On June 18, 2024, in NAIB v. Weiser, the United States District Court for the District of Colorado granted the motion for preliminary injunction filed by plaintiffs—the National Association of Industrial Bankers (NAIB), American Financial Services Association (AFSA), and American Fintech Council (AFC) (collectively, “Trade Associations”)—against the Colorado Attorney General and Administrator of the Colorado Uniform Consumer Credit Code (Colorado), which challenges Colorado’s opt-out of Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and its interpretation of Colo. Rev. Stat. § 5-13-106, which was set to take effect on July 1, 2024.

Background on DIDMCA and Legal Challenge by Trade Associations

As discussed in our prior articles, Sections 521–523 of DIDMCA granted federal authority to insured, state-chartered banks and credit unions, authorizing them to contract for the interest rate permitted by the state where the bank is located and export that interest rate into other states. In June 2023, Colorado signed into law legislation exercising its right under Section 525 to opt out of DIDMCA, which it believes will require state-chartered banks and credit unions to adhere to Colorado laws regarding interest rate and fee limitations.

The preliminary injunction filed by the court follows the original complaint filed by the Trade Associations on behalf of their members on March 24, 2024, which challenged the interpretation of Colo. Rev. Stat. § 5-13-106 and the opt-out. Colorado filed a motion to dismiss on May 13, 2024.

Amicus Curiae Briefs in Support

In a unique turn of events, the Federal Deposit Insurance Corporation (FDIC) filed an amicus curiae brief in support of Colorado’s position and asserted that loan transactions between parties in different states are made in the state where the borrower enters into the transaction. The FDIC’s position in the brief contradicted its long-standing position on this topic that loans are made in the state where the contractual choice-of-law and the location where certain nonministerial lending functions are performed, such as where the credit decision is made, where the decision to grant credit is communicated from, and where the funds are disbursed.

The American Bankers Association and Consumer Bankers Association also filed an amicus curiae brief in support of the Trade Associations and noted that the position the FDIC took was the first time it had ever argued that the loan is made where the borrower is located.

Court’s Interpretation and Ruling

The preliminary injunction issued by the court in NAIB v. Weiser provides that Colorado is enjoined preliminarily from enforcing the rate and fee limitations “with respect to any loan made by the [Trade Associations’] members, to the extent the loan is not ‘made in’ Colorado and the applicable interest rate in Section 1831d(a) exceeds the rate that would otherwise be permitted.” The court found strong support in the interpretation of where a loan is “made” in the plain language of Section 521 when viewing the statutory scheme holistically and when coupled with the Federal Deposit Insurance Act and Title 12 of the United States Code, containing the National Bank Act.

Further, the court provided that “the plain and ordinary answer to the question of who ‘makes’ a loan is the bank, not the borrower. It follows, then, that the answer to the question of where a loan is ‘made’ depends on the location of the bank, and where the bank takes certain actions, but not on the location of the borrower who ‘obtains’ or ‘receives’ the loan.”

Implications and Potential Impact of the Injunction

While the court found that the requirements for a preliminary injunction were satisfied, it is certainly worth noting that if the Trade Associations were not granted the injunction, the products their members offer could no longer be offered to Colorado customers. As a result, “those customers—and their goodwill along with that of the banks’ business partners—may be gone forever.” Even if the Trade Association members were able to recover monetary damages from Colorado, the “loss of customers, loss of goodwill, and erosion of a competitive position in the marketplace are the types of intangible damages that may be incalculable, and for which a monetary award cannot be adequate compensation.”

Additionally, the court determined that the balance of the harms weighed in favor of the Trade Associations because national banks would be able to continue making consumer loans to Colorado residents irrespective of the interest rate and fee limitations under Colorado law and placing the Trade Associations’ members at a disadvantage, all for only providing marginally more protections from higher interest rates. Further, the court determined that the public interest favors enjoining enforcement of “likely invalid provisions of state law.”

Colorado has thirty days to appeal the preliminary injunction, and an appeal is very likely. However, the outcome of such an appeal is uncertain. Assuming the District Court decision is upheld on appeal, the rate and fee limitations would no longer be applicable to out-of-state, state-chartered banks that make consumer loans to Colorado residents. If the decision is overturned, these parties would need to adhere to the prescribed rate caps and fee limitations as prescribed by Colorado law.

The Takeaway

Even though this injunctive relief is limited to the Trade Association’s members, we still recommend that financial services companies operating in the fintech and nondepository space remain mindful that Colorado has previously used true lender theories to challenge loan charges assessed by out-of-state depository institutions in the context of bank partnership programs, resulting in a prior Assurance of Discontinuance (AOD) that sets forth guidelines for true lender determinations in Colorado.

As workers were leaving their offices for the Fourth of July holiday, the Northern District of Texas issued its much-anticipated order preliminarily enjoining the effective date of the controversial noncompete ban rule issued by the Federal Trade Commission (FTC). The court’s decision, however, is limited to the named plaintiffs in the case—a tax accounting firm and several business groups. Although the stay is temporary pending the court’s final decision on the merits of the case and applies only to the movants in the case, it signals that a permanent and nationwide injunction is likely.

The FTC’s noncompete rule, if it becomes effective, will apply to any written or oral employment term or policy that penalizes or prevents a worker from (a) seeking or accepting work in the U.S. with a different employer, or (b) operating a business in the U.S. after the conclusion of the employment that includes the term or condition. The rule prohibits entering into new noncompete agreements on or after the effective date with any worker. The rule also prohibits enforcing or attempting to enforce a noncompete clause that existed before the effective date for any worker except for those who qualify as senior executives. The ban does not apply to customer or employee nonsolicitation agreements.

The central issue before the Texas court was whether the FTC Act gives the FTC the authority to promulgate substantive rules in general, and the broad, sweeping noncompete ban in particular. The court rejected the FTC’s interpretation of the FTC Act and ruled that a “plain reading” of Section 6(g) of the FTC Act “does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition.” Further, the court cited a 1979 Supreme Court case that referred to Section 6(g) as a “housekeeping statute,” authorizing rules related to “procedure or practice,” not “substantive rules.” Ultimately, the court found that “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g).” The court also determined that the FTC noncompete rule is likely “arbitrary and capricious.”

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

The court’s ruling on the preliminary injunction is not a final judgment in the case. However, its approach to the preliminary injunction and finding that the plaintiffs demonstrated a “substantial likelihood of success on the merits” strongly suggest that it will strike down the rule on the merits. The court committed to issuing its decision on the merits by August 30. In the interim, the parties will further brief the merits issues and the narrow scope of the court’s order, including whether the injunction should be expanded to be national.

A separate case brought by ATS Tree Services LLC is proceeding in a Pennsylvania federal court; that case currently has a preliminary injunction hearing scheduled for July 10. The ATS court anticipated that it would publish its opinion by or before July 23. The ATS court is not bound by the Texas court’s reasoning or decision, but it will doubtless be taken into consideration.

What’s Next?

Because the Texas court limited its preliminary injunction ruling to only the plaintiffs and rejected a request to issue a nationwide preliminary injunction, companies should continue to plan for implementation of the rule on September 4.

A few things employers can do to be prepared include:

• Assess existing agreements imposing post-employment restrictions, including noncompetition agreements that would be banned under the FTC noncompete rule and confidentiality and nonsolicitation agreements that are not.
• Consider improvements and clarifications that could strengthen your nonsolicitation and confidentiality agreements regardless of the noncompete ban’s future. Clear and precise drafting is essential, and employers with workers in multiple states must account in their agreements for the many different and evolving state laws.
• Prepare to provide the required notice under the final rule, because it could take time to identify the workers who are subject to oral or written noncompetes or equivalent employee policies, compile the relevant worker address information, and draft the notices. If the rule becomes effective, the notification must be made by the effective date.

