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Assistant Editor

Contributors

§ 1.1. Introduction

Over the last few years, we have continued to see a large push for a narrowing of the use of noncompetition agreements, including the Biden Administration issuing an executive order directing multiple federal departments and agencies to take action against the unfair use of noncompete agreements and revise guidance on no-poach agreements. On January 5, 2023, the Federal Trade Commission (“FTC”) gave notice of a proposed rule to ban noncompete clauses for all workers, including independent contractors, volunteers, and interns. The proposed rule broadly prohibits traditional post-employment noncompetes and would result in significant changes for employers that routinely use noncompetes to protect their valuable trade secrets. If it becomes effective, the rule would require employers to rescind existing noncompete agreements within 180 days of publication of a final rule and to provide individualized notice to all current and former workers previously covered by a noncompete that the noncompete is no longer in effect. Further, this rule supersedes any state law contrary to the noncompete ban, but not any law providing greater protections for workers. The public comment period ended on March 20, 2023, after which the FTC will review the comments and publish a final rule. If and when the rule goes into effect, protecting trade secrets will be more important than ever for employers.

Additionally, the continued remote work and access to technology during these unprecedented times will continue to create more opportunities for departing employees to retain and misuse their former employer’s confidential information. Trade secret misappropriation litigation will continue to be on the rise. This Chapter provides an overview of recent developments in case law and will continue to serve as a practical guide for business law practitioners navigating new changes in employee mobility issues and the protection of trade secrets.

§ 1.2. Employee Mobility: Breach of Duty of Loyalty; Breach of Fiduciary Duties

§ 1.2.1. United States Supreme Court

There were no qualifying decisions by the United States Supreme Court.

§ 1.2.2. First Circuit

There were no qualifying decisions within the First Circuit.

§ 1.2.3. Second Circuit

Zurich Am. Life Ins. Co. v. Nagel, 590 F. Supp. 3d 702 (S.D.N.Y. 2022), reconsideration denied, 2022 WL 1173885 (S.D.N.Y. 2022). The District Court found that an employee emailing documents to his personal account or retaining those documents after his employment was terminated did not constitute a breach of his fiduciary duties to the company because there is no evidence that he ever shared those documents with anyone other than his lawyer. Because the employee did not use the information to compete or divert business opportunities from his former employer, simply sending and keeping the information was not a breach of fiduciary duty. Further, the employee’s attempt to use those documents to leverage a severance package did not constitute a breach of fiduciary duty.

§ 1.2.4. Third Circuit

There were no qualifying decisions within the Third Circuit.

§ 1.2.5. Fourth Circuit

Adnet, Inc. v. Soni, 2021 U.S. Dist. LEXIS 177825 (E.D. Va. 2021), appeal filed (Oct. 20, 2021). The U.S. District Court for the Eastern District of Virginia denied an employer’s motion for summary judgment of claims brought against three employees for breach of loyalty, tortious interference, and business conspiracy, and granted the employees competing motion. There, the U.S. Army awarded a contract to the employer. The employer hired three employees who incorporated their own company providing similar services as the employer. The Army transitioned the work originally awarded to the employer to a third party, General Dynamics Technology, Inc. (GDIT). The employer and the employees’ company competed for the subcontract with GDIT. GDIT awarded the subcontract to the employees’ company. The work with GDIT was to begin after the employees’ job termination with the employer. The District Court denied the employer summary judgment on its breach of the duty of loyalty claim, and granted the employees competing motion, because the employer did not have a preexisting contractual or client relationship with GDIT and the employees were preparing for future employment rather than soliciting employer’s current clients. The District Court also denied the employer summary judgment on the tortious interference claim because the employer failed to establish the existence of a valid contractual relationship or business expectancy. Finally, the District Court also denied the employer summary judgment on its conspiracy claims because their predicate acts failed.

Additional Cases of Note

LStar Dev. Grp., Inc. v. Vining, 2021 U.S. LEXIS 181972 (E.D.N.C. 2021) (denying defendant’s motion to dismiss plaintiff’s breach of fiduciary duty and conflict of interest claim which alleged that employees violated their duty of loyalty to plaintiff by forming defendant entity using plaintiff’s money, equipment, employees, and facility to operate the entity, and attempted to divert plaintiff’s corporate business opportunities to defendant entity).

§ 1.2.6. Fifth Circuit

Trench Tech Int’l, Inc. v. Tech Con Trenching, Inc., 2022 U.S. Dist. LEXIS 100280 (N.D. Tex. 2022). Trench Tech Int’l designs, manufactures, and sells trench-digging machines. Trench-Tech, Ltd. (owned by Trench Tech Int’l), was the domestic seller of parts for Trench Tech Int’l. An owner of Trench Tech Int’l had a son who worked for Trench Tech Ltd. The son downloaded design drawings owned by Trench Tech Int’l to his personal laptop. He and another Trench Tech Ltd. employee then left for a competitor, Tech Con Trenching (Tech Con). Tech Con allegedly used the downloaded information to build several machines. Trench Tech Int’l and Trench Tech Ltd. (Plaintiffs) sued Tech Con and the former employees (Defendants) for trade secret misappropriation and breach of fiduciary duty, among other claims. Defendants moved for summary judgment, arguing, in part, that the son owed a duty of confidence and fiduciary duty only to his direct employer, Trench-Tech, Ltd., and not to the owner of the trade secrets, Trench Tech Int’l. The court rejected this argument, noting that defendants failed to cite any authority restricting a confidential or fiduciary relationship to employer-employee relationships. The son was entrusted with trade secrets and “knew” of his duty to maintain their confidentiality. As such, the formalities of plaintiffs’ formation did not preclude a finding that he breached his duties.

Additional Cases of Note

Winsupply E. Houston v. Blackmon, 2021 U.S. Dist. LEXIS 225067 (S.D. Tex 2021) , appeal dismissed 2022 U.S. App. LEXIS 34871 (5th Cir. (Tex.) 2022) (denying preliminary injunction stemming from defendant’s alleged breach of fiduciary duty where (1) defendant had already terminated her employment with the plaintiff, thus ending her fiduciary duty to the plaintiff and (2) the plaintiff’s ultimate harm—loss of customer sales—could be compensated by a damages award).

§ 1.2.7. Sixth Circuit

There were no qualifying decisions within the Sixth Circuit.

§ 1.2.8. Seventh Circuit

Cary v. Northeast Ill. Reg’l Commuter R.R. Corp., 2021 U.S. Dist. LEXIS 244865 (N.D. Ill. 2021). Cary resigned from her position with Metra. In connection with her employment and resignation, Cary sued Metra and forwarded certain confidential documents to her attorney and her own personal email address. Metra filed a counterclaim against Cary for breach of fiduciary duty based on Cary’s act of forwarding the confidential documents. Cary moved to dismiss the counterclaim and argued that forwarding documents to oneself and one’s counsel cannot support a claim for breach of fiduciary duty. Metra argued that any act sharing of sharing confidential documents outside the workplace could support its claim. The Court found that each party’s position was “too extreme.” While the Court noted that no Illinois court had directly addressed this issue, it found that “Illinois law would likely not punish an employee who lawfully obtains records; discloses only those records reasonably necessary to develop a lawsuit; and discloses the records only to the employee’s attorneys and, later, to the pertinent government agency.” Nevertheless, Metra’s counterclaim survived due to the need for more information regarding the nature of the confidential documents at issue.

§ 1.2.9. Eighth Circuit

Moeschler v. Honkamp Krueger Fin. Servs., Inc., 2021 U.S. Dist. LEXIS 179787, (D. Minn. 2021). The U.S. District Court for the District of Minnesota denied the employer’s motion for a preliminary injunction seeking to restrict a former employee’s ability to work for a direct competitor, in part on the grounds that soliciting customers from memory does not constitute statutory misappropriation of trade secrets. Former employee, Peter Moeschler (Moeschler), resigned from his position at asset management company, Honkamp Krueger Financial Services, Inc. (HKFS), to work for competitor Mariner, LLC (Mariner). The same day that he resigned, he filed an action for declaratory judgment that HKFS’s restrictive covenants were unenforceable. HKFS filed counterclaims against Moeschler and Mariner alleging breach of contract, violation of Iowa’s Uniform Trade Secrets Act (IUTSA), and tortious interference with contractual relations. Moeschler called former clients based on public information or phone numbers he had committed to memory, which HKFS claimed resulted in an $11 million loss of assets to Mariner. Moeschler submitted an affidavit stating that he deleted all business contacts at the time of his resignation and that he hired a forensic expert to ensure he did not have protected information on his personal devices. The court declined to consider names and general information retained in a former employee’s memory to be trade secrets, so Moeschler had not used or disclosed trade secrets. However, the District Court did find that although he did not violate IUTSA, HKFS had established a likelihood of success on the claim that Moeschler breached an agreement prohibiting use of HKFS’s client contacts. Nonetheless, the court denied HKFS’s motion for a preliminary injunction on the grounds that HKFS failed to establish irreparable harm.

§ 1.2.10. Ninth Circuit

Aitkin v. USI Ins. Serv., LLC, 607 F. Supp. 3d 1126 (D. Ore. 2022). District of Oregon held that breach of garden leave provision could not serve as a predicate breach for breach of loyalty claim law under Oregon law. Plaintiff submitted his resignation on February 4, 2021. Defendants argue that because plaintiff failed to provide 60-days’ notice as required by the Employment Agreement, his resignation was not effective until April 4, 2021. Defendants claimed that plaintiff breached a duty of loyalty he owed to USI between February 4, 2021, and April 4, 2021, when he publicly displayed on his LinkedIn page that he worked for Alliant and directed his former USI clients to call Alliant representatives.

While the court acknowledged that plaintiff breached the garden leave provision of his Employment Agreement by not providing 60-days’ notice, the employee has the power to terminate his employment at any time. Thus, defendants could not compel plaintiff to remain their employee after he resigned, and his resignation was effective on the date he provided. And plaintiff only owed defendants a duty of loyalty until the date and time he effectively resigned.

Accordingly, for defendants to have a viable claim that plaintiff breached his duty of loyalty, they must present facts showing plaintiff’s breaching conduct before he resigned on February 4, 2021. Defendants provide no such evidence. Defendants only allegation that plaintiff engaged in conduct breaching his duty of loyalty is that on information and belief, plaintiff participated in and withheld information about a planned group departure from USI. But under Oregon law, nothing prevents an employee under contract from seeking other employment. Oregon law generally favors the freedom of employees to choose where they work. Because defendants present no evidence that plaintiff engaged in conduct that breached his duty of loyalty while he was employed at USI, the Court granted summary judgment for plaintiff on this claim.

Best Label Co. v. Custom Label & Decal, LLC, 2022 WL 1189884 (N.D. Cal. 2022). California district court found that alleged unlawful statements made to divert business to customers were not preempted by state trade secret statute. Defendants argued causes of action for breach of duty of loyalty, unlawful interference with prospective economic advantage, and statutory unfair competition, respectively, are superseded by CUTSA. While it is true that CUTSA can supersede other claims, it only does so if the claim(s) are based on the same nucleus of facts as the misappropriation of trade secrets claim for relief. Plaintiff argued it premised these claims on defendants’ alleged statements made to divert business to plaintiff’s competitor, defendant CLD, while the individual defendants still worked for plaintiff. Plaintiff also premised these causes of action upon defendants’ alleged solicitation of BLCI/BLC LLC employees to join its competitor, defendant CLD, while defendants were still employed by BLCI/BLC LLC. The court found that they stand as independent claims, supported by alleged facts beyond misappropriation of trade secrets, and therefore were not superseded by CUTSA.

§ 1.2.11. Tenth Circuit

Southwest Preferred Fin., Inc. v. Bowermeister, 2022 N.M. App. Unpub. LEXIS 190 (N.M. Ct. App. 2022). Plaintiff Southwest Preferred Financial, Inc. (“Southwest”) appealed the judgment of the district court dismissing all of Southwest’s claims following a bench trial. The appellate court affirmed the district court’s judgment dismissing all claims. Southwest hired Jason Bowermeister (“Bowermeister”) to fill an entry-level, unskilled position at Southwest’s gold and precious metals store. He signed a written agreement not to compete in 2012 and another noncompete agreement in 2013 that was significantly more expansive. The 2013 noncompete agreement prohibited Bowermeister from working for or forming any competitive business within 25 miles of anywhere Southwest had a physical store or anywhere Southwest has an internet presence for three years following termination of employment. Bowermeister resigned and then later formed a business that bought and sold precious metal and coins. Southwest initiated a lawsuit; the district court held a bench trial and concluded that the noncompete agreement was too large and wide, and it was not supported by consideration because Bowermeister did not receive an increase when he signed the new agreement in 2013. Southwest failed to establish that there were any damages proximately caused by competition from Bowermeister’s business, and Southwest failed to offer any evidence of harm as a result of Bowermeister’s conduct that resulted in a breach of the duty of loyalty. The appellate court, affirming the district court’s dismissal of all claims, agreed with the district court that the 2013 agreement was unreasonably restrictive in terms of the length of time, the geographic area, and the types of employment precluded, which was sufficient to make the agreement unenforceable, and that Southwest did not suffer any harm as a result of a breach of fiduciary duty or breach of the duty of loyalty.

§ 1.2.12. Eleventh Circuit

Klaas v. Allstate Ins. Co., 21 F.4th 759 (11th Cir. (Ala.) 2021), cert. denied 143 S. Ct. 233 (2022) and 143 S. Ct. 85 (2022). Allstate, an insurance company, informed former employees who retired after 1990—in 2013—that it would stop paying the premiums on their life insurance policies at the end of 2015. For many years, Allstate offered employees who met certain qualifications life insurance that continued into retirement, and Allstate provided its employees with information about life insurance in summary plan descriptions. The summary plan descriptions reserved for Allstate the right to modify or terminate the benefit plan. Allstate had previously made representations, both orally and in writing, to employees that their retiree life insurance benefits were “paid up” or “for life.” After the company made this decision, two putative classes sued Allstate seeking declaratory and injunctive relief and alleged that Allstate (1) violated the Employee Retirement Income Security Act of 1974 (ERISA) by no longer paying the insurance premiums and (2) breached its fiduciary duty to them by failing to provide full and accurate information about their retiree life insurance. The district court granted summary judgment to Allstate on all claims, concluding that the benefit plan documents unambiguously gave Allstate the power to terminate the life insurance benefits and that retiree classes’ claims for breach of fiduciary duty were time barred. The plaintiffs appealed, arguing that the district court (1) erred by concluding that the language in the benefit plan documents was unambiguous and by failing to consider extrinsic evidence and (2) incorrectly determined that their breach of fiduciary duty claims were untimely. The Eleventh Circuit held that (1) Allstate’s actions did not give rise to an ERISA § 502(a)(1)(B) claim because the summary plan descriptions unambiguously gave Allstate the right to terminate the retiree life insurance and the district court correctly granted summary judgment to Allstate. The Eleventh Circuit also held that none of the employees filed their respective suits within six years of the last action by the employer that could constitute a breach of fiduciary duty so the actions occurred outside of statute of repose period and were subject to summary judgment.

Gimeno v. NCHMD, Inc., 38 F.4th 910 (11th Cir. (Fla.) 2022). Plaintiff Raniero Gimeno’s spouse, Justin Polga, was employed by NCHMD, Inc., which is a subsidiary of NCH Healthcare System, Inc. During the initial hiring process, with the help from NCHMD’s human resources staff, Polga completed enrollment paperwork for life insurance benefits through an ERISA plan. Gimeno was the primary beneficiary under the plan, and NCH Healthcare was the named plan administrator. Polga elected to receive supplemental coverage, but did not submit the necessary evidence of insurability form because it was not included in the enrollment paperwork. NCHMD’s human resources staff did not notify him that the form was necessary or missing. Nonetheless, for three years, NCHMD deducted premiums corresponding to the supplemental life insurance coverage from Polga’s paychecks. Polga died, and Gimeno filed a claim for benefits with the plan’s insurance company under 29 U.S.C. § 1132(a)(1)(B), which allows a beneficiary to bring a civil action “to recover benefits due to him under the terms of his plan.” The insurance company refused to pay any supplemental benefits because it had never received the form. Gimeno sought leave to amend his complaint to assert his claims for breach of fiduciary duty under section 1132(a)(3), but the district court denied. The appellate court reversed and remanded to allow Gimeno to bring a claim for breach of fiduciary duty. The appellate court found that both NCHMD and NCH Healthcare were fiduciaries under ERISA as those who “‘exercise[] any discretionary authority or discretionary control respecting management’ or ‘administration’ of the plan.” In finding NCHMD as a fiduciary despite it not being a named administrator, the appellate court relied on the factual circumstances under which NCHMD’s human resources staff effectively assumed the function of administrating the plan for Polga.

§ 1.2.13. D.C. Circuit

Hirecounsel D.C., LLC v. Connolly, 2021 U.S. Dist. LEXIS 242370 (D.D.C. 2021) (unpublished). Defendant Connolly worked for plaintiff, HIRECounsel D.C., LLC, a legal staffing and document management company. Connolly, based in HIRECounsel’s Boston office, worked as a managing director of client relations. Connolly signed an agreement with HIRECounsel. The agreement contained a nondisclosure covenant, which forbid the use, disclosure, or removal of HIRECounsel’s confidential information. The agreement also contained a noncompetition restriction, which lasted for 12 months and forbid Connolly from being employed by a competitor of HIRECounsel within 75 miles of any its offices. Connolly eventually resigned from HIRECounsel and joined a competitor, Beacon Hill Staffing, LLC, in their Boston office. Further, HIRECounsel learned that Connolly allegedly screenshotted confidential information during a virtual meeting with superiors who had shared their computer screens with meeting participants. Connolly then allegedly forwarded the screenshot to his personal email address ten days before resigning. HIRECounsel sued alleging two breaches of contract and a violation of the District of Columbia Uniform Trade Secrets Act (DCUSA). Connolly moved to dismiss. In his Motion to Dismiss, Connolly argued that the noncompete provision was unenforceable because it was not reasonable. The court disagreed, noting that HIRECounsel has legitimate business interests in stopping former employees from taking confidential client information to competing firms. Further, the court noted that courts applying DC law have upheld 100-mile restrictive noncompete agreements. Second, Connolly argued that HIRECounsel failed to allege a violation of the nondisclosure covenant. The court disagreed. The court noted that HIRECounsel sufficiently described the image as containing “a confidential internal report” and that forwarding the image to his personal email violated the agreement. Finally, Connolly argued that he did not misappropriate trade secrets under DCUTSA because he did not access the information without permission nor did he use it for purposes other than work at HIRECounsel. The court disagreed, noting that he took the screenshot for use unrelated to his employment with HIRECounsel and that it was improper for him to email the screenshot to his personal email ten days before resigning. The court also noted that the plain language of DCUTSA does not require an improper use; simply acquiring a trade secret through an improper means is sufficient to violate the statute.

§ 1.2.14. State Cases

There were no qualifying decisions within the State Cases.

§ 1.3. Restrictive Covenants: Covenants Not to Compete

§ 1.3.1. United States Supreme Court

There were no qualifying decisions by the United States Supreme Court.

§ 1.3.2. First Circuit

Idexx Lab’ys v. Bilbrough, 2022 U.S. Dist. LEXIS 136676 (D. Me. 2022), report and recommendation adopted, dismissed by, 2022 U.S. Dist. LEXIS 181179 (D.Me. Oct. 4, 2022). Magistrate Nivoson of the U.S. District Court of Maine recommended dismissal of plaintiff Idexx Laboratories’ (Idexx) claim against its former employee, Bilbrough. The Court reasoned that the majority of courts have rejected the theory that the Inevitable Disclosure Doctrine (IDD) applies based on the language and history of the Defend Trade Secrets Act (DTSA). Idexx alleged that Bilbrough would necessarily misappropriate its trade secrets in his current employment at a competitor in violation of the federal DTSA and the Maine Uniform Trade Secrets Act (MUTSA). Thus, Idexx sought to enjoin him from disclosing Idexx’s trade secrets and from working on product offers that implicated the trade secret information. The Court dismissed the claim for failing to assert an actionable federal claim. Regarding his motion to dismiss, Bilbrough focused on the third element of a misappropriation claim, arguing Idexx had not sufficiently alleged an actionable “use” of its trade secrets. Idexx’s claim was based on the information Bilbrough knew and the concern that he would disclose the information. The Court found that to the extent there is an ambiguity in the DTSA, a review of the development of the statute suggests Congress did not intend the IDD to apply to DTSA claims. Based on the plain language of the statute, the Court held that the IDD does not apply to claims brought pursuant to the DTSA, thus Idexx had not alleged an actionable claim under the DTSA. Regarding the MUTSA claim, the Court stated that whether a court could apply the IDD is an open question under Maine law and therefore, the issue should be decided in state court.

§ 1.3.3. Second Circuit

New York Packaging II LLC v. Mustang Mktg. Grp. LLC, 2022 WL 604136 (E.D.N.Y. 2022). The District Court found that a company looking to enforce a covenant not to compete had failed to show that irreparable harm would occur if a former employee breached its noncompete clause. The Court rejected the argument that irreparable harm must be assumed based on an alleged breach of the noncompete. It also held that general allegations of loss of client relationships and customer good will is not sufficient to show irreparable harm.

§ 1.3.4. Third Circuit

Howmedica Osteonics Corp. v. Howard, 2022 WL 16362464 (D.N.J. 2022). Defendants Howard and Petulla were two surgical supply sales employees who lived and worked in California for a New Jersey-based corporation. Their employment agreements contained New Jersey choice-of-law provisions, as well as noncompete and customer nonsolicit provisions. Both Howard and Petulla resigned to go to a competitor. The court conducted a conflict-of-law analysis and determined that California’s interest was not materially greater than New Jersey’s and as such, the noncompete’s enforceability should be evaluated under New Jersey law. The court found New Jersey’s interest was as great as California’s because Howmedica’s senior leadership team was partially based in New Jersey; the company’s research and development, finance, and operations departments were located in New Jersey; the equipment and inventory were shipped from New Jersey; and the agreements were voluntarily negotiated to designate New Jersey law to control. The court found that under New Jersey law, the agreements were enforceable because customer relationships and goodwill are protectable interests under New Jersey law. They were not overly broad in scope at 12 and 18 months respectively and were limited to the geographic area the sales employees serviced. The court, however, blue-penciled the definition of customer to include only current customers, not prospective customers. The court granted summary judgment to Howmedica on its breach-of-contract claims for violations of the restrictive covenants.

Syzygy Integration LLC v. Harris, 616 F. Supp. 3d 439, 2022 WL 2869317 (E.D. Pa. 2022), appeal dismissed 2022 WL 18587916 (3d Cir. (Pa.) 2022. Harris signed an operating agreement with plaintiff Syzygy midway through his employment. Syzygy is a government contractor providing communications technology to the military, law enforcement, and other related agencies. The operating agreement entitled Harris to 2% of the membership interests in Syzygy and also contained various restrictive covenants, including an agreement not to compete. After Harris resigned in March of 2022, he received a buyout of his shares of the company. Syzygy learned of Harris’s intent to join a competitor and brought suit seeking an injunction in April 2022. Despite the fact that since joining the competitor firm, Harris had not solicited any customers, been a part of any client pitches, or done any sort of business development, the court found that he was likely in violation of his noncompete because he had become “engaged in ‘any other business’ which competes ‘in whole or in part’ with any business engaged in by” Syzygy. The court held that Syzygy’s minor breaches of the operating agreement, by failing to provide Harris with certain tax forms, did not relieve him of his obligations to comply with the agreement. The court granted the application for the preliminary injunction enforcing the noncompete agreement under Pennsylvania law, and blue-penciled the five-year agreement with no geographic restriction to one with no geographic restriction for two years.

Rago v. Trifecta Techs., Inc., 2022 WL 2916688 (E.D. Pa. 2022). A former executive Rago worked for Trifecta Technologies. He brought suit against Trifecta for failure to pay wages pursuant to his employment agreement. Trifecta brought counterclaims against Rago claiming he breached his noncompetition and employment agreements by disparaging the company and competing with it after his termination. He moved to dismiss the counter claims for breach of the noncompetition agreement because he signed that agreement three days after he signed his employment agreement with Trifecta. He argued that because he already had agreed to the terms and conditions of employment, the noncompetition agreement was not supported by adequate consideration and was not “ancillary to an employment relationship” as required under Pennsylvania law. The court denied Rago’s motion to dismiss the counterclaims because his employment agreement that was signed three days prior to the noncompete referred to the noncompete agreement. Thus, as to the argument that the noncompete was not supported by adequate consideration, the Court held that the three-day gap between signing the agreements did not evince an effort by Trifecta to impose a noncompete later on in the relationship, and instead the same consideration for the employment agreement was also adequate for the noncompete.

ADP, Inc. v. Levin, 2022 WL 1184202 (3rd Cir. (N.J.) 2022). Matthew Levin, ADP’s Chief Strategy Officer, resigned his position to join competitor Benefitfocus as its president and CEO. ADP quickly filed a breach-of-contract claim, seeking a temporary restraining order and a preliminary injunction to prevent Levin from starting his new job. ADP claimed that Levin’s move violated several Restrictive Covenant Agreements that he had signed which prohibited him from providing “substantially similar services” as ADP to a competing business for 12 months after he left ADP. The District Court declined to issue a temporary restraining order and ruled from the bench denying ADP’s request for a preliminary injunction without any written opinion. ADP subsequently appealed claiming that the District Court abused its discretion. Upon review, the Third Circuit Court found that the District Court abused its discretion by failing to make findings on the record in compliance with Rule 52 of the Federal Rules of Civil Procedure and applying the wrong legal standard. However, instead of issuing a reversal and remand, the Circuit Court exercised its power under Rule 52 to issue its own ruling affirming the District Court’s decision because it reached the same conclusion under the correct legal standard. The Circuit Court held that to satisfy the irreparable harm prong of the four-factor balancing test for ruling on a preliminary injunction, the moving party had to establish they would specifically and personally risk irreparable harm if relief was denied. The Circuit Court found that ADP failed to meet its burden because it offered only conclusory allegations of how Levin had the potential to harm ADP and failed to show that Levin might actually cause any of the potential harm in his new role. Therefore, although a party seeking a preliminary injunction is not required to show actual harm by violation of the restrictive covenants, they must make a showing that is more than just speculative by showing a connection between the alleged potential harm and the employee’s new role.

§ 1.3.5. Fourth Circuit

Power Home Solar, LLC v. Sigora Solar, LLC, 2021 U.S. Dist. LEXIS 163753 (W.D. Va. 2021).^[1] The U.S. District Court for the Western District of Virginia held that a reasonable duration does not redeem a restrictive covenant where the function and geographic scope of the noncompete covenant vastly exceed a reasonable prohibition on trade. There, first, the noncompete covenant prohibited employees from engaging in “any employment or business” related to the commercial or residential solar-energy market in the entire United States. Second, the noncompete covenant’s geographic scope restricted all competition within 100 miles of each location of the employer’s locations. The District Court held that the noncompete covenant’s function and geographic scope were both exceptionally broad where it restricted employees from engaging in any employment or business related to the commercial or residential solar-energy market in the entire United States and effectively prohibited former employees from seeking employment in the solar-energy business in large swaths of the middle and eastern regions of the U.S.

§ 1.3.6. Fifth Circuit

Clark v. Truist Bank, 2022 U.S. Dist. LEXIS 17625 (N.D. Tex. 2022). Insurance broker Clark worked for insurance company McGriff Insurance Services in Texas. Clark and the predecessor company to McGriff, Regions Insurance, Inc., entered into an employment agreement that included a noncompete covenant providing that for two years following the end of his employment, Clark would not solicit, accept, service, or assist in the solicitation or acceptance of any insurance business of any customers for whom he had sold, serviced, managed, or consulted regarding insurance products in the 12 months before the end of his employment. Clark resigned and joined Edgewood Partners Insurance Center (EPIC). Nine of Clark’s customers moved their business from McGriff to EPIC to be serviced by Clark. McGriff sued, and moved for summary judgment to enforce the noncompete. After a brief application of the Texas Supreme Court’s three-part reasonableness test, the court found that Regions had a legitimate business interest in protecting its clients and business, and that a two-year prohibition on soliciting or servicing former customers whose accounts Clark serviced during his final year of employment did not unduly restrict Clark. Clark argued that the noncompete was unenforceable as to the nine clients who transferred to him because he did not solicit the clients, and McGriff had no protectable interest in customers who voluntarily left. This argument was rejected because the court “lack[ed] any indication” that Texas courts would narrow a noncompete in such a manner. Despite Texas law requiring an evaluation of any injury likely to the public due to noncompete enforcement, the court did not consider the impact of enforcement on a client’s right to work with the insurance broker of their choosing. The court found that the noncompete was enforceable and breached by Clark and granted McGriff’s motion.

Additional Cases of Note

Allied Pipe, LLC v. Paulsen, 2021 U.S. Dist. LEXIS 243510 (S.D. Tex. 2021)^[2] (declining to set aside a noncompete clause as unreasonable where the defendant expressly agreed in the contract that “the restrictions imposed herein are: (i) reasonable as to scope, time, and area; [and] (ii) necessary for the protection of the Buyer and the Company’s legitimate business interests”); Sutherland Glob. Servs., Inc. v. Sengupta, 2021 U.S. Dist. LEXIS 254355 (W.D. Tex. 2021), report and recommendation adopted 2022 WL 566191 (W.D. Tex. 2022) (applying New York law) (finding a substantial threat of irreparable harm, despite plaintiff’s two-month delay in seeking injunctive relief, where the defendant’s new position was substantially similar to his position at plaintiff’s company and the defendant violated the noncompete agreement prior to his employment ending with the plaintiff); Winsupply E. Houston v. Blackmon, 2021 U.S. Dist. LEXIS 225067 (S.D. Tex. 2021), appeal dismissed 2022 U.S. App. LEXIS 34871 (5th Cir. (Tex.) 2022) (finding that the plaintiff did not have a valid noncompete agreement with defendant because the agreement—originally between the defendant and another company, which plaintiff purchased all of the equity in but remained a separate entity from—could not be assigned or transferred to the plaintiff without the defendant’s consent); Direct Biologics, LLC v. McQueen, 2022 U.S. Dist. LEXIS 94514 (W.D. Tex. 2022), appeal filed (June 2, 2022) (denying a preliminary injunction on the grounds that there was no irreparable injury; although defendant, who left for a competitor, was a highly-trained employee who possessed critical knowledge about plaintiff’s business, that alone was not enough to give rise to a presumption of irreparable injury, which some Texas courts have found where there is “proof that a highly trained employee is continuing to breach a non-competition covenant”).

§ 1.3.7. Sixth Circuit

RECO Equip., Inc. v. Wilson, 2021 U.S. App. LEXIS 32413 (6th Cir. (Ohio) 2021). Jeffrey Wilson and Joseph Craig Russo left their jobs at RECO Equipment, Inc., to start a competing business. Wilson’s employment contract stated that he could not compete with RECO for three years after leaving and within 50 miles. After Wilson and Russo left, RECO found that they had retained or taken its confidential information, including retaining a company cell phone and uploading company files to a personal DropBox account. RECO sued for breach of contract and misappropriation of trade secrets and moved for a preliminary injunction. The district court granted the motion, ordering Wilson to comply with the noncompete agreement, among other relief. On appeal, regarding the noncompete agreement, Wilson did not dispute that he breached the agreement by opening a competitor company. He argued only that the agreement was unenforceable because it was not reasonable, a requirement under Ohio law for noncompete agreements that must be established by clear and convincing evidence. The court held that RECO failed to meet this burden because it presented no evidence about whether the three-year restriction imposed undue hardship on Wilson—one of the factors necessary to find a noncompete agreement reasonable under Ohio law. Because RECO failed to establish that the noncompete agreement was reasonable, RECO could not, at that time, be likely to succeed on the merits of its breach-of-contract claim based on the noncompete agreement. Accordingly, the court vacated this part of the district court’s preliminary injunction.

Union Home Mortg. Corp. v. Cromer, 31 F.4th 356 (6th Cir. (Ohio) 2022). Erik Cromer worked as a managing loan officer for plaintiff and signed a noncompete as part of his employment. In January 2021, Cromer left for a competitor and plaintiff filed suit. The court held the noncompete provision preventing Cromer from working within a 100-mile radius in “the same or similar capacity” for 22 months was unenforceable as written. The court vacated the district court’s preliminary injunction holding that the lower court had failed to analyze whether the noncompete provision was reasonable under Ohio law and therefore enforceable.

§ 1.3.8. Seventh Circuit

Custom Truck One Source, Inc. v. Norris, 2022 U.S. Dist. LEXIS 34291 (N.D. Ind. 2022). Norris worked for CTOS as an account manager. As part of his employment agreement, Norris agreed to certain noncompetition provisions restricting his right to compete in a geographic area defined as the “Territory.” Norris resigned from CTOS and formed his own company, which operated in the same industry. Norris resided in (and operated his company from) the Territory; however, all of Norris’s clients were located outside the Territory. CTOS sued Norris for breach of the noncompetition clause and moved for a temporary restraining order. The Court addressed whether CTOS had a legitimate protectable interest in preventing Norris’s actions. Norris argued that the provision was unenforceable because all of Norris’s clients were based outside the Territory. Norris argued that CTOS only had a protectable interest in the place where competition occurred, and Norris did not compete for any customers within the Territory. CTOS argued that “the mere formation of a business inside the Territory” was a violation regardless of where the businesses’ customers were located. According to CTOS, Norris’s acts of sending emails and making calls from within the Territory were sufficient. The Court agreed that Norris was conducting business within the Territory through his formation of the business and his communications. However, it raised questions regarding whether CTOS could possibly have a legitimate, protectable interest in preventing Norris from operating within the Territory when he was only competing for clients outside the Territory. The Court concluded that CTOS failed to meet its burden of showing a likelihood of success on the merits and it denied CTOS’s motion.

Concentric, LLC v. Mages, 2021 U.S. Dist. LEXIS 194740 (E.D. Wis. 2021). Mages worked for Courtney Industrial Battery for 28 years. When Concentric purchased Courtney Industrial Battery, it offered Mages a position. Mages accepted the position and began working for Concentric. However, Mages did not sign an employment agreement with Concentric until two months after starting her new position. The employment agreement contained noncompetition and confidentiality provisions. Two years later, Mages resigned and began working for one of Concentric’s competitors. Concentric sued Mages and moved for a temporary restraining order. Mages argued that the noncompetition provisions of her employment agreement were unenforceable because they were not supported by consideration. Mages argued that she received no consideration because she was already working for Concentric when she signed the agreement. Concentric argued that its continued employment of Mages constituted adequate consideration because Mages’s employment was strictly conditioned upon signing the employment agreement. The Court found a likelihood that Concentric could show the employment agreement was supported by consideration. It highlighted evidence demonstrating that Mages negotiated her employment agreement during the period she worked for Concentric without a signed agreement in place and that Concentric would have terminated Mages if the negotiations failed.

In re Adegoke, 632 B.R. 154 (Bankr. N.D. Ill. 2021). Adegoke worked for 3Cloud for approximately one year before resigning. When he resigned, 3Cloud sued Adegoke for, among other things, breach of restrictive covenants in Adegoke’s employment agreement. Adegoke argued that the restrictive covenants were not enforceable because he was not employed for a “substantial period of time.” The Court noted that, in the context of post-employment restrictive covenants, Illinois courts indicated that an employment must last for a “substantial period of time” to support restrictive covenants. (Otherwise, an employer could hire an employee for a short period of time for the sole purpose of imposing restrictive covenants.) However, the Court found that a “substantial period of time” should not be required under the circumstances. 3Cloud had invested significant resources in training Adegoke. Despite Adegoke’s unsatisfactory performance, 3Cloud tried to maintain the employment relationship by moving Adegoke into a different role. 3Cloud never decreased Adegoke’s salary and it paid Adegoke a bonus. Nevertheless, Adegoke voluntarily chose to resign. Under the circumstances, the Court found that no “substantial period of time” was required. Nevertheless, in an abundance of caution, the Court proceeded to evaluate whether the employment satisfied the “substantial period of time” requirement. The Court noted a split in authority among Illinois cases regarding what constitutes a “substantial period of time:” some cases upheld a bright-line rule requiring two years of employment while others found that additional factors must be considered. The Court rejected the bright-line approach and found that, under the circumstances, Adegoke’s one year of employment constituted a “substantial period of time.”

DM Trans, LLC v. Scott, 38 F.4th 608 (7th Cir. (Ill.) 2022). Six employees left DM Trans, LLC d/ba Arrive to work for a competitor named Traffic Tech. Arrive sued the employees and Traffic Tech and moved for a temporary restraining order. The Court denied the TRO, and Arrive appealed. On appeal, the defendants argued that part of the appeal was moot under Texas law because the noncompetition provisions had expired (for all except one of the defendants) and because three of the employees no longer worked with Traffic Tech. Regarding the first issue, the Court determined that the claims were not moot because, under Texas law, the District Court had the equitable authority to extend the duration of the restrictive covenants. Thus, the restrictive covenants could still have legal effect despite the expiration of their term. Regarding the second issue, the Court found that the employees’ departure from Traffic Tech did not render the issues moot because injunctive relief could still be appropriate and effective. Specifically, the Court noted that injunctive relief might prevent Traffic Tech from rehiring the defendants or prevent the defendants from working with any similar competitor of Arrive. The Court retained jurisdiction over the appeal.

Gillaspy v. Club Newtone, Inc., 2021 U.S. Dist. LEXIS 157249 (N.D. Ind. 2021). Gillaspy worked as a fitness instructor for Club Newtone. Gillaspy asserted claims for sexual discrimination and harassment under Title VII. Club Newtone asserted a counterclaim against Gillaspy for breach of contract alleging, among other things, that Gillaspy entered into a noncompetition agreement and that since she ceased working for Club Newtone she breached Section 2 of said noncompetition agreement. According to Newtone, Section 2 of the noncompetition agreement precluded Gillaspy from entering into or attempting to enter into “Restricted Business,” interfering with Club Newtone’s employees, interfering with Club Newtone’s customers, and utilizing Club Newtone’s confidential information and intellectual property. Gillaspy moved to dismiss Club Newtone’s counterclaim on grounds that the Court lacked subject matter jurisdiction over Newtone’s breach-of-contract claim. In declining to exercise supplemental jurisdiction over Newtone’s breach-of-contract claim, the Court noted that Gillaspy’s Title VII claims and Club Newtone’s breach-of-contract counterclaim have no overlapping elements and the claims necessarily rely on different evidence. The Court went on to find that Club Newtone failed to explain how evidence of conduct occurring after Gillaspy was terminated will disprove or defend liability from Gillaspy’s Title VII claims, which involve how she was treated during her term of employment. As a result, the Court held that the employment relationship between the parties, standing alone, is insufficient to establish supplemental jurisdiction and dismissed Newtone’s breach-of-contract claim against Gillaspy.

§ 1.3.9. Eighth Circuit

Miller v. Honkamp Krueger Fin. Servs., Inc., 9 F.4th 1011 (8th Cir. (S.D.) 2021). The Eighth Circuit Court of Appeals overturned a preliminary injunction a South Dakota federal judge issued in favor of former employer Honkamp Krueger Financial Services, barring former employee Cara Miller from working at Mariner Wealth Advisors, her new employer, pending the outcome of the case. Miller had entered into an employment agreement with Honkamp that contained restrictive covenants, including a noncompete provision prohibiting her from working for a competitor for a year, and a nonsolicitation provision. Later, both parties entered into an ancillary agreement that updated the nonsolicitation agreement prohibiting Miller from accepting unsolicited clients. Honkamp was subsequently acquired by company Bluecora, Inc. and terminated Miller’s employment. Miller initiated an action against Honkamp and Bluecora seeking a declaration that the restrictive covenants and ancillary agreement were unenforceable. She also began working for Mariner Wealth Advisors, a direct competitor to Honkamp. Honkamp counter-claimed seeking a preliminary injunction enforcing the noncompete and nonsolicitation provisions against Miller and Mariner. The district court granted the preliminary injunction in favor of Honkamp. The Court of Appeals vacated the preliminary injunction and reversed the district court, holding that: (1) under Iowa law, the noncompete provision of an employment agreement did not survive termination of the employment agreement; and (2) under South Dakota law, the nonsolicitation provision, which prohibited Miller from accepting unsolicited business from her former clients, fell outside South Dakota statute setting out permissible exceptions to general prohibition on restraints on exercise of trade and thus was void as violating South Dakota public policy.

Progressive Techs., Inc. v. Chaffin Holdings, Inc., 33 F.4th 481 (8th Cir. (Ark.) 2022), reh’g en banc denied 2022 WL 2906576 (8th Cir. (Ark.) 2022). Progressive sought an injunction against David Chaffin and Chaffin Holdings, Inc. for breaching a noncompete agreement. Chaffin and Chaffin Holdings appealed the district court’s preliminary injunction entered against them. The Eighth Circuit Court of Appeals overturned a preliminary injunction, holding that Progressive has not shown a fair chance of prevailing on the breach of the noncompete agreement, including the noncustomer solicitation agreement. Chaffin owned Arkansas State Security, Inc., which sold and maintained video security equipment for school districts. Chaffin in 2013 sold his business to Progressive and agreed to continue working at the company as an employee. The parties entered into an employment agreement, which contained a noncompete agreement with four restrictive covenants: The first covenant (the competition restriction) barred Chaffin from being involved in the “Video Security Business” throughout the state of Arkansas for five years. The second covenant (the customer-solicitation restriction) barred Chaffin from soliciting any of Progressive’s current or prospective customers for video security sales or for the purpose of terminating their business with Progressive for five years. The third covenant (the employee-solicitation restriction) barred Chaffin from soliciting any Progressive employees for two years. The fourth covenant (the nondisclosure clause) barred Chaffin indefinitely from disclosing any proprietary information. After six-and-a-half years, Progressive terminated Chaffin. Chaffin began soliciting Progressive clients. Progressive sued, claiming Chaffin breached the restrictive covenants in the noncompete agreement and misappropriated trade secrets in violation of the Arkansas Trade Secrets Act. While the Court acknowledged the validity of strict noncompete agreements in relation to the sale of a business, the Court categorized the agreement here as an employment agreement, drawing more scrutiny. The Court found the restrictions too lengthy and went beyond what is required to protect Progressive’s interests.

Ronnoco Coffee, LLC v. Castagna, 2021 WL 5937427 (E.D. Mo. 2021). Plaintiff Ronnoco Coffee, LLC filed this action against Defendants Kevin Castagna and Jeremy Torres to enforce noncompetition and confidentiality agreements against each of them, and to enjoin the threatened misappropriation of trade secrets. Defendants had been employed by Trident Beverage, Inc. before Ronnoco acquired 80% of Trident’s shares. Thereafter, defendants were employed by both Trident and Ronnoco. Ronnoco and defendants entered into a Fair Competition Agreement, which expressly prohibited defendants from: 1) engaging in any business or activity that competes with “the business of” Ronnoco both during their employment and for two years after employment with Ronnoco; 2) from soliciting Ronnoco’s employees, clients, or customers; and 3) from disclosing Ronnoco’s confidential and proprietary information. Defendants left their employment and began working for Thirsty Coconut, a direct competitor of Trident. The Court granted Ronnoco’s Request for a Temporary Restraining Order, and Preliminary Injunction against defendants prohibiting defendants from violating the terms of their Agreement. At the end of the bench trial, the Court dissolved the injunction and dismissed the case. In analyzing the trade secret claim, the Court held that while Ronnoco owned Trident by a stock purchase where they bought 80%, the stock purchase did not equate to the purchase of assets, and therefore Trident was still the legal holder of the trade secrets. The Court found that it was a basic principle of corporate law that a subsidiary is a legal entity separate from its parent. The shareholders may be the same but their property is distinct. Thus the parent, Ronnoco, cannot sue to enforce the subsidiary, Trident’s, property, including the trade secrets alleged in this suit.

§ 1.3.10. Ninth Circuit

Aitkin v. USI Ins. Servs., LLC, 2022 WL 1439128 (9th Cir. (Ore.) 2022). The Ninth Circuit upheld a preliminary injunction issued against an insurance sales representative for violation of his noncompetition agreement under Oregon law. In affirming the district court order, the Ninth Circuit, found, among other reasons, that the noncompete clause did not violate public policy. The Court rejected the employee’s argument that his noncompete clause violated public policy because he is entitled to the goodwill generated from his client relationships. The Court found, as the district court noted, Oregon common law establishes that employers have a protectable interest in the goodwill generated by their employees.

Millennium Health, LLC v. Barba, 2021 WL 4690949 (9th Cir. (Ore.) 2021). The Ninth Circuit upheld a preliminary injunction against two healthcare employees for violation of their noncompetition agreements governed by Oregon law. On appeal, the employees only challenged the district court’s finding that the employer had a likelihood of success on the merits in enforcing the noncompetition agreements against them. They argued that an employee seeking to void a “voidable” noncompetition agreement cannot be preempted by their employer’s effort to enforce the covenant, especially where, as here, the employee has not yet formally left their employment or violated the agreement.

