and that these acquisitions had anticompetitive effects, the court denied Meta’s motion for summary judgment. Id. The court, however, granted in part the FTC’s cross-motion for summary judgment as to the specific defense of strategic positioning against Apple and Google. Id. The case will proceed to trial.

§ 2.3.8. United States v. Live Nation Entertainment, Inc., No. 24-cv-3973 (AS), 2024 WL 4381074 (S.D.N.Y. Oct. 3, 2024).

In May 2024, the United States Department of Justice, Antitrust Division (“DOJ”), twenty-nine states, and the District of Columbia (collectively, “plaintiffs”) sued Live Nation Entertainment, Inc. (“Live Nation”) and its subsidiary, Ticketmaster L.L.C. (“Ticketmaster”), alleging violations of Sections 1 and 2 of the Sherman Act and several state laws. Plaintiffs alleged that Live Nation and Ticketmaster engaged in anticompetitive conduct through their control of music management, concert promotion, concert venues, and ticketing. See Complaint at ¶ 5, United States v. Live Nation Entertainment, Inc., No. 24-cv-3973 (AS), 2024 WL 4381074 (S.D.N.Y. Oct. 3, 2024). Plaintiffs sought, among other things, an order requiring Live Nation to divest Ticketmaster. Id. at ¶ 371(f). Plaintiffs also demanded a jury trial because they sought monetary damages for overcharges paid by government agencies. Id. at ¶ 372.

Plaintiffs defined the first relevant market as primary ticketing services, which allow venues to sell, track, and distribute tickets. Id. at ¶ 5. The primary ticketing services market also allows fans to purchase tickets. Id. at ¶ 136. Plaintiffs argued that there were no reasonable substitutes for this market because of the investment and technology required to build and maintain a primary ticketing service, and because of the unique purposes, customers, and platforms for primary ticketing services. Id. at ¶ 153. Plaintiffs defined the second relevant market as concert promotions services, which arrange and coordinate artist performances at venues. Id. at ¶ 178. Plaintiffs argued that there were no reasonable substitutes for this market because of the unique expertise of promoters. Id. at ¶ 180. Plaintiffs’ final alleged relevant market was artist use of large amphitheaters, which are a distinct type of venue. Id. at ¶ 148. Plaintiffs argued that there were no reasonable substitutes for large amphitheaters because they have unique capacity, sight line, acoustic, seating, and staging features. Id. at ¶ 193. Plaintiffs defined the relevant geographic market as the United States. Id. at ¶¶ 152, 166, 172, 181, 189, 196.

Plaintiffs set forth multiple forms of anticompetitive conduct by Live Nation and Ticketmaster, including: (1) exploiting Oak View Group, a potential competitor-turned-partner, (2) threatening financial retaliation against potential entrants, (3) acquiring competitors, (4) threatening venues that work with rivals, (5) locking concert venues into exclusive contracts, (6) preventing venues from being able to use multiple ticketers, and (7) restricting artists’ access to venues. Id. at ¶ 6.

More specifically, the plaintiffs alleged that Oak View Group recognized that it had a significant financial interest in maintaining existing Ticketmaster contracts and converting other venues to Ticketmaster. Id. at ¶ 78. Thus, by advocating for Ticketmaster over rivals, Oak View Group removed any potential competition against Ticketmaster. Id.at ¶ 79. Plaintiffs also presented evidence that Live Nation’s CEO explicitly threatened potential entrants and venues upon learning of rival promotions and potential switches to rival companies. See id. at ¶¶ 80–91. Live Nation also allegedly presented venues with a choice to use Ticketmaster and receive a significant payment for long-term exclusivity, or to use another ticketing service and risk losing access to Live Nation’s assets, including lucrative concerts. Id. at ¶ 87. Plaintiffs also alleged that Ticketmaster renewed the ticketing agreements before they expired, which lessened competitive pressure. Id. at ¶ 101. These threats and exclusive agreements, the plaintiffs alleged, meant that neither artists nor venues were free to choose a ticketing system based on what worked best for them. Id. at ¶ 97. Live Nation also had a long history of acquiring competitors, such as United Concerts, AC Entertainment, Frank Productions, National Shows 2, Red Mountain Entertainment, 313 Presents, ScoreMore Shows, and Logjam Presents. Id. at ¶¶ 120–135. Plaintiffs also alleged that Live Nation had a policy of preventing artists who used third-party promoters from using its venues. Id. at ¶ 111.

Live Nation and Ticketmaster’s anticompetitive conduct, the plaintiffs alleged, created and enhanced barriers for rivals. Id. at ¶ 61. For example, Live Nation and Ticketmaster’s power in promotions, ticketing, and venues disadvantaged rivals who did not have similar portfolios. Id. at ¶ 61. Those rivals would be required to develop sufficient data and working capital to secure business, a process that was made more difficult by Live Nation and Ticketmaster’s exclusive contracts. Id. at ¶ 61. The anticompetitive conduct also allegedly led to non-transparent, non-negotiable fees for fans, fewer choices of concerts for fans, and fewer opportunities for artists to perform. Id. at ¶ 138.

In July 2024, Live Nation and Ticketmaster filed a motion to transfer the case from the Southern District of New York to the District of Columbia (“D.C.”), arguing that a prior consent decree’s retention-of-jurisdiction provision mandated transfer, and that transfer was warranted for the convenience of the parties and in the interests of justice. United States v. Live Nation Entertainment, Inc., No. 24-cv-3973 (AS), 2024 WL 4381074, at *1 (S.D.N.Y. Oct. 3, 2024). In 2010, the DOJ and nineteen states sued Live Nation and Ticketmaster under the Clayton Act in an attempt to block their proposed merger. Id. The parties filed a consent decree that allowed Live Nation and Ticketmaster to merge, so long as they followed certain restrictions. Id. Under the consent decree, the D.C. Court retained jurisdiction “to carry out or construe th[e] Final Judgment, to modify any of its provisions, to enforce compliance, and to punish violations of its provisions.” Id. Thus, the court’s decision on the motion to transfer turned on whether the 2024 case was an effort to (1) carry out, (2) construe, (3) modify, (4) enforce, or (5) punish violations of the consent decree. Id. at *2.

Live Nation and Ticketmaster’s main argument was that this case attempted to modify the consent decree by “unwind[ing] the merger that was the entire subject of the [2010] agreement” and the “core bargain” of the negotiation. Id. That is, the consent decree allowed Live Nation and Ticketmaster to merge in the first place, so by seeking a divestiture of Ticketmaster in 2024, the plaintiffs sought to modify the consent decree. Id. The court, however, was not persuaded. There was no immunity provision or release in the consent decree, so nothing in the decree insulated Live Nation and Ticketmaster from future antitrust challenges. Id. The consent decree did not reach beyond the specific pre-merger challenge that it helped resolve. Id. Therefore, the court held that the retention-of-jurisdiction provision did not apply to this case and a transfer to D.C. was not warranted on this ground. Id. at *3.

Live Nation and Ticketmaster also argued that a transfer to D.C. would serve the convenience of the parties and the interests of justice given the D.C. Court’s experience with the 2010 case. Id. The court was not persuaded here, either. The D.C. case was never litigated, the judge who oversaw the consent decree was inactive, and transferring an already steadily moving case would be inefficient. Id. Therefore, the court denied Live Nation and Ticketmaster’s motion to transfer to D.C., and the case will continue in the Southern District of New York. Id.

§ 2.3.9. Heckman v. Live Nation Entertainment, Inc., 120 F.4th 670 (9th Cir. 2024).

In a related case, a putative class of plaintiffs sued Live Nation Entertainment, Inc. (“Live Nation”) and Ticketmaster L.L.C. (“Ticketmaster”) for violations of the Sherman Act. See Heckman v. Live Nation Entertainment, Inc., 120 F.4th 670, 676 (9th Cir. 2024). Live Nation and Ticketmaster sought to compel arbitration based on an agreement that included a delegation clause, which delegated to the arbitrator the authority to determine the validity of the arbitration agreement. Id. The District Court for the Central District of California found this clause to be procedurally and substantively unconscionable under California law. Id. at 680. The court specifically took issue with four features of the arbitration agreement: (1) the application of precedent from bellwether decisions to the claimants who had no opportunity to participate in those decisions, (2) the lack of discovery, (3) the provisions governing the selection of arbitrators, and (4) the limited right to appeal. Id. The District Court also held that the Federal Arbitration Act (“FAA”) did not preempt the application of California unconscionability law. Id. Live Nation and Ticketmaster appealed to the United States Court of Appeals for the Ninth Circuit.

The Ninth Circuit first analyzed whether the delegation clause itself was unconscionable and therefore unenforceable. Id. Under California law, to demonstrate unconscionability, a plaintiff must show procedural and substantive unconscionability. Id. at 681. When analyzing procedural unconscionability, courts focus on oppression and surprise. Id. The Ninth Circuit held that the delegation clause was oppressive because of the power imbalance between Live Nation, Ticketmaster, and consumers. Id. at 682. It also held that the delegation clause was surprising because of Live Nation and Ticketmaster’s abilities to unilaterally modify terms without notice and apply changes retroactively. Id. The rules for arbitration were also dense, convoluted, and internally contradictory. Id. at 683.

The Ninth Circuit then turned to substantive unconscionability, which pertains to the fairness of an agreement’s actual terms. Id. The Ninth Circuit analyzed the following features of the arbitration rules that were identified by the district court: (1) the application of precedent from the bellwether decisions to other claimants, (2) no right to discovery, (3) unilateral right of the arbitration company to choose arbitrators, and (4) limited rights to appeal denials of injunctive relief. See id. at 683–687. The Ninth Circuit agreed with the district court that all these features were substantively unconscionable. Id. at 684.

For the application of precedent from the bellwether decisions to other claimants, the Ninth Circuit found that it is black-letter law that binding litigants like this violates due process. Id. For the lack of discovery, the Ninth Circuit found discovery to be necessary to decide threshold issues, such as the validity of the delegation clause. Id. For the provisions governing the selection of arbitrators, Live Nation and Ticketmaster did not dispute that these provisions violated the California Arbitration Act (“CAA”), but rather argued that the CAA was preempted by the FAA. Id. at 686. The Ninth Circuit, however, disagreed, holding that the CAA is not intended to obstruct the FAA’s objectives, and that the FAA is not intended to occupy the entire field of arbitration. Id. Finally, for the limited rights to appeal, the Ninth Circuit agreed with the District Court that this feature was substantively unconscionable because only plaintiffs are likely to pursue injunctive relief, which created an unfair advantage for Live Nation and Ticketmaster. Id. at 686–87.

Therefore, the Ninth Circuit held that the delegation clause was procedurally and substantively unconscionable, and because the unconscionability permeated all aspects of the arbitration agreement, the entire agreement was unconscionable under California law. Id. at 688. The Ninth Circuit also held, as an alternate and independent ground, that the FAA does not preempt California’s unconscionability law and does not apply to the type of mass arbitration agreements in question. Id. at 689–90. The Ninth Circuit therefore affirmed the district court’s denial of Live Nation and Ticketmaster’s motion to compel arbitration. Id. at 690.

Judge VanDyke concurred in the judgment, emphasizing that he would have resolved the case by simply concluding that the FAA does not apply to Live Nation and Ticketmaster’s mass arbitration agreements. Id.

The arbitrability of antitrust claims continues to be construed narrowly and this decision is consistent with that trend and a reminder of the importance of drafting fair and reasonable arbitration provisions.

§ 2.3.10. Epic Games, Inc. v. Google LLC, No. 20-05671, 2024 WL 4438249 (N.D. Cal. Oct. 7, 2024), appeal filed, No. 24-6256 (9th Cir. Oct. 15, 2024).

On December 11, 2023, several years after the district court’s ruling in Epic Games v. Apple, Epic Games (“Epic”) achieved against Google what it could not against Apple: a complete victory on its multiple antitrust claims, including its Section 2 monopolization claims. Verdict Form, Epic Games, Inc. v. Google LLC, 20-05671 (N.D. Cal. Dec. 11, 2023), ECF No. 606. After more than fifteen days of trial including the testimony by 45 witnesses, a jury found in favor of Epic on: (1) monopolization under Section 2 of the Sherman Act; 15 U.S.C. § 2 (2) unlawful restraint of trade under Section 1 of the Sherman Act 15 U.S.C. § 1 and the California Cartwright Act; Cal. Bus. & Prof. Code §§ 16700 et seq. and (3) tying under Section 1 of the Sherman Act and the Cartwright Act. The plaintiffs’ California Unfair Competition Law and appropriate remedy were decided by the court in October 2024.

In Epic Games v. Google, Epic alleges that Google imposed illegal restraints on app distribution by restricting the downloading of apps from sources other than its own digital storefront, the Google Play Store. The complaint further claims that Google has maintained an in‑app payment monopoly and engaged in unlawful tying by conditioning developers’ access to the Play Store on the exclusive use of Google’s own in‑app payment tools for digital content. Allegedly, Google unlawfully monopolized both the Android app distribution market and in-app billing services on Android devices market. See generally Second Amended Complaint, Epic Games, Inc. v. Google LLC, 3:20-cv-05671 (N.D. Cal. Nov. 17, 2022), ECF No. 341. Epic’s complaint sought purely injunctive relief to permit alternative options for apps to be downloaded and for payments to be handled.

The difference in outcome in Epic’s cases against Apple and Google may be attributable to several factors, including that the case against Google was decided by a jury rather than a judge, and, notably, that the jury adopted Epic’s narrower definition of the relevant market. Sean Hollister, “The Epic question: how Google lost when Apple won / How is Google running an illegal monopoly with the Play store—while Apple’s App Store is in the clear?” The Verge (Dec. 16, 2023). Specifically, the verdict relies on two product markets: (1) Android app distribution market and (2) Android in-app billing services for digital goods and services transactions market. Verdict Form, Epic Games, Inc. v. Google LLC, 20-05671 (N.D. Cal. Dec. 11, 2023), ECF No. 606, at 4. These markets are narrower than the mobile-gaming transactions market that the district court found in the Apple case and thus make it easier for a fact-finder to find that Google possessed monopoly power in those markets.

Google is not seeking monetary damages. Second Amended Complaint, Epic Games, Inc. v. Google LLC, 20-05671 (N.D. Cal. Nov. 17, 2022), ECF No. 341, at 13. The court, therefore, considered only the requested injunction. Under Section 16 of the Clayton Act, “[a]ny person, firm, corporation, or association” is entitled to “injunctive relief . . . against threatened loss or damage by a violation of the antitrust laws, . . . , when and under the same conditions and principles as injunctive relief against threatened conduct that will cause loss or damage is granted by courts of equity.” A plaintiff “‘need only demonstrate a significant threat of injury from an impending violation of the antitrust laws or from a contemporary violation likely to continue or recur.’” Epic Games, Inc. v. Google LLC, 20-05671, 2024 WL 4438249, at *3 (N.D. Cal. Oct. 7, 2024) (quoting Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 130 (1969)).

The court weighed in on the ongoing debate of whether new laws are necessary to address antitrust violations in a tech-based economy and emphasized that the existing antitrust laws are sufficient, despite their age. “[I]njunctive relief is meant to restore economic freedom in the relevant markets and break the shackles of anticompetitive conduct.” Id. The court explained that it had broad power to restrain acts which are of the same type as unlawful acts committed and that the relief granted must be effective to redress the violations and to restore competition. Moreover, court stated that it is not limited to a remedy that simply prohibits the specific conduct found to be anticompetitive and that it has discretion to fashion a remedy directed to the effect of the anticompetitive conduct. Id. (citing Mass. v. Microsoft Corp., 373 F.3d 1199, 1209 (D.C. Cir. 2004)). In sum, the court described its responsibility as making a reasonable judgment on the means needed to restore and encourage the competition adversely affected by Google’s anticompetitive conduct.

First, the court enjoined Google from sharing Play Store revenues with current or potential Android app store rivals, and from imposing contractual terms that condition benefits on promises intended to guarantee Play Store exclusivity for a period of three years. The court described these provisions as “designed to level the playing field for the entry and growth of rivals, without burdening Google excessively.” Id. at *5.

Second, the court will require that Google give rival app store developers access to the catalog of Play Store apps for three years, which the court deemed a sufficient time period to give rival stores a fair opportunity to establish themselves. The court determined that access to the Play Store apps was necessary to remediate the anticompetitive “consequences” of Google’s illegal conduct. “The consequences to be remediated are intertwined with the network effects of Google’s dominant position in the relevant markets.” Id. at 5–6. The court described “network effects” here as the greater the number of developers, the greater the number of users, and the greater the number of users, the greater the number of developers. Google unfairly enhanced the network effects in a way that would not have happened but for its anticompetitive conduct.

Although the court acknowledged that there are potential security and technical risks involved in making third-party apps available, including rival app stores, it prohibited Google blocking rival app stores’ presence to lower the barriers for rival app stores to get onto users’ phones. Id. at 7. The court viewed its mandate allowing other app stores to be distributed through the Play Store for three years as a “modest step” to correct the consequence of Google’s unlawful conduct preventing rival stores from reaching users and developers. Id.

To the extent technical issues about security and the like come up, the injunction established a “Technical Committee.” The committee will be made up of one person selected by each side, plus a third person to be selected by the parties’ two nominees, to resolve the issue in the first instance. Id. at 9.

Google filed an appeal in the U.S. Court of Appeals for the Ninth Circuit.

§ 2.3.11. Sidibe v. Sutter Health, 103 F.4th 675 (9th Cir. 2024).

A divided panel of the U.S. Court of Appeals for the Ninth Circuit reversed a jury verdict in favor of the defendant healthcare system in one of the most followed antitrust cases. The majority’s decision provides support for admission of intent evidence when analyzing a restraint under the rule of reason. See Sidibe v. Sutter Health, 103 F.4th 675 (9th Cir. 2024).

The plaintiffs, a class of individuals and businesses, were insured by health plans that contracted with the defendant, Sutter Health. Id. at 680. Plaintiffs alleged that the defendant charged supracompetitive rates to their health plans, which in turn were passed on to the plaintiffs in the form of higher premiums. Id. Plaintiffs alleged that Sutter Health tied the sale of services across certain inpatient hospitals and imposed contract terms that prevented health plans from steering patients towards lower-priced providers. Id. at 689–90. Plaintiffs, indirect purchasers, brought their claims under the Sherman Act, California’s Cartwright Act, and California’s Unfair Competition Law. Id.

The trial court granted Sutter Health’s motions in limine to exclude evidence of its earlier business practices and related litigation against it. Id. at 681–82. The lower court also adopted Sutter Health’s proposed jury instructions for the Cartwright Act claim, which instructed the jury to consider only the “effect” of the defendant’s conduct on competition, not the “purpose.” Id. at 682. After a four-week trial, the jury returned a verdict in favor of Sutter Health on both the tying and unreasonable course of conduct claims. Id. Plaintiffs appealed to the Ninth Circuit. Id.

On appeal, plaintiffs first argued that the district court erred by omitting “purpose” from the jury instructions for the Cartwright Act claim. They contended that anticompetitive purpose is a relevant factor in evaluating whether Sutter Health had engaged in an unreasonable anticompetitive course of conduct under the Cartwright Act. See id. at 683. Sutter Health argued that an anticompetitive purpose alone is not sufficient to prove a violation. Id. at 687. The Ninth Circuit agreed with the plaintiffs that anticompetitive purpose is a relevant factor under the Cartwright Act and held that the district court erred. Id. at 685–88.

Next, the plaintiffs argued that the district court abused its discretion by excluding evidence that they contended was crucial to proving intent, including evidence from years before the alleged damages period. Id. at 688. That evidence included internal documents reflecting Sutter Health’s intent to force health plans to pay above-market rates, its implementation of systemwide contracting, anticompetitive contract terms between 2001 and 2005, the health plans’ objections to the challenged contract terms, and prior lawsuits to block potential mergers. See id. at 694–98. The Ninth Circuit agreed with the plaintiffs, determining that the evidence was relevant and should have been admitted by the trial court. Id. at 703.

According to the majority opinion, plaintiffs’ antitrust injury theory was pivotal to its decisions regarding the exclusion of evidence predating the damages period and the relevance of Sutter Health’s intent. Specifically, the majority described defendant’s shift around 2000 from negotiating health plan contracts on a hospital-by-hospital basis to a systemwide basis and found that plaintiffs’ main contention was that Sutter Health tried to use its market power in the regions where it was an important provider to get higher anticompetitive rates in more competitive regions. Further, the majority noted that plaintiffs claim it was Sutter Health’s systemwide strategy that gave it the leverage to win the anticompetitive contracting terms they were challenging. The importance of the reasons for and original shift to a systemwide health plan negotiation strategy, thus, was pivotal to the majority.

Accordingly, the majority agreed with plaintiffs’ arguments that the combined effect of the erroneous jury instructions and the exclusion of evidence was prejudicial, warranting a new trial. Id. at 705–06.

Judge Bumatay dissented, finding that the trial court acted within its discretion with the jury instructions and exclusion of evidence. Id. at 707–08. “So broad is the district court’s discretion in this context that, to my knowledge, no federal circuit court has ordered a retrial based on the setting of a reasonable evidence cutoff date,” he said. “We are now the first.” Id. at 707. Judge Bumatay concluded that anticompetitive purpose is not a required element under the Cartwright Act, and that the excluded evidence was cumulative and would confuse the jury. Id. at 720–21. Judge Bumatay believed that any error in the jury instructions or exclusion of evidence was harmless because it would not have had any impact on the jury’s considerations of whether Sutter Health engaged in tying or anticompetitive contracting practices. Id. at 720.

