Over the past few years, companies have been hit by a wave of hundreds of putative class actions—and untold numbers of threatened mass arbitrations—alleging that use of pixel tracking tools violates the Video Privacy Protection Act (“VPPA”). In the first few months of 2025, that trend continued due to (among other things) the ever-growing use of pixels and similar technology and the Second Circuit’s recent decision in Salazar v. National Basketball Ass’n,^[1] which gives an expansive reading to the statute. In fact, as of March 1, 2025, at least twenty-eight VPPA cases have already been filed. This trend parallels the filing rates in recent years, during which around two hundred cases were filed annually.

The Sixth Circuit, however, just rejected the Second Circuit’s reading in Salazar v. Paramount Global,^[2] a highly similar case involving the same plaintiff. The second Salazar case (which we refer to as Paramount for clarity) creates a circuit split on who is a “consumer” of “goods and services” under the statute—which is notable because a petition for certiorari has already been filed seeking review of the Second Circuit’s decision.

In light of these recent and significant developments, companies with an online presence should be aware of the contours of the VPPA, trends in VPPA litigation, and various defenses and arguments available to them.

The VPPA

Congress enacted the VPPA in 1988 in response to a newspaper’s disclosure of VHS tapes that then–Supreme Court nominee Judge Robert Bork rented from a local video rental store. The statute forbids disclosing certain data about consumers’ video viewing habits, along with identifying information, without their consent.

Specifically, the VPPA prohibits “video tape service provider[s]” from “knowingly disclos[ing]” consumers’ “personally identifiable information” (“PII”) to third parties.^[3] Under the Act, PII is “information which identifies a person as having requested or obtained specific video materials or services.”^[4] The statute defines a “video tape service provider” as any entity “engaged in the business . . . of rental, sale, or delivery of prerecorded video cassette tapes or similar audio visual materials.”^[5] Significantly, the VPPA contains a private right of action and authorizes recovery of “actual damages but not less than liquidated damages in an amount of $2,500” per violation, punitive damages, attorneys’ fees and costs, and other equitable relief.^[6]

Pixel Litigation and the Salazar Decisions involving the NBA and Paramount

The recent influx of VPPA lawsuits and mass arbitrations can be attributed to the coalescence of two phenomena: (1) the ever-increasing use of pixel technology and (2) the growing number of courts, such as the Second Circuit in Salazar, giving key terms in the VPPA a broad reading. But time—and perhaps the U.S. Supreme Court—will tell whether the Sixth Circuit’s April 2025 decision in Paramount represents a turning of the tide in which courts begin to rein in VPPA claims.

A. The Prevalence of Pixels

VPPA lawsuits initially focused on companies’ use of Meta’s Pixel tool, a piece of code embedded in a website’s HTML. The code sends Meta information about what visitors do on the website, which enables the website operator to understand the effectiveness of its ad campaigns on Meta and other website user behaviors. What information it sends depends on how the website configures the Pixel. The use of Meta’s Pixel tool is widespread and spans a number of industries: according to a March 2024 report, about 47 percent of websites use Meta Pixel, including 55 percent of those in the S&P 500, 58 percent in the retail industry, 42 percent in finance, and 33 percent in health care.^[7] Other social media companies, including X (formerly Twitter), now offer tracking pixels, too.^[8]

Plaintiffs contend that VPPA liability can arise when a pixel is set up to share with a third party (1) information about a prerecorded video that a user watches on a company’s website (such as the title of the video); and (2) information that could be used to identify that user. This use of pixels has drawn plaintiffs’ lawyers like a moth to the flame, in large part because of the VPPA’s private right of action and potential for massive statutory damages if a class is certified.

B. The Salazar Decisions

The Second Circuit’s decision in Salazar has further accelerated this trend. Plaintiff Michael Salazar brought a lawsuit against an entity one wouldn’t naturally think of as a “video tape service provider”: the National Basketball Association.^[9] Salazar had signed up for the NBA’s newsletter by providing the company his email address.^[10] He then visited the NBA’s website and watched basketball videos.^[11] Based on these unexceptional facts, Salazar alleged that the NBA violated the VPPA.^[12] Why? Because the NBA’s website used the Meta Pixel, he alleged, some of his personal information—his Facebook ID and information about the videos he watched—was sent to Meta without his consent.^[13]

Salazar’s complaint was initially dismissed.^[14] The district court held that the VPPA required him to offer plausible allegations that (1) the NBA newsletter was a “good or service” within the meaning of the VPPA and that (2) he was a “consumer” of that good or service. He also needed to allege facts demonstrating that he has standing under Article III of the U.S. Constitution, which, among other things, requires that he allege suffering a “concrete” injury. The district court agreed that Salazar had standing to sue, but it dismissed the claim on the merits because it determined that Salazar was not a “consumer” within the meaning of the VPPA.

The Second Circuit reversed, holding that Salazar was a “consumer” under the statute.^[15] The VPPA defines “consumer” to mean “any renter, purchaser, or subscriber of goods or services from a video tape service provider.”^[16] The NBA asserted that the online newsletter Salazar signed up for was not a “good or service” within the meaning of the Act, because it was not an audiovisual good or service—a qualifier that the NBA argued was consistent with the statute’s requirement that the “goods or services” must come “from a video tape service provider.”^[17] But the Second Circuit rejected this limitation of the statutory language, holding that any consumers—even those who receive non-audiovisual goods from the video tape service provider—are covered by the statute.^[18] Plaintiffs are already relying on this aspect of Salazar in bringing lawsuits involving “goods and services” provided by a whole host of industries, ranging from education to sports betting.^[19]

The Second Circuit also rejected the NBA’s challenge to Salazar’s standing. The NBA pointed out that any information about Salazar was not disclosed to the public but instead directed to one private company (Meta), and accordingly the nature of the disclosure was insufficient to count as the kind of “harm ‘traditionally recognized as providing a basis for lawsuits in American courts’”—the test under Supreme Court precedent for whether an alleged harm constitutes a “concrete injury” for Article III purposes.^[20] The court of appeals rejected this argument, holding that Salazar had standing because his “alleged injury stems from the unauthorized disclosure of his personal viewing information, which is closely related to at least one common-law analog . . . [the] public disclosure of private facts.”^[21] In holding that disclosure to one company alone is enough, the court found it significant that Meta is a major company that uses the information for advertising, and that (according to the complaint) did not have any restrictions on its selling, disclosing, or otherwise using the data.^[22]

Despite describing its holding as “narrow,” the Second Circuit’s decision in Salazar has already had a significant impact in this area.^[23] In the Ninth Circuit, where the court of appeals has not yet reached the issues presented in Salazar, a district court in the Southern District of California has already denied a motion to dismiss a claim by a plaintiff suing Zillow for its use of pixels, relying on Salazar’s reasoning.^[24] In the Second Circuit, courts have quickly made rulings following Salazar’s lead.^[25] In the Eighth and D.C. Circuits—where appeals concerning interpretation of the VPPA are pending—litigants have cited to Salazar in an effort to persuade those courts.^[26]

On March 14, 2025, the NBA filed a petition for certiorari seeking Supreme Court review of the Second Circuit’s decision.^[27] In its petition, the NBA argues that the Second Circuit’s decision created not one but two circuit splits. First, it asserts that the Second Circuit split from the Third, Seventh, Tenth, and Eleventh in holding that a consumer suffers concrete harm when one business discloses the consumer’s personal information to another, even if that information is never disclosed to the public. Second, it argues that the Second Circuit’s ruling on the VPPA definition of “consumer” creates a circuit split because the Sixth, Seventh, and D.C. Circuits are considering the same issue on appeal and are “likely to reject” the Second Circuit’s broad interpretation.^[28]

The NBA’s prediction was correct as to the Sixth Circuit: on April 3, 2025, that court issued a ruling in Paramount (its own case involving Salazar), opting for a narrower reading of the statute. In that case, the same plaintiff sued Paramount Global under the VPPA, asserting that a website owned by the defendant disclosed his video viewing history and Facebook ID without his consent.^[29] As in his case against the NBA, Salazar asserted that he was a “consumer” because he became a “subscriber” to the website when he signed up for its online newsletter.^[30] A federal court in Tennessee disagreed, holding that the definition of “subscriber” is “cabined by the definition of ‘video tape service provider.’”^[31] Thus, the district court concluded, “to qualify as a ‘consumer,’ a ‘plaintiff must be a subscriber of goods and services in the nature of audio-video content.”^[32] Salazar’s allegations failed, the court explained, because Salazar did not plausibly allege that a newsletter subscription “was a condition to accessing the site’s videos, or that it enhanced or in any way affected [his] viewing experience.”^[33]

The Sixth Circuit affirmed, holding that “the most natural reading” of the statute limits the definition of “consumer” to apply only to someone who “subscribes to ‘goods or services’ in the nature of ‘video cassette tapes or similar audio visual materials.’”^[34] The court’s holding pointed to a line of Supreme Court decisions emphasizing that particular words in a statute must be interpreted in the context of the statute as a whole.^[35]

It remains to be seen whether the Sixth Circuit’s decision in Paramount will stanch the flow of VPPA complaints, at least outside the Second Circuit. In the immediate term, Paramount—which acknowledges creating a circuit split on the question of how to define the term “consumer” under the statute—increases the likelihood that the Supreme Court will grant the NBA’s petition and take up the issue itself.

Defenses and Arguments

In light of these developments and the continued flood of VPPA lawsuits, companies should be aware of potential arguments and defenses. We discuss some of these defenses and arguments below.

A. Procedural Defenses

i. Moving to Compel Arbitration

As a threshold matter, in many instances, defendants will have strong grounds to compel arbitration if their customer terms of service include an arbitration provision. That is because the VPPA’s definition of “consumer” is limited to a “renter, purchaser, or subscriber of” a defendant’s services,^[36] and many companies require website visitors to assent to an arbitration provision prior to subscribing or making a purchase.

But companies that have strong arbitration arguments to avoid class action lawsuits in court may nonetheless be targeted by mass arbitrations. Several plaintiffs’ firms specialize in threatening mass arbitrations independent of or as follow-ons to privacy class actions, and VPPA cases are no exception to this trend. Indeed, there are several websites actively recruiting claimants to assert VPPA claims in mass arbitrations. Accordingly, potential VPPA defendants should also take steps to ensure that their arbitration agreements contain provisions to ameliorate the possibility of mass arbitration.^[37] One point to consider; the 2024 AAA rules regarding mass arbitrations alleviate some of the burdens on defendant companies by introducing a “process arbitrator” to manage administrative issues in some circumstances and implementing a fee structure for better predictability and reduced initial burdens on all parties.^[38]

ii. Challenging Class Certification

Even if a VPPA claim is not dismissed at the pleading stage, defendants should have arguments to raise in opposing class certification. For example, defendants can oppose certification of classes under Rule 23(b)(3)’s predominance prong. Because website users configure their browsers differently—some don’t accept cookies, others install software designed to block data sharing, and others still aren’t logged into their Facebook account on the same browser from which they access a defendant’s website—the data disclosed to Meta will not be uniform across visitors. As a result, defendants could argue that the individualized inquiry that would be required to determine whether a class member’s PII was actually disclosed would overwhelm any common issues. In addition, to the extent class litigation waivers are permissible in a particular jurisdiction, defendants should raise that issue. The Salazar court mentioned the NBA’s class-litigation waiver argument in a footnote but did not reach it on its merits.^[39]

B. Statutory Arguments

i. Safe Harbor for Consent

The VPPA contains a safe harbor that permits companies to disclose consumers’ PII as long as they first obtain consent in the manner prescribed by the statute.^[40] The VPPA also authorizes disclosure of PII to third parties if it “is incident to” the company’s “ordinary course of business”—a term defined to “mean[] only debt collection activities, order fulfillment, request processing, and the transfer of ownership.”^[41]

Some VPPA defendants may have a viable consent-based defense, depending on their privacy and cookie policies or other terms of service. To be effective under the VPPA, “informed, written consent” must meet certain statutory requirements: It must (1) be “in a form distinct and separate from any form setting forth other legal or financial obligations of the consumer,” (2) be given at the time disclosure is sought or given in advance for a set period of time not to exceed two years, and (3) provide the consumer with the ability to opt out from disclosures “in a clear and conspicuous manner.”^[42] Courts have suggested that, because of these requirements, the disclosure cannot be part of a website’s general privacy policy or terms of service and must instead consist of its own page or pop-up notice.^[43] The Salazar court reserved the question of whether Salazar had consented to disclosure of his PII by assenting to the NBA’s privacy policy, which stated that it collects certain “Personal Information” from site visitors.^[44] But defendants are more likely to be able to invoke consent if the presentation and wording of the consent language is clear to the reasonable user.^[45]

ii. Interpretive Arguments

Personally Identifiable Information

Generally speaking, plaintiffs in Pixel-related VPPA actions allege that the information that a website sends to Meta (or other Pixel provider) typically includes some combination of (1) the user’s unique Facebook ID, (2) the name of the video the user watched, (3) the times when the user started and stopped viewing the video, and (4) the video’s URL. Plaintiffs then argue that this information constitutes PII under VPPA, because it is “information which identifies a person as having requested or obtained specific video materials.”^[46]

