A rapid transformation in consumer finance is being brought about by open banking—a pivotal innovation that allows consumers to give third parties real-time access to their detailed financial data. Open banking has the potential to increase transparency, promote account portability, spur competition, and drive the next wave of innovation in consumer financial services.

Organic Market-Led Growth in the US

Over the last twenty years, open banking technology and use cases in the United States have developed organically, without significant federal or state regulatory intervention. The growth of open banking has been led by data aggregators—middlemen that use technology to extract data from a broad swath of financial institutions and provide it to third parties, which have predominantly been nonbank fintechs but increasingly include banks. Open banking creates opportunities for the companies leveraging this data to offer innovative products and features. But it simultaneously exposes consumers and financial institutions to significant risks, including data security vulnerabilities and unauthorized data use.

At the same time, governments around the world are granting consumers more rights to access their financial data and control how it is used and disclosed. The United Kingdom, the European Union, Singapore, and Australia, among others, have enacted open banking frameworks regulating consumer-permissioned sharing of financial data.

A Turning Point: New Rules Governing Consumers’ Personal Financial Data Rights

In October 2024, the Consumer Financial Protection Bureau (“CFPB”) issued final rules governing Personal Financial Data Rights under Section 1033 of the Dodd-Frank Act. After an eight-year rulemaking journey, the final rules codify consumers’ rights to

1. access their financial data electronically via “consumer interfaces,” such as a website or mobile app; and
2. delegate access to an “authorized third party” that can access data via a “developer interface,” such as an application developer interface (“API”).

The rules also require consumer disclosures and informed consent before a consumer may authorize a third party to access data, and they impose substantive limitations on how such third parties may access, use, and retain data. The rule also creates obligations for data accuracy and security.

While the rules don’t explicitly prohibit third parties from screen scraping—a controversial practice where a third party collects the consumer’s online banking credentials (username and password) to log in as the consumer and extract data from a bank’s website—they require data providers to offer more secure data sharing channels to mitigate risks and improve data sharing efficiency.

Transformative Potential of Open Banking Rails and Data

The transformative potential of open banking in consumer finance is just beginning to be understood. Take credit underwriting as a prominent example. By leveraging real-time, granular transaction data directly from a consumer’s deposit account, lenders can develop accurate assessments of financial health and ability to pay that move beyond the limitations of traditional credit reports, which can be stale and plagued with inaccuracies. Innovative use cases are also enabling better personal financial management and budgeting tools, faster identity verification, and smarter payments. This shift in capabilities has broad implications for expanding financial inclusion and enabling the next generation of personalized financial services. Like self-driving cars enabled by sensors that collect thousands of data points a second, and the powerful computers and systems that analyze and react to these data points to avoid collisions, open banking tools are providing the data points and signals that innovative financial services companies need to create an “autopilot” for the average consumer’s financial life.

Areas of Consensus and Controversy

There are areas of consensus in the final rules that should be celebrated, including requirements for clear and meaningful consumer disclosures and robust data security requirements for all parties handling sensitive financial data. However, controversies persist regarding many policy choices in the final rules. For example, the rules only subject certain financial products to disclosure, including credit cards and deposit accounts, while excluding a host of other financial products, including mortgages, auto loans, and investments. The rules also place significant restrictions on third parties receiving data by requiring that all use and retention be limited to what is “reasonably necessary” to deliver a consumer’s requested product or service—an amorphous standard that could be read to restrict innovative secondary uses. And while screen scraping is viewed critically as a risky and outdated practice, it remains permissible under the rules, placing the burden of managing its consequences on data providers. There are also strategic and technical decisions data providers and third parties must make, from API design to bilateral agreements that properly allocate liability for errors, fraud and data breaches, and risk management protocols. Banks may experience an influx of requests for data from authorized third parties, and their third-party risk management practices will need to adapt to assess the unique risks presented by these third parties.

The CFPB’s final rules also rely on “recognized standard setters” to develop “consensus standards” for data formats and access protocols, which are intended to promote interoperability, making it easy for a third party to obtain and digest similar data from multiple data providers. However, the coexistence of multiple data formatting standards (and proprietary formats from data aggregators) complicates this effort to achieve seamless interoperability.

Lastly, the integration of payment initiation data, such as bank account numbers and routing numbers used for ACH transactions, into open banking frameworks introduces opportunities for “pay by bank” services to challenge existing card networks. But these advancements also raise fraud concerns, requiring innovative solutions such as tokenized account numbers (“TANs”) to enhance security.

The Path Forward

Challenges lie ahead for the sound regulation of open banking in the US. A national banking trade association filed suit to stop the rule from taking effect the day it was finalized, and shifts in the CFPB’s leadership and regulatory priorities could cause the agency to amend the final rules in the near term. Notwithstanding these regulatory controversies and headwinds, the demand for consumer-authorized data sharing is expected to continue growing, driven by market forces and consumer expectations for greater control over their financial data.

Data providers will need to identify and document the “covered data” in their control or possession that is subject to disclosure, design compliant APIs, and establish robust third-party risk management protocols. Third parties accessing data, including fintechs and data aggregators, must evaluate their compliance strategies, consumer-facing experiences, and approaches to managing data use and retention. Questions around liability for errors, means of achieving accuracy and interoperability, and minimum contractual terms for third party access remain critical.

This is a transformative moment for open banking and the consumer financial services industry more broadly. Banks, fintechs, standard-setting organizations, and regulators are being pushed to work together in new ways. Now it is incumbent upon them to find common ground to support innovation, manage the operational and regulatory risks presented, and deliver real value to consumers.

Franchising, both domestically and abroad, represents a massive force driving economic growth. In 2023 alone, franchising output eclipsed $893 billion, with a rapidly growing trajectory that will likely see that number continue to grow in the coming years.^[1] As with many of the industries seeing continued growth and success, the franchising industry has become increasingly in demand, with companies seeking to expand their footprint through mergers and acquisitions (“M&A”).^[2] In particular, franchise systems have become sought-after targets for private equity companies.^[3] While acquiring franchise systems can provide lucrative growth opportunities, the industry presents challenges unique from those of other sectors.

Franchising is a highly regulated industry governed by a multitude of federal and state laws regarding the relationship between the franchisor and the franchisee.^[4] For eager investors and expanding companies, this complex legal framework can often be overlooked, overshadowed by the potential for massive financial gain achieved by either acquiring or merging with successful franchise systems. However, navigating this complex statutory and regulatory landscape is crucial for avoiding legal pitfalls that could significantly impact the success of the deal. New acquisitions are often followed by attempts to cut costs using a variety of strategies, one of which is terminating underperforming franchisees. In many states, investors are surprised to find that terminations are subject to a number of state-specific laws governing the relationship between franchisors and franchisees. Currently, twenty-three states have laws governing the relationship between franchisors and franchisees.^[5] Franchise relationships are also subject to the vast array of contractual obligations established in franchise agreements.

Beyond compliance with existing laws and applicable contractual provisions, prospective stakeholders must also carefully consider the relationship dynamics between the franchisor and franchisees. Unlike typical corporate acquisitions, where a company owns and controls its subsidiaries, franchise systems involve independent franchise owners who operate their businesses under the franchisor’s brand. While franchisees within a given system use a common set of trademarks and are subject to standardized system standards and requirements, each franchisee is ultimately responsible for the successful operation of their locations.^[6] Due to the more independent nature of franchisee operations, the success and satisfaction of these franchisees are essential for a successful franchise system. So, how can prospective investors maximize the success of a franchise system following an acquisition?

Strategies for Successful Franchise Acquisitions

Establish Clear Communication

One of the most important aspects of post-acquisition success is maintaining open, transparent lines of communication with franchisees. Franchisees, who are often independent business owners with significant investments, may feel uncertain or anxious about changes to the system. New ownership should immediately establish trust by holding open forums or meetings where franchisees can ask questions and voice concerns. Franchisee satisfaction is closely tied to franchisees’ perception of being heard by franchisors, which in turn affects overall performance and system growth. By being proactive in addressing concerns and outlining a clear vision for the future, new owners can mitigate potential disruptions and foster a positive transition. Trust is essential for franchisee buy-in, and clear communication builds that trust from the outset.

Engage in Collaborative Decision-Making

Allowing franchisees to have a seat at the table regarding important operational decisions can foster goodwill and system-wide buy-in.^[7] This could involve establishing a franchisee advisory council, which offers a structured way for franchisees to collaborate with the corporate team. Some franchise systems also have independent franchisee associations, which can serve as valuable allies for franchisors if sufficient effort is put into developing successful relationships.^[8] Research suggests that franchisee involvement and satisfaction lead to positive outcomes for the franchise system as a whole.^[9] Collaboration with experienced franchisees can also benefit franchisors. Franchisees often have extensive experience with the success and challenges faced by the system, providing practical insights into the success (or lack thereof) of different initiatives.

Think Beyond the Numbers

In the rush to maximize profits after an acquisition, some investors focus heavily on increasing EBITDA (earnings before interest, taxes, depreciation, and amortization). While EBITDA growth is important, it’s equally critical to take a long-term view of the franchise’s value, particularly regarding brand equity and sustainability. Short-term cost-cutting measures, such as reducing marketing spend or increasing franchise fees, may boost immediate profits but can erode the brand’s reputation and the satisfaction of franchisees. Instead, new ownership should focus on investments that build the brand’s reputation, customer loyalty, and franchisee success over time. 

A Tale of Two Acquisitions

The abovementioned points are showcased in two notable acquisitions within the franchise world. The first (Quiznos) serves as a cautionary tale, and the second (Popeyes), a playbook for success. These two acquisitions represent significantly different strategies for franchisee relations, resulting in two vastly different outcomes for each system. These cases also emphasize the importance of thorough due diligence prior to the acquisition of a franchise system. While financial statements and market trends provide necessary information for prospective investors, diligent investors and the lawyers who represent them can also learn invaluable information from those operating franchise systems at the ground level: the franchisees. As these case studies demonstrate, the success of a franchise system is inherently tied to the success of its individual franchisees.