§ 2.4. Clayton Act, Section 7—Mergers

§ 2.4.1. Overview

Section 7 of the Clayton Act prohibits acquisitions where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” 15 U.S.C. § 18. This forward-looking language has been interpreted to mean “that a section 7 violation is proven upon a showing of reasonable probability of anticompetitive effect.” FTC v. Warner Commc’ns Inc., 742 F.2d 1156, 1160 (9th Cir. 1984). The FTC or DOJ may obtain an injunction of a merger they fear violates the Clayton Act if they can persuade a court that they will succeed on the merits and the court then balances the equities and finds an injunction is warranted. Id.

Both the agencies and parties subject to regulation under the Clayton Act pushed the boundaries of the law with novel arguments in 2024, including resurrection of 1960s case law, very narrow market definitions, and adoption of lower thresholds for certain presumptions. With significant overhauls in the 2023 Merger Guidelines that came into effect on December 18, 2023, and the agencies’ updated HSR premerger form in 2025, it is likely this trend will continue into next year as well. See U.S. Department of Justice & Federal Trade Commission, Merger Guidelines (2023); Premerger Notification; Reporting and Waiting Period Requirements, 88 Fed. Reg. 42178 (June 29, 2023) (to be codified at 16 C.F.R. 801 and 16 C.F.R. 803).

§ 2.4.2. Federal Trade Commission v. Kroger Co., No. 3:24-cv-00347-AN, 2024 WL 5053016 (Or. Dec. 10, 2024) and Washington v. Kroger Co., No. 24-2-00977-9 SEA (Wash. Sup. King Cty. Dec. 10, 2024).

Within hours of each other, an Oregon federal district court, Federal Trade Commission v. Kroger Co., No. 3:24-cv-00347-AN, 2024 U.S. Dist. LEXIS 223077 (Or. Dec. 10, 2024) [hereinafter “Oregon case”], followed by a Washington state court, Findings of Fact & Conclusions of Law, State v. Kroger Co., No. 24-2-00977-9 SEA (Wash. Sup. King Cty. Dec. 10, 2024) [hereinafter “Washington case”], enjoined the $24.6 billion merger of the Kroger and Albertsons grocery chains. The Oregon court adopted the controversial 2023 Merger Guidelines’ market concentration presumption and largely accepted the Federal Trade Commission’s (FTC) and its expert’s arguments for a narrow grocery market. Oregon case, at *16. In a loss for the FTC, the Oregon court declined to find that the proposed transaction was likely to substantially harm competition in the labor market alleged. Oregon case, at *38

The Washington court similarly relied on structural presumptions based on market concentration calculations, though it did not expressly adopt or reject the 2023 Merger Guidelines. Washington case, at 108–09. The Washington attorney general (AG) did not assert harm to any labor market, and accordingly, that court did not address the proposed transaction’s impact on labor.

While the decisions are notable for their narrow market definition limited to traditional grocery stores, they are most noteworthy for their embrace of a post-merger market share as low as 30% as “unacceptable” or a “threat,” Oregon case, at *15; Washington case, at 108, the Oregon court’s express acceptance of the 2023 Merger Guidelines’ market concentration presumption, Oregon case, at *16, and the Oregon court’s rejection of the FTC’s labor market harm theory because of the lack of the type of economic evidence used in the evaluation of traditional sell-side markets. Oregon case, at *38. Also potentially problematic were the courts’ skeptical approaches to the merging parties’ proposed divestiture package and buyer.

Market One: Traditional Grocery Stores

Both courts held the enforcement agencies established their prima facie case that the Kroger/Albertsons merger would substantially lessen competition or tend to create a monopoly in the submarket limited to traditional grocery stores. Oregon case, at *111; Washington case, at 108.

The courts defined the traditional grocery submarket as stores with a large footprint, a large number of grocery products, and a large number of services like deli and gas—essentially a one-stop shop. Oregon case, at *11; Washington case, at 3. Excluded from the market were value stores, which have low prices and limited services and SKUs; club stores, which have a membership model, larger size products, and limited service and SKUs; dollar stores, which are generally smaller and lack fresh foods, service, and many SKUs; and natural, gourmet or limited assortment stores, which are generally smaller and focus on differentiated and organic brands. Oregon case, at *11–12; Washington case, at 2. Embracing the 2023 Merger Guidelines’ approach, the courts applied the 1962 Brown Shoe Co. v. United States factors. Oregon case, at *12; Washington case, at 100. According to the two courts, the fact that certain retailers may draw some customers away from and that they may compete in some sense with the merging parties does not suggest that the retailers should be in the same relevant market because those retailers also differ generally in terms of price, customers preferences, and format. Oregon case, at *11–12; Washington case, at 2.

The courts held that the enforcement agencies met their prima facie burden of showing the merger would substantially lessen competition. Oregon case, at *17; Washington case, at 108. The courts sided with the agencies’ experts and methods and found unpersuasive the defendant experts’ critiques. Oregon case, at *19–20; Washington case, at 27–37. The Oregon court expressly accepted the 2023 Merger Guidelines’ market concentration thresholds for triggering a presumption of illegality, while the Washington court remained uncommitted because it found that the presumption applied under either the 2010 or 2023 guidelines. Oregon case, at *16; Washington case, at 108. Both courts relied on the 1963 Philadelphia National Bank case’s 30% market share as a competitive threat. Oregon case, at *15; Washington case, at 108.

The courts viewed Kroger and Albertsons as particularly close competitors to each other based largely on their internal documents and rejected their rebuttal arguments. Oregon case, at *18–20; Washington case, at 41–42. For example, the courts were not persuaded that the merger would (1) allow the retailers to better compete against larger competitors like Wal-Mart, Oregon case, at *19–20; Washington case, at 97, or (2) generate substantial efficiencies that would be passed on to consumers, Oregon case, at *21–24; Washington case, at 116. Both courts rigorously reviewed and found the proposed divestitures inadequate to restore the competition that would be lost, accepting the agencies’ arguments that the selected buyer was not sufficiently experienced or prepared. Oregon case, at *28–30; Washington case, at 112.

Therefore, the courts held that the FTC and Washington AG were likely to succeed on the merits and granted the injunction. Oregon case, at *30; Washington case, at 121.

Market Two: Union Grocery Store Labor

The Oregon court rejected the FTC’s standalone argument that an injunction should be issued based on harm in the union grocery store labor market. Oregon case, at *38.

Unlike the Tapestry/Capri court, which declined to reach the labor market arguments in connection with that transaction, the Oregon court carefully reviewed the agency’s labor market theory. Oregon case, at *36–37. Although the court, in dicta, was willing to accept a labor market limited to only unionized grocery workers, in the end it rejected the FTC’s request for an injunction because the agency was unable to provide sufficient economic evidence of the type used in the sell-side grocery market. Oregon case, at *37.

Although the parties have since abandoned the proposed transaction, with Albertsons suing Kroger in Delaware Chancery Court, the Oregon and Washington courts’ decisions are a significant win for the Biden administration, at a minimum, with respect to its approach to defining the narrowest market possible and the burden of establishing an appropriate divestiture remedy. When considered along with the Tapestry/Capri court’s embrace of the 2023 Merger Guidelines’ market concentration presumptions, there is an increased risk of future courts applying the 2023 standard. And while the court ultimately did not grant an injunction on the basis of a labor theory, the Oregon court’s labor market discussion confirms the concerns raised by commentors regarding the 2023 Merger Guidelines’ emphasis on the theory.

§ 2.4.3. Federal Trade Commission v. Tapestry, Inc., No. 1:24-cv-03109 (JLR), 2024 WL 4647809 (S.D.N.Y. Nov. 1, 2024).

A New York federal court’s recent decision to enjoin the merger of two fashion companies gave the FTC and the 2023 Merger Guidelines a boost. Since the issuance of the draft Merger Guidelines in July 2023, commenters and practitioners have asked whether the courts will accept the more pro-enforcement and interventionist guidance, particularly given the fact that the FTC had no sitting Republican commissioners at the time the draft guidance was issued. Court rulings like the following provide counselors and merging parties with some insight into whether and how the 2023 Merger Guidelines should be taken into account in transaction-related risk assessments.

Earlier this year, the Commission voted unanimously (5–0) to challenge Tapestry, Inc.’s proposed $8.5 billion acquisition of Capri Holdings. Federal Trade Commission v. Tapestry, Inc., No. 1:24-cv-03109 (JLR), 2024 WL 4647809, at *2 (S.D.N.Y. Nov. 1, 2024). According to the FTC’s Complaint, the parties “compete on everything from clothing to eyewear to shoes” but compete “most fiercely” and have “eye-popping market shares” in accessible luxury handbags. Complaint at ¶ 2, Federal Trade Commission v. Tapestry, Inc., No. 1:24-cv-03109 (JLR), 2024 WL 4647809 (S.D.N.Y. Nov. 1, 2024). Accessible luxury handbags are well-built and made largely of leather, unlike mass-market handbags, and are affordable, unlike luxury handbags. Id. at ¶¶ 33–34.

In addition to alleging a narrow product market, the FTC’s Complaint was noteworthy for its repeated citation to Guideline 8 of the 2023 Merger Guidelines for the proposition that “a firm that engages in an anticompetitive pattern or strategy of multiple acquisitions in the same or related business lines may violation Section 7” of the Clayton Act. Id. at ¶ 71. The agency alleged that Tapestry, Inc., having previously acquired two other significant handbag brands in 2015 and 2017, is “engaged in an anticompetitive pattern and strategy of acquisitions in the ‘accessible luxury’ market and intends to continue this pattern and strategy.” Id. at ¶ 72.

Serial acquisitions was not the only theory that the FTC claimed was relevant to the proposed transaction. Specifically, the FTC also alleged that Tapestry, Inc.’s acquisition of Capri Holdings would substantially harm competition in the labor market because it would eliminate the incentives for the two companies to compete for employees, thereby limiting wages and benefits. Id. at ¶ 57.

Although in the past the agencies could and did challenge transactions based on niche market definitions, including premium fountain pens and “super premium ice cream,” the 2023 Merger Guidelines articulated a very narrow approach to relevant market definitions and allowed the agencies to ignore the impact of “significant substitutes” that may not fit within the narrowly defined relevant markets. U.S. Dep’t of Justice & Fed. Trade Comm’n, Merger Guidelines (2023). The Tapestry, Inc./Capri Holdings court’s decision turned entirely on acceptance of the FTC’s niche relevant product market for “accessible luxury handbags,” despite the existence of significant substitutes both at lower and higher price points.

The court’s analysis rested on the nature of the competition between the parties, the product market definition, the concentration of the market and the parties’ alleged market shares. The “central dispute” was the FTC’s claim that, within a broader market of over 150 alleged handbag brands, there are three distinct submarkets—“mass market,” “accessible luxury,” and “true luxury”—and that mass-market handbags and luxury handbags are not reasonably interchangeable with accessible-luxury handbags and therefore are not part of the relevant product market. Tapestry, 2024 WL 4647809, at *10.

The court recognized that accessible luxury handbags function similarly to mass market and luxury handbags: “One can carry a wallet, a phone, or a personal item in a Trader Joe’s tote bag just as effectively as in an Hermès Birkin.” Id. The court noted, however, that even when two products are functionally fungible, consumers may not view them as reasonably interchangeable. Id. The court also concluded that brands play a role in consumers’ selection of which handbag to purchase. Id. at *11.

The court also examined the premise that higher-quality, higher-priced products may constitute a separate market than lower-quality, lower-priced products. Id. It found, among other things, the following distinguishing factors:

• The materials and craftsmanship commonly used in accessible luxury handbags compared to mass market handbags. Id. at *12.
• Manufacturing location distinguishes accessible luxury handbags from luxury handbags. Id. at *13.
  • Accessible luxury brands outsource almost all manufacturing to third parties in Southeast Asia. Id.
  • Most luxury brands are made in European countries such as France and Italy, with little (if any) manufacturing presence in Asia. Id. at *14.
• Price and pricing method differences between mass market, accessible luxury, and luxury brands. Id. at *16.
  • Accessible luxury handbags have an entry price point of approximately $100 and rarely approach or exceed $1,000 and heavily rely on discounts and other promotions. Id.
  • Mass market handbags generally are priced below $100. Id. at *17.
  • Luxury brands generally are priced over $1,000 and discount less frequently. Id. at *19.

The Tapestry, Inc./Capri Holdings court noted that, even if alternative submarkets exist or if there are broader markets that might exist, the viability of such additional markets does not render the one identified by the FTC inappropriate. Id. at *39 (quoting United States v. Bertelsmann SE & Co. KGaA, 646 F.Supp.3d 1, 28 (D.D.C. 2022)).

Although the court acknowledged that the distinguishing factors above, alleged by the FTC, do not apply consistently to the products at issue, the court found that the factors still weigh in favor of a separate mid-tier or accessible luxury market. Id. at *13. The court also discounted the importance of consumer preference with respect to some factors. See id. at *15.

Perhaps most importantly, the court found the evidence of head-to-head competition between the parties compelling. Id. at *66. Because the court found the competition between the parties on pricing, discounting, and marketing efforts compelling, the court determined that it need not reach the FTC’s arguments that the parties also compete regarding handbag design, brick-and-mortar presence, and sustainability efforts. Id. at *67 n. 51.

Generally, the court found the FTC’s expert analysis more compelling than that of the merging parties’ expert. For example, the court accepted the FTC’s expert’s inclusion of wholesale prices along with retail prices when defining a market based on price, thereby rejecting the defendants’ approach. Id. at *42 n. 37. The agency’s expert calculated that the post-merger market concentration would be 3,646 points, with a merger-induced change in concentration of 1,449 points. Id. at *39. Under the Merger Guidelines, the post-merger market concentration exceeded the highly concentrated range of 1,800 points and the change in market concentration exceeded the 100 points necessary for the FTC to assert the structural presumption that the proposed transaction would substantially lessen competition. Id. The FTC estimated that the post-merger market share of the parties would be 59%. Id. at *38.

The Tapestry, Inc./Capri Holdings challenge appears to support the agencies’ pro-enforcement policy and is interesting for several reasons. The court accepted the 2023 Merger Guidelines’ lower market concentration for triggering a presumption that the transaction will substantially lessen competition or tend to create a monopoly. The current nature of the competition between the parties should not be underestimated. Even if other competitors are also important, if the parties’ internal documents and external statements arguably focus on each other, the potential for loss of competition and the parties’ risks will likely be amplified. Niche submarkets within broad markets, including those with many competitors, will not get a pass from the agencies.

§ 2.4.4. Federal Trade Commission v. IQVIA Holdings, Inc., 710 F.Supp.3d 329 (S.D.N.Y. 2024).

On January 8, 2024, the U.S. District Court for the Southern District of New York issued an order preliminarily enjoining the proposed merger of two healthcare programmatic advertisers, IQVIA Holdings, Inc., and Propel Media, Inc., pending an in-house administrative proceeding. Federal Trade Commission v. IQVIA Holdings, Inc., 710 F.Supp.3d 329 (S.D.N.Y. 2024). The parties abandoned their merger attempt shortly after the preliminary injunction was issued.

The Federal Trade Commission (“FTC”) filed this action in July 2023 after a 3–0 vote in favor of blocking IQVIA’s proposed acquisition of Propel and its subsidiary, DeepIntent. The vote was technically unanimous, as there were only three sitting commissioners at the time; however, it was not bipartisan, because all three voters were Democratic commissioners. Id. The court issued an opinion on October 31, 2023, granting the FTC’s motion to strike several constitutional and equitable defenses raised in the defendants’ answers. IQVIA, 710 F.Supp.3d at 346. Litigation proceeded quickly throughout the remainder of 2024, with the court hearing closing arguments in early December. Id. at 347.

In its complaint, FTC alleged that the merger between IQVIA and Propel would violate Section 7 Clayton Act and Section 5 of the FTC Act by “substantially lessening competition in the field of programmatic advertising to health care professionals” (“HCPs”). IQVIA, 710 F.Supp.3d at 340. IQVIA and Propel own two programmatic advertisers, called Lasso and DeepIntent, respectively. Lasso and DeepIntent are two of the three preeminent players in the burgeoning HCP programmatic advertising industry. Id. at 340 (These two entities and their rival, PulsePoint, have been referred to as the “Big 3” in IQVIA’s internal business records.) “The vigorous competition among these three firms through the present day has not only resulted in lower prices, according to the FTC, but has also driven technological innovation in the field.” Id.

In determining whether the FTC is entitled to a preliminary injunction, courts follow a two-step inquiry which “asks (1) whether the FTC has shown a likelihood of ultimate success on the merits in the administrative proceeding, and (2) whether the equities weigh in favor of an injunction.” Id. at 347. The parties disagreed as to what exactly is required for the FTC to demonstrate “a likelihood of ultimate success.” Id. While the FTC contended that it need only show “a fair and tenable chance of ultimate success on the merits,” defendants argued that the FTC must go further and present evidence that “raise[s] questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance and ultimately by the Court of Appeals.” Id. Ultimately, the court held at “there is no meaningful difference between the two standards,” applying a relatively low bar to FTC’s preliminary injunction argument. Id. at 348.

The FTC based its claims on both horizontal and vertical theories of harm. It argued that a horizontal merger between IQVIA and Propel would eliminate the beneficial competition between Lasso and DeepIntent and enhance concentration of the HCP programmatic advertising market. Regarding its vertical theory of harm, the FTC claim that IQVIA is “a provider of essential data for HCP programmatic advertising.” Id. This vertical theory asserted that allowing the merger to be finalized would enable IQVIA to prevent other industry participants from accessing IQVIA’s data, a key element of HCP programmatic advertising. Id. at 352.

The defendants challenged both theories on several grounds. Foremost, they argued that the FTC defined the market for HCP programmatic advertising too narrowly, due to the availability of alternative advertising channels such as social media and endemic websites. Id. at 351. Even within that proposed market, the defendant companies argued that “competition [would] remain vibrant post-merger in what they characterize as a dynamic and rapidly evolving industry.” Id. Responding to the vertical theory specifically, they claimed that IQVIA has neither the ability nor the incentive to prevent other companies from accessing its data.

The court disagreed, however, holding that the FTC was likely to succeed on the merits of its horizontal challenge. Id. To do so, the court noted that the Commission was required to (1) define a relevant market and (2) show that the merger’s effect on that market would likely be anticompetitive.

All parties agreed to one component of market definition—that the geographic market is worldwide. However, they “forcefully dispute[d]” the relevant product market’s scope. Id. A relevant product market is defined by “the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.” Id. The FTC argued that the relevant product market is HCP programmatic advertising, which it defines as “an automated process for digital advertising that facilitates an auction process in microseconds across many digital advertising spaces.” Id. This method of advertising is distinct and “not reasonably interchangeable” with any other form of digital marketing, according to the Commission, and thus should not include channels like social media or endemic websites. Id. According to the FTC, other advertising channels do not offer the same functionality as HCP programmatic advertising and, thus, are not significant competitive restraints. Id. at 353. The defendants, on the other hand, claimed that the relevant market should be defined far more broadly. They argued that social media platforms and endemic websites can easily offer programmatic advertising to HCPs and are thus reasonable substitutes that belong in the relevant market definition. Customers, defendants claimed, could simply respond to any post-merger price increase by sending their business to alternative advertising channels. Id. Both sides offered their own economic experts to support their positions on the appropriate relevant market definition. Id. at 354.

Ultimately, the court accepted the FTC’s narrow market definition. Id. It held that alternative advertising channels like social media and endemic websites are not reasonably interchangeable with HCP programmatic advertising because the latter “offers something meaningfully different than what is provided by those alternative channels.” Id. In making this decision, the court utilized the factors set forth by the U.S. Supreme Court in Brown Shoe Co., Inc. v. United States, 370 U.S. 294 (1962), including “industry or public recognition of the submarket as a separate economic entity, the product’s peculiar characteristics and uses, unique productions facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.” IQVIA, 710 F.Supp.3d at 354. The court noted that the first two Brown Shoe factors, distinct characteristics and industry recognition, were the “most illuminating” to the matter at hand. Id. at 355.

The FTC’s “distinct characteristics” argument was extensive. It claimed that HCP programmatic advertising gives customers “unparalleled inventory access, transparency, efficiency, and control.” Id. Compared to social media, the FTC said, programmatic advertising provides customers with a much broader reach for their product, rather than just the users and data within the walls of a social media platform. Id. Likewise, advertising on endemic websites limits customers to the fixed limits and inventory on each specific website, rather than the access across myriad websites that programmatic advertising offers. Id. Several expert witnesses supported the FTC’s position, arguing that advertising dollars stretch much further with programmatic advertising than with social media or endemic websites, citing the “walled garden” confines of those platforms. Id. at 357–58.

The defendants offered witnesses who claimed they regularly shift money around to various advertising platforms, and that they would simply take their business elsewhere if the proposed merger resulted in raised prices in programmatic advertising. Id. at 358. However, the court held that the mere willingness or habit of shifting advertising dollars across different platforms fails to establish that those alternative channels are adequate substitutes for the unique features of programmatic advertising. Id. Rather, it noted that “it is hard to see how moving away from programmatic to social or endemic would not result in at least some sacrifice in services.” Id. at 359. While the parties argued heavily about whether or not Google sufficed as a competitive constraint, the court was ultimately persuaded by the FTC’s witnesses who testified that the tech giant participates only minimally in the HCP advertising space. Id. at 361.