The Court rejected the employee’s argument. Oregon treats noncompetition agreements that do not comply with the statutory requirements of Oregon Revised Statute § 653.295 as “presumptively valid rather than void ab initio.” Neither employee received notice that a noncompetition agreement would be a condition of their employment two weeks prior to commencing their employment. Thus, their noncompetition agreements were voidable. Oregon courts treat a voidable noncompetition agreement as valid and enforceable if the employee has not taken affirmative steps to void the agreement at the time the employer seeks to invoke the noncompetition agreement. Because the agreement had not been voided at the time that defendant sought to invoke the contract, the agreement was valid and in effect.

§ 1.3.11. Tenth Circuit

There were no qualifying decisions within the Tenth Circuit.

§ 1.3.12. Eleventh Circuit

Vital Pharms., Inc. v. Alfieri, 23 F.4th 1282 (11th Cir. (Fla.) 2022). Vital, a producer of energy drinks, hired the four relevant individuals in 2019, and these individuals signed employment agreements, which contained three restrictive covenants. The four individuals agreed to: (1) not to work for a competing company during the term of their employment with Vital and for a period one year from their termination or cessation date, (2) not to solicit Vital employees to join a competing company (which was valid for one year from termination), and (3) never to disclose or to utilize for their own benefit, or for any third party’s benefit any of Vital’s confidential information, including its product formulae and its marketing sales information. These four individuals later joined Elegance Brands, which is a company that primarily produces alcoholic beverages, but developed a cannabidiol-infused caffeinated drink in 2019, Gorilla Hemp. Vital sued the four individuals and Elegance Brands alleging that (1) all the individuals violated their noncompete covenants by working for Elegance Brands within a year after leaving Vital, (2) one individual, Christopher Alfieri, violated the employee nonsolicitation covenant by encouraging the rest of the individuals to join Elegance Brands, and (3) Elegance Brands and Alfieri engaged in tortious interference with Vital’s contractual relationships with the other three former employees. Vital moved for a preliminary injunction and asked the district court to (1) enjoin all the individuals from violating their noncompete covenants by working for Elegance Brands during the one-year term of the covenants, (2) enforce Alfieri’s nonsolicitation covenant, and (3) asked Elegance Brands be enjoined from interfering with all the individuals’ restrictive covenants and from using any confidential information belonging to Vital. The district court granted the motion in part (1) determining that the restrictive covenants were valid and enforceable under Florida law since the covenants were justified by Vital’s “legitimate business interests” in its product formulae, in its other confidential information, and in its customer relationships and (2) rejecting the argument that Vital was required to “identify specific customers” to establish a legitimate business interest in its customer relationships. One of the individuals, Amy Maros, then appealed the preliminary injunction against her and Vital timely cross-appealed the partial denial of preliminary injunctive relief against Alfieri and another individual. The Eleventh Circuit held that: (1) Maros’s appeal was moot because the noncompete and employee nonsolicitation covenants in the employment agreement had already expired, (2) Vital did not prove its entitlement to all of the preliminary relief it obtained against Maros, because it could not rely on its customer relationships to establish a legitimate business interest as Vital failed to name and prove a substantial relationship with any specific clients, and (3) the district court abused its discretion when it applied the presumption of irreparable harm to the nondisclosure covenant, because there was no finding that Maros disclosed confidential information.

Perma-Liner Indus., LLC v. D’Hulster, 2022 U.S. Dist. LEXIS 93981 (M.D. Fla. 2022), report and recommendation adopted 2022 WL 3138995 (M.D. Fla. 2022). Perma-Liner, a company specializing in rehabilitating existing sewer systems without excavation, using cured-in-place-pipe technology, alleged that Gerald D’Hulster, the company’s founder and former president, competed against it in violation of restrictive covenants contained in four contracts between the parties. The parties entered into four contracts containing restrictive covenants between 2012 and 2019. These restrictive covenants prohibited D’Hulster from engaging in any competing business, soliciting customers or suppliers that transact business with Perma-Liner, and disclosing confidential information or soliciting employees of Perma-Liner. D’Hulster’s employment at Perma-Liner ended in April 2019. Perma-Liner alleged that, months later, D’Hulster formed a competing company, Paramount Pipe Lining Products and became its CEO, in breach of the restrictive covenants, months after his employment at Perma-Liner. Perma-Liner further alleged that D’Hulster solicited Perma-Liner’s customers, vendors, and employees, and was using Perma-Liner’s confidential information and trade secrets, including customer lists and intimate knowledge of Perma-Liner’s business, pricing, and operations, to compete with it. Perma-Liner additionally alleged that due to D’Hulster’s actions it led its company to lose customers and sales revenues due to forced discounting. Perma-Liner also contended that D’Hulster disclosed confidential and trade secret information he learned with Perma-Liner to create Paramount products that directly overlap with product lines that were developed by Perma-Liner through extensive research and development. D’Hulster denied any connection to Paramount, or that he violated the restrictive covenants. The court recommended the entry of a preliminary injunction that prohibits D’Hulster from having an interest in, or being employed by, a business in the United States that inspects and rehabilitates pipes, or soliciting Perma-Liner’s customers, employees, vendors or suppliers during the pendency of litigation. The court explained that Perma-Liner satisfied the four prerequisites for entry of a preliminary injunction as to the defendant’s alleged breach of the noncompetition and nonsolicitation provisions of the 2019 equity appreciate rights agreement cancellation acknowledgment and release.

Arrington v. Burger King Worldwide, Inc., 47 F.4th 1247 (11th Cir. (Fla.) 2022). Plaintiffs were all employees of Burger King franchise restaurants at some point between 2010 and 2018. From at least 2010 until 2018, Burger King incorporated into its standard franchise agreement, a “No-Hire Agreement.” The No-Hire Agreement restricted hiring any employee of Burger King or of another Burger King franchisee for six months after the employee leaves the first Burger King restaurant. Plaintiffs alleged antitrust violations, asserting that the No-Hire Agreement prevented them from obtaining employment at other Burger King restaurants and, as a result, caused them to be paid artificially depressed wages, suffer decreased benefits, and be deprived of job mobility. The district court dismissed the action, finding that Burger King and each of its independent franchisees together constituted a single enterprise, so they were not capable of conspiring under the Sherman Act. The appellate court reversed and remanded. The appellate court reviewed the independent nature of Burger King’s and its franchisees’ hiring process, including the standard franchise agreement that expressly emphasized the “independent nature of each franchisee’s relationship with Burger King,” and the Burger King Franchise Disclosure Document that explicitly embraced competition among Burger King and its franchisees. The court then found that, in the absence of the No-Hire Agreement, each independent Burger King restaurant would pursue its own economic interests when hiring employees. As a result, the court ruled that “the No-Hire Agreement deprive[d] the marketplace of independent centers of decision making about hiring, and therefore of actual or potential competition.”

§ 1.3.13. D.C. Circuit

There were no qualifying decisions within the D.C. Circuit.

§ 1.3.14. State Cases

Blue Mountain Enters., LLC v. Owen, 74 Cal. App. 5th 537 (2022), as modified (Jan. 19, 2022). The California Court of Appeal found that Business and Professions Code section 16601 applied to a three-year post-termination nonsolicitation of customer provision in an employment agreement and upheld the trial court’s decision to enforce the provision against the executive/seller who entered into a joint venture. The court found that section 16601 applied as a matter of law because the defendant disposed of all of his ownership interest in one transaction agreement while concurrently agreeing under an employment agreement and that both contracts, along with other contracts the parties executed, were drafted to accomplish the parties’ joint venture. The court also found that the trial court correctly found that the defendant’s letter for his new business constituted a solicitation as a matter of law because the letter went well beyond an announcement by actively encouraging customers to leave and do business with his new company.

Lastly, the court affirmed the trial court’s award of $600,000 in attorney fees to the plaintiff as the prevailing party on the grounds that plaintiff secured a temporary restraining order, a preliminary injunction, and a permanent injunction against defendant based on the breach of the customer nonsolicitation provision. The court found that the trial court was diligent in arriving at its attorney fee determination and that there was no basis on which to conclude that the trial court’s attorney fee award was “clearly wrong” or that the trial court otherwise abused its discretion in determining the amount of the attorney fee award.

Prudential Locations, LLC v. Gagnon, 151 Hawai’i 136 (2022). A brokerage firm brought action against a former broker, claiming the broker violated a noncompete agreement by establishing a new group and soliciting brokerage firm’s agents. The Circuit Court denied brokerage firm’s motion for partial summary judgment and granted the former broker’s motion for partial summary judgment. Brokerage firm appealed, and the Intermediate Court of Appeals vacated the order. The Supreme Court granted certiorari review.

The Hawaii Supreme Court held that the noncompete clause was not ancillary to the protection of non-trade-secret, confidential business information and that the desire to prevent a real estate broker from forming a competing firm was not a legitimate purpose for a noncompete clause. The mere termination of three agents’ employment with the brokerage firm and subsequent employment with real estate broker’s new firm did not demonstrate a violation of the nonsolicitation clause. Solicitation, for purposes of a nonsolicitation clause in an employment agreement, requires an active initiation of contact. The Court found that there was a genuine issue of material fact regarding the broker’s active initiation or contact with coworker that precluded summary judgment on brokerage firm’s claim that broker violated nonsolicitation clause.

Skaf v. Wyo. Cardiopulmonary Servs., P.C., 495 P.3d 887 (Wyo. 2021). The Wyoming Supreme Court reversed the district court’s order confirming an arbitration award, vacated the award, and remanded the case to the district court. Dr. Michel Skaf, a cardiologist, signed an agreement not to compete when he became a shareholder in Wyoming Cardiopulmonary Services (“WCS”). The noncompete clause stated that he could not practice medicine for a period of two years following termination of employment within a 100-mile radius of Casper, Wyoming and each outreach clinic. After WCS terminated Dr. Skaf for cause, he immediately set up his own practice in Casper, providing cardiology services to patients. In arbitration, an arbitrational panel determined that the covenant not to compete was enforceable once it modified the scope of the prohibited services and narrowed the geographic area. The district court confirmed the arbitration panel’s decision to enforce the covenant not to compete. Upon appeal, Dr. Skaf argued, in part, that a noncompete agreement between physicians is a violation of public policy and is always unenforceable and that the arbitration panel’s decision should be vacated because it rests on a manifest error of law (that the noncompete agreements are strongly favored in Wyoming and their enforcement promotes public policy). The Wyoming Supreme Court declined to find that physician noncompete agreements are per se void as against public policy, reasoning that the Wyoming Legislature has not acted to ban or limit physician noncompete agreements. Additionally, the Wyoming Supreme Court determined that the arbitration panel began with a manifest error by applying a nonexistent public policy that noncompete agreements are strongly favored in Wyoming, which led to another manifest error of law—rewriting restrictions in the covenant which resulted in wholesale contract revision.

Hassler v. Circle C. Res, 505 P.3d 169 (Wyo. 2022). The Wyoming Supreme Court concluded that it is no longer tenable for courts to use the blue-pencil rule to modify unreasonable noncompete agreements. Because plaintiff’s noncompete agreement was unreasonable on its face, the Court determined it was void in violation of public policy. Plaintiff Circle C provides day and residential habilitation services to disabled clients. Plaintiff hired defendant Ms. Charlene Hassler as a CNA to provide residential habilitation care in her home for one of its long-term adult clients. At the time of hire, plaintiff signed a noncompete and nonsolicitation agreement. Plaintiff was notified that the client was changing providers and that Ms. Hassler was leaving its employ. Client remained in Ms. Hassler’s home for residential habilitation services and transferred to another provider for day rehabilitation. Upon receiving a cease-and-desist letter from plaintiff’s attorney to stop her activities for at least one year, pursuant to the noncompete and nonsolicitation agreement, Ms. Hassler responded that she would not do paid services starting August 7, 2017. However, the client continued to live in Ms. Hassler’s home, and she occasionally helped with the client’s care. Moreover, Ms. Hassler was paid through Medicaid for her services.

To be enforceable, a noncompete agreement must be (1) in writing, (2) part of a contract of employment, (3) based on reasonable consideration, (4) reasonable in duration and geographical limitations, and (5) not against public policy. When courts encounter unenforceable restrictions on trade, they have taken three approaches. The blue-pencil approach enables the court to enforce the reasonable terms of the agreement once its unreasonable provisions are excised. Noting that allowing a court to reform an agreement that otherwise would be void strays from rational and well-established black letter rules of contract interpretation and enforcement, the Wyoming Supreme Court overruled adoption of the liberal blue-pencil rule. It concluded that the noncompete agreement at issue was unreasonable on its face and, therefore, void in violation of public policy.

LGCY Power, LLC v. Superior Court, 75 Cal. App. 5th 844 (2022). The California Court of Appeal found that where a California employee is sued by the employer for trade secret misappropriation in a separate state based on an out-of-state forum selection clause, the employee may separately sue in California to void the provision, despite the ongoing litigation in a sister state.

Despite finding employee’s claims related to the same transaction or occurrence as the employer’s case in Utah and the employee having already answered that complaint, the Court of Appeal affirmed the trial court’s decision overruling employer’s demurrer to dismiss the employee’s action. The Court held that although employee signed his employment agreement prior to Labor Code Section 925 taking effect, the employment agreement had been orally modified thereafter, and therefore the statute governed the agreement. The Court further reasoned Labor Code Section 925 provided for an exception to California’s compulsory cross complaint rules and the employee did not need to bring his claims as a cross-complaint in the Utah action. Lastly, the Court held an employee can request the contract be rendered void even after the employer has initiated litigation and the employee’s compulsory claims would have otherwise been due.

§ 1.4. Customer and Employee Nonsolicitation Agreements

§ 1.4.1. United States Supreme Court

There were no qualifying decisions by the United States Supreme Court.

§ 1.4.2. First Circuit

There were no qualifying decisions within the First Circuit.

§ 1.4.3. Second Circuit

Permanens Cap. L.P. v. Bruce, 2022 WL 3442270 (S.D.N.Y. 2022), report and recommendation adopted, 2022 WL 4298731 (S.D.N.Y. 2022). The District Court found that a provision prohibiting the solicitation of employees was unenforceable as it did not protect a legitimate interest of the employer, but rather prohibited the former employee from communicating with current employees about other job opportunities. It also found that a provision prohibiting solicitation of clients was unenforceable because it encompassed prospective, dormant, and occasional clients and prohibited more than active solicitation of clients, but also anything that could interfere, disrupt, or attempt to disrupt the former employer’s relationships with the clients, which was overly broad.

§ 1.4.4. Third Circuit

There were no qualifying decisions within the Third Circuit.

§ 1.4.5. Fourth Circuit

Power Home Solar, LLC v. Sigora Solar, LLC, 2021 U.S. Dist. LEXIS 163753 (W.D. Va. 2021).^[3] The U.S. District Court for the Western District of Virginia held that an employer’s nonsolicitation clause was unenforceable because it was overly broad and unduly burdensome on its former employees. A competitor allegedly induced former employees to cease their employment with the employer and join the competitor. The employer asserts that its former employees breached the nonsolicitation covenant. The employer’s nonsolicitation covenant prohibited employees from contacting any of the employer’s active customers or customers that the employer solicited in the last two years while employed and for a period of 12 months following termination. The District Court found, however, that this covenant was too broad as it restricted employees from contacting any of the employer’s customers, regardless of the employee’s prior contact with them. The District Court also determined the nonsolicitation agreement was unduly burdensome because it prohibited a former employee’s contact with customers and those that the employer solicited (even if the customers did not become actual customers) over a two-year period. Thus, the District Court held the nonsolicitation agreement unenforceable because it was not narrowly tailored and was unduly burdensome.

Volt Power, LLC v. Butts, 2021 U.S. Dist. LEXIS 160586 (E.D.N.C. 2021). The U.S. District Court for the Eastern District of North Carolina denied summary judgment to a former employee, Butts, where it found triable issues of fact regarding Butts’s solicitation of Volt Power, LLC’s employees and customers. Volt’s employee manual prohibits personal use of Volt’s computers, network systems, electronic mail systems, and the like. Volt brought a breach-of-contract claim alleging that Butts violated the restrictive covenants prescribed under the executive common unit profits agreement by soliciting customers whom Butts worked with or whom he received confidential information from while working for Volt. Butts argued that Volt did not produce any evidence to support its solicitation allegation and moved for summary judgment. However, the court disagreed. Because there was evidence that a codefendant learned about potential opportunities with Volt’s competitor from Butts, several employees left Volt shortly after Butts resigned, Butts shared his new contact information with Volt employees, and a codefendant shared customer contact and bid information with Butts while said codefendant was still working for Volt, the court found there were still triable issues of fact and summary judgment was inappropriate as to the breach of the nonsolicitation agreement.

Wolff v. CapeSide Psychiatry, PLLC, 2021 U.S. Dist. LEXIS 153818 (D.S.C. 2021). The U.S. District Court for the District of South Carolina held that the nonsolicitation clause of an independent contractor agreement was enforceable because it contained essential terms, was sufficiently definite, and included specific nonsolicitation requirements. Wolff entered the agreement with CapeSide Psychiatry where Wolff was to provide telepsychiatry services to patients. The agreement included a nonsolicitation clause that applied during any and all periods of engagement with CapeSide Psychiatry and for two years thereafter. Pursuant to the agreement, Wolff was prohibited from enticing, soliciting, or encouraging, directly or indirectly, any of CapeSide Psychiatry’s employees, agents, representatives, or independent contractors to leave CapeSide Psychiatry’s employment. Wolff was also prohibited from soliciting or discouraging any patient, customer, or prospective customer from doing business with CapeSide Psychiatry. Because the ICA and the nonsolicitation clause contained enough detail and the required terms were sufficiently definite, the court found the ICA and nonsolicitation clause enforceable.

§ 1.4.6. Fifth Circuit

Sunbelt Rentals, Inc. v. Holley, 2022 U.S. Dist. LEXIS 64557 (N.D. Tex. 2022), appeal dismissed 2022 U.S. App. LEXIS 29597 (5th Cir (Tex.) 2022). Jimmy Holley worked at Sunbelt Rentals for over 20 years, during which time Holley signed an employment agreement containing a nonsolicitation clause. Holley later resigned and began a new job at a competitor company. Sunbelt sued Holley, claiming Holley actively solicited former customers in breach of his nonsolicitation agreement. Sunbelt sought a preliminary injunction to prohibit Holley’s solicitation. At issue was the type of conduct that establishes solicitation. Holley argued the term “solicit” required active conduct, while Sunbelt claimed the term “solicit” included a broader range of conduct. The court discussed a spectrum of possible solicitation conduct, finding that a reasonable construction of a nonsolicitation clause must include more than just active conduct. The court found that solicitation could include conduct between the middle of two extremes – active employee conduct on one side, and requests instigated entirely by former clients on the other. The court examined Holley’s conduct, including his testimony that at the time of his resignation, he communicated to clients the contact information of his successor at Sunbelt and did not provide any clients with information about his new employment. The court denied Sunbelt’s request for a preliminary injunction to prohibit Holley’s solicitation, noting that although Holley’s conduct contained bad facts, his behavior did not rise to the level of solicitation.

Additional Cases of Note

Allied Pipe, LLC v. Paulsen, 2021 U.S. Dist. LEXIS 243510 (S.D. Tex. 2021)^[4] (finding sufficient consideration supported the enforceability of the nonsolicitation agreement where plaintiffs provided defendant access to confidential information).

§ 1.4.7. Sixth Circuit

Hobbs v. Fifth Third Bank, N.A., 2021 U.S. Dist. LEXIS 227661 (S.D. Ohio 2021). Myron Hobbs, an insurance broker, moved to a new employer and brought along some of his long-term customers. He agreed to a nonsolicitation provision with the new employer prohibiting him from engaging with current or prospective customers for 24 months following termination. After several acquisitions and “corporate machinations” by the employer that left “the operative facts here a little murky,” Hobbs’s relationship with his employer soured. He would not sign a general release of claims or an offer letter sent by the entity that purchased his employer’s assets. His employer treated this as a resignation. Hobbs sued for, among other things, breach of contract, and sought a preliminary injunction preventing the employer from enforcing the restrictive covenants in his employment agreement or telling customers or potential customers that Hobbs was precluded from doing business with them. Although the typical procedural posture would be for the former employers to seek a preliminary injunction to prevent Hobbs from violating the restrictive covenants, the court did not find the posture of this case to be precluded. The court proceeded to the four preliminary-injunction factors, first concluding that Hobbs “established some likelihood of success” on at least one of his arguments and therefore that the first factor “weighs at least somewhat in his favor.” But Hobbs failed the second factor: whether movant would suffer irreparable injury without the injunction. The court agreed with Hobbs that the damages associated with depriving Hobbs of a right to solicit existing customers would be at least somewhat speculative, which supports finding irreparable harm. But the court disagreed that injunctive relief would remedy or prevent this harm. Hobbs pointed to his long-term customers’ fear of becoming enmeshed in a lawsuit as the harm to be prevented, but the court explained that a preliminary injunction would not extinguish such a fear. Specifically, adjudication on the merits would still proceed, with both parties likely seeking discovery from the long-term customers and embroiling them in the lawsuit despite a preliminary injunction. The court held that preliminary injunctive relief was therefore improper based on this conclusion for factor two.

Slinger v. Pendaform Co., 2022 U.S. App. LEXIS 16391 (6th Cir. (Tenn.) 2022). Jack Slinger was fired for cause from Pendaform, a plastic-manufacturing company, for saying “don’t be the last man standing” to his coworkers. Pendaform alleged Singer violated the nonsolicitation clause in his employment agreement which bars “soliciting any of [PendaForm’s employees] to resign from their employment.” The court held that a nonsolicitation clause that bars soliciting employees to resign their employment is void under Wisconsin law as an unreasonable restraint on trade. The court relied on precedent from the Wisconsin Supreme Court which found similar nonsolicitation clause unenforceable.

§ 1.4.8. Seventh Circuit

There were no qualifying decisions within the Seventh Circuit.

§ 1.4.9. Eighth Circuit

There were no qualifying decisions within the Eighth Circuit.

§ 1.4.10. Ninth Circuit

Aya Healthcare Servs., Inc. v. AMN Healthcare, Inc., 9 F.4th 1102 (9th Cir. (Cal.) 2021). The Ninth Circuit held in a dispute between two health care staffing agencies that nonsolicitation provisions in business-to-business collaboration agreements are not per se violations of the Sherman Act.

The Ninth Circuit framed the issue on appeal as whether a nonsolicitation provision in a collaboration agreement constitutes a “naked” restraint on trade warranting a per se Section 1 violation. Aya argued it did. Alternatively, Aya argued that the nonsolicitation provision violated Section 1 under a rule-of-reason analysis. The United States Department of Justice (DOJ) weighed in and filed an amicus brief arguing that all naked nonsolicitation agreements between market competitors are per se violations.

The Ninth Circuit rejected the arguments of both Aya and the DOJ. The Ninth Circuit explained that while Section 1 bars restraints on trade, courts distinguish between naked restraints and ancillary restraints. Naked restraints are explicitly anticompetitive. Ancillary restraints, while restraints on competition, are subordinate, collateral, and necessary to a legitimate transaction. Naked restraints are per se violations of Section 1, while ancillary restraints are evaluated through a three-step, burden-shifting, rule-of-reason factual analysis.

The Ninth Circuit then looked at the purpose of the nonsolicitation provision and the broader market effects. The Ninth Circuit said that given the purpose of an agreement was to supply travel nurses, the nonsolicitation provision was necessary for AMN to ensure it would not lose personnel. AMN could not meaningfully enter into staffing subcontractor agreements without nonsolicitation protections. Absent staffing subcontractors, there would be less nurses for hospitals facing chronic nurse shortages. Thus, the Ninth Circuit determined that the nonsolicitation agreement was ancillary to the collaboration agreement and had important pro-competitive benefits for the health care market.

§ 1.4.11. Tenth Circuit

ORP Surgical, LLP v. Howmedica Osteonics Corp., 2022 U.S. Dist. LEXIS 84398 (D. Colo. 2022), amended and superseded by 2022 U.S. Dist. LEXIS 170132 (D. Colo. 2022), appeal dismissed 2022 WL 19039680 (10th Cir. (Colo.) 2022).^[5] After a bench trial, the District Court found in favor of plaintiff/counter-defendant ORP Surgical, LLP (“ORP”) on its breach-of-contract claim and all counterclaims (breach of the two agreements, unfair trade practices, and tortious interference) and entered judgment in favor of defendant Howmedica Osteonics Corp., a subsidiary of Stryker Corp. (“Stryker”) on ORP’s claim for corporate raiding. Stryker contracted with ORP, an independent company with sales representatives, who sold Stryker products on commission. Stryker and ORP had entered into two agreements: the joint sales representative agreement (“joint SRA”) and the trauma sales representative agreement (“trauma SRA”), which both granted ORP the exclusive right to sell Stryker products in certain locations, specified which non-Stryker products ORP could and could not sell, and permitted either party to voluntarily terminate the contract so long as they complied with certain post-termination restrictions. In the event of a termination of the contract, ORP would be prohibited from selling competitive products for a year and in exchange, Stryker would pay ORP “restriction payments” equal to ORP’s commissions from Stryker sales made in the previous 12 months before termination. Additionally, both contracts included one-year nonsolicitation/non-divert provisions that would survive the contracts. Stryker terminated the contracts, contending that because termination was for “cause,” Stryker was not bound by the contracts’ terms and was not obligated to pay the restriction payments. ORP contended that there was no “cause” and that the payment obligations, sales restrictions, and nonsolicit/non-divert covenants applied.

The District Court found that Stryker’s independent “causes” for terminating the joint SRA and the trauma SRA were not credible and Stryker did not have “cause” to terminate the contracts, concluding that ORP was entitled to the restriction payments outlined in the contracts (applying New Jersey law to interpret the contracts). Additionally, the District Court determined that Stryker breached the contracts’ provisions regarding nonsolicitation of any current employee or independent contractor working for ORP, as evidenced by compelling evidence of solicitation and diversion that the defendants and their witnesses could not credibly explain away. Further, while Stryker attempted to argue that the sales representatives would have come to Stryker of their own accord, the District Court reasoned that the contracts prohibited all solicitation and diversion, not only necessary or effective solicitation and diversion. The District Court concluded that ORP is entitled to damages.

§ 1.4.12. Eleventh Circuit

Usi Ins. Servs. LLC v. Se. Series of Lockton Co., LLC, 2022 U.S. Dist. LEXIS 96215 (N.D. Ga. 2022). Three employees left USI to go work for Lockton, which are competing insurance brokerage firms. In 2017, USI purchased all issued and outstanding equity interests of Wells Fargo Insurance Services. At the time of the stock purchase and sale agreement, Dean Anderson, Taylor Anderson, and Roger Maldonado were employed by USI. Dean Anderson and Taylor Anderson executed employment agreements when employed by Wells Fargo Insurance Services, which applied to their employment with USI. Upon the closing of the purchase agreement between Wells Fargo Insurance Services and USI, Roger Maldonado accepted an at-will position at USI’s office in Atlanta, Georgia. Lockton reviewed the employment agreements of all the employees including whether the recruit was subject to a noncompete or nonsolicit provision and when and how a recruit could resign from their employer. USI filed a lawsuit and set forth the following three tortious interference with contractual and business relations claims: Lockton (1) engaged in wrongful and malicious conduct designed to induce the Andersons to breach the notice provisions and the duty of loyalty provisions of their employment agreements, (2) engaged in wrongful and malicious conduct designed to have Maldonado and the Andersons breach their noncompete covenants, client noncompete covenants, and nonsolicitation covenants, and (3) wrongfully and maliciously raided USI’s Aviation Practice Group. Lockton in its counterclaims set forth the following two substantive claims against USI: (1) tortious interference with contractual and business relations based on USI’s alleged false and misleading statements about Lockton’s ability to service its customers, and (2) deceptive trade practices based on the same allegations of false and misleading statements by USI regarding Lockton’s ability to service its customers. On March 10, 2021, the court dismissed the counterclaim for deceptive trade practice and the claim asserting tortious interference with business relations and the tortious interference with contractual relations claim to the extent that it was based on USI attorney communications. On March 29, 2022, the court held that the defendant Lockton was not entitled to summary judgment on all three tortious interference with contractual and business relations claims because while aware of the employment agreements, Lockton directly induced the employees to breach multiple provisions of their agreements plus provided them legal counsel and indemnity with regard to any legal challenges they faced from USI. The court concluded accordingly that Lockton was not entitled to summary judgment on USI’s claims against it based on an absence of evidence of improper conduct.

§ 1.4.13. D.C. Circuit

There were no qualifying decisions within the D.C. Circuit.

§ 1.4.14. State Cases

There were no qualifying decisions within the State Cases.

§ 1.5. Misappropriation of Trade Secrets

§ 1.5.1. United State Supreme Court

There were no qualifying decisions by the United States Supreme Court.

§ 1.5.2. First Circuit

Amyndas Pharms., S.A. v. Zealand Pharma A/S, 48 F.4th 18 (1st Cir. (Mass.) 2022). The First Circuit Court of Appeals affirmed a Massachusetts District Court decision to dismiss all claims against a foreign corporation according to a binding forum selection clause. Amyndas Pharmaceuticals (Amyndas) entered into a confidential disclosure agreement (CDA) with Zealand Denmark to share information pursuant to business and services relationships between the parties and their respective affiliates. In April 2017, the biotechnology companies ultimately terminated the CDA. In August 2018, Zealand Denmark announced a collaboration with Alexion to develop complement-targeted therapeutics. Amyndas filed a complaint alleging misappropriation of trade secrets. The Court ultimately held that the forum selection clause in the CDA was mandatory and unambiguous. Even so, Amyndas argued that enforcing the clause would be unreasonable in the interest of public policy and as such, the Court should refuse to enforce the forum selection clause. These arguments included the bulk of the alleged conduct occurring in the US, a strong US preference for plaintiff’s choice of forum, and the inconvenience of litigating in a distant forum. The Court stated that though the Defend Trade Secrets Act (DTSA) guarantees a federal forum for trade secret theft claims under 18 U.S.C. § 1836, the DTSA was not meant to supersede the forum selection decisions of sophisticated parties except regarding unusual cases. The entry of judgments under Fed. R. Civ. P. 54(b) is reserved for unusual cases in which the costs and risks of multiplying the number of proceedings and of overcrowding the appellate docket are outbalanced by pressing needs of the litigants for an early and separate judgment. Given Amyndas’s failure to identify facts to suggest this issue qualified as an unusual case, the Court maintained its enforcement of the forum selection clause. The fact that the DTSA provides a federal cause of action with some extraterritorial reach does not prevent private parties from contracting either outside it or around it.

§ 1.5.3. Second Circuit

Turret Labs USA, Inc. v. CargoSprint, LLC, 2022 U.S. App. LEXIS 6070 (2d Cir. (N.Y.) 2022). This case affirmed that parties asserting trade secret misappropriation claims under the Defend Trade Secrets Act (“DTSA”) or New York law, must specifically detail in a pleading the “reasonable measures” employed to maintain the secrecy of the alleged trade secret. Prior to this case, the Second Circuit had not construed the meaning of the DTSA’s “reasonable measures” requirement. In Turret Labs, the Second Circuit affirmed the lower court’s granting of a motion to dismiss, concluding that plaintiff Turret Labs failed to adequately allege that “reasonable measures” were taken. Although there was an agreement providing the plaintiff’s customer with exclusive access to the alleged trade secret, the agreement did not contractually obligate the customer to maintain confidentiality of the alleged secret. The Second Circuit explained that the DTSA gives scant guidance on what constitutes “reasonable measures” to keep information secret. The analysis “will often focus on who is given access, and on the importance of confidentiality and nondisclosure agreements to maintaining secrecy.” The Second Circuit also concluded that plaintiff Turret Labs’s failure to execute a contract with a nondisclosure obligation undermined its trade secret misappropriation claim. The Court further noted that any of the alleged security measures in place, such as servers in restricted areas and software access restricted by passwords, were basically irrelevant because all customers of Turret Labs’s customer could view the functionality.

§ 1.5.4. Third Circuit

Warman v. Loc. Yokels Fudge, LLC, 2022 WL 17960722 (W.D. Pa. 2022). Plaintiffs were an individual Warman, a trust with the same name, and a chocolate company Chocolate Moonshine, LLC that brought suit against a competing fudge maker and certain individuals to whom plaintiffs had previously licensed their recipe claiming trade secret theft under the Defend Trade Secrets Act (DTSA) and the Pennsylvania Uniform Trade Secrets Act (PUTSA). The defendants argued that all of the ingredients of the recipe, the unified process and operation of making the fudge are in the public domain, have been well known for decades and are disclosed in a patent issued to another party in 1968. Plaintiffs contended that while this information was generally known, its specific trade secret recipe and process was not public, and that several ingredients and techniques changed since the publication of the 1968 recipe. Plaintiff moved for summary judgment on the DTSA and PUTSA claims at the close of discovery, but the court denied the motion. The court held that while a fudge recipe can be a trade secret and the recipe at issue has been found to be a trade secret in prior decisions in state court, there were too many disputed issues of fact that needed to be resolved at trial, including how much the trade secret had been transformed from the original 1968 recipe, whether the compilation of ingredients and processes is unique, the extent to which the claimed trade secret was known outside plaintiffs’ business, and whether reasonable measures were taken to protect it.

§ 1.5.5. Fourth Circuit

AirFacts, Inc. v. Amezaga, 30 F.4th 359 (4th Cir. (Md.) 2022). The U.S. Court of Appeals for the Fourth Circuit vacated a district court ruling and held that “commercial use” was not a threshold requirement to obtaining reasonable royalty damages under the Maryland Uniform Trade Secrets Act (MUTSA). In AirFacts, an employer sued its former employee for trade secret misappropriation of software when the former employee disclosed the software to a noncompetitor third party during the job-interview process. The district court held the employer was ineligible for reasonable royalty damages because it failed to prove the information was disclosed for commercial use. The Fourth Circuit disagreed. In referencing Fifth and Tenth Circuit decisions, the Fourth Circuit held it was inappropriate to condition such awards on commercial use because the MUTSA authorizes reasonable royalty damages for unauthorized disclosure or use of a trade secret. The Fourth Circuit explained that although “commercial use” is not a threshold requirement, courts may factor how the trade secret was used when conducting their analyses. The Fourth Circuit also refused to decide the royalties issue on the merits and limited its holding to rejecting the district court’s ruling that the employer was ineligible for reasonable royalty damages, not that the employer was entitled to said damages.

Additional Cases of Note

GlaxoSmithKline, LLC v. Brooks, 2022 U.S. Dist. LEXIS 27483 (D. Md. 2022) (granting employer’s motion for a temporary restraining order against former employee where employee had access to and improperly obtained trade secret information before and after resignation, the alleged misappropriation risked a devastating impact on employer’s business, and any intrusion on the former employee’s privacy in conducting a forensic analysis on her devices was not outweighed by employer’s interest in confirming that any misappropriated data has been removed from employee’s personal accounts and devices).

§ 1.5.6. Fifth Circuit

Oracle Elevator Holdco, Inc. v. Exodus Sols., LLC, 2021 U.S. Dist. LEXIS 169833 (S.D. Tex. 2021). Oracle Elevator Holdco (Oracle) provides elevator services such as maintenance and repair. Another elevator company, Exodus, provides similar services to Oracle in overlapping locations. David Luxemburg (David) worked as a general manager for Oracle. His daughter, Sarah Luxemberg (Sarah), worked as the owner and operator of Exodus. On multiple occasions, David emailed his daughter pricing proposals that he had originally sent to customers on behalf of Oracle. Upon learning of these communications, Oracle terminated David and sued him for misappropriation of trade secrets. The court analyzed various factors to determine whether the pricing proposals constituted a trade secret. Two factors weighed in favor of finding a trade secret: (1) the information in the pricing proposals could provide value to competitors since customers often chose the lowest bid when deciding to contract with an elevator company and (2) without her father’s emails, Sarah would not have been able to “properly” acquire Oracle’s pricing information. But three significant factors weighed against such finding: (1) Nearly all Oracle personnel had access to the pricing information, (2) Oracle merely guarded the pricing information with password protection rather than, for example, marking the information as confidential, and (3) neither considerable time nor considerable expense was necessary to create the pricing proposal. As such, the court found that the pricing proposals did not constitute a trade secret and David was not liable for misappropriation.

Additional Cases of Note

Cox Operating, LLC, v. Wells Fargo, N.A., 2021 U.S. Dist. LEXIS 239133 (S.D. Tex. 2021), appeal dismissed 2022 WL 1916855 (5th Cir. (Tex.) 2022) (holding that plaintiff’s alleged trade secret, the status of ongoing negotiations for financing, had no “independent economic value” because it “took no investment to create and has no demonstrated value for royalties”); Giddy Holdings, Inc. v. Kim, 2022 U.S. Dist. LEXIS 87679 (W.D. Tex. 2022) (granting plaintiff’s summary judgment motion where defendant improperly acquired his former employer’s trade secrets by accessing them “after his termination” and then misappropriated those trade secrets by using the company’s “investor contact list” to reach out to investors via Twitter as well as screenshotting marketing data from his company account, also after his termination); Maxim Healthcare Staffing Servs., Inc. v. Mata, 2022 U.S. Dist. LEXIS 4944 (W.D. Tex. 2022) (granting plaintiff’s motion for preliminary injunction prohibiting former employee and competitor from using trade secrets, finding that former employee and competitor acquired a contract proposal unique to plaintiff through improper means); Pittsburgh Logistics Sys. v. Barricks, 2022 U.S. Dist. LEXIS 115706 (S.D. Tex. 2022) (determining that although defendant emailed himself his former employer’s customer list, defendant did not misappropriate trade secrets because defendant never used the customer list to garner customers); Sunbelt Rentals, Inc. v. Holley, 2022 U.S. Dist. LEXIS 64557 (N.D. Tex. 2022), appeal dismissed 2022 U.S. App. LEXIS 29597 (5th Cir (Tex.) 2022) (granting in part plaintiff’s request for a preliminary injunction, holding that plaintiff demonstrated a substantial likelihood of prevailing on its trade secret misappropriation claim where plaintiff established defendant forwarded confidential information to his personal email account); Winsupply E. Houston v. Blackmon, 2021 U.S. Dist. LEXIS 225067 (S.D. Tex. 2021), appeal dismissed 2022 U.S. App. LEXIS 34871 (5th Cir. (Tex.) 2022) (holding that plaintiff failed to prove its customer lists were trade secrets because the lists were publicly available and thus “readily ascertainable through proper means”).

§ 1.5.7. Sixth Circuit

Epazz, Inc. v. Nat’l Quality Assur. USA, Inc., __ F. App’x __, 2021 U.S. App. LEXIS 25942 (6th Cir. (Mich.) 2021). This “messy business dispute” relates to a software package that Jadian Enterprises licensed to National Quality Assurance USA, Inc. (NQA). Because this software was critical to NQA’s business and required significant support from Jadian Enterprises, the companies signed an escrow agreement that would allow NQA to obtain the software’s source code from a third party and use it to continue receiving the benefits afforded by the license agreement if Jadian Enterprises breached its agreement with NQA. The software package was later sold to Jadian, Inc., after which the technical support provided to NQA suffered. In response, NQA withheld payment, leading Jadian to withhold further support. Accordingly, NQA asked for, and received, the source code from the third party, and hired another company to provide the support it had wanted from Jadian. Jadian then sued for, among other things, trade secret misappropriation. The district court granted summary judgment to NQA on Jadian’s trade secret claims because the issues were “contractual issue[s], not a trade secret theory,” and allowing the trade secret claims to proceed “would improperly blur the line between contract and tort.” The Sixth Circuit affirmed, holding that any potential error in the summary judgment ruling was harmless, because the agreements between the parties allowed for NQA’s actions—obtaining the code from the third party and using it without paying further subscription fees—such that there could not have been trade secret misappropriation.

B&P Littleford, LLC v. Prescott Mach., LLC, __ F. App’x __, 2021 U.S. App. LEXIS 25590 (6th Cir. (Mich.) 2021). Ray Miller, the former CEO and president of B&P, left and started his own company and allegedly misappropriated trade secret schematics for the benefit of his new company. B&P performed a reasonable investigation at the time but was unable to find any evidence of misappropriation. In 2017, Miller hired a former employee of B&P who allegedly also misappropriated trade secret schematics. In 2018, B&P learned that Prescott Machinery was using B&P schematics and filed suit. The court reversed the district court’s summary judgment ruling that plaintiff’s trade secret claim was barred by a three-year statute of limitations which began to run in 2012. The court held that misappropriating one trade secret does not trigger the limitation period for a claim of misappropriation of a different, but related, trade secret. The court further held that B&P’s prior investigation had tolled the statute of limitation until discovery of misappropriation in 2018.

§ 1.5.8. Seventh Circuit

There were no qualifying decisions within the Seventh Circuit.

§ 1.5.9. Eighth Circuit

ImageTrend, Inc. v. Locality Media, Inc., 2022 U.S. Dist. LEXIS 211741 (D. Minn. 2022). ImageTrend Inc., an emergency medical services (EMS) software developer, alleged that their competitor, Locality Media, conspired with four of ImageTrend’s former employees to steal ImageTrend’s trade secrets. The amended complaint identified broad categories of documents and information, as well as several specific documents, but did not describe with sufficient specificity how those documents and information were inherently confidential or possessed economic value from their secrecy. The court therefore held that ImageTrend’s broad and vague allegations did not plausibly establish that any of the information at issue qualified as trade secret information under the Minnesota Uniform Trade Secrets Act (MUTSA) and the federal Defend Trade Secrets Act (DTSA), nor did the allegations plausibly connect any specific trade secret with a specific act of misappropriation. Thus, the court granted defendants’ motion to dismiss for counts alleging misappropriation of trade secrets.

§ 1.5.10. Ninth Circuit

Precision Indus. Contractors Inc. v. Jack R. Gage Refrigeration Inc., 2021 WL 3472377 (W.D. Wash. 2021). A Washington district court found that there was not sufficient evidence on summary judgment to establish misappropriation by a former employee who submitted competing bids for a competitor. The defendant former employee was provided access to plaintiff’s confidential information during employment, including strategies on how to secure winning bids and information about plaintiff’s existing and potential clients.

In the past, plaintiff had won about 75 percent of the bids it submitted for a specific client. Shortly after a client project was announced, defendant employee abruptly quit. Following this, plaintiff was only awarded one project for the client project even though it submitted five or six bids. Though there were other factors in play, plaintiff believed that part of the reason it lost bids was because defendant used plaintiff’s confidential information to submit bids to the client. Plaintiff eventually moved for summary judgment on its federal and state trade secret misappropriation claims, arguing that the defendant improperly took plaintiff’s confidential information, including bidding sheets, internal costs, manuals, and other techniques developed internally and exclusively for plaintiff’s own use.

Despite this, the court found that while defendant may have had access to some of plaintiff’s confidential information, that in itself did not demonstrate that he misappropriated the information. Moreover, the court noted that it was undisputed that defendant had decades of “know-how and experience,” including with submitting bids for industrial construction projects. In addition, defendant testified that he had no idea what plaintiff’s bids were going to be on the client project. In sum, there was no evidence that defendant misappropriated plaintiff’s trade secrets or acquired them through improper means, that he disclosed the trade secrets to his new company, or that he used the trade secrets in connection with submitting bids for the client project. Accordingly, summary judgment was denied as to plaintiff’s claims for trade secret misappropriation.

MBS Eng’g Inc. v. Black Hemp Box LLC, 2021 WL 2458370 (N.D. Cal 2021). A California district court ruled that plaintiff’s DTSA claim could proceed despite the defendants’ assertions that the company did not do enough to secure the technology’s secrecy when it sold the hemp dryers at issue without prohibiting buyers from reverse-engineering them. “It may be that the ease of reverse engineering bears on the question of what secrecy efforts were reasonable under the circumstances, but defendants cite no authority indicating that the mere possibility of reverse engineering by a third-party purchaser necessarily invalidates a trade secret,” the court stated. The court concluded, “[a]t most, this raises a fact question that should be resolved at summary judgment or trial.”

XpandOrtho Inc. v. Zimmer Biomet Holdings Inc., 2022 U.S. Dist. LEXIS 46698 (S.D. Cal. 2022). A California district court rejected defendant’s motion to dismiss finding allegations of trade secret misappropriation sufficient at the pleading stage. The court held that the identification of “thirteen general trade secrets along with explanations” in the complaint and allegations of facts supporting its efforts to maintain the secrecy of the trade secrets were sufficient. The court rejected defendant’s challenges to the allegations of misappropriation, reasoning that the plaintiff had alleged how defendant gained access to the trade secrets and how it used the information to develop its own offering. The court also found that plaintiff’s allegations that defendant refused to return or destroy the plaintiff’s information after calling off the acquisition were sufficient. Lastly the court rejected defendant’s contention that the trade secret claim sounded in fraud and was thus subject to Rule 9(b)’s heightened pleading requirement.