Quiznos: The High Cost of Ignoring System Stability

In 2006, Quiznos became the target of a leveraged buyout (“LBO”) led by a private equity firm. At the time, Quiznos appeared to be a thriving franchise system with over 5,000 locations.^[10] However, the LBO saddled the company with significant debt, creating a financial environment where short-term profit extraction and aggressive cost-cutting took precedence over franchisee success. Over the next decade, Quiznos’s mismanagement of its franchisee relationships and systemic neglect led to lawsuits, closures, and a collapse that serves as a cautionary tale for the franchising industry. While Greg Brenneman’s tenure as chief executive officer (“CEO”) saw briefly improved relations due to his dedication to improved communication, Quiznos’s management ultimately failed to meaningfully work with franchisees long-term.

Lack of Meaningful Communication with Franchisees

Quiznos’s corporate leadership, under the financial pressures imposed by private equity ownership, operated with a one-sided approach that created significant discontent among franchisees. Quiznos largely failed to engage with its franchisees in meaningful dialogue. Complaints about high food costs, driven by mandatory purchasing agreements with corporate-approved suppliers at inflated prices, were ignored.^[11]

Over time, these unresolved issues fractured trust within the system, leading many franchisees to file lawsuits alleging fraud, breach of contract, and other claims. Transparent communication and a willingness to address franchisee concerns could have mitigated this crisis. Instead, the company’s silence and disregard for franchisee well-being amplified frustrations, destabilizing the system and tarnishing its reputation.

Failure to Involve Franchisees in Meaningful Decisions

Rather than fostering collaboration with franchisees, Quiznos imposed unilateral decisions that prioritized rapid revenue growth. The company pursued an aggressive expansion strategy, often saturating markets by placing new locations near existing ones.^[12] This policy forced franchisees into direct competition, diluting individual store profits and further straining relationships between franchisees and corporate leadership.

Quiznos also failed to meaningfully engage franchisees in the decision-making process surrounding food suppliers. While many fast-food franchisors negotiate with vendors who then supply locations directly (at a reduced cost since they’re buying in bulk), Quiznos corporate bought all of its supplies from vendors and then sold them to franchisees, resulting in substantially higher costs. While this decision may have been Quiznos’s contractual right, it ultimately cut into the margins of franchisees, reducing their earnings and making it difficult to earn any meaningful profit.^[13] Franchisees repeatedly requested a change in food sourcing to align with the industry standard preference for food co-ops, but Quiznos’s management held firm on its position.^[14]

Quiznos also took an adversarial approach to independently forming franchisee associations.^[15] Rather than seeing the associations as cooperative partners, the value of which has been seen in numerous franchise systems,^[16] management refused to meaningfully work with the formed associations.

Short-Term Thinking, Long-Term Consequences

The LBO also led to policies that emphasized short-term financial gains over the system’s long-term health. High franchise fees and royalties, combined with costly operational mandates, placed significant financial strain on franchisees. These revenue-generation strategies temporarily improved Quiznos’s EBITDA but undermined the profitability of its operators, forcing many into financial distress.

Additionally, Quiznos reduced investments in franchisee support, such as training, marketing, and operational resources. These cost-cutting measures saved money in the short term but left franchisees ill-equipped to navigate challenges, further exacerbating their struggles. As closures became rampant and legal disputes mounted, Quiznos’s reputation with franchisees, customers, and the market deteriorated. By 2014, Quiznos filed for bankruptcy, with its store count plummeting from over 5,000 locations to fewer than 400.

Lessons from the Decline

Quiznos’s collapse underscores the dangers of prioritizing short-term financial metrics over system stability and franchisee well-being. Where Popeyes (discussed below) thrived by embracing transparency, shared decision-making, and long-term investments, Quiznos crumbled under the weight of mistrust, overreach, and shortsightedness driven by private equity pressures.

The disconnect between corporate executives and franchisees also cost millions in litigation and settlements. In 2010, Quiznos settled a class action with disgruntled franchisees to the whopping tune of $206 million.^[17] Several other settlements have been reached with franchisees in the following years, resulting in the franchisor paying over $40 million in 2012 to a group of franchisees. Settlements have continued to be reached in franchise-related litigation as recently as 2020.^[18] These massive awards and countless years of litigation illustrate the importance of working collaboratively with franchisees early to ensure effective communication and collaboration.

For investors in franchising, this case highlights the risks of ignoring the operational foundations of the business. A franchise system is only as strong as the trust between franchisors and franchisees. When that trust is broken, no amount of aggressive growth or cost-cutting can compensate for the damage. Quiznos serves as a powerful reminder that success in franchising depends not just on financial engineering but on the strength of the relationships that sustain it.

Popeyes: A Recipe for Post-Acquisition Success

When Cheryl Bachelder stepped into her leadership role as CEO of Popeyes Louisiana Kitchen in 2007, the brand was struggling. Once a celebrated name in the quick-service industry, Popeyes had stagnated. Franchisees were disgruntled, profits were underwhelming, and the relationship between corporate and franchise owners was fractured. Yet, what could have been a cautionary tale in franchise mismanagement became a textbook example of post-acquisition success—rooted in the earlier strategies of clear communication, collaboration, and a steadfast focus on long-term growth.

Rebuilding Trust Through Transparent Communication

One of Bachelder’s first priorities was to bridge the chasm of mistrust between the corporate office and its franchisees. Years of one-sided, top-down decision-making had left franchisees feeling unheard and undervalued—sentiments that significantly stymie franchise systems.^[19] Bachelder turned the tide by establishing open forums, creating a space for franchisees to express their concerns and contribute ideas. This took multiple forms, one of which was conducting franchisee satisfaction surveys, something that the previous Popeyes ownership had declined to do.

Inviting Franchisees to the Table

Under Bachelder’s leadership, Popeyes took the bold step of embedding franchisee voices into the company’s decision-making process. By forming a franchisee advisory council, Bachelder ensured that operational strategies reflected the on-the-ground realities of franchise operations. Franchisees were invited to participate in high-level discussions about Popeyes’s strategy, particularly in discussions that directly impacted them, such as implementing a national advertising fund and increasing advertising contributions from franchisees.^[20] By involving franchisees in the strategy and discussions, Bachelder was able to more effectively convey the overall vision for corporate strategies. This strategy was successful, with the franchisees agreeing to increase their advertising contributions and transition to a more nationally focused advertising effort.

While many franchisors reserve the contractual right to unilaterally increase advertising fees (subject to some limitations), practically speaking, this move often results in significant pushback from franchisees. The decision by Popeyes’s leadership to include franchisees in discussions helped earn their buy-in to corporate initiatives.^[21] While franchisors oftentimes have the opportunity to make sweeping changes unilaterally under the language of their franchise agreements, the decision to include franchisees in the process results in greater collaboration, trust, and alignment between the franchisor and franchisees.

Shifting Focus from Quick Wins to Lasting Value

Rather than chasing short-term gains, Bachelder focused on fortifying Popeyes’s long-term value. She spearheaded initiatives that revitalized the brand, such as overhauling the menu, launching a Louisiana-themed marketing campaign, and introducing operational improvements. Perhaps most crucially, she restructured the financial relationship with franchisees, ensuring their profitability and encouraging reinvestment. These measures reflect a core principle explored in this paper: while immediate profitability may tempt new owners, sustainable growth demands thoughtful investments in the brand, franchisees, and customers alike.

Achieving Success Through Collaboration

The results of Bachelder’s strategy speak volumes. Over seven years, Popeyes experienced a dramatic resurgence in franchisee satisfaction, profitability, and market share. These more intangible improvements were reflected in the company’s financials as well. When Bachelder took over in 2007, Popeyes’s share prices were approximately $16.^[22] In 2017, when Popeyes was acquired by Restaurant Brands International, the share price had grown by a whopping 388 percent.^[23] Restaurant Brands International ultimately ended up paying $1.8 billion to acquire the franchise system.

A collaborative approach with franchisees also reduces the chances of burdensome litigation from displeased franchisees following an acquisition.^[24] For investors hoping to eventually profit off the sale of the franchise system later down the road, reducing the footprint of franchisee litigation within the system can lead to a more attractive valuation.

Bachelder’s journey at Popeyes underscores the lessons explored in this paper: post-acquisition success requires more than financial acumen—it requires building trust with franchisees, inviting collaboration at all levels of the franchise system, and balancing short-term financial demands with long-term aspirations for growth. For prospective investors in the franchising industry, Popeyes offers an invaluable case study on how to revitalize a system and secure enduring success in a competitive landscape. It proves that satisfying franchisee stakeholders and increasing company value aren’t mutually exclusive but rather deeply intertwined.

Conclusion

In the competitive and highly regulated franchising landscape, prospective investors must approach potential acquisitions of a franchised system with a nuanced understanding beyond mere financial metrics. The complexities of franchise laws and the intricate relationships between franchisors and franchisees demand a strategy that accounts for the vast array of franchising laws and regulations and strikes a sustainable balance between short-term financial success and long-term system growth. Successful integration of a franchise system hinges on more than just optimizing EBITDA; it requires fostering franchisee trust, ensuring collaborative decision-making, and making thoughtful investments that enhance brand equity and operational sustainability.

By recognizing the unique dynamics of the franchise model and addressing them with transparency and foresight, investors can position themselves to achieve sustained growth, brand loyalty, and enduring success in a rapidly expanding industry. Ultimately, those who recognize and prioritize franchisee engagement and success are not only going to be better positioned to comply with franchise laws and applicable contractual obligations, but they’re also more likely to realize more sustained financial growth within the system. A thriving franchise system is built on thriving franchisees—those who understand this simple truth are poised to turn their investments into enduring success stories.