Regarding industry recognition, the FTC argued that industry participants recognize HCP programmatic advertising as distinct. Id. at 362. Several witnesses testified that companies often have entirely separate budgets for programmatic advertising and social media or endemic websites. Id. The court also found documents from the ordinary course of defendants’ business indicative of distinct market for programmatic advertising. Id. at 363. Several documents offered as evidence referred to only three main competitors, including DeepIntent and Lasso, in the programmatic advertising market. Id.

The defendants criticized the FTC’s reliance on ordinary course documents, arguing that many of them were outdated and often include “anecdotal speculation.” Id. They further argued that any indication of market dominance in those documents should be viewed as laymen’s comments, rather than evidence to define an antitrust market. Id. at 364. While the court agreed that mere references to a “market” in a business’s internal documents “are not themselves dispositive in delineating the boundaries of the relevant antitrust market,” courts have repeatedly held that such documents “can and should play a role in analyzing competitive dynamics and evaluating whether certain products qualify as reasonable substitutes that must be included in the market.” Id. Defendants also pointed to evidence that many companies compete for bites of healthcare and pharmaceutical industry advertising budgets.

Ultimately, the court agreed with the FTC on this point. It held that “the fact that many companies are competing in a broad market for advertising dollars does not prove that the FTC’s proposed market here is unduly narrow.” Id. at 365. Rather, courts assessing antitrust challenges must focus on “the narrowest market within which the defendant companies compete that qualifies as a relevant product market,” which does not include social media channels or endemic websites in this case. Id. at 366. “In this case, there is undeniably a broader market for digital healthcare advertising in which programmatic, social media, and endemic websites all participate. But ‘the viability of such additional markets does not render the one identified by the government unusable.’” Id. at 368 (quoting United States v. Bertelsmann SE & Co., 646 F. Supp. 3d 1, 28 (D.D.C. 2022)).

With the relevant market issue settled, the court then turned to the second step of the FTC’s injunction hurdle: whether the proposed merger’s effect on the market would likely be anticompetitive. The FTC relied on two arguments to assert that IQVIA’s acquisition of Propel and its advertiser, DeepIntent. Id. at 377. First, the Commission “argue[d] that the merged firm’s market share would exceed the 30% threshold, first set out by the U.S. Supreme Court in United States v. Philadelphia National Bank 374 U.S. 321 (1963) in 1963, that triggers a presumption of anticompetitive effects.” IQVIA, 710 F.Supp.3d at 377. It claimed the HHI also supported a presumption of anticompetitive effects. Second, the FTC argued that merger would substantially eliminate competition between DeepIntent and Lasso (IQVIA’s programmatic advertiser). Id. Despite vigorous opposition from the defendants, the court agreed with the FTC. “The FTC’s market share and HHI calculations . . . establish a presumption that the proposed acquisition will harm competition in the market for HCP programmatic advertising. And that presumption is reinforced by ample evidence that the transaction would eliminate substantial head-to-head competition between DeepIntent and Lasso.” Id.

IQVIA and Propel argued that the 30% threshold from Philadelphia National Bank has been repudiated, and that the FTC’s calculations were based on significant errors. Id. at 378. They claimed that the FTC’s Merger Guidelines make no mention of the 30% threshold and that it is an arbitrary number. Id. The court, though, noted several decisions from the Second Circuit and other courts since Philadelphia National Bank was issued that continue to support that opinion’s 30% threshold holding to this day, promptly setting aside the defendants’ argument that it is invalid. Id. at 379 The FTC’s expert testified that the merger would result in IQVIA controlling 46% of the HCP programmatic advertising market, while the defendants’ expert claimed it would be 30.6%. Id. Because of the court’s support of the 30% threshold, the post-merger market share would trigger a presumption of anticompetitive effects regardless of which side’s expert is correct.

While the court noted that this high market concentration would be sufficient for the FTC to state its prima facie case, it also discussed the Commission’s extensive evidence of how the proposed merger would eliminate head-to-head competition between DeepIntent and Lasso. Id. at 382 It noted that courts often agree that elimination of direct competition between merging parties can bolster a conclusion that the merger will have anticompetitive effects. Ordinary course documents and witness testimony are frequently relied upon to illustrate whether two parties view one another as strong competition, and that was no different in this case. Id. at 383. “Time and again, defendants’ own records revealed evidence of fierce competition between DeepIntent and Lasso. For instance, DeepIntent documents repeatedly refer to Lasso as a significant competitor.” Id. (citing internal documents in which DeepIntent executives made comments such as “glove are off with Lasso,” and “we need a few strong bullets as to what makes our integrated planning, activation & real-time optimization, stronger than Lasso,” and “we are in a dogfight . . . between us and Lasso”). Lasso internal documents likewise identify DeepIntent as major competition. Id. at 383–84 (citing internal documents in which Lasso executives made comments such as “We have been very clear that Deep[I]ntent is our largest competitor on the programmatic side of things.”). These internal documents indicate that the two companies often compete on price, product quality, and innovation, because customers frequently weigh one’s offerings against the other’s, and witness testimony and quantitative evidence revealed similar conclusions. Id. at 384–87.

Once the FTC established a presumption of anticompetitive effects, the defendants raised rebuttal arguments based on four grounds: “(1) the inability of current market shares to predict future competition; (2) ease of entry into the market; (3) the sophisticated customers in the market; and (4) efficiencies that will result from the transaction.” Id. at 389. They attempted to argue that current markets shares are not reliably indicative of future competition because the programmatic advertising industry is dynamic; that Lasso’s rapid ascent to illustrate how the ease with which competitors may enter the market; that there are “power buyers” in the industry who would be able to combat the merged parties’ ability to raise prices; and that the merger would reduce costs for customers and expand the firms’ capabilities and quality. Id. at 389–397. Ultimately, the court rejected all four of these arguments, holding that the defendants failed to “overcome the FTC’s strong prima facie case of anticompetitive effects,” granting the Commission’s preliminary injunction request.

§ 2.4.5. Federal Trade Commission v. U.S. Anesthesia Partners, Inc., No. 4:23-cv-03560, 2024 WL 2137649 (S.D. Tex. May 13, 2024).

A Texas federal court dismissed the Federal Trade Commission’s (FTC) lawsuit against private equity (PE) owner, Welsh, Carson, Anderson & Stowe (Welsh Carson), while allowing to proceed the agency’s challenge against U.S. Anesthesia Partners’ (USAP) series of acquisitions. See Federal Trade Commission v. U.S. Anesthesia Partners, Inc., No. 4:23-cv-03560, 2024 WL 2137649 (S.D. Tex. May 13, 2024).

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 15 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. Id. at *1. 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.” Id. at *2.

When Welsh Carson formed USAP it owned 50.2% and chose company leadership. In 2017, the firm sold half of its stake in USAP. Id. at *3. Since then, one of the firm’s funds owns 23% of USAP and has the right to appoint only two of USAP’s 14 board members. Id.

In September 2023, the FTC sued Welsh Carson and USAP, claiming that they engaged in anticompetitive practices to monopolize Texas’ anesthesiology. See Complaint, FTC v. U.S. Anesthesia Partners, Inc., No. 4:23-cv-03560 (S.D. Tex. Sept. 21, 2023). Allegedly, “Welsh Carson masterminded the plan for USAP to roll up markets across Texas and inflate prices,” pointing to internal communications at Welsh Carson where the firm allegedly bragged about being USAP’s primary architect. Id. at ¶336. 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.” Id. at ¶337. 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 claims 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. 15 U.S.C. § 53(b). Welsh Carson and the USAP each moved to dismiss the claims against it.

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 currently violating 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. U.S. Anesthesia Partners, No. 2024 WL 2137649, at *4. Welsh Carson, however, owns only 23% 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.” Id. at *5. 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.” Id. at *8.

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 disposes of this by pointing out that “the mere capacity to do something does not meet the requirement that the thing is likely to recur.” Id. at *6. And the fact that USAP is continuing its alleged anticompetitive practices “goes to USAP’s violations, not Welsh Carson’s.” Id. at *5. The court also acknowledged that Welsh Carson seeks to replicate its strategy in other health care markets, but “comments from . . . executives indicating a desire to consolidate other health care markets do not show that Welsh Carson is about to violate antitrust laws.” Id. at *6.

Welsh Carson was a minority, noncontrolling investor. It controlled only two of USAP’s 14 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 “hand-off” the investor is regarding operations. The 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.” Merger Guidelines §2.8 (2023) 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.” Press Release, Fed. Trade Comm’n, FTC Challenges Private Equity Firm’s Scheme to Suppress Competition in Anesthesiology Practices Across Texas (Sept. 21, 2023).

§ 2.5. Miscellaneous

§ 2.5.1. Non-Compete Rulemaking—Ryan, LLC v. Federal Trade Commission, Civil Action No. 3:24-CV-00986-E, 2024 WL 3297524 (N.D. Tex. July 3, 2024).

The Northern District of Texas issued its much-anticipated order preliminarily enjoining the effective date of the Federal Trade Commission’s (“FTC”) controversial noncompete ban rule. See Ryan, LLC v. Federal Trade Commission, No. 3:24-CV-00986-E, 2024 WL 3297524 (N.D. Tex. July 3, 2024). The court’s decision, however, is limited to the named plaintiffs—a tax accounting firm and several business groups—in the case. Id. at *16. Nevertheless, the stay 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. Id. at *3 (citing 16 C.F.R. § 910.1). The rule prohibits workers from entering into new noncompete agreements on or after the effective date. Id. (citing 16 C.F.R. § 910.2(a)). The rule also prohibits workers from enforcing or attempting to enforce a noncompete clause that existed before the effective date, except for those workers who qualify as senior executives. Id. The ban does not apply to customer or employee nonsolicitation agreements. For a more thorough review of the rule, see FTC Bans Employee Noncompete Clauses, Troutman Pepper (Apr. 24, 2024).

The central issue before the Texas court was whether the FTC Act gave the FTC the authority to promulgate substantive rules in general, and the broad, sweeping noncompete ban in particular. See Ryan, LLC, 2024 WL 3297524 at *8. 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.” Id. Further, the court cited a 1979 Supreme Court case which referred to Section 6(g) as a “housekeeping statute,” authorizing rules related to “procedure or practice,” not “substantive rules.” Id. (citing Chrysler Corp. v. Brown, 441 U.S. 281, 310 (1979)). 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).” Id. The court also determined that the FTC rule is likely “arbitrary and capricious.” Id. at *12.

Notably, the Texas court limited its preliminary ruling to the parties and declined to enter an order enjoining enforcement of the FTC rule nationwide. Id. at *16. As a result, the court’s preliminary injunction order does not invalidate the FTC rule for any nonparty.

However, the court’s ruling on the preliminary injunction was not a final judgment in the case. Its approach to the preliminary injunction and finding that the plaintiffs demonstrated a “substantial likelihood of success on the merits” strongly suggested that it would strike down the rule on the merits. Id. at *10. Notably, the court also cited the Supreme Court decision overturning the recent Chevron doctrine, Loper Bright Enterprises v. Raimondo. See id. at *7. Indeed, on August 20, 2024, after the parties cross-moved for summary judgment, the court held that the FTC lacked substantive rulemaking authority, and that the rule was arbitrary and capricious. See Ryan, LLC v. Federal Trade Commission, No. 3:24-CV-00986-E, 2024 WL 3879954, at *12–14 (N.D. Tex. Aug. 20, 2024). The court therefore granted the plaintiffs’ motion for summary judgment and set aside the FTC’s noncompete rule. Id. at *14.

§ 2.5.2. Non-Compete Rulemaking—ATS Tree Service v. Federal Trade Commission, Civil Action No. 24-1743, 2024 WL 3511630 (E.D. Pa. July 23, 2024).

In direct conflict with a recent Texas District Court ruling, an Eastern District of Pennsylvania Court denied ATS Tree Services’ motion for a preliminary injunction, staying the effective date of the Federal Trade Commission’s (“FTC”) noncompete ban. ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743, 2024 WL 3511630, at *19 (E.D. Pa. July 23, 2024). The ATS court limited application of its decision to the plaintiff, but its holding—“the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition,” id. at *13—conflicts with the Texas Court’s conclusion that “the FTC lacks the authority to create substantive rules.” Ryan, LLC, 2024 WL 3297524 at *8.

The ATS court undertook a full statutory analysis of the FTC Act in light of the U.S. Supreme Court’s recent Loper Bright Enterprises v. Raimondo decision, which overturned Chevron deference to agencies in cases of statutory interpretation. See ATS Tree Services, LLC, 2024 WL 3511630 at *13. Despite this lack of deference, the court relied heavily on the FTC’s non-binding 2022 Policy Statement. The non-binding Policy Statement lays out the FTC’s current position regarding the scope and history of Section 5 of the FTC Act. See Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act Commission (Nov. 10, 2022), available at https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyStatement.pdf. Less than a month after Chair Khan’s Senate confirmation, the FTC, in a 3–2 vote along party lines, withdrew its 2015 policy statement, replacing it with the more controversial, less stringent, and more flexible 2022 Policy Statement. See id.

Additionally, the court found that the plaintiff’s noncompete agreements were “not justified by legitimate business purposes” and, using the 2022 Policy Statement’s language, found that they were “exploitative and coercive” when entered into with employees who are not senior executives. ATS Tree Services, LLC, 2024 WL 3511630 at *17.

The court’s opinion ignored the dissenting statements of the two Republican commissioners and gave short shrift to the arguments of ATS and the amici supporting the stay. For example, the fact that the agency did not issue substantive rules until 1962, and even doubted that it had the authority to issue substantive rules, was left to a footnote. See id. at *15 n. 19. Importantly, the court offered little guidance as to what principles exist to limit the FTC’s issuance of other substantive rules under Section 6(g) of the FTC Act, other than the fact that such rules must concern “unfair methods of competition.” See id. at *13. The court noted that Congress intended that the phrase, “unfair methods of competition” be “vague” to not limit the FTC’s ability to define what should be prohibited conduct. Id. at *3.

The court also found that ATS failed to meet its burden of proving irreparable harm, and the court characterized the arguments that (1) ATS would have to scale back its training program and (2) its employees would quit absent a noncompete provision as “speculative.” Id. at *10.

The Pennsylvania court’s ruling on the preliminary injunction motion was not a final judgment in the case, but its approach to the preliminary injunction and its finding that the plaintiff did not demonstrate either a substantial likelihood of success on the merits or irreparable harm strongly suggested that it would ultimately deny the Plaintiff’s request for a permanent injunction. Plaintiff filed a motion to stay the case on September 6, 2024, which was denied. See ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743, 2024 U.S. Dist. LEXIS 192128 (E.D. Pa. Oct. 3, 2024). Plaintiff then voluntarily dismissed its claim against the FTC on October 4, 2024, ending the case before a decision on the merits could be reached. See Notice of Voluntary Dismissal by All Plaintiffs, ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743, 2024 WL 3511630 (E.D. Pa. Oct. 4, 2024).

§ 2.5.3. Non-Compete Rulemaking—Property of the Villages, Inc. v. Federal Trade Commission, No. 5:24-cv-316-TJC-PRL, 2024 WL 3870380 (M.D. Fla. Aug. 14, 2024).

The third of the three federal district court cases to consider the Federal Trade Commission’s (“FTC”) rule banning employee noncompete arrangements was the Middle District of Florida. See Property of the Villages, Inc. v. Federal Trade Commission, No. 5:24-cv-316-TJC-PRL, 2024 WL 3870380 (M.D. Fla. Aug. 14, 2024). In a decision issued from the bench, in Property of the Villages, Inc. v. Federal Trade Commission, the court granted the plaintiff’s motion for a preliminary injunction and stayed the FTC’s rule. Id. at *11.

Plaintiff, Properties of the Villages, Inc., a real estate broker, entered into noncompete agreements with its agents. Id. at *2. The four-count complaint challenged the FTC’s rule under the Administrative Procedure Act, 5, U.S.C., Section 706(2), including two counts alleging violations of the federal Constitution. See id. Plaintiff alleged that the FTC does not have substantive rulemaking authority over unfair methods of competition. Id. Plaintiff argued that, even if the FTC has substantive rulemaking authority, the noncompete rule exceeds that authority and is impermissibly retroactive, and the noncompete rule violates the commerce clause. Id.

With respect to the agency’s rulemaking authority, the court began by noting that Congress “empowered and directed” the FTC “to prevent” for-profit businesses “from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” Id. at *4. Section 5 of the FTC Act also includes mechanisms for enforcement actions to stop violations. Id. Section 6 of the FTC Act, entitled “Additional Powers of the Commission,” provides authority for the agency to undertake investigations, require reports of various entities, publish periodic information and reports, and assist with international investigations. Id. Section 6(g) grants the FTC the authority to “from time to time classify corporations and except as provided in Section 57a(a)(2) of this title,” which addresses rulemaking with respect to unfair or deceptive acts or practices, “to make rules and regulations for the purpose of carrying out this subchapter.” Id.

The FTC argued that, given its Section 5 mission to prevent businesses from using unfair methods of competition combined with its authority in Section 6(g) to make rules and regulations, it has the authority to promulgate substantive unfair competition rules, specifically the noncompete rule. Id. at *4. The court rejected the plaintiff’s argument that Section 6 granted the FTC only certain process-related authority for ministerial acts such as recordkeeping and publications. Id. at *4–5. Instead, the Florida court concluded that Section 6(g) granted the FTC the authority to make substantive rules as opposed to procedural rules. Id. at *5.

The court also determined that the plaintiff had not demonstrated a likelihood of success with respect to its constitutional arguments, claiming there is no interstate commerce connection, a separation of powers concern, and the non-delegation doctrine. Id.

Although the court concluded that Section 6(g) of the FTC Act grants some type of substantive rulemaking authority, it next examined whether it granted the FTC the authority to issue the noncompete rule at issue and whether the rule implicated a major question. See id. at *5–6. The major questions doctrine provides that when an agency claims to have the power to issue rules of “extraordinary . . . economic and political significance,” it must “point to ‘clear congressional authorization’ for the power it claims.” Id. at *6. The agency’s support for its authority must be more than plausible, given the significant consequences of the “major” rule. Id. The doctrine’s purpose is to protect the separation of powers by requiring Congress to state its intention to confer that power clearly and unambiguously. Id. The court further described the doctrine as the “context” against which a statutory delegation is enacted, and therefore “a tool for discerning, not departing from, the text’s most natural interpretation.” Id. Given the sweep and the breadth of the final rule, however, the court held it substantially likely that the plaintiffs had shown that it presents a major question. Id. at *8. Further, the court concluded that the Section 6 language relied on by the FTC, by its text, placement, context, and history, falls short with respect to a rule as sweeping and consequential as the noncompete ban. Id. at *9.

The court granted the plaintiff’s motion for a preliminary injunction. Id. at *11. On September 24, 2024, the FTC appealed the decision to the U.S. Court of Appeals for the Eleventh Circuit.

§ 2.5.4. Non-Compete Rulemaking—Ryan, LLC v. Federal Trade Commission, Civil Action No. 3:24-CV-00986-E, 2024 WL 3879954 (N.D. Tx. Aug. 20, 2024).

In a victory for plaintiffs, a Texas court permanently enjoined the Federal Trade Commission’s (“FTC”) rule banning nearly all employee noncompetes. See Ryan, LLC, 2024 WL 3879954. The Texas opinion gave much-needed clarity regarding the rule and eliminated the need for employers to address the rule by September 4, 2024, which is when the rule was scheduled to become effective. See id. at *1.

The FTC’s noncompete rule, if it had become effective, would have applied to any written or oral employment term or policy that penalized or prevented 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. Id. at *3 (citing 16 C.F.R. § 910.1). The rule, with narrow exceptions, prohibited new noncompete agreements on or after the effective date with any worker. Id. The rule also prohibited enforcing or attempting to enforce a noncompete clause that existed before the effective date for any worker except for those who qualified as senior executives. Id. at *4 (citing 16 C.F.R. § 910.2(a)).

The Texas and Pennsylvania courts reached conflicting preliminary injunction decisions, with the Pennsylvania court upholding the ban, see ATS Tree Services, LLC, 2024 WL 3511630, at *19, and the Texas court finding that the FTC did not have the authority to issue the noncompete rule. See Ryan, LLC, 2024 WL 38779954, at *14. Although the Florida court agreed that its plaintiff was entitled to preliminary relief from the rule, it applied a different analysis to reach that decision. See Properties of the Villages, Inc., 2024 WL 3870380 at *4–11. All three of the preliminary rulings applied only to the plaintiffs in each of those cases, leaving other employers with a difficult choice: (1) comply with a rule that negated their bargained-for employee arrangements, (2) attempt to preserve their right to enforce noncompete obligations, or (3) not comply in hopes that the ban would, in the future, be struck down.

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. Ryan, LLC, 2024 WL 3879954 at *9. Unlike the Texas court’s preliminary injunction ruling, which was limited to only the parties before it, in the instant decision the court held that the FTC’s noncompete rule “shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.” Id. at *14. The court agreed that the FTC Act granted the agency the power to prevent unfair methods of competition, but concluded that Congress did not affirmatively grant the FTC the authority to promulgate “substantive rules regarding unfair methods of competition.” Id. at *12. The court determined that the pertinent Section of the FTC Act—Section 6(g)—is “a housekeeping statute,” authorizing rules regarding the agency’s practices and procedures. Id. at *9 (citing Chrysler Corp. v. Brown, 441 U.S. 281, 310 (1979)).

The court also concluded that the FTC’s noncompete ban was arbitrary and capricious, and accordingly violated the Administrative Procedures Act because of its “one-size-fits-all approach with no end date.” Id. at *13. “The [FTC]’s lack of evidence as to why [it] chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all noncompetes—instead of targeting specific, harmful noncompetes, renders the Rule arbitrary and capricious.” Id.