Circuit courts (including the Second Circuit) have not addressed whether the above information would constitute PII.^[47] Instead, what exists is a patchwork of cases attempting to interpret what could constitute PII on a case-by-case basis. The First Circuit, for example, decided that a plaintiff’s GPS coordinates at the time he viewed a video was PII, because another “unrelated third party” was able to “[u]s[e] this information . . . to identify [the plaintiff] and link the videos he had viewed to his individualized profile maintained by [the third party].”^[48] By contrast, the Ninth Circuit determined that a plaintiff’s Roku device serial number and the names of the videos he watched were not PII, because “that information cannot identify an individual unless it is combined with other data in [a third party’s] possession.”^[49] The Third Circuit recognized the complexity of discerning what PII means, noting that its interpretation “has not resulted in a single-sentence holding capable of mechanistically deciding future cases.” As it stated, “We have not endeavored to craft such a rule, nor do we think, given the rapid pace of technological change in our digital era, such a rule would even be advisable.”^[50]

In light of the complexities inherent in the term “personally identifiable information,” companies should consider whether the data collected by the pixel on their website is PII. To the extent defendants operate a version of Meta Pixel that only sends some, but not all, of the information listed above, they should consider contesting whether it is PII, as some courts have dismissed VPPA claims on this ground.^[51]

Subscriber

As mentioned above, the VPPA applies only if the plaintiff is a “renter, purchaser, or subscriber.”^[52] The Salazar court and the First Circuit have interpreted the term “subscriber” broadly to encompass those who have provided any personal information to a company in exchange for a good or service.^[53]

Other circuits have been skeptical of adopting this broad definition. The Eleventh Circuit, for example, has twice declined to confer “subscriber” status to a plaintiff under the VPPA.^[54] That court has held that merely downloading a free application is insufficient to confer “subscriber” status and held that a subscription “involves some type of commitment, relationship, or association (financial or otherwise) between a person and an entity.”^[55]

Goods and services and “video tape service provider”

Most courts have interpreted the term “similar audio visual materials” fairly broadly to include essentially all prerecorded video content on a website, even if such content does not bear a close resemblance to the feature-length films that inspired Congress to pass the VPPA. However, several courts have concluded that live-streamed video content is not covered by the statute, because it is not “prerecorded,” and a couple of defendants have achieved dismissal of VPPA claims on that basis.^[56] Similarly, the U.S. District Court for the Northern District of Illinois recently confirmed that a video-editing application is not a “video tape service provider” under the statute because it provides users the ability to edit their own videos—even if that service provides filters, templates, visual effects, or other tools.^[57] Relatedly, the Ninth Circuit recently held that movie theaters are not “video tape service providers” within the meaning of the statute because the “provision of shared access to film screenings” is not encompassed by the statute’s definition limiting video tape service providers to those engaged in the “rental, sale, or delivery” of prerecorded videos.^[58]

C. Constitutional Defenses

i. Standing

First, VPPA claims may be vulnerable on standing grounds. Because such claims are generally based purely on a statutory violation, there are good arguments that they fail the “concrete injury” standard set forth in TransUnion LLC v. Ramirez. That said, standing challenges in Pixel VPPA cases have failed to gain much traction, as several courts have concluded that, at their core, VPPA claims are premised on the disclosure of private information, a type of harm that these courts deem sufficient to confer standing.^[59] The Ninth Circuit has joined the Eleventh and Third Circuits in holding, prior to TransUnion, that alleged violations of the VPPA are sufficient in themselves to satisfy the concrete-injury requirement.^[60] But an appeal currently pending in the Ninth Circuit is worth watching to get that court’s latest word on how to approach standing in privacy cases in light of TransUnion.^[61]

ii. First Amendment

Next, defendants could mount a viable First Amendment challenge to the VPPA on grounds that the statute impermissibly restricts and chills protected noncommercial speech. Patreon asserted such a challenge to the VPPA.^[62] Though the court ultimately found that the merits of the challenge were too fact-intensive to be decided at the pleading stage, it appeared receptive to some of Patreon’s arguments (including that the VPPA’s regulations are content-based) and urged Patreon to reassert its challenge on a more developed record. (Patreon ultimately settled its case.^[63]) Other district courts have reached similar conclusions on the First Amendment question.^[64]

iii. Due Process

Finally, because the VPPA authorizes $2,500 in statutory damages per violation, a defendant could contend that an aggregated award would be excessive and thus violate due process. Though this argument might not be viable until the class certification stage, it has recently proven successful in similar statutory contexts. In one case, the Ninth Circuit vacated a statutory damages award of over $900 million in a Telephone Consumer Protection Act (“TCPA”) case on grounds that the district court failed to properly consider the due process implications of such an award.^[65] The Eighth Circuit similarly affirmed a district court’s decision to reduce a $1.6 billion TCPA verdict to $32 million, because the original award was “so severe and oppressive as to be wholly disproportioned to the offense and obviously unreasonable.”^[66] And, while the Seventh Circuit ultimately affirmed a $280 million verdict in a TCPA case, it noted that the district court had charged the defendant only about $4 per violation and that imposing the statutory maximum of $10,000 per violation “would be impossible to justify.”^[67]

Conclusion

The trends make clear that companies that offer videos on their websites will continue to face VPPA lawsuits, and courts will need to grapple with the text of a statute written when the corner video rental store was ubiquitous. Few of these cases have proceeded far—and no federal VPPA class action has gone to trial yet. What we can confidently predict is that VPPA litigation will continue to evolve as a greater body of case law emerges over the next several years, and businesses should remain attuned to developments in the law.

1. 118 F.4th 533 (2d Cir. 2024). ↑

2. No. 23-5748, 2025 WL 1000139 (6th Cir. Apr. 3, 2025). ↑

3. 18 U.S.C. § 2710(b)(1). ↑

4. Id. § 2710(a)(3). ↑

5. Id. § 2710(a)(4). ↑

6. Id. § 2710(c)(1)–(2). ↑

7. Online Data Privacy Report: Website Privacy and Compliance Challenges, Lokker 3 (Mar. 2024). ↑

8. Ian Cohen, Are Web-Tracking Tools Putting Your Company at Risk?, Forbes (Oct. 19, 2022, 7:15 AM) (listing various pixels). ↑

9. Salazar v. Nat’l Basketball Ass’n, 118 F.4th 533, 536 (2d Cir. 2024). ↑

10. Id. at 538. ↑

11. Id. ↑

12. Id. at 539. ↑

13. Id. at 537–38. ↑

14. Salazar v. Nat’l Basketball Ass’n., 685 F. Supp. 3d 232, 244–45 (S.D.N.Y. 2023). ↑

15. Salazar, 118 F.4th at 537, 553. ↑

16. 18 U.S.C. § 2710(a)(1). ↑

17. Salazar, 118 F.4th at 536, 539. ↑

18. Id. at 548. ↑

19. See, e.g., Kelcey Caulder, Legal Ed. Cos. Shared Customers’ Data, Suit Claims, Law360 (Dec. 11, 2024, 6:38 PM); Elaine Briseño, DraftKings Sued in NY for Secret Use of Meta Tracking Pixel, Law360 (Dec. 16, 2024, 5:43 PM). ↑

20. Id. at 542 (quoting Bohnak v. Marsh & McLennan Cos., 79 F.4^th 276, 286 (2d. Cir. 2023) (quoting TransUnion LLC v. Ramirez, 594 U.S. 413, 425 (2021))). ↑

21. Id. at 540. ↑

22. Id. at 543–544. ↑

23. Id. at 553. ↑

24. Mata v. Zillow Grp., Inc., No. 24-CV-01095-DMS-VET, 2024 WL 5161955, at *4 (S.D. Cal. Dec. 18, 2024). ↑

25. See, e.g., Golden v. NBCUniversal Media, LLC, No. 22 CIV. 9858 (PAE), 2024 WL 4904676, at *1 (S.D.N.Y. Nov. 27, 2024). ↑

26. See, e.g., Reply Brief of Plaintiff-Appellant at *1, Pileggi v. Wash. Newspaper Publ’g Co., No. 24-7022, 2025 WL 252705 (D.C. Cir. Jan. 20, 2025); Brief of Plaintiff-Appellant at *21, 25, Christopherson v. Cinema Ent. Corp., No. 24-3042, 2024 WL 5159565 (8th Cir. Dec. 6, 2024). ↑

27. Petition for Writ of Certiorari, Nat’l Basketball Ass’n v. Salazar, No. 24-994 (U.S. Mar. 14, 2025). ↑

28. Id. at 30. ↑

29. Salazar v. Paramount Glob., No. 23-5748, 2025 WL 1000139, at *1 (6th Cir. Apr. 3, 2025). ↑

30. Id. at *2. ↑

31. Id. (quoting Salazar v. Paramount Glob., 683 F. Supp. 3d 727, 743 (M.D. Tenn. 2023)). ↑

32. Id. (quoting Salazar v. Paramount Glob., 683 F. Supp. 3d at 743 n.23). ↑

33. Salazar v. Paramount Glob., 683 F. Supp. 3d at 743 (citing Carter v. Scripps Networks, LLC, 670 F. Supp. 3d 90, 98–99 (S.D.N.Y. 2023)). ↑

34. Paramount, 2025 WL 1000139, at *5. ↑

35. Id. ↑

36. 18 U.S.C. § 2710(a)(1). ↑

37. See Andrew J. Pincus, Archis A. Parasharami, Kevin Ranlett, and Carmen Longoria-Green, Mass Arbitration Shakedown: Coercing Unjust Settlements, U.S. Chamber of Com. Inst. for Legal Reform (Feb. 28, 2023). ↑

38. See Andrew J. Pincus, Archis A. Parasharami, Andrew J. Demko, Megan S. Webster, Tony Weibell, Kevin S. Ranlett, and Daniel E. Jones, American Arbitration Association Adopts New Mass Arbitration Rules and Fee Schedules, Mayer Brown (Feb. 5, 2024). ↑

39. Salazar v. Nat’l Basketball Ass’n, 118 F.4th 533, 539 (2d Cir. 2024). ↑

40. 18 U.S.C. § 2710(b)(2)(B). ↑

41. Id. §§ 2710(a)(2), (b)(2)(E). ↑

42. 18 U.S.C. § 2710(b)(2)(B). ↑

43. See Cappello v. Walmart Inc., No. 18-cv-06678-RS, 2019 WL 11687705, at *2 (N.D. Cal. Apr. 5, 2019). ↑

44. Salazar, 118 F.4th at 538–39. ↑

45. See, e.g., Calhoun v. Google, LLC, 113 F.4th 1141, 1151 (9th Cir. 2024) (“[A] determination of what a ‘reasonable’ user would have understood must take into account the level of sophistication attributable to the general public, which uses Google’s services.”). ↑

46. 18 U.S.C. § 2710(a)(3). ↑

47. Some district courts have generally concluded that, because disclosure of the Pixel allegedly shares both the user’s unique Facebook ID—which can be used to ascertain the user’s Facebook profile—and the name of the video watched, an ordinary person could use that information to glean a specific individual’s video-watching behavior. See, e.g., Stark v. Patreon, Inc., 635 F. Supp. 3d 841, 853 (N.D. Cal. 2022); Feldman v. Star Trib. Media Co., 659 F. Supp. 3d 1006, 1014–15, (D. Minn. 2023); Czarnionka v. Epoch Times Ass’n, Inc., No. 22 Civ 6348 (AKH), 2022 WL 17069810, at *4 (S.D.N.Y. Nov. 17, 2022). ↑

48. Yershov v. Gannett Satellite Info. Network, Inc., 820 F.3d 482, 484–85 (1st Cir. 2016). ↑

49. Eichenberger v. ESPN, Inc., 876 F.3d 979, 986 (9th Cir. 2017). ↑

50. In re Nickelodeon Consumer Priv. Litig., 827 F.3d 262, 290 (3d Cir. 2016). ↑

51. See, e.g., Martin v. Meredith Corp., 657 F. Supp. 3d 277 (S.D.N.Y. 2023), appeal withdrawn, No. 23-412, 2023 WL 4013900 (2d Cir. May 24, 2023) (dismissing VPPA claims when the defendant ran a version of the Meta Pixel that sent only the user’s Facebook ID and the name of the webpage accessed); see also, e.g., Ghanaat v. Numerade Labs, Inc., 689 F. Supp. 3d 714, 721 (N.D. Cal. 2023). ↑

52. 18 U.S.C. § 2710(a)(1). ↑

53. Yershov, 820 F.3d at 487; see also, e.g., Harris v. Pub. Broad. Serv., 662 F. Supp. 3d 1327, 1334–35 (N.D. Ga. 2023); Lebakken v. WebMD, LLC, 640 F. Supp. 3d 1335, 1339–40 (N.D. Ga. 2022) (concluding that plaintiffs are plausibly covered as “subscriber[s]” as long as they register for an account and provide personal information in the process). ↑