On June 6, the U.S. Department of the Treasury issued a request for information (“RFI”) seeking information and public input on the use of artificial intelligence in the financial services sector. The RFI asks that written comments and information be submitted on or before August 12, 2024.

Through this RFI, the Treasury Department seeks to increase its understanding of how AI is being used within the financial services sector and the opportunities and risks presented by the development and applications of AI. The Treasury Department is relying on the definition of AI utilized in President Biden’s Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence and the National Artificial Intelligence Initiative: “a machine-based system that can, for a given set of human-defined objectives, make predictions, recommendations, or decisions influencing real or virtual environments. Artificial intelligence systems use machine and human-based inputs to perceive real and virtual environments; abstract such perceptions into models through analysis in an automated manner; and use model inference to formulate options for information or action.” It is worth noting that the first question asked by the Treasury Department, however, is whether this definition is appropriate for financial institutions.

The focus of the RFI is on the following uses of AI by financial institutions:

• Provision of products and services (e.g., how is AI being used to offer financial products or services? How is AI being used for financial forecasting products and pattern recognition tools?)
• Risk management (e.g., how is AI being used to manage risk and asset liability?)
• Capital markets (e.g., how is AI being used to identify investment opportunities and provide financial advisory services?)
• Internal operations (e.g., how is AI being used to manage payroll, HR functions, training, and software development?)
• Customer service (e.g., how is AI being used to help handle complaints or manage a website?)
• Regulatory compliance (e.g., how is AI being used to assist with regulatory reporting or disclosure requirements?)
• Marketing (e.g., how is AI being used to market to consumers?)

As part of the RFI, the Treasury Department has posed a series of questions geared toward a broad set of stakeholders in the financial services ecosystem (including consumer and small business advocates, nonprofits, academics, and others) to understand the benefits and risks of AI. These questions are use-case focused and seek to ferret out how AI could benefit or pose risks to stakeholders. In addition, the Treasury Department is seeking specific information on how financial institutions are protecting against “dark patterns” and predatory targeting, which could lead to bias and fair lending issues; mimicry of biometric data (e.g., a consumer’s voice), which could affect fraud detection and prevention tools such as multi-factor authentication; and unfair or deceptive acts or practices. The Treasury Department also asks about the privacy impact of AI, noting that AI can enable a firm’s ability to infer attributes and behavior about an individual that could “undermine privacy (including the privacy of others) and dilute the power of existing ‘opt-out’ privacy protections.”

The Treasury Department’s RFI is one of several requests for information on AI. Various other federal agencies are seeking or have sought information on AI, including the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau, and the National Credit Union Administration, which issued an interagency RFI in 2021 on financial institutions’ use of AI. This most recent RFI is a reminder that this is a hot topic for regulators, and the heat does not appear to be dissipating any time soon.

Is a single-member limited liability company (“SMLLC”) that is taxed as a “disregarded entity” and has to date not had its own employer identification number (“EIN”) required to apply for an EIN in anticipation of filing beneficial ownership information reports as required by the Corporate Transparency Act (“CTA”)?^[1] And even if not required, should it?

Short answers: no and yes.

CTA Reporting Regulations

Under the CTA, a limited liability company (“LLC”) is a “reporting company”^[2] that, absent the availability of any of twenty-three exemptions,^[3] must file a beneficial ownership information report identifying itself and its “beneficial owners” and, if formed on or after January 1, 2024, its “company applicant(s).” Those reports will be filed with the Financial Crimes Enforcement Network (“FinCEN”) office of the Department of the Treasury via the Beneficial Ownership Secure System (“BOSS”) interface and database. In identifying itself on its BOSS report, a reporting company must provide its EIN.^[4]

Many SMLLCs, being for tax purposes “disregarded entities,”^[5] do not have their own EIN but rather use, where the sole member is a natural person, the sole member’s Social Security number^[6] or, where the sole member is a business entity, the sole member’s EIN.

The Internal Revenue Service (“IRS”) has made all of this, as considered from the perspective of CTA compliance, unintelligible, writing:

For federal income tax purposes, a single-member LLC classified as a disregarded entity generally must use the owner’s social security number (SSN) or employer identification number (EIN) for all information returns and reporting related to income tax. For example, if a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number (TIN) and Certification, the W-9 should provide the owner’s SSN or EIN, not the LLC’s EIN.

For certain Employment Tax and Excise Tax requirements discussed below, the EIN of the LLC must be used. An LLC will need an EIN if it has any employees or if it will be required to file any of the excise tax forms listed below. Most new single-member LLCs classified as disregarded entities will need to obtain an EIN. An LLC applies for an EIN by filing Form SS-4, Application for Employer Identification Number. See Form SS-4 for information on applying for an EIN.

A single-member LLC that is a disregarded entity that does not have employees and does not have an excise tax liability does not need an EIN. It should use the name and TIN of the single member owner for federal tax purposes. However, if a single-member LLC, whose taxable income and loss will be reported by the single member owner needs an EIN to open a bank account or if state tax law requires the single-member LLC to have a federal EIN, then the LLC can apply for and obtain an EIN.^[7]

This IRS guidance both predates the January 1, 2024, effective date of the CTA reporting regulations and is focused upon compliance under the Internal Revenue Code. Meanwhile, the release accompanying the CTA reporting regulations,^[8] in discussing the requirement that a reporting company provide its EIN, did not address the issue of disregarded entity LLCs and wrote as well that “the vast majority of reporting companies will have a TIN or will easily be able to obtain one.”^[9] Not helpful is the IRS’s suggestion that a Form SS-4 should be filed only when the SMLLC wants a tax classification other than as a disregarded entity,^[10] especially when there are numerous situations already recognized by the IRS where an SMLLC will desire disregarded entity classification even as an EIN is either desired or necessary.

Neither the Beneficial Ownership Information Reporting FAQs^[11] nor the Small Entity Compliance Guide,^[12] each issued by FinCEN, shed any additional guidance on the issue, and certainly there is nothing in the CTA or the reporting regulations that mandates that an SMLLC that is a reporting company apply for its own EIN.

So, is the EIN of the sole member of a disregarded entity LLC, whether a Social Security number of the sole natural person member or the EIN of the sole business entity member, appropriate for the SMLLC’s CTA beneficial ownership information report? And even if the answer is yes, is it better practice for an SMLLC owned by a natural person to apply for its own EIN for inclusion in its CTA filings?

Short answers: yes and yes.

Benefits of an SMLLC Having Its Own EIN

For an SMLLC that is taxed as a disregarded entity and does not already have its own EIN, it may file its CTA beneficial ownership information report using the sole member’s EIN, which in the case of a natural person sole member will be the person’s Social Security number. But it is entirely permissible for that LLC to request from the IRS its own EIN and file the CTA report using that number.^[13]

This approach may be seen as better in that it will not require submitting on behalf of the reporting company the beneficial owner’s Social Security number. True, if the BOSS database is hacked, the beneficial owner’s personal identifying information^[14] may be divulged, but at least her or his Social Security number will not be part of the information leaked or stolen.^[15] That said, this implicit expectation to use a federal EIN will oft have unacknowledged costs such as updating of tax filings, updating of information at the bank or other financial institution at which funds are transacted, differentials in treatment of employment tax remissions, and a parallel obligation to then apply for a state taxpayer identification number.