After concluding that the FTC did not have the statutory authority to establish the noncompete ban and that the ban was arbitrary and capricious, the Texas court found that it was obligated to “hold unlawful” and “set aside” the FTC’s rule in its entirety and as required under Section 706(2) of the APA. Id. at *14.

The Texas and Florida courts’ analyses differed. The Texas court held that the FTC did not have the authority to promulgate “substantive rules regarding unfair methods of competition.” Id. at *9. Instead, the court determined that the pertinent Section of the FTC Act—Section 6(g)—is “a housekeeping statute,” authorizing rules regarding the agency’s practices and procedures. Id. (citing Chrysler Corp., 441 U.S. at 310). The Florida court, on the other hand, held that Congress granted the FTC the authority to make rules to prevent unfair methods of competition, but that given the economic significance of noncompetes, the noncompete rule likely violates the major questions doctrine. See Properties of the Villages, Inc., 2024 WL 3870380 at *5–8.

The Pennsylvania court took yet a third approach, denying the plaintiff’s request for preliminary injunctive relief and finding that the FTC likely has the authority to issue substantive unfair competition rules, including a rule prohibiting noncompetes as a class, and that the rule likely does not violate the non-delegation doctrine. ATS Tree Services, LLC, 2024 WL 3511630 at *19. Following the court’s decision that the plaintiff’s challenge was unlikely to succeed on the merits, the plaintiff sought a stay. See ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743, 2024 WL 4525514 (E.D. Pa. Oct. 3, 2024). In opposition to the stay, the FTC argued that it would be unfair to allow the Pennsylvania plaintiff “to avail itself of [the Texas court’s] judgment . . . while preserving plaintiff’s challenge to the Rule indefinitely, for the sole purpose of reviving it in the event the Commission were to prevail in an appeal in another circuit.” See Opposition to Motion to Stay, ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743, 2024 WL 4525514 (E.D. Pa. Sept. 11, 2024). After the Pennsylvania court refused to stay the proceedings, the plaintiff voluntarily dismissed its challenge. See Notice of Voluntary Dismissal by All Plaintiffs, ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743, 2024 WL 3511630 (E.D. Pa. Oct. 4, 2024).

On October 18, 2024, the FTC filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit. Accordingly, both the Fifth and Eleventh Circuits will have the opportunity to speak to the authority of the FTC to promulgate rules regarding unfair methods of competition if the new administration does not change course.

§ 2.5.5. State Antitrust Enforcement Venue Act Developments

Since it was signed into law on December 29, 2022, the State Antitrust Enforcement Venue Act 28 U.S.C. § 1407 (2022) (“Act”) has enabled state attorneys general to fight to keep antitrust cases on their own turf, forcing companies to defend against antitrust lawsuits based on very similar facts in multiple jurisdictions. States have been successful under the Act thus far.

The Act amended 28 U.S.C. § 1407, which governs the ability of the Judicial Panel on Multidistrict Litigation (“JPML”) to transfer and consolidate litigation spanning multiple jurisdictions. H.R. Rep. No. 117-494, at 2 (2022). Prior to the Act’s passage, the statute enabled the JPML to consolidate multijurisdictional antitrust cases, but provided an exception for antitrust cases brought by the federal government. Id. Because of that exclusion, “the United States [was] entitled to litigate most antitrust actions in the federal district court where it file[d] its claims . . . As a result, federal government enforcement actions [could] often proceed more quickly than those brought by states or private plaintiffs.” Id. The 2022 amendment, which was enacted as part of the Consolidated Appropriations Act, 2023, added the words “or a State” to this exemption. See Pub. L. No. 117-328, Div. gg, Title III, § 301, 136 Stat. 4459, 5970 (Dec. 29, 2022). Consequently, the Act extended the exclusion to state AGs and now prohibits companies from transferring state-filed antitrust lawsuits.

In a September 2022 report, the House Committee on the Judiciary noted that the Act was intended “to promote competition by preventing the transfer of actions arising under the antitrust laws in which a State in a complainant.” Id. It further said that the Act would ensure “that states were afforded deference when selecting an appropriate venue to enforce the antitrust laws and protect the public from antitrust injury . . . [and] eliminate[ ] delays, inefficiencies, and associated higher costs that states face enforcing the antitrust laws under the current JPML process.” Id.

The Act received significant bipartisan support at its passage, which was often described as a necessary reaction to Big Tech’s purported litigation strategies. Advocates for the Act frequently cited the state antitrust lawsuits filed against Google. Specifically, Google had moved to transfer several lawsuits to California shortly before the Act was initiated, in the attempt to land a more favorable forum. Id. While defendants view consolidation or venue transfers as cost-saving mechanisms and a way to minimize the risk of conflicting decisions affecting their businesses, plaintiffs’ attorneys and states often view them as mere disruptive strategies that slow the pace of litigation. Id.

Now, states have the power to choose their own antitrust venues, offering more control to state plaintiffs, but increasing the cost of antitrust litigation for defendants, third parties, and the judiciary over multiple jurisdictions. Since the Act was passed, several state AGs have attempted to take advantage of their new power, and they have been largely successful.

The State of Texas invoked the Act for the first time in 2023, when it successfully got a case against Google remanded to the Eastern District of Texas where it had been originally filed. Remand Order, In Re: Google Digital Advertising Antitrust Litigation, MDL No. 3010, at 4 (JPML June 5, 2023). Before the Act was passed, the case had been transferred and consolidated with similar actions in New York. Id. at 1. In June 2023, a seven-member JPML panel held “that the recent amendment to Section 1407(g) applies to pending state antitrust enforcement actions and, absent a state’s waiver of its venue rights, the [p]anel must grant the motion for remand.” Id. at 2. Google appealed to the U.S. Court of Appeals for the Second Circuit, which held that Google had failed to show the “exceptional circumstances” required to overturn the JPML transfer decision and affirmed the remand of the Texas case. Order, Google LLC v. Texas, No. 23-910 (2d. Cir. Oct. 4, 2023).

In November 2023, a group of AGs attempted to argue that, in light of the Second Circuit’s remand decision in the Google case, the Act should be applied retroactively to remand their antitrust actions regarding generic drug pricing from Pennsylvania back to Connecticut federal court where they were originally filed. Memorandum of Law in Support of Motion to Remand, In Re: Generic Pharmaceuticals Pricing Antitrust Litigation, MDL No. 2724, at 3-6 (JPML Nov. 1, 2023). The generic drug pricing cases had been pending since long before the Act was passed; the first related state case was filed in 2016 and consolidated as multidistrict litigation in 2017. The Pennsylvania court’s status report to the JPML panel noted that “the Transferee Court and the Special Masters appointed to assist with the informal resolution of disputes have developed significant knowledge with regard to the cases and the generic pharmaceutical industry.” Status Order, In Re: Generic Pharmaceuticals Pricing Antitrust Litigation, MDL No. 2724, at 3 (E.D. Pa. Dec. 7, 2023). The panel acknowledged that remand of the state AG cases to Connecticut would mean that significant resources of the parties and the transferee court would be wasted, but stated that the impact of remand on the multidistrict litigation is “largely irrelevant.” Remand Order, In Re: Generic Pharmaceuticals Pricing Antitrust Litigation, MDL No. 2724, at 7 (JPML Jan. 31, 2024).

In 2024, state AGs successfully kept parallel antitrust actions in their chosen home forums on multiple occasions. In January, an Arkansas federal judge granted a state AG’s request to keep an antitrust action against pesticide companies in Arkansas, despite the defendants’ efforts to transfer the lawsuit to North Carolina, where they are already facing similar claims. See also Ark. ex rel. Griffin v. Syngenta Crop Prot. AG, No. 4:22-CV-01287-BSM, 2024 WL 183111, at *1 (E.D. Ark. Jan. 17, 2024). The court found that the defendants’ reasons for transfer did not outweigh the state’s right to choose the forum under the Act. Id. The supermarket chains Kroger and Albertsons have also been forced to litigate challenges to their proposed merger in several different venues. The merger was blocked in December 2024 in two separate suits; one brought by the Federal Trade Commission in Oregon federal court, and one brought by Washington state in its state court. See FTC v. Kroger Co. & Albertsons Co., Inc., No. 3:24-cv-00347-AN, 2024 U.S. Dist. LEXIS 223077, at *1 (Or. Dec. 10, 2024); Findings of Fact & Conclusions of Law, State v. Kroger Co., No. 24-2-00977-9 SEA (Wash. Sup. Dec. 10, 2024). The grocery retailers also faced a merger challenge in Colorado state court, where a decision was still pending at the close of 2024. Colorado v. Kroger, No. 24-CV-30459 (Colo. Dist. Ct. 2024); see also Lindsey Toomer, Colorado awaits decision in Kroger-Albertsons case after rulings block merger in other states, Colo. Newsline (Dec. 22, 2024).

Editor

Assistant Editor

Contributors

Keo McKenzie, Mercedes Subhani, Avi Toltzis, and Alex Crowley

§ 1.1. Introduction

Another year has passed, and the legal issues arising out of Artificial Intelligence’s increasingly broad adoption across every facet of our lives continued to expand. As business lawyers, there is optimism that AI (especially Generative and Agentic AI) will create new opportunities for us to assist our clients in this rapidly developing legal landscape of lawsuits, proposed and newly enacted regulations, and novel IP, employment and privacy concerns. At the same time, lawyers must recognize how AI is changing the practice of law and clients’ expectations of how their outside counsel will work efficiently and smartly to further their interests.

Simply stated, lawyers have an ethical obligation to learn, understand and keep apace with how AI can be used in the daily practice of law. And as I write this, the media reports Bill Gates is predicting that in 10 years, most jobs across industries will become obsolete thanks to AI; something that has concerned me since at least 2014 (for those interested in my perspective, which remains largely unchanged 11 years later, please see my 2014 Tech Crunch article on the subject). Whether or not Mr. Gates is correct (and I would wager that he is), there is no denying AI’s impact on the legal profession and the seismic shift upon us in the way we utilize Generative AI to perform tasks which hitherto were the sole provenance of paralegals, legal assistants and junior lawyers. Tasks like legal research, document automation, risk and compliance management, and many other legal functions are rapidly becoming the provenance of AI tools and AI-powered legal assistants.

The pace of change with regard to AI’s use in the legal profession will only increase in the coming years, changing nearly everything about how our data-driven profession operates (“find a case that holds Y”; “pull up the last contract and compare it with the draft opposing counsel just sent,” “what is the law in X jurisdiction on Y issue”; “for an opening statement, pull the stats on how many drunk driving collisions end in fatalities,” “analyze this draft crypto loan agreement and suggest ways to strengthen it,” “find how many times Person Y is mentioned in all of the various FTX related filings around the country,” “for the 2 TB data set, find all of the documents that reference ‘Z,’ explain the new EU regulations on [subject] and our compliance obligations,” etc.). Like our clients, it is our duty to utilize AI in responsible and transparent ways.

For 2024, we have continued our practice of focusing on cases decided in 2024 and legislation enacted in 2024. Not surprisingly, emerging themes for both the courts and state and local legislators center around copyright infringement, privacy, fairness/perceived bias, civil rights, transparency and consent. The headline is that for the foreseeable future, practicing law will increasingly mean staying abreast of AI technology in many different use cases and domains. Our clients are looking for ways to produce and utilize AI to make themselves more efficient while cutting costs and errors associated with human capital. In the near future, it is likely that clients and judges will expect lawyers to utilize AI to better serve them and the courts. And like it or not, AI will remain the focus for regulators and litigants across the United States.

We hope that this Chapter continues to be a useful tool for lawyers looking for a straightforward summary of the major AI cases and legislation for 2024. And my colleagues Adam Aft, Keo McKenzie, Mercedes Subhani, Avi Toltzis, and Alex Crowley have my gratitude for their assistance in preparing this year’s Chapter.

We look forward to tracking the trends in these cases and presenting the cases arising over the next several years.

Bradford Newman

Editor and Co-Chair of the AI and Blockchain Subcommittee of the Business and Corporate Litigation Committee

Palo Alto

§ 1.2. Artificial Intelligence Cases of Note

§ 1.2.0. United States Supreme Court

Moody v. NetChoice, LLC, 603 U.S. 707, 144 S. Ct. 2383 (2024). Defendant NetChoice, an internet trade association, alleged that Florida and Texas laws restricting social media platforms’ ability to moderate content on their websites via algorithms (including artificial intelligence) violated the First Amendment to the U.S. Constitution. The Court found that the lower courts had not properly considered the issues and vacated and remanded the prior judgments regarding each law.

§ 1.2.1. First Circuit

Harris v. Adams, No. 24-cv-12437-PGL, 2024 U.S. Dist. LEXIS 210951 (D. Mass. Nov. 20, 2024). Two high school students were punished for cheating on an AP U.S. History project by failing to attribute the source for text (which included hallucinations) that they copied from Grammarly’s artificial intelligence software. Plaintiff Harris claimed that the high school violated Plaintiff’s due process rights and that the punishments were too harsh. The Court denied Plaintiff’s motion for preliminary injunction because Plaintiff had failed to show any misconduct by authorities of Plaintiff’s schools.

Overjet, Inc. v. VideaHealth, Inc., Civil Action No. 24-cv-10446-ADB, 2024 U.S. Dist. LEXIS 128030 (D. Mass. July 19, 2024). Overjet and VideaHealth compete in providing artificial intelligence-enabled dental software. In this case, Overjet alleged that Videa infringed Overjet’s copyrights related to its software and falsely advertised, including regarding Videa’s software’s artificial intelligence capabilities, in violation of the Lanham Act. The Court denied Overjet’s motion for a preliminary injunction because Overjet had not sufficiently shown a likelihood that its claims would succeed on the merits nor a likelihood of irreparable harm.

WEX Inc. v. HP Inc., No. 2:24-cv-00121-JAW, 2024 U.S. Dist. LEXIS 119715 (D. Me. July 9, 2024). WEX alleged that HP’s “HP WEX” software name infringed WEX’s trademark “WEX.” HP argued that a news article presented as evidence of confusion of the WEX mark and HP WEX “‘was created using generative artificial intelligence,’ and therefore ‘no person . . . was confused.’” WEX countered that the article was nonetheless reviewed by a confused human editor. The Court found that the AI-generated article indicated that HP and WEX could be confused as being affiliated given the “HP WEX” brand. The Court granted WEX’s motion for a preliminary injunction against HP regarding use of “WEX.”

Baker v. CVS Health Corp., 717 F. Supp. 3d 188 (D. Mass. Feb. 16, 2024). A job candidate alleged that CVS violated the Massachusetts Lie Detector Statute (Mass. Gen. Laws. Ch. 149, §19B) by subjecting the candidate to an artificial intelligence-based test (to help evaluate an individual’s integrity and cultural fit) during a job interview without notifying the candidate of his statutory rights. The Court denied CVS’ motions to dismiss for failure to state a claim and for lack of standing.

§ 1.2.2. Second Circuit

N.Y. Times Co. v. Microsoft Corp., No. 23-cv-11195 (SHS) (OTW), 2024 U.S. Dist. LEXIS 212998 (S.D.N.Y. Nov. 22, 2024). The Court denied Open AI’s motion to compel production of disputed discovery because Open AI failed to demonstrate the relevance of asking for the New York Times’ documents related to the Times’ use of non-parties’ generative AI tools due to it neither being relevant nor proportional to Open AI’s fair use defense.

Dukuray v. Experian Info. Sols., 2024 U.S. Dist. LEXIS 132667 (S.D.N.Y. July 26, 2024). The Court did not believe any sanctions would be appropriate against a pro se Plaintiff because they would not be aware of the risk that ChatGPT and similar AI programs can generate fake case citations and other misstatements of law in their Fair Credit Reporting Act case.

Z.H. v. N.Y.C. Dep’t of Educ., No. 23-cv-3081 (ER), 2024 U.S. Dist. LEXIS 124478 (S.D.N.Y. July 12, 2024). The Judge declined to credit evidence the Firm submitted using ChatGPT that showed the Firm’s requested rates are reasonable market rates because ChatGPT has been shown to be an unreliable source.

Gross v. Madison Square Garden Ent. Corp., No. 23-cv-3380 (LAK) (JLC), 2024 U.S. Dist. LEXIS 83102 (S.D.N.Y. May 7, 2024). The Court granted the defendant’s motion to dismiss the complaint for failure to state a claim because it held that sharing biometric data with a third party to implement a policy banning certain individuals from venues does not constitute “profiting” from the biometric data within the meaning of NYC Ad. Code § 22-1202(b).

Network-1 Techs., Inc. v. Google LLC & YouTube, LLC, 2024 U.S. Dist. LEXIS 76545 (S.D.N.Y. Apr. 24, 2024). The Court held that in this patent infringement case against Google, the term “non-exhaustive search” is indefinite because persons skilled in the art could reasonably construe it in different ways based on the intrinsic and extrinsic evidence. Therefore, even though Google’s Siberia version of Content ID conducted an algorithmic patent search which increased computing resources, it did not perform a sublinear search as required by the ’237 Patent because undisputed evidence showed the search to be linear and the Plaintiff failed to show the multi-step search as a whole is sublinear.

Rensselaer Polytechnic Inst. v. Amazon.Com, Inc., 723 F. Supp. 3d 132 (N.D.N.Y. Mar. 18, 2024). The Court denied Plaintiffs’ motion for summary judgement and granted Defendant’s motion for summary judgement due to its ’798 patent of an approach for interpreting and responding to a natural language input by storing and searching certain types of information not being subject matter eligible for patent protection under 35 U.S.C. § 101.

Park v. Kim, 91 F.4th 610 (2d Cir. Jan. 30, 2024). The Court referred an attorney to the Second Circuit’s Grievance Panel for investigation for submitting a brief that relief on “non-existent” caselaw generated by ChatGPT.

§ 1.2.3. Third Circuit

Thomson Reuters Enter. Ctr. GmbH v. Ross Intel. Inc., No. 1:20-cv-613-SB, 2025 U.S. Dist. LEXIS 24296 (D. Del. Feb. 11, 2025) and Thomson Reuters Enter. Ctr. GmbH v. Ross Intel. Inc., No. 1:20-cv-613-SB, 2024 U.S. Dist. LEXIS 175507 (D. Del. Sep. 27, 2024). Ross Intelligence aimed to improve legal research via development of an artificial intelligence-based research tool. Thomson Reuters alleged that Ross infringed Thomson Reuters’ copyrighted Westlaw headnotes and Key Number System by using them in the development of Ross’s tool. In its February 2025 opinion, the Court “grant[ed] most of Thomson Reuters’s motion for partial summary judgment on direct copyright infringement and related defenses, D.I. 674; (2) grant[ed] Thomson Reuters’s motion for partial summary judgment on fair use, D.I. 672; (3) den[ied] Ross’s motion for summary judgment on fair use, D.I. 676; and (4) den[ied] Ross’s motion for summary judgment on Thomson Reuters’s copyright claims, D.I. 683.”

In parallel to Thomson Reuters’s copyright infringement claim, Ross alleged that Thomson Reuters’s Westlaw caselaw database and search tools were tied together in violation of antitrust laws. The Court rejected Ross’s allegation and granted summary judgment to Thomson Reuters with respect to Ross’s antitrust claims.

Huckabee v. Meta Platforms, Inc., Civil Action No. 24-773-GBW, 2024 U.S. Dist. LEXIS 209624 (D. Del. Nov. 18, 2024). Former Governor of Arkansas Mike Huckabee alleged that Meta should be liable under various laws and for violation of various legal rights for allowing, via its machine learning algorithms, presentation of third-party advertisements that made false claims and falsely attributed statements to Governor Huckabee. The Court held that Meta was liable under Section 230 of the Communications Decency Act as an “information content provider” because its algorithms determined advertisement presentation, but the Court denied Governor Huckabee’s claims as they did not state claims upon which relief can be granted.

VB Assets, LLC v. Amazon.com Servs. LLC, No. 19-1410 (MN), 2024 U.S. Dist. LEXIS 176993 (D. Del. Sep. 30, 2024). Plaintiff VB Assets alleged that Amazon’s Alexa voice assistant and associated devices violated VB Assets’ smart speaker technology patents. The Court granted Amazon’s motion for judgment as a matter of law for only one of VB Assets’ infringement claims.

Lee v. ElectrifAI, LLC, Civil Action No. 23-2239 (JXN) (JRA), 2024 U.S. Dist. LEXIS 165093 (D.N.J. Sep. 13, 2024). As part of this case, the Court rejected plaintiff’s claim that her prior employer, ElectrifAI, LLC was misrepresenting the functionality of artificial intelligence in its products. The Court found that the plaintiff did not provide sufficient facts to establish a plausible claim.

Elkin Valley Baptist Church v. PNC Bank, N.A., Civil Action No. 23-1798, 2024 U.S. Dist. LEXIS 162888 (W.D. Pa. Sep. 10, 2024). In this case regarding statutory interpretation of Section 4A-207 (pertains to financial fraud) of the Uniform Commercial Code, the Court notes that financial institutions’ use of artificial intelligence and other automation necessitates developing a well-reasoned interpretation of the Section.

State Farm Mut. Auto. Ins. Co. v. Amazon.Com, Inc., Civil Action No. 22-1447-CJB, 2024 U.S. Dist. LEXIS 160437 (D. Del. Sep. 6, 2024). State Farm alleged that Amazon infringed several of State Farm’s patents relating to use of machine learning and neural networks to evaluate whether an individual can safely live independently. In this case, the Court denied Amazon’s motion to dismiss under which Amazon argued that the asserted patents pertained to patent ineligible subject matter and were thus invalid.