54. Perry v. Cable News Network, Inc., 854 F.3d 1336, 1342 (11th Cir. 2017). ↑

55. Ellis v. Cartoon Network, Inc., 803 F.3d 1251, 1254, 1256 (11th Cir. 2015); see also Perry, 854 F.3d at 1342–43. ↑

56. See, e.g., Stark v. Patreon, Inc., 635 F. Supp. 3d 841, 853–54 (N.D. Cal. 2022); Louth v. NFL Enters. LLC, 2022 WL 4130866, at *4 (D.R.I. Sept. 12, 2022). ↑

57. See Rodriguez v. ByteDance, Inc., No. 23-cv-4953, slip op. at 15–16 (N.D. Ill. Mar. 3, 2025). ↑

58. Osheske v. Silver Cinemas Acquisition Co., No. 23-3882, slip op. at 7 (9th Cir. Mar. 27, 2025). ↑

59. See, e.g., Martin v. Meredith Corp., 657 F. Supp. 3d 277 (S.D.N.Y. 2023); Feldman v. Star Trib. Media Co., 659 F. Supp. 3d 1006, 1015 (D. Minn. 2023). ↑

60. Eichenberger v. ESPN, Inc., 876 F.3d 979, 984 (9th Cir. 2017) (citing Perry, 854 F.3d at 1341; In re Nickelodeon Consumer Priv. Litig., 827 F.3d 262, 274 (3d. Cir. 2016)). ↑

61. See Greg Lamm, 9th Cir. Skeptical of Undoing Microsoft Win in Wiretap Case, Law360 (Jan. 16, 2025, 7:20 PM). ↑

62. See, e.g., Stark v. Patreon, Inc., 656 F. Supp. 3d 1018, 1027–28 (N.D. Cal. 2023). ↑

63. Plaintiffs’ Notice of Motion and Motion for Preliminary Approval of Class Action Settlement at 5, Aug. 2, 2024, Stark v. Patreon, Inc., 656 F. Supp. 3d 1018 (N.D. Cal. 2023) (No. 22-cv-03131-JCS), ECF No. 176. ↑

64. See, e.g., Saunders v. Hearst Television, Inc., 711 F. Supp. 3d 24, 32–33 (D. Mass. 2024); Christopherson v. Cinema Ent. Corp., No. 23-cv-3614, 2024 U.S. Dist. LEXIS 47847, at *13 (D. Minn. Mar. 6, 2024). ↑

65. However, the panel also noted that reducing statutory damages awards should not be done lightly and “must be reserved for circumstances” in which the award is “gravely disproportionate to and unreasonably related to the legal violation committed.” Wakefield v. ViSalus, Inc., 51 F.4th 1109, 1124 (9th Cir. 2022), cert. denied, 143 S. Ct. 1756 (2023); see also Montera v. Premier Nutrition Corp., 111 F.4th 1018, 1043 (9th Cir. 2024) (Ninth Circuit remands district court decision to determine whether the statutory damages award violates due process under Wakefield.). ↑

66. Golan v. FreeEats.com, Inc., 930 F.3d 950, 963 (8th Cir. 2019) (quoting St. Louis, I.M. & S. Ry. Co. v. Williams, 251 U.S. 63, 67 (1919)). ↑

67. United States v. DISH Network L.L.C., 954 F.3d 970, 980 (7th Cir. 2020). ↑

This article discusses a Showcase CLE program titled “All the President’s Men: A Look at Attorneys’ Ethical Duties in View of Recent Disbarments and Criminal Convictions” at the American Bar Association Business Law Section’s upcoming Spring Meeting. Register now to attend the program online or in person in New Orleans, LA, on Friday, April 25, 2025, 12:00–1:30 p.m. CT.

The legal profession has long upheld a duty to maintain ethical integrity, ensuring that attorneys act within the boundaries of professional responsibility while zealously representing their clients. Yet, recent years have tested the limits of these ethical standards, particularly in the political and corporate arenas. High-profile cases involving attorneys working in presidential administrations and as in-house counsel for entities and educational institutions—as well as the legal profession at large—have resulted in an unprecedented wave of disciplinary actions, disbarments, and even criminal convictions. These cases provide striking examples of what may happen when attorneys prioritize personal loyalty, political influence, or financial gain over their fundamental ethical obligations or, in some cases, failures to properly identify their client.

This presentation will examine the evolving landscape of legal ethics through the lens of recent attorney misconduct cases, exploring how and why these ethical lapses occurred, what lessons can be drawn from them, and how attorneys can ensure they remain within the bounds of professional conduct. The discussion will emphasize the core duties that attorneys owe to their clients, the judicial system, and the public, as well as how ethical boundaries shape legal advocacy, decision-making, and professional accountability.

At the heart of this discussion are the ABA’s Model Rules of Professional Conduct, which serve as the foundation for ethical legal practice. The presentation will analyze critical provisions such as Rule 1.2 (Scope of Representation and Allocation of Authority Between Client and Lawyer); Rule 1.13 (Organization as Client); Rule 1.16 (Declining or Terminating Representation); Rule 1.6 (Confidentiality of Information); Rule 3.3 (Candor Toward the Tribunal); Rule 5.1 (Responsibilities of Partners, Managers, and Supervisory Lawyers); and Rule 8.4 (Misconduct). Through case studies of attorneys who have faced disciplinary actions or criminal prosecution, the panel will illustrate how these ethical guidelines were violated and the consequences that followed. It will also address the recent ABA Formal Ethics Opinion 513 (Aug. 23, 2024) regarding an attorney’s “duty to inquire into and assess the facts and circumstances of each representation” and possibly the obligation to withdraw from such representation under the now amended ABA Model Rule 1.16, as well as ABA Formal Opinion 514 (Jan. 8, 2025) regarding an attorney’s “obligations when advising an organization about conduct that may create legal risks for the organization’s constituents.”

One of the key themes of this discussion is the tension between zealous advocacy and other ethical responsibilities. Attorneys have a duty to vigorously represent their clients within the bounds of the law, but where do the boundaries lie, and when do attorneys cross them? Recent cases involving election-related litigation, obstruction of justice, and business fraud have underscored the difficulty attorneys face when they navigate high-stakes political and corporate environments. Lawyers who crossed ethical lines—whether by submitting false claims, misleading courts, suppressing evidence, or engaging in other forms of misconduct—have faced disbarment, financial penalties, and, in some cases, imprisonment.

Beyond the direct consequences for individual attorneys, these high-profile cases have significant implications for the broader legal profession. Public confidence in the legal system is heavily influenced by attorneys’ conduct, particularly when attorneys are involved in matters of national significance. When attorneys violate ethical rules, they not only damage their own reputations but also erode trust in the integrity of the legal profession as a whole. This session will explore the public perception of attorney misconduct and discuss whether existing professional rules and enforcement mechanisms are adequate to deter unethical behavior.

Another crucial aspect of the discussion is the role of attorneys as gatekeepers of the justice system. Lawyers are not mere advocates for their clients; they are also officers of the court with a duty to uphold the rule of law. This responsibility requires attorneys to balance their obligations to clients with broader ethical duties to the legal system and the public. The presentation will address how attorneys can identify ethical red flags, navigate challenging situations, and seek ethical guidance before engaging in conduct that could lead to professional or legal consequences.

Additionally, the discussion will explore corporate legal ethics and business law applications, focusing on attorneys working in advisory roles within corporate entities. Attorneys serving in executive or in-house counsel positions may face immense pressure from corporate leadership to take legally questionable actions. The Enron scandal, the mortgage meltdown of the late 2000s, and more recent corporate legal battles highlight the risks attorneys face when they fail to exercise independent legal judgment. These examples will be used to illustrate the dangers of enabling unethical or illegal corporate behavior and the importance of attorneys maintaining professional independence.

This presentation offers a critical examination of the ethical challenges attorneys face in today’s legal and political climate. By analyzing recent cases of attorney misconduct, panelists will provide insights into the risks and responsibilities of legal practice. Through an exploration of professional conduct rules, real-world case studies, and ethical best practices, attendees will gain a clearer understanding of their obligations as attorneys and the importance of maintaining ethical integrity in all aspects of their work. The lessons drawn from these cases serve as a powerful reminder of the legal profession’s role in safeguarding justice and the rule of law.

This is the fourth 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.”

There is an expanding array of technology platforms that facilitate board-related communications and administration of board functions, including some that leverage artificial intelligence (“AI”). Some companies are adopting new technologies, while others are staying with methods that have existed for many years. Regular reviews of the technology used for board-related functions will ensure that companies are weighing the benefits and drawbacks of their current approach while appropriately identifying innovative solutions that could provide enhanced efficiency and flexibility, or reduce risk.

1. Board Management and Communication Platforms: Numerous vendors offer platforms that provide an efficient medium for distribution of board materials, communications, and administration of board functions. Many of these platforms incorporate cybersecurity protections, thus reducing risk, and integrate with internal company systems such as those used for cloud storage and virtual collaboration. They can also help reduce risk by aiding with the administration of company record retention policies. Appropriate training should be provided to ensure consistency in adoption across the board and company stakeholders.
2. Audio and Video Recording: Recording board or committee meetings in audio or video format could present significant litigation risk. It is also inconsistent with the core governance principle that the minutes stand as the only record of such meetings. Even if deleted, recordings may later be recovered via backups. When using collaboration platforms for virtual board or committee meetings, deactivate the recording functionality.
3. Use of AI by Boards: For companies that are considering implementing AI solutions to record and summarize board and committee meetings, see the above tip on Audio and Video Recording. Separately, AI platforms may be able to summarize large amounts of written data, such as board books, which directors and others might find helpful. If considering such a technology solution, ensure that any third-party vendor leveraging AI will treat company information confidentially, has best-in-class cybersecurity controls, regularly tests its models for accuracy, and will not use the company’s data for its own business purposes.
4. Email Communications: Companies should use a secure board management and communication platform/portal for company-related communications. The use of personal email accounts for company business poses heightened cybersecurity concerns and can potentially jeopardize confidentiality. Use of personal or day-job email accounts could also expose those accounts to discovery in litigation. Companies should consider providing directors with company email accounts, on the company’s system and protected by its cybersecurity controls, for purposes of communicating on company business. If it is not possible to avoid directors’ using their everyday email accounts, they should avoid substantive messages and only exchange short, actionable messages like “Call me” or “Check the board portal for new material.”
5. Text Messaging: Companies should caution directors to avoid exchanging substantive text messages regarding company business using personal cell phones or devices. Like use of personal email accounts, use of text messaging via personal devices can give rise to security risks. Text messaging is also often informal, which can lead to the exchange of damaging, embarrassing, or unclear communications that could later become discoverable and misconstrued. If it is impossible to eliminate all text messaging, companies should advise directors that texts related to the company should only be sent for scheduling or administrative reasons (e.g., “I am running 10 minutes late”).
6. Business Continuity and Disaster Recovery: Boards, like companies, should confirm that their business continuity and disaster recovery plans are up to date, tested regularly, and stored in a place where they would be accessible in the event of a significant technology disruption caused by a cybersecurity or ransomware event or a weather disaster. As part of this planning process, boards should confirm that any company technology systems required for the board to communicate or access important information are appropriately backed up and prioritized from a systems resiliency standpoint so that they would be accessible in the event of a significant disruption.
7. Access to Records: Companies should regularly review their access controls, including who has access to electronic board and committee materials and communications. Access should only be granted to those with a “need to know.” Certain employees might only have a “need to know” as it relates to certain committees or matters, and access should be limited accordingly.
8. Destruction of Records: Failure to promptly destroy documents and communications in accordance with the company’s records retention policy, including those relating to the board, raises a company’s risk profile. Documents that could have been properly destroyed can become discoverable in litigation. Overbroad litigation hold orders can also result in companies retaining documents that they could and should have destroyed pursuant to their retention policies. If a company uses a board communications portal, it is advisable to confirm that the portal’s storage settings align with the company’s record retention policy.
9. Technology While Traveling: To address confidentiality and cybersecurity risks, precautions should be taken if the board meets outside of the United States, if directors reside or regularly travel abroad, and if board meetings occur at offsite locations. Companies should consider whether travel or meeting locations abroad present heightened risk of intrusion by state and nonstate actors. They should consider issuing directors with “vanilla” devices for company-related communications (including only software necessary for company business) and/or Faraday bags, which can potentially block signals and provide enhanced security. For offsite board meetings, companies should consider conducting digital sweeps for recording devices.
10. Website Bios and Social Media: Companies, in consideration of their respective risk profiles, should consider whether there is a need to include board (and management) biographies and photographs on company websites and social media sites given that this information could be exploited by bad actors seeking to do harm. It is a good practice to conduct a digital risk assessment periodically to identify what digital information on directors is publicly available so that guidance can be provided to minimize risk.

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

This article is Part VIII of the Musings on Contracts series by Glenn D. West, which explores the unique contract law issues the author has been contemplating, some focused on the specifics of M&A practice, and some just random.

Contractual boilerplate is much maligned. Every contract has it, but it is considered the “standard stuff” at the back that is rarely relevant to the “substantive” provisions at the front. The problem with that view is that a boilerplate provision contained in a contract between sophisticated parties is not, generally, any less enforceable than any other provision.^[1] And the boilerplate provisions given short shrift in the negotiation or drafting of a contract could undermine other provisions of that contract.