In addition, it may be that multiple SMLLCs filing BOSS reports with FinCEN, all using the same EIN, will encounter problems or, at minimum, additional unwanted scrutiny. In promulgating the reporting regulations, FinCEN wrote that “FinCEN believes that a single identification number for reporting companies is necessary to ensure that the beneficial ownership registry is administrable and useful for law enforcement, to limit opportunities for evasion or avoidance, and to ensure that users of the database are able to reliably distinguish between reporting companies.”^[16] Furthermore, in characterizing its determination of the deadline for filing an initial beneficial ownership information report, FinCEN said that the final rule “provide[s] more time to reporting companies to acquire TINs and other identifying information, which is critical to the ability of FinCEN to distinguish reporting companies from one another, which in turn is necessary to create a highly useful database.”^[17] So, it may well be that there is going to be a problem with using a sole member’s EIN to make BOSS filings for multiple SMLLCs—an issue that may arise regardless of whether the sole member is an individual or an entity. Until the end of June the BOSS system would at least some of the time not accept an initial filing with the same EIN as a prior filing (updates and corrections were not so affected). This was not a feature of BOSS intended to prevent multiple initial BOIRs from being filed under the same EIN, but rather a programming bug that has now been remedied.^[18]

Conclusion

So, must an SMLLC get its own EIN before filing its initial beneficial ownership information report with FinCEN? Probably not. But, in order to avoid potential problems and as a concession to the brevity of life, should an SMLLC get its own EIN before filing its initial beneficial ownership information report with FinCEN? Almost certainly yes.

1. The CTA was adopted as part of the Anti–Money Laundering Act of 2020, which was part of the 2021 National Defense Authorization Act for Fiscal Year 2021 (“NDAA”). The full name of the NDAA is the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021. Pub. L. No. 116-283 (H.R. 6395), 134 Stat. 338 (116th Cong., 2d Sess.). Congress’s override of the president’s veto was taken in Record Vote No. 292 (Jan. 1, 2021). The anti–money laundering provisions are found in sections 6001–6511 of the NDAA. The CTA consists of sections 6401–6403 of the NDAA. Section 6402 of the NDAA sets forth Congress’s findings and objectives in passing the Corporate Transparency Act, and section 6403 contains its substantive provisions, primarily adding § 5336 to title 31 of the U.S. Code. ↑

2. CTA, 31 U.S.C.A. § 5336(a)(11)(A); 31 C.F.R. § 1010.380(c)(1)(i)(B). While there are slightly separate treatments under the CTA for LLCs formed in the U.S. and those formed in other countries, this discussion is focused upon U.S.-organized LLCs. ↑

3. CTA, 31 U.S.C.A. §§ 5336(a)(11)(B)(i)–(xxiii); 31 C.F.R. §§ 1010.380(c)(2)(i)–(xxiii). ↑

4. 31 C.F.R. § 1010.380(b)(1)(i)(F) (requiring “[t]he Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) of the reporting company”). ↑

5. It bears noting that the definitions of who is a member for state law and tax purposes are different, so it is possible that an LLC can be a single-member LLC from a state law perspective and a multiple-member LLC for tax purposes, and vice versa. See generally Thomas E. Rutledge, When a Single-Member LLC Isn’t and When a Multiple-Member LLC Is, J. Passthrough Entities, July/Aug. 2015, at 49. Here, we are referring to an SMLLC from the tax perspective. ↑

6. An individual Social Security number is a type of an EIN. See Taxpayer Identification Numbers (TIN), IRS.gov (reviewed/updated June 14, 2024). ↑

7. Single Member Limited Liability Companies, IRS.gov (reviewed/updated Aug. 2, 2023). ↑

8. Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59,498 (Sept. 30, 2022). ↑

9. Id. at 59,517. ↑

10. Instructions for Form SS-4 (12/2023), IRS.gov (reviewed/updated Jan. 17, 2024) (“Don’t file Form 8832 if the LLC accepts the default classifications above.”). ↑

11. Beneficial Ownership Information: Frequently Asked Questions, FinCen.gov (Apr. 18, 2024). ↑

12. Fin. Crimes Enf’t Network, U.S. Dep’t of the Treasury, Small Entity Compliance Guide: Beneficial Ownership Information Reporting Requirements (Dec. 2023). ↑

13. In completing section 10 of the Form SS-4, presumably the box for “Other” should be checked and the reason given as “CTA compliance.” ↑

14. 31 C.F.R. § 1010.380(b)(1)(ii). ↑

15. Admittedly, this horse may be out of the barn. See, e.g., Eva Rothenberg, AT&T Says Personal Data from 73 Million Current and Former Account Holders Leaked onto Dark Web, CNN (Mar. 30, 2024) (noting that the data leak includes customer Social Security numbers). ↑

16. Beneficial Ownership Information Reporting Requirements, supra note 8, at 59,517. ↑

17. Id. at 59,511. ↑

18. See CT Corporation, Key update on beneficial ownership reporting (email newsletter) (June 27, 2024). ↑

As business transaction or litigation counsel, you will be the initial line of contact in a patent dispute. You will have the first conversations with the client, and probably opposing counsel. When the dispute involves accused products sold through Amazon, you will want to keep the APEX program, and its potential drawbacks, in mind as an early, less expensive alternative to drawn-out patent litigation.

Under Amazon’s Patent Evaluation Express (APEX) program, a patent owner initiates its claim against a seller on Amazon’s platform by submitting an APEX agreement form identifying the seller and a claim of one patent, which may be asserted against as many as twenty Amazon-listed products. Amazon sends the agreement to the accused seller, who has three alternatives: (1) agree to continue in the APEX proceeding and have a neutral evaluator make a decision; (2) informally resolve the claim directly with the patent owner; or—significantly here—(3) file a lawsuit for declaratory judgment of patent invalidity and noninfringement against the patent owner. Failure to respond is not an option. If a seller does not act within twenty-one days, Amazon will simply remove the seller’s product listing, thus ending its sales through Amazon.

The APEX program, formally launched in 2022, is a new weapon for patent owners. It provides a low-cost, expedited option for patent owners to prevent infringing sales on Amazon’s platform. For clients who think they can’t afford patent litigation, that’s the good news.

However, here’s the bad news: Sometimes, patent owners wind up in the decisively “wrong” court anyway because they invoked APEX, which the owners could have avoided.

So, what’s the rub? It’s the third, “declaratory relief” option.

What usually happens in declaratory judgment actions?

Outside the APEX system, the rules for patent infringement cases in federal court are well established. Suppose the seller is located in my home district, Northern California, and the patent owner is a Delaware corporation, doing business there. The patent owner must sue the accused infringer in the latter’s state of California.^[1] If the accused infringer chooses to initiate suit instead, in order to request declaratory relief that it is not infringing, it must generally sue the declaratory defendant patent owner in Delaware, the owner’s state of incorporation.^[2] The rationale is that the patent owner must purposefully have availed itself of the benefits of the seller’s jurisdiction, which is not satisfied by its sending a mere cease-and-desist letter. In other words, under the established pattern, the initiating party does not get to sue in its own home district, in either case.

The SnapRays decision.