§ 1.5.11. Tenth Circuit

KeyBank Nat’l Ass’n v. Williams, 2022 U.S. Dist. LEXIS 40880 (D. Colo. 2022). The District Court found that defendants have not met their burden of demonstrating the absence of a genuine dispute as to material facts governing KeyBank’s trade secret misappropriation claims. This case involves defendants’ alleged misappropriation of trade secrets with their former employer, Plaintiff KeyBank National Association. Defendant Williams worked for KeyBank since 2007, and most recently was employed as a Senior Vice President and Regional Manager of Keybank’s commercial mortgage practice. Defendant Weldon was employed as Vice president in plaintiff’s Mortgage Bank group. Both defendants signed several agreements regarding trade secrets. In 2018, both defendants began negotiating new employment with Newmark Knight Frank. Defendant Williams provided Newmark with two types of documents: 1) PDFs containing portions of KeyBank’s internal tracking documents (“Pipeline Reports”) and 2) Excel sheets of the Pipeline Reports. The Pipeline Reports contain KeyBank’s confidential information, including KeyBank’s revenue and fees. Defendant Williams emailed copies of the Pipeline Reports to his personal email account prior to his departure.

To prove a claim for misappropriate of trade secrets, KeyBank must prove that: 1) KeyBank possessed a valid trade secrete; 2) the trade secret was acquired, disclosed, or used without consent, and 3) the person acquiring, disclosing, or using the trade secret knew or should have known that the trade secret was acquired by improper means. A claim for misappropriation does not require the “use” of the trade secret; rather, the claim can be established by the acquisition of a trade secret by another who knows or has reason to know that the trade secret was acquired by improper means. Rejecting the defendant’s reliance on a Sixth Circuit case Heartland Home Fin., Inc. v. Allied Home Mortg. Cap. Corp., 258 F. App’x 860, 861 (6th Cir. (Ohio) 2008) (unpublished), the Court determined that summary judgment was inappropriate for the trade secret claims.

§ 1.5.12. Eleventh Circuit

Fin. Info. Techs., LLC v. iControl Sys., USA, LLC, 21 F.4th 1267 (11th Cir. (Fla.) 2021). Financial Information Technologies (Fintech) and iControl Systems (iControl) were competitors who sold niche computer software that rapidly processed electronic payments between retailers and wholesale distributors of alcoholic beverages. Fintech sued iControl, alleging that iControl violated the Florida Uniform Trade Secrets Act (FUTSA) by misappropriating seven Fintech trade secrets. The jury returned a general verdict in favor of Fintech, finding that iControl misappropriated Fintech’s trade secrets and, further, that iControl acted willfully and maliciously in doing so. iControl filed a motion for a new trial on liability and a renewed JMOL motion on damages, alleging that Fintech’s seven alleged trade secrets were never actually secret, and contending that Fintech failed to prove lost profits, as required under FUTSA. Fintech moved for a permanent injunction “prohibiting iControl from doing business in the regulated commerce industry.” The district court denied all three motions. The appellate court affirmed the district court’s judgement with respect to iControl’s liability and Fintech’s request for a permanent injunction, but reversed its judgement on damages. In affirming the two motions, the appellate court made two points. First, Fintech needed to show evidence of misappropriation only as to one as the jury rendered a general verdict. In so ruling, the court reviewed evidence indicating iControl improved its software by receiving assistance from Fintech’s former employees. Second, FUTSA only “authorizes the injunction of specific, identifiable trade secrets,” not “blanket restraint of competition.” Fintech’s request for injunction “wasn’t narrowly tailored and did not identify specific acts to be restrained,” nor was it provided for a specified period of time.

§ 1.5.13. D.C. Circuit

CoStar Grp., Inc. v. Leon Cap. Grp. LLC, 2022 U.S. Dist. LEXIS 101663 (D.D.C. 2022). Plaintiff CoStar Group, Inc. (CoStar) operates a commercial real estate information database. CoStar in turn licenses the database to users. Leon Capital (Leon), a real estate investment and development firm, agreed to a license contract with CoStar. Per their License Agreement, Leon agreed to follow CoStar’s Terms and Conditions, which included a limitation on “access or use” of the database by any “direct or indirect competitors of CoStar,” and the database’s Terms of Use, which provided that only “authorized users” may access the database and forbid “direct or indirect competitors of CoStar” from accessing the database. CoStar alleged that Leon violated both sets of terms. In particular, CoStar alleged that Leon was deemed an indirect competitor, breaking the agreement and requiring Leon to pay remaining annual fees. Additionally, CoStar alleged that Leon’s new Managing Director, Wood, accessed the databased with his former employer’s credentials and “mined” beneficial data for Leon. This access occurred after CoStar terminated Leon’s access. CoStar alleges that this action violated the Terms of Use, in the alternative were fraudulent and constituted unjust enrichment, and finally violated the Computer Fraud and Abuse Act (CFFA). Leon moved to dismiss all claims. Regarding the first claim for unpaid fees, the court ruled the issue moot and dismissed it because Leon had paid the fees after initial filings. Regarding the claims centered on Wood’s access, Leon contended that was a contract dispute between CoStar and Wood’s former employer. The court disagreed, stating that “it is beside the point whether Wood’s actions also violated some [other] agreement . . . .” Additionally, per the respondeat superior doctrine, Leon may be held accountable for Wood’s actions because he used a Leon device and accessed data favorable to Leon. The court concluded that Leon is an “indirect competitor” due to its sufficient direct investments in a directly competing firm. Finally, the court stated that even though Wood had valid credentials, in the sense that they allowed him to log into the database, his access was still unauthorized and therefore met the requirements of a CFAA claim.

§ 1.5.14. State Cases

There were no qualifying decisions within the State Cases.

§ 1.6. Damages

§ 1.6.1. United States Supreme Court

There were no qualifying decisions by the United States Supreme Court.

§ 1.6.2. First Circuit

There were no qualifying decisions within the First Circuit.

§ 1.6.3. Second Circuit

Hosp. Media Network v. Henderson, 209 Conn. App. 395 (Conn. App. Ct. 2021). In this case, the plaintiff employer had employed the defendant employee as its Chief Revenue Officer until 2013, when he was fired for cause. The plaintiff employer then brought an action against the former employee, claiming that, among other things, he violated the Connecticut Uniform Trade Secrets Act (“CUTSA”) and breached his fiduciary duties by simultaneously working for a private equity firm that was involved in the same business sector as plaintiff. The lower court ruled in favor of the plaintiff employer. The Connecticut Court of Appeals affirmed, but remanded the case for a new hearing on damages. The defendant employee then appealed the judgment rendered on remand awarding damages, claiming the trial court (1) exceeded the scope of the court’s remand order, and (2) awarded damages that were inequitable, and predicated on factual findings that were not supported by the record. As to the first point, the Connecticut Court of Appeals concluded that the lower court did not exceed the scope of the remand order. However, the Court of Appeals agreed with the defendant employee that the lower court committed error in ordering the defendant to disgorge $50,000 of the $150,000 consulting fees he received. The appellate court explained that its previous decision prohibited disgorgement of amounts earned by the defendant employee outside of his period of employment with the plaintiff employer, and that the court had previously assumed the defendant employee earned the consulting fees after his employment with the plaintiff employer had ended.

ML Fashion, LLC v. Nobelle GW, LLC, 2022 U.S. Dist. LEXIS 18634 (D. Conn. 2022). This case involves former employees leaving their employer ML Fashion, LLC to form a new competitor company. Plaintiff ML Fashion, LLC lodged a number of claims against the former employees, including but not limited to, claims under the Computer Fraud and Abuse Act (“CFAA”), the Defend Trade Secrets Act (“DTSA”), conversion, breach of fiduciary duty, breach of contract, and tortious interference with a noncompetition agreement. Defendants moved for the court to order plaintiffs to pay certain costs associated with a previously-filed action in the United States District Court for the Northern District of Illinois. They also sought a stay of the proceedings until plaintiffs pay those costs. The defendants also moved to dismiss the Complaint in its entirety, in addition to moving to stay discovery and moving to amend the scheduling order, pending resolution of the motion to dismiss. The court ultimately held that it was appropriate to award defendants costs under Federal Rules of Civil Procedure 41 where plaintiffs initially filed an action in Illinois and litigated it vigorously, imposing costs on defendants, then dismissed it voluntarily and refiled their claims in another court. This case serves as a reminder that parties will likely be subject to costs if Federal Rules of Civil Procedure 41 is violated, and that Federal Rules of Civil Procedure 41 does not require any showing of bad faith in order to recover such costs.

§ 1.6.4. Third Circuit

There were no qualifying decisions within the Third Circuit.

§ 1.6.5. Fourth Circuit

There were no qualifying decisions within the Fourth Circuit.

§ 1.6.6. Fifth Circuit

There were no qualifying decisions within the Fifth Circuit.

§ 1.6.7. Sixth Circuit

There were no qualifying decisions within the Sixth Circuit.

§ 1.6.8. Seventh Circuit

Select Rehab., LLC v. Painter, 2021 U.S. Dist. LEXIS 159437 (S.D. Ill. 2021). Painter and Vasquez worked for Select Rehabilitation. When they resigned from Select Rehabilitation and began working with a competitor, Select Rehabilitation sued for, among other things, breach of the Computer Fraud and Abuse Act (“CFAA”). Select Rehabilitation alleged that Painter and Vasquez stole trade secrets. Painter and Vasquez moved to dismiss the CFAA claim on the basis that Select Rehabilitation failed to allege damages that are recoverable under the act (which defines “damage” as impairment to the integrity or availability of data and “loss” as any reasonable cost to a victim). Select Rehabilitation argued that the misuse of trade secrets constituted recoverable damages under the CFAA. The Court acknowledged a split in authority regarding whether the loss in value of trade secrets (or a competitive edge) constituted damages under the CFAA, but it determined that Select Rehabilitation failed to allege recoverable damages. The Court found that the cases Select Rehabilitation relied upon had been “discredited due to statutory changes.” Allegations of an interruption in access to data were required to state a claim under the CFAA.

§ 1.6.9. Eighth Circuit

There were no qualifying decisions within the Eighth Circuit.

§ 1.6.10. Ninth Circuit

Bladeroom Group, Ltd. v. Emerson Elec. Co., 11 F.4th 1010 (9th Cir. (Cal.) 2021), amended and superseded on denial of reh’g en banc 20 F.4th 1231 (9th Cir. (Cal.) 2021). The Ninth Circuit reversed a $60 million verdict on the grounds that the district court should not have ignored the plain language in an NDA providing that confidentiality obligations would terminate after two years. The court rejected the district court’s reasoning that the two-year limit controlled because it was contrary to the parties’ intent and would lead to an absurd result.

Dr. V Prods., Inc. v. Rey, 68 Cal. App. 5th 793 (2021). A California appellate court found that an order denying a motion for attorneys’ fees under CUTSA is not an appealable order. In the case, plaintiff filed suit against a former employee, alleging the former employee converted and destroyed documents belonging to the plaintiff, which contained “proprietary company information.” After discovery, the plaintiff voluntarily dismissed its trade secret misappropriation claim, and the defendant moved for an award of attorneys’ fees under CUTSA which the court denied. The defendant appealed, and the plaintiff moved to dismiss on the grounds that a denial of a motion for attorneys’ fees under CUTSA is not an appealable order.

The defendant argued that “if a collateral order that directs payment of attorney fees (i.e. “payment of money”) is appealable, by parity of reasoning the opposite should be true.” The appellate court disagreed, citing to case law which made no mention of an order denying the payment of money being appealable. The court also cited other examples where “statutes are not always reciprocal to the parties” and where “some authorize an appeal by one side to a matter but deny that right to the other side.”

The defendant argued that an order denying fees under CUTSA is collateral to the litigation. The court disagreed and cited authority that a party may not normally appeal from a judgment on one cause of action if determination of other causes of action is pending. Defendant’s underlying motion addressed only one of respondent’s causes of action and six remained. The appellate court also stated that because the core of the lawsuit concerned destruction and conversion of corporate documents, the trade secret misappropriation claim was intertwined with the other claims and therefore not collateral. Accordingly, in California, an attorneys’ fees claimant must litigate all claims to conclusion at the trial level, before appealing the fees’ order.

Elation Sys. v. Fenn Bridge LLC, 71 Cal. App. 5th 958 (2021). The Court of Appeal concluded that the trial court erred in granting JNOV on plaintiff’s breach of nondisclosure claim. While the trial court correctly concluded that substantial evidence did not support the jury’s finding of harm or $10,000 in damages for that harm, the Court found that it should have awarded plaintiff nominal damages on this cause of action. The Court reasoned the breach of the nondisclosure was in itself a legal wrong, regardless of whether damage was inflicted. The Court of Appeal noted that, under Section 3360, California courts have held “‘[a] plaintiff is entitled to recover nominal damages for the breach of a contract, despite inability to show that actual damage was inflicted.’” The Court further reasoned that reversal should be granted where, as here, an award of nominal damages would provide “‘absolute entitlement to costs’” or “‘determine some question of permanent right.’” Reversal was appropriate because the nondisclosure provided either party could seek specific performance for a breach, and therefore an award of nominal damages would impact plaintiff’s rights to obtain further equitable relief, such as a permanent injunction preventing the former employee from further breaching the nondisclosure.

§ 1.6.11. Tenth Circuit

ORP Surgical, LLP v. Howmedica Osteonics Corp., 2022 U.S. Dist. LEXIS 84398 (D. Colo. 2022), amended and superseded by 2022 U.S. Dist. LEXIS 170132 (D. Colo. 2022), appeal dismissed 2022 WL 19039680 (10th Cir. (Colo.) 2022). The District Court determined that Stryker did not have “cause” to terminate the two contracts and concluded that ORP was entitled to the restriction payments outlined in the contracts.^[6] The District Court awarded ORP $1,018,896 in damages for the restriction payments outlined in the joint SRA and $3,731,791.47 in damages for the restriction payments outlined in the trauma SRA. The District Court reasoned that there was insufficient evidence that Stryker’s solicitation and diversion tactics were the cause of the sales representatives leaving ORP for Stryker. The District Court explained that its order should not be misconstrued as an indication that Stryker’s solicitation and diversion tactics were okay, but awarded $1.00 in nominal damages for Stryker’s breach of the nonsolicitation provision because the Court cannot award damages where damages were not proved. The District Court awarded ORP reasonable attorney’s fees and expenses. Additionally, the District Court determined that Stryker failed to meet some of its preservation obligations and upon review of the special master’s observations, ordered Stryker and its counsel to reimburse ORP for the full amount of its shares of the special master’s fees and costs, half of which is to be paid by Stryker for its failure to preserve text messages and half to be paid by Stryker’s law firm for counsel’s misconduct during the discovery process.

§ 1.6.12. Eleventh Circuit

Ala. Aircraft Indus. v. Boeing Co., 2022 U.S. App. LEXIS 4039 (11th Cir. (Ala.) 2022). Alabama Aircraft Industries (Pemco) and Boeing were competitors in the aerospace industry. Pemco and Boeing decided to submit a joint bid to the United States Air Force concerning a contract to maintain, repair, and upgrade the Air Force’s fleet of KC-135 Stratotanker aircraft. Pemco and Boeing signed a contract, but the teaming arrangement fell apart when Boeing terminated the agreement upon finding that the Air Force reduced the number of KC-135s available for the contract. The two companies pursued the opportunity independently. Boeing’s bid was 1.28% lower than Pemco’s, and Boeing won the contract. Pemco went out of business and into bankruptcy. Pemco sued Boeing on several theories of liability, including a misappropriation-of-trade-secrets claim, damages of which allegedly amounted to $100 million. The district court dismissed the claim in a pretrial order, finding that the Alabama law, and not the parties’ choice of Missouri law for the agreement, applied and that the claim was time-barred under Alabama law. This was detrimental to Pemco as its claim was not time-barred under Missouri law. The appellate court reversed. The court reviewed the parties’ choice-of-law provision in the agreement, which provided “[t]he interpretation of this Agreement and the rights and liabilities of the parties to this Agreement shall be governed by the law of the state of Missouri[.]” The court found that the language was “broad enough to encompass Pemco’s misappropriation-of-trade-secrets claim,” noting that the parties intended Missouri law to govern the sort of misappropriation-of-trade-secrets claim that arose from “the exchange of proprietary information in connection with the parties’ teaming arrangement.” The court also performed the analysis under Alabama’s choice-of-law regime and reached the same conclusion based on a finding that Pemco suffered its trade secrets injury in Missouri. The court refused to apply Boeing’s preferred financial harm test, stating that it had no application under Alabama law, which distinguishes the concept of injury from the concept of damages.

§ 1.6.13. D.C. Circuit

Iron Vine Sec., LLC v. Cygnacom Sols., Inc., 274 A.3d 328 (D.C. 2022) (applying Virginia law). Appellant Iron Vine, a Virginia corporation, obtained a 10-year contract with the State Department in 2011. Per the State Department’s request, Iron Vine was to subcontract specific work from the State Department contract to Cygnacom, also a Virginia corporation. Iron Vine and Cygnacom entered into an agreement, stipulating to a mutual nonsolicitation agreement. Additionally, Cygnacom had noncompetition provisions with its own employees. One of those employees, Shanley, left Cygnacom and started his own company, Second Factor, with Cygnacom’s consent. Second Factor also subcontracted to work on the State Department contract. In late 2015, Iron Vine informed Cygnacom that it was not renewing the subcontract. On the same day, Iron Vine and Second Factor posted job advertisements matching those of Cygnacom employees. Together, the two companies hired six employees away from Cygnacom. Cygnacom sued Iron Vine, Second Factor, and Shanley with claims stemming from alleged breaches or interferences with the nonsolicitation and noncompetition agreements. At trial, the jury returned a verdict in favor of Cygnacom. On appeal, Iron Vine contends that the verdicts cannot stand because the nonsolicitation provision and noncompetition provisions are unenforceable under Virginia law. The court disagreed, finding the nonsolicitation provision enforceable because it was mutually accepted and the noncompetition provision narrowly drawn. Finally, Second Factor argued that the tortious interference award of compensatory damages is duplicative of the breach-of-contract award. The court held that Cygnacom cannot recover compensatory damages above its lost profits from the State Department contract unless they offer evidence of additional harm. Cygnacom argued that it lost business opportunities yet offered no evidence. As such, the court was not persuaded and ordered the trial court to reassess the compensatory damages.

§ 1.6.14. State Cases

There were no qualifying decisions within the State Cases.

1. See Section 1.4.5 for a summary of the court’s ruling on the issue of customer and employee nonsolicitation agreements. ↑

2. See Section 1.4.6 for a summary of the court’s ruling on the issue of customer and employee nonsolicitation agreements. ↑

3. See Section 1.3.5 for a summary of the court’s ruling on the issue of restrictive convents: covenants not to compete. ↑

4. See Section 1.3.6 for a summary of the court’s ruling on the issue of restrictive covenants: covenants not to compete. ↑

5. See Section 1.6.11 for a summary of the court’s ruling on the issue of damages. ↑

6. See Section 1.4.11 for a summary of the court’s ruling on the issue of customer and employee nonsolicitation agreements. ↑

Editors

§ 1.1. Introduction

This chapter summarizes the significant case law developments from state and federal courts across the country in 2021–22 concerning directors’ and officers’ liability insurance coverage claims. Noteworthy decisions included the following:

• First Solar, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 274 A.3d 1006 (Del. 2022). The Delaware Supreme Court held that the insurance policy language dictates whether a claim relates back to an earlier claim under a claims-made liability policy, not the “fundamentally identical” standard.
• Verizon Communications Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2022 WL 14437414 (Del. Super. Oct. 18, 2022). The Superior Court of Delaware’s Complex Commercial Litigation Division held that a settlement in a fraudulent transfer suit brought by a bankruptcy trustee for FairPoint Communications against Verizon Communications Inc. was covered under Verizon’s directors and officers liability policy.
• CUMIS Specialty Ins. Co., Inc. v. Kaufman, 2022 WL 10640903 (S.D.N.Y 2022). The United States District Court for the Southern District of New York denied the former Melrose Credit Union CEO’s motion to reconsider its ruling that CUMIS Specialty Insurance Company was not obligated to cover Kaufman’s legal costs in appealing his bribery conviction. The court held further that CUMIS was entitled further to recoup Kaufman’s post-sentencing expenses that the insurance company already paid. 

§ 1.2. Claim

First Solar, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 274 A.3d 1006 (Del. 2022). The Delaware Supreme Court held that the insurance policy language dictates whether a claim relates back to an earlier claim under a claims-made liability policy, not the “fundamentally identical” standard.

In March 2014, First Solar Inc.’s (“First Solar”) stockholders filed a class action lawsuit against the company, alleging that it violated federal securities laws by making false or misleading public disclosures (“Smilovits Action”). First Solar’s primary insurer, National Union Fire Insurance Company of Pittsburgh, PA (“National Union”), provided coverage for the Smilovits Action under a 2011–2012 $10 million “claims made” directors and officers insurance policy (“D&O policy”). While the Smilovits Action was pending, on June 23, 2015, First Solar stockholders who opted out of the Smilovits Action filed a class action lawsuit, referred to as the Maverick Action, alleging violations of the same federal securities laws as the Smilovits Action, in addition to violations of Arizona statutes and claims for fraud and negligent misrepresentation.

When the Maverick Action was filed, First Solar had a $10 million “claims made” policy with National Union for 2014–2015 (the “Primary Policy”) and a $10 million layer of excess coverage with XL Specialty Insurance Company (the “Excess Policy”). After First Solar sought insurance coverage under the Primary Policy and Excess Policy for the Maverick Action, the insurers denied coverage under a “Related Claims” exclusion, which provided that a Related Claim is “a Claim alleging, arising out of, based upon or attributable to any facts or Wrongful Acts that are the same as or related to those that were . . . alleged in a Claim made against an Insured.” The insurers argued that the Maverick Action was a “related claim” to the Smilovits Action. Thereafter, First Solar brought the instant insurance coverage action against the insurers, asserting claims for breach of contract and declaratory judgment. The insurers moved to dismiss the complaint and First Solar filed a cross motion for partial summary judgment as to relatedness.

In considering whether the two claims were related, the Superior Court of Delaware’s Complex Commercial Litigation Division applied a “fundamentally identical” standard, ultimately finding that the exclusion applied. The court reasoned that the Smilovits and Maverick actions had “substantial similarities,” and were “fundamentally identical” because the lawsuits stemmed from the same original suit, were against “identical defendants,” overlapped in relevant time periods, alleged the same securities law violations, relied on the same specific disclosures, and pertained to the same underlying wrongful conduct—allegedly inflating First Solar’s stock price by misrepresenting cost-per-watt metrics and falsifying financial reports.

On appeal, the Delaware Supreme Court affirmed the Superior Court’s holding, but rejected the application of the “fundamentally identical” standard. The Supreme Court instead held that whether a claim relates back to an earlier claim is decided by the language of the policy, not the generic “fundamentally identical” standard. Applying the policy language at issue, the Supreme Court reasoned that the primary policy’s Related Claim provision was broad and the question on appeal was therefore whether the Maverick Action raised Claims that “aris[e] out of, [are] based upon or attributable to any facts or Wrongful Acts that are the same as or related to” the Smilovits Action. The Supreme Court held that the Maverick Action was a Related Claim under the Primary Policy because both actions were based on the same alleged misconduct—First Solar’s misrepresentations about the cost-per-watt of its solar power. Accordingly, there was no coverage for the Maverick Action.

Smartsheet, Inc. v. Federal Insurance Co., Case No. C22-315 MJP (W.D. Wash. Aug. 8, 2022). The United States District Court for the Western District of Washington denied the insurers’ motion to dismiss Smartsheet’s claim for coverage, holding that the underlying actions were not related. In 2018, the wife of Smartsheet’s founder, Brett Frei, filed an arbitration demand alleging that Frei induced her into selling her Smartsheet shares ahead of a tender offer at a much lower price as part of their divorce settlement. In 2019, Smartsheet investors who had sold Smartsheet shares in the tender offer brought a class action against Smartsheet, alleging that it failed to disclose plans of an initial public offering to induce investors to sell Smartsheet shares in the tender offer at a reduced price.

Smartsheet held insurance policies for 2018 and 2019 and submitted both claims to its insurers. The insurers claimed that the actions were interrelated and constituted a single claim dated on the first of the claims, 2018. Thus, the insurers determined, only the 2018 policy, and not the 2019 policy applied. Smartsheet sought declaratory relief that the two claims were not interrelated and that the later claim triggered the 2019 policy.

The court held that the two claims shared “only limited overlap and several key distinctions” and thus were unrelated and distinct claims within the relevant policy definitions. In particular, the 2018 demand concerned alleged misrepresentations by Frei to his wife regarding the tender offer, while the 2019 class action concerned omissions by Smartsheet to investors regarding the IPO. The court held that the two distinct claims lacked sufficient overlap to make the claims related.

§ 1.3. Loss

Federal Insurance Company v. Healthcare Information and Management Systems Society, Inc., 567 F.Supp.3d 893 (N.D. Ill. 2021). In this case, the defendant-insured was a non-profit corporation in the health information systems sector which was responsible for organizing one of the largest annual conferences in the U.S. The 2020 conference was cancelled due to the pandemic. Two exhibitors to this conference filed actions against the insured seeking breach of contract damages for failing to return fees paid and damages incurred from preparing for and travelling to the conference. One of the exhibitors filed a class action which was resolved via settlement.

Plaintiff-insurer filed a declaratory action seeking a declaration that, under the insurance policy it issued to the insured, it had no duty to defend or indemnify defendant-insured in these underlying actions. The insured counterclaimed, asserting that the policy did provide coverage and that the insurer breached the contract. The United States District Court for the Northern District of Illinois denied in part the insurer’s motion to dismiss the counterclaim, holding that the underlying claims constituted a loss under the policy and that the two exceptions to the policy’s coverage for loss were inapplicable.

The insurance policy at issue was titled “ForeFront Portfolio Not-For-Profit Organizations Policy.” The Directors and Officers section of this policy covered losses that the insured became legally obligated to pay on account of any claim made against it during the policy period. This section contained a “Professional Services Exclusion” and a “Contract Exclusion.” The Professional Services Exclusion provided no coverage for loss resulting from an actual or alleged failure to render any professional services. The Contract Exclusion provided that the insurer was not liable for loss on account of any claim arising from liability under any written or oral contract.

The court found that the claims constituted a loss under the policy because the settlement resolved all of the exhibitors’ claims, not only those that were restitutionary in nature. The Professional Services Exclusion did not apply because the underlying claims were not entirely based on the insured’s negligent provision of professional services, but instead sought reimbursement for damages resulting from the inability to sublet floor space at the conference. The court found that subleasing floor space was not necessarily a professional service and that the underlying complaints did not allege the insured exercised poor professional judgment when cancelling the conference. The Contract Exclusion did not apply because the underlying complaints sought more than contract damages and the settlement agreement settled all of the exhibitors’ claims, not just the contract claims. The court dismissed the insured’s counterclaim for a statutory penalty for bad faith denial of coverage because it had an insufficient factual basis and because the insurer’s complaint established a bona fide dispute about coverage.

G-New, Inc. dba Godiva Chocolatier, Inc. v. Endurance American Insurance Co., 2022 WL 4128608 (Del. Super. Sept. 12, 2022). The Superior Court of Delaware’s Complex Commercial Litigation Division held that a class action settlement was covered under Godiva’s directors and officers liability policy. Plaintiffs brought a class action suit against Godiva, alleging consumer protection violations based on the “Belgium 1926” label that appeared on Godiva’s products. The class action settled, and Godiva sought coverage under its insurance policies for the settlement. The insurers denied the coverage claims, asserting that the settlement was not a covered loss because Godiva’s unlawful conduct was intentional, and that the policy excludes from coverage unfair trade practices and fines or penalties imposed by law.

The court, however, held that the policy language contemplated settlements as covered losses and the insurers had not provided evidence that Godiva’s violation of law was knowing or willful. The Court noted further that the policy did not define “unfair trade practices” and insurers could not show that unfair trade practices were the equivalent of consumer fraud. Lastly, the court, relying on Delaware precedent, agreed that a settlement, which is meant to compensate plaintiffs, does not equate to a penalty imposed by law, which is meant to punish defendants.

§ 1.4. Securities Claim

Stillwater Mining Co. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2021 WL 6068046 (Del. Super. Ct. Dec. 22, 2021). After approximately two years and much procedural wrangling, the Superior Court of Delaware’s Complex Commercial Litigation Division dismissed a Delaware policyholder’s amended complaint with prejudice for failure to state a claim on which relief could be granted. After Stillwater sought D&O coverage for an appraisal action, both the insurers and Stillwater filed complaints in Delaware regarding insurers’ obligation to pay defense costs and indemnify Stillwater for its settlement payment and interest resulting from the appraisal action. At the time both sides filed their actions, the Delaware Supreme Court was considering whether appraisal claims fell within the definition of a “securities claim” under D&O insurance in another case, In re Solera Insurance Coverage Appeals (“Solera II”). In its initial complaint, Stillwater argued that Delaware law governed its D&O policies.

The Superior Court stayed Stillwater’s case until the resolution of the Solera II appeal. After Solera II was resolved in insurers’ favor and the Superior Court lifted the stay, however, Stillwater sought to dismiss its case in favor of a coverage action it had filed in Montana, where its headquarters was located. In its Montana action, Stillwater already had moved for summary judgment on its D&O policies, arguing that Montana law applied. In the alternative, Stillwater asked the Delaware court to allow it to amend its complaint to add Montana-law claims. The insurers opposed Stillwater’s motion to stay and moved to dismiss its amended complaint.

According to the Superior Court, the “decision as to whether Delaware or Montana law applies is dispositive to the case. If Delaware law applies . . . the Delaware Supreme Court’s Solera II decision bars Stillwater from receiving coverage for the Appraisal Action, effectively deciding the instant action.” To determine the governing law, the court first considered whether an actual conflict existed between Montana and Delaware law. The parties disagreed on this question, with Stillwater arguing that Montana law imposed a higher burden on insurers for refusing to defend and insurers arguing that the relevant standards were materially identical. The court assumed a conflict of law existed and proceeded to analyze which state had the “most significant relationship” to the action, using the factor test set forth in the Restatement (Second) Conflict of Laws. The court explained that “Delaware precedent holds that the state of incorporation is the ‘center of gravity’ for D&O policies” and that Stillwater was incorporated in Delaware. The court gave little weight to the fact that Stillwater was headquartered in Montana or that the D&O policy contained Montana endorsements, noting that “a company’s principal place of business generally will not outweigh its state of incorporation in determining coverage for a D&O policy.” The court also found that Stillwater’s previous statements about the application of Delaware law to its policy and its failure to raise its Montana claims in its initial complaint underscored the conclusion that Delaware law applied.

Finally, the Superior Court addressed the doctrine of depecage, in which different states’ laws are applied to different aspects of a contractual relationship, noting that the doctrine is “disfavored generally, including in Delaware.” The court found that Stillwater had not articulated any compelling basis to apply the doctrine, which the court believed contradicted the Delaware Supreme Court’s emphasis on applying a single body of law to national and multi-national insurance programs.

Because Stillwater’s policy covered Stillwater only for “securities claims,” and the Appraisal Action was not a “securities claim” under Delaware law, the Superior Court dismissed Stillwater’s amended complaint with prejudice.

Verizon Communications Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2022 WL 14437414 (Del. Super. Oct. 18, 2022). The Superior Court of Delaware’s Complex Commercial Litigation Division held that a settlement in a fraudulent transfer suit brought by a bankruptcy trustee for FairPoint Communications against Verizon Communications Inc. was covered under Verizon’s directors and officers liability policy. The court held that the suit was a securities claim brought derivatively on behalf of Northern New England Spinco Inc., an entity that Verizon created for the transfer of landline assets and merged into FairPoint Communications. The Court held further that the trustee that brought the claim qualified as a security holder of Spinco, as a result of the merger between Spinco and FairPoint. The Court reasoned that because FairPoint held Spinco liabilities, such as payment on Spinco Notes, anyone holding the Spinco Notes were holders of Spinco debt securities. Thus, the trustee brought the fraudulent transfer suit as a Spinco security holder.

The policy defined a Securities Claim to include a claim “brought derivatively on the behalf of an Organization by a security holder of such Organization.” The policy defined “Organization” to include any for-profit entity Verizon controlled on or before the effective date of the policy. Holding that the suit constituted a securities claim, the Court determined that the settlement for the suit was covered under the insurance policy.

§ 1.5. Wrongful Act

The Options Clearing Corporation v. U.S. Specialty Ins. Co., 2021 WL 5577251 (Del. Super. Ct. Nov. 30, 2021). Plaintiff-insured, Options Clearing Corporation (“OCC”), moved for partial summary judgment on its D&O insurers’ obligation to cover defense costs arising out of two federal enforcement actions against it. Its insurers opposed, arguing that the actions were related to previous federal investigations and therefore barred by related claims exclusions. The Delaware Superior Court’s Complex Commercial Litigation Division granted summary judgment in OCC’s favor, finding that the current enforcement actions were not meaningfully linked to the earlier investigations to trigger the exclusions.

OCC’s policy contained an “event exclusion” precluding coverage for specified federal investigations and “Interrelated Wrongful Acts.” Three letters and responses relating to proceedings by a compliance division of the SEC (the “2012-14 Letters”) were identified as non-covered events in the event exclusion. The policy also contained a prior notice exclusion that barred coverage for Loss in connection with a Claim arising out of Wrongful Acts alleged or contained in “any claim which has been reported, or with respect to any notice has been given, under any policy of which this Policy is a renewal or replacement or which it may succeed in time.” OCC sought coverage for two enforcement actions (“Enforcement Actions”) brought by the Securities and Exchange Commission and the Commodity Futures Trading Commission in 2017 and 2018, respectively.

In opposing summary judgment, insurers argued that fact discovery was necessary to determine the exact scope and circumstances of the Enforcement Actions, and that the event exclusion was broad enough to exclude coverage for the Enforcement Actions as related to the 2012-14 Letters. Reviewing the policy language, the court determined that the relevant terms were clear and unambiguous, such that the terms “arising out of,” “based upon,” and “attributed to” meant “originating from or sharing some meaningful linkage.” Accordingly, the court concluded that to invoke either exclusion, the insurers had the burden to demonstrate a “meaningful link” between the Enforcement Actions and the 2012-14 Letters.

The Superior Court then compared the two types of claims. It found that merely having some facts in common was insufficient to establish a meaningful link; “there is bound to be some surface-level overlap” between the claims, and the insurers “did not bargain for the inclusion of any Claim that has ‘any fact in common’ with the [2012-14 Letters] or any Claim involving an SEC office.” Key differences existed between the claims, including the type of investigation, the investigation time periods, the regulations allegedly violated, the type of conduct alleged, and the nature of the relief sought. Those differences led the Court to conclude that the exclusions did not apply. The Superior Court also denied the insurers’ request for discovery, noting that “the Court takes no issue with the timing of [OCC’s] motion.” The policy terms were unambiguous, and discovery beyond the pleadings was unnecessary to the analysis. Thus, the court granted partial summary judgment in favor of OCC on the applicability of the exclusions.

Jarden, LLC v. ACE Am. Ins. Co., 2021 WL 3280495 (Del. Super. Ct. July 30, 2021), aff’d, 273 A.3d 752 (Del. 2022). The Delaware Superior Court’s Complex Commercial Litigation Division granted the insurers’ motion to dismiss, finding that an appraisal proceeding did not constitute a claim “for a Wrongful Act” as required by the D&O policies.

After the insured underwent a merger, several stockholders who voted against the merger filed appraisal petitions in the Delaware Court of Chancery under 8 Del. C. § 262, requesting that the Court of Chancery determine the fair value of the company’s shares at the time of the merger (the “Appraisal Action”). After trial, the Court of Chancery ordered the insured to pay a judgment of $177,406,216.48, consisting of the fair value of the petitioners’ shares plus interest. The insured then filed a complaint in the Superior Court seeking insurance coverage for the interest award and defense costs that it incurred in the Appraisal Action. In its original complaint, the insured claimed the Appraisal Action was a “Securities Claim” under the D&O Policies, relying in part on the Superior Court’s decision in Solera Holdings, Inc. v. XL Specialty Insurance Co. (“Solera I”), which at that time was on appeal to the Delaware Supreme Court. The parties moved to stay the proceedings pending resolution of the Solera I appeal.

Thereafter, the Delaware Supreme Court reversed Solera I, holding that an appraisal action was not “for a violation of law” and therefore did not fit the definition of a “securities claim” under the policy at issue in that case (“Solera II”). After Solera II was resolved, the insured filed an Amended Complaint in this action, which included claims for declaratory judgment and breach of contract relating to the insurers’ refusal to cover the defense costs and interest award incurred in the Appraisal Action. The insurers moved to dismiss the Amended Complaint, arguing that although the Appraisal Action was a “securities claim,” it was not made “for a Wrongful Act.”

First, the Superior Court accepted the position advocated by the insurers, and which the insured did not squarely dispute, that the D&O policies’ requirement that a claim be made “for” a “Wrongful Act” meant that it must “seek redress in response to, or as requital of,” that act. The Superior Court reasoned that this conclusion is the logical extension of the Supreme Court’s decision in Solera II because an appraisal claim purely is a creature of statute and does not involve any inquiry into claims of wrongdoing. Instead, an appraisal proceeding is “neutral in nature” and requires the Court of the Chancery to determine the fair value of the dissenting stockholder’s shares. Accordingly, the Superior Court concluded that an appraisal action is a statutory proceeding that does not seek redress in response to any corporate act. Finally, the Superior Court held that even if the Appraisal Action was a claim “for a Wrongful Act,” it did not arise out of an act committed before the Run-Off Date. The Superior Court reasoned as to appraisal actions, the act at issue is the merger’s effectuation, which did not occur before the Run-Off Date.

Liberty Insurance Underwriters, Inc. v. Cocrystal Pharma, Inc., 2022 WL 1624363 (D. Del. May 23, 2022). The United States District Court for the District of Delaware granted plaintiff-insurer’s request for a declaratory judgment and held that the defendant-insured’s insurance policy did not provide coverage for an SEC investigation or action, or derivative actions, and that the insurer did not engage in bad faith conduct when denying insured’s claim for coverage.

The insured, Cocrystal Pharma Inc., was formed in 2014 following a reverse merger of Biozone Pharmaceuticals, Inc. and Cocrystal Discovery, Inc. The insurers sold the insureds an insurance policy in 2015. In the policy, Cocrystal Pharma Inc. was the insured organization and Cocrystal’s directors and officers were the insured persons. The insured’s policy provided coverage for claims arising from the wrongful acts of the insured’s directors and officers. “Wrongful Act” was defined as “any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty, actually or alleged[ly] committed or attempted by the Insured Persons in their capacities as such . . . .” The policy provided that, in the event the insurer advanced defense costs and later litigation determined that any such costs were not covered by the policy, the insureds agreed to repay the insurer the amount that was not covered.

After the SEC initiated investigation of the insured, the insured provided notice to the insurer who ultimately agreed to reimburse the insured for expenses incurred in the investigation. The SEC subsequently filed suit against the insured alleging violation of the Securities and Exchange acts of 1933 and 1934. The insured made a claim against its policy based on this action, which the insurer denied asserting that the allegations in the SEC’s complaint occurred in 2013, prior to the policy’s start date. For this reason, the insurers also advised that it was seeking a recoupment of the advanced defense costs related to the investigation of the litigation.

The court found that the policy did not provide coverage for the SEC investigation or action because the conduct alleged in the SEC’s complaint did not constitute a wrongful act. The SEC alleged that the directors and officers engaged in conduct that occurred before Cocrystal Pharma Inc. was formed, when they were the directors and officers of Biozone. The court ordered the insured to repay its defense costs because the policy did not cover the wrongful conduct that the SEC had investigated. The insurer did not waive the right to recoup these funds by electing to not issue an updated reservation of rights letter because, under Delaware law, “the doctrine of waiver does not operate to expand or create coverage that the Parties did not negotiate and for which the Policy does not provide.”

The court also found that the policy did not cover derivative actions filed by the insured’s shareholders, which alleged violations of the Exchange Act, because these claims were not made until after the policy expired. As the conduct in the SEC litigation did not qualify as a wrongful act, the derivative actions also did not fall under the policy’s relation-back provision because there was nothing to which the derivative actions could relate back.

CVR Refining, LP, v. XL Specialty Insurance Co., 2021 WL 5492671 (Del. Super. Nov. 23, 2021). The Delaware Superior Court’ Complex Commercial Litigation Division granted the insured’s motion for partial summary judgment that alleged the insurer anticipatorily breached the insurance policy by denying coverage for defense costs associated with two putative class action lawsuits. The class actions contended that the insured improperly used a call right in the limited partnership agreement to buy out its public common unit holders and that CVR Refining manipulated the price of its stock to enable CVR Energy to call common units at an artificially depressed price. The insurer had indicated that it would not cover defense costs related to pending litigation against insured.

The section of the insurance policy relevant to the underlying claim, Endorsement No. 23, provided for a $2.5 million retention limit “with respect to any Claim . . . involving any: (a) acquisition, assumption, merger, consolidation or otherwise of any entity, asset, Subsidiary or liability described in Section VI General Conditions (D)(1) and (2). . . .” Section VI General Conditions (D)(1) and (2) covered any loss involving a claim for a Wrongful Act occurring after the acquisition of “any entity by merger, consolidation or otherwise such that the entity become a Subsidiary[,]” including acquisitions where the insured acquired assets or liabilities exceeding 40% of the insured’s total assets or liabilities.

The court found that that this section of the policy was unambiguous and that the purpose was to increase the deductible where the insured’s increased risk by acquiring entities, assets, or liabilities. The court held that the increase in retention required by Endorsement No. 23 did not apply to the underlying claims because they challenged a transaction that did not involve acquisition of a subsidiary or a buyback where assets or liabilities were acquired. The insured, therefore, was entitled to summary judgment that the insurer was obligated advance defense costs.

§ 1.6. Other Coverage Issues

J.P. Morgan Securities, Inc. v. Vigilant Insurance Company, 37 N.Y.3d 552 (2021). The New York Court of Appeals held that the insured’s disgorgement of funds as part of a settlement with the SEC was not excluded from insurance coverage as a “penalty imposed by law” under the insured’s insurance policy. The policy provided coverage for “loss” as a result of any claim that insured became liable to pay for “any civil proceeding or governmental investigation—for any wrongful act, which encompassed any actual or alleged act, error, omission, misstatement, neglect, or breach of duty. . . .” “Loss” included compensatory and punitive damages and excluded “fines or penalties imposed by law.” The SEC investigated and commenced an action against the insured which resolved in a settlement whereby the insured agreed to a disgorgement and civil money penalties, the latter of which it was required to treat as a penalty for tax purposes. The administrative settlement order stated the insured “facilitated late trading” and the “deceptive market timing activity” of certain clients.

The court found that a reasonable insured purchasing the policy at the time this policy was purchased would have understood the phrase “penalties imposed by law” to include coverage for the disgorgement payment. The court found that “penalty” was commonly understood to mean a monetary sanction exceeding actual damages that is designed to address a public wrong and aimed at deterrence and punishment. The court reasoned that “where a sanction has both compensatory and punitive components, it should not be characterized as punitive in the context of interpreting insurance policies.” The court found there was no genuine issue of material fact that the disgorgement payment served a compensatory goal and was estimated from the insured’s customers’ gains and the corresponding injury suffered by investors. The court further reasoned that when the insured purchased the policy, the SEC itself viewed disgorgement payments as an equitable remedy rather than a monetary penalty. The court reasoned that Kokesh v. SEC, 581 U.S. 455 (2017) did not control the disposition of this case because the meaning of “penalty” varies between contexts and the Supreme Court in that case was not interpreting the term “penalty” in an insurance contract. Moreover, Kokesh could not have informed the parties’ understanding of the meaning of this term because it was decided two decades after the parties executed the policy.

CUMIS Specialty Ins. Co., Inc. v. Kaufman, 2022 WL 10640903 (S.D.N.Y 2022). The United States District Court for the Southern District of New York denied the former Melrose Credit Union CEO’s, Alan Kaufman, motion to reconsider its ruling that CUMIS Specialty Insurance Company was not obligated to cover Kaufman’s legal costs in appealing his bribery conviction. The court held further that CUMIS is entitled further to recoup Kaufman’s post-sentencing expenses that the insurance company already paid.