IPA Techs. Inc. v. Microsoft Corp., Civil Action No. 18-1-RGA, 2024 U.S. Dist. LEXIS 76038 (D. Del. Apr. 25, 2024). IPA Technologies alleged that Microsoft products containing Microsoft’s virtual assistant Cortana infringed on various of IPA Technologies’ patents regarding software architecture that “supports cooperative task completion by flexible and autonomous electronic agents.” The Court granted in part, denied in part, and dismissed as moot in part Plaintiff’s and Defendant’s summary judgment and Daubert motions.

§ 1.2.4. Fourth Circuit

Saas v. Major, Lindsey & Africa, LLC, No. 1:23-cv-02102-JRR, 2024 U.S. Dist. LEXIS 84968 (D. Md. May 10, 2024). Plaintiff Saas alleged that the defendants used algorithmic and machine learning tools in their recruitment processes, which led to unlawful discrimination based on sex and age in violation of Title VII of the Civil Rights Act and the Age Discrimination in Employment Act of 1967. Saas claimed that these tools discriminated against women with employment gaps due to motherhood, which caused them to be passed over for interviews and other opportunities. However, the plaintiff’s claims that the defendant used discriminatory AI tools was based solely on the supposition that all large businesses use AI tools, which was contradicted by the defendant’s statement that it does not use AI tools. The Court therefore concluded that the plaintiff had not adequately pleaded discrimination through the use of AI tools. The decision highlights the importance for plaintiffs to plead specific facts relating to a defendant’s use of AI tools in respect of discrimination claims.

§ 1.2.5. Fifth Circuit

Mullen Indus. LLC v. Meta Platforms, Inc., No. 1:24-CV-00354-DAE, 2024 U.S. Dist. LEXIS 207934 (W.D. Tex. Nov. 14, 2024). Mullen Industries alleged that Meta’s augmented and virtual reality systems infringed on twelve of its patents, including a claim on the use of AI technologies. The Magistrate Judge for this case recommended that the District Court grant Meta’s motion to dismiss in respect of the AI claims, because it found that Mullen had not plausibly pled that AI was present in the allegedly infringing systems.

Hicks v. Collier, No. 2:24-CV-00126, 2024 U.S. Dist. LEXIS 241129 (S.D. Tex. Oct. 31, 2024). Plaintiff, a Texas prisoner, alleged that his constitutional rights were violated due to excessively hot living conditions and inadequate medical care. A significant aspect of the case involved the Texas Department of Criminal Justice’s (“TDCJ”) use of an algorithm to classify inmates for housing assignments based on their “heat scores.” Hicks claimed that this algorithm misclassified him, leading to his placement in non-air-conditioned housing, which exacerbated his health issues. The Court’s decision to preserve the claims against the TDCJ and its officials highlights the need for transparency, accuracy, and accountability in AI implementation to protect individual rights. However, the Court dismissed the plaintiff’s claims under § 1983 against the unidentified developer of the algorithm because the Court found that it was not acting under the color of state law.

§ 1.2.6. Sixth Circuit

Concord Music Grp., Inc. v. Anthropic PBC, 738 F. Supp. 3d 973 (M.D. Tenn. 2024). Several music publishers sued Anthropic, an AI research company, alleging that Anthropic used their copyrighted song lyrics to train its AI model, Claude, without proper authorization. The Court found that it lacked personal jurisdiction over Anthropic, a Delaware company with its principal place of business in California (and which used data located in Virginia to train the Claude model, which itself was hosted on servers in Iowa), and transferred the action to California. The Court rejected plaintiffs’ arguments that Anthropic had availed itself of sufficient contacts with the forum state by making the model available to Tennessee through an interactive website. This decision will be significant insofar as it rejects the notion that personal jurisdiction can be established over the developer of an AI model simply by the developer’s making that model available in the jurisdiction.

§ 1.2.7. Seventh Circuit

G.T. v. Samsung Elecs. Am., Inc., No. 21 CV 4976, 2024 U.S. Dist. LEXIS 233003 (N.D. Ill. Dec. 23, 2024) and G.T. v. Samsung Elecs. Am. Inc., No. 21 CV 4976, 2024 U.S. Dist. LEXIS 130771 (N.D. Ill. July 24, 2024). In a first amended complaint, plaintiffs in this class action lawsuit alleged that Samsung violated Illinois’s Biometric Information Privacy Act (“BIPA”) in possessing and collecting their biometric data via Samsung’s Gallery photo applications. The Court found claims to be insufficiently pled and granted Samsung’s motion to dismiss.

In their second amended complaint, the plaintiffs alleged that Samsung violated BIPA by offering software that generates and stores biometric data (face templates) on a device using facial recognition technology. The Court granted Samsung’s second motion to dismiss on the basis that BIPA requires control over the actual biometric data, and Samsung did not have such control.

Arnold v. Target Corp., No. 24 CV 4452, 2024 U.S. Dist. LEXIS 212009 (N.D. Ill. Nov. 21, 2024). Plaintiffs alleged that Target Corp. violated BIPA in possessing, collecting, and disclosing their biometric data (face geometry captured by facial recognition technology in Target stores). The Court denied Target’s motion to dismiss on the basis that plaintiffs’ claims were plausible.

Hartman v. Meta Platforms, Inc., No. 3:23-CV-02995-NJR, 2024 U.S. Dist. LEXIS 167696 (S.D. Ill. Sep. 17, 2024). Plaintiffs in this putative class action lawsuit alleged that Meta violated BIPA in possessing and collecting their biometric data via augmented reality features of the Facebook Messenger and Messenger Kids applications. The Court denied Meta’s motion to dismiss on the basis that plaintiffs’ claims were plausible, and the case proceeded to discovery.

Lewerentz v. 1411 State Parkway Condo. Ass’n, No. 23-cv-1635, 2024 U.S. Dist. LEXIS 159664 (N.D. Ill. Sep. 5, 2024). A building engineer continued to receive calls from elevator call buttons after stopping work at those buildings. The calls included an artificial intelligence voice. The engineer alleged that the calls were harassment under the Telephone Consumer Protection Act and a tort of intrusion upon seclusion under Illinois state law. The Court found that these claims were insufficiently pled and granted the Defendant’s motion to dismiss the complaint.

Plumbers v. Morris Plumbing, LLC, No. 23-CV-616-JPS-JPS, 2024 U.S. Dist. LEXIS 70751 (E.D. Wis. Apr. 18, 2024). In this case, the Court noted that a case in Plaintiff’s reply brief appeared to be hallucinated by artificial intelligence, as the case could not be found via online searching. The Court warned Plaintiff’s counsel that they would be sanctioned for any future presentations of non-existent cases.

Taylor v. 48forty Sols., LLC, No. 23 C 14400, 2024 U.S. Dist. LEXIS 64573 (N.D. Ill. Apr. 9, 2024). In this putative class action, a truck driver alleged that his former employer collected scans of his face geometry (biometric data) in violation of BIPA Sections 15(a), (b), and (d). The Court denied the former employer’s motion to dismiss all those claims, though plaintiff was required to be ready to inform the Court whether he would like to proceed with the Section 15(a) claim in federal or state court.

Hernandez v. Omnitracs, LLC, No. 1:22-CV-00109, 2024 U.S. Dist. LEXIS 58865 (N.D. Ill. Mar. 31, 2024). In this putative class action, a truck driver alleged that his former employer collected scans of his face geometry (biometric data) in violation of BIPA Sections 15(a)-(d). The Court denied the former employer’s motion to dismiss all those claims.

§ 1.2.8. Eighth Circuit

No cases identified for the Eighth Circuit.

§ 1.2.9. Ninth Circuit

Tate v. VITAS Healthcare Corp., No. 2:24-cv-01327-DJC-CSK, 2025 U.S. Dist. LEXIS 3828 (E.D. Cal. Jan. 8, 2025). VITAS uses third party conversation intelligence software, records calls, creates transcripts, and uses AI to classify data into a searchable database. Plaintiff, who interacted with the software to discuss hospice care for her mother, alleged violations of California Invasion of Privacy Act (CIPA). The Court found that the AI software could be considered a third party and a recording device under CIPA and denied VITAS’s motion to dismiss.

Netchoice v. Bonta, No. 5:24-cv-07885-EJD, 2024 U.S. Dist. LEXIS 234919 (N.D. Cal. Dec. 31, 2024). The Court considered the constitutionality of SB 976, the Protecting Our Kids from Social Media Addiction Act, to regulate social media platforms’ interactions with minors. Among other requirements, SB 976 restricts personalized feeds and notifications for minors. The Court found that algorithms designed to maximize a person’s time spent on social media do not reflect any message from its creator and therefore do not constitute expressive speech. The Court found that the plaintiff had not met its burden of establishing that the personalized feed provisions of the law impermissibly restrict free speech and dismissed those elements of the claim.

Ryan v. X Corp., No. 24-cv-03553-WHO, 2024 U.S. Dist. LEXIS 222459 (N.D. Cal. Dec. 9, 2024). Plaintiff Ryan alleges X Corp. used AI to target and suspend his accounts without proper notice. The Court granted X Corp.’s motion to dismiss after finding that all claims were barred by X Corp.’s Terms of Service, which limit liability for account suspensions. Additionally, the unjust enrichment claim was also barred by Section 230 of the Communications Decency Act and X Corp.’s use of AI to moderate content does not negate Section 230 immunity. Ryan was given leave to amend his complaint.

Vance v. Google LLC, No. 20-cv-04696-BLF, 2024 U.S. Dist. LEXIS 220639 (N.D. Cal. Dec. 5, 2024). In this case, the Court denied the motion to dismiss the plaintiffs’ claims under section 15(b) of Illinois’s BIPA but granted dismissal of their Section 15(c) claim. Plaintiffs posted photos containing their faces to Flickr, a photo hosting website. IBM created the Diversity in Faces (DiF) Dataset using Flickr photos without user permission and Google obtained the DiF Dataset from IBM to improve facial recognition technology for its facial unlock feature. The Court found that improving a product was not sufficient to demonstrate a commercial transaction to support a Section 15(c) claim.

Samuels v. Dao, No. 23-cv-06492-VC, 2024 U.S. Dist. LEXIS 209474 (N.D. Cal. Nov. 18, 2024). This case was brought by an investor who bought cryptocurrency tokens issued by Lido DAO and lost money on his investment. The Court rejected defendant’s argument that it is merely autonomous software that runs without human management and therefore not a legal entity that can be subject to legal proceedings. Rather, the alleged actions are of an entity run by people, and this entity can be sued as a general partnership.

Kohls v. Bonta, No. 2:24-cv-02527 JAM-CKD, 2024 U.S. Dist. LEXIS 179933 (E.D. Cal. Oct. 2, 2024). The Court granted a preliminary injunction against California’s AB 2839, which aims to address the spread of AI-generated “deepfakes” and other manipulated media that could mislead voters or undermine confidence in the electoral process. The Court found the law unconstitutional for being overly broad and not narrowly tailored, thus violating the First Amendment. The decision highlighted the role of AI in creating “deepfakes” and emphasized the importance of protecting free speech involving digitally manipulated content.

Lamontagne v. Tesla, Inc., No. 23-cv-00869-AMO, 2024 U.S. Dist. LEXIS 178030 (N.D. Cal. Sep. 30, 2024). The plaintiffs alleged that Tesla, Inc., and Elon Musk made twenty-nine false or misleading statements about the development and safety of Tesla’s autonomous driving technology. The Court granted Tesla’s motion to dismiss, finding that the statements were either protected by the PSLRA safe harbor, nonactionable corporate puffery, or not sufficiently alleged to be false or misleading. The Court also dismissed the plaintiffs’ claims under Sections 10(b) and 20(a) of the Securities Exchange Act, as well as claims under Items 105 and 303 of Regulation S-K, due to insufficient allegations of scienter and materiality. The plaintiffs were given leave to amend their complaint.

Andersen v. Stability AI Ltd., No. 23-cv-00201-WHO, 2024 U.S. Dist. LEXIS 143204 (N.D. Cal. Aug. 12, 2024). The Court partially granted and partially denied the defendants’ motions to dismiss. The plaintiffs, a group of artists, alleged that Stability AI and other defendants used their copyrighted works to train AI models without permission. The Court allowed the copyright infringement claims to proceed, finding the plaintiffs’ allegations plausible. However, it dismissed the Digital Millennium Copyright Act (“DMCA”) claims and unjust enrichment claims. The Court found that the plaintiffs’ infringement allegations regarding the use of their works in training AI models were sufficiently pled. The court granted the plaintiffs leave to amend their unjust enrichment claims complaint but dismissed the DMCA claims with prejudice.

Mobley v. Workday, Inc., No. 23-cv-00770-RFL, 2024 U.S. Dist. LEXIS 126336 (N.D. Cal. July 12, 2024). The Court granted in part and denied in part the defendant’s motion to dismiss an employment discrimination case. The plaintiff, Derek Mobley, alleged that Workday’s algorithm-based applicant screening tools discriminated against him and others based on race, age, and disability. The Court denied the claims under Title VII, ADEA, and ADA based on Workday’s liability as an agent of employers. However, it granted the claims based on Workday being an employment agency and intentional discrimination claims under Title VII, ADEA, and Section 1981. Additionally, the Court granted with leave to amend the claims under California’s Fair Employment and Housing Act (FEHA). Mobley was permitted twenty-one days to amend his complaint regarding the FEHA claim.

Jones v. Peloton Interactive, Inc., No. 23-cv-1082-L-BGS, 2024 U.S. Dist. LEXIS 118511 (S.D. Cal. July 5, 2024). The Court denied Peloton’s motion to dismiss the First Amended Complaint. The plaintiffs claimed that Peloton violated the California Invasion of Privacy Act (CIPA) by using AI-powered third-party software, Drift, to intercept and record chat communications on its website without users’ consent. The Court found that Drift’s AI technology, which analyzed and used the intercepted data for its own purposes, acted as a third-party eavesdropper. Accordingly the plaintiffs’ CIPA claims were sufficiently pled.

Ambriz v. Google, LLC, No. 23-cv-05437-RFL, 2024 U.S. Dist. LEXIS 119619 (N.D. Cal. June 20, 2024). The Court dismissed Misael Ambriz’s complaint against Google, which alleged that Google’s Cloud Contact Center AI wiretapped, eavesdropped on, and recorded his call to Verizon’s customer service. The Court found that Google’s AI acted as a virtual agent for Verizon, a telephone company, and thus fell under the exemption provided by the California Invasion of Privacy Act (CIPA).

Forrest v. Meta Platforms, Inc., No. 22-cv-03699-PCP, 2024 U.S. Dist. LEXIS 107340 (N.D. Cal. June 17, 2024). The Court partially granted and partially denied Meta’s motion to dismiss. The case centered on Facebook advertisements using Dr. Andrew Forrest’s likeness to promote fraudulent investments. The advertisements were alleged to have been created and optimized by Meta’s AI and machine learning tools, raising factual disputes about Meta’s liability under Section 230 that were unsuitable for preliminary resolution. Specifically the pleadings left a factual dispute as to whether Meta materially contributes to the ads to render it beyond Section 230’s protection. The claims for misappropriation and negligence were allowed to proceed.

Dental Monitoring SAS v. Align Tech., Inc., No. C 22-07335 WHA, 2024 U.S. Dist. LEXIS 88739 (N.D. Cal. May 16, 2024). The Court granted the defendant’s summary judgment motion, invalidating Dental Monitoring’s patents, which involved methods for remote dental aligner assessment using deep learning devices. Applying the Alice two-step test, the Court determined that the invention was both directed to an abstract concept and that it merely applied generic machine learning technology to the known field of dental aligners.

Alich v. Opendoor Techs. Inc., No. CV-22-01717-PHX-MTL, 2024 U.S. Dist. LEXIS 86544 (D. Ariz. May 14, 2024). The Court granted the plaintiffs’ motion for reconsideration of the Court’s earlier dismissal, thereby allowing claims under Sections 11 and 15 of the Securities Act of 1933 to proceed. The plaintiffs alleged that Opendoor made misleading statements about its algorithm’s ability to adjust to market conditions, which they claimed led to investors’ financial losses. The defendant’s algorithm was designed to adjust dynamically to market indicators and economic conditions. The Court found that misrepresentations regarding Opendoor’s algorithm touches upon the alleged reasons for plaintiffs’ losses, finding that the plaintiffs have adequately pleaded a Section 11 claim.

Gibson v. Cendyn Grp., LLC, No. 2:23-cv-00140-MMD-DJA, 2024 U.S. Dist. LEXIS 83547 (D. Nev. May 8, 2024). The Court dismissed the plaintiffs’ claims with prejudice. The plaintiffs had alleged that the defendants, including a software company and several hotel operators, violated the Sherman Antitrust Act by artificially inflating hotel room prices through the use of pricing algorithms. The Court found that the plaintiffs failed to plausibly allege a tacit agreement among the defendants to fix prices and that the vertical agreements between the software company and the hotel operators did not restrain trade. The Court found that the mere use of algorithmic pricing, without allegations of any explicit or implicit agreement between competitors to accept the prices that the algorithm recommends, does not enable a plausible allegation of illegal collusion.

Tremblay v. OpenAI, Inc., 716 F. Supp. 3d 772 (N.D. Cal. Feb. 12, 2024). The Court granted in part and denied in part OpenAI’s motions to dismiss. The plaintiffs, authors of copyrighted books, alleged that OpenAI used their works to train its language models without permission. The Court dismissed claims for vicarious copyright infringement, DMCA violations, negligence, and unjust enrichment, but allowed the unfair competition claim to proceed. The plaintiffs were permitted to amend their complaint with respect to the dismissed claims.

Meta Platforms, Inc. v. Bright Data Ltd., No. 23-cv-00077-EMC, 2024 U.S. Dist. LEXIS 11913 (N.D. Cal. Jan. 23, 2024). The Court granted the defendant, Bright Data’s motion to dismiss finding that its scraping of publicly available data while not logged into a user account did not breach Meta’s Terms of Service. The Court also determined that the Terms did not apply to Bright Data’s activities after it terminated its accounts, and the survival clause did not impose a perpetual ban on scraping public data. This led to the dismissal of Meta’s breach of contract claims.

§ 1.2.10. Tenth Circuit

United States v. Cole, No. 1:24-cr-00054-SKC, 2024 U.S. Dist. LEXIS 184877 (D. Colo. Oct. 8, 2024). Criminal defendant Cole argued that the “unique selection” of his image using facial recognition software contributed to making his image stand out in a photo array. The Court did not find that such selection caused the array to be impermissibly suggestive.

MarketDial, Inc. v. Applied Predictive Techs., Inc., No. 1:23-cv-00477-JNP-CMR, 2024 U.S. Dist. LEXIS 109809 (D. Utah June 20, 2024). MarketDial, Inc. alleged that Applied Predictive Technologies, Inc.’s (APT) patent directed toward “determining optimal parameter settings for a predictive machine-learning model in business initiative testing software” was invalid or unenforceable. The Court determined that the patent failed the Alice test for patent eligibility, granted MarketDial’s motion to dismiss APT’s counterclaim of patent infringement, and denied APT’s motion to dismiss the complaint.

Total Quality Sys. v. Universal Synaptics Corp., No. 1:22-cv-00167-RJS-DAO, 2024 U.S. Dist. LEXIS 93224 (D. Utah May 23, 2024). In this case, Universal Synaptics Corporation alleged that Total Quality Systems infringed two of Universal’s patents, one of which covers an apparatus containing a neural network. Applying the Alice test, the Court held that the claimed inventions were ineligible for patent protection under 35 U.S.C. § 101.

§ 1.2.11. Eleventh Circuit

United States v. Deleon, 116 F.4th 1260 (11th Cir. 2024) and Snell v. United Specialty Ins. Co., 102 F.4th 1208 (11th Cir. 2024). In two cases, Judge Kevin C. Newsom of the United States Court of Appeals, Eleventh Circuit, wrote concurring opinions in which he evaluates how AI-based large language models could aid in conducting interpretive analysis in line with an “ordinary meaning” approach to evaluating legal texts.

Mazile v. Larkin Univ. Corp., No. 1:23-cv-23306-LEIBOWITZ, 2024 U.S. Dist. LEXIS 128457 (S.D. Fla. July 22, 2024). Larkin University expelled student/plaintiff Mazile after an AI system owned by remote testing company ExamSoft flagged that Mazile had cheated on a test monitored by the AI system. Mazile brought claims against ExamSoft and Larkin. The Court granted ExamSoft’s motion to compel arbitration under the End User License Agreement to which Mazile had agreed. The Court dismissed Mazile’s claim for discrimination based on her disability because Mazile failed to provide evidence that Larkin knew that ExamSoft’s AI system was discriminatory, and that Larkin discriminated against Mazile because of her disability.

Medallia Inc. v. Echospan, Inc., No. 1:23-cv-3730-TCB, 2024 U.S. Dist. LEXIS 160154 (N.D. Ga. June 14, 2024). Medallia Inc. asserted that Echospan, Inc. infringed Medallia’s patent regarding sentiment analysis of text. The Court denied Echospan’s motion asserting that Medallia’s patent was directed to patent-ineligible subject matter because the parties had not yet agreed on the meaning of critical terms “first model” and “relevantly similar analysis model” in the patent claims.

Doe v. Emory Univ., 734 F. Supp. 3d 1369 (N.D. Ga. 2024). Two students at Emory University created an “artificial intelligence-based learning tool” that Emory’s Honor Council determined may be used for cheating. Emory initiated disciplinary proceedings against the students. In this case, the Court rejects one student’s motion to proceed in litigation anonymously because the student did not satisfy precedential requirements for permitting anonymity in court, despite the student’s assertions that they could be subject to negative attention if their identity was made public.