The APEX procedure likely changes that result. In the May 2024 decision of SnapRays v. Lighting Defense Group, No. 2023-1184 (Fed. Cir. May 2, 2024), a Delaware-based patent owner initiated an APEX enforcement proceeding against a Utah-based alleged infringer. The seller opted for “door number three”: It filed a declaratory relief action of noninfringement. Contrary to usual practice, however, the seller did not file suit in the patent owner’s home state of Delaware. Instead, the accused infringer filed in its own home state of Utah. After appeal, the Federal Circuit Court of Appeals upheld this forum choice.

The court reasoned that, by initiating an APEX proceeding, the patent owner had purposefully directed its enforcement activities at the accused infringer in Utah by affecting its sales and marketing in Utah through the Amazon platform. Foreseeably, Amazon would notify the accused infringer and inform it of its options, and the accused infringer’s Amazon listings could be removed, injuring its marketing, sales, and other activities within Utah.

So, under APEX, the patent owner loses its right to be sued only in its home state in a declaratory relief action. As in other distant litigation matters, some inconvenience is incurred. The patent owner will have to hire remote counsel to defend its patent in the distant district court. It must bring its witnesses to that forum. It must accept any “home court” advantage the suing party may have with a sympathetic judge or jury.

If the standards for proceeding ahead with a patent infringement case were the same in each federal district, that would be no big deal. But what if the standards differ? What if it’s easier to knock out a patent infringement case in one’s home district than that of the patent owner?

The APEX program changes the declaratory judgment landscape after SnapRays.

APEX poses a potentially more significant disadvantage for the patent owner. In our example, the Northern District Court of California would be the forum chosen by the accused infringer, rather than submitting to Delaware. The Northern District of California is significantly more likely to grant motions to dismiss patent infringement cases than one would face in most other active districts. Defendants, in other words, can sometimes wield a unique “knockout” weapon there.

In the old days of required “Form 18” pleading, motions to dismiss patent infringement cases were virtually nonexistent. In 2015, that gave way to current fact pleading requirements. Under the Twombly/Iqbal standards,^[3] a plaintiff must plead facts that plausibly could entitle it to relief, rather than mere recitation of the elements of infringement. In patent cases, motions to dismiss arise based on arguments that either there is no subject matter eligibility (an Alice challenge)^[4] or a critical element of the asserted patent claim is not alleged and cannot be. Different district courts apply the standards differently, at least statistically.

In a 2020 study, for example, the difference was stark. A motion to dismiss on eligible subject matter succeeded 86 percent of the time in the Northern District of California, but only 48 percent of the time in the District of Delaware and zero percent in the Eastern District of Texas. This no doubt is due not simply to a given judge’s predilections but also to emerging case law developing in each district for such pleading standards.^[5]

Similarly, rulings have diverged on how much must be pleaded to satisfy the Twombly/Iqbal standard. A Northern District of California patent complaint may be dismissed based on intense scrutiny of the allegations of a key element.^[6] This evolved from the district’s dismissal practice, requiring “factual allegations that the accused product practices every element of at least one exemplary claim.”^[7] In the Eastern District of Texas, it may be sufficient simply to identify the accused product and to give merely “fair notice” of the nature of the factual issue.^[8] Likewise, in the District of Delaware, recent cases have not been overly demanding of the allegations.^[9] The dilemma for patent owners is, sometimes the greater specificity required in pleading is more than a “do-over” nuisance. Instead, the more specific pleadings invite greater scrutiny into whether a particular patent claim element really exists in the accused product, thus leading to increased dismissals at the earliest stages of patent litigation.

So, the takeaway for both patent owners and accused infringers is clear: While patent owners and accused infringers should consider resolving their dispute through the APEX program, a pitfall looms for the former and an opportunity may appear for the latter. If the accused seller sits in a district that robustly dismisses poorly pleaded infringement claims, plaintiff’s counsel must tread carefully, and defense counsel should think boldly. This is especially so if the patent infringement case is weak: Then the choice of district may make a considerable difference, in both case viability and settlement value.

1. TC Heartland LLC v. Kraft Foods Grp., 581 U.S. 258, 137 S.Ct. 1514 (2017). ↑

2. Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc., 148 F.3d 1355 (Fed. Cir. 1998). ↑

3. Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955 (2007). ↑

4. Alice Corp. v. CLS Bank Int’l, 573 U.S. 208, 134 S.Ct. 2347 (2014). ↑

5. Brandon Rash, Andrew Schreiber, and Brooks Kenyon, “Overlooked Patent Cases: Lessons on Section 101 Motions,” Law360, September 22, 2020. ↑

6. Coop. Ent. Inc., v. Kollective Tech., Inc., No. 5:20-cv-07273-EJD, Dkt. 51, at *7 (N.D. Cal. Feb. 5, 2024) (no plausibility despite defendant’s admission of segmentation); Viavi Sols., Inc. v. Platinum Optics Tech., Inc., No. 21-cv-06655-EJD, Dkt. 146, at *6 (N.D. Cal. Feb. 23, 2024) (alleged same design and filter stack as in previous complaint); Cyph, Inc. v. Zoom Video Comm., 642 F.Supp.3d 1034, 1044 (N.D. Cal. 2022) (use of “social media service channel” not plausibly pleaded by “social accounts” of user); Cyboenergy, Inc. v. No. Electric Pwr. Tech., Inc., No. 23-cv-06121-JST, Dkt. 21, at 4–5 (N.D. Cal. Mar. 6, 2024). ↑

7. Novitaz, Inc. v. inMarket Media, LLC, No. 16-CV-06795-EJD, 2017 WL 2311407, at *3 (N.D. Cal. May 26, 2017). ↑

8. Plano Encryption Techs., LLC v. Alkami Tech., Inc., No. 2:16-CV-1032-JRG, 2017 WL 8727249, at *3–4 (E.D. Tex. Sept. 22, 2017); Headwater Rsch. LLC v. Samsung Elecs. Co., No. 2:23-CV-00103-JRG-RSP (Mar. 5, 2024); STA Grp. v. Motorola Sols., Inc., No. 2:22-CV-0381-JRG-RSP (July 7, 2023). ↑

9. Robocast, Inc. v. Netflix, Inc., 640 F.Supp.3d 367 (D. Del. 2022); Cleveland Med. Devices, Inc. v. Resmed, Inc., No. 22-794-GBW (D. Del. Oct. 2, 2023). ↑

Federal and state antitrust enforcement agencies, as well as private plaintiffs, are actively investigating and challenging companies within the same industry using common pricing algorithms, along with the software vendors or the data analytics firms that provide pricing recommendations or industry reports related to pricing. The challenges are industry-agnostic, thus far covering algorithms used in multifamily rental housing, health insurance, and hotels, as well as agricultural data reporting. Most recently Assistant Attorney General Jonathan Kanter told the New York Times, “If your A.I. fixes prices, you’re just as responsible. If anything, the use of A.I. or algorithmic-based technologies should concern us more because it’s much easier to price-fix when you’re outsourcing it to an algorithm versus when you’re sharing manila envelopes in a smoke-filled room.”

Recently, a Nevada federal court dismissed a private class action alleging that several Las Vegas hotel operators violated Section 1 of the Sherman Act by agreeing to set hotel room prices using pricing algorithms from the same vendor. The latest decision contrasts with a federal court’s decision late last year in the multifamily rental cases, where the private plaintiffs’ allegations were allowed to proceed. The Las Vegas hotel operators’ decision also adds to the ongoing debate over algorithmic price fixing and whether, without more, antitrust law prohibits competitors from using the same price-related data reporting company or price recommendation software vendor.

The court’s dismissal hinged on several key findings.