After being convicted of bribery, Kaufman sought to appeal his conviction and requested an advancement of legal fees from CUMIS. CUMIS argued that legal fees for the appeal of Kaufman’s felony conviction were excluded under the policy’s dishonest or willful acts exclusion and remuneration exclusion. The court held that “New York law considers a criminal trial to be finally adjudicated upon conviction, and therefore held that the policy’s exclusions precluded coverage of Kaufman’s appeal costs.” Thus, Kaufman’s conviction constituted a final adjudication, releasing CUMIS from its obligation to pay Kaufman’s legal fees post-sentencing, including his appeal.

Infinity Q Capital Mgmt., LLC v. Travelers Casualty and Surety Co., 2022 WL 3902803 (Del. Super. Aug. 15, 2022). The Superior Court of Delaware’s Complex Commercial Litigation Division held that there was no genuine issue of fact as to whether warranty letters provided to insurers barred coverage and that the insurers were entitled to judgment as a matter of law. Upon procuring excess insurance coverage, Infinity Q provided the insurers with warranty letters representing that Infinity Q did not have “any knowledge or information of any act, error, omission, fact or circumstance that may give rise to a claim under the proposed insurance,” and that “any claim for, based upon, arising from, or in any way related to any act, error, omission, fact or circumstance of which any such person or entity has any knowledge or information shall be excluded from coverage under the proposed insurance.”

At the time, the Court found, Infinity Q executives were aware of an ongoing SEC investigation but did not disclose it to the insurers. Thus, the clear and unambiguous language of the prior knowledge exclusion in the warranty letters precluded defense and indemnity coverage for investigations, enforcements actions, and litigation arising out of the SEC’s inquiry into Infinity Q.

Editor

Contributors

§ 1.1. Introduction

As in past years, laws and regulations relating to cannabis and the cannabis industry are evolving at a dizzying pace. In order to put current developments in context, it is important to understand the current state of the law regarding marijuana.

The starting point is the Controlled Substances Act, 21 U.S.C. § 801 et. seq. (“CSA”), passed in 1970 to regulate the manufacture, use, and distribution of certain controlled substances for medical, scientific and industrial purposes and to prevent these substances from being used for illegal purposes. The CSA classified various drugs and chemicals into five categories, or schedules. Marijuana, along with heroin, cocaine, LSD and other substances, was placed on the most restrictive schedule, Schedule 1. The CSA prohibits the manufacture, distribution, sale possession or use of marijuana. Also, the CSA operates to prohibit the transportation of marijuana across state lines, even between states that have passed laws legalizing marijuana, as well as international borders.

Despite the existence of the CSA, as of today, thirty-nine states plus the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands have laws legalizing marijuana for medical use, and twenty-one of those states, plus D.C. and Guam a have legalized marijuana for recreational use, as well. Legislation to legalize marijuana is currently expected to work its way through other state legislatures. Since the CSA is the law of the land, the question remains as to how states can “legalize” marijuana consistent with the preemption doctrine.

The laws relating to marijuana and hemp became very complicated at the end of 2018, with the passage of the Agricultural Improvement Act of 2018, the Farm Bill. It is important to understand that both hemp and marijuana come from the same species of plant, Cannabis sativa L., and both were included in the definition of marijuana in the CSA. Both marijuana and hemp contain a number of chemical compounds, the two most known of which are THC (the psychoactive compound) and CBD. The legal difference is that hemp contains less than 3% THC. Part of the confusion revolves around the other chemical compound, CBD, which is extremely popular and ubiquitous in the market place. CBD comes from both hemp and marijuana. Further complicating the situation is that there is no standard for measuring THC content in a cannabis plant, so what might be classified as hemp by one state might be classified as marijuana by a different state.

While hemp is technically legal under federal law, the Food and Drug Administration maintains jurisdiction over hemp (and therefore CBD) to the extent it is marketed as a food or dietary supplement or as a drug. Also, the state statutory and regulatory framework for hemp and CBD derived from hemp remains very confusing and is rapidly evolving.

This section will focus on recent case law developments in cannabis.

§ 1.2. Contracts

Praetorian Global Inc. v. Eel River Organics LLC, A164245 (Court of Appeal of the State of California, First Appellate District)

Date: October 10, 2022

Facts: In January 2019, the parties entered a contract under which Plaintiff licensed portions of its intellectual property to Defendant. In exchange, Defendant was to pay a monthly royalty, with a minimum total of $1 million due for the first year and $2 million due for the second year. The contract contained an arbitration clause under which the parties agreed to submit disputes to binding arbitration in Colorado. After Defendant failed to pay over $2 million owed under the contract, Plaintiff filed a demand for arbitration seeking damages for breach of contract. In August 2021, the arbitrator found for Plaintiff and rejected Defendant’s claim that the contract was illegal under former California Code of Regulations title 16, division 42, section 5032 (former section 5032), which prohibited entities licensed to conduct commercial cannabis activity from conducting such activity “on behalf of, at the request of, or pursuant to a contract with” an unlicensed entity. After the arbitrator entered the final award, Plaintiff filed a petition to confirm the award in the trial court. Defendant opposed on the ground that the arbitrator exceeded her powers by issuing an award enforcing an illegal contract. The court granted the petition in a summary order. A judgment confirming the award was entered on October 13, 2021.

Held: Affirmed.

Reasoning: The Court of Appeals of California, First District, Division One upheld the decision confirming the arbitration award even if the contract violated former section 5032. The Court concluded that the contract was enforceable because: (i) even if the contract was illegal, it was not void, because the statutory scheme does not contemplate unenforceability as a penalty; (ii) Defendant, as a cannabis business, not a consumer or member of the public, is not part of the group primarily in need of protection; and (iii) Defendant is the party more at fault and would be unjustly enriched if the contract was not enforced.

Brewfab LLC v. George Russo, 22-11003 (U.S. Court of Appeals for the Eleventh Circuit)

Date: October 13, 2022

Facts: Defendant appealed from the district court’s order granting summary judgment in favor of Plaintiff. In 2018, 3 Delta, Inc. (Delta) hired Plaintiff to build a machine for extracting cannabidiol oil. Delta and Plaintiff did not have a written contract. Instead, Delta and Plaintiff proceeded under an oral agreement whereby Plaintiff sent Delta invoices for the work it performed, and Delta paid those invoices. In December 2019, Delta stopped paying Plaintiff’s invoices. In turn, Plaintiff stopped shipping equipment to Delta and stopped working on the extraction machine. On January 30, 2020, Defendant, the president of Delta, had a conference call with Plaintiff’s owners to discuss the outstanding invoices and the work stoppage. After the conference call, Defendant sent the following text message to Rick Cureton, one of Plaintiff’s owners: “As per our conversation on Jan 30th 2020 I George Russo from 3 Delta do promise to pay brew fab in full all outstanding bills as of this date and all agreed upon work done for 3 delta future forward. I thank you for your patience.” Thereafter, Plaintiff resumed work and shipped additional equipment to Delta. But neither Delta nor Defendant paid the past due invoices and, on February 12, 2020, Delta instructed Plaintiff to stop all work. In August 2020, Plaintiff filed suit to recover the unpaid invoices and, among other claims, asserted claims against Defendant for breach of his personal guaranty—i.e., the text message. Defendant asserted that his text message was not a personal guaranty and that he sent the text message in his capacity as an officer of Delta. Defendant also asserted that the text message did not satisfy Florida’s statute of frauds and that it was not supported by consideration. The district court held that Defendant’s text message was a personal guaranty because its plain language acknowledged that “Defendant would personally finance Delta’s past and future invoices.” The district court further held that Defendant’s text message was an unambiguous and enforceable personal guaranty that satisfied Florida’s statute of frauds because: (1) the language “I george Defendant from 3 Delta” was an electronic signature under Florida law; (2) that language indicated that Defendant signed the text message in his personal capacity; and (3) the text message was supported by consideration, i.e., “Plaintiff’s voluntary return to work and delivery of equipment.”

Held: Affirmed.

Reasoning: The Court determined that: (i) the language of the text message was unambiguous; (ii) the language “I george Russo from 3 Delta” did not contain any descriptio personae for Defendant, and merely identified Defendant as an individual generally affiliated with Delta and not as an officer; (iii) the language “I george Russo from 3 Delta” constitutes an electronic signature under Florida law; and (iv) Defendant’s promise was a unilateral contract that covered future indebtedness for future work because Defendant’s promise became a binding guaranty agreement when Plaintiff accepted Defendant’s promise by resuming work and sending Delta additional equipment, after Defendant sent the text message.

§ 1.3. Insurance

Kinsale Ins. Co. v. JDBC Holdings, 3:20-cv-00008 (U.S. District Court for the Northern District of West Virginia)

Date: November 29, 2022

Facts: On October 31, 2019, a fire occurred at Defendant’s facility. On January 13, 2020, Plaintiff filed a civil action against defendant for rescission and declaratory relief. On October 28, 2022, a jury awarded Defendant $6,450,000.00, plus prejudgment interest for its insurance contract claim under the policy. Defendant then moved for the Court to declare that it substantially prevailed against Plaintiff, thereby entitling it to recover reasonable attorneys’ fees and costs.

Held: Defendant’s Motion for Judgment as a Matter of Law that it substantially prevailed was granted.

Reasoning: Defendant substantially prevailed because: (i) the Court previously ruled on summary judgment that Plaintiff had a duty to accept and pay the underlying insurance claim; and (ii) Plaintiff offered Defendant nothing on its claim prior to filing suit, and Defendant ultimately recovered the approximate amount demanded by Defendant prior to Plaintiff’s initiation of suit. The Court cited Thomas v. State Farm Auto. Ins. Co., 181 W.Va. 604, 383 S.E.2d 786 (1989), stating “[a]n insured ‘substantially prevails’…against his or her insurer when the action is settled for an amount equal to or approximating the amount claimed by the insured immediately prior to commencement of the action, as well as when the action is concluded by a jury verdict for such an amount.”

Admiral Insurance Company v. Just Brands LLC, 0:22-cv-60550-AHS (U.S. District Court for the Southern District of Florida)

Date: October 27, 2022

Facts: Erin Gilbert alleged she sustained serious and life-threatening injuries by using an e-cigarette manufactured, marketed, or distributed by Defendant. Defendant demanded a defense to the claim by its insurer (Plaintiff). Plaintiff filed suit arguing that the claim was barred by Defendant’s insurance policy.

Held: Joint stipulation filed in the Southern District of Florida dismissing the suit with prejudice.

Reasoning: No details about the settlement were provided, but Plaintiff was defending Defendant “subject to a reservation of rights.” Plaintiff stated in the Complaint that it was “uncertain of its rights and obligations under the policy,” and had asked the Court to issue a Declaration of Rights under the policy. Before the Court could issue such a Declaration, the parties settled.

§ 1.4. Real Estate

§ 1.4.1. Access to Leased Cannabis Property

Yan Hong Zeng v. Casimir-Shelton, LLC, No. 56396-7-II (Wash. Ct. App. Oct. 18, 2022)

Facts: Appellant, Casimir-Shelton, LLC (“Casimir”), appealed the trial court’s grant of summary judgment and order of specific performance of a purchase and sale agreement (“PSA”) in favor of Respondent, Yan Hong Zeng (“Zeng”).

Casimir owns a property in Shelton, Washington, which was leased to CM1, LLC (“CM1”) for use as a cannabis production facility. The lease included a provision stating that Casimir may not enter the premises without notice and escort by CM1 or their employee or agent at any time. In November 2020, Casimir entered into a PSA to sell the property to Zeng. The PSA included a feasibility contingency which allowed Zeng to conduct inspections of the property and required Casimir to permit access to the property “at reasonable times subject to the rights of and after legal notice to tenants.” On December 7, a few days before the feasibility period expired, Zeng’s broker requested access to the property for an inspection on December 9, but was told that the tenant, CM1, was not available until December 19. Zeng’s broker asked about extending the feasibility period, but Casimir refused unless some of the earnest money would become non-refundable or if additional earnest money was provided. Zeng refused and the feasibility period expired without waiver of the contingency by Zeng. Accordingly, the PSA terminated by its terms. Zeng filed a lawsuit against Casimir for specific performance of the PSA. The trial court granted Zeng’s motion for summary judgment and ordered specific performance of the PSA.

Held: Court of Appeals of Washington, Division 2, affirmed the trial court’s order granting summary judgment and specific performance in favor of Zeng and the award of Zeng’s attorney fees.

Reasoning: According to the PSA, Casimir was required to allow Zeng to inspect the property, as long as the rights of the tenant were respected. However, CM1 did not have the right under the lease to specify that only Cheung could serve as the escort for inspections or to require more than four days’ notice before allowing access. Therefore, Casimir should have ensured that CM1 allowed entry for the inspection during the feasibility period, even if Cheung was not available. Casimir’s failure to do so constituted a breach of the PSA.

§ 1.4.2. Breach of Contract and Fraud

1240 S. Bannock, LLC., v. Dennis Siem, et al., Case No. 2:21-cv-00183 (W.D. Mich. May 27, 2022)

Facts: The United States District Court, W.D. Michigan, Northern Division, addressed two motions to dismiss that were filed by defendants in a lawsuit brought by 1240 S. Bannock LLC (“Bannock”) against defendants Coldwell Banker Real Estate Group, Coldwell real estate agent Dennis Siem, and property owners Donald J. Nerat and Steven A. Nerat. Bannock’s amended complaint alleges claims of breach of contract (Count 1), fraud and silent fraud (Count 2) against the Nerats, and a claim of fraud and silent fraud (Count 3) against Siem and Coldwell.

The dispute arises from Bannock’s offer to purchase a strip mall located in Menominee, Michigan, which was owned by the Nerats. Bannock January 2021 written offer included an expiration date for acceptance, and the Nerats only accepted the offer several days after the expiration date, after which Bannock make an earnest money deposit and began inspecting the property However, in March 2021, the Nerats agreed to sell the property to another buyer without disclosing the latter agreement to Bannock. Subsequently, Bannock and the Nerats executed an amendment to the original purchase contract in April 2021, which made the sale and purchase of the property contingent on a third-party business first obtaining a retail marijuana license to operate a marijuana establishment at the property and to extend the closing date to July 1, 2021. Then, when preparing for closing, Bannock was informed that the Nerats had already sold the property to the third-party purchaser.

Held: The Court granted the defendants’ motions to dismiss because the plaintiff’s factual allegations fail to state a claim upon which relief may be granted as a matter of law.

Reasoning: The Court concluded that Bannock’s claims against the defendants failed to state a claim upon which relief could be granted under Federal Law because (i) the initial proposed agreement had expired prior to acceptance, and (ii) the subsequent amendment to the agreement was premised on a contingency that is illegal under federal law and, therefore, unenforceable.

§ 1.4.3. Leasing

Prime Care, Inc. v. Nguyen Phat Real Estate Inv., No. B304910 (Cal. Ct. App. Jan. 19, 2022)

Facts: In January 2019, the plaintiff, as tenant, entered into a commercial lease with the defendant, Nguyen Phat, as landlord, for an industrial building in Montebello, California, which stated that the premises would be used for “commercial cannabis distribution, manufacturing, cultivation, and retail delivery in accordance with all state and local licenses and laws.” The lease provided that the tenant was responsible for determining the suitability of the premises for their intended use and had been advised to satisfy themselves with respect to the size, condition, and compliance with applicable requirements of the premises. The lease also stated that the plaintiff had made the necessary investigations and assumed responsibility for their use of the premises. The tenant paid $150,000 to landlord after signing the lease, which included a deposit, advance rent, and other charges. However, before the tenant began operations, the City of Montebello determined that the property was not suitable for cannabis distribution due to its proximity to a residential area.

In this case, the tenant filed a complaint alleging five causes of action against the defendants, Nguyen Phat and Sam Ho (who was landlord’s manager): (i) negligence, (ii) fraud, (iii) negligent misrepresentation, (iv) rescission based on fraud, and (v) rescission based on unilateral mistake. The defendants demurred to the complaint, arguing that the plaintiff had assumed responsibility for determining the suitability of the premises for their intended use under the express terms of the lease and therefore could not prove negligence or any of the other claims. The trial court sustained the demurrer to the first cause of action for negligence and the remaining four causes of action with leave to amend. The plaintiff then filed an amended complaint, including its original negligence claim, as well as amended claims for fraud and negligent misrepresentation. The defendants again demurred, arguing that the amended complaint still did not sufficiently allege the necessary elements for these claims. The trial court sustained the demurrer without leave to amend and entered judgment of dismissal in favor of the defendants. The plaintiff appealed.

Held: The Court of Appeal, Second District, Division 5, affirmed the decisions of the trial court, with costs for the defendants.

Reasoning: In connection with the plaintiff’s claim for negligence (the first cause of action arguing that plaintiff’s argument that the defendants owed them a general duty of care, which was breached through their listing, advertising, leasing, and representations about the property), the Court found that the allocation of duties in the written agreement between the parties clearly stated that the plaintiff was responsible for determining the suitability of the property for their intended use and that the defendants had no such duty. Further, the Court found, with respect to the second and third causes of action, that the plaintiff did not adequately allege that they relied on the defendants’ false statements in order to establish their claims for fraud and negligent misrepresentation. Finally, in connection with the trial court’s denial of the plaintiff’s request for leave to amend actions one through four, the plaintiff failed to provide an explanation of how they would amend their allegations to adequately allege each element of their causes of action, and therefore did not demonstrate that an amendment would cure the defective pleadings. As a result, the Court upheld the trial court’s decision to sustain the demurrers to the plaintiff’s negligence claim.

§ 1.5. State Law

Northeast Patients Group et al. v. United Cannabis Patients and Caregivers of Maine, and Northeast Patients Group dba Wellness Connection of Maine et al. v. Kirsten Figueroa et al., case numbers 21-1719 and 21-1759 (1st Cir.)

Date: August 17, 2022

Facts: Northeast Patients Group is a corporation wholly owned by three Maine residents and that owns and operates three of Maine’s seven licensed dispensaries as a for-profit corporation. High Street Capital is a Delaware corporation that is owned exclusively by non-Maine residents and that wanted to acquire Northeast Patients Group. If the deal between the two companies proceeded, then the resulting company would violate the Maine Medical Marijuana Act’s residency requirement, because the “officers or directors” of that new company would not be only Maine residents. The Court struck down Maryland’s residency requirement for cannabis business owners, saying it was a clear violation of the constitutional doctrine that limits states’ power over interstate commerce.

Held: Affirmed.

Reasoning: The Court rejected Defendant’s argument that the residency requirement does not run afoul of the dormant Commerce Clause because “it is impossible for there to be an interstate market in any good that, under federal law, is contraband throughout the country.” The Court noted that Maine’s prohibition “reflects the reality that the market continues to operate,” and that, “the market is so robust that, absent the Medical Marijuana Act’s residency requirement, it would be likely to attract entrants far and wide.” The Court also pointed to Congress’s enactment of the Rohrabacher-Farr Amendment (which prohibits the U.S. Department of Justice from targeting companies that are acting in accordance with state cannabis regulations) stating that the amendment “hardly reflects a congressional understanding that the Controlled Substances Act succeeded in eradicating the interstate market in medical marijuana.” The Court goes on to add, “…whatever the circumstances may be with respect to other goods that Congress has deemed contraband, this is not a case in which Congress may be understood to have criminalized a national market with no expectation that an interstate market would continue to operate. Quite the opposite. Congress has taken affirmative steps to thwart efforts by federal law enforcement to shut down that very market, through the annual enactment of the Rohrabacher-Farr Amendment. And it has taken those steps, presumably, with an awareness of the beneficial consequences that those steps will have for consumers who seek to obtain medical marijuana.”

Variscite Inc. et al. v. City of Los Angeles et al., 2:22-cv-08685, (U.S. District Court for the Central District of California)

Date: December 8, 2022

Facts: Los Angeles created a licensing program for commercial cannabis related businesses that includes a social equity component, referred to as the “Social Equity Program.” Pursuant to the Social Equity Program, the storefront retail, delivery, and cultivation application processes are exclusively available until January 1, 2025, to individuals who have been verified by Los Angeles as a Social Equity Individual Applicant (“SEIA”). To be verified as a SEIA, an individual must submit evidence of two of the following three criteria: (a) a qualifying California cannabis arrest or conviction prior to November 8, 2016; and (b)(1) 10 years of residency in a disproportionately impacted area, or (b)(2) low income in the 2020 or 2021 calendar year. Plaintiff lived in Michigan and applied to be verified as a SEIA for the Lottery. Plaintiff’s application was ultimately rejected for failing to satisfy any of the verification criteria.

Held: Application for Temporary Restraining Order denied.

Reasoning: Plaintiff could not show how allowing the lottery to go ahead as planned would irreparably harm them. The Court noted that “Plaintiffs’ argument that they will suffer irreparable harm are based on their speculation that they would be able to successfully enter the commercial retail cannabis market, establish a loyal customer base, and make a profit…Plaintiffs’ monetary losses associated with the challenged provisions are purely speculative and insufficient to demonstrate irreparable harm.”

§ 1.6. Trademarks

§ 1.6.1. Trademark Protection for Delta-8 Marks

AK Futures LLC v. Boyd Street Distro, LLC, 35 F.4th 682 (9th Cir. 2022)

Facts: Appellant, Boyd Street Distro, LLC (“Boyd Street”), appealed the district court’s grant of a preliminary injunction in favor of Appellee, AK Futures, LLC (“AK Futures”).

AK manufactures the CAKE brand of e-cigarette and vaping products, including Delta-9 cannabis products. Boyd Street sold CAKE unauthorized products with virtually identical logos and branding at its downtown Los Angeles retail store. AK Futures hired a private investigator who purchased the counterfeit products and confirmed they were not authentic.

Boyd Street alleges it received a first batch of CAKE products from an unidentified “someone” selling the goods on consignment, and a second batch from an unidentified person holding himself out to be an authorized distributor of CAKE products.

Held: The Ninth Circuit Court of Appeals affirmed the district court’s order granting a preliminary injunction.

Reasoning: The Ninth Circuit reviewed the district court’s preliminary injunction analysis and agreed AK Futures was likely to succeed on the merits and had suffered irreparable harm. Boyd Street relied heavily on its argument that AK Futures could not own valid rights to its marks because AK Futures was not using the marks lawfully in commerce through its sale of Delta-8 products. AK Futures asserted its Delta-8 products were lawfully sold because the 2018 Agriculture Improvement Act (the “Farm Act”) legalized Delta-8. The Ninth Circuit ultimately sided with AK Futures and agreed the Farm Bill legalized Delta-8 products.

The Ninth Circuit focused extensively on the text of the Farm Bill including its definition of “Hemp.” This definition removed from schedule I and therefore legalized “the plant Cannabis Sativa L…with a delta-9 [THC] concentration of not more than 0.3 percent on a dry weight basis.” The Ninth Circuit noted AK Futures’ Delta-8 products included less than 0.3 percent THC and were therefore lawfully sold according to the Farm Act. Because the products were lawfully sold, AK Futures owned common law trademark rights in the marks used with the products and those rights were infringed by Boyd Street’s counterfeit sales of CAKE-branded products.

Editor

Contributors

§ 1.1. Introduction

The term “business divorce” includes disputes that cause business partners to end their partnership, situations that require owners to separate, or circumstances where a business partner wishes to change the composition of management. This chapter provides summaries of developments related to such business divorce matters that arose from October 1, 2021, to September 30, 2022 from mostly nine states.

Contributors to this chapter used their best judgment in selecting business divorce cases to summarize. We then organized the summaries, first, by subject matter, then, by jurisdiction. This chapter, however, is not meant to be comprehensive.

The reader should be mindful of how any case in this chapter is cited. Some jurisdictions prohibit courts and parties from citing or relying on opinions not certified for publication or ordered published. To the extent unpublished cases are summarized, the reader should always consult local rules and authority to ensure the unpublished cases can serve as relevant and permissible precedent. The reader should also be mindful that this chapter provides a “snapshot” of developments within a single year. Any development in a particular year covered by this chapter may be altered by legislation or cases in subsequent years.

We hope this chapter assists the reader in understanding recent developments in business divorces.

§ 1.2. Access to Books and Records

§ 1.2.1. California

Fowler v. Golden Pac. Bancorp Inc., 80 Cal.App.5th 205, 295 Cal.Rptr.3d 501 (2022). A trial court granted a director plaintiff’s petition for a writ of mandate against a corporation to enforce his statutory and absolute right to inspect corporate books and records as a director under Cal. Corporations Code § 1602. The corporation appealed, then moved to dismiss the appeal as moot due to another company acquiring the corporation and eliminating the plaintiff as a board member during the pendency of the appeal. The court agreed that the primary issue on appeal is moot because plaintiff is no longer a member of the corporation’s board of directors and, therefore, has no director’s inspection rights. But the court exercised its discretion to reach the merits because it presented an issue of substantial and continuing public interest: whether a director’s “absolute” right of inspection under § 1602 may be curtailed because the director and corporation are involved in litigation and there is a possibility the documents could be used to harm the corporation. The court concluded that the mere possibility that information could be used adverse to the corporation is not by itself sufficient to defeat a director’s inspection rights. Rather, any exception to the general rule favoring unfettered access must be limited to extreme cases, where enforcing an “absolute” right of inspection would produce an absurd result, such as when the evidence establishes the director’s clear intent to use the information to breach fiduciary duties or otherwise commit a tort against the corporation.

Grove v. Juul Labs, Inc., 77 Cal.App.5th 1081, 293 Cal.Rptr.3d 202 (2022). This case addresses, among other things, the demand of a former California employee who is a shareholder (through post-employment, exercised options), to inspect the books and records of his former employer, a Delaware company, headquartered in San Francisco, that operated under a corporate charter that required the shareholder to pursue his claims in Delaware. The company responded to the shareholder’s inspection demand letter by filing an action for declaratory and injunctive relief in Delaware, to seek a judgment to establish that the shareholder’s inspection rights are governed by Delaware law and that the shareholder contractually waived his inspection rights, and that he is prohibited from asserting an inspection right under California law. The shareholder then sued the company in California to enforce his shareholder inspection rights, under Cal. Corporations Code § 1601, but that action was stayed due to the Delaware action. The Delaware court first ruled that the shareholder had not surrendered by contract his right to inspect documents under California law because the parties’ agreements addressing inspection rights pertain specifically and exclusively to inspection rights under California law, § 1601. But under the internal affairs doctrine, the Delaware court determined the shareholder’s inspection rights were not dictated by California law, but under Delaware law, because Delaware was the state of incorporation and the corporate charter contains a forum selection clause making the Delaware Chancery Court the sole and exclusive forum for any shareholder to bring an action related to any provision of Delaware corporate law or asserting a claim against the company governed by the internal affairs doctrine. The shareholder then tried to restart the stayed California action in an attempt to have the California court void the forum selection clause. Ultimately, the California trial court determined that the shareholder’s inspection request had been adjudicated in the Delaware Court of Chancery, whose decision is entitled to full faith and credit in California. The appellate court affirmed this decision under the principles of collateral estoppel and full faith and credit. The shareholder was precluded from relitigating a dispute in California that was already adjudicated in the Delaware action.

§ 1.2.2. New York

O’Donnell v. Fleetwood Park Corp., 203 A.D.3d 1048 (NY App. Div. 2022). The court affirmed the trial court’s order compelling a corporation to provide books and records to a petitioning shareholder. A shareholder of a corporative corporation sought to be provided with an unredacted list of the corporation’s current shareholders so that he could communicate with the shareholders as he campaigned for a position on the corporation’s board of directors. The corporation allowed the shareholder to view at its offices an outdated list of shareholders in which the names and addresses of some of the shareholders had been redacted. The shareholder filed a petition to compel the corporation to provide him with an updated, unreacted shareholder list. The trial court granted that petition, finding that the shareholder had established a proper purpose for his request by asserting that he requested the list to campaign for a position on the corporation’s board of directors. The appellate court affirmed, observing that, “Under New York law, shareholders have both statutory and common-law rights to inspect a corporation’s books and records so long as the shareholders seek the inspection in good faith and for a valid purpose”. As the shareholder had established a proper purpose, the corporation was required to provide him with an updated, unredacted list of shareholders.

§ 1.3. Business Judgment Rule

§ 1.3.1. Nevada

In re Newport Corporation Shareholder Litigation, 507 P.3d 182 (Nev. Mar. 30, 2022). Shareholders brought action against the former board members of Newport for breach of fiduciary duties in their approval of a merger. The court affirmed the district court’s summary judgment ruling, finding that Newport’s CEO’s alleged self-interests in the merger were not actionable conflicts: the evidence did not show that he sought the merger out of fear of being fired or to achieve a more lucrative severance package. Moreover, the CEO’s alleged self-interest in the merger, alone, was insufficient to rebut the business judgment rule. Shareholders did not carry their burden to demonstrate that the CEO concealing his alleged self-interests from the Board impacted the Board’s overall independence. The evidence showed that the Board knew of the activist shareholders’ pressure on the CEO’s job performance, and knew of the CEO’s change-of-control severance package. Lastly, the court found that even if the shareholders could defeat the business judgment rule, they did not show an actionable injury; i.e., that the Board breached their fiduciary duties and that those breaches involved intentional misconduct, a knowing violation of law, or fraud.

§ 1.3.2. New York

Max v. ALP, Inc., 203 A.D.3d 580 (NY App. Div. 2022). A shareholder and director of a corporation brought suit against the other two directors alleging breach of fiduciary duty among other claims. As set forth in the motion court’s decision, the amended complaint alleged that the directors undertook a series of decisions that deviated from the corporation’s previous business model. The trial court held that these decisions were protected by the business judgment rule and dismissed the complaint. The appellate court affirmed, observing that, the complaint merely alleged that a course of action other than that pursued by the board of directors would have been more advantageous.

§ 1.4. Dissolution

§ 1.4.1. Arizona

IMH Special Asset NT 168 LLC v. Beck, 2022 WL 1580864 (Ariz. Ct. App., Div. 1 May 19, 2022). RNMA I was a New Mexico limited partnership that, pursuant to the terms of its Partnership Agreement, was set to dissolve in December 2015. Pursuant to the Partnership Agreement, the dissolution would follow “a liquidation period not to exceed 12 months.” None of its limited partners took any action to extend the dissolution date prior to its passing. A year later, in December 2016, more than 75% of the limited partners gave notice that they were “retroactively” extending the term of the limited partnership. Subsequently, in January 2017 RNMA I made a capital call on the limited partners and, also, in July 2017 took out a loan.

IMH Special Asset NT 161, LLC and IMH Special Asset NT 168, LLC (collectively “IMH”) obtained an interest in RNMA I through a post-foreclosure deficiency action. Although the underlying litigation and arguments are complex, the superior court held that the receiver IMH had appointed did not have authority to manage RNMA I and could not make capital calls and IMH appealed. Initially, the court of appeals concluded that the limited partners’ “retroactive” attempt to extend RNMA I’s term was invalid as it had occurred after the dissolution date and liquidation period and remanded the case so the superior court could determine the effect of RNMA I’s failure to wind up by the date set by the Partnership Agreement. On remand, the superior court held that the January 2017 capital call and the July 2017 loan agreement were ultra vires and not proper winding-down acts. Again, IMH appealed. On the second appeal, the court of appeals confirmed the superior court’s ruling and held that RNMA I was in a wind-up period and, thus, continued to have a legal existence as a limited partnership during that wind-up period but that the capital call and loan were ultra vires as they were not proper winding down acts.

§ 1.4.2. California

Guttman v. Guttman, 72 Cal.App.5th 396, 287 Cal.Rptr.3d 296 (2021). In this case, a plaintiff-partner-plaintiff sued to dissolve a limited partnership. In response, the remining defendant-partners initiated a statutory procedure to buyout plaintiff’s interest in the partnership. Pursuant to this procedure, court-appointed appraisers submitted to the court their valuations of the partnership’s properties. Plaintiff, believing the appraisals undervalued the properties, dismissed his complaint without prejudice. The court then granted defendants’ motion to vacate the dismissal. On appeal, which was treated as a writ of mandate, the court of appeals denied the petition. The court explained that Plaintiff’s dismissal of the dissolution action would frustrate the statutory scheme for permitting buyout of any partner moving to dissolve a limited partnership. Under Cal. Corporations Code § 15908.02, once the buyout procedure has been ordered, a plaintiff’s dissolution action is stayed, and the buyout procedure goes forward in its place. Since the order granting the buyout motion effectively disposed of the dissolution action, such disposition, together with the policy considerations of discouraging tactics of repeatedly filing and dismissing dissolutions until an appraisal acceptable to a plaintiff is issued, deprived the plaintiff in this case of his right to dismiss his dissolution action after the buyout motion was granted.

Friend of Camden, Inc. v. Brandt, 81 Cal.App.5th 1054, 297 Cal.Rptr.3d 732 (2022). Plaintiff, a 1% membership owner of an LLC initiated a judicial dissolution of the LLC under Cal. Corporations Code § 17707.03. Defendants, the other members of the LLC who held 50% of the membership interests, filed a motion to avoid the dissolution by purchasing plaintiff’s 1% interest, under § 17707.03(c). Then, the plaintiff with other members owning 49% membership interest—for a total of 50% of the membership interests in the LLC—voted to voluntarily dissolve the LLC pursuant to § 17707.01(b). The issue on appeal was whether the vote of 50% of the membership to dissolve the LLC extinguished the right defendants otherwise would have had to purchase plaintiff’s 1% interest and avoid dissolution of the LLC. An issue on appeal was whether § 17707.03(c)(6) supports defendants’ contention that plaintiff cannot prevent a buyout, even though plaintiff never dismissed the dissolution action, and the buyout procedure did not commence, before the other 50% of the membership voted to dissolve the LLC. The court ruled that based on the plain language of § 17707.01, the vote of 50% of the LLC membership interests to dissolve the LLC must be given effect and the trial court must dismiss the buyout proceeding as moot and direct the members to wind up the activities of the LLC because the LLC was dissolved in accordance with the vote before a buyout could be implemented, and § 17707.01 says an LLC is dissolved by the “happening of the first to occur,” either “the vote of 50 percent” or “[e]ntry of a decree” of judicial dissolution.

§ 1.4.3. Delaware

In re Doehler Dry Ingredient Solutions, LLC, 2022 WL 4281841 (Del. Ch. Sept. 15, 2022). The Court of Chancery dismissed a petition for dissolution of a limited liability company, finding that the petitioner minority member had failed to plead facts that could reasonably support an inference that the company was deadlocked or could no longer fulfill its defined purposes. The company is owned by two 25% Members, including Russell Davis (“Davis”), and one 50% Member. Following disputes with Davis, the other two Members together executed a written consent removing Davis as a Manager. Davis subsequently accused the other Members of various wrongdoing, including breaches of fiduciary duty and the operating agreement. After a lawsuit was initiated in federal court to force Davis’s compliance with a buyback provision in the operating agreement, Davis petitioned the Court of Chancery for dissolution arguing, among other things, that Davis would “decline to approve ‘nine actions critical to the LLC’ for which unanimous consent is required under the LLC Agreement” thus creating deadlock.

The Court of Chancery dismissed the petition, holding that prospective deadlock was insufficient under the statute to prove actual deadlock. The Court further held that, even if Davis carried out his plan, deadlock could not exist because the operating agreement contained a mechanism by which to resolve potential deadlock in the form of a buyout provision in the operating agreement. The Court additionally noted the existence of a contractual provision for dissolution that could be invoked in the event of deadlock.

§ 1.4.4. New York

Stile v. C-Air Customhouse Brokers-Forwards, Inc., 204 A.D.3d 429 (N.Y. App. Div. 2022). After Stile, a shareholder of the defendant corporation, signed a settlement agreement, the personal representative of Stile’s estate sued the corporation and its other shareholders for withholding distributions and for minority shareholder oppression, among other claims. After holding that the personal representative was bound by the settlement agreement signed by Stile and thus was not entitled to distributions or to seek dissolution of the company per the terms of the agreement, the court agreed with the personal representative that Stile “did not cease being a shareholder by virtue of the settlement.” Rather, the agreement merely required Stile to not “assert any of his rights as a shareholder,” so long as the payments provided for in the settlement are made to him. While the settlement also provided that if Stile transferred any of his shares, the settlement would be terminated, the court determined that “it [was] unclear if ‘transfer’ includes . . . the transfer to Stile’s estate when he died.” Thus, Stile’s estate remained a shareholder of the corporation.

As to the oppression claim, the court dismissed the claim to the extent it was based on the corporation’s refusal to allow the personal representative to examine the corporation’s books and records, as Stile had relinquished that right in the settlement agreement. However, “to the extent the claim is based on the defendants’ refusal to recognize the plaintiff as a shareholder, it was properly permitted to continue.”

Hoffman v. S.T.H.M. Realty Corp., 207 A.D.3d 722 (N.Y. App. Div. 2022). A 25 percent shareholder, who had inherited her shares, filed a petition for dissolution under Business Corporation Law § 1104-a, in which she alleged shareholder oppression. The day-to-day operations of the corporation were managed by the petitioning shareholder’s brother and cousin, each of whom also owned 25 percent of the shares. After a bench trial, the trial court denied the shareholder’s petition for dissolution holding that she had not established shareholder oppression. The appellate court affirmed, noting that, “Oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture.” As the trial evidence demonstrated that, after inheriting her stock, the petitioning shareholder did not seek employment or responsibilities in the day-to-day management of the corporation, or express an interest in shareholders’ meetings, but, rather, remained, for many years, a passive shareholder, acquiescing in the exercise of control by her brother and cousin, the trial court’s decision that the petitioning shareholder had not established shareholder oppression was supported by the evidence.

Fernandes v. Matrix Model Staffing, Inc., 2022 WL 1172487 (N.Y. Sup. Ct. Apr. 20, 2022). The plaintiff shareholder in a closely held corporation pursued dissolution after discovering that the corporation, through its director, failed to pay the corporation’s tax liabilities and then improperly informed the IRS that the plaintiff was the party responsible for accounting and employee tax withholding, resulting in $200,000 in tax penalties levied on the plaintiff. Reciting the standard under New York law for judicial dissolution of a company, the court stated that “[f]ailing to pay tax liabilities is corporate mismanagement which defeats a petitioner’s reasonable expectations sufficient to constitute oppression.” Further, the court stated that “[i]t is beyond argument that a shareholder, who is not responsible for payroll and accounting, has an objectively reasonable expectation that the corporation will not designate the shareholder as the responsible party for payroll withholdings in IRS filings.” Such conduct on the part of the defendant “is oppressive, if not fraudulent or criminal behavior.” Therefore, “the petition alleg[ed] a demonstrated risk to petitioner’s rights—chiefly continued future tax and other financial liabilities arising from respondent’s oppressive conduct.” However, recognizing dissolution as an extraordinary remedy, and because the defendant “questioned the need for dissolution,” the court referred the matter to a referee to establish the underlying facts and report on the issue of dissolution.

Epstein v. Cantor, No. 506730/19, 2022 WL 3597646 (N.Y. Sup. Ct. Aug. 19, 2022). In a law firm partnership dispute, after the court initially held that the firm was not a partnership and that, even if it were a partnership, the plaintiff was not a partner, the plaintiff moved for re-argument to resolve an apparent conflict between Steinbeck, a 1958 partnership case and Congel, a case decided in 2018. After 14 years in a law partnership with the defendant, Epstein, the plaintiff, sued Cantor, alleging that Cantor formed his own firm without his consent and transferred all the firm’s clients to the new firm. Cantor moved to dismiss, arguing that Cantor was the firm’s sole principal, that the firm was not a partnership, and that the plaintiff was not a partner.

In its first decision, the court applied Steinbeck’s rule that “an indispensable essential of a contract of partnership . . . both under common law and statutory law, is a mutual promise or undertaking of the parties to share in the business and submit to the burden of making good the losses” and dismissed Epstein’s claims. While there was an agreement naming the firm a partnership and naming Epstein as a partner, the agreement allocated profits and losses solely to Cantor. Therefore, the firm could not have been a partnership as a matter of law.

However, citing the 2018 Congel decision holding that partners “as between themselves, may include in the partnership articles any agreement they wish concerning the sharing of profits and losses,” the court granted Epstein’s motion to reargue the case. Ultimately, as to which line of cases controlled, the court sided with the defendants, stating that “it is unclear that Congel controls when the very issue is whether a partnership was formed or whether a partnership agreement can include that no profits and losses would be shared.” (emphasis in original). Nevertheless, applying the indicia of partnership formation outlined in Steinbeck, the court held that “issues of fact abound sufficient to warrant reinstating the claims against the Cantor Defendants.”

Chen v. 697 Dekalb LLC, No. 527902/2021, 2022 WL 2870138 (N.Y. Sup. Ct. Jul. 18, 2022). Alleging multiple violations of the LLC’s operating agreement and that his $300,000 contribution to the LLC was mismanaged by the defendant, the plaintiff sued for dissolution and requested a return of his investment. The defendants argued that the plaintiff was required to provide additional capital contributions to the business and that the standard for judicial dissolution had not been triggered.

Despite the operating agreement provision dealing with capital contributions among members not expressly requiring the consent of all members to make additional contributions to the company, the court interpreted the agreement to require unanimity and held that, contrary to the defendants’ argument, “there can be no reasonable reading of [the operating agreement] that limits the number of members that may impose a capital contribution.”

§ 1.4.5. Utah

Hills v. Nelson, 506 P.3d 552 (Utah Feb. 10, 2022). This case arose from the judicial dissolution of an LLC owned by two equal members in which one member filed a lawsuit seeking the dissolution of the LLC. In lieu of dissolution, the LLC and the other member filed elections to purchase the other member’s interest in the LLC pursuant to Utah Code § 48-3a-14(1). The district court, however, denied the elections on equitable grounds and ordered, sua sponte, the dissolution of the LLC. The member that elected to purchase the other member’s interest appealed, and her standing to appeal the dissolution ruling was challenged.

The supreme court found that the appellant had standing because she was a party to the action below and that she was aggrieved by the district court’s judgment given that, upon liquidation, she would lose her 50% membership in the LLC. The court noted that while she would be compensated for her 50% membership, liquidation typically garners less value than interests sold without any compulsion to sell. The appellant also satisfied the requirement of having standing under the traditional test in the original proceeding because dissolution of the LLC would cause the appellant to lose her status as a 50% member of the LLC.

§ 1.5. Jurisdiction, Venue, and Standing

§ 1.5.1. California

Sirott v. Superior Court of Contra Costa County, 78 Cal.App.5th 371, 293 Cal.Rptr.3d 408 (2022). The court of appeals granted a petition for a writ of mandate to instruct a trial court to reverse its refusal to dismiss an LLC member’s derivative action for lack of standing. Defendants, members of the LLC, demurred on the ground that plaintiff-member lacked standing under Cal. Corporations Code § 17709.02 to pursue them, because during the litigation, plaintiff relinquished its interest in and was no longer a member of the LLC. In overruling the demurrer, the trial court determined that it had statutory discretion to allow the plaintiff-member to maintain the derivative claims even though it was no longer a member of the LLC. On appeal, the appellate court based its decision on § 17709.02, which requires both “contemporaneous” membership—meaning the party seeking to bring a derivative claim was a member in the LLC at the time of the challenged transaction (or became a member by gaining an interest from a party who was a member at the time of the transaction)—and “continuous” membership—meaning the party was a member throughout the litigation of a derivative claim. It was uncontested that the plaintiff-member met the contemporaneous membership requirement under § 17709.02, but did not meet the continuous membership requirement because plaintiff relinquished its membership interest in the LLC during litigation. As the appellate court explained, § 17709.02(a)(1) grants a trial court discretion to permit a derivative action by any “member” who does not meet these requirements but does not include such discretion to confer standing on a plaintiff, who is not a member. The plaintiff was no longer a member of the LLC. Thus, it could not satisfy the requirement for continuous membership and the trial court erred in not sustaining the demurrer for lack of standing.

§ 1.5.2. Illinois

Staisz v. Resurrection Physicians Provider Group, Inc., 2022 IL App (1st) 201316, 2022 WL 1446843 (Ill. App. May 9, 2022). In this case, the court held that a former shareholder lacked standing to bring a claim for shareholder oppression under Section 12.56 of the Illinois Business Corporation Act because shareholder status was needed at the commencement of the lawsuit and not, as the plaintiff argued, at the time of the alleged oppressive conduct. The plaintiff also lacked standing to bring a claim for breach of fiduciary duty because the alleged injuries of lost dividends and diversion of corporate funds were common to all shareholders and the claim was derivate, which requires active status as a shareholder.

Smith v. Lucas, 2022 IL App (1st) 210960-U, 2022 WL 4233767 (Ill. App. Sep 14, 2022). In this case , the court held that a plaintiff lacked a membership interest in a limited liability company because she received her rights as a transferee in an inheritance and did not receive the unanimous consent of the non-transferring members to admit a new member as required by the operating agreement. The court reversed the entry of summary judgment on a claim for a forced buy-out under the operating agreement, holding that there was issues of fact whether the accountant had the qualifications to properly value mineral rights and whether he changed portions of his valuation to favor the company.