1. Ashley Rogers, Jin Qi & Khadija Cochinwala, 2024 Franchising Economic Outlook (Int’l Franchise Ass’n & FRANdata Feb. 14, 2024). ↑

2. Alan R. Greenfield, Christina M. Noyes & Sherin Sakr, Presentation at the Am. Bar Ass’n 40th Annual Forum on Franchising: Mergers & Acquisitions: The Basics for Buying and Selling the System (Oct. 20, 2017). ↑

3. Id. ↑

4. Fundamentals of Franchising (Rupert Barkoff, Joseph Fittante Jr., Ronald Gardner Jr. & Andrew Selden eds., 4th ed. 2015). ↑

5. Id. ↑

6. Fundamentals of Franchising, supra note 4. ↑

7. Andrew Beilfuss, Ronald K. Gardner Jr., Eric H. Karp, Brenda B. Trickey & Kate B. Ward, Presentation at the Am. Bar Ass’n 47th Annual Forum on Franchising: Multiple Voices at the Table: Effective Franchisee Associations and Franchise Advisory Councils (Oct. 16, 2024). ↑

8. Greenfield et al., supra note 2. ↑

9. Fundamentals of Franchising, supra note 4. ↑

10. Katie Porter, What Happened to Quiznos? 4,000+ Closures—but There’s Still Hope, 1851 Franchise (updated Jan. 13, 2023). ↑

11. Jonathan Maze, A Brief History of Quiznos’ Collapse, Rest. Bus. (June 13, 2018). ↑

12. Keith Donovan, What Happened to Quiznos? (A Franchisee Hellscape), Startup Stumbles (Apr. 9, 2024). ↑

13. Jason Daley, Why These 3 Once Thriving Franchises Have Fallen on Hard Times, Entrepreneur (Aug. 6, 2014). ↑

14. Jonathan Maze, Has Quiznos Changed?, Franchise Times (updated Nov. 24, 2020). ↑

15. Id. ↑

16. Fundamentals of Franchising, supra note 4. ↑

17. Janet Sparks, Quiznos Settlement Finalized, Among Highest Penalties in Franchising, Marks & Klein LLP (Aug. 17, 2010). ↑

18. Beth Ewen, Leading Plaintiff Settles in Quiznos Lawsuits, Franchise Times (updated Oct. 12, 2020). ↑

19. Beilfuss et al., supra note 7. ↑

20. Cheryl A. Bachelder, The CEO of Popeyes on Treating Franchisees as the Most Important Customers, Harv. Bus. Rev. (Oct. 2016). ↑

21. Id. ↑

22. Popeyes Louisiana Kitchen, Inc. (PLKI) Stock Price History, Macrotrends (last visited Nov. 22, 2024). ↑

23. Id. ↑

24. Kirk Reilly, L. Seth Stadfeld & Phillip Leslie Wharton, Presentation at the Am. Bar Ass’n 29th Annual Forum on Franchising: Litigation After Acquisition of a Competing Franchise System (Oct. 11–13, 2006). ↑

Lateral partner hiring has become an essential component of law firms’ business development strategies, allowing firms to expand client relationships, strengthen practice groups, and enhance their competitive position in the legal market. However, while recruiting top talent is a significant investment, integration remains the determining factor in whether a lateral hire ultimately succeeds.

A failed lateral integration can have significant consequences, with an impact on not just the individual attorney but also firm morale, client retention, and overall profitability. Despite the high stakes, many firms lack a structured, accountable approach to ensuring a smooth transition.

Through conversations with law firm leaders who have managed the integration process or experienced it firsthand, this article highlights the essential components of a successful lateral partner transition and offers concrete strategies for law firms looking to maximize their investment in new talent.

1. Strategic Alignment: Identifying Success Before the Move

Before a lateral partner joins a new firm, both the firm and the partner must share a clear vision of what success looks like. Whether the goal is to expand into a new market, support existing client relationships, or strengthen a particular practice area, alignment on strategic priorities is critical.

Britt Schmidt, Chief Legal Talent and Inclusion Officer at Vorys, stresses the importance of setting expectations early. “In terms of successful integration, it all comes back to defining what success looks like,” she said. “We spend time up front discussing this with each lateral partner because success can mean different things depending on the reasons for the hire. It’s about aligning their goals with the firm’s strategic objectives.”

Similarly, David McClune, Chief Marketing & Business Development Officer at Davis Polk & Wardwell, highlights the risks of misalignment: “Lateral hiring is inherently risky, and there’s no one-size-fits-all solution. It’s crucial to have a clear understanding of what success looks like for both the firm and the lateral partner. This involves setting realistic goals and ensuring that the partner’s practice aligns with the firm’s strategic priorities.”

A key part of this alignment is integrating the lateral’s practice into the firm’s existing platform. A formal client cross-selling strategy should be developed as part of the lateral’s integration plan, with buy-in from all relevant stakeholders. This includes identifying how the lateral’s clients can benefit from the firm’s broader capabilities and determining where existing firm clients can leverage the lateral’s expertise.

This process requires coordination between the lateral partner, practice group leaders, business development teams, and key partners across the firm. Without this level of engagement, laterals may struggle to find their place within the firm’s business development ecosystem, limiting cross-selling opportunities and diminishing their long-term impact.

Lilit Asadourian, Partner at Barnes & Thornburg, points to that kind of engagement in describing how she assessed whether a firm was truly committed to her success. “I could tell right away that I was talking to a firm that was serious about me. It was clear because they were moving quickly, they were moving deliberately, and they had a defined vision of how I would fit into their strategic goals,” she said. “This alignment was crucial because it showed me that they valued my practice and were committed to supporting my growth.”

Firms that define success early, create a clear roadmap, and integrate laterals into the firm’s broader client strategy set the foundation for a smooth and effective transition.

2. Relationship Building: Proactively Facilitating Connections

Lateral integration is not just about business strategy; it is about people. The most successful laterals establish strong internal networks quickly, yet many firms take a passive approach, assuming that lateral partners will navigate the firm’s culture and relationships on their own.

Firms that take a hands-on approach to facilitating connections see better outcomes. At Vorys, for example, the firm ensures laterals are introduced to key stakeholders early. “We call them colleague connections,” Schmidt said. “We’ve already identified what they should see in a ninety-day plan and the key people they need to meet early on. We are putting those meetings on their calendar for them and act as matchmakers before they even get here.”

Sarah Kelly-Kilgore, Partner at Holland & Knight LLP, underscores the importance of internal visibility. “The more that you’re able to speak about your practice internally and connect with new colleagues to let them know you’re there and available, the better,” she said.

The scope of integration required of a successful transfer can be extensive. Joseph Welch, Partner at Blank Rome LLP, notes that he has opened over one hundred matters in the couple of years since he joined the firm. “This client demand has required me to integrate very quickly and get to know as many of my law partners and colleagues as possible. While great legal support is essential for growing and maintaining a sizable book of business, the firm’s business and marketing teams are equally important for continued success,” he said. “I enjoy regular (often weekly) meetings with our firm’s marketing and business support teams to make sure I’m reaching the right audiences and staying ahead of developing legal needs.”

Early introductions help new partners feel confident in their transition, Anna Maria Vitek, Executive Director of Lateral Partner Integration and Strategy at DLA Piper, explains. “We have dedicated support teams who can help them with a variety of different things on the logistical side. We have meetings scheduled as soon as they’re ready to join the firm where we introduce them to the administrative team that will support their onboarding and integration. This coordinated effort really helps our laterals feel supported and provides them with reassurance that they have made the right decision to join DLA Piper.”

Strong internal relationships accelerate integration, foster collaboration, and lay the foundation for long-term success.

3. Structured Oversight: Managing the Integration Process

Many lateral hires struggle not because they lack talent or business potential, but because their integration is left unstructured. A well-designed lateral integration program includes key milestones, regular check-ins, and clear performance metrics.

Patrick S. Tracey, Partner at Saul Ewing LLP, shares how a structured onboarding program made his transition seamless: “The firm’s onboarding program provided a comprehensive road map and introduction to the firm’s culture, policies, and initiatives. The guidance provided both nationally and locally from fellow partners, associates, and staff was critical to the transition.”

Taking ownership of the transition can accelerate success, says Licia Vaughn, Executive Director, Lateral Partner Integration, Strategy & Transitions at DLA Piper. “I had a corporate partner who joined from in-house and ramped up quickly because he approached the firm as his most valuable client. He was proactive and took everything seriously, including the plan we provided, which made his integration seamless,” she said.

McClune noted that rewarding leadership also helps drive successful integration efforts: “At a previous firm, we had a process where sponsoring partners were responsible for regularly checking in with laterals, especially in the first few months. This proactive management was incentivized and helped identify and address roadblocks early on.”

Firms that prioritize lateral success create incentives that reinforce the right behaviors. Recognizing a sponsoring partner’s role in a lateral’s success in compensation discussions encourages active engagement in the integration process. Aligning financial incentives with partner collaboration and client-sharing strengthens firmwide participation and fosters a culture where laterals are positioned to contribute more effectively. Individuals responsible for lateral integration, such as business development professionals or integration managers, are similarly more invested in outcomes when their compensation reflects measurable success. When integration is treated as a strategic function rather than an administrative task, firms maximize the impact of their lateral hires and strengthen long-term retention.

4. Measuring Success: Accountability in Lateral Integration

Without ongoing accountability and continuous refinement of the recruiting and onboarding approach, even a well-structured integration plan can fall short. Clearly defining responsibility for lateral success is critical. Firms often distribute ownership of integration across multiple departments—recruiting, business development, practice group leadership—without a single person or team ensuring that the process stays on track. When no one is specifically accountable, integration can become an afterthought, and the lateral’s long-term success is left to chance.

Firms that take a data-driven approach to lateral hiring and integration can refine their strategy over time. McClune underscores the importance of evaluating hiring decisions carefully and making adjustments based on real outcomes. “So much of the success of a lateral program comes down to the due diligence or recruiting process,” he said. “Firms can rush to make quick decisions to plug strategic gaps without taking the investment time to do proper due diligence.”

Firms that systematically track client retention, revenue growth, internal engagement, and business development activity can identify patterns in lateral success and failure. Metrics such as client follow-through on expected transitions, the depth of client relationships, and the lateral’s ability to generate new firmwide opportunities can reveal when an attorney overestimated their client loyalty or misunderstood client motivations. By analyzing these patterns—whether related to practice fit, integration effort, or individual approach—firms can refine their hiring strategy and provide targeted support to laterals at risk of underperformance.

Elevating Lateral Integration as a Competitive Advantage

Lateral hiring is not just about adding talent; it is about making strategic investments in people that strengthen a firm’s long-term trajectory. The firms that approach integration with the same rigor as recruitment position themselves not only to retain top laterals but to maximize their contributions in a way that enhances firmwide success.

Integration is most successful when there is a clear owner of the process—an individual or team dedicated to overseeing the integration journey. While collaboration among firm leadership, practice groups, business development professionals, and lateral partners is essential, having a designated point of accountability ensures that the integration is seamless and strategic. By establishing clear expectations, providing structured oversight, and aligning incentives to match desired behaviors, this process creates an environment where laterals can succeed quickly.

Capturing and analyzing data on client retention, integration success, and business development patterns can help firms refine their hiring approach, ensuring they are bringing in laterals whose practices and working styles align with the firm’s culture and long-term objectives.