• The hotel operators had signed up for the pricing software services at different times, undermining the plaintiffs’ allegations of a coordinated effort to fix prices.
• There was no evidence that the defendants had exchanged confidential information, which was inconsistent with the plaintiffs’ need to prove a concerted arrangement.
• The defendants had not agreed to be bound by the software’s pricing recommendations, suggesting that they maintained independent control over their pricing decisions.

The Nevada court also rejected the plaintiffs’ theory that they “need not allege the exchange of non-public information” so long as the algorithmic pricing software was trained using machine learning on defendants’ nonpublic information. The court found that the rate information “exchanged” was instead publicly available and that the defendants often rejected the vendor’s algorithmic price recommendations, further suggesting that the hotel operators maintained independent control over their pricing decisions.

The Nevada court’s decision is unlikely to deter the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) from their recent efforts to persuade courts that the existing antitrust laws are flexible enough to reach the independent decisions of competing firms to use a common price-related data or algorithm vendor. For example, the agencies have submitted statements of interest in support of class action plaintiffs in three separate lawsuits challenging the use of software to assist in pricing decisions. The agencies argue that even if the defendants did not wholly delegate pricing decisions to the algorithm or agree to accept the algorithm’s recommendations, the use of this common technology alone constitutes a per se illegal tacit agreement. The agencies also highlight that competitors do not need to communicate directly with each other, particularly when the competitors are allegedly working in concert with a single vendor. The focus of this approach is on one “concerted action”—the decision to use the same software or vendor that is also used by your competitors—rather than an agreement or contract to raise, fix, or maintain prices.

Key Takeaways

• State attorneys general, the DOJ, and the FTC will continue to advocate against price-related algorithms and for interpretations of the antitrust laws that deem them automatically illegal.
• Whether or not the antitrust agencies are effective in those efforts, Congress will also look for legislative solutions, such as Senate Bill 3686, the Preventing Algorithmic Collusion Act of 2024.
• Companies considering third-party sourced price-related algorithms should consider conducting diligence around the potential antitrust risks, including a review of the company’s antitrust compliance training/policies.
• Counsel should review the vendor’s marketing materials and public statements regarding its role in the industry, the objectives of its services, or any impact its products might have on price.
• Companies should consider revising and supplementing their antitrust compliance programs and training to address the increased risk associated with price-related vendors.
• Commitments to adhere to vendor price or output recommendations should be avoided.
• It is important for companies to understand how the algorithm or recommendations work, whether the company has the ability to and will customize the product, and whether the use of the vendor will diminish the company’s independent decision-making.
• Companies should not consult with their competitors or use competitors as references for the vendor, product, or service.
• After a vendor selection has been made and the service implemented, companies should conduct routine legal audits of the relationship and the impact of the product.
• The results of diligence and audits should not be ignored, particularly if those results raise antitrust concerns.

As the legal landscape continues to evolve, it is crucial for businesses to stay informed and adapt their practices accordingly.

The legal profession is undergoing a significant transformation. Traditionally, lawyers honed their skills and built their careers within the confines of a single office, surrounded by colleagues and mentors. Today, the landscape is markedly different. Law firms are increasingly global, with attorneys collaborating across multiple offices and often working in hybrid environments. This shift necessitates a new approach to professional development, one that extends beyond the traditional office setting.

Board service provides a unique avenue for lawyers to expand their professional horizons. Through roles that demand strategic decision-making, leadership, and governance, lawyers acquire skills that enhance their legal practice. Participation in board activities fosters improved team leadership and conflict resolution capabilities, which are crucial for managing legal teams and client relationships. Board leadership opens doors to greater visibility and extensive networking opportunities, essential for both career advancement and business growth. By aligning with corporations or organizations that reflect their personal values, lawyers can enhance their reputations as committed and thoughtful leaders. This involvement not only polishes their professional image but also imbues a sense of personal fulfillment, allowing them to contribute positively to societal causes and enrich their professional lives.

Professional Development Benefits of Board Service

Serving on a board offers lawyers a wealth of professional development opportunities that are difficult to replicate in a traditional legal setting. Attorneys on boards are often involved in high-level planning processes that require a long-term perspective. This experience sharpens their ability to foresee potential challenges and opportunities, a skill that is directly transferable to their legal practice.

Exposure to different organizational structures is another key benefit of board service. Lawyers gain firsthand experience with nonprofit and corporate governance, enriching their understanding of diverse operational models and strategies. By understanding how different organizations operate in practice, lawyers can offer more informed and strategic advice in their work.

Decision-making is another critical skill honed through board service. Lawyers are accustomed to making decisions based on legal precedents and statutes, but board roles often require a more nuanced approach. Decisions must balance legal considerations with business, ethical, and community factors. By navigating complex board decisions, attorneys become adept at weighing various factors and making informed choices that benefit their clients and their practice.

Team leadership is also significantly enhanced through board participation. Working with a diverse group of board members, each with their own expertise and viewpoints, in the effort of steering an organization involves collective leadership and strategic collaboration. This team environment fosters a dynamic approach to governance and decision-making. Additionally, board membership usually offers opportunities to lead committees and task forces, providing even more avenues for developing leadership capabilities. Lawyers learn to motivate and manage teams effectively, fostering collaboration and resolving conflicts. These leadership skills are invaluable when managing legal teams and coordinating with clients.

Deborah Dixon, managing partner at The Dixon Firm, shared her experience:

My board experience has been instrumental in my development, and I am sure in ways I may not fully recognize. I now feel a sense of confidence that I understand how board meetings should be run, the rules that generally apply to board meetings (e.g., Robert’s Rules of Order), [and] how to properly prepare agendas, call for votes, and use bylaws or policies as guidance for decisions.

Career and Business Development Advantages of Board Service

Board service offers substantial career and business development advantages for lawyers. One of the most immediate benefits is increased visibility within the professional community. Serving on a board places lawyers in the spotlight, showcasing their leadership and strategic capabilities to a broader audience. This visibility can lead to new opportunities, such as speaking engagements, media features, and invitations to join other prestigious boards.

Alejandro Moreno, San Diego office managing partner at Sheppard Mullin, noted, “Legal periodicals are always looking for stories of lawyers doing ‘good.’ Board service is a good platform to promote stories about the board and your own service to the community, which can increase a lawyer’s visibility and profile in the community.”

Networking opportunities are another significant advantage of board service. Lawyers on boards interact with a diverse group of professionals, including business leaders, other attorneys, and community advocates. These interactions can lead to valuable connections that might not occur within the confines of a traditional legal practice.

Moreno emphasized the importance of these relationships:

One of the best features of professional board service is that it brings together many different types of lawyers. Our board includes everything from consumer advocates to corporate defense counsel. Having these various cross-sections of the legal community sit on the same board promotes good relationships between counsel and civility.

These connections can result in referrals, collaborations, and new client relationships, enhancing a lawyer’s professional network and reputation.

Aligning with an organization whose mission resonates personally is crucial for successful board service. Lawyers should choose to serve organizations that align with their values and passions, fostering genuine commitment and effectiveness. When attorneys serve on boards of organizations they care about, their contributions have a greater impact, and the experience is more fulfilling.

Lawyers can select board roles that highlight their existing expertise, allowing them to share unique skills and demonstrate their professional capabilities. This visibility enables more professionals to see what it is like to work with these attorneys. Additionally, they can choose roles to develop new skills, such as finance or marketing, broadening their knowledge and enhancing their business acumen.