§ 1.5.3. New York

Harounian v. Harounian, 198 A.D.3d 734 (N.Y. App. Div. 2021). A father, his son, and two daughters jointly owned several LLCs, most of which involved the ownership and management of real estate. Over the course of years, the family formed several additional LLCs. The father filed an action against the son alleging breach of fiduciary duty, unjust enrichment, and seeking an accounting for several of the companies. However, with regard to certain of the companies, the operating agreements for those companies established that the father was not actually a member. The son moved to dismiss the father’s derivative claims on behalf of the companies for which the operating agreements established that the father was not a member. The trial court denied the son’s motion; however, the appellate court modified that order and dismissed the claims related to the companies for which the operating agreements established that the father was not a member. The court explained that, in order to maintain a derivative action on behalf of an LLC, one must be a member of the company. Because the operating agreements established that the father was not a member of certain of the companies at issue, his derivative claims relating to those companies should have been dismissed for lack of standing.

Sajust, LLC v. Mendelow, 198 A.D.3d 582, (NY App. Div. 2021). The court affirmed the dismissal of the direct claim of an LLC member, which had alleged that the value of its capital account was reduced through the diversion of a company asset, as the claim was a derivative rather than direct claim. The court explained that the determination of whether a claim is direct or derivative hinges on whether the company or the suing members individually suffered the harm and whether the company or the suing members individually would receive the benefit of a recovery. The court further explained that the lost value of an investment in a company is a quintessential derivative claim. Because the company was allegedly injured by the diversion of the company asset, the claim was derivative rather than direct. Accordingly, the member’s complaint was dismissed for lack of standing.

Newman v. Newman, 202 A.D.3d 442, 443 (NY App Div. 2022). The court affirmed the denial of a motion to dismiss the direct claim brought by a shareholder of a closely-held family business against his father, the other shareholder, arising out of the father’s misappropriation from the corporation and having caused the corporation to fail to pay certain state and federal taxes. The son had alleged that the father’s having caused the corporation to fail to pay state and federal taxes subjected the son to potential civil and criminal liability. The court held that the son’s potential civil and criminal liability was an individual harm that was separate and distinct from the loss to the corporation, which was the subject of a separate derivative claim. Additionally, because the father and son were family members, the father owed the son an independent fiduciary duty that was separate from the duty that the father owed to the corporation. Therefore, the trial court properly denied the motion to dismiss the son’s direct claim as it was not duplicative of his derivative claim.

Mohinani v. Charney, 208 A.D.3d 404 (NY App. Div. 2022). Two minority members of an LLC sued the estate of the company’s majority member and manager alleging breach of fiduciary duty. The claims arose out of a special distribution that the majority member received, the majority member’s personal receipt of an acquisition fee that the minority members alleged should have been provided to the LLC, and a management fee paid by two other companies to a management company owned by the majority member that the minority members alleged should have been paid to the company owned jointly by the parties. The minority members brought their claims as direct rather than derivative claims. The case proceeded to a bench trial, after which the court dismissed the minority members’ claims, finding that the claims were derivative rather than direct.

The appellate court affirmed, holding that damages are an essential element of a breach of fiduciary duty claim and that the individual members had failed to establish any personal damages as all of the damages that they had alleged were losses to the company than the individual minority members. The fact that the minority members were the only other members of the company did not change this analysis.

The court rejected the minority members’ argument that the majority member’s personal representative waived this defense by failing to plead lack of standing in his answer or through a motion to dismiss. The court further noted that the minority members had never sought leave to amend their complaint to seek recovery derivatively on behalf of the LLC despite numerous opportunities to do so.

Roche Cyrulnik Freedman LLP v. Cyrulnik, 582 F. Supp. 3d 180 (S.D. N.Y. 2022). A law firm limited liability partnership brought an action for declaratory relief and for breach of fiduciary duty against a former partner in federal court in New York. The defendant partner moved to dismiss the action for lack of subject matter jurisdiction and, in the alternative, called on the court to abstain from hearing the case in favor of a stayed action in Florida state court.

In response to Cyrulnik’s abusive behavior and other misconduct, the firm voted to oust him from the partnership. A fight ensued over the firm’s right to remove Cyrulnik and the amount the firm was obligated to pay him. After the firm filed the suit in federal court, Cyrulnik sued the firm in Florida state court. The firm argued that the court had diversity jurisdiction, as Cyrulnik was no longer a member of the firm. However, the court held that the relevant time for determining diversity of citizenship was the time of the filing of the original complaint, not any amended complaint.

Citing the “intertwining rule,” which provides that “where jurisdiction is so intertwined with the merits that its resolution depends on the resolution of the merits, the court should use the standard applicable to a motion for summary judgment and dismiss only where no triable issues of fact exist,” the court denied the defendant’s motion to dismiss for lack of subject matter jurisdiction. Instead, the court held that “[t]he determination of the firm’s citizenship . . . cannot be separated from [the firm’s] claim that Cyrulnik was properly dissociated from the firm.”

§ 1.5.4. Utah

Hills v. Nelson, 506 P.3d 552 (Utah Feb. 10, 2022). This case arose from the judicial dissolution of an LLC owned by two equal members in which one member filed a lawsuit seeking the dissolution of the LLC. In lieu of dissolution, the LLC and the other member filed elections to purchase the other member’s interest in the LLC pursuant to Utah Code § 48-3a-14(1). The district court, however, denied the elections on equitable grounds and ordered, sua sponte, the dissolution of the LLC. The member that elected to purchase the other member’s interest appealed, and her standing to appeal the dissolution ruling was challenged.

The supreme court found that the appellant had standing because she was a party to the action below and that she was aggrieved by the district court’s judgment given that, upon liquidation, she would lose her 50% membership in the LLC. The court noted that while she would be compensated for her 50% membership, liquidation typically garners less value than interests sold without any compulsion to sell. The appellant also satisfied the requirement of having standing under the traditional test in the original proceeding because dissolution of the LLC would cause the appellant to lose her status as a 50% member of the LLC.

§ 1.6. Miscellaneous Claims and Issues in Business Divorce Cases

§ 1.6.1. Accounting

§ 1.6.1.1. New York

Harounian v. Harounian, 198 A.D.3d 734 (N.Y. App. Div. 2021). A father was a member of an LLC managed by his son. The father filed a complaint, inter alia, demanding an accounting. The son filed a motion to dismiss, which the trial court denied. However, the appellate court modified that portion of the trial court’s order denying the motion to dismiss the accounting claim as the father’s complaint did not allege that he had made a demand for an accounting that had been refused. The court explained that, to prevail on a cause of action for an accounting, an LLC member must show that a demand for an accounting had been made, which was refused. Additionally, the company’s operating agreement provided that members were entitled to inspect the company’s books and records for the immediately preceding three-year period upon 10 days written notice. Because the complaint did not allege that the father had made a demand to inspect the books and records or that such a demand had been refused, the court held that the accounting claim should have been dismissed.

Grgurev v. Licul, 203 A.D.3d 624 (N.Y. App. Div. 2022). This case involved the four shareholders of the corporation that operates Delmonico’s Steakhouse. The trial court found that two of the shareholders, who had exclusive control over the corporation’s finances, had committed shareholder oppression and ordered the forced buyout of their shares by the petitioning shareholders. However, the trial court denied the petitioning shareholders’ request for an accounting. The appellate court modified the order to provide that the non-petitioning shareholders were required to provide an accounting. While the non-petitioning shareholders had produced extensive books and records that had been reviewed by a special referee, an accounting was still warranted as the bookkeeping was described as inadequate and sometimes nonexistent, and there was evidence that key financial data had been destroyed during the litigation.

§ 1.6.2. Alternative Entities

§ 1.6.2.1. Delaware

Freeman v. Qualizza, 2022 WL 3330377 (Del. Ch. Aug. 12, 2022). In an action seeking a declaration as to the proper manager of a Delaware limited liability company, the Delaware Court of Chancery determined that the manager of the owner of 99.99% of the membership interest of the subject entity had the power to cause the 99.99% owner to replace the manager of the subject entity because the removal was properly within the manager’s duties as manager under the operating agreement. On a cautionary procedural point, practitioners should take note that the Court initially granted a motion to expedite the action and a status quo order but ultimately vacated both due to a failure to proceed with alacrity on the part of both parties.

The subject entity, UDF, was formed in Delaware. Its membership interests were owned 99.99% by Aries Community Capital, LLC (“ACC”) and .01% by Michael Qualizza (“Qualizza”). Qualizza was designated Manager of UDF. ACC was owned 46% by Aries Capital, LLC, which was, in turn, owned by Neil Freeman (“Freeman”). QSG owned another 46% of ACC and was, in turn, itself owned by Qualiza. The remaining 8% of ACC was owned by Edward Keledjian. Aries Capital was designated Manager of ACC, and its sole duties were to control ACC and manage its sole asset, UDF. After a falling-out among the three business partners, Freeman caused Aries Capital to cause ACC as 99.99% Member of UDF to replace Qualizza with Freeman as Manager of UDF. Qualizza challenged the action as outside the scope of Aries Capital’s duties as Manager of ACC. The Court, however, found that because Aries Capital’s duties as Manager of ACC were solely to cause ACC to manage its sole asset, UDF, the written consent was valid, and Freeman was the proper Manager of UDF.

Avgiris Bros., LLC v. Bouikidis, 2022 WL 4672075 (Del. Ch. Sept. 30, 2022). In an action to determine the proper Managers of an LLC pursuant to 6 Del. C. § 18-110, the Court held that the majority Members of the LLC properly removed the Managers appointed by the minority Members. The Court further held that Plaintiff’s attempts to compel the return of company property were outside the scope of an 18-110 action and declined to enter such relief.

In this case, Plaintiff owned a 65% Membership interest, while defendants owned a 35% Membership interest. The Court declined to entertain any of defendants’ arguments by which they contended that Plaintiff’s Membership interest should be reduced to below a control threshold via reallocation or any other theory. The Court additionally declined to enter an order in favor of plaintiff compelling the defendants to return company property, including passwords and surveillance equipment, because the defendants are no longer Managers. Rather the Court held that “Section 18-110 grants this court jurisdiction ‘to determine who validly holds office as a manager of a Delaware limited liability company.’ It does not address the retention of property by removed managers. … It does not contemplate that the court will bar former managers from the premises of company property. That ancillary relief is beyond the scope of this particular proceeding.”

§ 1.6.2.2. Minnesota

Johnson v. Wright, No. 27-CV-20-2012, 2021 WL 7630246 (Minn. Dist. Ct. Oct. 13, 2021). In an action for employment-based oppression and breach of contract arising out of Johnson’s alleged membership interest in associated corporate entities, the Minnesota district court held that the employment agreement between the parties did not grant Johnson a membership interest but was merely “an agreement to agree.”

Two members of LLCs operating memory care facilities asked Johnson to serve as president of the entities due to her experience in the industry. According to the complaint, the two defendants instructed the attorney drafting the employment contract to include that Johnson would receive a 5% interest in all current and future companies related to the memory care business and real estate holding companies. After Johnson signed the agreement, the defendants then represented to their creditors that the plaintiff had a 5% interest in all related entities. However, two years after executing the employment agreement, Johnson’s employment was terminated. When Johnson requested access to financial records, she was informed that she had no ownership interest in any of the associated LLCs.

Responding to Johnson’s claims arising out of her alleged membership interest, the court held that the employment agreement was an unenforceable “agreement to agree,” and thus did not grant Johnson a membership interest, for two reasons. First, the contested provision “contain[ed] several instances of prospective language that unambiguously contemplate future documentation and memorialization.” Second, the employment agreement, in referencing Johnson’s membership interests, did not specify in which entities Johnson would be a member. Rather, the agreement failed to mention any of the then-existing LLCs and merely anticipated that “Johnson could have membership interests in entities yet to be formed.” Therefore, because Johnson failed to establish that she possessed a membership interest in any of the LLCs, the court awarded the defendants summary judgment on Johnson’s claims for breach of contract and equitable relief.

§ 1.6.3. Breach of Fiduciary Duty

§ 1.6.3.1. Arizona

Zambezi Holdings, LLC v. Proforma Health, PLLC, 2022 WL 3098020 (Ariz. Ct. App. Div. 1, Aug. 2, 2022). Proforma Health, PLLC (“Proforma”) was formed to do business as Munderloh Chiropractic. Munderloh Holdings, LLC and Zambezi Holdings, LLC (“Zambezi”) were simultaneously created with Munderloh Holdings owning 75% of Munderloh Chiropractic and Zambezi owning the remaining 25%. Timothy Munderloh (“Tim”), a chiropractor, and his wife, Siobahn, owned Munderloh Holdings and Mark Love (Siobahn’s brother), an entrepreneur, owned Zambezi. The parties later formed a new holding company, Timark, Inc., to own and operate a Massage Envy franchise in Flagstaff, Arizona. A dispute arose when Mark wanted to open a Massage Envy franchise in Prescott, Arizona. Mark wanted to own the Prescott franchise 75/25 and Tim wanted the ownership split to be 50/50. After much discussion and negotiation, Tim declined the opportunity to participate in the Prescott franchise. Mark obtained the Massage Envy Prescott franchise and opened for business. Tim responded by freezing Mark/Zambezi out of Proforma by cutting off the twice-monthly cash distributions they had been receiving from Proforma. Mark filed suit against Tim, Proforma and Munderloh Holdings alleging breach of contract for failure to pay cash distributions and, also, sought judicial dissolution of Proforma. Tim filed counterclaims against Mark alleging that Mark had breached his duties to Tim by usurping the corporate opportunity of the Prescott franchise.

After a jury trial, the superior court granted judgment as a matter of law in favor of Tim on the corporate opportunity claim and Mark appealed. The jury issued a verdict in favor of Mark on the breach of contract claim. Tim moved for a new trial on Mark’s breach of contract claim. The motion was denied and Tim appealed.

On appeal, the court reversed the judgment as a matter of law in Tim’s favor on the corporate opportunity claim. In doing so, the court of appeals focused on the issue of who had an expectation regarding the corporate opportunity of the Prescott franchise. The court focused on the fact that the Flagstaff franchise was owned by Timark and that Timark (a) was not a party to the litigation; and (b) due to language in the Flagstaff franchise agreement, Timark had no expectation that it would own anything other than the Flagstaff franchise. The court also found that even if Tim, as a 50% owner of Timark, had an individual expectation of the Prescott franchise opportunity, the undisputed facts made clear that judgment as a matter of law should have been granted in Mark’s favor, and not Tim’s, because the Prescott franchise was never a corporate opportunity belonging to Tim. The court based this finding on evidence that Massage Envy was not interested in granting the franchise to Tim without Mark because: (a) Tim’s chiropractic business conflicted in part with Massage Envy’s business; and (b) Tim could not devote full-time efforts to the Prescott Massage Envy. Finally, the court held that even if Tim did have an individual expectation in the opportunity, Tim could have no such expectancy after he had previously rejected the opportunity. Specifically, it was inequitable for Tim to decline the opportunity, let Mark open the franchise and take all the risk, wait for almost three years after declining the offer and almost two years after the Prescott franchise opened, and then claim that Mark had usurped a corporate opportunity.

The court affirmed the jury verdict in Mark’s favor on the breach of contract claim and upheld the denial of Tim’s motion for a new trial. The court of appeals found that the instruction given the jury on the issue of the distributions that had been made to Mark by Proforma mirrored the language of former A.R.S. § 29-703(B) and (C)(1) which provided that in the absence of distribution instructions in the Proforma operating agreement, that Proforma had been making distributions to Tim and Mark in proportion to the value of their capital contributions and Proforma should have continued making such distributions to Mark until “each member has been repaid his capital contribution.”

§ 1.6.3.2. Colorado

Li v. Colo. Reg. Cntr. I, LLC, 2022 WL 5320135 (D. Colo. Oct. 7, 2022). Two sets of foreign investors asserted several actions against a Colorado LLLP, its general partner and others related to the partnership’s investments. The Colorado LLLP served as an EB-5 Regional Center, an entity approved by the federal government to promote economic growth by encouraging investments by foreign persons in exchange for permanent resident cards (green cards). As described in Liu v. SEC, 140 S. Ct. 1936, 1941 (2020), “[t]he EB–5 Program, administered by the U.S. Citizenship and Immigration Services, permits noncitizens to apply for permanent residence in the United States by investing in approved commercial enterprises that are based on proposals for promoting economic growth.” Although the lawsuits involved federal and state securities and common law claims, the focus of this summary relates to the breach of fiduciary duty claims against the general partner.

The first set of foreign investors brought a derivative-breach-of-fiduciary-duty claim against the general partner. They alleged that the general partner failed to adequately ensure that a loan the partnership issued was sufficiently collateralized and that the general partner failed to demand complete repayment of the loan and by providing misleading information about it. The second set of foreign investors separately brought both direct and derivative breach-of-fiduciary-duty claims against the general partner, alleging that the general partner provided them with misleading marketing materials and took advantage of the investors lack of English proficiency to convince them to invest in the limited partnership. These claims were dismissed under Colorado’s economic loss rule and the contemporaneous ownership rule, under Federal Rule of Civil Procedure 23.1(b). Under the economic loss rule, if a plaintiff alleges only economic loss from the breach of an express or implied contractual duty, the plaintiff may not assert a tort claim for such a breach absent an independent duty of care under tort law. The contemporaneous ownership rule provides that a plaintiff bringing a derivative action must allege that he or she “was a shareholder or member at the time of the transaction complained of.” Fed. R. Civ. P. 23.1(b). Under Colorado’s limited partnership statue, “member” means a general partner or a limited partner. The complaint was deemed not subject to the economic loss rule because it alleged that the fiduciary relationship arose from contract; so, the court determined that they were contract claims and not subject to the economic loss rule. But to the extent their claims were based on pre-investment misrepresentations, they were dismissed because the alleged malfeasance occurred before the investors became “members” of the partnership in violation of the contemporaneous ownership rule. The second set of investors, however, failed to allege a contractual breach of fiduciary duty claim without establishing an independent source of fiduciary duty and was subject to the economic loss rule.

§ 1.6.3.3. Delaware

Manti Holdings, LLC v. Carlyle Group Inc., 2022 WL 444272 (Del. Ch. Feb. 14, 2022). The Delaware Court of Chancery held that the terms of a “drag along” provision in a stockholders agreement was not sufficient to cause a waiver of the right of minority stockholders to challenge the sale of the subject company by minority stockholders based on a breach of fiduciary duties. Notably, the Court did not reach the question of the general waiverability of fiduciary duties in this opinion.

The stockholders agreement provided that: “In the event that … a Company Sale is approved by the Board and … the holders of at least fifty percent (50%) of the then-outstanding Shares …, each Other Holder shall consent to and raise no objections against such transaction ….” The Court held that the provision did not rise to the level of a waiver of bringing a claim for breach of fiduciary duties because “a waiver must be clear and unequivocal” while the provision in question never mentioned the waiver of fiduciary duties. The Court noted that the provision did specify certain other actions stockholders agreed not to take when being “dragged along,” including voting against the transaction, asserting appraisal rights, and refusing to execute certain transaction documents.

§ 1.6.3.4. New York

Miami Firefighters’ Relief & Pension Fund v. Icahn, 199 A.D.3d 524 (N.Y. App. Div. 2021). Shareholders of Xerox Holdings Corporation (Xerox) filed a derivative action against Carl Icahn, Xerox’s largest single shareholder, without filing a demand on Xerox’s board of directors to initiate the litigation. The trial court dismissed the action finding that the shareholders had not sufficiently pled that a demand would have been futile. However, the appellate court reversed, holding that the shareholders had sufficiently pled demand futility as four of the seven members of the board of directors lacked sufficient independence from Icahn to impartially decide whether to bring suit against him. Icahn at least tacitly conceded that he controlled two of the board members. Another board member, who served as the corporation’s CEO, received a level of compensation that called into question his independence as he would be putting his employment at risk if he voted to bring suit against Icahn. A fourth board member had served as a managing director of another company owned by Icahn and had served as Icahn’s representative on at least ten other boards.

The case arose out of Icahn and two partnerships that he controlled allegedly using Xerox’s confidential information regarding its planned acquisition of HP, Inc. (“HP”) to purchase HP shares before news of the sale became public. In addition to dismissing the case based on the shareholders’ failure to make a demand, the court trial court also found that the shareholders had not sufficiently pled a cause of action for breach of fiduciary duty as they had not pled that Xerox had been damaged by Icahn’s actions. However, the appellate court reversed this decision as well, holding that damages are not an essential element of a breach of fiduciary duty claim. The court explained that the function of a breach of fiduciary duty action is not just to compensate the plaintiff but to prevent breaches of fiduciary duty by removing any temptation on the part of fiduciaries to breach their duty.

Newman v. Newman, 202 A.D.3d 442, 443 (NY App Div. 2022). A shareholder in a closely-held, family corporation sued his father, the other shareholder, alleging breach of fiduciary duty and other claims. The son’s allegations arose out of the father’s alleged misappropriation of corporate assets and causing the company to fail to pay state and federal taxes. The trial court denied the father’s motion to dismiss. The appellate court affirmed, holding that, because the father and son were family members in a closely-held corporation, the father owed a fiduciary duty to the son that was independent of the fiduciary duty that the father owed to the corporation.

Max v. ALP, Inc., 203 A.D.3d 580 (NY App. Div. 2022). A shareholder and director sued the other two directors for breach of fiduciary duty among other claims. The motion court dismissed the shareholder-director’s breach of fiduciary duty claims finding that they were barred by both the business judgment rule and by an exculpatory provision in the corporation’s certificate of incorporation. As set forth in the trial court’s decision (2021 WL 2416518), the exculpatory provision in the certificate of incorporation tracked the language of New York Business Corporation Law § 402(b) and limited the liability of directors for breach of fiduciary duty subject to certain exceptions. Those exceptions include bad faith and intentional misconduct. The appellate court affirmed the trial court’s holding that the plaintiff shareholder-director’s allegations of bad faith and intentional misconduct were conclusory and, therefore, did not overcome the protections provided to the directors by the exculpation language of the certificate of incorporation.

Salansky v. Empric, 208 A.D.3d 983 (N.Y. App. Div. 2022). Plaintiff minority shareholder sued the corporation’s other two shareholders for breach of fiduciary duty and breach of the shareholder agreement after the defendants made additional capital contributions to the corporation in exchange for shares, diluting the plaintiff’s interest from 45% to less than 3%. The shareholder agreement required the written agreement of all shareholders to amend the certificate of incorporation (“CI”), but the defendants had raised the number of authorized shares by a mere majority vote. The defendants argued that the shareholder agreement violated BCL § 803(a), which states that a CI may be amended by a simple majority vote. However, the court held that § 803 does not prohibit parties from entering into a separate agreement that requires unanimity among the shareholders to amend a CI.

Troffa v. Troffa, No. 6095102016, 2022 WL 3140457 (N.Y. Sup. Ct. Aug. 02, 2022). Son and 50% shareholder sued his father, also a 50% shareholder, alleging that his father breached his fiduciary duties by usurping corporate opportunities in purchasing land in his own name and then wasting corporate assets in making rent payments to a third-party entity with no ownership interest over the property. The plaintiff claimed that in 1999 his father told him their corporation would be leasing a compost yard but did not tell him that the rent would be applied to pay down the purchase price on the property. The father also allegedly failed to mention that he was the actual party leasing the property and charging rent to the corporation. The father argued his lease to purchase the compost yard was a prudent business decision conferring tax advantages on the corporation and that the son was informed of the arrangement. Further, a third-party entity belonging to the father was receiving the corporation’s rent payments. Ultimately, the court held that the son demonstrated his prima facie entitlement to judgment as a matter of law that his father breached his fiduciary duties to the corporation by wasting corporate assets in the payment of rent to the third-party corporation, which had no ownership interest in the compost yard. However, the father raised “a triable issue of fact” regarding whether his son consented to the arrangement.

§ 1.6.4. Breach of Contract and Breach of Covenant of Good Faith and Fair Dealing

§ 1.6.4.1. Delaware

In re Morrow Park Holding LLC, 2022 WL 3025780 (Del. Ch. Aug. 16, 2022). In a cautionary tale, the Court of Chancery denied both parties’ claims of breach of contract against the other in connection with their attempts to wind up their mutual business affairs. The parties were real estate developers and, after deciding they could no longer work together, “established limited liability companies with operating agreements governing the continued operation and subsequent division of their jointly owned assets.” The process, however, was derailed by impatience coupled with “mutual animus” that resulted in actions that could only be characterized as “spiteful retribution.” Ultimately, after a six day trial, during which the parties submitted 931 joint exhibits and called 12 witnesses, the Court found that, even if there were breaches of contract, no damages had been suffered. Accordingly, the Court “leaves the parties as they are.”

§ 1.6.4.2. Minnesota

Koch v. Koch, No. 27-CV-18-20579, 2022 WL 1467980 (Minn. Dist. Ct. May 06, 2022). One of three brothers and shareholders in two closely held corporations sued in 2005 for a fair value buyout from both companies. That action resulted in a 2006 settlement agreement which required the sale of one of the companies and the provision of successive rounds of bonus distributions to the brothers. However, a 2012 IRS audit scrutinizing the tax deductibility of the bonus payments made to the brothers resulted in the two defendants suspending the payments, and the plaintiff sued for breach of the 2006 settlement. The court found that the use of the word “bonus” as opposed to “dividend” in the 2006 settlement agreement left open the question of whether tax deductibility was an essential feature of the payments to be made under the settlement. In answering the question whether the settlement agreement required bonuses to be made regardless of whether they were tax deductible as employee compensation, the jury sided with the plaintiff and awarded him $12,000,000.

§ 1.6.5. Fraud

§ 1.6.5.1. Arizona

AOW Management LLC v. Scythian Solutions LLC, 2022 WL 2813523 (Ariz. Ct. App. Div. 1, July 19, 2022). Demitri Downing (“Demitri”) was a board member of a not-for-profit marijuana dispensary and entered into an oral agreement with Alex Lane (“Lane”) to transfer his board seat to Lane purportedly to hide the board seat (and its resultant income) from Demitri’s wife in a pending divorce. Demitri contended that, despite his official resignation, Lane agreed that Demitri would maintain a 50% interest in the board seat. The superior court granted summary judgment in Lane’s favor on Demitri’s claim for rescission of his transfer of the board seat to Lane. The appellate court reversed that decision and held that if Demitri could establish he surrendered his seat on the board to Alex due to fraud, then rescission or avoidance may be the appropriate remedy.

§ 1.6.6. Equitable/Statutory Relief

§ 1.6.6.1. California

Siry Invest. L.P. v. Farkhondehpour, 13 Cal.5th 333, 513 P.3d 166, 296 Cal.Rptr.3d 1 (2022). In an action involving alleged improper diversion of a limited partnership’s cash distributions through fraud, misrepresentation and breach of fiduciary duty, the California Supreme Court addressed whether Cal. Penal Code § 496(c)’s treble damages and attorney fees were available as civil remedies to address partnership distribution disputes. Under § 496(c), any person who has been injured by the crime of receiving stolen property “may bring an action for three times the amount of actual damages, if any, sustained by the plaintiff, costs of suit, and reasonable attorney’s fees.” A person commits the crime of receiving stolen property, under § 496(a), when that person “buys or receives any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen or obtained.” The Supreme Court noted that § 496(c) is unambiguous, and when read together with other sections of the Penal Code, § 496(c) must be understood to mean that a plaintiff may recover treble damages and attorney’s fees under § 496(c) when property has been obtained in any manner constituting theft. The fraudulent diversion of partnership funds in the case at issue was deemed to be within criminal definition of theft because the defendants received property (the diverted partnership funds) belonging to plaintiff, having obtained the diverted funds in a manner constituting theft. The court also found that defendants concealed or withheld those funds from plaintiff. Defendant did all of this knowing the diverted funds were so obtained.

§ 1.6.6.2. Minnesota

Steffen v. Uttley, No. A22-0042, 2022 WL 3711487 (Minn. Ct. App. Aug. 29, 2022). In a shareholder oppression claim based on alleged wrongful withholding of dividends, the Minnesota court of appeals affirmed the district court’s ruling that the decision to delay payments to the plaintiff was made in good faith and in the best interest of the corporation. The plaintiff, a physician and shareholder in an association of entities operating eye clinics, brought a shareholder oppression claim under Minnesota Statute § 302A.751 based on the clinic’s alleged denying of his governance rights, giving him inadequate meeting notice and accommodations, withholding his distributions, and frustrating his reasonable expectations in valuing his shares. As to the delayed distribution theory, the trial court merged its shareholder oppression analysis under § 302A.751 with the standard for breach of fiduciary duty. On appeal, Steffen argued the court erred in not “separately analyzing the legal requirements of a claim of unfairly prejudicial conduct” under § 302A.751 from that of a breach of fiduciary duty claim.

While the court of appeals agreed with Steffen that the trial court “relied on its breach-of-fiduciary-duty analysis,” the court affirmed the trial court’s analysis and holding, stating that “it identified legitimate reasons that justified the delay, including advice of counsel . . . and the parties’ disagreement regarding the proration date.” The court continued that “the determination that respondents did not breach their fiduciary duty is plainly relevant to the question of whether [Steffen’s] reasonable expectations were frustrated . . . . [H]ere, no breach occurred, and the conduct was reasonable under the circumstances . . . .”

Dualeh v. Abdulle, No. A21-1615, 2022 WL 3581812 (Minn. Ct. App. Aug. 22, 2022), review denied (Nov. 15, 2022). In a dispute over ownership of a business providing non-emergency medical transportation services, the court of appeals affirmed both the district court’s summary judgment ruling that the plaintiff owned a 50% interest in the LLC and the eventual court ordered buyout of the defendant’s 50% interest. In 2017, Abdulle, the defendant, began negotiations to buy Byro Consulting LLC (“Byro”). In March 2018, Abdulle and Dualeh signed an operating agreement identifying them as the two members and stating that each would provide $60,000 for the purchase of the business. Dualeh, a part-owner of a competing business, was to join Abdulle in buying Byro, as she had experience in the industry. However, the purchase agreement with the previous owner was signed only by Abdulle and identified only Abdulle as the purchaser. In December, Dualeh sued Abdulle seeking control of Byro and a buyout of Abdulle’s interest, and Abdulle counterclaimed, arguing that Dualeh did not hold any interest in Byro at all.

On Abdulle’s motion for summary judgment, the district court ruled in Dualeh’s favor on the question of whether she held an interest, determining that she was a 50% owner. Relying on contract principles, the court reasoned that the operating agreement was enforceable, as between Abdulle and Dualeh, after the previous owner transferred his 100% interest to Abdulle, based on their joint payment of the purchase price. Additionally, Abdulle represented to the IRS and a business partner that he and Dualeh were co-owners. In support of this argument, the court also cited to Minnesota Statute § 322C.0401, subd. 4(1)–(3), which provides for the addition of members to an existing LLC “as provided in the operating agreement” or by consent of all members.

§ 1.6.6.3. New York

Grgurev v. Licul, 203 A.D.3d 624 (NY App. Div. 2022). This case involved the four shareholders of the corporation that operates Delmonico’s Steakhouse. The trial court found that two of the shareholders, who had exclusive control over the corporation’s finances, had committed shareholder oppression and ordered equitable dissolution of the corporation through the forced buyout of their shares by the petitioning shareholders. The court also ordered a money judgment in favor of the petitioning shareholders against the non-petitioning shareholders personally. The value of the shares that the non-petitioning shareholders were forced to sell was offset against the money judgment. The appellate court affirmed this decision based on the closely held nature of the corporation, the non-petitioning shareholders’ exclusive control over its finances, and the breach of fiduciary duty findings.

Stile v. C-Air Customhouse Brokers-Forwards, Inc., 204 A.D.3d 429 (NY App. Div. 2022). The court held that a settlement agreement in which a 33 percent shareholder agreed not to: seek dissolution of the company, seek dividends from the company, commence any derivative actions on behalf of the company, or seek to inspect the company’s books and records was binding on the personal representative of the shareholder’s estate. Although the settlement agreement did not explicitly reference whether or not the agreement would be binding on the shareholder’s personal representative, the presumption is that a contract is binding on the personal representative of the estate of a party to the contract unless the contract involves a personal quality of the testator or explicitly excludes the personal representative of the party’s estate from coverage. Therefore, the appellate court affirmed the dismissal of the personal representative’s claims for relief that the shareholder had agreed not to seek including a books and records inspection, issuance of distributions, recovery of corporate assets that had allegedly been misappropriated, and dissolution of the company.

The corporation had claimed that the estate never became a shareholder. The personal representative also alleged a shareholder oppression claim based on the refusal to recognize the personal representative as a shareholder. The court affirmed the trial court’s refusal to dismiss this claim and allowed this claim for dissolution based on shareholder oppression to proceed.

§ 1.6.7. Tax Estoppel

§ 1.6.7.1. New York

Tradesman Program Managers, LLC v. Doyle, 202 A.D.3d 456, 457 (NY App Div. 2022. An LLC sought judgment declaring that a corporation that claimed to be a member of the LLC was not a member. The corporation claiming to be a member asserted that the LLC was estopped from claiming that it was not a member because the LLC had distributed a Schedule K-1 that identified the corporation as having a profit and loss share and a capital share. The court discussed the doctrine of tax estoppel, which provides that a party may not contradict factual statements as to a company’s ownership contained in its tax returns, proved that the party signed the tax returns and has failed to assert any basis for not crediting the statements contained in them. The court held that that tax estoppel did not apply because the company had not signed the K-1 in question. The court further held that tax estoppel did not apply because the company had offered a reasonable explanation as to why the K-1 contradicted the actual ownership, namely the affidavit of one of its managers stating that it paid distributions to the corporation based on the misrepresentations of one of its members. As tax estoppel did not apply, the appellate court affirmed the trial court’s grant of summary judgment in favor of the company declaring that the corporation was not a member.

§ 1.7. Valuation and Damages

§ 1.7.1. California

Crane v. R.R. Crane Investment Corp., Inc., 82 Cal.App.5th 748, 298 Cal.Rptr.3d 759 (2022). Shareholder brought action for involuntary dissolution of family-owned investment corporation, after which his brother, who was the other 50% shareholder, and corporation invoked statutory appraisal and buy-out provisions, Cal. Corporations Code § 2000. After the appraisal process, the trial court confirmed the fair value of the shares as of the date the shareholder filed for dissolution but refused to award prejudgment interest on the valuation of his shares. On appeal, the shareholder argues he was entitled to interest at a rate of 10 percent per annum from the date he first sought dissolution until the eventual purchase of his shares more than three years later. The shareholder predicated his arguments on Cal. Civil Code § 3287(a) and § 3288. Section 3287(a) governs damages in civil cases. Since the option to exercise a buyback of shares is not considered damages, § 3287(a) was deemed inapplicable. Similarly, since § 3288 grants a jury the discretion to award interest in cases of oppression, fraud, or malice, interest could not be awarded to the shareholder because the shares were bought-out pursuant to a statutory appraisal and buy-out provisions of the Corporations Code. Finally, the court noted that the shareholder should have, but failed to, seek a deferred valuation date under Corporations Code § 2000(f).

§ 1.7.2. Delaware

In re Cellular Tel. P’ship Litig., 2022 Del. Ch. LEXIS 56, 2022 WL 698112 (Del. Ch. March 9, 2022). This case involves a dispute regarding the valuation of minority owners’ interests in freeze-out transactions in several partnerships which held licenses to provide cellular telephone services in specified geographic areas. The court determined that the defendant failed to prove that the freeze-outs were entirely fair to the minority partners, did not employ sufficient procedures that assured fairness to the minority partners, and instead sought to capture the future value for itself. In addition, the court considered that the valuation firm had a long relationship with the defendant and found that improperly influenced the outcome of the valuations.

§ 1.7.3. Louisiana

Shop Rite, Inc. v. Gardiner, 333 So. 3d 506, 2021 La. App. LEXIS 2081, 21-371 (La. App. 3rd Cir. December 29, 2021). This case addresses the fair value of the minority interests of a dissenting shareholder who was withdrawing their shares in two corporations: a 3.8 percent interest in a grocery and convenience store business and a 3.95 percent interest in a tobacco and alcoholic beverage store business. The trial court accepted the adjusted net asset method of valuation which was selected by experts for both parties because the corporations owned large amounts of real estate, and also allowed a discount for “trapped” capital gains taxes that would be owed in the event the underlying real estate was sold. The appellate court rejected the discount for capital gains taxes, stating that there must be a factual basis for a discount to be taken and that a sale of the underlying real estate assets was an unknown future event.

§ 1.7.4. Michigan

Pitsch v. Pitsch Holding Co., 2022 Mich. App. LEXIS 2730, 2022 WL 1508774 (Mich. App. 2022). This case pertains to challenges to the valuation quantification recommended by a special master and accepted by the trial court in a forced stock sale in a shareholder deadlock case. The special master had determined that a sale of shares from one shareholder to the other would yield more value than if the company was dissolved. In this matter, the special master determined a “modified liquidation value” which approximated the middle of the range between liquidation value and fair market value. The appellate court considered that all parties initially expressed a willingness to sell their stock for the amount determined by the special master, that the appellants do not explain why the company would net a higher value, and that the appellants had recommended the particular special master. As a result, the appellate court rejected the appellant’s claims and affirmed the trial court’s decision.

§ 1.7.5. Minnesota

Steffen v. Uttley, No. A22-0042, 2022 WL 3711487 (Minn. Ct. App. Aug. 29, 2022). When Steffen was a shareholder-physician with the clinic, four other shareholders were bought out using a valuation method that diverged from the valuation method provided in the shareholder agreements. Strict adherence to the terms of the agreements would provide for a lesser buyout, and, upon discovering that these previous buyouts were not in compliance with the valuation method provided in the agreements, the remaining shareholders agreed that future buyouts would be valued according to the agreements’ actual terms.

Then, Steffen announced his departure from the clinic. When the clinic offered to purchase his shares in accordance with the terms of the agreements—and not the terms of the repurchase of the shares of previous departing doctors—Steffen declined. He commenced a shareholder oppression claim under Minnesota Statute § 302A.751 arguing the clinic frustrated his reasonable expectations in valuing his shares.

The trial court ruled that Steffen’s “expectation upon signing the Agreements was that his buyout would be calculated as set forth in the Agreements.” In reaching this determination, the court relied on the fact that neither Steffen nor the other shareholders were aware that the previous valuations were not in compliance with the agreements and that, after the shareholders discovered the error, Steffen was aware of the decision to bring the buyback program into compliance and had an opportunity to voice his objection but failed to do so. The court of appeals affirmed, citing the fact that Steffen attended board meetings where the issue was discussed and agreed to use the formulas set forth in the agreements to calculate future buyouts. Therefore, Steffen “had no reasonable expectation for his shares to be valued contrary to the Agreements.”

Koch v. Koch, No. 27-CV-18-20579, 2022 WL 1467980 (Minn. Dist. Ct. May 06, 2022). In this shareholder dispute among three brothers of two closely held corporations, a battle of valuation experts eventually resulted in the largest reported fair value buyout in Minnesota state history, with the court siding with the plaintiff’s expert “[o]n almost every issue.” The plaintiff brother brought both breach of contract claims and equitable claims for breach of fiduciary duty and unfairly prejudicial conduct under Minnesota Statute § 302A.751 against his two brothers. After a jury verdict for the plaintiff on his breach of contract and breach of the duty of good faith and fair dealing claims (awarding him $12,000,000), the parties stipulated that a buyout should occur but could not agree as to the valuation of the plaintiff’s interest in the two companies, which was tried to the court as a bench trial.

While both experts considered the firms’ income, their respective markets, and their assets in arriving at their valuations, the weight the experts gave to the three approaches differed significantly; therefore, they arrived at wildly divergent estimations of the value of the plaintiff’s interest. Ultimately, the court found that “[the plaintiff’s expert’s] primary reliance on the income and market approaches is more credible than [the defendants’] primary reliance on the asset approach.” Because the two corporations were “strong, solid enterprises” with no expectation of being liquidated or dismantled, the court determined that “a buyer for these companies is more likely to be interested in the income they have the potential to earn than in the liquidation value for their assets.” Therefore, because the plaintiff’s expert’s fair value opinions were “more reasonable, better supported, and closer to a proper valuation” of the plaintiff’s interest in the two firms, the court awarded the plaintiff a total of $58,501,760 based on his expert’s valuation of the two companies. Plaintiff was also awarded his fees and costs incurred in the action.

§ 1.7.6. Nebraska

Bohac v. Benes Serv. Co., 310 Neb. 722, 969 N.W.2d 103 (Neb. 2022). This case encompasses an election to make a purchase in lieu of judicial dissolution of a minority ownership interest in the shares of a corporation which operates an agricultural equipment dealership. The appellate court determined that the trial court did not use the correct definition of “fair value” pursuant to the Nebraska statute and, consequently, it should not have subjected the value of the shares to minority or lack of marketability discounts.

§ 1.7.7. New Jersey

Robertson v. Hyde Park Mall, 2022 N.J. Super. Unpub. LEXIS 848, 2022 WL 1572600 (N.J. Super. Ct. App. Div. May 19, 2022). In this partnership dispute case, the appellants assert that the trial court erred by not applying discounts to the fair value of the dissociated partners’ ownership interests for lack of control and marketability. The partnership owns and operates a major shopping mall. The appellate court determined that the trial court “appropriately considered the equities of the case when it decided not to apply discounts for lack of control and marketability, and its findings and conclusions are supported by the record and applicable law.”

Sipko v. Koger, Inc., 251 N.J. 162, 276 A.3d 160 (N.J. 2022). This case involves a shareholder dispute regarding computer design services businesses and whether a marketability discount should be applied to a shareholder’s interest in the two businesses. On the second appeal, the Supreme Court of New Jersey determined that no marketability discount should be allowed. The appellate court made this determination based upon findings that the comprehensive accounting ordered by the trial court showed that the defendants had attempted to render the corporation worthless to thwart the plaintiff and to create false evidence of the plaintiff giving up one of their ownership interests.

§ 1.7.8. New York

Collins v. Tabs Motors of Valley Stream Corp., 2021 N.Y. Misc. LEXIS 6058, 2021 NY Slip Op 32438(U) (Sup. Ct. N.Y. Cnty. Nov. 23, 2021). This case addresses whether a Shareholder Agreement is determinative in a dissolution to determine the value of a 25 percent ownership interest in a corporation that operates an automotive repair business. In this case, the buy-sell sections of the Shareholder Agreement state, “if any shareholder files a petition to dissolve the Corporation; … the Corporation firstly, and then the other Shareholders shall have the option to purchase all, but not part of the shares owned by such Shareholder,” and an accompanying schedule executed contemporaneously with the Shareholder Agreement stipulates the value per share is a specific dollar amount. The court determined that the Shareholder Agreement and the stipulated value in the accompanying schedule were enforceable.

Ng v. Ng, 2022 N.Y. Misc. LEXIS 3755, 2022 NY Slip Op 31750(U) (Sup. Ct. N.Y. Cnty. May 27, 2022). This case considers a valuation dispute regarding the “separation of a number of businesses previously owned by two brothers and former partners” pursuant to a dissolution agreement which the court considered “a global business divorce between the two brothers.” The valuation dispute arises from the assertion by one brother that “the entire interest” defined in the dissolution agreement only includes the shares of the stock but not the company’s goodwill. The court noted that although the dissolution agreement does not have a restriction on competition, it is well established in case law that there is an “important distinction between the duty to refrain from soliciting former customers which arise from the sale of good will of an established business.” The court determined that the sale terms do include the goodwill and consequently limited preliminary injunctive relief to only apply to the extent of the implied duty to not engage in solicitation impairing the company’s goodwill.

§ 1.7.9. North Dakota

Sproule v. Johnson, 2022 ND 51, 971 N.W.2d 854 (N.D. 2022). This case arises from a valuation dispute in a partnership dissolution of a family farm business. The appellants assert that taxes should have been deducted from the value which the trial court determined for the buyout of the plaintiff’s ownership interest. The appellate court found that there was no intention to currently liquidate, that the proffered tax analysis of what would happen if a liquidation would occur is hypothetical, and that the agreements in principle negotiated by the parties regarding the valuation methods were consistent to valuations without discounts for taxes. Ultimately, it concluded that such a taxes discount would be speculative.

§ 1.7.10. Tennessee

Boesch v. Holeman, 2022 Tenn. App. LEXIS 335, 2022 WL 3695977 (Tenn. Ct. App. Aug. 26, 2022). This is a dispute case regarding the buyout price for a disaffiliated partner in a three-partner business that distilled flavored moonshine. In the initial appeal, the appellate court determined that a “discount for lack of control by the minority partnership is inappropriate because the statute calls for determining value based on a sale of the entire business as a going concern” and remanded the case to the trial court to adjust the valuation accordingly. In this second appeal, the court rejected the appellant’s new challenge to the business valuation, which claims that the income-based method of business valuation was not properly applied. Ultimately, the appellate court determined that under the Tennessee Code, the buyout price after disassociation is measured as “the amount that would have been distributable to the disassociated partner on the day of disassociation if the assets of the business had been sold that day,” that the appellant’s request to include the revenue from stores which opened after the dissociation date should be rejected because it is not consistent with the requirements of the Tennessee Code and that the expert witness for the defendant partner “provided the court with a fully supported and properly calculated method of business valuation in conformity with the court’s previous instructions.”