Ultimately, lateral integration is not a one-time event but an ongoing strategy. The firms that excel in this domain understand that the true value of a lateral hire lies not in their initial arrival but in the enduring business, relationships, and leadership they cultivate over time. By elevating lateral integration to a strategic priority, with clear ownership of the process, firms can transform it into a powerful competitive advantage, securing their place at the forefront of the legal profession.

It’s no secret that the legal industry is stressful. Tight deadlines, substantial workloads, and difficult cases all combine to create a culture that is often detrimental to the mental well-being of attorneys and firm administrators. Recent lawyer suicides have brought even more light to this serious issue.

According to Reuters, which cites a 2023 Krill Strategies and University of Minnesota study, lawyers are twice as likely as the average adult to contemplate suicide, and attorneys who considered their jobs high-stress were twenty-two times more prone to considering suicide than those who called their jobs low-stress.^[1] Despite the increased research and heightened awareness, the mental health crisis in the legal industry hasn’t shown many signs of abating.

Association of Legal Administrators (“ALA”) members—and law firm leaders as a whole—have often been tasked with finding solutions to one of the industry’s more intractable issues. Here are five strategies firm leaders can use to help promote employee well-being and, as a result, increase retention, productivity, and profitability.

No. 1: Look at Billing Requirements

One of the main pressure points in the legal industry is meeting billable-hour requirements. Attorneys often work late, early, and on weekends or holidays to log their necessary hours. While many have accepted this as “the way things work,” leaders of the modern law firm should ask themselves whether this kind of overwork should still be inherent to the practice of law. Except in the most urgent cases, what work is accomplished at 10 p.m. that can’t wait until the next morning?

There is often the presumption that clients expect 24/7, 365-days-a-year service from their attorneys. However, as long as quality work is done during the day, clients tend to appreciate a firm’s commitment to the well-being of their employees. Of course, communication is key in this regard, as firms should be up-front about the expectations that clients should have when working with their attorneys.

A frequent counterargument to reducing billable hour requirements is that it would hurt firm profitability. In many cases, that may be true in the short term. But a longer-term view shows that decreased pressure to produce creates better-quality work, happier employees, and increased client satisfaction. Considering that word of mouth holds significant weight in the legal industry, lawyers who enjoy the firm at which they work are more likely to pitch their firm to high-value laterals or promising young associates.

Firm leaders may also want to consider changing their billing method entirely. Fixed fees and value-based pricing are two ways that firms can de-emphasize the billable hour while providing consistency for their clients and ensuring that the work done best serves the clients’ needs. This kind of change is not easy but can be a concrete way for a firm to demonstrate its commitment to reducing the stress of an already demanding job.

No. 2: Embrace Diversity and Inclusion

In any workplace, mental health can suffer when employees do not feel accepted or included by their employer or coworkers. The legal industry has historically been known as having a higher barrier to entry for women, people of color, and other minority groups. But in recent years, firms have put more effort into promoting diversity, equity, inclusion, and accessibility (“DEIA”)—to much positive acclaim.

What makes a DEIA program effective differs from firm to firm, but the most successful often include events centered around cultural celebrations (such as Pride Month and African American History Month); awareness campaigns surrounding microaggressions and other problematic behaviors; and employee resource groups that consist of like-minded attorneys and staff who can support, mentor, and advise each other on a regular basis.

The topic of DEIA is especially crucial today as many large organizations have begun to roll back their diversity initiatives amid the current political environment or for other reasons, such as a lack of buy-in or financial support from those in charge. However, many clients still want their firms to show progress on advancing diversity, so it behooves firms to continue making DEIA a priority in their strategic planning.

From a wellness perspective, a demonstrated commitment toward supporting employees no matter their backgrounds goes a long way in making them feel comfortable being their true selves at work.

No. 3: Utilize Employee Benefits

Today, many benefit programs offer mental health support, whether through insurance allowances for therapy and other mental health treatment, or through Employee Assistance Programs (“EAPs”). Hopefully, your firm is already making these options available to your employees. If not, now is the time to assess what you’ll want to include in your next benefit package.

EAPs can be a particularly crucial resource, as they allow employees and their families to seek help during different types of crises—including mental health—without encountering the (unfortunate) stigma that often accompanies such admissions in the workplace. It’s important for attorneys and staff to know to whom they can turn when struggling with their mental wellness.

No. 4: Explore New Technologies

While there has been much trepidation about the use of artificial intelligence (“AI”) in the legal industry—understandably so—there is one way in which it undoubtedly helps: efficiency. So much of the practice of law involves time-consuming tasks, such as extensive research and drafting myriad legal briefs. Though they must be used with caution, the AI tools available are cutting down the time it takes to complete those tasks, which in turn can help reduce burnout and job dissatisfaction.

No. 5: Engage the Legal Community

The issue of suicide hit close to home for ALA in 2023, when a member of our Middle Tennessee Chapter tragically took her own life. Those in the legal administration community wanted to make sure lessons were learned from such a devastating loss. Members from the chapter created a Mental Health Task Force to increase dialogue and bring awareness and education to help prevent a similar tragedy from happening in their community again. They also reached out to the Tennessee Lawyers Assistance Program, which supports lawyers and judges in need. While the program hasn’t extended to legal administrative professionals, the chapter is currently working to make that happen.

While resources may differ between states, the Middle Tennessee Chapter has offered a shining example of how the legal community can band together to make positive change when it comes to mental health awareness and support. Perhaps it starts within a firm or a town before extending to a group of firms or a larger locality.

Burnout and other overwhelming feelings of stress are real, and it is incumbent on all law firm leaders to address them before they turn into a crisis or, even worse, a suicide. The statistics are alarming, but the community’s response can alleviate this situation. With these strategies in hand, firms can be well prepared to ease some of the stress on attorneys and staff and make mental well-being a strong priority.

If you or someone you care about is struggling, confidential help is available for free by calling or texting 988 or going to the 988 Lifeline.^[2]

1. Jenna Greene, Stressed, Lonely, Overworked: What New Study Tells Us About Lawyer Suicide Risk, Reuters (Feb. 15, 2023). ↑

2. 988 Lifeline (last visited Jan. 25, 2025). ↑

Duke Law School was crowned “champion” of the MAC Cup II law student negotiation competition at the M&A Committee Meeting of the ABA Business Law Section in Laguna Beach, California, on January 31. Teams from Duke, Missouri Law School, Cardozo Law School, and Georgetown Law School achieved “Final Four” status after months of intense rounds of negotiations that began in October 2024 with sixty-four teams from forty-six law schools across the U.S. and Canada.

Jimmy Scoville and Kiran Singh of Duke Law School won the second MAC Cup hosted by the ABA BLS M&A Committee, triumphing over sixty-three other teams. Photo by Sarah Sebring.

“The M&A Committee started the MAC Cup to give law students opportunities to learn about and apply M&A negotiation skills,” said Rita-Anne O’Neill of Sullivan & Cromwell, chair of the M&A Committee. “The students get to advocate on behalf of a buyer or a seller while seeking a mutually agreeable deal.”

Students Jimmy Scoville and Kiran Singh from Duke Law School, who were self-coached, achieved first place; and students Liz Eastlund and Austin Siener from Missouri Law School, coached by Aaron Pawlitz (Lewis Rice) came in second. In the final negotiation round, Duke represented the seller’s counsel and Missouri represented the buyer’s counsel.

M&A Committee Chair Rita-Anne O’Neill welcomes attendees to the MAC Cup II championship awards presentation at the Committee’s Laguna Beach meeting. Photo by Sarah Sebring.

An Opportunity to Learn Negotiation Strategies

“The students’ performance was inspiring. Many judges noted the students’ ability to engage in constructive discussions on complex issues, and their evident preparation and thoughtfulness,” said Mike O’Bryan of Morrison Foerster, immediate past chair of the M&A Committee.

The MAC Cup is a mock M&A negotiation tournament; students are given a fact pattern and assigned to be buyer’s or seller’s counsel. They then prepare and negotiate with their counterpart counsel team the issues they deem most significant and a mark-up of a draft acquisition agreement.

According to O’Bryan, students learn about negotiating strategies and how to get to a deal, as well as substantive M&A issues. They receive access to professional M&A learning resources.

“Many teams have coaches from the M&A Committee, and others work with other practicing lawyers or professors. Students also get opportunities to network with M&A Committee members and other students interested in M&A issues,” said O’Bryan. “And, of course, the opportunity to be recognized for writing and negotiating skills and to compete for prizes including travel to Laguna and scholarships.”

Students Undaunted by Fierce Competition

“Beyond the basic research on sample provisions and legal issues, we spent a lot of time developing questions to guide each negotiation,” said Jimmy Scoville of Duke. “We would also prepare various ‘creative solutions’ that we could integrate or modify as we learned more about what our opponents cared about.”

According to Scoville, he and his colleagues found the competition helpful because of the exposure to so many different methods of negotiating.

“I appreciated all of the time the judges took to give individualized feedback and really enjoyed seeing myself progress in the competition as I applied their advice,’ said Scoville. “That was really satisfying. I also enjoyed getting to know our competitors in the semifinal and final rounds. All of the competitors were fantastic and incredibly smart people.”

And what qualities enabled Duke to come out on top?

“The Duke team showcased great poise in all of their matches and were one of the best teams that were able to not only present their arguments in a thoughtful fashion but also listen and adjust to their counterparties,” said Thaddeus Chase of McDermott Will & Emery. “They were collegial in all their matches and seemingly had a great mastery of the materials (even with the curveball for the Final).”

In addition to the MAC Cup trophy for the winning team, the winning and runner-up teams receive scholarship awards. 

Members and students celebrate the MAC Cup II winners. The winning and runner-up teams receive scholarship awards. Photo by Sarah Sebring.

The Path to MAC Cup III

The success of MAC Cup II has already created enthusiasm for next year’s competition among students, law schools, and the M&A Committee.

Wilson Chu of McDermott Will & Emery, who was chair of the M&A Committee from 2018 to 2021, was instrumental in building the competition from the ground up and has witnessed its enhanced reputation.

“We wanted to build a more robust pipeline of future business lawyers by flipping the law school experience to encourage students with a taste of real-world M&A,” said Chu. “MAC Cup II was more successful than planned with almost one hundred applicant teams from around fifty schools, with sixty-four teams competing in the main draw. Law schools are buzzing about MAC Cup III, especially the oversized, gaudy champions’ belt!”

The competition also benefits the M&A Committee’s leadership and members.