Personal Growth and Broader Perspective from Board Service

Board service also offers lawyers a broader perspective and significant personal growth. Engaging with people from various industries and backgrounds exposes practitioners to new viewpoints and problem-solving approaches. This diversity of thought enhances their empathy and cultural competence.

Brian Condon, senior counsel at Arnold & Porter, shared, “Serving on the board of a nonprofit providing pro bono legal services allows me to understand the unmet legal needs in our community, and what resources there are to provide representation.”

This exposure to societal issues is both eye-opening and rewarding, providing lawyers with a deeper understanding of the challenges faced by a range of communities.

Additionally, serving on boards facilitates connections with like-minded professionals who often become mentors, mentees, and friends. These relationships are invaluable, providing personal and professional support, fostering collaboration, and enhancing the sense of community within the profession. The friendships formed through board service add a layer of fulfillment and camaraderie that enriches the professional journey of a lawyer.

Conclusion: The Importance of Board Service for Lawyers

Board service is a powerful tool for attorneys seeking to enhance their professional and personal development. It offers a unique platform to develop strategic thinking, decision-making, and leadership skills, all of which are directly transferable to legal practice. Lawyers gain increased visibility and networking opportunities, which can lead to new career and business prospects. By aligning with organizations whose missions resonate with their personal values, lawyers can not only enhance their professional image but also find personal fulfillment in contributing to meaningful causes.

Board service can also enhance lawyers’ commitment to equity and access to legal services for underserved communities. Michael Geibelson, California managing partner at Robins Kaplan, LLP, underscored this point: “As professionals, we have a duty to ensure access to legal services for those who cannot afford them. As a complement to pro bono work on individual cases, board work for legal service organizations is a powerful way to fulfill that duty.”

By supporting board service, law firms can foster a culture of leadership and community engagement, ultimately benefiting their clients and the broader community. Encouraging board participation is an investment not just in individual lawyers but also in the firm’s long-term success and the societal contribution of its attorneys.

As money continues to flow into the private credit investment strategy, it is worth considering what effect this movement will have on corporate credit generally and, more specifically, on restructurings. Key differences between private and syndicated debt often lead to vastly different restructuring options and outcomes. The divergence in options and outcomes has become more pronounced by recent trends over the last three to five years in the syndicated loan market with respect to stressed and distressed companies, including earlier lender organization, cooperation agreements, and non–pro rata “liability management” transactions.

What Is Private Credit?

What is private credit? No one knows, but it sounds provocative; it gets investors going. Jokes aside, a recent report from the Federal Reserve has a good definition: non-publicly-traded debt provided by non-bank entities that “involves the bilateral negotiation of terms and conditions to meet the specific needs and objectives of the individual borrower and lender, without the need to comply with traditional regulatory requirements.”^[1] Private credit lending deals typically involve a single direct lender or a “club” of a few unaffiliated lenders. Since borrowers and sponsors choose their lenders in connection with financing, private credit is a relationship business. The sponsors usually have a relationship with at least one of the lenders prior to doing a new deal, and the lenders usually have relationships among themselves. In times like the present, where the amount of private credit capital available to deploy exceeds the opportunities, these relationships are especially important.^[2] Private credit is typically not rated, nor broadly traded with public pricing quotes. Private credit loans are less liquid than syndicated loans, and they are less likely to be traded due to borrower financial distress and/or for purposes of avoiding involvement in a restructuring transaction.

Restructuring Trends in the Syndicated Loan Market

Public Trading and Ratings; Lender Organization

In contrast to private credit, syndicated loans are rated and broadly traded with public pricing quotations. Moreover, the originating lenders may sell the loan if a borrower becomes stressed (or distressed), often at a price well below par to a fund not previously invested in the credit. Further, such buyer may be purchasing the loan specifically in anticipation of restructuring or a liability management transaction.

Importantly, as a result of these dynamics, lenders often proactively organize into “ad hoc” groups at the first sign of operational or balance sheet stress, in anticipation of a restructuring transaction or new money capital raise. Lender organization itself may increase volatility, as news of lenders organizing will often get leaked to the market and cause lenders to sell out of the loan, which may cause loan trading prices to decrease further. In a worst-case scenario, vendors, customers, and landlords may cut exposure to the borrower (e.g., tighten trade credit). Early lender organization may frustrate the sponsor and/or the borrower; however, if it causes loan trading prices to decline, this may present an opportunity for the sponsor and borrower to capture discount via debt purchases or exchanges.

Non–Pro Rata Liability Management Transactions

Lenders often view the benefit of ensuring participation in an ad hoc group and inclusion in the “Required Lender” group as outweighing any costs or downsides of early organization. In contrast to private credit deals—where the lenders know who the co-lenders are and how much of the loan they hold—syndicated loan holdings are not disclosed unless the vehicle holding the loan, such as a business development company (“BDC”) or collateralized loan obligation (“CLO”) fund, has to publicly report its holdings. Thus, the lenders are in a literal race to join an ad hoc group that holds loans in the aggregate constituting “Required Lenders,” which permits (or ostensibly permits) a wide range of amendments and other restructuring transactions.^[3]

While there have always been economic benefits to controlling Required Lenders, the economic value has significantly increased owing to the well-documented trend of non–pro rata liability management transactions—colloquially referred to as “lender-on-lender violence.” The crux of these transactions—which come in many different flavors—is that the borrower receives new money from the ad hoc group, and the loans of the ad hoc group are elevated in lien and/or payment priority compared to the loans held by those not in the ad hoc group. This may also come with other bells and whistles, like a significant make-whole or double-dip structure.^[4]

A corollary of the opacity of lender identity and holdings in syndicated deals is the potential fluidity of the Required Lenders. An ad hoc group that holds 60 percent of outstanding loans today and, therefore, constitutes the Required Lenders could easily lose that status. The remaining 40 percent of outstanding loans could be held by twenty different institutions holding 2 percent each, or it could be held by one institution. In the latter scenario, there is a real risk that the 40 percent lender could either persuade a few members of the initial ad hoc group to disband and join the 40 percent lender’s new group, or just buy their loans and then constitute Required Lenders by itself.

Lender identity and holdings opacity significantly increase restructuring process risk and volatility in a world where non–pro rata liability management transactions are common. Ostensibly to address this risk, lawyers now encourage lenders of an ad hoc group to sign a cooperation agreement. Of course, the cooperation agreement itself is often viewed by lenders as a sign that a non–pro rata liability management transaction is in the cards, and it may cause lenders excluded from the coop group to sell their loans.^[5]

Private Credit v. Syndicated Loan Restructurings

A borrower will necessarily have more restructuring options when it is negotiating with a single or a few lenders as compared to potentially dozens of unaffiliated lenders. As a practical matter, it is easier to implement an out-of-court restructuring, maturity extension, or payment-in-kind (“PIK”)/defer cash interest—or any other transaction implicating “sacred” rights (i.e., amendments that require the consent of all lenders instead of just Required Lenders)—if only a few lenders need to consent. Further, given that private credit is a relationship business, the borrower/sponsor may feel more comfortable engaging in restructuring/recapitalization negotiations or sharing information with lenders far earlier than they would with respect to a syndicated loan facility. The private credit lenders are likely to be aligned with each other on a general restructuring philosophy well before making the loan. In contrast, in the syndicated loan market, different lending vehicles have different strategies (e.g., compare a CLO manager with a loan-to-own hedge fund).