Buckley v. Carlock, 652 S.W.3d 432 (Tenn. Ct. App. 2022). In this minority shareholder oppression case, the appellate court evaluated the appellant’s challenge to the valuation methodology accepted by the trial court to determine the fair value of the minority owner’s interest in a luxury automobile dealership. The appellate court considered that “The trial court accepted a valuation methodology… that is considered acceptable in the financial community. Authoritative automotive publications endorse the blue-sky approach. And it is used in the ‘great majority’ of ultra-high-end dealership transactions. The [trial] court also found the blue-sky method admissible and reliable.” Furthermore, the appellate court considered that “The method was based on fair value, not fair market value.” Consequently, the appellate court concluded that the valuation method was appropriate.

§ 1.7.11. Utah

Diversified Stripping Systems Inc. v. Kraus, 516 P.3d 306 (Utah Ct. App. Jul. 21, 2022). In an appeal from a complex business dispute involving a joint venture, the court of appeals found that the district court’s damages awards were unsupported. The joint venture, a construction business, was owned by two parties with 80% and 20% equity share. The parties’ agreement to form the joint venture was memorialized in a series of documents, including an asset purchase agreement and a profit advance agreement. In the asset purchase agreement, a third entity, owned the majority owner of the joint venture, purchased all the construction equipment from the minority owner, which would then lease this equipment to the joint venture. In the profit advance agreement, the joint venture agreed to pay the minority owner $70,000 per year for two years as an advance on profits, not a salary. And the minority owner agreed that if his 20% share of the joint venture’s profits fell below $70,000 per year, he would repay the joint venture for any overage. Shortly after the joint ventures’ inception, the parties’ relationship deteriorated, and the majority owner pushed the minority owner out of the joint venture. The majority owner later shut down the joint ventures’ operations and caused his equipment entity to sell all the equipment. The parties brought suit, and the district court found that the majority owner breached its fiduciary and contractual duties.

For damages, the district court awarded the minority owner its lost profits of $227,500 by determining that, based on the profit advance agreement, all parties to the joint venture envisioned that the joint venture’s profits for the first two years would by $350,000. The court extrapolated that estimate over five years, awarding the minority owner 20% of that estimated profit, less certain payments he had already received. The district court also awarded the minority owner 20% of the proceeds of the equipment sale after the joint venture was discontinued.

The majority owner appealed the damages award, arguing that the district court’s lost profit award was unsupported by evidence and that the minority owner was not entitled to the proceeds of the equipment sale. The court of appeals agreed, finding that the district court relied solely on profit advance agreement to calculate the lost profits, making its lost profit calculation speculative and unreliable as it was not based on reasonable assumptions or projections. There was no evidence that the $70,000 figure in the profit advance agreement was based on any projections, profitability analysis, or reasonable expectations of the joint venture’s profitability. The court of appeals also remanded the minority owner’s award of the portion of the equipment sales proceeds because the equipment was owned by an entity wholly owned by the majority owner, not by the joint venture.

Editors

§ 1.1. Tribal Litigation & The Third Sovereign

We have been writing this annual update of cases relevant to tribal litigation for many years. Recognizing that the average practitioner consulting this volume may not have much experience with federal Indian law, we have endeavored to provide historical context and citation to most relevant circuit and even district court cases in every volume. To target primarily those cases decided within the last year, this chapter will focus on cases decided between October 1, 2021 – October 1, 2022. The chapter begins with a Supreme Court overview and then is structured around sovereigns—Indian Tribes, the United States, and the fifty sister States.

Retired Supreme Court Justice Sandra Day O’Connor has aptly referred to tribal governments as the “third sovereign” within the United States.^[1] Much like federal and state governments, tribal governments are elaborate entities often consisting of executive, legislative, and judicial branches.^[2] Tribes are typically governed pursuant to a federal treaty, presidential executive order, tribal constitution and bylaws, and/or tribal code of laws, implemented by an executive authority such as a tribal chairperson, governor, chief, or president (similar to the United States’ president or a state’s governor) and a tribal council or senate (the legislative body). Tribal courts adjudicate most matters arising from their reservations or under tribal law.^[3]

Indian tribes are “distinct, independent political communities, retaining their original natural rights” in matters of local self-government.^[4] Thus, state laws generally “have no force” in Indian Country.^[5] While in the eyes of federal and state government, tribes no longer possess “the full attributes of sovereignty,” they remain a “separate people, with the power of regulating their internal and social relations.”^[6]

This chapter explores the repose of tribal sovereignty, federal plenary oversight of that sovereignty, and perennial state encroachment upon that sovereignty. Federal trial and appellate courts issue more than 650 written opinions in cases dealing with Indian law each year,^[7] and settle, dismiss, or resolve without opinion countless others. This chapter introduces those cases most relevant to a business litigation focused audience.

§ 1.2. Indian Law & The Supreme Court 

§ 1.2.1. The 2021–2022 Term

The Supreme Court hears an average of between two and three new Indian law cases every year.^[8] During the 2021–2022 term, the Court decided three Indian law cases.

Oklahoma v. Castro-Huerta, 142 S. Ct. 2486 (2022). The U.S. Supreme Court held that the federal government and state governments have concurrent jurisdiction to prosecute crime committed by non-Indians against Indians in Indian country.

Victor Manel Castro-Huerta was convicted in Oklahoma state court for child neglect. Castro-Huerta appealed the conviction, and while the state-court appeal was pending, the U.S. Supreme Court decided McGirt v. Oklahoma.^[9] McGirt held that the Creek Nation’s reservation in eastern Oklahoma had never been properly disestablished and therefore remained “Indian country.” This area of eastern Oklahoma included the city of Tulsa, where Castro-Huerta was accused of committing child neglect. The Oklahoma appellate court vacated Castro-Huerta’s conviction as a result of McGirt and held that the federal government, not the State of Oklahoma, had jurisdiction to prosecute him. The Supreme Court granted certiorari, and in a 5-4 decision, the Court reversed and remanded, holding that both the federal and state government had jurisdiction to prosecute the crime.

Justice Kavanaugh, writing for the majority, began the analysis with the premise that Indian country is a part of a state’s territory and that, unless preempted, states have jurisdiction over crimes committed in Indian Country. For example, the Court has previously held that states have jurisdiction to prosecute crimes committed by non-Indians against non-Indians in Indian country.^[10] A state’s jurisdiction in Indian country may be preempted by federal law under ordinary principles of federal preemption, or when the exercise of state jurisdiction would unlawfully infringe on tribal self-government.

The Court held that the state’s jurisdiction was not preempted in this case. Specifically, the Court rejected Castro-Huerta’s argument that the General Crimes Act and Public Law 280 preempted Oklahoma’s authority to prosecute crimes committed by non-Indians against Indians in Indian country. The General Crimes Act merely extends federal laws that apply on federal enclaves to Indian country, but does not state that Indian country is equivalent to a federal enclave for jurisdictional purposes, that federal jurisdiction is exclusive in Indian country, or that state jurisdiction is preempted in Indian country. Therefore, the General Crimes Act does not preempt state jurisdiction to prosecute crimes committed by non-Indians against Indians in Indian country. Nor does Public Law 280 preempt state jurisdiction under such circumstances. Public Law 280 grants states jurisdiction to prosecute state-law offenses committed by or against Indians in Indian country, but contains no language preempting state jurisdiction.

The Court also held that the test articulated in White Mountain Apache Tribe v. Bracker^[11] does not bar a state from prosecuting crimes committed by non-Indians against Indians in Indian country. In Bracker, the Court held that even when federal law does not preempt state jurisdiction under ordinary preemption analysis, preemption may still occur if the exercise of state jurisdiction would unlawfully infringe upon tribal self-government.

Here, the Court determined the exercise of state jurisdiction does not infringe on tribal self-government. First, state prosecution would not deprive the tribe of any of its prosecutorial authority since Indian tribes lack criminal jurisdiction to prosecute crimes committed by non-Indians. Second, a state prosecution of a non-Indian would not harm the federal interest in protecting Indian victims because state prosecution would supplement federal authority, not supplant federal authority. Third, states have a strong sovereign interest in ensuring public safety and criminal justice within their territory, and in protecting all crime victims.

Justice Gorsuch, writing for the dissent, viewed the majority’s decision as a step back from the foundational rule that Native American Tribes retain their sovereignty unless and until Congress ordains otherwise.

Ysleta Del Sur Pueblo v. Texas, 142 S. Ct. 1929 (2022). This case represents the latest conflict between Texas gaming officials and the Ysleta del Sur Pueblo Indian Tribe. The Attorney General, on behalf of the State of Texas (the “State”), sought to enjoin the Ysleta del Sur Pueblo (the “Tribe”), a federally-recognized Indian tribe, from offering bingo within its entertainment center located on Tribe’s reservation. In 1968, Congress recognized the Ysleta del Sur Pueblo as an Indian tribe and assigned its trust responsibilities for the Tribe to Texas. In 1983, Texas renounced its trust responsibilities because they were inconsistent with the State’s constitution. The State also expressed opposition to any new federal trust legislation that did not permit the State to apply its own gaming laws on tribal lands.

Congress restored the Tribe’s federal trust status in 1987 when it adopted the Ysleta del Sur and Alabama and Coushatta Indian Tribes of Texas Restoration Act (“Restoration Act”). The Restoration act prohibited “[a]ll gaming activities which are prohibited by the laws of the State of Texas.” Shortly thereafter, Congress adopted its own comprehensive Indian gaming legislation: the Indian Gaming Regulatory Act (“IGRA”). IGRA established the rules for separate classes of games. IGRA permitted Tribes to offer Class II games—like bingo—in States that “permi[t] such gaming for any purpose by any person, organization or entity.” 25 U.S.C. § 2710(b)(1)(A). Class III games—like blackjack and baccarat—were only allowed pursuant to negotiated tribal/state compacts.

After losing a legal battle (“Ysleta I”) to offer Class III games,^[12] the Tribe began to offer bingo, including “electronic bingo” machines.^[13] The State sought to shut down the Tribe’s bingo operations. Bound by Ysleta I, the district court enjoined the Tribe’s bingo operations, but stayed the injunction pending appeal. The Fifth Circuit reaffirmed Ysleta I and held that the Tribe’s bingo operations were impermissible because they did not conform to Texas’s bingo regulations.^[14] Certiorari was granted.

Section 107 of the Restoration Act directly addresses gaming on the lands of the Ysleta del Sur Pueblo. It provides that “gaming activities which are prohibited by [Texas law] are hereby prohibited on the reservation and on lands of the tribe” and does not grant Texas “civil or criminal regulatory jurisdiction” with respect to matters covered by § 107 (contained in subsection (b)). The State’s interpretation of the Act subjected the Tribe to the entire body of Texas gaming laws and regulations. The Tribe understood the Act to bar offering State-prohibited gaming activities—State-regulated gaming such as bingo would therefore be subjected only to federal law, not state law, limitations.

The Supreme Court stated that in Texas’s view, laws regulating gaming activities become laws prohibiting gaming activities—an interpretation that violates the rule against “ascribing to one word a meaning so broad” that it assumes the same meaning as another statutory term. Gustafson v. Alloyd Co., 513 U.S. 561, 575 (1995). The Court further explained that indeterminacy aside, the State’s interpretation would leave subsection (b)—denying the State regulatory jurisdiction—with no work to perform. As a result, Texas’s interpretation also defies another canon of statutory construction—the rule that courts must normally seek to construe Congress’s work “so that effect is given to all provisions.” Corley v. United States, 556 U.S. 303, 314 (2009) (internal quotation marks omitted).

Seeking to give subsection (b) real work to perform, Texas submitted that the provision served to deny its state courts and gaming commission “jurisdiction” to punish violations of subsection (a) by sending such disputes to federal court instead. However, that interpretation only serves to render subsection (c), which grants federal courts “exclusive” jurisdiction over subsection (a) violations, a nullity. A full look at the statute’s structure suggests a set of simple and coherent commands; Texas’s competing interpretation renders individual statutory terms duplicative and leaves whole provisions without work to perform.

The Supreme Court also looked at Congress’s intent when they passed the Restoration Act just six months after the Supreme Court handed down its decision in California v. Cabazon Band of Mission Indians, 480 U.S. 202 (1987). There, the Court interpreted Public Law 280—a statute Congress had adopted in 1953 to allow a handful of States to enforce some of their criminal laws on certain tribal lands—to mean that only “prohibitory” state gaming laws could be applied on the Indian lands in question, not state “regulatory” gaming laws. The Cabazon Court held that California’s bingo laws—materially identical to Texas’s laws here—fell on the regulatory side of the ledger. In Cabazon’s immediate aftermath, Congress also adopted other laws governing tribal gaming that appeared to reference and employ in different ways Cabazon’s distinction between prohibition and regulation. In doing so, Congress demonstrated that it clearly understood how to grant a State regulatory jurisdiction over a Tribe’s gaming activities when it wished to do so.

Accordingly, the Supreme Court held that the Restoration Act bans, as a matter of federal law on tribal lands, only those gaming activities also banned in Texas.

Denezpi v. United States, 142 S. Ct. 1838 (2022). In a 6-3 decision, the United States Supreme Court held that a Native American defendant previously prosecuted in a special federal administrative tribal court can be charged in a federal court for a separate offense arising from the same act without violating the Double Jeopardy Clause.

The case involved Merle Denezpi, a Navajo Nation member, who was charged by an officer with the Bureau of Indian Affairs for assault and battery, terroristic threats, and false imprisonment. These crimes were alleged to have occurred on the Ute Mountain Reservation. Denezpi was tried in the Court of Indian Offenses—a court established by the United States Department of the Interior in 1883 to administer justice for Indian tribes in certain parts of Indian country where tribal courts have not been established. Here, the Court of Indian Offenses sentenced Denezpi to 140 days in jail. Six months later, a federal grand jury indicted Denezpi on one count of aggravated sexual abuse in Indian country, an offense covered by the federal Major Crimes Act. Denezpi moved to dismiss the indictment, arguing that the Double Jeopardy Clause barred the consecutive prosecution. The District Court denied Denezpi’s motion. Denezpi was convicted and sentenced to 360 months’ imprisonment. The Tenth Circuit affirmed. Certiorari was granted.

Justice Amy Coney Barrett, writing for the majority, held that the Double Jeopardy Clause does not bar successive prosecutions of distinct offenses arising from a single act, even if a single sovereign prosecutes them. The Court reasoned that the Double Jeopardy Clause does not prohibit putting a person twice in jeopardy “for the same conduct or actions,” but rather focuses on whether successive prosecutions are for the same “offense.” Relying on the dual-sovereignty doctrine, the Court stated that because the sovereign source of a law is an inherent and distinctive feature of the law itself, an offense defined by one sovereign is necessarily a different offense from that of another sovereign.

Denezpi’s single act transgressed two laws: the Ute Mountain Ute Code’s assault and battery ordinance and the United States Code’s proscription of aggravated sexual abuse in Indian country. The two laws—defined by separate sovereigns—proscribe separate offenses, so Denezpi’s second prosecution did not place him in jeopardy again “for the same offence.”

Denezpi attempted to argue that this reasoning is only applied when the offenses are enacted and enforced by separate sovereigns. Because prosecutors in the Court of Indian Offenses exercise federal authority, Denezpi argued that he was prosecuted twice by the United States. The Court did not credit this argument, holding instead that the Double Jeopardy Clause does not prohibit successive prosecutions by the same sovereign; rather, it prohibits successive prosecutions “for the same offense.” Thus, even if Denezpi was right that the federal government prosecuted his tribal offense, the Double Jeopardy Clause did not bar the federal government from prosecuting him under the Major Crimes Act as well.

The dissent, led by Justice Neil Gorsuch, and joined by Justices Sonia Sotomayor and Elena Kagan, wholly disagreed with the majority. The dissent argued that this was the “same defendant, same crime, [and] same prosecuting authority” and further argued that the dual-sovereignty “doctrine is at odds with the text and meaning of the Constitution” and “cannot sustain the Court’s conclusion.”

Justice Gorsuch emphasized that the Court of Indian Offenses truly belonged to the United States through the Department of the Interior instead of being a tribal court. On this basis, the majority ruling could allow prosecutors to rehearse their trial in one jurisdiction to prepare for the subsequent trial in another. Furthermore, Gorsuch believed the majority’s ruling undermines tribal sovereign authority.

§ 1.2.2. Preview of the 2022–2023 Term

As of October 1, 2022, the Supreme Court granted certiorari in one Indian law case for the 2022–2023 term, with twelve more petitions for certiorari pending. If any new cases are granted and decided, they will be included in next year’s volume.

§ 1.3. The Tribal Sovereign

§ 1.3.1. Tribal Courts

More than half of the 574 federally recognized tribes have created their own court systems and promulgated extensive court rules and procedures to govern criminal and civil matters involving their members, businesses, and activity conducted on their lands. Notwithstanding federal restrictions on tribal adjudicatory power, tribes have extensive judicial authority. As the complexity of life on reservations has increased, so has Congress’s willingness to enhance and aid tribal courts’ adjudicatory responsibilities.

While tribal courts are similar in structure to other courts in the United States, the approximately 400 Indian courts and justice systems currently functioning throughout the country are unique in many significant ways.^[15] It cannot be overemphasized that every tribal court is different and distinct from the next.^[16] For example, the qualifications of tribal court judges vary widely depending on the court.^[17] Some tribes require tribal judges to be members of the tribe and to possess law degrees, while others do not.^[18] Some tribal courts meet regularly and have a fairly typical court calendar, while others may meet on Saturdays or only a couple days a month in order to meet the more limited needs of a court system serving a smaller population or particularly isolated tribal community.

Tribal courts can have their own admissions rules and counsel should not assume that because they are licensed in the state where the tribal court is located that they can automatically appear in tribal court. While many tribes allow members of the state bar to join the tribal bar, often for a nominal annual fee, the requirements vary from one tribe to another. For example, the Navajo Nation has its own bar exam that tests knowledge of Navajo tribal law as well as other requirements.^[19]

Counsel should keep this uniqueness in mind when addressing a tribal court orally or in writing. If counsel has never appeared before a particular tribal court, it would be wise to solicit common court practices from persons who regularly appear before the court.

Tribal court jurisdiction depends largely on: (1) whether the defendant is a tribal member;^[20] and (2) whether the dispute occurred in Indian Country,^[21] particularly lands held in trust by the United States for the use and benefit of a tribe or tribal member or fee lands within the boundaries of an Indian reservation.^[22] These two highly complex issues should be analyzed first in any tribal business dispute.

In the context of a tribe’s civil authority, the important distinction is between tribal members and non-members (whether or not the non-member is an Indian). Generally, tribal courts have jurisdiction over a civil suit by any party, member, or non-member against a tribal member Indian defendant for a claim arising on the reservation.^[23] Even in tribal court, claims against the tribe itself require a waiver of tribal immunity.^[24] Indian tribes also generally have regulatory authority over tribal member and non-member activities on Indian land.^[25]

In the “path-making” decision of Montana v. United States,^[26] however, the U.S. Supreme Court held that a tribal court cannot generally assert jurisdiction over a non-tribal member when the subject matter of the dispute occurs on land owned in fee by a non-member, explaining that “exercise of tribal power beyond what is necessary to protect tribal self-government or to control internal relations is inconsistent with the dependent status of tribes, and so cannot survive without express Congressional delegation.”^[27] To help lower courts determine when the assertion of tribal power is necessary, the Court articulated two exceptions: (1) a tribe may have civil authority over the activities of non-tribal persons who enter into consensual relations with the tribe or its members via a commercial dealing, contract, lease, or other arrangement; or (2) the tribe has civil authority over non-Indians when their actions threaten or have a direct effect upon the “political integrity, the economic security, or the health or welfare of the tribe.”^[28]

These exceptions are “limited,” and the burden rests with the tribe to establish the exception’s applicability.^[29] The first exception specifically applies to the “activities of non-members,” and the second exception is extremely difficult to prove, as it must “imperil the subsistence of the tribal community.”^[30] These exceptions have become known as the “Montana rule.”

There are new opinions issued every year on the limits of tribal court jurisdiction that are built upon Montana and its exceptions. This section highlights those most relevant.^[31]

Ute Indian Tribe of the Uintah & Ouray Rsrv. v. Lawrence, 22 F.4th 892 (10th Cir. 2022), cert denied, 143 S.Ct. 273 (2022). Lynn Becker, a non-native, former employee of the Ute Indian Tribe of the Uintah & Ouray Reservation (the “Tribe”) filed suit in Utah State Court for breach of an employment contract. The Tribe filed a motion to dismiss on the ground that the state court lacked jurisdiction, which the state court denied. The Tribe then filed suit against Becker in federal district court seeking to enjoin the state court action on the ground that the state court lacked subject matter jurisdiction. The district court denied the requested injunction to enjoin the state court action. The district court found that, even though Becker’s claims involve events that occurred on the reservation, a federal statute, 25 U.S.C. § 1322, authorizes state-court jurisdiction of the claims.

The Tenth Circuit reversed the district court’s decision and ruled that the Tribe is entitled to injunctive relief enjoining the state court action. A state court can only exercise jurisdiction over the dispute with “clear congressional authorization.” The Tenth Circuit held that the district court erred when it determined that 25 U.S.C. § 1322 supplied the state court with authorization. 25 U.S.C. § 1322 allows states to acquire jurisdiction over civil causes of action arising within Indian country and involving Indian parties. But state-court jurisdiction under § 1322 requires certain prelitigation action, such as tribal consent. Specifically, 25 U.S.C. § 1326 provides that a state acquires jurisdiction pursuant to § 1322 only when a tribe votes by a special election to accept such jurisdiction. The Tribe argued that it never consented by special election to Utah courts exercising jurisdiction under § 1322. The Tenth Circuit agreed.

The Tenth Circuit rejected the district court’s interpretation of § 1322, which was that although a tribe must conduct a special election before it can consent to “permanently authorize the state to assume global jurisdiction over [it],” it need not hold a special election before it can “selectively consent”—in a contract like the at issue employment agreement, for example—”to a state’s exercise of . . . jurisdiction” over a specific legal action. The Tenth Circuit disagreed, holding that such an interpretation is inconsistent with the explicit statutory text. Because the Tribe never held a special election granting the state court jurisdiction, § 1322 is inapplicable, the state court lacked jurisdiction, and the state court action should have been enjoined. The United States Supreme Court subsequently denied certiorari in October 2022.

Ute Indian Tribe of Uintah & Ouray Rsrv. v. McKee, 32 F.4th 1003 (10th Cir. 2022). The Tenth Circuit held that a tribal court lacks jurisdiction over a dispute with a non-tribal member arising off Indian lands. In this case, the defendant, a non-tribal member, owned land that was once a part of the Ute Reservation. However, two Uintah Indian Irrigation Project (UIIP) canals still crossed through the defendant’s property. In 2012, UIIP was notified that the defendant was diverting water from the canals to irrigate his property. After an investigation, UIIP determined that the defendant was “unlawfully misappropriating tribal waters in violation of the Cedarview Decree.”

The Ute Tribe sued the defendant in Ute Tribal Court, where the defendant moved to dismiss for lack of subject matter jurisdiction. The Ute Tribe claimed they had subject matter jurisdiction pursuant to the Montana rule, which states that a “tribe can regulate activities of all non-Indians who enter a consensual relationship with the Tribe or whose conduct imperils the Tribe’s political integrity, economic security, or health and welfare.” The defendant chose not to participate in the Ute tribal court action, and the tribal court entered judgment against him. Subsequently, the Ute Tribe petitioned the district court to enforce the tribal court’s judgment. The district court denied the Ute Tribe’s motion, holding that “the tribal-court judgment was unenforceable because the tribal court lacked subject-matter jurisdiction.” The Ute Tribe appealed.

The Tenth Circuit affirmed the district court’s decision. There are only two circumstances when a tribe or tribal entity may regulate non-tribal members and their activities: when a non-tribal member enters a consensual relationship with a tribe or tribal entity or when the non-tribal member’s “activity threatens [the tribe’s] political integrity, economic security, or health and welfare.” The Ute Tribe argued these exceptions did not need to be addressed as the action dealt with the exclusive rights to water from the reservation lands. The Ute Tribe explained that they have the authority to exclude people from their lands and thus have the power to exclude people from using their water.

The Tenth Circuit disagreed. The Ute Tribe did not provide any precedent to support the assertion that a tribe could regulate the usage of “natural resources outside of the tribe’s territory.” The Tenth Circuit held that because the defendant only used the water on non-Indian land, the “tribal court did not have jurisdiction arising from the Tribe’s authority to exclude nonmembers from its territory.”

Furthermore, the Tenth Circuit held that the defendant’s water use is a matter of the Ute Tribe’s external relations, not tribal self-government. The Court explained that because of the external nature of the matter, the parties must have had a contractual relationship where the defendant agreed to tribal court jurisdiction. Additionally, the Court noted that the Ute Tribe did not show how the use of the water would be harmful—the defendant had been using the water for over thirteen years without the Ute Tribe noticing. Ultimately, the Tenth Circuit held that the tribal court lacked jurisdiction over the water dispute.

Big Horn Cnty. Elec. Coop., Inc. v. Big Man, No. 21-35223, 2022 WL 738623 (9th Cir. Mar. 11, 2022). Big Horn County Electric Cooperative (“BHCEC”) provides electrical services to members of the Crow Tribe on the Crow Reservation. BHCEC notified a member of the Crow Tribe, Big Man, who lived on the Reservation, that his account was delinquent and would be terminated if non-payment continued. Big Man failed to pay, and his services were disconnected. Big Man sued BHCEC in Crow Tribal Court alleging that BHCEC’s termination violated Title 20, Chapter 1 of the Crow Law and Order Code, which provides that “no termination of residential service shall occur between November 1 and April 1 without specific prior approval of the Crow Tribal Health Board.” BHCEC filed suit in district court seeking to enjoin the tribal court action for lack of jurisdiction.

The district court granted summary judgment in favor of Big Man. First, the district court held that BHCEC did not show that Congress had intended to divest the Crow Tribe of its tribal jurisdiction over BHCEC’s action on the Tribe’s land. In the alternative, the district court concluded that both Montana v. United States^[32] exceptions apply, which grant a tribal court jurisdiction over a non-tribal member: “1) BHCEC formed a consensual relationship with the Tribe and there is a sufficient nexus between the regulation and that relationship, and 2) BHCEC’s conduct has a direct effect on the health and welfare of a tribal member.” BHCEC appealed the district court’s ruling.

The Ninth Circuit concluded that the first Montana exception was sufficiently met to sustain tribal jurisdiction over the dispute. BHCEC’s voluntary provision of electrical services on the Tribe’s reservation and its contracts with tribal members to provide electrical services created a consensual relationship within the meaning of Montana. Additionally, the Ninth Circuit held that the at-issue tribal regulation had a nexus to the activity that is the subject of the consensual relationship between BHCEC and the Tribe. The Ninth Circuit affirmed the district court’s decision.

§ 1.3.2. Exhaustion of Tribal Court Review

The doctrine of exhaustion of tribal remedies reflects the ongoing tension between tribal and federal courts. If a tribal court claims jurisdiction over a non-Indian party to a civil proceeding, the party usually^[33] is required to exhaust all options in the tribal court prior to challenging tribal jurisdiction in federal district court.^[34] If tribal options are not exhausted prior to bringing suit in federal court, the federal court will likely dismiss^[35] or stay^[36] the case.

Ultimately, the question of whether a tribal court has jurisdiction over a nontribal party is one of federal law, giving rise to federal questions of subject matter jurisdiction.^[37] Thus, non-Indian parties can challenge the tribal court’s jurisdiction in federal court.^[38] Pursuant to this doctrine, a federal court will not hear a matter arising on tribal lands until the tribal court has determined the scope of its own jurisdiction and entered a final ruling.^[39] Ordinarily, a federal court should abstain from hearing the matter “until after the tribal court has had a full opportunity to determine its own jurisdiction.”^[40] And again, notwithstanding a provision that appears to vest jurisdiction with an arbitrator, several federal courts have ruled that a tribal court should be “given the first opportunity to address [its] jurisdiction and explain the basis (or lack thereof) to the parties.”^[41]

After the tribal court has ruled on the merits of the case^[42] and all appellate options have been exhausted,^[43] the non-tribal party can file suit in federal court, whereby the question of tribal jurisdiction is reviewed under a de novo standard.^[44] The federal court may look to the tribal court’s jurisdictional determination for guidance; however, that determination is not binding.^[45] If the federal court affirms the tribal court ruling, the nontribal party may not relitigate issues already determined on the merits by the tribal court.^[46]

There are several exceptions to the exhaustion doctrine. First, federal courts are not required to defer to tribal courts when an assertion of tribal jurisdiction is “motivated by a desire to harass or is conducted in bad faith . . . or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction.”^[47] Second, when “it is plain that no federal grant provides for tribal governance of non-members’ conduct on land covered by Montana’s main rule,” exhaustion “would serve no purpose other than delay.”^[48] Third, where the primary issue involves an exclusively federal question, exhaustion of tribal remedies may not be mandated.^[49]

Because litigation is expensive, the question of whether the defendant is required to exhaust their tribal court remedies before challenging the jurisdiction of the tribal court is regularly litigated. Several of these cases were decided in the last year.^[50]

Chegup v. Ute Indian Tribe of Uintah & Ouray Rsrv., 28 F.4th 1051, 1053 (10th Cir. 2022). The Ute Indian Tribe of the Uintah and Ouray Reservation (“Tribe”) temporarily banished four members (“Banished Members). Rather than challenging their banishment in tribal court, the Banished Members sought relief in federal court by filing a petition for habeas corpus. The Banished Members claimed that, as a result of their temporary banishment, they were detained within the meaning of the Indian Civil Rights Act of 1968 (“ICRA”). The district court dismissed the suit, finding that temporary banishment did not constitute detention for the purposes of ICRA. Because the district court first analyzed whether tribal banishment amounted to detention under ICRA, it failed to address the Tribe’s alternative position that the Banished Members failed to exhaust their tribal remedies. The Banished Members appealed.

On appeal, the Tenth Circuit concluded that the district court should have started its analysis by addressing tribal exhaustion. “Only then, assuming that exhaustion was not an obstacle to this suit, should it have considered whether temporary or permanent banishment is cognizable as detention under ICRA’s habeas provision.” The Tenth Circuit declined to address the Banished Members’ argument that tribal exhaustion should be excused. Rather, the Tenth Circuit noted three reasons for finding the district court erred by not first addressing tribal exhaustion: (1) whether banishment constitutes detention under ICRA presented a significant, complex, and contentious issue; (2) tribal exhaustion was not obviously excused; and (3) the strong comity and sovereignty concerns underlying the tribal exhaustion doctrine. Accordingly, the Tenth Circuit reversed with instructions to resolve the exhaustion issue before turning to the substance of the claim.

In a dissenting opinion, Judge Lucero maintained that the district court was “unequivocally correct in dismissing the case.” Judge Lucero explained that “[a]bsent any authority requiring an exhaustion determination before jurisdiction, the complexity of the exhaustion issue in this case is yet another reason to defer to the district court’s discretion to first decide the bounds of its jurisdiction.”

Monster Tech. Grp., LLC v. Eller, No. CIV-21-879-J, 2021 WL 5395788 (W.D. Okla. Oct. 14, 2021). In September 2021, the United States District Court for the Western District of Oklahoma dismissed the Plaintiff’s suit for failure to exhaust tribal court remedies (“Order”). Plaintiff subsequently filed a motion for reconsideration, arguing the Order was erroneous. Plaintiff maintained that although it filed an appeal with the Supreme Court of the Iowa Tribe (“Tribal Supreme Court”) six months prior, it anticipated further delay because the Tribal Supreme Court consisted of only one judge. The court rejected this argument and denied a motion for reconsideration because the Tribal Supreme Court’s review was not complete.

The district court noted that a delay in the pending appeal did not negate the requirement that federal courts should generally abstain from hearing cases until tribal court remedies are fully exhausted. The court further explained that “[a] delay of less than six months coupled with some indefinite amount of anticipated additional delay does not qualify as ‘exceptional circumstances,’” nor does it result in a denial of justice. Accordingly, the district court dismissed Plaintiff’s action without prejudice, permitting the Plaintiff to reassert its claims in the future should the delay of tribal review extend for such a time that it becomes an extraordinary circumstance.

Adams v. Dodge, No. 21-35490, 2022 WL 458394 (9th Cir. Feb. 15, 2022). Adams filed a habeas petition under 25 U.S.C. § 1303 seeking relief from a Nooksack Tribal Court (“Tribal Court”) warrant. The United States District Court for the Western District of Washington denied Adams’ habeas petition for failure to exhaust tribal remedies. Adams appealed the district court’s decision, but the Ninth Circuit affirmed dismissal, explaining that “prior to turning to federal court, habeas petitioners must exhaust the remedies available to them in tribal court.”

The Ninth Circuit rejected Adams’ argument that she was not required to exhaust her tribal court remedies because the Tribal Court acted in bad faith. The Ninth Circuit similarly rejected Adams’ argument that she was not required to exhaust her tribal remedies because she was arrested off-reservation and the Tribal Court therefore lacked criminal jurisdiction to arrest her.

In her final argument, Adams claimed that under Congress’ passage of Public Law 280 in 1953, Washington State assumed exclusive criminal jurisdiction over tribal lands. The Ninth Circuit disagreed with this argument, reasoning that Adams failed to show Washington State’s jurisdiction was exclusive. The court noted that “the Washington Supreme Court has stated in dicta that tribal and state courts generally have concurrent jurisdiction over criminal cases.” Ultimately, because Public Law 280 was designed to supplement tribal institutions rather than supplant them, Adams failed to show the Tribal Court lacked jurisdiction. Because Adams failed to demonstrate that she was not first required to exhaust tribal remedies, the Ninth Circuit affirmed dismissal of her habeas petition.

Allstate Indem. Co. v. Cornelson, No. 21-5831 RJB, 2022 WL 856863 (W.D. Wash. Mar. 23, 2022). This case stems from a complaint filed by Joaquin Ortega Carrillo (“Carrillo”) alleging that Joshua Cornelson (“Cornelson”) assaulted and battered him. The assault and battery allegedly occurred at Cornelson’s home, which is located on the lands of the Lower Elwha Klallam Tribe. Because Cornelson’s home was covered by an Allstate insurance policy, Carrillo sent a letter to Allstate demanding over $500,000 in damages. Accordingly, Allstate sought a declaratory judgment in federal court that it had no obligation to provide coverage or a defense to Cornelson in connection with Carrillo’s claims. Allstate also sought a declaration that it did not owe Carrillo money pursuant to the coverages allowed under Cornelson’s policy.

On February 11, 2022, Cornelson and his wife filed a complaint in the Lower Elwha Klallam Tribal Court (“Tribal Court”) “seeking a declaration that the Tribal Court ha[d] jurisdiction and that Allstate [wa]s under a duty to defend and indemnify them” in the dispute with Carrillo. The Cornelsons then filed a motion to dismiss for lack of tribal court exhaustion, arguing that the United States District Court for the Western District of Washington should dismiss or stay the case to give the Tribal Court an opportunity to rule on whether it had jurisdiction. Allstate opposed the motion, claiming “the Tribal Court plainly lack[ed] jurisdiction over Allstate . . . and exhaustion [wa]s therefore not required.”

The court rejected Allstate’s argument that tribes lack civil authority over the conduct of nonmembers on non-Indian land within a reservation. Because the present case involved activities on Indian trust land, such an argument was inapplicable. The district court therefore concluded that the case should be stayed until the Tribal Court had an opportunity to determine whether it had jurisdiction over the dispute. The district court explained that the “case should be stayed, not dismissed, because exhaustion of tribal court remedies is a matter of comity, not of jurisdiction.” As such, the Tribal Court should first be permitted to consider whether it is the appropriate forum before the district court considers the issue.

Cross v. Fox, 23 F.4th 797, 799 (8th Cir. 2022). Plaintiffs, members of the Three Affiliated Tribes of the Fort Berthold Indian Reservation (“Tribe”), challenged provisions in the tribal constitution requiring nonresidents to return to the reservation to vote in tribal elections and prohibiting nonresidents from holding tribal office. Plaintiffs sued Tribe officials in tribal court. While the case was pending in tribal court, Plaintiffs also filed a lawsuit against the Tribe in federal court. Plaintiffs alleged that the return-to-reservation requirement and the eligibility requirement for holding public office violated the Voting Rights Act (“VRA”) and the Indian Civil Rights Act (“ICRA”). The Tribe moved to dismiss the case for lack of subject-matter jurisdiction, which the district court granted. The district court explained that Plaintiffs “inexcusably failed to exhaust tribal remedies for their ICRA claims and the court lacked federal-question jurisdiction over the VRA claims.”

On appeal, the Eighth Circuit assessed the district court’s dismissal of the ICRA claims as a result of Plaintiffs’ failure to exhaust tribal remedies. The Eighth Circuit affirmed dismissal of Plaintiffs’ ICRA claims on the separate ground that “ICRA does not contain a private right of action to seek injunctive or declaratory relief in federal court, and therefore, the district court lacked subject-matter jurisdiction . . . .” The court pointed out that a writ of habeas corpus is the only federal remedy for ICRA violations authorized by Congress. Because the plaintiffs did not seek a writ of habeas corpus, but rather declaratory and injunctive relief, the action required resolution through tribal forums. In other words, because there was no private right of action to enforce the ICRA in federal court, there could be no jurisdiction.

Stanko v. Ogala Sioux Tribe Pub. Safety Div. of the Ogala Sioux Tribe, No. CIV. 21-5085-JLV, 2022 WL 220088 (D.S.D. Jan. 25, 2022). On November 30, 2021, Stanko, a non-Indian man, filed a pro se complaint against the Ogala Sioux Tribe (“Tribe”) and various tribal officers. The complaint alleged that, while traveling on a federally maintained highway located on reservation land in South Dakota, tribal officers unlawfully arrested and detained him in violation of his constitutional rights. The complaint further alleged that the tribal officers assaulted, battered, and stole from him. Accordingly, Stanko brought claims under the Civil Rights Act, the Indian Civil Rights Act, as well as the common law torts of assault, battery, and theft. With the complaint, Stanko filed an objection and supporting affidavit seeking to avoid dismissal of his claims for failure to exhaust tribal remedies.

The United States District Court for the District of South Dakota rejected this argument, finding Stanko’s allegation that tribal officers violated his civil rights on reservation land squarely within the tribal court’s jurisdiction. Ultimately, the district court noted that “[w]hether Mr. Stanko approves of that jurisdiction or believes he cannot get a fair trial in tribal court is not relevant to the court’s evaluation of the issues before it.” The court further reasoned that federal policy supporting tribal self-government requires federal courts to first give tribal courts an opportunity to determine their own jurisdiction. Accordingly, Stanko’s claims were dismissed without prejudice.

On May 12, 2022, following de novo review, the Eighth Circuit affirmed the district court’s dismissal of Stanko’s claims.^[51]

Rincon Mushroom Corp. of Am. v. Mazzetti, No. 3:09-cv-02330-WQH-JLB, 2022 WL 1043451 (S.D. Cal. Mar. 15, 2022). In 2009, the Rincon Mushroom Corporation of America (“RMCA”) filed a complaint in federal court against Defendants in their personal and official capacities as representatives of the Rincon Band of Luiseño Indians (“Tribe”). RMCA alleged that Defendants and the Tribe conspired to regulate activity on RMCA’s land (“Land”) to lower the value so the Tribe could purchase the Land at a discount. On September 21, 2010, the district court granted Defendants’ motion to dismiss, explaining that RMCA failed to exhaust tribal remedies.

In 2015, RMCA filed a complaint in the Rincon Tribal Court (“Tribal Court”) challenging the Tribe’s regulatory jurisdiction over RMCA’s activities on the Land. Following a bifurcated trial, the Tribal Court held it had adjudicatory jurisdiction over the dispute, and entered judgment in favor of Defendants, granting several forms of relief (“Judgment”). The Judgment included an injunction requiring RMCA to receive Tribe approval prior to any future development or use of the Land, as well as to provide the Tribe with access to the Land to assess contamination. On appeal, the Rincon Appellate Court reversed and remanded the injunction on the grounds that it was overbroad. The Tribal Court subsequently entered an Amended Judgment modifying the scope of the injunction, which was not appealed within the tribal court system.

On April 22, 2020, RMCA filed a motion to reopen case in federal court on the basis that it had exhausted its tribal remedies. The district court granted the motion, and RMCA subsequently filed a motion for summary judgment contending that the Amended Judgment of the Tribal Court should not be recognized or enforced. Following oral argument on the matter, the district court held that RMCA had “not exhausted tribal remedies with respect to the injunctive relief contained in the Amended Judgment because they ha[d] not appealed the injunction to the Rincon Appellate Court.” Accordingly, RMCA’s failure to exhaust tribal remedies with respect to the injunction precluded federal court review of the injunction.

Brown v. Haaland, No. 3:21-cv-00344-MMD-CLB, 2022 WL 1692934 (D. Nev. May 26, 2022). Plaintiffs are ten individuals whose families have resided on the Winnemucca Indian Colony (“Colony”) for many generations. After more than thirty-five years of disputes over Colony leadership, the Rojo Council was recognized as the Colony’s permanent council. In June 2019, the Rojo Council filed trespass actions against the plaintiffs in the Bureau of Indian Affair’s Court of Indian Offenses (“BIA Court”) seeking to evict and remove them from the Colony. Shortly after, the Rojo Council began demolishing homes, and the plaintiffs moved for an emergency mandatory injunction in federal court. This prompted the Colony to request permission to intervene in opposition (“Intervenor”).

After the district court denied the emergency motion, the plaintiffs successfully moved to amend their complaint. Intervenor then filed a countermotion to dismiss, arguing that the plaintiffs “ha[d] not exhausted their tribal court remedies before challenging their evictions in federal court.” The district court rejected this argument, explaining that Intervenor’s arguments related to tribal court exhaustion were predicated on claims in the original complaint. The district court reasoned that “[b]ecause the claims in the [Amended Complaint] arise from different law and challenge different actions, the Court finds that Intervenor’s tribal exhaustion arguments are not responsive to the claims asserted in the [Amended Complaint].”

Cayuga Nation by & through Cayuga Nation Council v. Parker, No. 522-cv-00128 (BKS/ATB), 2022 WL 1813882 (N.D.N.Y. June 2, 2022). The Cayuga Nation (“Nation”) sued numerous parties (“Defendants”) for allegedly conducting an unlawful scheme involving the illegal sale of untaxed and unstamped cigarettes, marijuana, and other merchandise on the reservation. Defendants sold such untaxed goods through a small convenience store (“Pipekeepers”) and aimed to open another Pipekeepers store in Montezuma, New York. Under the Cayuga Nation’s Amended and Restated Business License and Regulation Ordinance (“Ordinance”), business cannot be conducted on Nation land without a business license issued by the Nation. Moreover, licenses may not be issued to businesses that compete with business conducted by the Nation.

On December 2, 2021, the Nation obtained an order from the Cayuga Nation Civil Court (“Tribal Court”) enjoining Pipekeepers from operating and imposing a fine. In February 2022, the Nation filed an amended Tribal Court complaint alleging that Defendants continued to violate the Ordinance. The Tribal Court therefore issued an order temporarily enjoining Defendants from operating Pipekeepers. After Defendants failed to file any opposition, the Tribal Court issued an order permanently enjoining Defendants.

Defendants filed motions to dismiss in the District Court for the Northern District of New York, arguing the court should abstain until all Tribal Court remedies were exhausted. The Nation maintained the position that tribal exhaustion was not applicable because there had been no federal action challenging tribal court jurisdiction and there were no further tribal court proceedings to exhaust. The court rejected this argument, holding there were remedies left to exhaust in the Tribal Court. The court pointed to various circumstances, including the presence of a proceeding in Tribal Court and concern about the Tribal Court’s authority to enforce the injunction as factors favoring application of the tribal exhaustion rule. Accordingly, the district court stayed the action pending exhaustion of Tribal Court proceedings, explaining it would be premature to act until the Tribal Court action was exhausted.

City of Seattle v. Sauk-Suiattle Tribal Ct., No. 2:22-CV-142, 2022 WL 2440076 (W.D. Wash. July 5, 2022). The Sauk-Suiattle Indian Tribe (“Tribe”) filed a complaint against the City of Seattle (“City”) in the Sauk-Suiattle Tribal Court (“Tribal Court”). The Tribe claimed Seattle City Light, which is owned by the City, infringed on the Tribe’s rights by constructing and operating three dams on the Skagit River. These dams blocked the passage of salmon, thereby threatening the Tribe’s livelihood. The dams are not located on Tribal land, but rather upstream.