“The competition enables our members to give back to their alma maters and have a hand in guiding the next generation of M&A practitioners,” said Chase. “It also allows current members to see that young associates have the ability to grasp complex matters and actually negotiate.”

The recognition received by the student teams and the law schools also has strengthened the M&A Committee’s reputation as experts in negotiation who possess the practical knowledge required of M&A legal professionals.

“We’re already gearing up for MAC Cup III,” said O’Bryan. “Students can sign up for information at our MAC Cup website. With the resources and support that the MAC Cup offers, even students who haven’t taken an M&A course or worked for an M&A law firm can compete effectively.”

This is the second installment in the Year in Governance Series from the In-House Subcommittee of the ABA Business Law Section’s Corporate Governance Committee. Each month, the series will share key tips on a different corporate governance topic. To get involved in the Corporate Governance Committee, please visit the committee’s webpage.

A message from Kathy Jaffari: “As Chair of the Corporate Governance Committee, I would like to extend my sincere appreciation to the authors for this publication. The Corporate Governance Committee has ongoing opportunities for writing and volunteering with various projects, whether it’s an article you want to publish or a CLE that you want to present. Our Committee is dedicated to helping you promote informative resources for corporate governance practitioners. You may contact me at [email protected] to get involved.”

Director orientation and onboarding are two complementary but distinct processes that provide the foundation a newly appointed director needs for success. Orientation is a one-time event that introduces the director to the company, while onboarding, which typically lasts three to six months, helps the director dive deeper into critical topics and become more integrated into the business. Together, orientation and onboarding ensure new directors have a foundation for satisfying their fiduciary duties and the knowledge they need to become valuable contributors on the board.

1. Governance Requirements: Requirements for referencing director orientation in your organizational materials depend on stock exchange listing rules. The New York Stock Exchange requires director orientation to be included in the company’s corporate governance guidelines. Nasdaq does not. Regardless of requirements, it’s common for a company’s nominating committee to be responsible for ensuring adequate director orientation and onboarding as prescribed in the committee charter.
2. Responsibilities: Director orientation and onboarding processes are typically the responsibility of the Corporate Secretary’s office. The Corporate Secretary, while working with other internal leaders, is best positioned to build out orientation and onboarding materials while also serving as a liaison between the new director and the leadership team. Orientation and onboarding materials are often previewed with the CEO and/or the nominating committee, depending on governance requirements and leadership preference.
3. Orientation Timing: Director orientation should ideally be provided before a new director’s first board meeting and should be scheduled as soon as possible following appointment to the board. Providing materials and resources prior to the first board meeting helps ensure the director is well prepared and “oriented” to the company’s business and leadership.
4. Onboarding Timing: Director onboarding generally occurs over the course of the first few months following appointment to the board as the new director becomes more familiar with the company and its business. When developing an onboarding schedule, keep the board and committee calendar in mind to ensure that onboarding sessions complement upcoming topics on board and committee agendas.
5. Orientation Key Deliverables: Core orientation materials include a broad overview of the business, financial performance, forecasts and industry trends, and key governance and risk-related topics. New directors can benefit from a binder with foundational documents including charters, bylaws, board and committee schedules, corporate governance guidelines, company filings, organizational chart, code of conduct, and other important policies and governance documents.
6. Onboarding Key Deliverables: Core onboarding materials include meetings and presentations from key senior executives, materials related to committee assignments, tours of corporate headquarters or site visits, and meetings with individual directors. Encourage new directors to provide feedback on the areas of the business they are interested in learning more about to enhance planning and engagement.
7. Customization: A director’s experience varies; some are on multiple boards, and for some, this is their first board appointment. Understand the needs of your director and customize an orientation and onboarding program to fit their background. For example, providing an overview of director fiduciary duties will take less time for a well-seasoned director, while a first-time director would benefit from a robust presentation.
8. Relationship Building: Throughout both orientation and onboarding processes, plan introductions to the leadership team, key employees, and other board members. Provide insight into the current relationship dynamics between management and the board, as well as the dynamics of the board and each board committee. It’s helpful to set up meetings with each committee chair as well, even if the new director has not been appointed to a board committee.
9. Meetings with Outside Advisors: As part of onboarding, a new director will benefit from meeting with certain outside advisors. Depending on standard committee appointments, meetings with the company’s independent auditor or independent compensation consultant can be informative. If the board has specialized committees (e.g., sustainability, cybersecurity, risk), connect the new director with key external advisors to provide a deeper understanding of these areas.
10. Planning for Director Education: Request feedback during the orientation and onboarding process, and pay attention to a new director’s understanding and engagement. Recognizing what topics your new director was comfortable with, or not comfortable with, will help inform what topics they need more education on in the future.

The views expressed in this article are solely those of the authors and not their respective employers, firms or clients.

Despite legal and ethical concerns, many business leaders are still bullish on generative artificial intelligence (AI), and the industry is accelerating at a rapid pace. In fact, according to a UBS study, ChatGPT reached over 100 million monthly active users in the two months following its initial launch—making it the fastest-growing consumer application in history.

Unfortunately, as the use of generative AI surges, so too have the legal questions surrounding it. Copyright and trademark disputes regarding AI-generated material are on the rise—thrusting intellectual property (IP) law into uncharted territory. The cases being decided today, barely two years into the generative AI boom, may establish legal precedent that shapes the future of law for decades to come.

In the past several months, several high-profile legal cases have tested the boundaries of IP in the age of artificial intelligence, highlighting key issues.

Copyright Infringement When Using Content Created by AI

In Alcon Entertainment, LLC v. Tesla, Inc., Alcon Entertainment, the exclusive rights holder of the 2017 film Blade Runner 2049, has accused Tesla and Warner Bros. Discovery of using AI-generated imagery that closely mimics an iconic image from its film without prior permission. The image—depicting a man next to a futuristic-looking vehicle—was used at Elon Musk’s Cybercab launch event.

The suit claims that Tesla initially requested to use an actual image from the film. When Alcon Entertainment denied the request, the suit alleges Tesla and Musk used generative AI to create similar visuals, using Blade Runner images as a close reference.

Interestingly enough, whether a work is generated by AI or created by humans is irrelevant in this case. The question of fact will remain the same irrespective of how the image was created: Does this work infringe on Alcon Entertainment’s intellectual property?

But this case still provides attorneys with a valuable lesson. We will likely see these types of cases grow exponentially. AI tools can now produce images or written works in seconds, much more quickly than a human could. However, the images are not created from the “mind” of the AI; they are based on the information the AI has been exposed to already. Therefore, the “new” content the AI is creating is, most of the time, based on a human’s work.

Many day-to-day users of generative AI platforms are unaware of the potential risks associated with how these tools are trained. They may believe that the work they have asked generative AI to create is truly “original.” In many instances, individuals may not realize that their generated content mirrors copyrighted material until it’s too late.

For this reason, IP attorneys must continue to educate their clients about the risks involved in using generative AI and encourage them to rely on original, human-created content when possible. While AI can certainly aid the creative process, it should not be relied on as the primary source for public-facing materials. Of course, any AI-generated works should be reviewed by legal experts with scrutiny, as any prudent attorney would with work created by a human.

Copyright Infringement When Using Content to Train AI

The rapid adoption of generative AI has given rise to legal disputes not only about the output of these tools, but also concerning how these tools are trained.

For example, in Toronto Star Newspapers Ltd. v. OpenAI, Inc., more than five of Canada’s most prominent news outlets, including the Toronto Star newspaper, have filed a suit against OpenAI, alleging that OpenAI “scraped” content from their websites to train ChatGPT without their consent. The plaintiffs argue that this constitutes copyright infringement.

Similarly, in another landmark case filed this June, UMG Recordings, Inc. v. Uncharted Labs, Inc., several major record labels have teamed up to file a suit against Uncharted Labs for copyright infringement. The plaintiffs allege that the company’s AI model, Udio, illegally copies digital sound recordings to train its system. The tech then generates music that imitates the qualities of genuine, human-made recordings.

One potential outcome of both of these cases could be the establishment of licensing agreements. In the early days of music streaming platforms, similar legal battles ensued. The result? Licensing agreements that compensated artists for their music. Such license agreements laid the foundation for today’s major streaming platforms like Spotify, Apple Music, and Pandora. Today’s legal battles could similarly shape how generative AI companies acquire legal consent to use content generated by human artists in their training models.

For example, newspapers could provide AI companies with a license to scrape their news articles so long as the company pays a fee for the content and links back to the newspapers’ original article to credit the source of the answer or new material created. OpenAI has already announced licensing deals with The Associated Press and News Corp, among others.

Likewise, owners of music could potentially provide an AI platform with a license to train on their songs and create new music so long as a royalty is paid for using the music and users are notified that using any “new” music is subject to the copyright rights of the original owners.

When it comes to generative AI, Pandora’s box has been opened. Like it or not, this technology is here to stay. For this reason, attorneys should continue to closely monitor the ongoing cases surrounding generative AI to keep abreast of the rapidly evolving legal landscape. As the legal framework solidifies, those who stay informed will be best positioned to serve their clients.

This article provides a comparative analysis of two prominent business structures: the limited liability company (“LLC”) in the United States, with a focus on Florida and Delaware, and the Sociedad de Responsabilidad Limitada (“SRL”) in Bolivia. This analysis aims to delve into the fundamental similarities and distinctions that exist between two prominent legal systems: common law and civil, or continental, law. By examining these entities, we seek to uncover how they function within their respective frameworks and the implications of those differences. However, it is important to note that this exploration is not exhaustive,^[1] as the scope of this article is inherently limited. Thus, the aspects discussed here relate to the structural elements and characteristics of these types of business entities within their unique legal systems.

Legal Framework

The basis of the U.S. legal system is a combination of foundational principles and key legal documents. At its core is the U.S. Constitution, the supreme law that establishes the framework of the federal government, its relationship with the states, and the rights of its citizens. Rooted in English common law, it relies on judicial precedents to guide decisions. Statutes enacted by legislative bodies and regulations issued by administrative agencies provide specific rules across various domains. These laws are interpreted by courts, whose decisions contribute to case law, further shaping the legal landscape. Together, these elements create a comprehensive and dynamic legal system that governs the United States.