§ 1.2.12. DC Circuit

TikTok Inc. & ByteDance Ltd. v. Garland, 122 F.4th 930 (D.C. Cir. 2024). The federal Protecting Americans from Foreign Adversary Controlled Applications Act, enacted in April 2024, results in the ban of Tik-Tok’s AI-enabled social media app in the US. Among other claims, TikTok asserted that the Act violated freedom of speech under the First Amendment. The Court rejected the TikTok’s First Amendment claim on the basis that the Act’s provisions addressed compelling national security interests “to counter (1) the PRC’s efforts to collect data of and about persons in the United States, and (2) the risk of the PRC covertly manipulating content on TikTok.” The U.S. Supreme Court affirmed this judgment in January 2025. See TikTok Inc. v. Garland, 145 S. Ct. 57 (2025).

Rubio v. District of Columbia, Civil Action No. 23-719 (RDM), 2024 U.S. Dist. LEXIS 218004 (D.D.C. Dec. 3, 2024). In this case, the Court denied all the plaintiff’s federal and D.C. law claims, including based on the plaintiff’s provision of cases likely fabricated by AI.

Biddle v. DOD, Civil Action No. 23-1380 (TJK), 2024 U.S. Dist. LEXIS 164961 (D.D.C. Sep. 13, 2024). Plaintiff Biddle requested certain “records pertaining to the Algorithmic Warfare Cross-Functional Team’s use of Google technology, software or hardware” from the Department of Defense via a Freedom of Information Act (FOIA) request. The Department asserted that disclosure of its approach to AI development and implementation in response to the FOIA request would “reveal vulnerabilities in Department of Defense critical infrastructure.” The Court was unconvinced, including because an approach to AI is not clearly “infrastructure.” The Court denied both parties’ motions for summary judgment.

United States v. Google LLC, 747 F. Supp. 3d 1 (D.D.C. 2024). As part of a broader case alleging that Google was engaged in monopolistic practices in violation of antitrust law, Google asserted that the rapid development of AI eroded barriers to entry to providing general search services. The Court rejected that assertion on the basis that AI had not yet developed sufficiently to “change the market dynamic in the ‘foreseeable future’.”

§ 1.2.13. Court of Appeals for the Federal Circuit

Promptu Sys. Corp. v. Comcast Corp., 92 F.4th 1372 (Fed. Cir. 2024). Plaintiff Promptu Systems alleged that Comcast infringed its patents related to speech or voice recognition technology. The Federal Circuit Court of Appeals vacated the district court’s judgment with respect to certain claims and remanded the case for further proceedings.

§ 1.3. Legislation

As in 2023, legislation governing the development, deployment, and use of artificial intelligence continued to be a hot topic in 2024. Below, we summarize key substantive artificial intelligence legislation enacted in 2024.

§ 1.3.0. Multiple States

Deepfakes and sexual offenses. Many states enacted laws in 2024 related to deepfakes and sexual offenses. We list those states and their laws below.

• Alabama:
  • H.B. 168, Alabama Child Protection Act of 2024
• Delaware:
  • H.B. 353, An Act to Amend Titles 10 and 11 of the Delaware Code Relating to Deep Fakes
• Florida:
  • S.B. 1680, Advanced Technology
• Idaho:
  • H.B. 465, An Act Relating to Crimes Against Children
  • H.B. 575, An Act Relating to Disclosing Explicit Synthetic Media
• Indiana:
  • H.B. 1047, Sexual Offenses
• Louisiana:
  • S.B. 6, An Act to enact R.S. 14:73.14, relative to computer related crime; to create the crime of unlawful dissemination or sale of images of another created by artificial intelligence; to provide definitions; to provide penalties; and to provide for related matters
• Pennsylvania:
  • S.B. 1213, An Act amending Titles 18 (Crimes and Offenses) and 61 (Prisons and Parole) of the Pennsylvania Consolidated Statutes, in sexual offenses, further providing for the offense of unlawful dissemination of intimate image; in minors, further providing for the offense of sexual abuse of children and for the offense of transmission of sexually explicit images by minor; and making editorial changes to replace references to the term “child pornography” with references to the term “child sexual abuse material”
• Tennessee:
  • H.B. 2163, An Act to amend Tennessee Code Annotated, Title 39 and Title 40, relative to the sexual exploitation of children
• Washington:
  • H.B. 1999, Concerning fabricated intimate or sexually explicit images and depictions

Deepfakes and election protection. Many states enacted laws in 2024 related to deepfakes and election protection. We list those states and their laws below.

• Alabama:
  • H.B. 172, Relating to elections; to provide that distrib. of materially deceptive media is a crime
• Arizona:
  • S.B. 1359, Election communications; deepfakes; prohibition
  • H.B. 2394, Digital impersonation; injunctive relief; requirements
• California:
  • A.B. 2355, Political Reform Act of 1974: political advertisements: artificial intelligence
  • A.B. 2655, Defending Democracy from Deepfake Deception Act of 2024
  • A.B. 2839, Elections: deceptive media in advertisements
    • Note that enforcement of A.B. 2839 was partially enjoined under Kohls v. Bonta, No. 2:24-cv-02527 JAM-CKD, 2024 U.S. Dist. LEXIS 179933, as described above.
• Colorado:
  • H.B. 24-1147, Candidate Election Deepfake Disclosures
• Delaware:
  • H.B. 316, An Act to Amend Title 15 of the Delaware Code Relating to Deep Fakes in Elections
• Florida:
  • H.B. 919, Artificial Intelligence Use in Political Advertising
• Hawaii:
  • S.B. 2687, Elections; Materially Deceptive Media; Artificial Intelligence; Deepfake Technology; Prohibition; Penalty; Remedies
• Minnesota:
  • H.F. 4772, Elections policy and finance bill
• Mississippi:
  • S.B. 2577, An Act to Create a New Section in Title 97, Chapter 13, Mississippi Code of 1972, to Create Criminal Penalties for the Wrongful Dissemination of Digitizations; and for related purposes
• New Hampshire:
  • H.B. 1596, An Act requiring a disclosure of deceptive artificial intelligence usage in political advertising
  • H.B. 1432, An Act relative to prohibiting certain uses of deepfakes and creating a private claim of action
• New Mexico:
  • H.B. 182, An Act relating to Elections; amending and enacting sections of the Campaign Reporting Act by adding disclaimer requirements for advertisements containing materially deceptive media; creating the crime of distributing or entering into an agreement with another person to distribute materially deceptive media; adding definitions; providing penalties
• Oregon:
  • S.B. 1571, Relating to the use of artificial intelligence in campaign communications; declaring an emergency
• Utah:
  • S.B. 131 (includes clauses touching on elections and criminal justice)
• Wisconsin:
  • A.B. 664, An Act to amend 11.1303 (title); and to create 11.1303 (2m) of the statutes; relating to: disclosures regarding content generated by artificial intelligence in political advertisements, granting rule-making authority, and providing a penalty

§ 1.3.1. California

A.B. 1008, California Consumer Privacy Act of 2018: personal information. Enacted in September 2024, this act revises the scope of personal information under California’s Consumer Privacy Act to allow for multiple formats in which personal information may exist, including abstract digital formats such as “artificial intelligence systems that are capable of outputting personal information.”

A.B. 1836, Use of likeness: digital replica. Enacted in September 2024, this act creates a cause of action for damages when a digital replica of a deceased person is used without prior consent from the person’s estate.

A.B. 2013, Generative artificial intelligence: training data transparency. Enacted in September 2024, this act requires developers of generative AI systems released to California residents on or after January 1, 2022, to disclose details about the data used to train the systems, including a summary of the relevant datasets.

A.B. 2602, Contracts against public policy: personal or professional services: digital replicas. Enacted in September 2024, this act makes unenforceable certain contract provisions regarding performance of services by a digital replica of an individual in lieu of that individual’s own work on or after January 1, 2025.

A.B. 2905, Telecommunications: automatic dialing-announcing devices: artificial voices. Enacted in September 2024, this act amends California’s requirements regarding automated phone calls to further require notification to the call recipient if a prerecorded message uses an artificial voice (generated or significantly altered via artificial intelligence).

A.B. 2885, Artificial Intelligence. Enacted in September 2024, this act amends various sections of California state law to define artificial intelligence as “an engineered or machine-based system that varies in its level of autonomy and that can, for explicit or implicit objectives, infer from the input it receives how to generate outputs that can influence physical or virtual environments.”

S.B. 942, California AI Transparency Act. Enacted in September 2024, this act applies to producers of generative artificial intelligence systems that have over one million monthly users and are publicly accessible within California. The producers must comply with various transparency requirements, such as providing free AI detection tools, and enabling disclosure of and disclosing when content is generated by AI.

A.B. 3030, Health care services: artificial intelligence. Enacted in September 2024, this act requires health care providers to notify patients when communication is performed using generative AI.

S.B. 1120, Health care coverage: utilization review. Enacted in September 2024, this act imposes various requirements on use of AI by health care service plan or disability insurers in performing utilization review or utilization management functions.

§ 1.3.2. Colorado

S.B. 24-205, Consumer Protections in Interactions with Artificial Intelligence Systems. Enacted in May 2024, this act requires developers and deployers of high-risk artificial intelligence systems to use reasonable care to protect Colorado consumers from any known or reasonably foreseeable risks of algorithmic discrimination.

§ 1.3.3. Illinois

H.B. 3773, Limit Predictive Analytics Use. Enacted in August 2024, this act amends Illinois’s list of civil rights violations to include (1) use of artificial intelligence for employment decision purposes that subjects employees to discrimination based on a protected class or zip code as proxy for a protected class, and (2) failure to notify employees of use of artificial intelligence for employment decision purposes.

H.B. 4875, Publicity Act—Use of AI. Enacted in August 2024, this act provides artists with rights to control use of digital replicas of them.

H.B. 4762, Digital Voice and Likeness Protection Act. Enacted in August 2024, this act imposes various requirements on contractual negotiations intended to permit creation and use of digital replicas of an individual.

§ 1.3.4. New Hampshire

H.B. 1688, An Act relative to use of artificial intelligence by state agencies. Enacted in May 2024, this act restricts state agencies from discriminating against people using AI, using AI for biometric surveillance, and using deepfakes for deceptive or malicious purposes.

§ 1.3.5. New York

S. 9832, New York State Fashion Workers Act. Enacted in December 2024, this act requires model management companies to obtain clear written consent to create or use, or alter or modify using artificial intelligence, a model’s digital replica.

S. 7676B, Establishes contract requirements for contracts involving the creation and use of digital replicas. Enacted in December 2024, this act imposes various requirements on contractual negotiations intended to permit creation and use of digital replicas of an individual.

S. 7543A, Enacts the legislative oversight of automated decision-making in government act (LOADinG Act). Enacted in December 2024, this act imposes various requirements, including disclosure requirements, on state agency use of automated decision-making systems.

§ 1.3.6. Tennessee

S.B. 1711, An Act to amend Tennessee Code Annotated, Title 49, relative to artificial intelligence. Enacted in March 2024, this act requires Tennessee state universities and public schools “to adopt a policy regarding the use of artificial intelligence by students, faculty, and staff for instructional and assignment purposes.”

H.B. 2091, Ensuring Likeness, Voice, and Image Security Act of 2024 (ELVIS Act). Enacted in March 2024, this act expanded existing law granting a property right in a person’s name, photograph, or likeness to include a property right in the person’s voice (including a simulation of the voice).

§ 1.3.7. Utah

S.B. 149, Artificial Intelligence Policy Act. Enacted in March 2024, this act requires disclosure of the provision of generative artificial intelligence-enabled services to a user, including for services of a regulated occupation. The act also establishes various initiatives related to artificial intelligence in Utah.

H.B. 366. Enacted in 2024, this act limits how an algorithm or risk assessment tool score may be used in various criminal justice procedures.

Shortly before the scheduled start of trial, the U.S. Department of Justice (“DOJ”), Antitrust Division (“Division”) reached a settlement with Hewlett Packard Enterprise (“HPE”) and Juniper Networks (“Juniper”) that allows their $14 billion merger to proceed. The settlement, described by the agency as “novel,” requires divestiture of an HPE business line to a preapproved buyer and at least one license of certain Juniper technology to one or more licensees that must be approved by the Division.

For the third time in a month, the new administration has approved a structural remedy in order to address the potential anticompetitive effects of a merger.

The Transaction

HPE offers products in a number of technology markets, including general-purpose servers, cloud storage, and finance. The company also sells networking products, including wireless access points and campus switches, under the HPE Aruba Networking brand and its legacy on-premises network management solution, Airwave. Juniper provides a range of networking products, including wireless access points, wired switches, and network management software under the Mist brand.

After the merger, HPE and Juniper’s aggregate market share would be only approximately 22–26 percent, below the 2023 Merger Guidelines’ 30 percent market share threshold for presumption of a merger’s illegality. However, the Division also alleged that the parties’ largest competitor has an approximate 48 percent market share and that at least seven other competitors each have market shares of only between 1 percent and 10 percent for commercial or enterprise-grade wireless networking solutions. The transaction would result in two firms controlling over 70 percent of the relevant market, with a significant gap between post-closing HPE and the next largest competitor in the market, allegedly making it easier for the two largest companies to reach and sustain a consensus on price, features, and reliability.

Though the transaction was cleared by fourteen foreign antitrust authorities, the Division sued to block the merger in January 2025 over concerns about competition for local wireless networking technology. According to the agency’s complaint, there were three primary theories of harm: (1) loss of head-to-head competition between the merging parties’ Aruba and Mist brands, causing prices to increase; (2) elimination of a disruptive force in the industry that has introduced tools to significantly lower the cost of wireless networks; and (3) increased risk of coordination among the remaining vendors.

The European Commission’s public findings regarding the transaction’s impact in the European Economic Area are in stark contrast with the Division’s allegations. Recent statements by HPE’s CEO might, however, explain the divergence; he has said that the transaction would facilitate the firm’s ability to better compete outside the United States, where more competitors with higher market shares participate in the market.

The Remedies

The divestiture and technology license(s) required by the settlement are intended to eliminate the alleged anticompetitive effects of the acquisition by strengthening one or more existing competitors or facilitating entry of a new competitor for enterprise-grade wireless local area network (“WLAN”) solutions.

• HPE must divest its global “Instant On” campus and branch WLAN business, including all assets, intellectual property, R&D personnel, and customer relationships within 180 days.
• The parties must also hold an auction for a perpetual, worldwide, nonexclusive license to Juniper’s AI Ops for Mist source code. The license will include optional transitional support “on reasonable commercial terms” and personnel transfers.

The settlement also assures that any winning licensee will have the right to any improvements to and derivatives of the licensed technology and the right to grant rights of use to the technology to its end users and service providers as reasonably needed. If the auction results in multiple bids exceeding $8 million, Juniper will be required to license to at least one additional bidder. This novel approach by the Justice Department reflects a commitment to solving unique challenges in mergers.

While not routine, license remedies have been used previously. For example, in 2017, the Federal Trade Commission (“FTC”) accepted a license remedy for it challenge to a pharmaceutical company’s acquisition of the US rights to the drug Synacthen. The FTC alleged there that the acquisition would prevent the development of a US competitor to the buyer’s monopoly. In another instance, a licensing remedy was approved in a post-consummation merger challenge.

A licensing remedy alone, however, would likely have been insufficient here. The divestiture of a business is an important component to the settlement with HPE and Juniper. Parties considering transactions should not assume that a license alone will resolve agency concerns. According to public reporting, the settlement was not supported by Division staff but was instead approved by leadership of the DOJ. Even assuming an antitrust enforcement divide within the administration, it is at least clear that there is a willingness to resolve merger challenges in advance of trial as was the case here and in advance of complaint in two other recent transactions. This shift in approach should be taken into consideration when assessing the enforcement risk of potential transactions, when designing agency clearance strategies, and when negotiating antitrust risk-shifting provisions in purchase agreements.

In a significant victory for environmental advocacy groups, the U.S. Supreme Court’s refusal on June 30, 2025, to grant certiorari in two pivotal cases—Port of Tacoma v. Puget Soundkeeper Alliance^[1] and ExxonMobil Corp. v. Environment Texas Citizen Lobby^[2]—is widely expected to embolden and increase the prevalence of citizen suits under federal environmental statutes. The Court’s decision leaves intact lower-court rulings that affirm a broad scope for citizen enforcement, reinforcing the role of individuals and organizations as “private attorneys general” in holding polluters accountable.

The denial of certiorari in these cases sends a clear message: The current legal framework empowering citizens to enforce environmental laws remains robust. Industry petitioners in both cases had sought to significantly narrow the reach of citizen suit provisions, particularly concerning standing requirements and the ability to enforce state-issued permits that go beyond federal standards. The Court’s inaction signals a rejection of these attempts to curb environmental watchdog efforts.

Port of Tacoma: Upholding State Permit Enforcement

In Port of Tacoma, the petitioners challenged a U.S. Court of Appeals for the Ninth Circuit ruling that allowed environmental groups to enforce state-issued Clean Water Act (“CWA”) permits in federal court, even when those permits contained requirements more stringent than federal law.^[3] This case centered on alleged violations of Washington State’s Industrial Stormwater General Permit, with Puget Soundkeeper Alliance arguing for accountability for polluted runoff from a wharf.

The Supreme Court’s denial of cert in this instance means that the Ninth Circuit’s expansive interpretation stands. This outcome is crucial because it allows citizens in circuits aligned with the Ninth (and Fourth and Eleventh) Circuit to continue to enforce the full scope of state-issued National Pollutant Discharge Elimination System (“NPDES”) permits. This is a considerable win for states seeking to implement stricter environmental protections and for citizen groups dedicated to upholding them.

It also highlights a continuing circuit split on this issue, as the U.S. Court of Appeals for the Second Circuit has a narrower view. But for now, the broader interpretation prevails in a significant portion of the country.

ExxonMobil: Affirming Broad Standing and Penalties

The ExxonMobil case involved a prolonged battle over air pollution from ExxonMobil’s Baytown, Texas, petrochemical complex. The U.S. Court of Appeals for the Fifth Circuit had upheld a substantial $14.25 million civil penalty against Exxon, the largest ever in a Clean Air Act (“CAA”) citizen suit.^[4] ExxonMobil had urged the Supreme Court to revisit its 2000 precedent in Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc., which established that civil penalties paid to the government could satisfy Article III’s “redressability” requirement for citizen plaintiffs.^[5] The company also sought to impose a more restrictive standard for demonstrating “traceability” of injuries to specific violations.^[6]

By denying cert, the Supreme Court left the Fifth Circuit’s decision undisturbed, affirming the broad interpretation of standing for citizen plaintiffs and reiterating that civil penalties can serve as a deterrent and redress injuries in citizen suits. This outcome is a significant affirmation of the fundamental principles underpinning environmental citizen enforcement, ensuring that groups like Environment Texas and the Sierra Club can continue to pursue accountability for environmental violations and secure substantial penalties that discourage future noncompliance.

The Landscape Ahead: More Citizen Suits Expected

The implications of these denials are clear: Environmental groups are poised to leverage these victories to intensify their citizen suit efforts. The CWA and CAA, along with over a dozen other federal environmental statutes, explicitly include citizen suit provisions, recognizing that government enforcement agencies may not always have the resources or the political will to pursue every violation.^[7]

As federal enforcement priorities potentially shift, citizen suits are expected to become an even more vital backstop, filling any perceived gaps in regulatory oversight. This means regulated entities should anticipate a heightened risk of litigation from environmental organizations, underscoring the critical importance of robust environmental compliance programs. The ability of citizens to seek both injunctive relief and significant civil penalties payable to the U.S. Treasury provides a powerful incentive for companies to adhere to environmental regulations.

In essence, the Supreme Court’s recent order list has reinforced the power of the public in environmental protection, solidifying the legal avenues for citizens to act as guardians of the nation’s air and water. This decision ensures that citizen suits will continue to be a formidable force in environmental litigation for the foreseeable future.

What This Means for Industry

1. Increased Legal Risk: Industries should anticipate a rise in citizen-led litigation, particularly from well-organized advocacy groups capable of using regulatory data and compliance reports to build strong cases.
2. Compliance Pressure: Regulatory compliance will no longer be a shield only scrutinized by the government. Any violation, even minor or self-reported, may trigger a lawsuit from a citizen group.
3. Litigation Costs: Even unsuccessful suits can entail significant legal costs and reputational damage. For example, ExxonMobil’s litigation spanned over a decade, involving appeals and millions in legal fees.

How Companies Can Protect Themselves

To mitigate this new landscape of liability, companies—especially those operating in manufacturing, energy, and logistics—should adopt proactive risk-management strategies.

1. Robust Compliance Systems: Implement and document environmental controls in real time. Use third-party audits to verify compliance with discharge, emissions, and permit conditions.
2. Transparency and Community Engagement: Foster open communication with local communities and environmental groups. Transparency can reduce adversarial relationships and build trust.
3. Rapid Incident Response: Ensure that any environmental release, even if minor, is addressed immediately and logged properly. Self-correction and voluntary reporting may reduce the likelihood of a lawsuit.
4. Legal Risk Assessments: Conduct periodic assessments to identify areas where past or current practices may be vulnerable to citizen suits. Remediate proactively.

Looking Ahead

The Supreme Court’s June 30 decision sends a clear signal: Citizen suits are here to stay—and may even be growing in power and frequency. While this strengthens environmental accountability, it also places added pressure on industries to go beyond minimum legal compliance and embrace more holistic environmental governance practices.