Unconsidered or outdated boilerplate may contain landmines that could wreak havoc on your contract’s other “substantive” provisions. But these landmines exist primarily because of thinking about boilerplate as if it were somehow not a substantive part of the contract. The fact “is that ‘boilerplate’ is a misnomer as applied to these provisions and that lying in wait within each of them are significant business and legal issues.”^[2] Just because “these provisions . . . have been in the firm’s precedents for ages, garnering ever more hallowed status,” does not mean that they are exempt from the same “critical analysis” that has been brought to bear on what are perceived to be the more substantive parts of the contract.^[3] Indeed, these provisions may have been “drafted by geniuses, but those geniuses may have been wearing powdered wigs.”^[4]

While contractual boilerplate is routinely relegated to the “Miscellaneous” section at the very back of a contract, the subjects covered include matters that could be outcome-determinative if there is a subsequent dispute regarding other contract terms. Those subjects include, among others: what law will govern any dispute (and whether that chosen law includes the chosen law’s statute of limitations and applicable tort law),^[5] in what forum any dispute must be adjudicated (and whether those claims requiring adjudication will include related tort claims or just the contractual ones),^[6] whether third parties have any enforceable rights under the contract,^[7] whether the contract is assignable,^[8] how certain words and phrases are to be interpreted, whether actions by a party may constitute a waiver of its substantive rights under the contract, and how and where notices are to be delivered. In reviewing contractual boilerplate after a dispute arises, one can be either mining for gold or uncovering landmines depending on the extent of the contractual hygiene^[9] practiced when the contract was first negotiated. In other words, one could find either peril or delight in a subsequent review of these provisions once a dispute arises.

The Peril Side of Contractual Boilerplate

The typical survival provision provides that the right to indemnification terminates with respect to any indemnifiable claim for which the indemnifying party has not received notice before the end of the specified survival period.^[10] While there are frequent disputes over whether the notice of claim was valid when the claim was for losses not yet incurred or the notice failed to provide sufficient detail of the claim,^[11] it is rare that there is a dispute over whether the notice was timely. Just ensure the indemnifying party receives your notice before the end of the survival period. Right?

In a recent Delaware Superior Court decision, Mosaic Capital Partners v. Local Bounti Operating Co.,^[12] Judge Paul R. Wallace had to consider whether a notice received by the indemnifying party after “normal business hours” on the last day of the specified survival period was timely and preserved the indemnification claim. The survival provision was set forth in Article VIII of the Purchase Agreement. Section 8.01(a) provided that:

Except as set forth below in this Section 8.01, the representations and warranties of the Sellers, the Target, Parent and Purchaser contained in this Agreement or in any certificates or documents delivered hereunder shall survive for a period of time ending at 11:59 p.m. Eastern Time, on that date which is twelve (12) months after the Closing Date.^[13]

Section 8.05(a) of the Purchase Agreement further provided that:

No Seller Indemnifying Party shall be liable for any claim for indemnification under this Article VIII unless written notice of a claim for indemnification is delivered by the Purchaser Indemnified Party seeking indemnification to the Seller Indemnifying Party from whom indemnification is sought prior to the expiration of any applicable survival period set forth in Section 8.01 (in which event the claim shall survive until finally and fully resolved).^[14]

The buyer sent a claim notice to the seller by email “at 10:04 p.m. EST” on April 4, 2023 (the twelve-month anniversary of the Closing Date). But the seller claimed that the notice was untimely (having been received by the seller on April 5, not April 4). Why? Well, buried in the boilerplate at the end of the Purchase Agreement was a notice provision, Section 11.03. That Section read as follows:

Notices. All notices, requests, consents, claims, demands, waivers and other communications hereunder shall be in writing and shall be deemed to have been given: (a) when delivered by hand (with written confirmation of receipt); (b) when received by the addressee if sent by a nationally recognized overnight courier (receipt requested); (c) on the date sent by facsimile or e-mail of a PDF document (with confirmation of transmission) if sent during normal business hours of the recipient, and on the next Business Day if sent after normal business hours of the recipient; or (d) on the third day after the date mailed, by certified or registered mail, return receipt requested, postage prepaid. Such communications must be sent to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 11.03).^[15]

Because the survival period did not end until 11:59 p.m. EST on April 4, 2023, the buyer argued that applying the “normal business hours” requirement (particularly if that meant 9 a.m. to 5 p.m. as it has been historically understood) would effectively mean that the survival period was shortened by almost seven hours.

Because this was a Motion for Judgment on the Pleadings by the seller, the seller was required to demonstrate that its interpretation of the Purchase Agreement was “the only reasonable one because the agreement is unambiguous.”^[16] Judge Wallace, however, determined that the Purchase Agreement (with the potential conflict between the survival clause and the boilerplate notice provision) was ambiguous. While “[s]pecific language in a contract controls over general language, and where specific and general provisions conflict, the specific provision ordinarily qualifies the meaning of the general one,”^[17] Judge Wallace did not believe that he could determine whether Section 8.01 (a) or Section 11.03 was the specific provision governing the required notice of indemnification before the end of the survival period. After all, while the survival clause was explicit in tying the end of the survival period to 11:59 PM EST on April 4, 2023, unless written notice of an indemnification claim was received by the sellers prior to such time, the survival clause did not specify how any such notice was to be given; only the notice clause provided that specificity.

But there was another reason that Judge Wallace was hesitant to rule on the case without further evidence: he was not certain that giving timely notice in the manner prescribed by Section 11.03 was even a condition to the continued survival of the indemnity provision. Why? Because he viewed Section 11.03 as simply a “procedural” notice requirement and “the Court shouldn’t read any agreement in a way that permits a procedural provision to limit a substantive right, unless such . . . intention to do so is explicitly stated in the agreement.”^[18] In other words, failure to give notice before 11:59 PM EST on April 4, 2023, may well have limited a substantive right because Section 8.05(a) said as much, but failure to give that notice until after the end of “normal business hours” may not have done so because Section 11.03 did “not clearly state it applies to indemnity notices.”^[19]

Judge Wallace found potential support for viewing the requirements of Section 11.03 as simply “procedural” and not limiting the substantive rights in Article VIII by looking at yet another boilerplate provision—Section 11.10.^[20] Section 11.10 of the Purchase Agreement, titled “Amendment and Modification; Waiver,” contained the following language: “No failure to exercise, or delay in exercising, any right, remedy, power or privilege arising from this Agreement shall operate or be construed as a waiver thereof.”^[21] So, did it matter whether the notice was timely, at least pursuant to the required notice procedures in Section 11.03? Hmm.

Finally, to the extent compliance with notice during “normal business hours” pursuant to Section 11.03 was operative as a condition to the seller’s indemnification obligations under Article VIII, Judge Wallace also noted that he needed evidence of what exactly were “normal business hours” of the seller/recipient of the notice, Mosaic Capital Partners, a lower-middle-market private equity firm. Are their “normal business hours” really 9 a.m. to 5 p.m.? What are most private equity firms’ “normal business hours?”

Interestingly, although not cited by Judge Wallace in Mosaic, a similar issue arose in Fesnak and Associates, LLP v. U.S. Bank National Ass’n.^[22] There, the U.S. District Court for the District of Delaware reacted the same way Judge Wallace did to a seeming conflict between a survival clause ending at 11:59 PM EST on June 9, 2010, a notice provision requiring notice by fax to be given during “normal business hours,” and a fax indemnity notice that was sent at 10:21 PM EST on June 9, 2010—the court decided it needed more evidence before ruling.

Is a reference to “normal business hours” something that should even be in a notice provision today, particularly given that the most likely notice it would apply to post-closing was the indemnification claim notice? Is a reference to “normal business hours” old-school and no longer workable? Obviously, this simple strike-through in the boilerplate notice provision would have presumably eliminated this dispute: “if sent during normal business hours of the recipient, and on the next Business Day if sent after normal business hours of the recipient.” And, by the way, did we ever think the standard no waiver clause (particularly the “no delay” language) would apply to a potential failure to provide timely notice of indemnification? Should we consider modifying or eliminating that language in M&A deals? Read on.

The Delight Side of Contractual Boilerplate

I have told a version of this story before,^[23] but it’s the best illustration I know of the “outcome-determinative” delights that can be found in contractual boilerplate. There was once a public company that, as part of the audit of its financial statements, was informed that its accounting firm might need to issue a “going concern” qualification based upon the accounting firm’s review of the company’s public debt indenture. Apparently, the company had engaged in a transaction during the prior year that appeared to have violated one of the indenture’s negative covenants, and the accounting firm was seeking confirmation from the company’s counsel that the indenture had not been violated. The company’s counsel, however, was unable to provide that assurance.

Given the seriousness of the issue and the fact that a private equity firm controlled the company, we were called for a second opinion. Reviewing the negative covenant, it was clear that the transaction would likely have violated the otherwise broad prohibition without an applicable exception. However, an exception permitted transactions otherwise prohibited by the negative covenant to the extent permitted by the “Credit Agreement.” “Credit Agreement” was defined elsewhere in the indenture to be that certain Credit Agreement, dated as of a specific date, and entered into with a named bank, “as the same may be amended, modified, or replaced from time to time.”

While nothing in the original credit agreement would have permitted the transaction in question, it turned out that the original credit agreement had been amended to allow the transaction during the prior year. Someone at the company had been alerted to the need to amend the original credit agreement but hadn’t necessarily considered the impact on the indenture. It appeared clear, therefore, that the transaction was permitted under the indenture because it allowed any transaction permitted by the “Credit Agreement,” which was defined to include any amendments thereto. Somehow, the current company counsel overlooked this fact. However, we had an advantage because, in the early days of private equity, we insisted on these “as amended” definitions to provide flexibility for our private equity clients and their portfolio companies in agreements that were more difficult to amend (like an indenture). So we were alert to look for them.

While the “amended, modified or replaced from time to time” language may not have technically been boilerplate in this particular indenture (and instead was part of an operative definition), there are, in fact, many contracts, including purchase and sale agreements, that routinely include boilerplate provisions with a similar effect. Indeed, the Purchase Agreement at issue in Mosaic contained the following provision in Section 11.04:

Unless the context otherwise requires, references herein: . . . (y) to an agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof.^[24]

In a different dispute, this might be a delightful find or one contributing to peril. And again, it’s a fairly standard provision.^[25] Is the flexibility it provides going to help or hurt? You have to decide whether you want to include it or not. One thing is for sure: you cannot ignore it simply because it’s considered “boilerplate.”

Could this “boilerplate provision” allow the seller to argue that a disclosed contract, which had been amended before entering into the Purchase and Sale Agreement but which amendment had been overlooked in compiling the disclosure schedules, had been disclosed in its “as amended” state? Presumably, any ability to rely on this clause to allow the seller to enter into amendments post-signing and pre-closing and have them deemed disclosed as of signing would be precluded by the pre-closing covenants. But, from a buyer’s perspective, what potential benefit could be derived from having this as part of the boilerplate? And what legitimate argument does the seller have to include this clause? While the clause may be helpful in other contexts, is it something better left out or at least modified to be clear it would not allow a nondisclosed amendment to have been deemed disclosed?

Concluding Thoughts on the Perils and Delights of Contractual Boilerplate

There are likely more perils than delights to be found in contractual boilerplate. And that would be more proof that transactional lawyering is not for the “faint of heart,”^[26] or, as Ken Adams prefers, “not for the faint-hearted.”^[27] So we have no choice but “to think clearly and act bravely.”^[28]

The truth is we need to regularly review our contractual boilerplate to ensure nothing lurking there could undermine other provisions of the agreement. And in reviewing that boilerplate, we must ensure that we are knowledgeable about some of the nuances associated with boilerplate (particularly the “encrusted” variety). As suggested in a recent law review article:

Lawyers need to [know] what boilerplate clauses were originally intended to accomplish and how they have been interpreted; they need to know what words make a difference in forum selection and governing law provisions to actually accomplish their objectives; they need to understand what a standard no-third-party beneficiary cause does and what exceptions should be built in to avoid causing more harm than good; they need to appreciate the nuances of liquidated damages provisions; they need to understand why and how no reliance clauses work to eliminate potential extra-contractual fraud claims in many states; they need to understand how courts have interpreted the supposed hierarchy of “efforts” clauses; they need to be able to confidently review an anti-assignment or change of control clause and advise on whether the contemplated deal needs consent based upon applicable caselaw; they need to understand the courts’ interpretation of standard material adverse change clauses; and yes, they need to know what each type of damage or loss included in a typical excluded loss provision might actually mean.^[29]

Because you may not have learned this stuff in law school,^[30] you need to ensure your in-house CLE programs are covering it; and, if you are not a member of the Jurisprudence Subcommittee of the ABA Business Law Section’s M&A Committee, where we regularly do that sort of thing based on a review of recent caselaw, you should be.