The Constitution does not directly govern LLCs in the United States but derives their existence and regulation from state laws, reflecting the decentralized nature of U.S. governance. The Tenth Amendment^[2] reserves to the states the power to regulate LLCs, resulting in diverse frameworks like the Delaware Limited Liability Company Act (“DLLCA”)^[3] and the Florida Revised Limited Liability Company Act (“FRLLCA”).^[4] However, federal constitutional principles indirectly shape LLC operations. The Commerce Clause^[5] allows Congress to regulate interstate business activities, affecting LLCs with cross-state operations. The Contracts Clause^[6] protects LLC operating agreements from retroactive state interference, while the Fourteenth Amendment^[7] ensures fair treatment under state laws. Additionally, LLCs benefit from First Amendment^[8] protections for commercial speech, such as advertising,^[9] though regulations must meet the criteria established in the U.S. Supreme Court’s Central Hudson Test.^[10] These constitutional influences underscore the balance between state-level autonomy and federal oversight in the regulation of LLCs.

Bolivia’s legal system is grounded in the civil law system, which draws its influence from the Roman Corpus Juris Civilis. Bolivia’s legal framework operates under the principles of civil law, which it inherited from Spanish and Napoleonic legal traditions. The civil law system emphasizes codified statutes, and legal decisions are often guided by applying these codes rather than judicial precedents.

Bolivia’s legal framework establishes a strong foundation for economic activity and business organization, emphasizing both individual and collective rights. The Bolivian Constitution^[11] ensures the right to engage in commerce, industry, or lawful economic activities, provided they do not harm the public good. It also guarantees freedom of business association, recognizing the legal status of such entities and supporting democratic business structures aligned with their statutes.^[12] Complementing this, the Commercial Code^[13] governs relationships arising from commercial activities, offering a broad definition that includes both the nature of activities and the individuals or entities conducting them.^[14]

Nature and Characteristics

In the United States, each state has its own laws governing the formation of LLCs. The first statute authorizing LLCs was adopted in Wyoming in 1977, and as late as 1988, only Florida had followed suit.^[15]

An LLC is a popular business structure in the United States that combines the liability protection of a corporation with the tax benefits and operational flexibility of a partnership or sole proprietorship.^[16] LLCs are hybrid business entities with a unique combination of favorable legal, business, and tax attributes that do not exist in any other single entity.^[17] In short, the LLC is an eclectic mixture of features drawn from several different traditional business forms that create an attractive package for many enterprises.^[18]

In Bolivia, the SRL is a relatively modern business entity, originating in nineteenth-century Germany with the Reich’s special law of 1892.^[19] From there, it spread to other jurisdictions, including Portugal in 1901, Austria in 1906, and England in 1907,^[20] eventually gaining global recognition.

The SRL occupies a hybrid position between capitalist and personalist corporate models. Like corporations, the SRL offers limited liability tied to members’ capital contributions but differs in not issuing freely transferable shares. Instead, it emphasizes the intuitu personae principle,^[21] prioritizing trust and personal relationships among members, as seen in the restricted transferability of quotas. This dual nature allows the SRL to combine the financial security of a corporation (Sociedad Anónima) with the personalized dynamics of a partnership (Sociedad Colectiva), making it a versatile and unique business entity.

Similarities

Limited Liability of Its Members

In the United States, one of the most appealing aspects of the LLC is the limited liability afforded to its owners and operators. For instance, in both Florida^[22] and Delaware,^[23] no member or manager is liable personally for any debt, obligation, or liability of an LLC solely by virtue of such party’s status as a member or manager. Furthermore, the individual assets of LLC members may not be used to satisfy the LLC’s debts and obligations; hence, a member’s risk of loss is limited to the amount of capital invested in the business.

In Bolivia, the SRL also provides limited liability to its members. According to Article 195 of the Commercial Code, members are liable only up to the amount of their contributions. This ensures that each partner’s personal assets remain protected, even if the company needs to cover debts or suffers losses during a given management period.^[24]

Separate Legal Entity

Under most LLC statutes, including under the DLLCA^[25] and the FRLLCA,^[26] an LLC is explicitly characterized as a separate legal entity whose identity is distinct from that of its members. As a separate “legal person,” an LLC can exercise rights and powers in its own name. Consequently, parties doing business with an LLC must look to the company, and not to the LLC’s members or managers, to satisfy any obligations owed to them.

Likewise, in Bolivia, SRLs are recognized as distinct legal entities from their members, meaning that they can enter into contracts, sue, and be sued independently from the individuals involved in ownership or management.

Flexible Management Structure

In the United States, LLCs can be member-managed or manager-managed, offering more flexibility for structuring control, especially for larger or multistate LLCs. The operating agreement typically sets the management terms​. Most LLC statutes default to a member-managed structure, such as under the DLLCA^[27] and the FRLLCA,^[28] where all members have management rights, similar to a general partnership.^[29] Some statutes, however, default to a manager-managed structure, where management is centralized in a smaller group of managers, akin to a corporation.^[30] Both member-managed and manager-managed structures can be elected, regardless of the jurisdiction’s default rule.^[31]

In Bolivia, the management of an SRL may consist of one or more managers, who can be either one or more of the members, similar to a member-managed LLC, or third parties who are nonmembers,^[32] similar to a manager-managed LLC. In any case, there must be a management structure, as it is the body that constitutes the “typical representation of that company.”^[33]

Differences

Perpetual Existence

LLCs often have perpetual existence and do not dissolve with member exit unless specified in the operating agreement.^[34] For instance, the DLLCA presumes a perpetual life.^[35] Likewise, under the FRLLCA,^[36] an LLC is presumed to have perpetual duration unless otherwise stated in its articles of organization or operating agreement.

In Bolivia, SRLs do not have an indefinite duration and are never presumed to have perpetual life; rather, its articles of formation must specify a lifespan in years. In practice, SRLs generally specify a ninety-nine-year duration, which may be renewed before its lifespan terminates.

Cap on Membership

In both Florida and Delaware, there are no minimum or maximum limits on the number of members an LLC can have. In both states, LLCs can have a single member or multiple members. There is no limit on the number of members in an LLC unless the LLC opts to be taxed as an S corporation, which has a maximum of one hundred members.

Membership limits are significantly different in Bolivia, where an SRL must have at least two members and no more than twenty-five members.^[37] This stems from the conception that defines a business entity (sociedad comercial) as a contractual agreement between two or more individuals to contribute resources toward a common goal. Consequently, it is inconceivable to have a business entity with only one member; thus, under Bolivian law, the legal minimum for forming such an entity is two members. On the other hand, the cap on the number of members of an SRL responds to its closely held nature, with both capitalist and personalist elements.

Operating Agreements

The governance of an LLC is outlined in a nonpublic document known as the “operating agreement” or “limited liability company agreement,” which, like a partnership agreement or corporate bylaws, is not filed with any state official.^[38] This document specifies the rights, duties, and obligations of members and managers and serves as the framework for the LLC’s operations. LLC members have considerable flexibility to tailor the operating agreement to their unique needs, often superseding default statutory provisions.^[39] Thus, the operating agreement controls relationships between members and between members and the company.^[40]

Contrary to the LLC, an SRL only requires one solemn document (testimonio de constitución) specifying the rights, duties, and obligations of members and managers and serving as the framework for the SRL’s operations, and it is made public through the Commercial Registry. Hence, an operating agreement is not required. However, on rare occasions, members of an SRL may choose to have a parasocial agreement (acuerdo parasocial),^[41] essentially a private contract among the members that provides specific terms and conditions governing the relationships between those members. A parasocial agreement differs from an operating agreement in that the former is very specific and limited to the laws and regulations that govern SRLs.

Taxation

By default, Florida^[42] and Delaware^[43] LLCs are taxed as pass-through entities, meaning that they do not pay income taxes themselves. Instead, their owners or members pay personal income tax on the LLC’s revenue after it passes through the business to members. This is advantageous because it avoids double taxation, which occurs when both the entity and the owners are taxed.

The tax regime in Bolivia is regulated by the Tax Code^[44] and Law No. 843.^[45] The SRL, which is governed by Bolivian tax law, does not support pass-through taxation for SRLs, so they are typically taxed as separate entities.

Conclusion

In comparing LLCs in Florida and Delaware with SRLs in Bolivia, several similarities and differences emerge, shaped by the distinct legal frameworks and business environments of these regions.

One of the key similarities between LLCs and SRLs is the concept of limited liability, which protects the personal assets of members or owners from the debts and obligations of the entity. Both business structures are also recognized as separate legal entities, capable of entering into contracts and engaging in litigation independently of their members. Additionally, both LLCs and SRLs offer flexibility in management structure, allowing for member-managed or manager-managed options, depending on the specific needs of the business.

However, notable differences exist between the two. LLCs in Florida and Delaware typically enjoy perpetual existence unless otherwise stated in their operating agreements, whereas SRLs in Bolivia must specify a finite duration in their formation documents. Another major difference is the membership structure: LLCs can have a single member or an unlimited number of members, while Bolivian SRLs are limited to a minimum of two and a maximum of twenty-five members. Furthermore, LLCs benefit from pass-through taxation, which avoids double taxation, while SRLs in Bolivia are taxed as separate entities, subject to different tax rules under Bolivian law.

The contrasting legal traditions in which these structures exist—common law in the United States and civil law in Bolivia—play a significant role in shaping these differences. While LLCs have a high degree of flexibility and autonomy, particularly in their internal governance through operating agreements, SRLs rely more on codified laws and public documentation, such as the testimonio de constitución. These structural and legal contrasts reflect the broader distinctions between the decentralized, case-law-driven approach of the United States and the codified, statute-based framework of Bolivia.

Thus, while LLCs and SRLs share common features like limited liability and separate legal status, the differences in membership, governance, duration, and taxation highlight how each entity is adapted to the legal and economic systems in which it operates. These distinctions can significantly influence the decision-making process for entrepreneurs and investors when choosing between these two business structures.