The City moved to dismiss the action in Tribal Court. Subsequently, the City sought a preliminary injunction in federal court to prevent the Tribal Court from exercising jurisdiction over it. The Tribe then filed a motion to dismiss, arguing the district court should first require the City to exhaust its tribal remedies. In opposition, the City argued that one of the four exceptions to the exhaustion requirement should apply. Specifically, the City argued that tribal court jurisdiction was so plainly lacking that requiring the City to exhaust tribal remedies would serve no purpose other than to delay. While courts have not precisely articulated how plain the issue of tribal court jurisdiction must be before exhaustion can be waived, some courts require that tribal exhaustion only be waived if the assertion of tribal court jurisdiction is frivolous or clearly invalid.

The district court noted that while the powers of an Indian tribe generally do not extend to the activities of nonmembers of the tribe, a “tribe may also retain inherent power to exercise civil authority over the conduct of non-Indians on fee lands within its reservation when that conduct threatens or has some direct effect on the political integrity, economic security, or the health or welfare of the tribe.” To this point, the Tribe argued the City’s upstream activities had a direct impact on the health of the salmon population downstream.

The district court acknowledged that depending on how the facts of the case developed, the argument may be attenuated. But, the court could not definitively find the argument frivolous. In addition, the district court explained that because the lawsuit was based on interpretation of tribal law and Indian treaty rights, the case would benefit from the Tribal Court’s expertise. Accordingly, the district court found the complex legal issues well-suited for review by the Tribal Court. The Defendants’ motion to dismiss was denied and the case stayed until the Tribal Court had a full opportunity to determine its own jurisdiction.

McKinsey & Co., Inc. v. Boyd, No. 22-CV-155-WMC, 2022 WL 1978735 (W.D. Wis. June 6, 2022). McKinsey is a management consulting firm that provided marketing advice to pharmaceutical clients that sold opioids. The Red Cliff Band of Lake Superior Chippewa Indians (“Red Cliff”), a federally recognized tribe in Wisconsin, sued McKinsey in the Red Cliff Tribal Court (“Tribal Court”). Red Cliff sought to hold McKinsey accountable for its consulting work with opioid companies and the resulting devastation to the Red Cliff Reservation caused by the opioid epidemic. McKinsey moved for a preliminary injunction against the tribal action, arguing the Tribal Court lacked jurisdiction given its purported lack of contacts to the Red Cliff Reservation and Wisconsin.

Defendants argued the tribal court exhaustion rule barred McKinsey from raising jurisdictional arguments. While the district court noted the general principle favoring tribal court exhaustion, it recognized that tribal exhaustion is unnecessary when “it is plain that no federal grant provides for governance of nonmembers’ conduct.”^[52] Because the court could find no legal basis for the assertion of tribal court jurisdiction over McKinsey, McKinsey’s likelihood of success on the merits of its claim was a “near certainty.” Accordingly, the district court enjoined Red Cliff from proceeding with its case in Tribal Court.

Clausen v. Eastern Shoshone Tribe Health Care Plan, et al., No. 2:20-cv-00242-NDF (D. Wyo. July 1, 2022). The plaintiff, Clausen, a non-Indian, was a registered nurse and worked as an employee of the Eastern ShoShone Tribe and Eastern Shoshone Tribe Health Care Plan (collectively, the “Tribe”) at the Morning Star Care Center (“Morning Star”)—a nursing home licensed by the State of Wyoming and operated by the Tribe. During her employment, Clausen experienced a series of ailments, and the resulting medical bills were submitted for payment under the tribal health care plan, but ultimately not paid. Clausen filed suit in Wind River Tribal Court against Defendants for failure to provide coverage under the tribal health care plan.

The action in the Tribal Court was stayed by stipulation of the parties, and ultimately was voluntarily dismissed without prejudice. Clausen then filed suit in district court seeking payment of benefits, a declaratory judgment that the tribal health care plan is not a governmental plan as defined in 29 U.S.C. § 1002(32), and damages for breach of fiduciary duties. The Tribe filed a motion to dismiss, arguing, among other things, that the action must be dismissed because Clausen failed to exhaust tribal court remedies. Clausen argued that she was not required to exhaust tribal court remedies given the preemptive nature of ERISA, which she claimed expresses a clear preference for a federal forum.

The district court explained that simply because Clausen alleged that ERISA applies to the tribal health care plan, does not mean that the sovereign immunity issue is somehow less important to tribal self-government and self-determination, or that a tribal court should for some reason lack the opportunity to first evaluate the factual and legal bases for resolution of this issue. In addition, the Tribal Court is particularly well suited to undertake the fact-specific analysis of the tribal health care plan at issue. For these reasons, the district court granted the Tribe’s motion to dismiss.

§ 1.3.3. Tribal Sovereignty & Sovereign Immunity

An axiom in Indian law is that Indian tribes are considered domestic sovereigns.^[53] Like other sovereigns, tribes enjoy sovereign immunity.^[54] As a result, a tribe is subject to suit only where Congress has “unequivocally” authorized the suit or the tribe has “clearly” waived its immunity.^[55] The U.S. Supreme Court, in a 2008 decision, pronounced that tribal sovereign immunity “is of a unique limited character.”^[56] Unlike the immunity of foreign sovereigns, the immunity enjoyed by sovereign tribal governments is limited in scope and “centers on the land held by the tribe and on tribal members within the reservation.”^[57]

Nontribal entities must be aware that, absent a clear and unequivocal tribal immunity waiver, tribes and tribal entities may not be subject to suit should a deal go bad. With regard to contracts, “[t]ribes retain immunity from suits . . . whether those contracts involve governmental or commercial activities and whether they were made on or off a reservation.”^[58]

Tribal immunity generally shields tribes from suit for damages and requests for injunctive relief,^[59] whether in tribal, state, or federal court.^[60] Sovereign immunity has been held to bar claims against the tribe even when the tribe is acting in bad faith.^[61]

Tribes enjoy the benefit of a “strong presumption” against a waiver of their sovereign immunity.^[62] Moreover, federal courts have made clear that simply participating in litigation does not waive the tribe’s sovereign immunity.^[63] Any waiver of tribal sovereign immunity “cannot be implied but must be unequivocally expressed.”^[64]

Exactly what contract language constitutes a clear tribal immunity waiver is somewhat unclear.^[65] The Supreme Court in C & L Enterprises, Inc. v. Citizen Band Potawatomi Indian Tribe of Oklahoma^[66] ruled that the inclusion of an arbitration clause in a standard-form contract constitutes “clear” manifestation of intent to waive sovereign immunity.^[67] In C & L Enterprises, the Tribe proposed that the parties use a standard-form contract that contained an arbitration clause and a state choice-of-law clause.^[68] Although the contract did not clearly mention “immunity” or “waiver,” the Supreme Court believed the alternative dispute resolution (ADR) language manifested the tribe’s intent to waive immunity.^[69]

Finally, waivers of immunity must come from a tribe’s governing body and not from “unapproved acts of tribal officials.”^[70] Attorneys must evaluate a tribe’s structural organization to determine precisely which tribal agents have authority to properly waive tribal sovereign immunity or otherwise bind the tribal entity by contract. If attorneys do not have a working knowledge of pertinent tribal documents, they risk leaving their clients without an enforceable deal. Below are summaries from some of the most relevant sovereign immunity cases of the last year.^[71]

**Immunity may be asserted by tribal corporations, as well as tribal governments. Some recent sovereign immunity cases dealing with tribal corporations are collected and discussed in § 1.3.4.

Treasure v. United States, No. CV-20-75-GF-BMM, 2021 WL 4820255 (D. Mont. Oct. 15, 2021). Plaintiffs’ land was destroyed and damaged when a fire spread from the nearby Fort Peck Indian Reservation (FPIR) onto their property. The Assiniboine and Sioux Tribes (“Tribes”) established and cultivated buffalo entirely on land located within the FPIR. The Tribes supplemented the buffalo’s food source through a scheme that involved a crop sharing arrangement with Defendants Dale and Doug Grandchamp. On August 31, 2018, while Defendants and a third crop-sharer were swathing fields for hay, a fire broke out. The fire ignited in Roosevelt County, which had a burn ban in effect due to the high risk of wildland fires.

Authorities, including the Bureau of Indian Affairs (BIA) Fire Services, responded to the blaze, reassuring the concerned Plaintiffs at a later point in time that the blaze was either extinguished or under control. However, on September 1, 2018, the fire spread to Plaintiffs’ land and consumed 3,100 acres, destroying another 700 acres from collateral fire impacts. Plaintiffs filed suit in United States District Court for the District of Montana regarding the damaged or lost property against the BIA, Doug and Dale Grandchamp, and several individuals suspected of involvement in the fire (Defendants). Defendants moved to dismiss for lack of subject matter jurisdiction based on the principle of tribal sovereign immunity. Defendants argued that tribal sovereign immunity shielded both the Tribes and Grandchamp, in his capacity as a tribal employee. Though Plaintiffs agreed that tribal sovereign immunity would shield the Tribes in the absence of a waiver, they argued the Tribes waived their immunity. Plaintiffs asserted that tribal sovereign immunity did not apply to Grandchamp because he was sued in an individual capacity. The court bifurcated its analysis, discussing separately the application of tribal sovereign immunity to the Tribes and to Grandchamp.

The Tribes argued that tribal sovereign immunity shielded them from suit in federal court absent a waiver or abrogation, “neither of which existed in the case.” However, Plaintiffs argued that the Tribes waived tribal sovereign immunity “by virtue of their relationship with the BIA” while they were fighting the fire. The Court cited Alvarado v. Table Mountain Rancheria^[72] for the premise that Indian tribes have sovereign immunity from lawsuits in state and federal court unless immunity is waived by the tribe or abrogated by Congress. The Court also cited Fletcher v. United States^[73] for the principle that a waiver cannot be implied, “but rather must be unequivocally expressed.”

The Tribes argued that they did not waive their tribal sovereign immunity, and that the Federal Torts Claims Act (FTCA), upon which Plaintiffs pursued their claims, did not abrogate their immunity. Plaintiffs requested more time for discovery, but the district court reminded Plaintiffs that (1) “the burden for the party seeking jurisdictional discovery remains particularly high where the party seeks to disprove the applicability of an immunity-derived bar to suit,” and (2) “immunity serves to shield a defendant from the burdens of defending the suit, including the burdens of discovery.”^[74] The district court agreed with Defendants that no evidence existed that the Tribes waived tribal sovereign immunity, and Plaintiffs failed to explain how additional discovery time would have uncovered applicable evidence. In support, the district court reminded Plaintiffs that courts strongly presume that tribal sovereign immunity has not been waived.

Although Plaintiffs argued the Tribes waived tribal sovereign immunity by operating as an instrument of the BIA, the FTCA only applies when “non-government defendants are acting as either an instrumentality or agency of the United States.”^[75] The Federal Government must “supervise day-to-day operations of an instrumentality in order for the FTCA to apply.”^[76] No evidence existed to show that the Tribes were involved in the daily operations supervised by the BIA. Therefore, the district court held the Tribes were not an instrumentality of the BIA and the FTCA had not waived tribal sovereign immunity. Additionally, the court ruled the Tribes were entitled to tribal sovereign immunity and thus immune from suit under the FTCA and related claims. The claims against the Tribes were dismissed pursuant to Rule 12(b)(1).

Next, the district court turned to Doug Grandchamp. As for Dale Grandchamp, he failed to appear, plead, or otherwise defend himself, so default was entered against him on July 9, 2021.

Defendants asserted that Doug Grandchamp was acting in an official capacity during the events alleged in the Complaint. Plaintiffs countered that even if that was true, they sued him in his individual capacity. The Court stated that tribal sovereign immunity does not bar individual capacity suits against tribal employees when the Plaintiffs seek damages from the individual personally. The exception applies even if the plaintiff’s claims involve actions that employees allegedly took in their official capacities and within their employment authority. This exception relies on a “remedy-focused” analysis to determine if tribal employees should have tribal sovereign immunity when sued in their induvial capacity. Sovereign immunity shields a tribal employee when recovery against the individual, in reality, would run against the tribe. Plaintiffs may not circumvent tribal sovereign immunity by identifying individual defendants when the tribe remains the real intended party of interest.

Though Plaintiffs claimed that they sued Grandchamp in an individual capacity, he was never identified individually; all allegations lumped him in with the Tribes. The Court stated that a court assumes that an employee has been sued in their official capacity where plaintiffs articulate only generalized allegations that fail to differentiate the alleged conduct of the individual defendants from a tribe. The Court agreed that Plaintiffs failed to distinguish Grandchamp in an individual capacity and thus sued him in his official capacity. Therefore, Grandchamp was entitled to tribal sovereign immunity, and the complaints against him were dismissed under Rule 12(b)(1).

Acres Bonusing, Inc v. Marston, 17 F.4th 901 (9th Cir. 2021). Blue Lake Rancheria, a federally-recognized Tribal Nation, sued Acres Bonusing, Inc. (ABI) and James Acres, ABI’s owner, in Blue Lake Tribal Court, but lost. Unsatisfied with the Tribal Court win, ABI sued in federal court, and included the tribal court judge, the judge’s law clerks, the clerk of the Tribal Court, tribal officials, and outside law firms and lawyers that represented the Tribe. However, ABI did not sue the Blue Lake Tribe. The district court concluded that tribal sovereign immunity shielded Defendants from suit because they were acting within the scope of their tribal authority, i.e., within the scope of their representation of Blue Lake Casino. The district court held that tribal sovereign immunity applied because adjudicating this dispute would require the court to interfere with the tribe’s internal governance. The main question on appeal was whether tribal sovereign immunity did in fact shield Defendants from suit. The Court held for the following reasons that the district court erred in that respect.

Reversing in part, the Ninth Circuit followed the framework laid out in Lewis v. Clarke^[77] and held tribal sovereign immunity did not apply because ABI sought money damages from Defendants in their individual capacities, and the Tribe therefore was not the real party in interest. The U.S. Supreme Court held in Lewis that “the protection offered by tribal sovereign immunity is no broader than the protection offered by state and federal sovereign immunity.”^[78] In situations where a suit is brought against a governmental official but might actually be brought against a sovereign entity, the courts look to whether the sovereign is the real party in interest to determine whether sovereign immunity bars the suit. Tribal sovereign immunity does not apply where the judgment will not operate against the Tribe. The Court relied on the Lewis framework, with support from additional on point cases in the Ninth Circuit, to conclude that tribal sovereign immunity did not bar ABI’s suit against Defendants. The Ninth Circuit reasoned that Plaintiffs sought money damages against Defendants in an induvial capacity, and any relief ordered by the district court would not require Blue Lake to do or pay anything. Thus, the Blue Lake Tribe is not the real party in interest and tribal sovereign immunity does not apply to bar the suit against applicable Defendants. In addition, the Ninth Circuit rejected the argument that Lewis and other case law were distinguishable in this case because the alleged tortuous conduct occurred in the Tribal Court, which is part of the Tribe’s inherently sovereign authority. The Court of Appeals reasoned that the district court misapplied several cases that did not comport with Lewis and other prior cases.

The Ninth Circuit concluded, among other matters, that tribal sovereign immunity did not bar the suit and the case was remanded back to the district court for further proceedings.

Grondal v. United States, 37 F.4th 610 (9th Cir. 2022). In the culmination of a series of appeals regarding a business lease which Defendant-Appellant Wapato Heritage, LLC once held on waterfront land held in trust for the Colville Indian Reservation and certain allottees, the Ninth Circuit Court of Appeals affirmed the district court’s decision (1) dismissing Wapato Heritage’s cross claims against the Confederated Tribes of the Colville Reservation (the Tribes) and the Bureau of Indian Affairs (BIA). The Court also affirmed the lower court’s decision to deny Wapato Heritage’s motion to intervene in a trespass damages trial between the BIA and other parties.

Regarding a specific piece of land on Lake Chelan, Washington, Wapato Heritage accused the Tribes and the BIA, the beneficial owners of the land, of misconduct related to the land’s lease. The Ninth Circuit Court of Appeals already determined Wapato Heritage’s business lease ended in 2009, and “the land at issue was still Indian land held in trust by the United States.” The lower court dismissed Wapato’s crossclaims against the Tribes and the BIA, in part, because of tribal sovereign immunity.

The Court analyzed five lower court holdings, focusing first on the tribal sovereign immunity issue. Wapato Heritage claimed that the Tribes waived tribal sovereign immunity by generally participating in this case. The Ninth Circuit rejected the argument, reasoning that an instance where participation in litigation will constitute waiver of tribal sovereign immunity must be viewed as a very limited exception to the rule that upholds tribal sovereign immunity. The Court of Appeals stated that a tribe’s participation in litigation does not constitute consent to counterclaims asserted by defendants in those actions. Nor does a tribe’s invocation of tribal sovereign immunity in a motion to dismiss for lack of jurisdiction waive that very defense to the relevant claims. Thus, the Tribes retained their tribal sovereign immunity to the crossclaims, and the lower court did not need to rule on the claims’ merits. The Ninth Circuit also held (1) the district court lacked subject matter jurisdiction over lessee’s claims against BIA; (2) lessee was not entitled to writ of mandamus compelling BIA to recoup overpayments; and (3) lessee was not entitled to intervene as of right in BIA trespass damages trial against members.

Sipp v. Buffalo Thunder, Inc., 505 P.3d 897 (N.M. App. 2021), cert. granted (Feb. 8, 2022) (No. S-1-SC-39169). Jeremiah Sipp, an employee of a casino’s lighting vendor, Dial Electric, and Sipp’s wife sued a casino owned by the Pueblo Tribe in state district court to recover damages for injuries allegedly sustained by hitting his head on one of the casino’s garage doors. Sipp hit his head and was knocked out while acting in his capacity as an employee delivering lights to the casino. The District Court of Santa Fe County granted the casino’s motion to dismiss for lack of subject matter jurisdiction. The state district court held that Plaintiffs’ allegations did not fall within the limited immunity waiver contained in Section 8(A) of the Pueblo Tribe’s Tribal-State Class III Gaming Compact. Plaintiffs appealed.

On appeal, Plaintiffs argued that the state district court erred in granting Defendants’ motion to dismiss because Section 8(A) of the Compact expressly waives sovereign immunity and provides for state court jurisdiction over Plaintiffs’ claims. In contrast, Defendants contended that Section 8(A) does not permit the district court to exercise jurisdiction in this case for two reasons. First, the termination clause at the end of Section 8(A) was triggered by two federal court decisions, Pueblo of Santa Ana v. Nash, 972 F. Supp. 2d 1254 (D.N.M. 2013), and Navajo Nation v. Dalley, 896 F.3d 1196 (10th Cir. 2018), such that Section 8(A) no longer provides for state court jurisdiction. Second, Sipp does not qualify as a visitor to a gaming facility under Section 8(A) because (a) he had a business purpose for visiting Buffalo Thunder and not a gaming purpose, and (b) he was not injured in a “gaming facility.”

The Court of Appeals of New Mexico held that the termination clause had not been triggered and applied New Mexico case law interpreting Section 8(A) to find that Plaintiffs’ complaint sufficiently pleaded claims that fall within the Compact’s waiver of sovereign immunity for visitors to a gaming facility. The key question regarding tribal sovereign immunity being whether the employee sufficiently alleged claims that fall within the Compact’s immunity-waiver for visitors to a gaming facility. Defendants argued that Sipp’s visit to Buffalo Thunder was for business, and that the immunity-waiver only applied to casino patrons and not persons on the premises for other purposes. Also, Defendants asserted that the waiver was inapplicable because Sipp was not injured in a gaming facility. The Court of Appeals concluded that Sipp’s status as a visitor was sufficiently pleaded.

The Court of Appeals also rejected Defendants’ argument that cited the policy rationale that businesses like Dial Electric can negotiate the terms under which they enter the gaming facility and suggest that employees of the business should be treated in the same manner as the business itself for purposes of the waiver of tribal sovereign immunity. The Court of Appeals agreed that a person capable of suffering a physical injury is simply not analogous to that of a business entity for purposes of the waiver. The court also concluded that Plaintiffs’ amended complaint sufficiently alleged that he was on the premises with the permission of Defendants, and that his status as a visitor should have withheld the motion for dismissal.

The Court of Appeals also determined that Defendants failed to provide any authority for the interpretation that there is no waiver of sovereign immunity for injuries that occur outside of the gaming facility, and both the plain language of the Compact and New Mexico precedent are to the contrary. For these reasons, and several other unrelated to sovereign immunity, the Court of Appeals held that Plaintiffs plausibly alleged that Sipp was a visitor to the facility for purposes of the limited waiver of sovereign immunity in tribal-state gaming compact. The state district court’s dismissal of Plaintiffs’ lawsuit was reversed and remanded for further proceedings consistent with the opinion.

In re Coughlin, 33 F.4th 600 (1st Cir. 2022). A Chapter 13 debtor, Coughlin, filed a motion to recover for alleged violations of an automatic stay during his bankruptcy proceedings, and the creditors, an Indian Tribe, moved to dismiss the order based on the principle of tribal sovereign immunity. The United State Bankruptcy Court for the District of Massachusetts granted the motion, Coughlin appealed, and the First Circuit Court of Appeals permitted the direct appeal. The First Circuit ultimately held that the Bankruptcy Code unequivocally abrogates tribal sovereign immunity, even though it never expressly mentions Indian tribes.

In this case, Coughlin took out a loan from Lendgreen, a subsidiary of the Niiwan Tribe. Soon after, Coughlin filed for bankruptcy and per the Bankruptcy Code (BC), an automatic stay was issued enjoining debt-collection efforts outside the umbrella of the bankruptcy case. However, Lendgreen allegedly continued to contact Coughlin via phone and email seeking repayment of the loan despite reminders of the automatic stay prohibiting such conduct. At a later point, Coughlin attempted suicide. He claimed the decision was in part driven by the belief that his mental and financial agony would never end, and much of that agony was due to Lendgreen’s regular and incessant telephone calls, emails, and voicemails. To stop the alleged harassment, Coughlin brought an action to enforce the automatic stay and sought an order prohibiting Lendgreen from further attempts to recover their money, along with damages, attorney’s fees, and expenses. Lendgreen, wholly owned by an Indian Tribe successfully asserted tribal sovereign immunity by the lower court in those proceedings.

The First Circuit ruled that Section 106(a) of the Bankruptcy Code abrogated sovereign immunity for Indian Tribes. The Court believed that Native American tribes are not exempt from federal law barring suits against debtors once they file for bankruptcy, holding the Bankruptcy Code unequivocally strips tribes of their [tribal sovereign] immunity. The Court provided that Section 106(a) states that sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to dozens of provisions in the Bankruptcy Code, including Section 362. A “governmental unit” is defined in Section 101(27) to mean:

United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States, (but not a United States trustee while serving as a trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.^[79]

The question then shifted to whether “domestic government” included Indian tribes. The Court concluded that there is no real disagreement that a tribe is a government, and it is also clear that tribes are domestic, rather than foreign, thus, a tribe is a domestic government and therefore a government unit. The First Circuit took note that Section 106 was amended in the late 1990s because the prior version was ambiguous regarding the abrogation of tribal sovereign immunity. The Court explained that when Congress enacted Section 101(27) and 106, it understood tribes to be domestic governments, and when it abrogated the sovereign immunity of domestic governments in § 106, it unmistakably abrogated the sovereign immunity of tribes. The First Circuit rejected the argument that the BC does not abrogate tribal sovereign immunity because it never uses the word “tribe,” and because the Supreme Court previously ruled that “magic words” are not required to waive immunity. Finally, the Court rejected the Tribe’s argument that the legislative history led to ambiguity, because legislative history cannot introduce ambiguity into an unambiguous statute. The First Court reversed the lower court’s decision dismissing Coughlin’s motion to enforce the automatic stay and remanded the case for further proceedings.

Unite Here Loc. 30 v. Sycuan Band of the Kumeyaay Nation, 35 F.4th 695 (9th Cir. 2022). A labor union brought an action against Sycuan Band of the Kumeyaay Nation, a federally-recognized Indian Tribe, alleging the tribe violated the labor provisions of a contract between the two parties with respect to operation of a casino on Tribe’s reservation, and seeking to compel arbitration of that dispute pursuant to an arbitration clause contained in the contract. The Tribe counterclaimed and the lower court granted the labor union’s motion for judgment to compel arbitration and dismissed the Tribe’s counterclaim for declaratory relief. The Tribe appealed, and during those proceedings the issue of tribal sovereign immunity arose.

The Tribe entered a compact with the State of California that included the requirement that the Tribe adopt and maintain a Tribal Labor Relations Ordinance (TLRO). Section 13 of the TLRO “provides for arbitration as the dispute resolution procedure for all issues arising under the TLRO,” and section 13(e) required the Tribe to waive its tribal sovereign immunity “against suits brought in state or federal court seeking to compel arbitration.” The Tribe contended that they did not waive tribal sovereign immunity. The Tribe argued that tribal sovereign immunity cannot be implied but must be unequivocally expressed. The Tribe admitted to waiving tribal sovereign immunity under the TLRO but denied waving it under the National Labor Relation Act (NLRA) because such a waiver was not clear and unequivocal. Essentially, the Tribe asserted that the NLRA preemption is a threshold issue that the district court should consider before sending the underlying claims to arbitration because if the NLRA preempts the TLRO, then the waiver of tribal sovereign immunity may also be preempted and arbitrating sovereign immunity is contrary to the principles of sovereign immunity. The Court rejected that argument, concluding instead that the Tribe expressly waived tribal sovereign immunity in section 13(e) of the TLRO, and when a tribe agrees to judicial enforcement of an arbitration agreement it waives its immunity concerning that agreement. The Court commented that the Tribe cited no law in support of its argument that the arbitration agreement must expressly list all issues to which the Tribe waives sovereign immunity. Thus, there was no tribal sovereign immunity to arbitration because a party is only obligated to arbitrate when that party agreed to arbitrate, as the Tribe did.

Seneca v. Great Lakes Inter-Tribal Council, Inc., No. 21-CV-304-WMC, 2022 WL 1618758 (W.D. Wis. May 23, 2022). This case arose after Plaintiff, Dean Seneca, claimed that Defendant, Great Lake Inter-Tribal Council, Inc. (GLITC) fired him as Director of Epidemiology because of his race, color, national origin, age, and sex. Plaintiff also alleged Defendant retaliated against him for engaging in protected activity, in violation of Title VII of the Civil Rights Act of 1964 (Title VII), the Americans with Disabilities Act of 1990 (“ADA”), the Age Discrimination in Employment Act of 1967 (ADEA), and the Genetic Information Nondiscrimination Act of 2008 (GINA). The lawsuit was Plaintiff’s third action challenging his termination. He filed two earlier cases in state court where GLITC asserted, as they did here, that the action should be dismissed based on tribal sovereign immunity. The district court agreed that tribal sovereign immunity as it was applied in state court applied in federal court too. Accordingly, Defendant’s motion to dismiss was granted.

The district court stated that federally-recognized Indian tribes are immune from suit in both state and federal courts unless Congress abrogates a tribe’s sovereign immunity, or the tribe waives its right to invoke sovereign immunity. More importantly, because the GLITC is an arm of the Great Lake Tribe, business entities owned and operated as arms of a federally-recognized Indian tribe may assert the same immunity as the tribe itself. The district court concluded that because of GLITC’s composition, the fact that it was operated solely by a recognized tribe, and that its purpose is to support its member tribes through service and assistance, it was entitled to tribal sovereign immunity as an arm of the Great Lakes Tribe. The district court granted Defendant’s motion to dismiss.

§ 1.3.4. Tribal Corporations

A majority of non-Alaskan tribes are organized pursuant to the Indian Reorganization Act of 1934 (IRA).^[80] Under Section 16 of the IRA, a tribe may adopt a constitution and bylaws that set forth the tribe’s governmental framework and the authority given to each branch of its governing structure.^[81] A tribe may also incorporate under Section 17 of the IRA, under which the Secretary of the U.S. Department of the Interior issues the tribe a federal commercial charter.^[82]

Through Section 17 incorporation, the tribe creates a separate legal entity to divide its governmental and business activities.^[83] The Section 17 corporation has a federal charter and articles of incorporation, as well as bylaws that identify its purpose, much like a state-chartered corporation.^[84] Section 17 incorporation results in an entity that largely acts like any state-chartered corporation.^[85]

An Indian corporation may also be organized under tribal or state law.^[86] If the entity was formed under tribal law, formation likely occurred pursuant to its corporate code; but it could have also occurred by tribal resolution (i.e., specific legislation chartering the entity).^[87] Under federal common law, the corporation likely enjoys immunity from suit.^[88] However, it is unclear whether a tribal corporation’s sovereign immunity is waived through state incorporation such that the entity may be sued in state court.^[89]

Therefore, when negotiating a tribal business transaction, counsel should consult the tribe’s governmental and corporate information—for example, treaty or constitution, federal or corporate charters, tribal corporate code—which, taken together, identify the entity with which you are dealing, the authority of that entity, and any applicable legal rights and remedies.

There are comparatively few cases decided on the basis of tribal corporate formation, but tribal corporations are often able to claim immunity from suit. In addition to IRA Section 17 entities, Native Alaskan communities are organized as corporations under some unique provisions within the Alaska Native Claims Settlement Act. Below find a discussion of recent cases dealing with tribal corporations.^[90]

** Some cases dealing with Tribal Corporations are discussed in § 1.3.3 because they deal with whether a Tribal Corporation may assert their tribe’s sovereign immunity.

A+ Gov’t Sols., LLC v. Comptroller of Md., 272 A.3d 882 (Md. Ct. Spec. App. 2022). The Oklahoma Indian Welfare Act (“OIWA”), 25 U.S.C. §§ 5201–10, is a parallel provision to section 17 of the Indian Reorganization Act of 1934, 25 U.S.C. §§ 5101–44. Chickasaw Nation Industries, Inc. (“CNI”) was a federally chartered corporation created and incorporated in 1996 under the OIWA. CNI owned CNI Government, LLC (“CNI Government”), which wholly owned CNI Subsidiaries, a collection of six limited liability companies—the appellants in this case. CNI Subsidiaries derived all, or substantially all, of their income from the performance of service contracts with the federal government.

In 2014, after concluding that CNI Subsidiaries were required to pay pass-through entity income tax (“PTE income tax”), the Comptroller of the Treasury issued notices of tax assessment for tax year 2012 against each of the CNI Subsidiaries. CNI Subsidiaries challenged these tax assessments, but two lower courts affirmed the Comptroller’s assessment.

The Court in this case, as relevant here, considered whether the Tax Court erred in assessing PTE income tax against CNI Subsidiaries even though CNI Government is owned by CNI, a federally chartered tribal corporation. The Court explained that PTE income tax is not imposed on a pass-through entity like CNI Subsidiaries and CNI Government. Rather, it is treated as a tax imposed on the nonresident owner of the pass-through entity, here, CNI. As such, central to determining whether the Comptroller could collect PTE income tax from CNI Subsidiaries turned on whether CNI’s income was taxable under Maryland law.

The Court held that the Tax Court erred in concluding that CNI Subsidiaries was subject to PTE income tax. The court explained that Section 17 corporations like CNI “are not recognized as separate entities for federal tax purposes,” and the corporations therefore receive the same federal tax treatment as the tribes that own them.^[91] Because Native American tribes are not subject to federal income tax, neither are federally chartered tribal corporations like CNI. Given CNI’s income was not taxable under federal law, and Maryland had elected to rely on the federal calculation of taxable income, the Court held that none of CNI’s income was taxable under Maryland law—and thus, it was error to require CNI subsidiaries to pay PTE income tax.

Cully Corp. v. United States, 160 Fed. Cl. 360 (Fed. Cl. 2022). In 2005, the defendant, the United States acting through the Air Force, purportedly transferred by donation three buildings to the plaintiff, Cully Corporation (“Cully”), an Alaska Native village corporation (“ANC”). Several years later, the Air Force attempted to reclaim the property by arguing that the buildings were never effectively transferred to Cully because the transaction violated federal regulations. An Alaskan state court found that Cully did not hold a present possessory interest in the buildings, a finding binding this United States Court of Federal Claims. Thus, the following claims remained: Cully sued the United States, asserting a Fifth Amendment takings claim and a quantum meruit claim. In this Court, Cully moved for summary judgment on its takings claim and the United States cross-moved for summary judgment on both of Cully’s claims.

According to the Code of Federal Regulations (“C.F.R.”) § 102-75.990, federal agencies may “[d]onate to public bodies any Government-owned real property (land and/or improvements and related personal property), or interests therein.”^[92] Thus, for the takings claim, the issue was whether Cully was a “public body for purposes of the Federal Regulations governing the transfer or donation of real property” such that the building transfer was valid—to the extent a revisionary interest was transferred.^[93]

A “public body” as it relates to the transfer of real property is “any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, or any political subdivision, agency, or instrumentality of the foregoing.”^[94] Cully, as an ANC, was distinct from Indian tribes throughout the rest of the United States; ANCs operate as corporations in form but appear as local governments on their face. For this reason, the Court determined that Cully, as an ANC, qualified as a “political subdivision” for purposes of 41 C.F.R. § 102-71.20, and thus was a public body as contemplated under 41 C.F.R. § 102-75.990.

The Court granted in part Cully’s motion for summary judgment on the takings claim, concluding that Cully held a reversionary property interest in the buildings which was temporarily taken by the United States, and reserved the issue of whether the taking was compensable for trial. The Court, however, denied summary judgment on the quantum meruit claim, reasoning that Cully’s recoverability in quantum meruit was “limited to the extent Cully believed it was performing remediation to receive a possessory interest and what interest the parties believed were being transferred,” such questions of fact further necessitating trial on these issues.^[95]

Evans Energy Partners, LLC v. Seminole Tribe of Fla., Inc., No. 21-13493, 2022 WL 2784604 (11th Cir. July 15, 2022). This case concerned whether the agreement between Seminole Tribe of Florida (the “Tribe”) and Evans Energy Partners (“Evans”) contained a clear waiver of tribal immunity. The Eleventh Circuit held that the agreement did not contain a waiver of the Tribe’s sovereign immunity.

The agreement included two relevant provisions: a limited arbitration clause and a waiver of tribal immunity. The arbitration clause explained that, though disputes arising out of the agreement would normally be settled in the Tribe’s courts, Evans retained the right “to initiate a binding arbitration proceeding . . . for the sole and exclusive purpose of terminating the Management Agreement and compelling the payment of the Termination Fee . . . .” But this right did not extend to a proceeding against the Tribe, as the parties agreed that “in no event shall the Seminole Tribe of Florida, Inc., or any of its other affiliated entities be named a party in any arbitration . . . .” Instead, Evans’s rights were “restricted to compelling Seminole Energy to participate in an arbitration proceeding for the express purpose set forth herein.” Seminole Energy is a third entity that is mentioned several times throughout the agreement, but whose identity is never clearly defined. The agreement also included a clause waiving tribal immunity. That clause stated that “[T]he Company through its parent company the Seminole Tribe of Florida, Inc., agrees to a limited waiver of sovereign immunity in order to allow Evans Energy” to exercise its rights under the arbitration clause.

After the agreement was terminated, the Tribe filed an action in tribal court against Evans, which resulted in a default judgment of $2.5 million. Before the final judgment was issued in the tribal court, Evans served the Tribe with a demand for arbitration for breach of contract. The arbitration panel found that they lacked jurisdiction to decide the gateway question of who decides the arbitrability of the dispute. Evans then sued in federal court seeking to enforce the agreement’s arbitration clause under the Federal Arbitration Act. The district court held that the agreement did not clearly waive the Tribe’s immunity and dismissed the complaint for lack of jurisdiction.

The Eleventh Circuit stated that the issue of tribal immunity depends on whether the agreement clearly waived the Tribe’s immunity from suit. Although a tribe may waive its immunity by contract, such waivers must be clear to be enforceable. Here, the agreement did not expressly waive sovereign immunity. Although the agreement typically refers to the Tribe as “the Company” and the purported waiver expressly states that “the Company” waives its sovereign immunity, the Eleventh Circuit could not read “the Company” as “the Tribe” in the waiver without creating an absurdity. If “the Company” was read as “the Tribe” in the waiver clause, the new waiver and arbitration provision would read: “[The Seminole Tribe of Florida, Inc.], through its parent company the Seminole Tribe of Florida, Inc., agrees to a limited waiver of sovereign immunity in order to allow Evans Energy to initiate a binding arbitration proceeding . . . for the sole and exclusive purpose of terminating the Management Agreement and compelling the payment of the Termination Fee . . . .” Because the Tribe cannot be its own parent company, Evans’s proposed construction is facially absurd. Instead, in the context of the waiver provision, “the Company” is best read to refer to Seminole Energy. 

Regardless, this ambiguity prevents the waiver language from containing the requisite clarity that is needed for the Tribe to waive its immunity.

§ 1.4. The Federal Sovereign

§ 1.4.1. Indian Country & Land Into Trust

The IRA authorizes the Secretary of the Interior to take land into trust for the benefit of an Indian tribe’s reservation.^[96] In 2009, however, the U.S. Supreme Court issued a landmark ruling reversing the Interior’s prior interpretation of the IRA, 25 U.S.C. § 465, now located at 25 U.S.C. § 5108, and limiting the Secretary’s ability to take land into trust on behalf of tribes.^[97] Carcieri held that the Secretary may only acquire land in trust for tribes that (1) were “under federal jurisdiction” in 1934, and (2) currently enjoy federal recognition.^[98] This effectively precludes certain tribes from avoiding state tax and regulatory compliance, or conducting gaming or other economic development activities on newly acquired or reacquired lands.

Despite the Carcieri ruling, Interior seems willing to issue final decisions on fee-to-trust applications by tribes that were recognized, restored, or reaffirmed after June 1934 on the basis that the tribe may have been under the jurisdiction of the United States in 1934 even if that recognition was not formally documented.^[99] Interior will continue processing applications for tribes that have enjoyed uninterrupted, formal recognition since June 1934 and for tribes that can point to a non-IRA statute granting the Secretary acquisition authority.^[100] In sum, any non-Indian party looking to enter into a joint venture with a tribe to develop Indian lands not yet in trust status must pause to consider the implications of Carcieri.^[101]

In response to the Carcieri decision, in 2014, the Interior Department issued a Memorandum that provided guidance on the meaning of “under federal jurisdiction.”^[102] The Solicitor’s M-37029 Memorandum outlined a two-part test for interpreting the phrase “under federal jurisdiction.” The first part of this inquiry examines whether, before June 18, 1934, the federal government took an action or series of actions through a course of dealings or other relevant acts reflecting its obligation to, responsibility for, or authority over, an Indian tribe, bringing such tribe under federal jurisdiction.^[103] The second prong examines whether this jurisdictional status remained intact in 1934.^[104] Satisfying either prong will suffice to establish that the tribe was “under federal jurisdiction.” In a recent decision, Confederated Tribes of Grand Ronde Community of Oregon v. Jewell, the D.C. Circuit Court of Appeals upheld Interior’s application of the two-part test outlined in M-37029.^[105] M-37029 appears to be a non-statutory Carcieri fix.

As if Carcieri were not complicated enough, in 2012, the U.S. Supreme Court issued its opinion in Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak.^[106] In that case, a local landowner by the name of David Patchak launched a legal challenge against the Interior Secretary’s decision to take the tribe’s land into trust for the purpose of gaming. Importantly, Patchak did not allege that he had a legal interest in the land to be taken into trust. Rather, Patchak brought an action under the APA^[107] asserting that the IRA did not authorize the Department of Interior to take land into trust for the tribe. The remedy Patchak sought was for the issuance of an injunction prohibiting the Interior from taking the land into trust. The basis for the injunction, in Patchak’s opinion, was that the requirements of the IRA were to be satisfied per the Supreme Court’s opinion in Carcieri. Both the federal government and the tribe argued that only the Quiet Title Act (QTA)^[108] could grant the waiver of sovereign immunity. Under the theory advanced by the defendants, the APA waiver of sovereign immunity was negated.

The Court determined that the QTA only applies to quiet title actions where a person claims an interest in the property that conflicts with, or is superior to, the government’s claim in the property.^[109] In addition, because the exception causing the APA waiver of sovereign immunity to be negated did not apply, the Court held Patchak had standing under the APA to pursue his challenge.

The result of this decision is that any party claiming harm to property nearby proposed trust land, even damage to an “aesthetic” interest, has legal standing under the APA to bring a lawsuit. This creates considerable risk for casino developers because the statute of limitations under the APA is considerably longer than that of the QTA, creating much more time for a party to challenge Interior’s trust transaction.^[110]

The Interior Department revised its land-into-trust regulations at Part 151 in response to the Patchak decision during the Obama Administration, in late 2013.^[111] This “Patchak Patch” provides that if the Interior Secretary or Assistant Secretary approves a trust acquisition, the decision represents a “final agency determination” subject immediately to judicial review.^[112] If a BIA official issues the decision, however, the decision is subject to administrative exhaustion requirements^[113] before it becomes a “final agency action.”^[114] In this instance, parties must file an appeal of the BIA official’s decision within 30 days of its issue.^[115] If no appeal is filed within the 30-day administrative appeal period, the BIA official’s decision becomes a “final agency action.” In October 2017, the Trump Administration’s Interior Department announced a consultation regarding a rulemaking that would reverse the “Patchak Patch,” and impose a much newer criteria for off-reservation land-into-trust applications. Assuming that rulemaking results in new Part 151 regulations, litigation will certainly follow.

A brief discussion of several of the year’s most prominent cases involving the diminishment of an Indian reservation and/or the taking of land into trust follow.^[116]

No Casino in Plymouth v. Nat’l Indian Gaming Comm’n, No. 2:18-cv-01398-TLN-CKD, 2022 U.S. Dist. LEXIS 87000 (E.D. Cal. May 11, 2022). In 2018, Plaintiffs filed a complaint for declaratory and injunctive relief against the Defendants following the Department of Interior’s (the “DOI”) Record of Decision (the “ROD”), announcing (1) its taking of nearly 230 acres of land in Amador County into trust for the Ione Band of Miwok Indians (the “Tribe”) and (2) approval of the Tribe’s gaming ordinance—wherein the ROD permitted the Tribe to construct a casino complex and conduct gaming once the land was taken into trust.

More specifically, the Plaintiffs challenged: (1) the Tribe’s gaming ordinance; (2) the then-Acting Assistant Secretary of Indian Affairs’ authority to approve the ROD under the Appointment Clause of the U.S. Constitution; (3) the Tribe’s federally recognized status under the Indian Reorganization Act (“IRA”); and (4) the Tribe’s federal recognition under 25 C.F.R. Part 83. Plaintiffs also claimed (5) Defendants violated Plaintiffs’ Equal Protection rights by favoring the Tribe, a race-based group, through approval of the ROD and (6) Defendants’ actions ran afoul of federalism protections. In June 2020, the Defendants filed a motion on the pleadings, which Plaintiffs opposed. And the Tribe successfully moved to intervene in this action.

Relying on Cnty. of Amador v. United States DOI, 872 F.3d 1012 (9th Cir. 2017), the Court granted the Defendants’ motion for judgment on the pleadings as to claims one through four. In Cnty. of Amador, the Ninth Circuit Court confirmed the Tribe’s status as a federally-recognized tribe and its under-federal-jurisdiction status in 1934 under the IRA.^[117] The Ninth Circuit Court further determined that the Tribe was qualified to have land taken into trust under the IRA, the Tribe could conduct gaming operations on the at-issue parcels under the Indian Gaming Regulatory Act (“IGRA”), and the then-Acting Assistant Secretary of Indian Affairs had the authority to take parcels into trust.^[118] As such, the Court found that the Ninth Circuit Court’s prior determinations in Cnty. of Amador disposed of Defendants’ claims one through four.

The Court also granted the Defendants’ motion for judgment on the pleadings as to claims five and six. As to claim five, the Court rejected Plaintiffs’ Equal Protection claim because approval of the ROD did not rest on the racial status of the Tribe but rather consideration of their status as members of a quasi-sovereign tribal entity. As to claim six, the Court rejected Plaintiffs’ argument concerning the Defendants’ alleged violation of federalism protections. The Court relied on Congress’ authority to grant IRA and IGRA benefits to tribes that have been federally recognized.

Berry v. United States, 159 Fed. Cl. 844 (Fed. Cl. 2022). Plaintiff, a landowner in Oklahoma, unsuccessfully brought a Fifth Amendment takings claim related to a gaming facility built by the Cherokee Nation (the “Nation”) on land held in trust by Defendant, the United States. The trust land was located next to Plaintiff’s property and Plaintiff alleged that development the gaming facility caused repeated flooding, erosion, and impoundment of water on her property. Plaintiff also asserted that the Nation removed vegetation and soil and dug a drainage ditch without her permission. Plaintiff alleged this activity constituted a taking pursuant to the Fifth Amendment because the United States, holder of the land in trust, failed to act in halting damage caused by the Nation.