1. See Rissman v. Rissman, 213 F.3d 381, 385 (7th Cir. 2000) (“[T]he fact that language has been used before does not make it less binding when used again. Phrases become boilerplate when many parties find that the language serves their ends. That’s a reason to enforce the promises, not to disregard them.”); see also Silva v. Encyclopedia Britannica Inc., 239 F.3d 385, 389 (1st Cir. 2001) (“[T]hat the forum-selection clause is a ‘boilerplate’ provision does not ipso facto render it invalid. ‘It is not the law that one must bargain for each and every written term of a contract.’” (citations omitted)). ↑

2. Tina L. Stark, Negotiating and Drafting Contract Boilerplate §1.01, at 5 (ALM Publ’g 2003). ↑

3. Id. §1.02, at 6. ↑

4. Howard Darmstadter, Does the Pony Express Still Stop Here?, Bus. L. Today, Sept./Oct. 1998, at 16–17. ↑

5. See John F. Coyle, The Canons of Construction for Choice-of-Law Clauses, 92 Wash. L. Rev. 631 (2017); see also Glenn D. West, There Is More to a Choice-of-Law Clause Than Filling in the Name of the Selected State, Weil’s Glob. Priv. Equity Watch (June 30, 2021). ↑

6. See John F. Coyle, Interpreting Forum Selection Clauses, 104 Iowa L. Rev. 1791 (2019); see also Glenn D. West, Special Order Your Forum Selection Clause, Weil’s Glob. Priv. Equity Watch (Oct. 28, 2019). ↑

7. See Glenn D. West, No-Third-Party-Beneficiary Clauses and the “Ever-Evolving Contractual Arms Race,” Weil’s Glob. Priv. Equity Watch (Sept. 9, 2020). ↑

8. See Glenn D. West, Stuff You Might Need to Know: What Assignments Do Broad Anti-Assignment Clauses Not Prohibit?, Weil’s Glob. Priv. Equity Watch (Aug. 9, 2021). ↑

9. A word borrowed from Ken Adams. See Ken Adams, In Contracts, It’s Best to Practice Good Semantics Hygiene, Adams on Cont. Drafting (Mar. 19, 2025). ↑

10. See Glenn D. West, Making Sure Your Survival Clause Works as Intended, Bus. L. Today (Mar. 7, 2025). ↑

11. See Glenn D. West, Indemnification 101: Without a Loss There Is No Claim, Weil Priv. Equity Sponsor Sync, Jan. 2024, at 16; Glenn D. West, How a 12 Month Survival Period Can Become A Lot Longer (or Not)—the Required Notice of Claim, Weil’s Glob. Priv. Equity Watch (Mar. 22, 2018); Glenn D. West, Making Sure Your Survival Periods Actually Work as Intended, Weil’s Glob. Priv. Equity Watch (Feb. 22, 2016). ↑

12. No. N23C-08-292 PRW CCLD, 2025 WL 898339 (Del. Super. Ct. Mar. 24, 2025). ↑

13. Id. at *2; Purchase and Sale Agreement, by and among Hollandia Produce Group, Inc. Employee Stock Ownership Trust, Mosaic Capital Investors I, LP, True West Capital Partners Fund II, L.P. F/K/A Seam Fund II, LP, Mosaic Capital Investors LLC, solely in its capacity as Sellers’ Representative, Hollandia Produce Group, Inc., Local Bounti Operating Company LLC, and Local Bounti Corporation, dated as of March 14, 2022, Section 8.01(a). ↑

14. Purchase and Sale Agreement, supra note 13, at Section 8.05(a). ↑

15. 2025 WL 898339, at *2; Purchase and Sale Agreement, supra note 13, at Section 11.03 (emphasis added). ↑

16. 2025 WL 898339, at *3. ↑

17. Id. at *4 (quoting DCV Holdings, Inc. v. ConAgra, Inc., 889 A.2d 954, 961 (Del. 2005)). ↑

18. Id. ↑

19. Id. ↑

20. Id. ↑

21. Purchase and Sale Agreement, supra note 13, at Section 11.10. ↑

22. 722 F. Supp. 2d 496 (D. Del. 2010). ↑

23. See Glenn D. West, Mining for Gold in Contractual Boilerplate, Weil Priv. Equity Sponsor Sync, Autumn 2024, at 24. ↑

24. Purchase and Sale Agreement, supra note 13, at Section 11.04. ↑

25. See, e.g., 13 Fletcher Corp. Forms § 61:91 (5th ed.) (“(h) any reference to a document or set of documents, and the rights and obligations of the parties under any such documents, means such document or documents as amended from time to time, and any and all modifications, extensions, renewals, substitutions, or replacements thereof”). ↑

26. Glenn D. West, Transactional Lawyering as an Art: When Saying Less Is More Than Enough, Bus. L. Today (Feb. 11, 2025). ↑

27. Ken Adams, What’s Semantic Acuity, and How Can I Get Some?, Adams on Cont. Drafting (Mar. 2, 2025). ↑

28. Darmstadter, supra note 4, at 17. ↑

29. Glenn D. West, Another Consequential Damages Redux: A Response to “Consequential Damages Clauses: Alien Vomit or Intelligent Design?,” 102 Wash. U. L. Rev. 633, 648 (2024). ↑

30. I do teach a course that covers this stuff at SMU Dedman School of Law. See Glenn D. West, Teaching Contract Drafting through Caselaw—A Syllabus and a Collection of My Musings About Contract Drafting Based upon Recent Cases (2023). ↑

In recent years, the Delaware Court of Chancery has increased its focus on the importance of preserving data and delineating the consequences for failing to do so. Indeed, last year we wrote an article about the risks of failing to preserve text messages and other messaging data.

Recently, the Court issued a ruling in In re Facebook Inc. Derivative Litigation^[1] that highlights the importance of preserving personal email. That ruling, along with its practical implications, is discussed below.

I. Summary of the Case

Facts

In March 2018, news broke that Cambridge Analytica, a British data analytics firm, harvested private information of more than 50 million Facebook users without their permission.^[2] Cambridge Analytica reportedly paid Meta Platforms, Inc. (“Meta”), which owns Facebook and other platforms, for information that included users’ identities, personal identifying information, friends, and “likes.”^[3]

Shortly after news broke about the Cambridge Analytica data harvest, Meta issued a legal hold that advised its recipients of their obligation to preserve (among other things):

all hard copy and electronic data and documents (such as files, data tables or logs, notes, memos, spreadsheets, docs stored in Dropbox and Box, Quip, and Google or Zoho Docs), and all correspondence (such as email, instant messages, Skype messages, WhatsApp messages, FB Messages, text messages, FB Group posts, and letters).^[4]

Sheryl Sandberg, then a member of Meta’s senior leadership team, received the legal hold.^[5] At the time, she was the chief operating officer, a position she held until August 2022.^[6] Sandberg was also on Meta’s board of directors (the “Board”), a position she held until May 2024.^[7]

On April 25, 2018, litigation stemming from the Cambridge Analytica data harvest was initiated.^[8] As litigation progressed, Meta reminded its document custodians about the legal hold.^[9] When a new director (Jeffrey Zients) joined the Board in 2018, Meta sent him the legal hold.^[10]

Outside counsel spoke with Sandberg and Zients, both of whom were defendants in the litigation, about document preservation and collection.^[11] They also received “FAQs Regarding Legal Holds,” which emphasized the obligation to preserve “‘any information related to the Matter,’” including information on personal devices and accounts.^[12]

In discovery, plaintiffs asked defendants to disclose information about their preservation and collection of electronically stored information. While interrogatory responses disclosed that Sandberg had a practice prior to the litigation of regularly deleting emails from her Gmail account that were over thirty days old,^[13] Sandberg’s counsel—as characterized by the Court—was not forthcoming with certain information about the preservation of her personal Gmail account and could not provide a specific date by when Sandberg ceased this practice.^[14] As to Zients, counsel disclosed that he had an auto-delete function enabled that deleted email approximately every six months.^[15]

Sandberg’s and Zients’s counsel investigated whether deleted emails could be obtained from other sources.^[16] They reviewed emails from Sandberg’s Gmail account and documents obtained from her in connection with other litigation.^[17] None were responsive.^[18] Counsel was able to identify fifty-seven emails in the litigation record that were sent to or from Sandberg’s Gmail account.^[19] For Zients, counsel reviewed documents from Zients’s other accounts and identified 415 that were sent to or from his personal account.^[20]

Plaintiffs moved for sanctions for spoliation.^[21]

Relevant Rulings

On January 21, 2025, the Court ruled on the sanctions motion, holding that Sandberg and Zients had “an affirmative duty to preserve their personal emails as evidence”— which neither contested.^[22] Both, as noted above, received litigation holds and were advised by their counsel to preserve personal email, but did not.

The Court held that while counsel was able to identify some deleted email, the balance was lost and could “support a spoliation sanction.”^[23]

The Court then considered whether the emails were lost due to a failure to take reasonable preservation steps. In doing so, the Court noted that individuals, like organizations,

must disable auto-delete functions that would otherwise destroy emails or texts. They also must back up data from personal devices before disposing of them. Failing to disable the auto-delete setting or back up messages before deletion demonstrates that a defendant acted unreasonably. Individuals may not claim ignorance. After receiving a litigation hold, an individual must take steps to determine what is necessary to comply. This includes learning what is necessary to prevent destruction or automatic deletion.^[24]

“Under these principles,” ^[25] the Court held that Sandberg and Zients failed to take reasonable steps to preserve their personal emails. The Court inferred Sandberg was “picking and choosing which emails to delete,” and the Court found that there was a lack of “transparency” to plaintiffs’ counsel about Sandberg’s email practices.^[26] Zients used an auto-delete function on his email that deleted data approximately every six months.^[27]

Against this backdrop, the Court held that plaintiffs “made a showing sufficient to demonstrate prejudice” and shifted the burden to Sandberg and Zients to show lack of prejudice.^[28]

Sandberg could not meet her burden “to make a convincing case against a finding of prejudice.”^[29] The Court noted that a review of the documents that counsel was able to recover reflected emails discussing matters relevant to the action, such as the “reputational danger” Cambridge Analytica posed to Meta and Meta’s lagging “trust among [Facebook] regular users.”^[30] As a sanction for spoliation, the Court raised Sandberg’s standard of proof by one level on any issue where she bears the burden of proof, and it awarded expenses incurred by plaintiffs in pursuing the spoliation issue against Sandberg including “for the effort required to pin down Sandberg’s positions and confirm that the ESI was not available from other sources.”^[31]

Conversely, the Court held that there is less reason to think that Zients lost relevant emails, and as a result the Court did not impose sanctions against him.^[32] Zients “was an outside director, not a C-suite officer, so he logically would have been less immersed in Company operations and likely received communications comparable to what other directors received.”^[33] Also, he joined the Board after the Cambridge Analytica data harvest—and did not “participate in those events in real time.”^[34]

II. Practical Application

How can I be certain that potentially relevant personal data is preserved? It is not uncommon for individuals to text or, as in the case of Facebook, use personal email accounts to communicate about business matters. In the context of litigation, any such potentially relevant communications must be preserved. As part of the preservation process, it is important to speak with custodians early on (and then throughout the litigation) about their preservation obligations—including discussing turning off any auto-delete functions and not actively deleting potentially relevant information.

Because a company often has less control over personal data, one option is to collect personal data to ensure that it is available, if ever needed. When considering whether to pursue this option, it is important to evaluate whether any applicable privacy laws or regulations restrict the collection of personal data.

What should I do when someone with potentially relevant personal data leaves while litigation is pending? The life cycle of litigation is often long. Indeed, Facebook began in 2018 and is still being litigated.

During the litigation life cycle, employees, officers, and directors with potentially relevant data may leave. In Facebook, Sandberg stopped being an officer and director years into the litigation.

Part of ensuring potentially relevant documents are adequately preserved can involve considering a company’s relationship with someone after they stop being associated with the company, and whether their data should be collected before they leave. For example, although Sandberg stopped being an officer and director, she remained a defendant and had to abide by discovery obligations as a party to the litigation. For individuals who are not parties to a litigation, it may be harder to access their potentially relevant personal data after they are no longer associated with the company absent an ongoing contractual agreement that would require their cooperation or a subpoena.

Do I have to disclose to opposing counsel that potentially relevant data such as personal email has been deleted? While every case is different, the Court—as evidenced by Facebook—expects transparency in discussions with opposing counsel about preservation matters, especially where there is a concern that data has been lost, destroyed, or deleted.

1. C.A. No. 2018-0307-JTL, 2025 WL 262194 (Del. Ch. Jan. 21, 2025). ↑

2. Id. at *3. ↑

3. Id. ↑

4. Id. ↑

5. Id. ↑

6. Id. ↑

7. Id. ↑

8. Id. ↑

9. Id.; see also id. at *7 (“Zients and Sandberg received frequent reminders about their preservation obligations”). ↑

10. Id. at *3. ↑

11. Id. at *4. ↑

12. Id. at *7. ↑

13. Id. at *4. ↑

14. Id. at *4–5, 9. ↑

15. Id. at *10; see also id. at *4. ↑

16. Id. at *5. ↑

17. Id. ↑

18. Id. ↑

19. Id. ↑

20. Id. ↑

21. Id. ↑

22. Id. at *7. ↑

23. Id. ↑

24. Id. at *8 (internal quotations omitted). ↑

25. Id. at *9. ↑

26. Id. at *9. ↑

27. Id. at *10. ↑

28. Id. ↑

29. Id. ↑

30. Id. at *11. ↑

31. Id. at *12–13. ↑

32. Id. at *11. ↑

33. Id. ↑

34. Id. ↑

This article is related to a Showcase CLE program at the American Bar Association Business Law Section’s upcoming Spring Meeting. Register now to attend the program online or in person in New Orleans, LA, on Thursday, April 24, 2025, 12:00–1:30 p.m. CT.