1. The author intentionally focuses on seven aspects to distinguish the similarities and differences between LLCs and SRLs: limited liability, separate entity status, management structure, perpetual existence, cap on members, operating agreements, and taxation. ↑

2. U.S. Const. amend. X. ↑

3. Del. Code Ann. tit. 6, §§ 18-101 to 18-1109. ↑

4. Fla. Stat. §§ 605.0101 to 605.1108. ↑

5. U.S. Const. art. I, § 8. ↑

6. Id. art. I, § 10. ↑

7. Id. amend. XIV, § 1. ↑

8. Id. amend. I. ↑

9. Jennifer L. Pomeranz, United States: Protecting Commercial Speech Under the First Amendment, 50 J.L. Med. & Ethics 265–75 (2022). ↑

10. The Supreme Court developed a four-part test, also known as “The Central Hudson Test,” in Central Hudson Gas & Electric Corp. v. Public Service Commission of New York to evaluate the constitutionality of regulations on commercial speech. 447 U.S. 557 (1980). ↑

11. Constitución Política del Estado (2009) (Bolivia). ↑

12. Article 47(I) states that all have the right to engage in commerce, industry, or any lawful economic activity, under conditions that do not harm the collective good. Id. art. 47(I). Likewise, Article 52(I) acknowledges and protects the right to freedom of business association. Id. art. 52(I). Additionally, Article 52(II) states that the State shall guarantee recognition of the legal personality of business associations, as well as democratic forms of business organizations, according to their own statutes. Id. art. 52(II). ↑

13. Código de Comercio (promulgado por Decreto Ley No. 14379 de 25 de Febrero de 1977) (Commercial Code (promulgated by Decree Law No. 14379 of Feb. 25, 1977)) (Bolivia) [hereinafter Code Com.]. ↑

14. Id. art. 1 (Scope of the Law). ↑

15. Jesse H. Choper, Jr. John C. Coffee & Ronald J. Gilson, Cases and Material on Corporations 810 (Wolters Kluwer, 7th ed. 2008). ↑

16. Chauncey Crail, What Is a Limited Liability Company (LLC)?: Definition, Pros & Cons, Forbes Advisor (updated June 5, 2024). ↑

17. Donald J. Scotto & Sharon Matthews, Limited Liability Company: The Growing Entity of Choice, Fairleigh Dickinson Univ. (last visited Dec. 7, 2024). ↑

18. Robert W. Hamilton & Richard A. Booth, Business Basics for Law Students: Essential Concepts and Applications 263 (Aspen L. & Bus., 3d ed. 2002). ↑

19. K. Wieland, La Sociedad de Responsabilidad Limitada, 19 Revista de Derecho Puertorriqueño 241 (1932). ↑

20. Raul Anibal Etcheverry, The Mercosur: Business Enterprise Organization and Joint Ventures, 39 St. Louis L.J. 979, 992 (1995). ↑

21. Intuitu personae refers to contracts or obligations that are entered into with specific consideration of the personal qualities, skills, or trustworthiness of the individual involved. ↑

22. Fla. Stat. § 605.0304. ↑

23. Del. Code Ann. tit. 6, § 18-303. ↑

24. Code Com. art. 195 (Characteristics). In SRLs, the partners are liable only up to the amount of their contributions. The common fund is divided into capital shares that, in no case, may be represented by stocks or securities. ↑

25. Del. Code Ann. tit. 6, § 18-201(b). ↑

26. Fla. Stat. § 605.0108. ↑

27. Del. Code Ann. tit. 6, § 18-402. ↑

28. Fla. Stat. § 605.0407(1). ↑

29. Jonathan R. Macey & Douglas K. Moll, The Law of Business Organizations: Cases, Materials, and Problems 925 (W. Acad. Publ’g, 14th ed. 2020). ↑

30. Id. ↑

31. Id. ↑

32. Code Com. art. 203 (Management of the Company). The management of the SRL shall be entrusted to one or more managers or administrators, whether they are partners or not, appointed for a fixed or indefinite term. ↑

33. Richard E. Hugo & Muiño O. Manuel, Derecho Societario 370 (Astrea, Buenos Aires, 2002). ↑

34. Lee Harris, Mastering Corporations and Other Business Entities 96 (Carolina Acad. Press 2009). ↑

35. Del. Code Ann. tit. 6, § 18-801(a)(1). ↑

36. Fla. Stat. § 605.0108(2). ↑

37. Code Com. art. 196 (Number of Members). An SRL may have no more than twenty-five partners. ↑

38. Macey & Moll, supra note 29, at 920. ↑

39. Id. at 920–21. ↑

40. Harris, supra note 34, at 82. ↑

41. This type of agreement is usually seen in corporations (shareholder agreements). ↑

42. 26 U.S.C. § 7701(a)(1); Treas. Reg. § 301.7701-3. ↑

43. 26 U.S.C. § 7701(a)(1); Treas. Reg. § 301.7701-3. ↑

44. Ley No. 2492, Agosto 2, 2003, Código Tributario Boliviano (Bolivia). ↑

45. Ley No. 843, Diciembre 20, 2004, Reforma Tributaria, Decreto Supremo No. 27947 (Bolivia). ↑

The Uniform Special Deposits Act (“USDA” or the “Act”) is a product of the Uniform Law Commission and was approved at its 2023 Annual Meeting. After consideration and deliberation by the Uniform Law Commission’s Special Deposits Committee, the Uniform Special Deposits Act was drafted to provide clarity on an area of law that has been subject to uncertainty for a number of years.

Special deposits, as the name suggests, are a “special” type of deposit that has different characteristics than other deposits, such as checking or savings deposits. Unlike deposits that are payable on a customer’s order, special deposits are established for a particular purpose, and a beneficiary becomes entitled to payment after a determination is made that a specified contingency has occurred. Special deposits play an important role in commerce and industry and ensure that funds deposited will be available to the person entitled to them in the future once their established purpose has been satisfied. They can serve a variety of parties in a range of contexts, but their use has been diminished by a small number of legal uncertainties, the collective significance of which is large. For example, in the past, case law has described special deposits or special accounts as akin to trust, bailment, or custody arrangements, but they are not used that way in practice.

The USDA establishes a framework under state laws for interested parties to utilize special deposits with a greater understanding of how such deposits will be treated under various circumstances. The Act was drafted utilizing a “minimalist” philosophy, and the drafters sought only to address specific uncertainties that exist under current law. As a result, the Act does not disrupt existing law but rather builds on it, and it leaves matters not addressed by the Act to be governed by general laws already governing deposits or contractual arrangements.

Importantly, the USDA is an “opt-in” statute, which means that parties intending to enter into a special deposit must specify in the agreement establishing the special deposit that they intend to be covered by the USDA as enacted in a particular state. This feature of the Act permits existing relationships to continue undisturbed, and permits parties to choose to utilize the protections provided by the USDA when they wish, so parties can choose to utilize the protections for certain deposit products and not others. Parties are also permitted to amend existing agreements to be covered by the USDA after enactment if they satisfy the criteria to establish a special deposit under the Act.

There are four key legal uncertainties that the USDA is designed to remedy by establishing rules to eliminate those uncertainties without interfering with other aspects of laws governing deposits.

First, the “opt-in” characteristic performs a kind of double duty in the USDA. As described above, it enables freedom of contract—the parties establishing the special deposit decide whether the arrangement will be governed by contract law or by the USDA. In addition, the “opt-in” is the mechanism identifying the deposit as “special” and subject to the select set of rules set out in the USDA. A deposit designated as “special” and subject to the USDA must satisfy the objective criteria in Section 5 of the Act, which include that it be (i) designated as “special” in an account agreement governing the deposit at a bank, (ii) for the benefit of at least two beneficiaries (one or more of which may be a depositor, which also has a specific definition in the Act that could include a person who establishes the special deposit even without funding it), (iii) denominated in money (defined in the Act as “a medium of exchange that is currently authorized or adopted by a domestic or foreign government,” which is borrowed from the Uniform Commercial Code), (iv) for a permissible purpose identified in the account agreement, and (v) subject to a contingency specified in the account agreement that is not certain to occur, but if it does occur, creates the bank’s obligation to pay a beneficiary.

The permissible purpose requirement is an important feature of the USDA that prevents the special deposit from being used inappropriately for fraudulent or abusive purposes—for example, to defraud creditors. A permissible purpose is defined in Section 2 as “a governmental, regulatory, commercial, charitable, or testamentary objective of the parties stated in the account agreement.” A special deposit must serve a permissible purpose from creation until termination. In addition, a deposit or transfer that is fraudulent would not be for a permissible purpose, and the voidability of the deposit under other law would not be affected by the USDA.

Second, the USDA provides clarity on the treatment of a special deposit in the event of the bankruptcy of a depositor. Under current law, there may be uncertainty as to whether funds deposited into a special deposit could be “swept” into the bankruptcy estate of the person who deposited them. A special deposit under the USDA is “bankruptcy remote” because Section 8 provides that neither a depositor nor a beneficiary has a property interest in a special deposit. The only property interest that may arise with respect to a special deposit is in the right to receive payment from the bank after the occurrence of a contingency. The USDA protects the special deposit, but not the accrued “payable” to a beneficiary after the contingency is determined.

Third, the Act provides clarity on the applicability of creditor process to a special deposit. Currently, the uncertainty as to whether a creditor can “freeze” a special deposit pending an adjudication by a court undermines the utility of the special deposit, because it could interfere with the purpose that the special deposit is designed to achieve. At the time the special deposit is established, the identity of the ultimate beneficiary has not yet been determined because the contingency has not yet occurred. Section 9 of the USDA provides that creditor process is not enforceable against the bank holding the special deposit, except in limited circumstances. Instead, creditor process may be enforceable against the bank holding a special deposit with respect to any amount that it must pay after the determination of a contingency, but not on the special deposit itself. Section 10 provides a similar limitation on using an injunction or temporary restraining order to achieve the same or a similar outcome. Like the provisions dealing with bankruptcy, the provisions dealing with creditor process protect the special deposit, but not an accrued payable to a beneficiary after the contingency is determined.

Fourth, the USDA provides clarity on the legality of the bank exercising a set off or right of recoupment against a special deposit that is unrelated to any payment to a beneficiary or the special deposit itself. Section 11 prohibits set off or recoupment except in limited circumstances. And, as with the provisions dealing with bankruptcy and creditor process, the provisions dealing with setoff protect the special deposit but not an accrued payable to a beneficiary after the contingency is determined.

The USDA creates a mechanism for parties to a commercial transaction to obtain a low-cost and safe return of earnest money and provides protection to parties seeking to deposit funds for particular purpose to be determined at a future point in time. The USDA also provides clarity to other aspects of a special deposit relationship that have been muddled in the case law, for example, by expressly providing that the relationship between the bank and a beneficiary is a debtor-creditor relationship and that a bank does not have a fiduciary duty to any person in connection with a special deposit. Section 12 of the Act includes additional clarifications on the scope of a bank’s duties and liabilities, and to provide incentives such that banks will offer a special deposit product.