As the regulatory landscape evolves, businesses must prepare not only to meet federal standards but also to defend their records in the court of public and legal opinion.

1. Port of Tacoma, No. 24-350, 2025 WL 1787738 (U.S. June 30, 2025) (denial of cert). ↑

2. ExxonMobil, No. 24-982 (U.S. June 30, 2025) (denial of cert). ↑

3. Port of Tacoma, 104 F.4th 95 (9th Cir. 2024); see also 33 U.S.C. § 1365. ↑

4. ExxonMobil, 968 F.3d 357 (5th Cir. 2020); see also 42 U.S.C. § 7604. ↑

5. Friends of the Earth, 528 U.S. 167, 187 (2000). ↑

6. See ExxonMobil, 968 F.3d at 368. ↑

7. 33 U.S.C. § 1365; 42 U.S.C. § 7604. ↑

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, Jake Granese of University of Miami School of Law, Class of 2026, below. Visit the University of Miami Business Law Review website to read the full article, published in Volume 34.

Sports betting in the United States has exploded in recent years, with a record-breaking $11 billion in revenue in 2023.^[1] This growth has inspired state governments to try to leverage this lucrative business. One recent development is the 2021 Gaming Compact between the Seminole Tribe of Florida and the state of Florida.^[2] The Compact represents a milestone towards exclusivity in mobile gaming for Native American tribal nations. Under the Compact, the Seminole Tribe receives sports betting exclusivity, for both retail sports wagering and online sports wagering, all across Florida, in exchange for a revenue sharing arrangement—unlike any other form of exclusivity. In the landmark case West Flagler Associates v. Haaland, the D.C. Circuit Court of Appeals upheld the Compact, ruling that any bet made off tribal land, but processed through servers located on tribal land, can be legally considered within tribal jurisdiction.^[3] This case solidified the Compact’s legality after a prolonged legal battle.

This ruling paves the way for sports betting legalization in other states with Native American tribal nations, shifting the balance of tribal-state relations throughout the country. Although the economic rewards of such arrangements are attractive, there are serious secondary concerns. One main worry is monopolistic control, detrimental to consumers through limited competition, suppressed market innovation, and increased costs. Though tribal sovereignty is important, policymakers need to also consider consumer protections as a top priority. Without proper regulation and oversight, sports betting offerings could yield predatory practices that exploit vulnerable customers. As more states move to legalize sports betting, regulators must guarantee competitive and fair markets for all consumers.

1. Marcus Lu, Visualizing the Growth of U.S. Sports Betting, Visual Capitalist (July 5, 2024). ↑

2. See generally 2021 Gaming Compact Between the Seminole Tribe of Florida and the State of Florida, Fla.–Seminole Tribe of Florida (Apr. 23, 2021) (available at Letter from Bryan Newland, Principal Deputy Assistant Sec’y – Indian Affs., U.S. Dep’t of the Interior, to the Hon. Marcellus W. Osceola, Jr., Chairman, Seminole Tribe of Florida (Aug. 6, 2021), at 13). ↑

3. W. Flagler Assocs., Ltd. v. Haaland, 71 F.4th 1059, 1066 (D.C. Cir. 2023). ↑

The continued expansion of e-commerce has driven a number of recent trends in intellectual property (“IP”) enforcement that require businesses to reexamine their IP assets’ form and protection. These include a shift in enforcement from traditional, registered IP to unregistered IP; an increase in IP enforcement against gray market goods; and an increase in infringement claims against online marketplaces. Policy changes such as new and increased tariffs may also affect IP enforcement. The effect of each trend will differ depending on the nature of a business, but business counsel should prioritize addressing them, as IP assets increasingly impact a business’s competitive edge and inform its future partnerships.

A Shift Toward Enforcement of Unregistered IP

Alice Corporation v. CLS Bank International, a landmark 2014 Supreme Court decision, generally weakened patent rights by invalidating a patent whose central concept was an abstract idea that merely required generic computer implementation and failed to sufficiently transform the abstract idea. Since then, many more patents, particularly in the software industry, have been challenged. In addition, the patent application process may take several years, and protection from a granted patent lasts only twenty years. This can lock businesses into IP that may or may not be valuable in the next decade, depending on e-commerce fads and new technologies. Because virality is often the source of a product’s success, flexibility in the ability to enforce different types of IP may be the most valuable commodity.

Accordingly, in addition to maintaining registered IP assets (like patents), businesses may benefit from developing a robust trade secret program and investing in unregistered trade dress and trademark protection. Counsel should help businesses increase their portfolio of unregistered IP, which offer flexibility to pursue infringement claims on an ad hoc basis. Unlike a patent or a registered trade dress or trademark, unregistered IP is amorphous—allowing the IP owner the flexibility to define its assets at the time the need to litigate against a competitor arises. For example, rather than have potential infringement allegations constrained by the four corners of a design patent, a business can define its trade dress as the exact elements of its own product packaging that are similar to its competitor’s packaging.

Strategies Against Gray Market Goods

There has been an increase in IP enforcement against resellers (often independent sellers) of gray market goods on e-commerce platforms because of the threat gray market goods pose to businesses’ revenue and brand integrity. Gray market goods are genuine goods originating from a brand owner but distributed outside of authorized channels. Some argue that distribution of gray market goods undercuts a brand’s control over its products. They further argue that these goods confuse customers, as listings of the same item on different platforms may offer different prices, with the cheaper gray market good lacking other official features like warranty policies or packaging. Accordingly, some believe this discrepancy hurts the brand’s reputation for consistency, reliable quality inspection, and transparent pricing, all of which ultimately devalues the brand’s IP.

For brand owners, trademark infringement claims are available to prevent sales of gray market goods. Brand owners typically bring a trademark infringement claim under Section 32 of the Lanham Act for registered marks and Section 43(a) for unregistered marks. An initial defense to these claims is the first sale doctrine, which protects subsequent lawful resellers of a product from trademark infringement claims because trademark owners no longer have the right to control distribution after the first sale—as long as the product is not materially altered and the source of the product is clear. To defeat this defense, brand owners should add intangibles to their products sold on authorized channels. Classic examples include warranty and satisfaction guarantee programs, but newer ideas could include access to online apps and profiles, exclusively for those who purchase the product through authorized channels.

Counsel for resellers should take note that brand owners have started pursuing false advertising claims under Section 43(a) of the Lanham Act. These claims are typically based on a reseller’s improper description of the product—for example, selling a used product as new. Claims for inadequate packaging or delay in delivery are also possible. The evidence for these claims is often gathered from feedback provided on the reseller’s account. To avoid false advertising claims, businesses (especially smaller shops) should clearly and unambiguously describe their product.

Policing Online Platforms

Policing IP infringement on e-commerce platforms is relatively simple for trademarks but becomes more complicated when the IP asset at issue is trade dress or a patented design. Keyword searches, which can be useful for identifying trademark infringement, are usually inadequate to hunt for and locate products that infringe these other IP rights.

In response to such difficulties, some brand owners bring infringement claims against the platform that hosts the infringing products rather than against the sellers (often foreign counterfeiters). To avoid liability and comply with the Digital Millennium Copyright Act, however, online marketplaces need only have a robust program where they take down infringing products upon notice and remove repeat infringers—and they typically do.

Though take-down programs are largely sufficient to meet their legal obligations, online marketplaces may find a proactive monitoring system a worthwhile strategy to consider and implement. With the sheer number of products listed on online marketplaces, traditional forms of monitoring are no longer capable of efficiently identifying infringing postings. As such, marketplaces should consider using artificial intelligence tools to monitor their websites for counterfeiting. These tools can identify patterns of counterfeiting within large numbers of listings and proactively take down infringing products even before receiving a notice.

The Impact of Tariffs—Counterfeit Goods and Licensing Agreement Disruption

At a surface level, tariffs are taxes imposed on foreign suppliers that subsequently impact business operations and supply chains in the U.S. and decrease the profits of those who export to the U.S. However, tariffs also have far-reaching ramifications for intellectual property that businesses should be aware of to stay ahead of the curve.

Businesses that source materials from foreign outlets face increased costs of operation and strained relationships with long-term suppliers because of tariffs. Two results tend to follow: (1) an influx of counterfeit goods trying to capitalize on the market’s dissatisfaction with the inflated price of legitimate goods and (2) a disruption in licensing as tariffs affect pricing and royalty structures and consequently cross-border licensing agreements.

Counsel and businesses should consider the following actions in light of these developments. First, if production is moved to a different jurisdiction in response to a shift in trade agreements, counsel should conduct an IP audit in the new jurisdiction to examine risks and ensure the enforceability of any IP assets. Second, to combat counterfeit products, tools like unique serial numbers, digital watermarking, and blockchain-based product tracking should be considered to bolster protection. Third, clauses in agreements including royalty adjustments, exclusivity terms, and termination triggers should be revisited in light of the tariffs.

Because the creation, acquisition and protection of IP is an investment and discretionary spend, tariffs may disincentivize the procurement of U.S. IP by foreign suppliers. However, because tariffs can make U.S. companies more profitable, it is possible that with increased tariffs, U.S. companies will enhance their investment in IP assets. In a tense competitive environment, foreign suppliers may resort to litigation to regain their declined competitive standing, while U.S. companies may be feeling less litigious. Counsel for U.S. businesses should be aware of this litigation potential and proactively analyze what IP protection the business has in its arsenal should the need to bring a claim against a competitor arise.

In light of the risks posed by the digital marketplace and the ever-evolving economic landscape, it is imperative that businesses and their legal advisors remain up to date with IP developments and consider incorporating flexible unregistered IP, product-associated intangibles, and artificial intelligence monitoring systems to strengthen their IP protection while reevaluating their supply chains and operations.

There are few issues as sensitive in private mergers and acquisitions (“M&A”) as “sandbagging.” As deal lawyers know well, “sandbagging” refers to a scenario where an M&A buyer brings a post-closing indemnification claim based on a breached seller representation and warranty that the buyer was arguably aware of prior to closing.

The recent ruling of the Delaware Court of Chancery in In re Dura Medic Holdings, Inc. has finally provided certainty in Delaware.^[1] However, cross-border M&A lawyers should know that the question remains open in Canada.

Sandbagging: Market Practice

The possibility of sandbagging presents M&A parties with three options: they can (1) include a “pro-sandbagging” clause that expressly permits it, (2) include an “anti-sandbagging” clause that expressly prohibits it, or (3) forgo any sandbagging clause and remain silent on the issue.

Which approach is most common? According to the most recent American Bar Association private target M&A deal point studies, the answer is clear: remaining silent is the most common avenue.^[2] In the United States, 76 percent of deals were silent on sandbagging, with 19 percent of deals including a pro-sandbagging clause and 5 percent of deals including an anti-sandbagging clause. In Canada, 82 percent of deals were silent on sandbagging, with 10 percent of deals including a pro-sandbagging clause and 8 percent of deals including an anti-sandbagging clause.

The question that follows is this: What approach to sandbagging would a court take when faced with contractual silence? The answer is now certain in Delaware. Things unfortunately remain murky in Canada.

Sandbagging in Delaware: Finally, Crystal Clear Skies

In Dura Medic Holdings, the buyer claimed damages for the seller’s breach of a representation and warranty stating that the target had not received notice of noncompliance with health-care laws in the preceding three years. The seller’s disclosure schedules had identified one such notice, but post-closing the buyer discovered others, and the additional regulatory review resulted in significant expense. The seller defended the claim on the basis that it had informed the buyer of the additional notices during a pre-closing due diligence call. The purchase agreement was silent on sandbagging. This put sandbagging squarely before the Delaware Court of Chancery.

Previous Delaware rulings had waffled somewhat. Historically, U.S. deal lawyers were confident that Delaware was a pro-sandbagging jurisdiction even without precedent directly on point. However, an aside by the Delaware Supreme Court in 2018 caused confusion by stating that “[v]enerable Delaware law casts doubt” on a buyer’s ability to sandbag.^[3] Subsequent and more favorable obiter comments by Delaware courts on sandbagging calmed U.S. lawyers’ concerns.^[4]

But it was not until Dura Medic Holdings, decided earlier this year, that the issue of sandbagging was confronted head-on. The court rejected the seller’s defense, explaining that the seller’s disclosure during the due diligence call “has no bearing on the legal analysis.”^[5] The reason was that a “breach of contract claim is not dependent on a showing of justifiable reliance.”^[6] The result was that having “contractually promised [the buyer] that it could rely on certain representations, [the seller] is in no position to contend that [the buyer] was unreasonable in relying on [the seller’s] own binding words.”^[7]

Notwithstanding that the purchase agreement was silent on sandbagging, the alleged knowledge of the buyer at execution that the representation was inaccurate did not impact the buyer’s ability to later claim for a breach of the representation. Stated more simply, Delaware is a pro-sandbagging jurisdiction.

Sandbagging in Canada: Still Cloudy, Twenty Years and Counting

The law around sandbagging in Canada is much less clear. The principal reason is conflicting appellate precedent from over two decades ago. Neither ruling was directly on point, but their general implications for sandbagging are relatively uncontroversial. The first, a 2001 ruling of the Alberta Court of Appeal (“ABCA”), appeared to endorse sandbagging.^[8] The second, a 2003 ruling of the Ontario Court of Appeal (“ONCA”), cast doubt on it.^[9]

The waters have since been muddied further by related rulings by the Supreme Court of Canada (“SCC”) regarding the duty of good faith in contract in 2014^[10] and 2020.^[11] The first established good faith as a “general organizing principle” of the common law, which includes a duty of honest performance in contract.^[12] It explained that this includes a duty that parties “not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.”^[13] The second elaborated that dishonest performance may include “lies, half-truths, omissions, and even silence, depending on the circumstances.”^[14]

Neither ruling addresses sandbagging. But it is arguable that the SCC’s treatment of good faith and honest performance could undermine an attempt at sandbagging, along the lines of the ONCA ruling. Alternatively, a court could instead focus on the SCC’s instruction that good faith does not require a counterparty to “forego advantages flowing from the contract,”^[15] along the lines of the ABCA ruling.

Practical Takeaways for Cross-Border Private M&A

Sandbagging raises complicated issues. Luckily for U.S. M&A lawyers, things have been greatly simplified by Dura Medic Holdings. On the other hand, given the continued uncertainty in Canada, U.S. M&A lawyers should remain vigilant regarding the potential complications surrounding sandbagging when working on cross-border deals. Given that the large majority of Canadian private M&A agreements go silent on sandbagging, these potential complications will quickly take on practical, real-world significance should a buyer foresee a possibility of sandbagging or should the seller suspect that the buyer may engage in sandbagging.

M&A parties should also be aware of related practical considerations relevant to sandbagging. For example, when acting for the buyer and the agreement is either silent on sandbagging or includes an anti-sandbagging clause, lawyers should be alert to the possibility that the seller might be tempted to engage in a “document dump” whereby a large amount of disclosure is made in the run-up to execution or closing. Related considerations regarding the drafting of the purchase agreement include (1) cross-referencing and whether disclosure in one disclosure schedule may constitute disclosure with respect to related disclosure schedules and (2) whether the acquisition agreement addresses updates to the seller’s disclosure schedules prior to closing (in the event of a transaction that has an interim period between signing and closing). Specific considerations regarding the latter include whether the agreement is silent on the point, expressly prohibits it, or expressly permits or requires it. This is important because whether (and under what conditions) the seller is permitted to update its disclosure schedules post-execution but prior to closing can impact the chance of sandbagging issues later arising.

1. In re Dura Medic Holdings, Inc., No. 2019-0474-JTL, 2025 Del. Ch. LEXIS 47 (Jan. 29, 2025). ↑

2. See the 2023 ABA Private Target Mergers & Acquisitions Deal Points Study (including transactions from 2022 and Q1 2023) and the 2025 ABA Canadian Private Target Mergers & Acquisitions Deal Points Study (including transactions from 2020, 2021, and 2022). ↑

3. Eagle Force Holdings, LLC v. Campbell, No. 10803, 2018 Del. LEXIS 233, at *66 (May 24, 2018). ↑

4. See, e.g., Arwood v. AW Site Servs., No. 2019-0904-JRS, 2022 Del. Ch. LEXIS 57 at *7 (Mar. 9, 2022) (“In my view, Delaware is, or should be, a pro-sandbagging jurisdiction.”). ↑

5. Dura Medic Holdings, 2025 Del. Ch. LEXIS 47, at *40. ↑

6. Id. at *41. ↑

7. Id. at *42. ↑

8. Eagle Res. Ltd. v. MacDonald, 2001 CanLII 264 (Can. Alta. C.A.). ↑

9. Transamerica Life Can. Inc. v. ING Can. Inc., 2003 CanLII 9923 (Can. Ont. C.A.). ↑

10. Bhasin v. Hrynew, 2014 CanLII 71 (S.C.C.), [2014] 3 S.C.R. 494. ↑

11. C.M. Callow Inc. v. Zollinger, 2020 CanLII 45 (S.C.C.), [2020] 3 S.C.R. 908. ↑

12. Bhasin, 2014 CanLII 71. ↑

13. Id. ↑

14. Callow, 2020 CanLII 45. ↑

15. Bhasin, 2014 CanLII 71. ↑

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

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

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

What Are DIV Damages?

DIV Damages are a form of expectation damages in which the amount of the damages is the difference between (i) the value of the target business as represented to the buyer (almost always the purchase price paid for the target business by the buyer) and (ii) the value of the target business after giving effect to the diminution in the target business resulting from a breach of the Acquisition Agreement representations and warranties (“R&W Breach”) or from fraudulent misrepresentation or deceit regarding the target business. DIV Damages are often the most significant portion of an RWI claim recovery sought by an insured.

Notwithstanding the terminology often inaccurately used, DIV Damages are not “multiplier losses” or based on “multiplied damages.” Instead, DIV Damages are M&A damages calculated by reference to either: (i) in the case of an MOE Methodology, (a) an actual or deemed shortfall in the EBITDA of the target business for a specified measurement period (“Measurement Period EBITDA”) caused by the R&W Breach or by the fraudulent misrepresentation or deceit, times (b) the multiple applied by the insured to the Measurement Period EBITDA in determining the purchase price to pay for the target business; or (ii) in the case of a DCF Methodology, the loss of future cash flows and terminal value over a specified period caused by the R&W Breach or by the fraudulent misrepresentation or deceit, discounted to present value by the application of a discount factor. By comparison, an example of “multiplied damages” would be treble damages awarded to a private plaintiff for an antitrust violation, in which damages are calculated and then statutorily multiplied by three to determine the aggregate amount to be paid by the offending person or entity to the private plaintiff for the specified antitrust violation.^[2]

The Principal Differences Between Using an MOE Methodology and Using a DCF Methodology to Calculate DIV Damages

An MOE Methodology and a DCF Methodology are both ways to value a target business. However, on the one hand, an MOE methodology is retrospective, focused on historical EBITDA for a specified Measurement Period prior to the Acquisition, typically a specified calendar year or a trailing twelve months (“TTM”) or latest or last twelve months (“LTM”) period before a specified month-end date. On the other hand, a DCF methodology is prospective, focused on projected cash flows during a specified period—say five years or seven years after the Acquisition—with a terminal value (i.e., an additional number of years of projected cash flows summed) added on, all subject to a discount rate. As such, DIV Damages calculated using a DCF methodology are often confused with, and even referred to as, “lost profits damages.”

In the case of an MOE Methodology, it is the multiple that accounts for the risks associated with the target business. In the case of a DCF Methodology, it is either the projected cash flows themselves or the discount rate (sometimes referred to as a “risk-adjusted discount rate”) that accounts for the risks associated with the target business. In the case of an MOE Methodology, it is the multiple that increases the size of the shortfall in EBITDA during the Measurement Period from 1x. In the case of a DCF Methodology, it is the multiple years of projected cash flows and the terminal value that increase the size of the loss of cash flows from 1x.

One other note about the two methodologies: While this is not true across the board, financial buyers such as private equity firms tend to use an MOE Methodology to determine the purchase price for the target business (subject to deal adjustments, as in the case of an auction), while strategic buyers tend to use a DCF Methodology to confirm the acceptability of, if not actually establish, the purchase price for the target business.

Evolution of Cases Involving DIV Damages Calculated Using an MOE Methodology Under Delaware M&A Damages Law

From the Beginning: Cobalt v. Crystal

The seminal case involving DIV Damages calculated using an MOE Methodology under Delaware M&A damages law is the 2007 Delaware Chancery Court case of Cobalt v. Crystal.^[3] Cobalt involved the sale of WRMF—a West Palm Beach, Florida, radio station—by James Crystal Enterprises, LLC (“Crystal”) to Cobalt Operating, LLC (“Cobalt”), for a purchase price of $70 million. The purchase price was based on measurement period Broadcast Cash Flow (“BCF”) (a “financial measure . . . roughly akin to [EBITDA]”^[4]) of the target of $5 million, times a multiple of 14.

After finding that Crystal had breached and committed fraud with respect to certain Acquisition Agreement representations and warranties, then–Vice Chancellor Strine^[5] awarded Cobalt (i) DIV Damages of $11 million, based on (a) a measurement period BCF of $4.2 million adjusted to eliminate the effects of the R&W Breach, times (b) the multiple of 14 ($58.8 million, rounded up to $59 million, and then subtracted from the purchase price paid of $70 million); (ii) indemnification for out-of-pocket damages of $180,754 for credits extended by Cobalt to certain advertisers in respect of the R&W Breach; (iii) prejudgment interest; and (iv) reasonable attorney fees and costs.^[6]

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

• “the traditional method of computing damages for a breach of contract claim is to determine the reasonable expectations of the parties”
• “[e]xpectation damages [in this case, the DIV Damages] are calculated as the amount of money that would put the non-breaching party in the same position that the party would have been in had the breach never occurred”
• Crystal “knew Cobalt was relying on a cash flow multiple in reaching the price it was willing to pay for WRMF”
• “Crystal did not present its own valuation evidence” to counter the valuation evidence presented by Cobalt^[7]

Cobalt continues to stand as the preeminent Delaware M&A damages law case involving an award of DIV Damages calculated using an MOE Methodology for an R&W Breach.