Since returning to office in January 2025, President Donald Trump has moved quickly to put his stamp on the federal regulatory landscape. For business lawyers, the implications are broad and fast-evolving, touching everything from litigation exposure and securities regulation to political risk, capital markets, and tax planning. This article offers a practical overview of five key practice areas for business lawyers: government affairs, corporate litigation, federal securities regulation, private equity and venture capital, and taxation.

1. Government Affairs: Political Realignment and Industry-Specific Disruption

The 2024 elections delivered unified Republican control of Congress, with the GOP holding a narrow majority in the House (220 R to 213 D) and a more solid advantage in the Senate (53 R to 47 D, including two independents who caucus with Democrats). This shift, combined with Republican momentum in several state legislatures and governorships, has created a political environment highly conducive to sweeping federal policy changes and aggressive administrative action.

The Trump administration’s early moves have included a regulatory freeze, a 10-to-1 deregulation order (requiring federal agencies to eliminate ten existing regulations for every new proposed regulation), and a rollback of diversity, equity, and inclusion (“DEI”) programs across agencies and federal contractors. Select industries—particularly financial services, hospitality, and tech—are feeling the immediate impact. Recent tariff hikes on goods from China, Canada, Mexico, and the EU are further disrupting global supply chains and forcing companies to reevaluate sourcing, pricing, and international contracts.

In addition to the waves from the new executive branch, business lawyers must also navigate the ripple effects of key judicial branch decisions, including the Supreme Court cases of Loper Bright Enterprises v. Raimondo, which curbed Chevron deference, and Food and Drug Administration v. Alliance for Hippocratic Medicine, in which the Court unanimously dismissed the case on standing grounds—leaving the FDA’s regulatory authority intact, but highlighting the ongoing legal vulnerability around agency actions in politically charged areas.

2. Business and Corporate Litigation: Executive Orders and Political Exposure

Corporate litigators must navigate emerging risks arising from recent executive orders that affect law firm operations, modify federal enforcement practices, and alter established compliance frameworks. Notably, the administration has issued a wave of multiple executive directives (with no end in sight) that: (1) eliminate DEI mandates; (2) restructure digital asset regulation; and (3) penalize firms perceived to have political conflicts.

Perkins Coie, Jenner & Block, and WilmerHale are each currently litigating actions that revoked the security clearances of their attorneys and barred federal contract access. These cases will likely provide important judicial guidance on the limits of executive power in determining eligibility for federal contracting and legal access.

Broader risks for corporate clients include increased scrutiny of labor practices, trade policy violations, and supply chain transparency. To mitigate exposure, business lawyers should advise clients on proactive compliance, robust documentation, strengthened internal controls, and dispute resolution planning. Cross-functional coordination between legal, HR, and government affair teams is increasingly essential.

3. Federal Regulation of Securities: A Refocused, Leaner SEC

President Trump’s nomination of Paul Atkins to chair the Securities and Exchange Commission (“SEC”) is expected to pivot the agency toward a more streamlined regulatory approach. Even though (as of this writing) Atkins has yet to be confirmed, the SEC has already begun realigning its agenda by, among other things, dissolving the Climate and ESG (environmental, social, and governance) Task Force, scaling back SEC staff’s enforcement discretion, and prioritizing capital formation initiatives. Furthermore, the departure of more than six hundred members of the Staff, representing more than 10 percent of the SEC’s workforce, will accelerate the need to narrow regulatory focus and reallocate resources.

Securities lawyers can expect (1) less aggressive disclosure mandates (especially for ESG and climate issues); (ii) expanded accommodations for emerging growth companies and non-U.S. issuers; and (iii) renewed scrutiny of shareholder proposals, proxy advisors, and beneficial ownership reporting. Meanwhile, a newly formed Crypto Task Force is working to (finally) develop a more coherent and durable framework for digital assets, with increased engagement from the SEC staff expected in the months ahead.

In sum, the SEC is likely to offer increased engagement and guidance on priority issues, while avoiding expansive new rulemakings that extend beyond its core statutory mandate.

4. Private Equity and Venture Capital: Deregulation Meets Strategic Uncertainty

The Trump administration’s deregulatory stance offers potential benefits across the venture and private equity landscape. Legal and regulatory burdens may ease for emerging companies, corporate venture programs, and financial sponsors alike—particularly in areas like investment adviser compliance, marketing restrictions, and disclosure obligations. The administration’s focus on capital formation, reduced enforcement around ESG-related reporting, and openness to digital asset innovation create a more permissive environment for venture-backed businesses, fintech startups, and transactional activity.

While broader market volatility has spiked following recent tariff escalations and stock market declines, private capital markets remain relatively insulated. Many venture-backed and private equity portfolio companies are not directly exposed to short-term public market swings. However, the ongoing closure of the IPO window—highlighted by high-profile delays such as Klarna and other unicorns—has complicated near-term exit planning. Most market participants view the shutdown as temporary, with expectations of a rebound once macroeconomic uncertainty and policy direction stabilize, potentially within the next several months.

Despite current headwinds, many in the PE/VC community remain optimistic that a shift in antitrust policy will lead to a more permissive M&A climate. Under the prior administration, heightened Federal Trade Commission (“FTC”) scrutiny created obstacles to strategic exits, delaying liquidity events and limiting capital recycling within the ecosystem. A more deal-friendly regulatory regime should help restore exit pathways and improve certainty for acquirers, sellers, and investors alike.

At the same time, political volatility—including abrupt regulatory shifts, heightened scrutiny of ESG strategies, growing Committee on Foreign Investment in the United States (“CFIUS”) exposure, and unpredictable executive actions—has introduced new risks across the ecosystem. These are particularly pronounced in cross-border transactions, co-investment structures, and sectors involving artificial intelligence, semiconductors, and defense-adjacent technologies. Trade nationalism, scrutiny of foreign investors, and enhanced national security reviews continue to elevate uncertainty around foreign capital and global dealmaking. While such an approach may seem counterintuitive under a Republican administration, it reflects a bipartisan realignment around economic nationalism and technological sovereignty. Legal counsel should prepare clients—whether funds, startups, or strategic investors—for enhanced diligence, evolving state and federal oversight, and reputational considerations in an increasingly complex regulatory climate.

5. Taxation: Modest Tools, Big Ambitions

While the 2025 congressional budget resolution provides no reconciliation pathway for major tax cuts, the Trump administration continues to press for extending key Tax Cuts and Jobs Act (“TCJA”) provisions and introducing new exemptions, especially for businesses impacted by tariff-related pressures. Absent new legislation, changes may occur through regulatory reinterpretation, IRS enforcement reprioritization, or executive-led guidance (e.g., on Global Intangible Low-Taxed Income (“GILTI”), Base Erosion and Anti-Abuse Tax (“BEAT”), or passthroughs).

At the same time, IRS staffing reductions and lower audit rates—particularly for high-income individuals—pose compliance risks that practitioners should monitor closely. Loper Bright, already shaping administrative law more broadly, may also expose longstanding tax regulations to legal challenge, contributing to a more uncertain regulatory climate.

Business lawyers should help clients navigate timing decisions and planning strategies around asset sales, intercompany transfers, and restructurings, with special attention to evolving litigation risks and guidance gaps.

Conclusion

The Trump administration’s second term has ushered in a uniquely fast-moving and ideologically driven transformation of the legal landscape. For business lawyers, this moment demands agility, vigilance, and strategic foresight. Whether advising a public company, a startup fund, or a multinational enterprise, attorneys must prepare clients for a regulatory environment where norms are shifting, institutions are evolving, and risk is increasingly political as well as legal.

In 1996, the U.S. Congress passed the Cuban Liberty and Democratic Solidarity Act of 1996, known as the Helms-Burton Act. Title III of the Act allows U.S. companies and U.S. citizens whose property was confiscated by the Cuban government in 1959 or later to sue parties profiting from their confiscated property. By its own terms, Title III did not go into effect immediately. Rather, Congress left the discretion to activate Title III to the president. In May 2019, the president activated Title III for the first time since the Act’s enactment, and several lawsuits were filed against parties trafficking in confiscated property.

On July 30, 2024, the U.S. Court of Appeals for the D.C. Circuit decided one such case brought by Exxon Mobil against several Cuban state corporations. Exxon is now seeking review of the decision by the U.S. Supreme Court.

In 1960, Cuba’s revolutionary government confiscated Cuban assets of a subsidiary of Exxon (then known as Standard Oil). When a few years later the U.S. Congress established a mechanism to submit expropriation claims against Cuba, Exxon filed a claim with the U.S. Foreign Claims Settlement Commission, which determined Exxon suffered a loss of $72 million plus interest at 6 percent. Exxon’s lawsuit contended that the defendants currently traffic in confiscated property by participating in the oil industry and operating service stations using the property.

One of the defendants unsuccessfully moved to dismiss the complaint based on foreign sovereign immunity. The Foreign Sovereign Immunities Act (“FSIA”) generally bars U.S. courts from exercising jurisdiction over foreign sovereign entities such as the defendants in this case. As the appellate opinion described it, “The district court held that the [Helms-Burton Act] does not itself overcome a foreign sovereign’s general immunity from suit under the FSIA, and that jurisdiction in [the] case thus depend[ed] on the applicability of an FSIA exception.” The district court determined the FSIA’s commercial-activity exception applied to the action, and thus foreign sovereign immunity did not apply.

After the defendants appealed the denial of the motion to dismiss and Exxon cross-appealed the district court’s holdings, a panel of the D.C. Circuit Court of Appeals determined 2 to 1 that “plaintiffs bringing Title III actions against foreign states must satisfy one of the FSIA’s exceptions,” and that the FSIA’s expropriation exception did not apply in the circumstances but that the district court needed to further analyze whether the FSIA’s commercial-activity exception did. The senior judge dissented on all points from his two younger colleagues.

The Court of Appeals wrote that given the FSIA’s terms, the Supreme Court has “repeatedly explained” the FSIA provides the “sole basis” for obtaining jurisdiction over a foreign state in the courts of the United States. It therefore rejected Exxon’s argument that Title III of Helms-Burton independently confers jurisdiction over its action against Cuba, in agreement with the district court.

Exxon also argued its lawsuit satisfied two FSIA exceptions: the expropriation exception and the commercial-activity exception. The Court agreed with the district court the expropriation exception was inapplicable. With respect to the commercial-activity exception, the Court concluded the district court needed to undertake additional analysis before determining jurisdiction exists under the exception.

The district court had concluded that defendant CIMEX “causes a direct effect in the United States,” as required for the commercial-activity exception, “in two ways: first, by operating a remittances business that enables transfers of money from the United States to recipients in Cuba; and second, by selling goods imported from the United States at its convenience stores.”

The Court of Appeals agreed with Exxon and the district court that “the types of effects Exxon allege[d]—outflows of money from the United States and purchases of U.S. goods—can constitute direct effects in the United States.” Nevertheless, the Court vacated and remanded for the district court to further assess whether the defendant “causes” those effects and whether the effects are sufficiently “direct,” finding there were questions necessary to that determination that had not been examined by the district court. For example, regarding the remittances business, it stated, “[T]he the pertinent inquiry is whether CIMEX’s remittances operations at the four to ten stations located on former [Exxon subsidiary] property cause a direct effect in the United States—not whether CIMEX’s entire remittances business does so.”

The dissent stated, “It is true the Supreme Court and [the D.C. Circuit court] have repeatedly referred to the exclusive nature of the FSIA. But in each case [cited by the majority], Title III [of the Helms-Burton Act] did not apply for at least one of three reasons.” Either Helms-Burton did not exist at the time, it was not in effect because the president had suspended its cause of action, or “the plaintiffs’ claims did not arise out of or relate to Cuba’s confiscations.” Not one of the cases cited by the majority mentioned Title III of Helms-Burton. The dissent argued that those decisions thus could not control the issue in this case and that Title III “considered alone, deprives the Cuban defendants of immunity from suit.”

As to the expropriation exception, the majority concluded it did not apply “because, under international law, the property Cuba confiscated was owned not by Exxon but by its subsidiary.” But in Helms-Burton actions, the dissent argued, “‘the court shall accept’ claims certified by the Foreign Claims Settlement Commission ‘as conclusive proof’ of violated property rights.”

This case is at the intersection of Helms-Burton and sovereign immunity, which always presents many problems. Both of the amicus briefs filed in support of Exxon’s petition for a writ of certiorari so far have highlighted the potential for the D.C. Circuit’s decision to make it more difficult for businesses to access the remedy of Title III of the Helms-Burton Act. In the present case as well as future ones that are sure to come up in this area, such complications should be handled with great simplicity.

The Delaware Chancery Court has issued a notable opinion that confirms Delaware’s position as a pro-sandbagging jurisdiction and clarifies when damages may be computed using a transaction multiple. These are important points for parties to take into account when negotiating and drafting acquisition agreements.