Finally, and most importantly, given the relationships that private credit lenders typically have with each other—which can be leveraged as part of originating and documenting the loan and later in connection with any subsequent liability management or restructuring transaction—non–pro rata liability management transactions among private credit lenders are rare. Such transactions often divide a single class of lenders into winners and losers, which may eliminate as viable options a balance sheet restructuring/recapitalization effectuated out of court or via a prepackaged Chapter 11 plan. In a worst-case scenario (e.g., Serta, Robertshaw), expensive intercreditor litigation among the “winners and losers” may reduce recoveries for all stakeholders, as the incremental cash costs of such litigation are significant.^[6]

That being said, private credit is not all a bed of roses. The same dynamics that add restructuring optionality to private credit—fewer lenders, lender/sponsor relationships, lack of price discovery and trading—may result in more “can kicking.” Further, lack of trading and price discovery also mean less liquidity, which, as Jamie Dimon recently suggested, may create additional downside risk in an economic downturn.^[7] Finally, while aggressive liability management transactions may create more restructuring costs and reduce options on the back end, they present the sponsor and borrower with significantly more opportunity to capture debt discount, which reduces leverage and increases equity value.

1. Fang Cai and Sharjil Haque, “Private Credit: Characteristics and Risks,” FEDS Notes, Board of Governors of the Federal Reserve System, February 23, 2024. ↑

2. John Sage and Carmen Arroyo, “Private Credit Has Too Much Cash and Not Enough Places to Put It,” Bloomberg, May 23, 2024. ↑

3. The broad rights of “Required Lenders” are described in my article “Key Issues in Standing to Challenge Liability Management-Related Transactions,” The Review of Banking & Financial Services 39, no. 10 (October 2023): 121–129. ↑

4. See “How Did They Do It? At Home Group and the ‘Double Dip’ Claim Financing Structure,” King & Spalding LLP. ↑

5. Reshmi Basu and Jill R. Shah, “The Gulf Between Restructuring’s Winners and Losers Is Growing,” The Brink (newsletter), Bloomberg, June 29, 2024. ↑

6. See In re Serta Simmons Bedding, LLC, No. 23-90020 (DRJ) (Bankr. S.D. Tex. filed Jan. 24, 2023); In re Robertshaw US Holding Corp., No. 24-90052 (CML) (Bankr. S.D. Tex. filed Feb. 15, 2024). Both of these cases involved costly intercreditor litigation over prepetition liability management financings. ↑

7. Hannah Levitt, “Dimon Says ‘Could Be Hell to Pay’ If Private Credit Sours,” Bloomberg, May 29, 2024. ↑

The recent growth in state healthcare transaction review laws is requiring parties to healthcare transactions to dust off their due diligence and closing checklists to conform to new requirements. Within the past few years, an increasing number of states^[1] have enacted legislation designed to review the impact of certain healthcare transactions on cost, quality, access, need, competition, and other related issues, affecting entities and transactions that have not previously been the focus of regulatory scrutiny (“Transaction Review Laws”).^[2] Anyone considering a healthcare transaction, particularly those with healthcare services providers, should be aware that Transaction Review Laws exist and are on the rise; they should factor them into their regulatory analysis and appreciate how transaction reviews by state regulators have and will change the nature of certain transactions. This article provides an overview of how to navigate Transaction Review Laws by the types of transactions that are reviewable, parties subject to review, notice and approval requirements, and applicable exceptions.

While there is some variation in the policy priorities driving different state initiatives, most states have an emphasis on addressing competition, market concentration, quality, accessibility of services, and cost containment. A few states also give attention to health equity and equitable access to care. Some states want to create more transparency and inform the public by creating oversight over investor-backed entities and unlicensed entities involved in the provision of healthcare.

Key Elements

Most states define the types of transactions covered by the applicable law as a “material transaction” or a transaction that results in a “material change.” Many states include any transaction that involves a change of control in the definition of “material transaction” or “material change.” Some states have thresholds of what constitutes “material” and also consider whether a transaction is part of a series of related transactions that take place over a specified period of time for purposes of meeting a threshold. As examples:

• New York defines a “material transaction”^[3] as a merger with a healthcare entity; an acquisition of one or more healthcare entities; an affiliation agreement or contract between a healthcare entity and another person; or the formation of a partnership, joint venture, accountable care organization, parent organization, or management services organization to administer contracts with health plans, third-party administrators, pharmacy benefit managers (“PBMs”), or healthcare providers as prescribed by the commissioner by regulation. Notice is required for any “material transaction,” whether in a single transaction or through a series of related transactions that take place within a rolling twelve-month period.
• California defines a “material change”^[4] to include both transactions with financial thresholds and transactions without financial thresholds. Transactions with financial thresholds involve healthcare services that have a fair market value of at least $25 million; will more likely than not (to be determined based on financial information submitted) increase annual California revenue of any healthcare entity party by at least $10 million or 20 percent of annual California revenue; involve the formation of a new healthcare entity projected to have $25 million in annual California revenue; or involve healthcare entities joining, merging, or affiliating where any entity has at least $10 million in annual revenue. Transactions without financial thresholds are those that involve a transfer or change of control of a healthcare entity; a sale, transfer, lease, or other disposition of 25 percent or more of the California assets of any healthcare entity; and a change in the form of ownership of a healthcare entity. For purposes of determining the revenue thresholds and asset and control circumstances, the law applies if the transaction (i) is part of a series of related transactions for the same or related healthcare services occurring over the past ten years involving the same healthcare entities or entities affiliated with the same entities or (ii) involves the acquisition of a healthcare entity by another entity and the acquiring entity has consummated a similar transaction or transactions over the past ten years.

States such as Colorado, Connecticut, New Mexico, Rhode Island, and Vermont have no materiality thresholds.

Even in states where a threshold may seem clear, applying the threshold can be a challenge. For example, Indiana’s law requires a healthcare entity involved in an acquisition or merger with another healthcare entity with total assets of at least $10 million (including combined entities and holdings) to provide notice, but the law does not state whether the $10 million applies to all assets or only Indiana assets. Similarly, Oregon’s law applies if one entity to a transaction has at least $25 million in annual revenue and one entity has at least $10 million in annual revenue (in each, average over the last three years), but the law does not specify if it is in-state revenue or all revenue.

States differ on the type of healthcare entities that are subject to a transaction review. Almost all states include group practices, hospitals, and hospital systems. Certain states include management service organizations and similar entities that provide administrative or management services to physician practices, and some also include organizations that represent healthcare providers in contracting with carriers and third-party administrators for the payment of healthcare services. Some states include health insurance plans, insurers, PBMs, payors, and Medicare advantage plans. As examples:

• Minnesota defines healthcare entities to include hospitals, hospital systems, captive professional entities, medical foundations, healthcare provider group practices, and any entities that are controlled by, or that exercise control over, any of the foregoing healthcare entities.^[5]
• Delaware defines entities covered by the law as including any not-for-profit healthcare entity seeking to engage in a not-for-profit healthcare conversion transaction.^[6]
• Indiana defines healthcare entity to include providers of healthcare services, health and accident insurers, health maintenance organizations (“HMOs”), PBMs, administrators, and private equity partnerships, regardless of where located, entering into a transaction with any of the foregoing.^[7]

Just as states differ in the types of entities subject to Transaction Review Laws, they differ on which transactions and entities are not subject to review. As examples:

• Nevada excludes transactions involving businesses that are under common ownership or have a contracting relationship that was established before October 1, 2021, from review.^[8]
• Massachusetts excludes providers or provider organizations with less than $25 million in net patient service revenue from review.^[9]

All Transaction Review Laws require parties to provide notice with some waiting period prior to closing. Some laws also require pre-closing approval of the transaction. As examples:

• New York requires that notice of a material transaction be provided to the New York State Department of Health (“DOH”) thirty days before the transaction’s closing date. The DOH does not approve or disapprove any transaction; rather, the DOH must immediately forward the notice to the New York Attorney General’s antitrust, healthcare, and charities bureaus. Post-closing notice to the DOH is also required.
• New Mexico requires that notice be provided to the Office of the Superintendent of Insurance at least 120 days prior to a transaction closing.
• Oregon requires pre-closing approval by the Oregon Health Authority (“OHA”). Notice must be submitted to the OHA no later than 180 days prior to closing of the transaction. The OHA then has thirty days to approve, approve with conditions, or decide to conduct a more comprehensive review of the transaction.