I Thought There Was a Rule Against Perpetuities? Zayo v. Latisys

The next significant Delaware M&A damages law case involving DIV Damages calculated using an MOE methodology is the 2018 Delaware Chancery Court case of Zayo v. Latisys.^[8] Zayo involved the sale of a group of IT infrastructure service providers ( “Latisys Companies”) by seller Latisys Holdings, LLC (“Latisys Holdings”) to buyer Zayo Group, LLC (“Zayo”) for a purchase price of $675 million. Zayo performed “extensive financial modeling of the Latisys business,” including “a synergies analysis[,] . . . an analysis of implied multiples of publicly known comparable transactions[,] . . . a 30-year [DCF] analysis, a net present value sensitivity analysis and an internal rate of return analysis.”^[9]

Vice Chancellor Slights first determined that the buyer Zayo had failed to prove a breach of the Acquisition Agreement representations and warranties, which by itself was dispositive of the case and did not require him to consider Zayo’s M&A contract damages claim. Nevertheless, “for the sake of completeness,”^[10] Vice Chancellor Slights also determined that Zayo was not entitled to a recovery of DIV Damages in respect of the asserted R&W Breach. In support of that determination, he made a number of factual and legal findings, including the following:

• Zayo’s valuation expert “lack[ed] . . . experience in valuing going concern businesses”
• Zayo’s valuation expert “base[d] her opinion solely on a multiple of EBITDA” analysis, even though “there [was] no evidence that Zayo actually based its purchase price on a multiple of EBITDA”
• to justify DIV Damages, “[t]he actual value the [buyer] received . . . must assume, and account for, a diminution of the [target’s] earnings into perpetuity”
• “[t]he ‘benefit of bargain’ methodology is appropriate for calculating damages only when the alleged breach of the representation or warranty has caused a permanent diminution in the value of the business (as a result of lost revenues into perpetuity) and the business has thereby been permanently impaired. This is where Zayo’s proof, and [its valuation expert’s] damages calculations, fell short.”^[11]

Although Vice Chancellor Slights’s damages dictum (that the loss and repricing of short-term customer contracts did not support Zayo’s claim for DIV Damages) was justified on the facts of the case, the extent and definitiveness of his findings that only a loss of revenues “into perpetuity” and thus a “permanent impairment” of earnings can support a claim for DIV Damages has been viewed by many M&A practitioners as legally unjustified.^[12] Nevertheless, for a period of time, RWI claimants seeking recovery of DIV Damages had a difficult precedent to contend with in Zayo, absent evidence of such a loss into perpetuity and permanent impairment.

The End of Perpetuity? In re Dura Medic

And then came the 2025 Delaware Chancery Court case of In re Dura Medic.^[13] Dura Medic involved the sale of a durable medical equipment supply company (“Dura Medic”) by its stockholders (“DM Stockholders”) to Comvest Partners, a private equity firm (“Comvest”), for a purchase price of $30 million. The buyer Comvest based the purchase price on the Company’s LTM^[14] April 2018 EBITDA, times a multiple of 6.7797.^[15]

After determining that certain Acquisition Agreement representations and warranties had been breached, Vice Chancellor Laster awarded Comvest: (i) DIV Damages of $2,847,890, based on (a) a deemed shortfall in Measurement Period EBITDA of $433,322 resulting from lost profits from two customers at the heart of one of the two R&W Breaches, times (b) the multiple of 6.7797, minus (c) $89,903 in actual post-Acquisition collections from such customers; and (ii) $100,000 of out-of-pocket damages for fees paid to a healthcare regulatory consulting firm with respect to the other of the two R&W Breaches.^[16]

In connection with awarding DIV Damages to Comvest, Vice Chancellor Laster made a number of factual and legal findings, including the following:

• Where the Acquisition Agreement is silent on the appropriate measure of damages, “the court must look to the common law [, under which] a party can recover reasonable expectation damages based on a multiple where the [purchase] price was established with a market approach using a multiple.”^[17]
• With respect to the DM Stockholders’ asserting Zayo as a precedent that only permitted the application of a multiple of a shortfall in EBITDA to losses permanently affecting the target business:
  • the buyer Zayo had provided no evidence in that case that it had based the purchase price for the target Latisys Companies on a multiple of EBITDA
  • the customer contracts at issue in that case all expired in one year or less after the Acquisition
  • the case’s “reference to a ‘permanent diminution . . . into perpetuity’ . . . [did] not translate into a test for future cases”
  • the Zayo court had offered no legal authority for the “permanent diminution” requirement for the application of a multiple^[18]
• Revenue from new customers added after the Acquisition would have been additive if Dura Medic could also have retained the lost customers at the heart of the applicable R&W Breach.^[19]
• Fraud is not required to apply a multiple in calculating expectation damages.^[20]

To summarize the foregoing, Dura Medic not only distinguished the damages findings in Zayo but also concluded that a recurring diminution in EBITDA after the Acquisition, not a “permanent diminution . . . into perpetuity” of EBITDA, was sufficient to support the award of DIV Damages based on a multiple.

But is Zayo actually dead? Cobalt, Zayo, and Dura Medic were all Delaware Chancery Court cases, decided by three different Vice Chancellors over an eighteen-year period. While the Delaware Supreme Court did affirm Vice Chancellor Strine’s decision in Cobalt, the Delaware Supreme Court has not directly or indirectly overruled Vice Chancellor Slights’s damages decision in Zayo. All that said, the strength and logic of the DIV Damages findings in Dura Medic, particularly those directly contradicting the findings in Zayo, taken together with the dicta status of the DIV Damages findings in Zayo, do appear to toll a death knell for the Zayo requirement of a “permanent diminution . . . into perpetuity.”

Practice Tips for Attorneys for Insureds

In the Acquisition Agreement drafting and negotiation phase, consider the following:

• If the definition of Damages or Losses in the Acquisition Agreement is incorporated into the definition of Loss in the policy, ensure that the definition in the Acquisition Agreement does not exclude “diminution in value,” “multiple of EBITDA,” “multiplier damages,” “lost profits,” or the like, and preferably try to have the definition explicitly include the first or second of those terms.
• If one-half (or some other portion) of the policy retention can be borne by the seller through an indemnification escrow provided for in the Acquisition Agreement, try to ensure that no type of Damages or Losses are disclaimed or waived in the Acquisition Agreement that are covered by the policy.

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

1. This article focuses on buyer-side RWI policies and U.S. law (principally Delaware case law). Although there may be other methodologies to calculate DIV Damages, this article focuses on those calculated using either an MOE Methodology or a DCF Methodology as defined in the second paragraph. The period of time for which the historical EBITDA is measured in an MOE Methodology, or for which the projections used in a DCF Methodology are included, is referred to in this article as the “Measurement Period.”

   • As used in this article:
     • the term Loss has the definition set forth in the RWI policy;
     • the term Acquisition Agreement includes stock purchase agreements, merger agreements, asset purchase agreements, and other types of business combination agreements by which a buyer acquires a target business from a seller;
     • the term Acquisition refers to the business combination contemplated by the Acquisition Agreement;
     • the term the buyer and the term the insured are often used interchangeably;
     • the term target and the term target business are used interchangeably;
     • the term R&W Breach also includes a claim under an RWI policy with respect to a tax indemnification provision in the Acquisition Agreement; and
     • the phrase without required disclosure by the seller refers to a failure by the seller to make a disclosure to the buyer even though required to do so by a representation and warranty in the Acquisition Agreement.

   ↑

2. See Section 4 of the Clayton Antitrust Act of 1914 with respect to certain violations of the U.S. antitrust statutes. 15 U.S.C. § 15. ↑

3. Cobalt Operating, LLC v. James Crystal Enters., LLC, No. 714, 2007 WL 2142926 (Del. Ch. July 20, 2007), aff’d, 945 A.2d 594 (Del. 2008) (unpublished table decision). ↑

4. Id. at *1 n.1. ↑

5. Vice Chancellor Strine later became the Chief Justice of the Delaware Supreme Court. Vice Chancellor Strine issued some of the most significant M&A opinions ever, and certainly some of the most entertaining. See, e.g., his description and the depiction of the “Rose Mary Stretch” in Cobalt, 2007 WL 2142926, at *2. ↑

6. Cobalt, 2007 WL 2142926, at *4, *29–31. ↑

7. Id. at *29 (footnotes omitted). For want of a better place in this article to discuss it, the 2013 Delaware Chancery Court case of Universal Enterprise Group, L.P. v. Duncan Petroleum Corp., No. 4948, 2013 WL 3353743, at *19 (Del. Ch. July 1, 2013), aff’d, 99 A.3d 228 (Del. 2014) (unpublished table decision), contains potentially confusing language that describes diminution in value as an “alternative to expectation damages in particular contexts,” rather than as a type of expectation damages. However, in Universal, expectation damages would arguably have been the costs to restore certain parcels of real property (which made up the target business) to their expected condition as represented by the seller in the Acquisition Agreement, with diminution in value damages being an alternative method to compensate the buyer for the injury suffered as a result of the R&W Breaches in question. The Chancery Court rejected diminution in value damages in part because they would have produced a damages award “an order of magnitude greater than an award based on expectation damages” and thus would have been “disproportionate, constitute economic waste, and bestow a windfall.” Id. at *20. In the end, the Chancery Court awarded neither expectation damages nor diminution in value damages but instead only “actual damages” (to make matters even more confusing) in the form of the costs and expenses incurred by the buyer in remediating the parcels of real property after the Acquisition. ↑

8. Zayo Group, LLC v. Latisys Holdings, LLC, No. 12874, 2018 WL 6177174 (Del. Ch. Nov. 26, 2018). Then–Vice Chancellor Strine did issue another opinion after Cobalt and prior to Zayo that involved a multiple of EBITDA methodology: WaveDivision Holdings, LLC v. Millennium Digital Media Systems, L.L.C., No. 2993, 2010 WL 3706624 (Del. Ch. Sep. 17, 2010). However, WaveDivision arose from certain covenant breaches by the seller, which led to the seller’s not selling the target businesses to the buyer, rather than R&W Breaches. Moreover, WaveDivision involved a comparison of (i) the purchase price for the target businesses that the buyer would have paid had the Acquisition been consummated, to (ii) the value of the target businesses as they would have been operated by the buyer in the future, rather than their value ex ante (which arguably would have been equal to the proposed purchase price and thus have left the buyer without a real remedy). As a result, while there are aspects of WaveDivision that are instructive, such as with respect to mitigation, it does not fit into the line of Delaware M&A damages law cases regarding DIV Damages calculated using an MOE Methodology that began with Cobalt. ↑

9. Zayo, 2018 WL 6177174, at *6. ↑

10. Id. at *15. ↑

11. Id. at *15–17 (footnotes omitted). Vice Chancellor Slights had noted that the buyer Zayo’s “initial indication of interest [IOI] . . . ‘propose[d] a total value in the range of $625M–$655M in cash (approximately 11–11.5x Q4 2014E LQA [presumably “Last Quarter Annualized”] Adjusted EBITDA of $56.8M),’” id. at *4 (citing and quoting the IOI), but he inexplicably seemed to disregard that IOI in determining that “there is no evidence that Zayo actually based its purchase price on a multiple of EBITDA.” Id. at *17. ↑

12. See, e.g., E. Hutchinson Robbins, Jr., M&A Representation and Warranty Damages: The Myth of Lost Revenues into Perpetuity, Bus. L. Today (Aug. 19, 2021). ↑

13. In re Dura Medic Holdings, Inc. Consolidated Litigation, 333 A.3d 227 (Del. Ch. 2025). ↑

14. In Dura Medic, “LTM” stands for “Last Twelve Months.” Id. at 243. ↑

15. Id. at 259. ↑

16. Id. at 261–3. ↑

17. Id. at 259 (footnotes and internal quotation marks omitted). ↑

18. Id. at 259–60 (footnotes omitted), 260 n.55. In Zayo, Vice Chancellor Slights gave significant weight to the American Institute of Certified Public Accountants Mergers and Acquisitions Dispute Practice Aid’s pronouncements regarding the need for a permanent impairment in value in support of his determination that a multiple of EBITDA was not an appropriate methodology to calculate damages absent such a permanent impairment, but he did not cite any cases or other basis in the law for that determination, although he did distinguish a number of cases, including Cobalt, in reaching that determination. Zayo, 2018 WL 6177174, at *17 n.215. ↑

19. Dura Medic, 333 A.3d at 260. ↑

20. Id. ↑

Imagine a fintech startup that deploys an artificial intelligence (“AI”) model to underwrite small-business loans—only to face a demand letter alleging “intentional discrimination” under Texas law. On June 22, 2025, Governor Greg Abbott signed the Texas Responsible Artificial Intelligence Governance Act (“TRAIGA”), placing Texas at the vanguard of state-level AI regulation. As the fourth state to enact a comprehensive AI statute—after Colorado, Utah, and California—Texas now offers both a clear roadmap for developers and heightened risks for those whose AI decisions cause harm.

With the passage of TRAIGA, business trial lawyers are entering an era where AI regulation is no longer a theoretical concern but a live, litigable issue. For trial attorneys handling commercial disputes, TRAIGA’s unique blend of intent-based liability and centralized enforcement reshapes the evidentiary landscape, requiring more rigorous documentation and strategic foresight. Business lawyers must now anticipate how a client’s AI-related decisions prone to allegations of bias—especially in areas such as lending, hiring, and marketing—might be scrutinized under a standard that demands proof of knowing and intentional misuse.

TRAIGA, which takes effect January 1, 2026, introduces a suite of targeted prohibitions, regulatory mechanisms, and compliance frameworks that will shape not only the development and deployment of AI systems in Texas but also the broader landscape of business litigation and regulatory strategy. For business trial lawyers, understanding the contours of this new law is essential, as it will influence litigation strategy, evidentiary standards, and the future of AI-driven business operations.

The version of TRAIGA that was passed and signed into law represents a pared-down evolution from earlier, more expansive drafts that mirrored the risk-based frameworks of the EU AI Act and the Colorado AI Act. The final version, however, reflects a pragmatic shift toward outcome-focused regulation, emphasizing specific prohibited uses of AI while scaling back broad compliance mandates for the private sector. This approach has direct and nuanced implications for business litigation in Texas and potentially beyond.

Intent-Based Evidentiary Standard for Liability

Under Section 4 of TRIAGA, civil liability attaches only where a developer or deployer “intentionally” uses AI to

1. promote self-harm or suicide;
2. promote harming another person;
3. facilitate criminal activity;
4. engage in unlawful discrimination;
5. produce unlawful deepfakes or child-exploitation content; or
6. infringe, restrict, or impair constitutional rights.

The elevated burden of proof placed on plaintiffs is one of TRAIGA’s most consequential implications for business trial attorneys. This intent-based standard departs from risk-only frameworks (e.g., the EU AI Act), requiring claimants to adduce evidence of purposeful misconduct—not merely disparate outcomes. Traditional arguments relying on disparate outcomes or statistical disparities will no longer suffice without evidence of deliberate intent; claimants must now demonstrate that the developer or deployer acted to discriminate or cause harm intentionally.

This heightened standard may reduce the volume of AI-related business litigation premised on algorithmic bias, particularly in employment, lending, and other regulated sectors. It also makes early discovery strategy and internal documentation absolutely pivotal, placing a premium on robust documentation and internal controls. TRAIGA’s safe harbor provisions—such as affirmative defenses for parties that discover violations through internal review, adversarial testing, or compliance with recognized risk management frameworks (e.g., the National Institute of Standards and Technology (“NIST”) AI Risk Management Framework)—may encourage businesses to adopt proactive compliance measures and self-audit protocols. Attorneys representing businesses should proactively advise clients to develop and maintain records showing compliance with these recognized frameworks to activate the safe harbor protections and blunt any allegation of purposeful harm. Further, businesses should strengthen internal controls and preserve audit trails demonstrating their AI systems’ legitimate aims and operational safeguards. These records can become powerful tools during motions to dismiss or summary judgment.

TRAIGA vests exclusive enforcement authority in the Texas attorney general, precluding private rights of action. The attorney general is empowered to investigate alleged violations, issue civil investigative demands, and seek injunctive relief and civil penalties ranging from $10,000 to $200,000 per violation, with additional penalties for continuing violations. TRAIGA also provides for a sixty-day cure period following notice of a violation, incentivizing prompt remediation. This centralized enforcement model may streamline the adjudication of AI-related disputes, reduce the risk of inconsistent outcomes, and provide greater predictability for businesses.

Impact on Discovery and Pretrial Practice

TRAIGA’s focus on intent and its explicit exclusion of liability for unintended third-party misuse of AI systems may limit the scope of discovery into downstream uses. In traditional business litigation, especially in cases involving products or technologies with broad downstream applications, plaintiffs often seek extensive discovery into how a product was used by third parties, the range of possible outcomes, and the foreseeability of misuse. Such discovery can be costly, time-consuming, and burdensome, as it may require the production and analysis of voluminous data regarding end-user behavior, system outputs in varied contexts, and communications with customers or partners.

AI tools like Technology-Assisted Review (“TAR”) can bring order to an overwhelming amount of complex data that in recent years had complicated discovery and pretrial motion practice while creating a massive litigation expense burden. TRAIGA clarified the lines as to what behavior is culpable, which reduces disputes over the adequacy of internal controls and the potentially limitless downstream effects of AI systems in the hands of third parties. And because TRAIGA excluded TAR from its scope, it implicitly affirms continued use of TAR to streamline discovery of just the relevant evidence.

Potential Benefits and Drawbacks of TRAIGA’s Sandbox Regulatory Model

One of TRAIGA’s most innovative features is the establishment of a regulatory sandbox program, administered by the Texas Department of Information Resources in consultation with the Texas Artificial Intelligence Council established by the legislation. The sandbox allows approved participants to develop and test AI systems in a controlled environment, temporarily exempt from certain state licensing and regulatory requirements, for up to thirty-six months.

The sandbox model offers regulatory flexibility and innovation by providing a structured pathway for businesses to experiment with novel AI applications without the immediate risk of regulatory penalties, which is particularly valuable in areas of legal uncertainty where traditional regulatory frameworks may lag behind technological advances. Additionally, by requiring quarterly reports on system performance, risk mitigation, and stakeholder feedback, the sandbox generates empirical data that can inform future legislative and regulatory reforms, enhancing the capacity of regulators and lawmakers to craft targeted, effective policies. Moreover, the Texas sandbox positions the state as a leader in AI regulation, potentially serving as a model for other jurisdictions and facilitating cross-jurisdictional data analysis, which may lay the groundwork for future reciprocity agreements, enabling businesses to scale innovative AI solutions across state lines with greater legal certainty. For business law practitioners, the sandbox offers a clear, time-limited framework for managing regulatory risk during the development and deployment of cutting-edge AI systems, and participation in the sandbox may also serve as a mitigating factor in enforcement actions, further incentivizing compliance.

However, the sandbox model also presents potential drawbacks. While it promotes innovation, it might contribute to a fragmented regulatory landscape if other states adopt divergent models or standards, creating challenges to harmonizing compliance across jurisdictions for businesses operating nationally. Effective oversight of the sandbox requires significant administrative resources, including technical expertise and ongoing monitoring, potentially creating barriers to entry for smaller businesses and limiting the program’s inclusivity. While the future of state-level AI sandboxes is safe for the moment, it remains uncertain due to the prospect of federal preemption. Though one had been proposed, there was no state AI law moratorium in the recently signed federal budget bill; it was stripped out of the U.S. House version by the U.S. Senate. Still, the political forces that had it included in the first place may try again. This could suspend or nullify the Texas sandbox and similar programs, making it essential for business law professionals to closely monitor federal developments, as the regulatory environment may shift.

Practical Advice for Business Law Practitioners

Ultimately, TRAIGA isn’t just a compliance statute—it’s a blueprint for how AI liability will be litigated. For business trial lawyers, this signals a shift in how risk is assessed, evidence is preserved, and cases are pled. Those who understand TRAIGA’s enforcement structure, sandbox incentives, and documentation expectations will not only better defend their clients but also shape emerging jurisprudence on AI accountability. In this evolving landscape, the ability to speak the language of both law and machine will become a key differentiator in the courtroom.

TRAIGA marks a watershed moment in the evolution of AI regulation. By focusing on specific, outcome-based prohibitions and embracing innovative regulatory mechanisms such as the sandbox model, Texas has crafted a framework that attempts to balance the imperatives of innovation, consumer protection, and legal certainty.

For business law practitioners, TRAIGA’s intent-based liability standard and robust safe harbor provisions offer both challenges and opportunities. Practitioners should consider advising clients to do the following:

• Maintain clear records of the intended uses and operational controls of AI systems to support defenses against claims of intentional misconduct.
• Implement and document compliance with frameworks such as the NIST AI Risk Management Framework to avail themselves of statutory safe harbors.
• Stay abreast of federal and state legislative activity, particularly regarding potential preemption and the evolution of sandbox programs.
• Evaluate whether to join the regulatory sandbox for innovative AI projects, balancing the opportunities for experimentation against the administrative requirements and potential for regulatory change.