The four uncertainties described here require statutory solutions because they relate to third parties’ interactions with a special deposit and cannot easily or effectively be addressed by contractual agreements between the parties. The USDA is narrowly tailored to cure these four mischiefs and eliminate uncertainty so that parties can utilize special deposits with greater confidence that their expectations will be met. In addition, creating clear rules should reduce litigation risks and expenses for the parties and banks.

The Act is intended to provide needed benefits to depositors, beneficiaries, and banks, and also to be fair to other creditors of the participants in the arrangement. The drafters considered a wide range of potential arrangements where a special deposit governed by the Act may be useful, and the statute was drafted to allow flexibility for the parties to create an account agreement reflecting the circumstances of their particular transaction. The USDA includes a list of sample permissible purposes that highlights some of the use cases for special deposits, and for the avoidance of doubt as to the permissibility of those use cases. But it is not an exclusive list, and in the time since the USDA was approved by the Uniform Law Commission, additional potential uses have been raised as well.

This article is related to a CLE program that took place during the ABA Business Law Section’s 2023 Fall Meeting. To learn more about this topic, listen to a recording of the program, free for members.

The views expressed in this article are the authors’ personal views and do not necessarily represent the views of the CFTC or the federal government.

Canadian courts are set to make another ruling on the legality of using artificial intelligence (“AI”) technology to scrape data from websites. Data scraping is the practice of automatically extracting data from online sources using software. While Canadian courts have previously determined that scraping data without permission is not permissible, the rise of AI and its growing accessibility have led to continued commercial use of AI technology to illegally obtain data and train AI systems.

OpenAI, Inc. Litigation

On November 29, 2024, a precedent-setting claim was brought forward in the Ontario Superior Court of Justice by several Canadian news companies (“Plaintiffs”) against OpenAI, Inc. and its related companies—including OpenAI GP, LLC; OpenAI, LLC; OpenAI Startup Fund I, LP; OpenAI Startup Fund GP I, LLC; OpenAI Startup Fund Management, LLC; OpenAI Global, LLC; OpenAI OpCo, LLC; OAI Corporation; and OpenAI Holdings, LCC—that work to develop, commercialize, and fund OpenAI’s AI products (collectively, “Defendants”) for allegedly data scraping copyrighted content.^[1] The Plaintiffs represent Canada’s leading news outlets that are responsible for publishing journalistic content and media across various platforms, including the Toronto Star, the Vancouver Province, the Calgary Sun, the Calgary Herald, the Daily Herald, the Edmonton Journal, the Edmonton Sun, the London Free Press, the National Post, the Ottawa Citizen, the Ottawa Sun, the Daily Observer, the Daily Press, the Winnipeg Sun, the Globe and Mail, the Canadian Press, and CBC.

The Plaintiffs, all well-known players in the Canadian media landscape, argue that the works that each Plaintiff has produced are highly valuable and a product of significant creative efforts and monetary investment. These works are widely distributed across Canada, including on websites, on mobile apps, and through print media. Together, the Plaintiffs host millions of works across various platforms, both owned and licensed by the Plaintiffs.

The Plaintiffs allege that the Defendants have used their intellectual property without proper authorization as a means of building a commercially successful business that has generated enormous profits through the sale of AI-powered products and services. The legal basis of the Plaintiffs’ claim is rooted in copyright infringement and breach of contract, specifically alleging that the Defendants’ use of the Plaintiffs’ works violates Canadian copyright law and amounts to a breach of the Plaintiffs’ applicable terms and conditions governing the use of each respective work.

In the claim, the Plaintiffs allege that the Defendants are liable for the following: (a) the alleged unauthorized use of the Plaintiffs’ copyrighted works by the Defendants in violation of sections 3 and 27 of the Copyright Act;^[2] (b) the alleged circumvention of protection measures by the Defendants used by the Plaintiffs to prevent unauthorized copying and access of its works, specifically in violation of sections 41 and 41.1 of the Copyright Act;^[3] (c) the Defendants’ breach of the Plaintiffs’ online terms and conditions governing their respective websites; and (d) the unjust enrichment received by the Defendants for the misappropriation of the Plaintiffs’ intellectual property.

The Plaintiffs have deployed myriad technical measures to restrict access to their copyrighted works on their websites, including the robot exclusion protocol used to prevent automated scraping of data. Despite this, the Plaintiffs allege, the Defendants have subverted these technical protection measures to gain access to their works and exploit them for commercial purposes.

Additionally, each of the Plaintiffs has endeavored to control how users could interact with and use their works by means of various legal terms and conditions. When accessing the Plaintiffs’ works online, users must accept the applicable terms and conditions, which specify that the use of the works is for personal, non-commercial use only and specifically prohibit the reproduction or distribution of the works without express authorization of the Plaintiffs. By allegedly using the Plaintiffs’ works for profit through the commercialization of products like ChatGPT Plus and ChatGPT Enterprise, the Plaintiffs assert, the Defendants have breached the Plaintiffs’ applicable terms and conditions.

The Plaintiffs further contend that the Defendants have been, and continue to be, unjustly enriched by using the works of the Plaintiffs without their knowledge, consent, or appropriate license. The Defendants have generated billions of dollars in annual revenue through the sale of their products and services: As of October 2024, the Defendants have been valued at a staggering $157 billion. The Plaintiffs allege that they have been deprived of significant potential revenue generated by their works.

The Plaintiffs are seeking substantial compensation from the Defendants. The order for compensation requested by the Plaintiffs includes a portion of the profits earned by the Defendants from the alleged infringement of the Plaintiffs’ copyright works and circumventing protections; statutory damages set at CAD 20,000 per work; damages for unjust enrichment; and, further, punitive damages for the Defendants’ willful misconduct. In addition to the damages sought, the Plaintiffs are requesting both prejudgment and post judgment interest, along with the costs of the legal proceedings.

The Defendants have released public statements stating that, based on the principle of fair use, it is fair or in the public interest to use publicly available information to train and improve its AI systems.^[4] The “fair use” of public content remains a highly debated practice in the Canadian technology sector.

In a joint statement released by a subset of the Plaintiffs, including Torstar, Postmedia, the Globe and Mail, the Canadian Press, and CBC, the news media companies indicated that while they “welcome technological innovations,” the act of data scraping of journalistic content for commercial gain is illegal and not in the public’s best interest.^[5] The Plaintiffs maintained that this case is about upholding Canadian journalism and protecting the substantial investments made by organizations across the country to produce fact-checked, sourced, reliable, and trusted news and information by, for, and about Canadians. The rapid spread of unverified content has eroded public trust, making it essential for credible outlets to uphold rigorous standards of fact-checking, transparency, and accountability. In an era where anyone can publish content, with or without assistance from an AI system, the role of professional journalists in verifying facts and maintaining ethical standards has never been more vital.

Other Data Scraping Litigation

This is not the first instance of a claim being brought forward through the Canadian legal system addressing the legality of data scraping. In 2019, the Federal Court of Canada ruled on the legality of data scraping in Toronto Real Estate Board v. Mongohouse.com, where it found that web scraping activities of the defendant were unlawful and upheld the plaintiff’s copyright in website content.^[6]

On November 4, 2024, the Canadian Legal Information Institute (“CanLII”) filed a notice of claim with the Supreme Court of British Columbia against 1345750 B.C. Ltd., Clearway Management Ltd., Alistair Vigier doing business as Caseway AI Legal, Caseway AI Legal Limited, and John Doe Corporation.^[7] The claim alleges that the defendants violated CanLII’s terms of use, which prohibited bulk downloading and scraping of the CanLII website without express permission or a license. CanLII is also seeking an injunction against Caseway AI Legal to prohibit the use of any material obtained from its website without authorization.

Conclusion

The allegations contained in the claim brought forward by the Plaintiffs have not been proven in Court, and the Defendants have not yet filed their defense to the allegations made. It is fair to say that the claim brought forward by these Canadian news companies against OpenAI, Inc. among others, has generated considerable public interest in Canada, and we await further guidance from the Ontario Superior Court of Justice regarding the legality of mass data scraping by AI systems.

1. Toronto Star Newspapers Ltd. v. OpenAI, Inc., No. CV-24-00732231-00CL (Ont. Super. Ct. Just. Nov. 29, 2024) (statement of claim). ↑

2. Section 3 of the Copyright Act deems that copyright, “in relation to a work, means the sole right to produce or reproduce the work or any substantial part thereof in any material form” and the right to authorize such acts. Copyright Act, R.S.C. 1985, c C-42, § 3 (Can.). Section 27 of the Copyright Act deals with copyright infringement generally and secondary infringement. “It is an infringement of copyright for any person to do, without the consent of the owner of the copyright, anything that by [the Copyright Act] only the owner of the copyright has the right to do.” Id. § 27(1). It is considered secondary copyright infringement for any person to:

   (a) sell or rent out,
   (b) distribute to such an extent as to affect prejudicially the owner of the copyright,
   (c) by way of trade distribute, expose or offer for sale or rental, or exhibit in public,
   (d) possess for the purpose of doing anything referred to in paragraphs (a) to (c),or
   (e) import into Canada for the purpose of doing anything referred to in paragraphs (a) to (c), a copy of a work . . . that the person knows or should have known infringes copyright or would infringe copyright if it had been made in Canada by the person who made it. Id. § 27(2). ↑

3. Sections 41 and 41.1 of the Copyright Act prohibit the circumvention of technological protection measures and deem that the owner of a copyright in a work subject to the Copyright Act is “entitled to all remedies—by way of injunction, damages, accounts, delivery up and otherwise—that . . . may be conferred by law for the infringement of copyright against the person” that has circumvented technological protection measures. Id. §§ 41–41.1(2). ↑

4. E.g., Canadian New Publishers Sue OpenAI over Alleged Copyright Infringement, Associated Press (Nov. 29, 2024). ↑

5. Press Release, Torstar, Postmedia, the Globe and Mail, the Canadian Press & CBC, Canada’s Leading News Media Companies Launch Legal Action Against OpenAI (Nov. 29, 2024). ↑

6. Toronto Real Est. Bd. v. Mongohouse.com, No. T-1653-18 (Fed. Ct. Can. Apr. 15, 2019) (order). ↑

7. Canadian Legal Info. Inst. v. 1345750 B.C. Ltd., No. VLC-S-S-247574 (S. Ct. B.C. Nov. 4, 2024) (notice of civil claim). ↑