Practical Considerations

In addition to understanding the fundamentals of Transaction Review Laws, there are a few practical issues to consider involving the timing of the review, the information to be disclosed, and the structure of a transaction.

Reviews, whether involving an approval or notice, will have an effect on transaction timing. Counsel and parties to transactions should monitor the process and timing from notice to completion, particularly because a transaction review may not align with other regulatory review and approval requirements. While advance notice requirements generally range from thirty days to ninety days prior to closing, regulators often request additional information, which can extend timelines. For example, in Massachusetts, Oregon, and California, the regulator may conduct a more extensive review, extending the pre-transaction review period to 180 days or more. Complete applications and thoughtful communication with regulators can make for a more efficient review process.

Parties to transactions that have to comply with Transaction Review Laws must be aware that they will likely be subject to public disclosure of transaction documents, ownership information, and equity and debt structures. Some statutory schemes may have exceptions to public disclosure based on the confidentiality of business-related information; however, many do not. More often, in the schemes that do have such protections, parties must request protection prior to any type of disclosure.

One of the most notable features of many Transaction Review Laws is how a particular regulatory framework ensures the law applies to scenarios in which not simply ownership, but some type of effective control has been assumed. This often comes up in the context of entering into a management services relationship that fits within a state’s definition of “material change” or “material transaction.” These kinds of frameworks also raise other questions as to whether the definitions might extend, for example, to a management and lease arrangement between a landlord and an operator of a senior housing facility. Parties to contractual arrangements where significant “control” might be exercised must carefully review whether entering into the contractual arrangement itself may trigger review. Many states with Transaction Review Laws are also states with corporate practice prohibitions. Parties to arrangements between professionals and management companies may have to rethink their normal operating processes if the control that is exercised via the business relationship does not violate corporate practice prohibitions but does trigger review.

Below are some general recommendations for parties to transactions that are subject to Transaction Review Laws:

• Early in the deal process, closely consider the statutory review factors such as overall cost, equity, competition, and availability of healthcare services, and document the review and analysis.
• Update due diligence processes to identify issues that will be subject to scrutiny or could result in disapproval.
• Be aware of the potential for increased transaction costs, and update budgets and pro formas accordingly.
• Be prepared for new levels of transparency that result from the review process.
• Understand the requirements for disclosure of proprietary information or the necessity for a request that certain information not be subject to public disclosure.
• Educate business development, operations, and transaction teams about these laws and the lengthier transaction timelines they entail.

Conclusion

In summary, several states have enacted Transaction Review Laws designed to review healthcare entities and transactions that have traditionally not been subject to review. States differ on how they determine which entities and transactions are reviewable. Parties to healthcare transactions need to understand which states have enacted laws, which states are considering them, and how a particular state’s law will affect either a current or future transaction. As Transaction Review Laws expand, patience and thoroughness will be key for parties when navigating processes and requirements that are not always clear and may raise more questions than answers.

Table of Current State Transaction Review Laws

1. Many states have modeled their legislation on the National Academy for State Health Policy’s Model Act for State Oversight of Proposed Health Care Mergers. See A Model Act for State Oversight of Proposed Health Care Mergers, National Academy for State Health Policy (Nov. 12, 2021). ↑

2. A full list of current state Transaction Review Laws is included at the end of this article. ↑

3. N.Y. Pub. Health L. § 4550(4)(a). ↑

4. Cal. Code Regs. tit. 22, § 97435(c). ↑

5. 2023 Minn. Laws page no. 225. ↑

6. Del. Code Ann. tit. 29 § 2532. ↑

7. Senate Enrolled Act No. 9 ch. 8.5 § 2(a). ↑

8. Nev. Rev. Stat. § 598A.370(2)(b). ↑

9. Mass. Gen. Laws ch. 6D § 10(a). ↑

Consumers often are able to effect transactions by providing payment authorization ahead of time. How often a consumer may authorize a prescheduled transaction differs slightly under Regulation E and the National Automated Clearing House Association (“NACHA”) Operating Rules and Guidelines (“NACHA Rules”). Very generally, Regulation E governs preauthorized electronic fund transfers (“EFTs”), while the NACHA Rules govern standing authorizations. However, both provide certain sets of rules and guidelines of how this can occur, and each is beneficial to the consumer.

At a high level, Regulation E provides guidelines for consumers and banks or other financial institutions in the context of EFTs, including point-of-sale transactions, ACH transactions and systems, and automated teller machines (“ATMs”). The requirements of Regulation E apply to a consumer account when there is an agreement for EFT services to or from the account between a consumer and a financial institution or between a consumer and a third party. A preauthorized EFT is a transaction that is authorized by the consumer in advance of a transfer that will take place on a recurring basis at substantially regular intervals. After the debit is authorized, further authorization or action by the consumer to initiate a transfer will not be required. In the scenario of a consumer and third-party relationship, the account-holding institution will receive notice of the agreement for preauthorized EFTs.

The NACHA standing authorization permits advanced authorization of future debits initiated by a consumer at varied, unscheduled intervals, without requiring either a single or recurring authorization. The standing authorization must specify how the consumer may initiate future subsequent debits or “subsequent entries,” and each subsequent entry must be separately initiated by an affirmative act by the consumer. Examples of such permissible affirmative acts include, but are not limited to, text messages, mobile app confirmations, emails, telephone calls, and ATM or point-of-sale terminal transactions. All authorizations must be in clear and understandable terms, as well as readily identifiable.

There is some overlap between standing authorizations and preauthorized EFTs; generally, both types of transaction authorizations can be provided in writing or electronically. Regulation E’s requirements are more stringent, requiring a writing signed or similarly authenticated by the consumer. By contrast, standing authorizations can be provided orally, electronically, or in writing. Further, each governing scheme specifies the timing of how such authorizations must be provided to an originator, bank, or other financial institution in order to process the transaction; they also require record retention after the transaction settles. Practically, both types of transactions should simplify electronic payments for consumers by reducing the frequency at which a consumer needs to initiate an EFT.

While the preauthorized EFT provides consumers with a mechanism for consistent and convenient debits—which often come into play with, for example, certain monthly or quarterly transactions, such as making a car payment or mortgage payment—the standing authorization provides consumers with more flexibility to initiate EFTs for transactions that occur frequently enough to justify preauthorization, but not on a set schedule. The lack of rigidity coupled with the provision of a separately initiated subsequent entry by the consumer gives consumers greater access to financial services. Additionally, the standing authorization allows originators a middle ground between a single authorization/entry and recurring ones. Ultimately, both payment schemes provide consumers and originators with greater payment access.