In re Dura Medic Holdings, Inc. Consolidated Litigation^[1] involved a private equity firm’s acquisition of a medical equipment supplier through a reverse triangular merger. As explained in more detail below, the buyer sought indemnification from the sellers for breaches of certain representations and warranties in the merger agreement.

Sandbagging

Background

The sellers represented and warranted that the target company had been in compliance with applicable healthcare laws and, except as otherwise disclosed, had not received written notice of alleged noncompliance from any government authority in the three years prior to closing. The disclosure schedules described one such notice, but soon after closing, the buyer discovered others, one of which resulted in further government review and significant expense to the buyer. The buyer sued the sellers for breach of the representation. In response, the sellers contended that the buyer’s claim failed because the sellers had informed the buyer about the relevant notices in a conference call during pre-closing due diligence.

Sandbagging Jurisprudence in Delaware

In M&A transactions, the term “sandbagging” refers to circumstances in which a buyer asserts a claim after the closing based on a breach of a representation or warranty despite having had reason to suspect it was inaccurate as of the closing. The term has a negative connotation,^[2] suggesting that the buyer is seeking to entrap the seller by concealing what the buyer knows and feigning reliance on the representation.

Delaware courts will enforce provisions in M&A agreements that expressly allow sandbagging (“pro-sandbagging” provisions) or expressly prohibit it (“anti-sandbagging” provisions, which effectively require the buyer to prove that it did not have knowledge of the inaccuracy of a representation or warranty in order to bring a claim). In cases where the acquisition agreement is silent, Delaware’s default position was widely thought to be pro-sandbagging, based in part on Chancery Court holdings by then–Vice Chancellor Leo E. Strine, Jr. However, the Delaware Supreme Court’s 2018 opinion in Eagle Force Holdings, LLC v. Campbell included dicta that muddied the waters. In a footnote, the majority opinion seemed to support a pro-sandbagging position (citing a New York line of cases)^[3] while a concurring opinion by then–Chief Justice Strine cited to a 1913 opinion for the proposition that “[v]enerable Delaware law casts doubt” on a buyer’s ability to engage in sandbagging.^[4]

Since Eagle Force, Delaware courts have consistently adopted a pro-sandbagging default position. Two post-trial Chancery Court opinions held that a buyer could terminate an acquisition agreement when the seller’s representations were incorrect even though the buyer was aware of the inaccuracy at an earlier stage of the transaction.^[5] In another post-trial opinion, the Chancery Court held that sandbagging was not implicated because the buyer lacked actual knowledge that the seller’s representations were false; however, then–Vice Chancellor Joseph R. Slights III wrote: “In my view, Delaware is, or should be, a pro-sandbagging jurisdiction.”^[6] Despite this general pro-sandbagging trend, none of these opinions squarely addressed the question of whether a buyer’s pre-closing knowledge of the inaccuracy of a seller’s representation or warranty would prevent the buyer from bringing a post-closing contractual indemnification claim for breach of that representation or warranty. In re Dura Medic addresses this issue.

The Court’s Holdings

In his opinion, Vice Chancellor J. Travis Laster noted that representations and warranties in an acquisition agreement serve to allocate risk between the parties and, unlike fraud claims, do not require a buyer to prove that it justifiably relied on the representations. He reiterated his pro-sandbagging holding in Akorn, Inc. v. Fresenius Kabi AG, which in turn quoted extensively from a pre–Eagle Force Vice Chancellor Strine opinion:

A breach of contract claim is not dependent on a showing of justifiable reliance. . . . [R]epresentations like the ones made in the agreement serve an important risk allocation function. By obtaining the representations it did, the buyer placed the risk [of inaccuracies] on the seller. Its need then, as a practical business matter, to independently verify those things was lessened because it had the assurance of legal recourse against the seller in the event the representations turned out to be false. . . . Having contractually promised the buyer that it could rely on certain representations, the seller is in no position to contend that the buyer was unreasonable in relying on the seller’s own binding words.^[7]

Vice Chancellor Laster emphasized that, by making a representation and warranty, a seller agrees to assume the risk that the facts and circumstances as represented are or may become incorrect, regardless of the foreknowledge of either the buyer or the seller. This approach not only holds the parties to the plain terms of their acquisition agreement, but it serves to reduce due diligence costs, especially when a buyer is confronted with circumstances that may be subject to change or otherwise difficult to determine at the time of contracting.

Vice Chancellor Laster made the additional point that, for breach of contract claims (as opposed to fraud claims), a standard integration clause prevents information outside of the four corners of the agreement from operating to modify the agreement.^[8] In the case of In re Dura Medic, this meant that, even if the sellers had disclosed other governmental notices to the buyer during the pre-closing due diligence process (the court ultimately found that they had not), such disclosures would only modify the representation if they appeared in the transaction documents.

Key Points for Buyers

As the latest installment in Delaware’s pro-sandbagging jurisprudence, In re Dura Medic should give buyers greater assurance that, unless sellers include an express anti-sandbagging provision in an acquisition agreement, their representations and warranties will be interpreted as they are written to shift risk to the sellers. While buyers can further strengthen their position through an express pro-sandbagging provision (at least perhaps until the Delaware Supreme Court speaks to the issue), In re Dura Medic holds that a standard integration clause will function essentially as a pro-sandbagging provision. As interpreted by Vice Chancellor Laster, such a clause will prevent sellers from claiming that information provided to buyers outside of the transaction documents (whether through due diligence, site visits, employee interviews, emails, or otherwise) operates to modify the sellers’ representations.

Key Points for Sellers

If sellers want anti-sandbagging protection, they should include an express anti-sandbagging provision in the acquisition agreement and, in a transaction that contemplates a bifurcated sign and close, a mechanism to update the disclosure schedules. In the absence of these protections, information provided to a buyer during pre-closing due diligence that does not appear in the transaction documents likely will not modify the sellers’ representations and warranties. Accordingly, sellers should take care to ensure that their representations and warranties are accurate and appropriately qualified and that disclosure schedules are complete.

Use of a Transaction Multiple to Calculate Damages

Background

In the merger at issue in In re Dura Medic, the purchase price for the target company was calculated using its EBITDA for the twelve months ending April 30, 2018, multiplied by 6.7797. The merger agreement provided that the sellers would indemnify the buyer for “Losses” resulting from inaccurate representations, with “Losses” defined as “any and all damages,” including “damages based on a multiple of earnings, revenue or other metric.”^[9] Despite expressly allowing for damages to be calculated using a transaction multiple, the agreement was silent as to when a multiple should or should not be used.

The sellers represented and warranted in the agreement that no significant customer had notified the target company of an intent to terminate or reduce its business. This representation proved to be false with respect to two customers. Vice Chancellor Laster calculated damages based on the loss of earnings that would have been received from those customers during the same twelve-month period used to calculate the purchase price. At issue was whether the Losses over this twelve-month period should be multiplied by 6.7797 to mirror the purchase price calculation. The sellers argued that no multiple should apply because the target company was not permanently impaired by the loss of the two customers and because the buyer had failed to mitigate the losses.

The Court’s Holdings

Vice Chancellor Laster applied the 6.7797 multiple to calculate damages. He held that when an acquisition agreement is silent as to when a multiple should be applied, the court must look to the common law, which allows a party to “recover reasonable expectation damages based on a multiple where the price was established with a market approach using a multiple.”^[10] He cited evidence—namely, the buyer’s pre-closing investment committee memorandum and expert testimony—that proved that the buyer had derived the purchase price using a 6.7797 multiple of EBITDA during the applicable twelve-month period. He also rejected an argument by the sellers that losses must permanently affect a business in order for a transaction multiple to apply to the calculation of damages.^[11] Instead, he found that “[w]hether a misrepresentation diminishes the value of the business sufficiently to warrant applying a multiple turns on the extent to which the misrepresentation affects future earning periods.”^[12] Using that standard, he found that the undisclosed customer losses resulted in recurring declines in the target company’s revenue, which resulted in the buyer paying an inflated purchase price and caused damages that the buyer could not mitigate due to the sellers’ breach of its significant customer representation.

Key Points

Many acquisition agreements are silent as to whether and when a transaction multiple will be applied to calculate damages. In re Dura Medic stands for the proposition that, when the purchase price is calculated using a transaction multiple and the suffered loss would have impacted that price, the court may interpret such silence by looking to the common law, which allows the buyer to seek multiple-based damages. This holding may encourage some buyers to leave the acquisition agreement silent on multiple-based damages, but sellers should be aware of the risk this presents and consider drafting the agreement to expressly exclude multiple-based damages or otherwise limit the circumstances under which such damages may apply.

Buyers that wish to ensure that a transaction multiple is used to calculate damages for breaches of the sellers’ representations and warranties should expressly state in the acquisition agreement that multiple-based damages may be recovered. Buyers should also be prepared to support their position with evidence (e.g., pre-closing deal models, investment committee memoranda, or fact or expert witness testimony) that demonstrates that the purchase price was calculated using a transaction multiple and that a lower purchase price would have been paid (or that the buyer would not have closed on the transaction) if the seller made accurate representations and disclosures in the transaction documents.

The authors would like to thank Andrew J. Spadafora for his contributions to this article.

1. ___ A.3d ___, Cons. C.A. No. 2019-0474-JTL (Del. Ch. Feb. 20, 2025) (Laster, V.C.). ↑

2. The term “sandbagging” has a criminal derivation: “In the 19th century, ruffians roamed the streets armed with cotton socks. These ostensibly harmless socks were filled with sand and used as weapons to rob innocent, unsuspecting victims. Sandbaggers, as they came to be known, were reviled for their deceitful treachery: representing themselves as harmless, until they have you where they want you. Then, revealing their true intentions, they spring their trap on the unwitting.” Arwood v. AW Site Servs., LLC, C.A. No. 2019-0904-JRS, slip op. at 71–72 (Del. Ch. Mar. 9, 2022) (Slights, V.C.) (quotations and citations omitted). ↑

3. Eagle Force Holdings, LLC v. Campbell, 187 A.3d 1209, 1236 n.185 (Del. 2018) (Valihura, J., majority opinion). ↑

4. Id. at 1247 (Strine, C.J., concurring in part and dissenting in part). ↑

5. Restanca, LLC v. House of Lithium, Ltd., C.A. No. 2022-0690-PAF (Del. Ch. June 30, 2023) (Fioravanti, V.C.), aff’d, 328 A.3d 328 (Del. 2024); Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL (Del Ch. Oct. 1, 2018) (Laster, V.C.), aff’d 198 A.3d 724 (Del. 2018). ↑

6. Arwood, slip op. at 6. ↑

7. In re Dura Medic Holdings, Inc. Consol. Litig., Cons. C.A. No. 2019-0474-JTL, slip op. at 32 (Del. Ch. Feb. 20, 2025) (Laster, V.C.) (quoting then–Vice Chancellor Strine’s holding in Cobalt Operating, LLC v. James Crystal Enters., LLC, C.A. 714-VCS (Del. Ch. July 20, 2007); textual revisions in the original not shown). ↑

8. An integration clause is a provision by which the parties agree that the transaction documents constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter. ↑

9. In re Dura Medic, slip op. at 17 (emphasis added). ↑

10. Id. at 47 (quotations and citations omitted). ↑

11. To support this argument, the sellers cited Zayo Group, LLC v. Latisys Holdings, LLC, C.A. No. 12874-VCS (Del. Ch. Nov. 26, 2018). However, Vice Chancellor Laster found Zayo Group to be factually distinguishable and held that it did not create a test for future cases requiring a permanent loss or diminution in business value for a transaction multiple to be applied. See In re Dura Medic, slip op. at 48–49. ↑

12. Id. at 49. ↑

The typical chapter 11 sale process is well-developed: A debtor markets substantially all of its assets and sells its business, ideally as a going concern, in accordance with a court-approved marketing and sale process.

While this structure is well-known, bankruptcy also offers mechanisms for the sale of discrete or unique assets—such as litigation, leftover assets at properties where leases have been or will be rejected, remnant assets, and many others. This flexibility provides unique opportunities to create value or acquire assets.

Chapter 11 Sale Process, Generally

A debtor or a trustee can “use, sell, or lease” property outside of the ordinary course of business, subject to bankruptcy court approval.^[1] While there are nuances in each case, a chapter 11 sale process generally falls into five stages.

1. Prepetition marketing and selection of a stalking horse. Prior to filing for bankruptcy, a chapter 11 debtor markets the assets to potential strategic and financial buyers. The goal is to identify a stalking horse bidder that would provide the baseline bid against which all other interested parties would compete. In exchange, the stalking horse bidder receives certain bid protections, like a break-up fee of 1–3 percent of the purchase price and reasonable expense reimbursement.
2. Commencement of chapter 11 case and approval of bidding procedures. Next, the debtor files its chapter 11 bankruptcy case and, shortly thereafter, seeks approval of bidding procedures that establish the process for selling its business.
3. Additional marketing, auction, and selection of successful bidder. After the bankruptcy court approves the bidding procedures, the debtor continues marketing the assets. The duration of the postpetition marketing period depends upon the extent of the prepetition marketing effort. The postpetition outreach includes those who were contacted prior to the bankruptcy filing. If there is sufficient interest, the debtor holds an auction, and the “highest or otherwise best” offer is selected as the successful bid, with the second-best offer often selected as the binding back-up bid.
4. Approval of the successful bid and the back-up bid by the bankruptcy court. Following the auction, the sale to the successful bidder and the back-up bidder is presented to and approved by the bankruptcy court.
5. Closing. Upon satisfaction of all conditions precedent, the sale closes.

One of the primary benefits of a chapter 11 sale process is the ability of the buyer to “cherry pick” specific assets (and liabilities) it wishes to acquire. The bankruptcy court authorizes the sale “free and clear” of liens, claims, and encumbrances that attach to the proceeds of the sale.^[2] The ability to make a “free and clear” sale can be reason enough to justify a chapter 11 filing.

Sales of Discrete Assets

Bankruptcy also offers additional, flexible sale structures that allow for liquidation and maximizing the value of individual, discrete, or intangible assets.

• Going out of business sales. Debtors, particularly those in retail, often file with the goal of right-sizing their lease portfolio. What to do with the inventory and other assets located at stores that will be closed? Going out of business sales allow the debtor, through a liquidation agent, to sell remaining inventory and fixtures at a discount. A debtor can generally conduct these sales notwithstanding applicable state law or lease provisions to the contrary. This process allows debtors to recover some value, instead of abandoning residual assets and deriving no value from them.
• Sales of wholly owned nondebtor entities. Rather than an “asset” sale, a debtor can sell the equity of a wholly owned subsidiary even if the subsidiary is not itself a debtor in bankruptcy. Since these are structured as equity sales, there are some limitations: The subsidiary is sold wholesale, and a buyer does not acquire the assets of the subsidiary free and clear of liens, claims, and encumbrances. Nevertheless, a sale of nondebtor subsidiary equity interests allows a debtor to effectively sell an entire, sometimes profitable, business unit through bankruptcy without directly involving that subsidiary in the chapter 11 process.
• Sales of litigation. Discrete litigation can be sold through chapter 11, even if it would not generally be assignable under state law. The sale can be structured as a contingency fee structure or a true sale, with complete control and risk passing to the purchaser. In some instances, a sale of litigation can occur through an auction process.
• Remnant asset sales. Remnant assets include intangible assets and payment rights not tied to the debtor’s core business. The sale of remnant assets allows a debtor to generate some value for assets that may be contingent, unknown, or otherwise abandoned.
• Intellectual property sales. A debtor can sell its intellectual property, such as brands, software, trademarks, patent portfolios, and digital assets, among others. There are some limitations on the assignability of intellectual property over a licensor’s objection.

Conclusion

Going concern sales in chapter 11 are common, but they are not the only means of monetizing a debtor’s diverse assets. There are creative solutions available for the sale and maximization of value of even unique asset portfolios and nontraditional assets. This flexibility offers opportunities for distressed companies to generate value as well as for interested parties to acquire discrete assets.

1. 11 U.S.C. § 363(b). ↑

2. 11 U.S.C. § 363(f). ↑

Liability management transactions (“LMTs”), at their core, are maneuvers whereby a favored (or “winning”) group of lenders to a given borrower extract value from an unfavored (or “losing”) group of lenders to the same borrower. LMTs have recently gained significant momentum and—from the perspective of unfavored lenders—notoriety.

Although structures continue to evolve, LMTs generally fall into three primary buckets.

• Drop-Down Transactions: Sometimes referred to as “trap door” transactions, drop-downs involve the borrower moving assets outside of the reach of the borrower’s primary lenders. The borrower then uses those same assets to raise new debt from existing or third-party lenders, typically on more favorable terms than previously provided by the primary lenders.
• Uptier Transactions: Substantially all credit agreements are rooted in the understanding that lenders in a given tranche of debt receive pro rata treatment. Uptier transactions upend this notion, whereby a subset of existing (and similarly situated) lenders to a given borrower move their loans into a new tranche featuring more senior payment and lien priority terms (sometimes alongside a new money component)—leaving the remaining (unfavored) lenders with subordinated payment terms and lien priority.
• Double-Dip Transactions: A more recent market innovation, the double-dip transaction is structured to use available secured debt capacity to provide a single new money loan with two separate claims against the assets of the borrower credit group. The proceeds of the new loan are used to fund an intercompany loan to an affiliate of the same borrower. The lenders’ new loan is then secured by both (i) the borrower’s repayment obligations and assets and (ii) the intercompany loan (and related guarantees and security) issued by the affiliate of the borrower.

The Administrative Agent

In a customary credit agreement, the administrative agent serves as a liaison between the borrower and the syndicate lenders, coordinating communications and facilitating operational efficiencies. In addition to routine matters involving the collection and disbursement of payments and providing access to financial reporting, agents play a pivotal role in assessing the necessary lender approval thresholds for proposed borrower actions. This latter function is of paramount importance in a contested LMT where, for example, a group of unfavored lenders may seek to block an uptier transaction by asserting that unanimous or affected lender consent is required to alter the pro rata treatment of lenders.

In this capacity, the duties of the administrative agent are delineated strictly as mechanical and administrative in nature. Separately, customary credit agreements typically provide that the administrative agent is not a trustee or fiduciary for either the borrower or the syndicate lenders. Unless granted the specific authority to take a unilateral action under the credit agreement or unless a given action requires unanimous or supermajority consent, the administrative agent must act at the direction of the “Required Lenders” (typically, lenders with more than 50 percent of outstanding loans and/or commitments under the credit agreement). In addition, when matters exceed the administrative agent’s explicit authority under the credit agreement (including matters of judgment), it is prudent for the administrative agent to consult with (and, ultimately, take direction from) the Required Lenders.

As LMTs have continued to proliferate and clear the lending market, administrative agents would be well served to take a measured and calibrated approach when evaluating requests from sponsors (and their related portfolio company borrowers) to consider, and sanction, LMTs.

Key Considerations in Drop-Down Transactions

The investment and restricted payments covenants in the credit agreement are central to drop-down transactions. A borrower utilizes negotiated baskets embedded in these covenants to transfer assets from a restricted subsidiary (that is, a subsidiary subject to the constraints of the credit agreement) to an unrestricted subsidiary (that is, one that is not).

While variations of this structure have existed for many years, J.Crew, Envision, and other drop-down transactions that have ensued highlight the types of determinations that administrative agents must undertake when analyzing the borrower’s use of covenant baskets.

As a preliminary matter, the administrative agent should evaluate whether the credit agreement contains protective terms (often referred to as a “J.Crew blocker”) that serve to prevent the borrower’s transfer of material assets in a specified asset category without the consent of the lenders. While intellectual property is commonly designated as the asset class subject to a J.Crew blocker, when negotiating the credit agreement, the administrative agent should confirm which asset classes are genuinely material for that particular borrower. For instance, the crown jewel of a mining company might be its leasehold rights—making those rights the appropriate asset class to designate as “material” for purposes of the J.Crew blocker.

If a J.Crew blocker is not contained in the credit agreement, the administrative agent must then confirm that the subsidiary that will receive the asset has been appropriately designated as an unrestricted subsidiary. Designation of an unrestricted subsidiary is generally construed as an investment (and typically utilizes the investment basket) under a credit agreement. In addition to calculating basket capacity under the investment covenant, when confirming the classification of a subsidiary as unrestricted, the administrative agent must determine if any other requirements that apply—such as pro forma financial covenant compliance, or the absence of any defaults or events of defaults—have been satisfied.

Given that basket capacity is a key feature when assessing the permissibility of a drop-down transaction, in addition to analyzing the investment basket, administrative agents should also consider the permitted indebtedness and asset disposition covenants (and related baskets). Furthermore, they should analyze whether any cumulative credit basket is available (sometimes referred to as “stacking”) and if the unallocated portion of a debt, investment, or restricted payments basket can be reallocated to another basket (sometimes referred to as “reclassifying”). An additional provision to consider is the “transactions with affiliates” covenant and whether it may be breached by the proposed drop-down.

Given that borrowers consistently seek to obtain operational flexibility, while lenders regularly endeavor to impose guardrails to mitigate collateral leakage, basket calculations are routinely subject to intense negotiations. As administrative agents analyze LMTs, there are a number of techniques that can be employed to provide additional lender protections. Administrative agents can, for example, require a borrower to certify its basket calculations (and provide the lenders with related supporting materials). Another useful approach is to require that the borrower provide a generally unqualified factual statement that the proposed transaction is permitted by the terms of the credit agreement. With respect to investments made by the borrower (using the investment basket), the lenders can insist on a borrower officer’s certificate that specifies the valuation mechanics of the proposed investment. For example, the lenders can require that the value of the transferred asset (in excess of a certain threshold) be validated by a third-party appraisal or valuation statement.

In the drop-down context, the operational mechanics of releasing a guarantor or lien on a transferred asset should also be considered. Administrative agents should evaluate whether liens and guarantees are automatically released in a proposed LMT. Careful scrutiny of the administrative agent’s ability to facilitate these releases is warranted. In practice, administrative agents need to consider whether they are required to provide the syndicate lenders with notice of a borrower-requested lien release. As a further step, some administrative agents now require the borrower to certify that the administrative agent is authorized to release its lien on designated collateral under the terms of the credit agreement.

Key Considerations in Uptier Transactions

In an uptier transaction, the administrative agent must first determine the consent threshold for the proposed credit agreement amendment intended to authorize the non–pro rata treatment of lenders. Does taking this step require an affected lender vote or a more permissive Required Lender vote?

In further analyzing whether an uptiering amendment is permissible, regardless of whether some level of syndicate lender approval is required, the administrative agent should evaluate whether the proposed amendment functionally modifies a sacred right (such as the maturity date of the facility—which modification would require an affected lender vote).

With respect to the required intercreditor agreement that will delineate the rights and remedies of the existing “unfavored” lenders vis-a-vis the “favored” lenders, the administrative agent should evaluate whether the credit agreement simply “authorizes” the administrative agent to enter into the intercreditor or “authorizes and instructs” the agent to do so, as this latter formulation is more protective of the administrative agent. An attendant consideration is whether the credit agreement requires unanimous syndicate lender consent to subordinate existing liens. Unlike drop-down transactions, a borrower’s certification with respect to the analytical issues associated with uptier transactions is less prevalent in the market.

In addition to voting rights, the debt repurchase mechanics are another area of focus in uptier transactions. Many credit agreements restrict a borrower (and its related sponsor and affiliates) from repurchasing debt under the credit agreement (subject to carefully negotiated thresholds and exceptions). The market has not reached a consensus standard as to whether a privately negotiated purchase of debt constitutes an open market purchase (which is a common exception to the non–pro rata treatment of lenders under a credit agreement). Agents must also consider if there are other mechanisms to facilitate the non–pro rata treatment of the “favored lenders.”

Key Considerations in Double-Dip Transactions

In the ever-evolving world of LMTs, the double-dip transaction represents a market development that poses a unique set of challenges for administrative agents, made more so by the fact that the structure has not been fully adjudicated in a bankruptcy court. A borrower’s ability to implement a double-dip stems from secured debt capacity under the credit agreement and the interpretation of how pari passu debt capacity can be applied. Since the double-dip primarily relies on pari passu baskets, administrative agents can carve out intercompany loans from those baskets in an attempt to limit their adoption in the market. Another alternative is to restrict a borrower’s ability to incur intercompany loans exclusively to the intercompany debt basket, which requires subordination and other protections. As a practical matter, these nuances are still being refined, and effective LMT blockers for double-dips are not yet pervasive in loan documentation.

Blockers: Not Created Equally

While the efficacy of LMT blockers has been the subject of much commentary, it is critical to note that not all LMT blockers are the same. Debtor-in-possession exceptions can cut a wide swath into intended protections. While what is referred to as a “Chewy blocker” is intended to prevent a subsidiary guarantor from being released from its guarantee obligations, borrowers do attempt to negotiate baskets around these release mechanics. Additionally, in response to borrowers using a drop-down transaction to remove assets from the collateral base and then, instead of raising debt, raising preferred equity and issuing a dividend to the borrower, some lenders have adopted what is referred to as a “Pluralsight blocker,” which restricts or otherwise imposes limitations with respect to any contemplated preferred equity issuance of an obligor. However, this blocker is not prevalent in the current market.

Conclusion

As administrative agents navigate drop-down, uptiering, and double-dip LMTs and their various permutations, considerations with respect to voting rights, basket capacity, and borrower certification will remain key areas of focus. Subtle changes in language, such as an agent “acting on the instruction” of the lenders, can provide incremental protections that further mitigate administrative agent risks. Finally, agents should bear in mind that for any LMT blocker that offers purported protections, there is likely an impending workaround being crafted. As such, facilitating thorough diligence and transparent communications between the borrower and the lenders will be key to balancing the various competing interests in LMTs.

David Ebroon is an Assistant General Counsel at J.P. Morgan Chase, and serves on the Commercial and Investment Banking Legal Team. He is the Head of Legal for each of Mid-Corporate and Capital & Advisory Solutions.

Arleen Nand is a shareholder at Greenberg Traurig, LLP.

The opinions expressed are those of the authors and do not necessarily reflect the views of their employer, its or their clients or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.