The Court, in dismissing the Plaintiff’s action for failure to state a claim, explained that a taking necessarily involves governmental action. And here, Plaintiff failed to allege any governmental action that caused the alleged injuries in her takings claim. Beyond conclusory assertions of liability, her amended complaint only alleged, without more, that Defendant acquired and held the land in trust, not that Defendant itself developed the land and therefore caused flooding on her property. Rather, it was the Nation who developed and operated the gaming facility on the trust land, not Defendant. To be sure, the Court noted that Plaintiff’s claim still failed even under Plaintiff’s assertion that the government acted, for purposes of a takings claim, by approving the Nation’s application for Defendant to acquire the land in trust and thereafter acquiring the trust land. In other words, development of the gaming facility would not have occurred—and thus no damages to her property would have ensued—if Defendant had not initially approved of the Nation’s application and acquired the land in trust. The Court clarified that what Plaintiff asserted was not direct governmental action effecting a taking but rather agency-decision making that permitted the Nation’s action, which may have given rise to a claim in federal district court under the Administrative Procedure Act but not in the Ninth Circuit as a taking under the Fifth Amendment.

In further support of her takings claim, the Court also rejected Plaintiff’s argument that Defendant owed her an actionable fiduciary duty. The Court explained that the Indian Gaming Regulatory Act does not create an enhanced duty of trust with respect to the land held in trust by Defendant, and, Plaintiff, who was not a beneficiary of the trust land, could not enforce such a duty.

Birdbear v. United States, No. 16-75L, 2022 WL 4295326 (Fed. Cl. Sep. 9, 2022). Plaintiffs, members of the Three Affiliated Tribes of the Fort Berthold Indian Reservation (the “Reservation”), were beneficial owners of allotted land on the Reservation held in trust by Defendant, the United States. Portions of the Plaintiffs’ allotted lands were subject to oil and gas leases the Secretary of Interior (the “Secretary”) approved and managed pursuant to federal statutes and regulations. Plaintiffs claimed that these statutes and regulations imposed fiduciary obligations on the Defendant concerning the approval and management of mineral leases on their allotted lands and that Defendant breached those obligations. Plaintiffs sought an award of compensatory damages for the millions of dollars in losses they allegedly suffered because of those breaches.

Plaintiffs’ complaint contained various counts, and various motions for partial summary judgment were before the Court in this matter. In pertinent part, however, as to counts three and eight, Defendant asserted it was entitled to summary judgment because the Court lacked jurisdiction as to these counts—that is, they did not fall within the waiver of sovereign immunity contained in the Indian Tucker Act (“ITA”), 28 U.S.C. § 1505. The Court explained that to establish the Court’s jurisdiction under the ITA, “a tribal plaintiff must invoke a rights-creating source of substantive law that can fairly be interpreted as mandating compensation by the Federal Government for the damages sustained.”^[119] To determine whether a claim by a tribal plaintiff alleging a breach of trust has met these requirements, the Supreme Court has established a two-prong test.^[120] For prong one, “the plaintiff must persuade the Court that the source of law on which the claim is based imposes ‘specific fiduciary or other duties’ on the government.”^[121] For prong two, “if a statute or regulation imposes a specific fiduciary or other duties on the United States, the Court must determine whether the statute or regulation also ‘can fairly be interpreted as mandating compensation by the Federal Government for the damages sustained.’”^[122]

The Court here found that Plaintiffs’ counts three and eight, as relevant, satisfied the aforementioned prongs. For context, in count three, Plaintiffs claimed the government breached its fiduciary duty “to properly manage, administer and supervise Plaintiffs’ lands to prevent the avoidable loss of oil and gas through drainage.”^[123] The Court concluded “that the government ha[d] a specific fiduciary obligation to protect Plaintiffs against the uncompensated drainage of oil and gas held in trust for them”—satisfying prong one of the test for determining jurisdiction under the ITA.^[124] In count eight, Plaintiffs claimed the Secretary breached its duty “to ensure the timely drilling of oil and gas wells on Plaintiffs’ leased land.”^[125] The Court ultimately concluded “that the United States ha[d] a specific fiduciary obligation to ensure that lessees exhibit reasonable diligence in their development of mineral resources”—also satisfying prong one of the test for determining jurisdiction under the ITA.^[126] Concerning the second prong for both counts, the Court concluded that “the money-mandating nature of the [specific fiduciary] obligations [could] be inferred from the government’s comprehensive control over the development of oil and gas on Plaintiffs’ land”—satisfying the requirement that the these specific fiduciary obligations set out in the at-issue statutes and regulations relied upon by Plaintiffs for its claims could be fairly interpreted as mandating compensation by the Federal government for the damages allegedly sustained by Plaintiffs.

§ 1.4.2. Federal Approval for Reservation Activity

Due to the unique trust status of Indian lands, contracts involving those lands are subject to various forms of federal oversight. The Secretary of the Interior must approve any contract or agreement that “encumbers Indian lands for a period of seven or more years,” unless the Secretary determines that approval is not required.^[127] Federal regulations explain that “[e]ncumber means to attach a claim, lien, charge, right of entry, or liability to real property.”^[128] Encumbrances may include leasehold mortgages, easements, and other contracts or agreements that, by their terms, could give to a third party “exclusive or nearly exclusive proprietary control over tribal land.”^[129]

Per revisions to Section 81 in 2000, the Interior Secretary will not approve any contract or agreement if the document does not (1) set forth the parties’ remedies in the event of a breach; (2) disclose that the tribe can assert sovereign immunity as a defense in any action brought against it; and (3) include an express waiver of tribal immunity.^[130] Leaseholds for Indian lands, which typically run 25 years, also require secretarial approval.^[131] Failure to secure secretarial approval could render the agreement null and void.^[132] Therefore, if the transaction implicates tribal lands, counsel should analyze whether the Secretary must approve the underlying contract or lease.^[133] Regardless of whether Secretary approval is necessary, all parties should be careful as to how they draft agreements which may encumber the land.^[134] If the contract pertains to a tribal casino, the parties must also consider whether the contract should be submitted to the National Indian Gaming Commission (NIGC) for approval pursuant to the Indian Gaming Regulatory Act (IGRA).^[135] Any “management agreement” for a tribal casino or “contract collateral to such agreement” requires NIGC approval to be valid and enforceable.^[136] The NIGC has recently found that certain consulting, development, lease, and financing documents that confer management authority to the consultant, developer, landlord, or lender thereby constitute a management contract that is void unless approved by the NIGC.

Non-Indian contractors must also consider whether they need to obtain an Indian Traders License from the BIA and/or a tribal business license to properly do business with a tribe.^[137] Federal regulations do not preclude certain tribes from imposing additional fees on non-Indian contractors. Failure to obtain appropriate licenses could subject the contractor to a fine or forfeiture, if not tribal qui tam litigation.^[138]

With much tribal and media fanfare, in 2012, President Obama signed into law the Helping Expedite and Advance Responsible Tribal Homeownership (HEARTH) Act.^[139] As noted above, prior to the passage of this bill, under 25 U.S.C. § 415 every lease of a tribe’s lands must undergo federal review and approval by the Secretary of the Interior under a sprawling, burdensome set of regulations.^[140] The HEARTH Act changes that scheme of Indian land leasing by allowing tribes to lease their own land. The Act gives tribal governments the discretion to lease restricted lands for business, agricultural, public, religious, educational, recreational, or residential purposes without the approval of the Secretary of the Interior. Tribes are able to do so with a primary term of 25 years, and up to two renewal terms of 25 years each (or a primary term of up to 75 years if the lease is for residential, recreational, religious, or educational purposes).

There are some caveats, though. First, before any tribal government can approve a lease, the Secretary must approve the tribal regulations under which those leases are executed (and mining leases will still require the Secretary’s approval). Second, before the Secretary can approve those tribal regulations, the tribe must have implemented an environmental review process—a “tribal,” or “mini” National Environmental Policy Act—that identifies and evaluates any significant effects a proposed lease may have on the environment and allows public comment on those effects. The HEARTH Act authorizes the Interior Secretary to provide a tribe, upon the tribe’s request, with technical assistance in developing this regulatory environmental review process. HEARTH Act implementing regulations went into effect in 2013.^[141] As of November 3, 2022, the BIA lists 79 tribes whose regulations have been approved to exercise the enhanced rights of sovereignty associated with taking control over the leasing of tribal land.^[142]

The following highlights several of the more relevant cases decided in the last year.^[143]

Kiowa Tribe v. United States Dep’t of the Interior, No. CIV-22-425-G, 2022 WL1913436 (W.D. Okla. June 3, 2022). The Kiowa tribe and Comanche Nation (“Plaintiffs”) filed an action on May 25, 2022, raising three claims “to prevent an illegal casino from conducting unlawful gaming within Plaintiff’s reservation:” (1) a declaration under the Administrative Procedure Act (“APA”) that the Tsalote Allotment (“Apache Wye”) is not owned by FSAT;^[144] (2) “a declaration that [Fort Sill Apache Tribe (“FSAT”)] may not conduct gaming on the Tsalote Allotment” because such gaming would violate the Indian Gaming Regulatory Act (“IGRA”);^[145] and (3) a declaration that gaming on the Tsalote Allotment by FSAT will violate the Racketeer Influenced and Corrupt Organization Act (“RICO”).^[146]

Plaintiffs contended that the FSA Defendants’ opening of the Casino would violate IGRA in several ways. IGRA prescribes that a tribe may engage in Class III gaming “on Indian lands of the Indian tribe” only if such activities are “authorized by an ordinance or resolution that” is adopted by a tribe “having jurisdiction over such lands.”^[147] This matter was before this Court on the Motion for Temporary Restraining Order.

At the hearing, the Federal Defendants argued Plaintiffs’ IGRA claim was improperly pled because any claim of an IGRA violation must be raised as a request for judicial review pursuant to the APA. Relatedly, the FSA Defendants argued that IGRA does not give Plaintiffs the right or authority to sue them based upon violation of that statute, emphasizing that Congress in passing the IGRA set out the NIGC as the agency tasked to regulate gaming pursuant to that statutory scheme.

The Court found that Plaintiffs did not present a claim that is reviewable by this Court pursuant to 25 U.S.C. § 2714. Plaintiffs also alleged in passing that FSAT’s Class III gaming operations on the Tsalote Allotment will violate FSAT’s gaming compact with Oklahoma, which recites that the tribe may conduct Class III gaming only on its own Indian lands.

While 25 U.S.C. § 2710(d)(7)(A) does provide a “[cause] of action in favor of tribes” to enjoin Class III gaming “located on Indian lands and conducted in violation of any Tribal-State compact,” Plaintiffs’ nominal argument, unsupported by any discussion of the statutory provision or citation to relevant authority, was insufficient to show a substantial likelihood of success on such a claim at this stage of proceedings. Because Plaintiffs did not satisfy their burden to show that they are substantially likely to succeed on the merits of any of their legal claims, the Court did not discuss the other three elements necessary for a Temporary Restraining Order. The Motion for Temporary Restraining Order filed by Plaintiffs was Denied. Id.

No Casino In Plymouth v. Nat’l Indian Gaming Comm’n, No. 218CV01398TLNCKD, 2022 WL 1489498 (E.D. Cal. May 11, 2022). On May 22, 2018, Plaintiffs filed a Complaint for declaratory and injunctive relief asserting seven causes of action against Defendants, National Indian Gaming Commission (“NIGC”) and others (collectively, “Defendants”). This lawsuit primarily presented a challenge to the Record of Decision (“ROD”) issued by the Department of the Interior’s (“DOI”) then-Acting Assistant Secretary of Indian Affairs, Donald Laverdure (“Laverdure”). The ROD announced the DOI’s taking of 228.04 acres of land in Amador County into trust for the Ione Band of Miwok Indians (“Tribe” or “Band”). It also allowed the Band to construct a casino complex and conduct gaming once the land was taken into trust. Pursuant to IGRA, 25 U.S.C. § 2702(1), NIGC Chairman Jonodev Chaudhuri approved the Tribe’s gaming ordinance on March 6, 2018.

Plaintiffs’ claims challenged various determinations as follows: (1) the Tribe’s gaming ordinance; (2) Laverdure’s authority to approve the ROD under the Appointment Clause of the U.S. Constitution; (3) the Tribe’s federally-recognized status under the Indian Reorganization Act (“IRA”); (4) the Tribe’s federal recognition under 25 C.F.R. Part 83; (5) Defendants’ violation of Plaintiffs’ Equal Protection rights by favoring the Tribe, a race-based group, through approval of the ROD and gaming ordinance; and (6) Defendants’ violation of federalism protection. Defendants moved for judgment on the pleadings, arguing Plaintiffs cannot challenge the federal agency action because: (1) the Ninth Circuit has affirmed both the Tribe’s status as federally recognized and Laverdure’s authority to issue the 2012 ROD as Acting Assistant Secretary of Indian Affairs; and (2) the Complaint fails to state claims for which relief can be granted.

Defendants argued the Ninth Circuit in County of Amador^[148] issued dispositive rulings on Claims One through Four in the instant matter, including: (1) the Tribe’s gaming ordinance; (2) Laverdure’s authority to issue the ROD; (3) the Tribe’s federally recognized status. In opposition, Plaintiffs argued the 2018 gaming ordinance was not at issue in County of Amador, and that the court did not conclusively decide Laverdure had authority to take land into trust for the Tribe. Plaintiffs also contended the Tribe lacked Part 83 recognition to be eligible for IRA and IGRA benefits. Plaintiffs argued the Tribe’s inclusion on the administrative list of “Indian Entities” eligible to receive service for the Bureau of Indian Affairs did not mean that the Tribe is federally recognized.

The “law of the circuit doctrine” mandates that a published decision of a Ninth Circuit court constitutes finding authority which must be followed unless and until overruled by a body competent to do so. Thus, the Ninth Circuit’s decision on the Tribe’s federally recognized status and the Tribe’s status in 1934 under the IRA are binding on this Court.^[149] Further, the Ninth Circuit clearly found Laverdure’s actions within his powers.

The Court found County of Amador disposed of Plaintiffs’ Claims One through Four on the following issues: (1) the Tribe’s gaming ordinance; (2) Laverdure’s authority to issue the ROD; and (3) the Tribe’s federally recognized status under the IRA and Part 83. Accordingly, the Court granted Defendants’ motion for judgment on the pleadings on Claims One through Four. Plaintiffs’ remaining claims were Claims Five (equal protection) and Six (federalism protection). Defendants argued Plaintiffs’ equal protection claim fails because provision of benefits to federally recognized tribes on the basis of their status as tribes does not offend equal protection principles. Further, Defendants argued Plaintiffs’ federalism claim, which alleges that the Tribe receives exemptions from state and local law, is inaccurate. Plaintiffs did not respond to these arguments in any meaningful way. Thus, Plaintiffs’ failure to respond to Defendants’ arguments was a concession of those arguments. Accordingly, the Court did not consider the arguments and granted Defendants’ motion for judgment on the pleadings on Claims Five and Six.

W. Flagler Assocs. Ltd. v. DeSantis, No. 4:21-CV-270-AW-MJF, 2021 WL 5768481 (N.D. Fla. Oct. 18, 2021), appeal dismissed sub nom. W. Flagler Assocs., Ltd. v. Governor of Fla., No. 21-14141-AA, 2021 WL 7209340 (11th Cir. Dec. 20, 2021). The Seminole Tribe of Florida (“Tribe”) has offered casino gambling on its tribal lands and recently entered a Compact that allows a new form of sports betting on (or through) the Tribe’s reservation. Parimutuel Operators (the “Plaintiffs”), also in the gaming business, sued Florida’s Governor and the Secretary of Florida’s Department of Business and Professional Regulation (the “State Officials”) seeking a declaration that the Compact’s sports betting provision violates federal law, and seeking an injunction precluding its enforcement. State Officials moved to dismiss for lack of standing, the Tribe moved to intervene, and Plaintiffs moved to expedite, and for summary judgment or a preliminary injunction.

The Plaintiffs alleged that the Compact violated several federal gambling laws, plus the Fourteenth Amendment. They sought a declaratory judgment that the Compact violated the Indian Gaming Regulatory Act, 25 U.S.C. § 2710(d) (permitting certain gambling activities “on Indian lands”); the Wire Act, 18 U.S.C. § 1084(a) (prohibiting certain interstate wire communications related to sports gambling); and the Unlawful Internet Gambling Enforcement Act, 31 U.S.C. § 5362(10) (defining internet betting on tribal lands as “unlawful internet gambling” if it is illegal under applicable state or federal law). They also sought a declaratory judgment that permitting Floridians to engage in online sports betting with the Tribe when not physically present on tribal land, while still prohibiting all other forms of sports betting in the state,^[150] violates Equal Protection.

The Court reviewed whether the Plaintiffs had standing, and held that: (1) Plaintiffs failed to state a claim that their alleged injury-in-in fact of lost business from Compact was traceable to Florida’s governor; (2) Plaintiffs failed to state a claim that their alleged injury-in fact of lost business from Compact was traceable to the Secretary of Florida’s Department of Business and Professional Regulation; (3) a declaration that would be entered against Florida officials and that would declare that Compact violated federal law would not address Plaintiffs’ alleged injury of lost business due to the compact; (4) an injunction precluding Florida’s governor from implementing the Compact would not redress Florida Plaintiffs’ alleged injury of lost business; and (5) an injunction precluding Secretary of Florida’s Department of Business and Professional Regulation from implementing sports-betting statute relevant to Compact would not redress Plaintiffs’ alleged injury of lost business. Accordingly, the Court granted the State Officials motion to dismiss because Plaintiffs lacked standing since the State Officials actions were not fairly traceable to any alleged harm and the requested declaratory and injunctive relief would provide no legal or practical redress for the Plaintiffs’ injuries.

Cal-Pac Rancho Cordova, LLC v. United States Dep’t of the Interior, No. 2:16-CV-02982-TLN-AC, 2021 WL 5826776 (E.D. Cal. Dec. 8, 2021). Cal-Pac Rancho Cordova LLC, Capital Casino, Inc., Lodi Cardroom, Inc., and Rogelio’s Inc.’s (collectively, “Plaintiffs”) filed this action seeking injunctive relief and declaratory relief based on: (1) violation of the Indian Gaming Regulatory Act’s (“IGRA”) jurisdiction requirement; (2) the unconstitutionality of the Indian Reorganization Act (“IRA”); (3) violation of IGRA due to inconsistency of Secretarial Procedures with state law; (4) and erroneous interpretation of IGRA. Plaintiffs are four state-licensed card clubs located within the same area as the proposed casino site.

Plaintiffs argued they would be at a competitive disadvantage if the Tribe opened a Nevada-style casino and operated casino-style games in the area because Plaintiffs are more limited in the gaming they can offer. Plaintiffs made two main arguments: (1) the Secretarial Procedures were issued in violation of IGRA, as the Tribe purportedly never acquired jurisdiction or exercised governmental power over the Yuba Parcel;^[151] and (2) assuming the Tribe acquired jurisdiction and exercised governmental power, IRA violates the Tenth Amendment by reducing the State’s jurisdiction over land within its territory without its agreement.

The Defendants notified the Court that the Ninth Circuit had already made a decision on a similar case, Club One Casino, Inc. v. Bernhardt^[152] (“Club One II”), where it held that “because Congress has plenary authority to regulate Indians affairs, . . . IRA does not offend the Tenth Amendment.” Because Club One II was binding on this Court, the Court did not address the arguments and granted summary judgment to Defendants as to Plaintiffs’ first two arguments.

Plaintiffs raised two alternative arguments. First, the Governor’s concurrence in the Secretary’s two-part determination as to gaming eligibility on the Yuba Parcel was negated by the California legislature’s refusal to ratify the Class III gaming compact. The Court agreed with Defendants that the IGRA does not require the Governor’s concurrence in Secretarial Procedures, nor does it require the Secretary to determine the validity of the Governor’s concurrence in the Secretary’s two-part determination. Second, Plaintiffs argued the Secretarial Procedures were inconsistent with California law requiring a Compact for Class III gaming. However, the Club One I court rejected this exact argument. That court further explained, “The issuance of Secretarial Procedures is the part of the remedial process that gives it teeth. If gaming pursuant to Secretarial Procedures was not contemplated, the purpose of the remedial process—restoring leverage to tribes to sue recalcitrant states and thereby force them into a compact—would be wholly eroded.”^[153] This Court agreed to decline to read the IGRA to have created (or the State of California to have waived immunity as to) an empty remedial process.

Accordingly, the Court held that the Secretary’s issuance of Secretarial Procedures was not arbitrary, capricious, or otherwise not in accordance with law for any of the reasons identified by Plaintiffs. Based on the foregoing reasons, the Court denied Plaintiffs’ motion for summary judgment and granted the Defendants’ motion for summary judgment.

W. Flagler Assocs. v. Haaland, No. 21-CV-2192 (DLF), 2021 WL 5492996 (D.D.C. Nov. 22, 2021). In August 2021, the Secretary of Interior approved a gaming Compact between the State of Florida and the Seminole Tribe of Florida (the “Tribe”). The Compact authorized the Tribe to offer online sports betting throughout the State, including the bettors located off tribal lands. Plaintiffs, West Flagler Associates and Bonita-Fort Myer’s Corporation (collectively, the “West Flagler Plaintiffs”) brought a civil action and argued that the Compact violated the Indian Gaming Regulatory Act, the Unlawful Internal Gambling Enforcement Act, the Wire Act, and the Equal Protection Clause. Accordingly, they asked the Court to “set aside” the Secretary’s approval of the Compact pursuant to the Administrative Procedure Act (“ACA”).

Before the Compact took effect, Florida law prohibited wagering on “any trial or contest of skill, speed[,] power or endurance.”^[154] Although that prohibition contained a narrow exception for horse racing, dog racing, and jai alai, it barred betting on all major sports, including football, baseball, and basketball. The Florida Constitution also limited the conditions in which the State could expand sports betting going forward. Specifically, it provided that the State could only expand such betting through a “citizens’ initiative,” with the caveat that this did not limit the ability of the state or Native American tribes to negotiate gaming compacts under IGRA.

The Compact in this case expanded the Tribe’s ability to host sports betting throughout the State. In relevant part, the Compact defines “sports betting” to mean “wagering on any past or future professional sport or athletic event, competition or contest;” classifies “sports betting” as a “covered game;” authorizes the Tribe “to operate Covered Games on its Indian lands, as defined in [IGRA].” The Compact also provides that all in-state wagers on sporting events “shall be deemed . . . to be exclusively conducted by the Tribe at its Facilities where the sports book(s) . . . are located,” even those that are made “using an electronic device” “by a Patron physically located in the State but not on Indian lands.” In this manner, the Compact authorizes online sports betting throughout the State. Because the State has not entered a similar agreement with any other entity, the Compact grants the Tribe a monopoly over both all online betting and all wagers on major sporting events.

On June 21, 2021, the Secretary of the Interior received a copy of the Compact. Because the Secretary took no action on it within forty-five days, the Compact was “deemed approved” on August 5. The next day, the Secretary explained her no-action decision in a letter to the Tribe. The letter reasoned that IGRA allows the Tribe to offer online sports betting to persons who are not physically located on its tribal lands. To support that conclusion, the letter noted that IGRA allows states and tribes to negotiate the “allocation of criminal and civil jurisdiction,” emphasized that Florida consented to the Compact, and argued that “IGRA should not be an impediment to tribes that seek to modernize their gaming offerings.” At the same time, the letter insisted that Florida residents could not place sports bets while “physically located on another Tribe’s Indian lands.” To do so would violate IGRA’s instruction that gaming is “lawful on Indian lands” only if such gaming is authorized by the “Indian tribe having jurisdiction over such lands.” On August 11, the Secretary published notice of the Compact in the Federal Register. At that point, the Compact took effect and acquired the force of law.

The West Flagler Plaintiffs’ civil action challenged the Secretary’s approval of the Compact. Both entities own brick-and-mortar casinos in Florida. To establish Article III standing, they alleged that the Compact’s allowance for online betting will divert business from their facilities. On the merits, they argued that the Compact’s authorization of online betting violated IGRA, the Unlawful Internet Gambling Enforcement Act (“UIGEA”), the Wire Act, and the Equal Protection Clause. Their leading argument was that the Compact violated IGRA because it authorizes Class III gambling outside of “Indian lands.” The Tribe moved to intervene for the limited purpose of filing a motion to dismiss. The Tribe argues that it may intervene as of right because it has an economic interest in the Compact and because the Secretary will not adequately protect that interest.

On September 27, 2021, other Plaintiffs, Monterra MF, LLC and its co-plaintiffs (collectively, the “Monterra Plaintiffs”) filed a separate challenge to the Secretary’s approval. All but one of these co-plaintiffs lived, worked, or owned property near Florida casinos. The remaining Plaintiff, No Casinos, is a nonprofit organization that opposed the expansion of gambling in Florida. To establish Article III standing, the Monterra Plaintiffs alleged that the expansion of gambling in Florida will increase neighborhood traffic, increase criminal activity, and reduce their property values. On the merits, they joined the West Flagler Plaintiffs in arguing that the Compact’s online gambling rules violated IGRA, UIGEA, and the Wire Act. They also argued that the Compact’s expansion of in-person gambling violates both the Florida Constitution and a separate provision of IGRA, which conditions the lawfulness of Class III gaming on whether the state “permits such gaming for any purpose by any person, organization, or entity.”

The West Flagler Plaintiffs moved for summary judgment on September 21, 2021. The Monterra Plaintiffs followed suit on October 15, 2021. The Secretary then moved to dismiss both cases for lack of standing. The Secretary also argued that the Plaintiffs failed to state a claim under IGRA, that IGRA does not require her to consider questions of state law, and that West Flagler’s constitutional argument fails. The Secretary did not, however, address whether the online gaming contemplated by the Compact occurs on or off “Indian lands.”

The Court found that West Flagler Plaintiffs had adequately established a competitive injury that was both caused by the conduct challenged in this action and redressable by a favorable decision on the merits. On that first point, the Court stated there is a “causal connection” between West Flagler’s Plaintiffs injury and the Secretary’s approval of the gaming Compact, without which the Tribe could not offer online sports betting. Setting aside the Secretary’s approval would prevent the Tribe from offering such betting, at least under the current Compact because that result would fully redress West Flagler’s Plaintiff’s injury, West Flagler has Article III standing. The Court did not address whether the other Plaintiffs in these actions had standing because as a general matter, “the presence of one party with standing is sufficient to satisfy Article III’s case-or controversy requirement.”

The Court found that “equity and good conscience” permitted this action to continue in the Tribe’s absence. The Court stated that because the Tribe moved to intervene solely to move for dismissal, because the Tribe seeks dismissal on the sole ground that it is indispensable and the Tribe is not indispensable, the Tribe’s motion for limited intervention was denied as moot.

On the merits, it is well-settled that IGRA authorizes sports betting only on Indian lands. Altogether, over a dozen provisions in IGRA regulate gaming on “Indian lands,” and none regulate gaming in another location. The Supreme Court has emphasized that “[e]verything—literally everything—in IGRA affords tools . . . to regulate gaming on Indian lands, and nowhere else.”^[155] The instant Compact attempts to authorize sports betting both on and off Indian lands. Accordingly, because the Compact allows patrons to wager throughout Florida, including at locations that are not Indian lands, the Compact violates IGRA’s “Indian lands” requirement. Therefore, the Secretary had an affirmative duty to reject it. The Court granted West Flagler Plaintiffs’ motion for summary judgment as to this claim.

The last issue in this case was the Plaintiffs’ remedy. The issue is governed by § 706 of the APA, which directs courts to “hold unlawful and set aside agency action” that is “not in accordance with law.”^[156] The “agency action” under review is the Secretary’s default approval of the Compact. Vacating the Secretary’s approval was appropriate because it would fully redress the West Flagler Plaintiffs’ injury. For those reasons, the Court concluded that the appropriate remedy was to set aside the Secretary’s default approval of the Compact. The remedy also resolved the Monterra Plaintiffs’ action.

It was the Court’s understanding that the practical effect of this remedy is to reinstate the Tribe’s prior gaming compact, and restore the legal status of Class III gaming in Florida to where it was on August 4, 2021—one day before the Secretary approved the new compact by inaction. Because the more recent Compact is no longer in effect, continuing to offer online sports betting would violate federal law.^[157] The Court clarified that this decision does not foreclose other avenues for authorizing online sports betting in Florida. The State and the Tribe may agree to a new Compact, with the Secretary’s approval, that allows online gaming solely on Indian lands. Alternatively, Florida citizens may authorize such betting across their State through a citizens’ initiative. What the Secretary may not do, however, is approve future Compacts that authorize conduct outside IGRA’s scope.

The West Flagler Plaintiffs’ motion for summary judgment was granted, the Monterra Plaintiffs’ motion for summary judgment was denied as moot, the Tribes’ motions to intervene was denied, and the Secretary’s motions to dismiss was denied. The matter is being appealed to the D.C. Court of Appeals.

Chicken Ranch Rancheria of Me-Wuk Indians v. California, 42 F.4th 1024 (9th Cir. 2022). California (“Defendant”) engaged in negotiations with the Chicken Ranch Rancheria of Me-Wuk Indians, Blue Lake Rancheria, Chemehuevi Indian Tribe, Hopland Band of Pomo Indians, and Robinson Rancheria (collectively, “Plaintiffs”) to enter into a compact.^[158] Under the Indian Gaming Regulatory Act (“IGRA”), topics of negotiation are limited to those directly related to the operation of gaming activities. These protections are in place to prevent states from using their compact approval authority to force regulations on tribes that the states would otherwise be powerless to enact.

During several years of negotiations, California demanded that the Tribes agree to compact provisions relating to family law, environmental regulation, and tort law that were unrelated to the operation of gaming activities and far outside the bounds of permissible negotiation under IGRA.

The Court held that in doing so, California did not act in good faith. To reach this conclusion, the Court held that the list^[159] enumerated in the IGRA is exhaustive. The Court noted the connection between gaming and topic of negotiation must be direct; this is a meaningful limitation on negotiations. None were.

The family support ordinances only tangentially touched gaming as they were applicable to gaming facility employees. The environmental provisions were far afield of the actual operation of gaming activities and the mitigation of organized crime and unfair gaming practices that were at the heart of IGRA’s limited extension of regulatory authority to the states. The tort provisions were similarly indirect and would require tribes to commit to adopting and applying an entire body of state law as tribal law, waive sovereign immunity, and create claims commissions for injuries that are merely “connected with” or “relating to” a casino gaming facility.

Having found that these were outside the IGRA’s permissible topics, the Court then considered whether a state could negotiate well outside the enumerated topics while simultaneously acting in good faith. The Court looked to the plain meaning and structure of the statute to conclude that a state could not. The good faith requirement exists because Congress anticipated that states might abuse their authority over compact negotiations to force tribes to accept burdens on their sovereignty in order to obtain gaming opportunities.

§ 1.4.3. Labor and Employment Law & Indian Tribes

When Indian tribes act as commercial entities and hire employees, they are not subject to the same labor and employment laws as nontribal employers. For example, state labor laws and workers’ compensation statutes are inapplicable to tribal businesses.^[160] Moreover, tribal employers may not be subject to certain federal labor and employment laws.^[161]

Tribal employers are ordinarily exempt from antidiscrimination laws. Both Title VII of the Civil Rights Act of 1964^[162] and the Americans with Disabilities Act^[163] expressly exclude Indian tribes,^[164] and state anti-discrimination laws usually do not apply to tribal employers.^[165] In addition, tribal officials are generally immune from suits arising from alleged discriminatory behavior.^[166]

The circuits remain severely split regarding the application of federal regulatory employment laws to tribal employers. The Eighth and Tenth Circuits have refused to apply to tribes such laws as the Occupational Safety and Health Act (OSHA),^[167] the Employee Retirement Income Security Act (ERISA),^[168] the Fair Labor Standards Act (FLSA),^[169] the National Labor Relations Act (NLRA),^[170] and the Age Discrimination in Employment Act (ADEA),^[171] because doing so would encroach upon well-established principles of tribal sovereignty and tribal self-governance.^[172]

Conversely, the Second, Seventh, and Ninth Circuits have applied OSHA and ERISA to tribes.^[173] Moreover, the Seventh and Ninth Circuits lean toward application of FLSA to tribes.^[174] These circuits reason that, because Indian tribes are not explicitly exempted from these statutes of general applicability, the laws accordingly govern tribal employment activity.^[175] Following this reasoning, the Department of Labor has stated that the FMLA^[176] applies to tribal employers.^[177] However, aggrieved employees may experience difficulty enforcing federal employment rights due to the doctrine of sovereign immunity.^[178] For example, the Second Circuit has held that, because Congress did not explicitly authorize suits against tribes in the language of the FMLA or the ADEA, tribal employers cannot be sued for money damages in federal court by employees under these statutes.^[179]

Questions remain concerning whether federal statutes of general applicability extend beyond the labor and employment arena where they do not affirmatively contemplate whether Indian tribes govern tribal or reservation-based activities. For example, do federal franchise laws apply in Indian Country? What about the federal Copyright Act or other federal intellectual property statutes? What about Sarbanes-Oxley? While subject to the split in circuits discussed immediately above, it is unclear in which federal jurisdictions a court would hold that such federal laws apply to tribes.^[180]

In the last year, federal courts have continued to decide cases involving the application of federal labor and employment rules to tribal employers. More generally, courts have grappled with how to apply statutes of general applicability to tribal sovereigns. A noteworthy case from the last year is discussed below:^[181]

Mashantucket Pequot Tribal Nation v. Davis, MPTC-CV-AA-2019-126, 2021 WL 5013894 (Mash. Pequot Tribal Ct. Oct. 7, 2021). Carrie-Ann Davis (“Ms. Davis”), was employed as a surveillance officer in the Surveillance Department of the Mashantucket Pequot Tribe (the “Tribe”). Ms. Davis was responsible for monitoring security cameras. Ms. Davis began having health problems and was observed asleep at her workstation on three different occasions. After the first two instances she was given a performance improvement notice dated September 5, 2017. This notice constituted a final warning. Ms. Davis provided a written statement regarding these two incidents explaining that her “condition is not falling asleep,” but instead is “due to some medical issue” where she would slur her speech, lose consciousness, and then become coherent again as if nothing had occurred. Ms. Davis noted that she had informed management about her medical issue and that she was seeing two doctors to address her medical issue. Ms. Davis’s medical issue continued and on May 26, 2018, the surveillance shift manager observed her asleep at her workstation in the surveillance monitor room for eight minutes. As a result, Ms. Davis was suspended on June 12, 2018, pending further investigation. On July 2, 2018, the Tribe terminated her employment. The charging document further stated that the Tribe terminated Ms. Davis’s employment because she violated the Tribe’s Standards of Conduct Section IV Subsection 4, which prohibits sleeping on the job. After her termination, Ms. Davis received a correct diagnosis of severe sleep apnea.

Ms. Davis appealed her termination. On March 13, 2019, the Board of Review (the “Board”) issued a decision returning Ms. Davis to work on a final warning with three months’ back pay because Ms. Davis had an “undiagnosed medical condition” at the time of her termination which was a mitigating circumstance that influenced the Board’s decision since she was actively seeking treatment and under doctors’ care. The Tribe appealed the Board’s decision arguing that there was no reasonable basis for the Board to have reversed Ms. Davis’s termination and ordered back pay.

The central issue in this case is the Board’s finding and application of mitigating circumstances. Title 8 of the Employee Review Code (the “Code”) is comprised of five factors to be considered when determining whether the Board’s decision was appropriate. Those factors ask whether: (1) There was a reasonable basis for the Board’s consideration that the employee did or did not violate the policies and/or procedures established by the employer for the position held by the employee; (2) There was a reasonable basis to find that the employer did or did not substantially comply with the policies and/or procedures regarding discipline; (3) The employee was given a description of the offense or conduct that was the basis for the disciplinary action and both parties were afforded a reasonable opportunity to present and refute evidence regarding the offense or conduct and/or evidence of aggravating or mitigating circumstances relating thereto; (4) There was a reasonable basis for the Board’s decision as to whether the form of discipline was or was not appropriate for the offense or conduct; and (5) The Board’s decision is in violation of tribal laws or exceeds the Board’s authority under tribal law.

Focusing on the issue at hand, the Code states that “mitigating circumstances are those that ‘do not constitute a justification or excuse of the offense in question, but which, in fairness and mercy, may be considered as extenuating or reducing the degree of moral culpability.’”^[182] The Board found that Ms. Davis’s undiagnosed medical condition at the time of termination was a mitigating circumstance which influenced their final decision since she was receiving treatment.

In accordance with the Code, the Tribal Court found that Ms. Davis’s medical condition, severe sleep apnea, was a mitigating circumstance which caused and was directly related to her violation of the Tribe’s prohibition against sleeping on the job. Therefore, the Board properly relied upon Ms. Davis’s medical condition, severe sleep apnea, as a mitigating circumstance.

§ 1.4.4. Federal Court Jurisdiction

Federal court jurisdiction is limited to cases that invoke a federal court’s limited subject matter jurisdiction. Such cases may involve a federal question^[183] or claims that are brought involving diversity of citizenship.^[184] Litigation that arises from a deal with a federally-recognized tribe, or otherwise has federal overtones, does not necessarily present a federal question that will allow a federal district court to assume jurisdiction,^[185] nor does the possibility that a tribe may invoke a federal statute in its defense confer federal court jurisdiction.^[186] Moreover, courts have generally held that a tribe is not a citizen of any state for diversity purposes and, therefore, cannot sue or be sued in federal court based on diversity jurisdiction.^[187] However courts are split on whether a business incorporated under federal statute, state law, or tribal law can qualify for diversity jurisdiction.^[188] Because the potential judicial forums for commercial litigation arising out of Indian Country are likely restricted to state or tribal court, choosing federal court as the choice of venue may not make sense.

The following highlights several of the more relevant cases decided in the last year.^[189]

Big Sandy Rancheria Enterprises v. Bonta, 1 F.4th 710 (9th Cir. 2021), cert. denied, 142 S. Ct. 1110, 212 L. Ed. 2d 8 (2022). Big Sandy Rancheria of Western Mono Indians (the “Corporation”) is a federally chartered tribal corporation engaged in tobacco distribution and was wholly owned by a federally recognized Native American tribe. The Corporation brought an action against the Attorney General for the state of California and the director of the California Department of Tax and Fee Administration seeking a declaration that California’s Complementary Statute, Licensing Act, and Cigarette Tax Law are preempted by federal law and tribal sovereignty under the Indian Reorganization Act (“IRA”). The United States District Court for the Eastern District of California granted California’s motion to dismiss for lack of subject matter jurisdiction.^[190] In the motion, California argued that the Corporation is a company and not a “tribe” within the meaning of 28 U.S.C. § 1362.

28 U.S.C. § 1362 confers federal jurisdiction over claims “brought by any Indian tribe or band with a governing body duly recognized by the Secretary of the Interior.” Congress enacted the IRA to enable tribes “to revitalize their self-government through the adoption of constitutions and bylaws . . . through the creation of chartered corporations, with the power to conduct the business and economic affairs of the tribe.” 25 U.S.C. § 5126.

The court ruled that based on the relevant statutory language, legislative history, and circuit precedent narrowly construing § 1362, the Corporation was not an “Indian tribe or band,” and that the Corporation may not invoke § 1362 to avoid the Tax Injunction Act’s jurisdictional bar. The court further noted that its conclusions align with Congress’s purpose in enacting 25 U.S.C. § 5126: “giving tribes the power to incorporate . . . enabl[ing] tribes to waive sovereign immunity, thereby facilitating business transactions.” The court further reasoned that in light of this purpose, it would be odd to allow a 25 U.S.C. § 5126 corporation to selectively claim the benefits of sovereignty in order to challenge a tax.

The U.S. Supreme Court denied the Plaintiff’s petition for writ of certiorari on February 22, 2022.

Brown v. Haaland, No. 321CV00344MMDCLB, 2022 WL 1692934 (D. Nev. May 26, 2022). This case arises in the context of a longer dispute about the living conditions on and rightful governance of the Winnemucca Indian Colony. The ten individual Plaintiffs resided on the Winnemucca Indian Colony and alleged civil rights abuses by the Bureau of Indian Affairs (“BIA”) and the Department of Interior (“DOI”) arising out of their self-determination contract with the BIA. The Plaintiffs brought this action in the U.S. District Court for the District of Nevada under the Indian Self-Determination and Education Assistance Act (“ISDEAA”). 25 U.S.C.A. § 5331(a). The BIA filed a motion to dismiss for lack of subject matter jurisdiction alleging that ISDEAA only confers federal court jurisdiction over claims involving federally-recognized tribes or tribal organizations.

ISDEAA directs the Secretary of the Interior to enter into contracts with willing tribes to provide services such as education and law enforcement that otherwise would have been provided by the federal government. Section 1330 of ISDEAA provides that:

Each contract . . . shall provide that in any case where the appropriate Secretary determines that the tribal organization’s performance under such contract … involves (1) the violation of the rights or endangerment of the health, safety, or welfare of any persons; or (2) gross negligence or mismanagement in the handling use of funds provided to the tribal organization pursuant to such contract … Such Secretary may, under regulations prescribed by [them] and after providing notice and a hearing on the record to such tribal organization, rescind such contract in whole or in part, and assume or resume control or operation of the program, activity or service involved if [they] determine that the tribal organization has not taken corrective action as prescribed by the Secretary to remedy the contract deficiency, except that the appropriate Secretary may, upon written notice to a tribal organization, and the tribe served by the tribal organization, immediately rescind a contract if the Secretary finds that (i) there is an immediate threat of imminent harm to the safety of any person, or imminent substantial and irreparable harm to trust funds, trust lands, or interests in such lands, and (ii) such threat arises from the failure of the contractor to fulfill the requirements of the contract.

The court held that ISDEAA does confer jurisdiction on federal district courts to hear disputes regarding self-determination contracts through § 5331(a). The court further ruled that § 5331(a) applies only to suits by Indian tribes or tribal organizations against the United States. This means that only tribes or tribal organizations can be parties to a self-determination contract. Because § 5331(a) does not waive sovereign immunity for claims brought by nonparties to the self-determination contract, the statute does not create jurisdiction for claims arising under ISDEAA except in the limited context of a tribe suing the federal government. The Court therefore found that it lacks jurisdiction over plaintiffs’ ISDEAA statutory claims given that the plaintiffs are individuals rather than a federally recognized tribe.

Newtok Village v. Patrick, 21 F.4th 608 (2021). Members of a village council for a federally recognized Alaskan Native tribe asserted state-law claims and sought injunctive and mandamus relief to prohibit former members from representing themselves as the tribe’s governing body to federal and state entities. The action was brought in the U.S. District Court for the District of Alaska under the Indian Self-Determination and Education Assistance Act (“ISDEAA”). 25 U.S.C.A. § 5331(a).

The court ruled that ISDEAA only authorized suits against United States, which was not a defendant in this case. Additionally, the claims did not assert any wrongful receipt of federal funds but rather rested on contractual obligations within the meaning of the ISDEAA. Accordingly, the claim did not present a substantial question of federal law that could support exercise of federal jurisdiction over the action despite the complaint’s reference to the tribe’s contracting with the Bureau of Indian Affairs. The court further noted that “[i]ntratribal disputes are generally nonjusticiable in federal courts . . . . While Congress has broad authority over Indian matters, the role of courts in adjusting relations between and among tribes and their members is correspondingly restrained.”

Kewadin Casinos Gaming Authority v. Draganchuk, 2022 WL 1715207 (W.D. Mich. Feb. 8, 2022). In 2011, the gaming and casino operation department of the Sault St. Marie Tribe of Chippewa Indians, a federally recognized Indian tribe (“Plaintiffs”), entered into separate contracts with developers (“Defendants”) for the purpose of developing two tribal casinos on two parcels of land in Michigan’s Lower Peninsula. In March of 2020, Plaintiffs brought state law claims against Defendants in the U.S. District Court for the Western District of Michigan. Defendants moved to dismiss based on tribal sovereign immunity. The court dismissed the case for lack of subject matter jurisdiction without deciding the issue of sovereign immunity. Defendants refiled the case in state court the next day. Plaintiffs then brought an action in the district court against the state court and Defendants seeking a temporary restraining order and preliminary injunction to enjoin state court proceedings until the district court ruled on whether there was a waiver of sovereign immunity such that the state court could hear Defendants’ claims against Plaintiffs.

The Rooker-Feldman Doctrine, as discussed in Rooker v. Fidelity Trust Co., 263 U.S. 413, 415–16 (1923), addresses a party’s ability to challenge a state court judgment in federal court. In Rooker, the Supreme Court held that no matter how wrongful a state court decision concerning compliance with the Constitution may have been, a federal district court has no jurisdiction to reverse or modify the decision and must dismiss such claims for lack of subject matter jurisdiction. The Anti-Injunction Act (“AIA”) provides that “[a] court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.”^[191] The Non-Intercourse Act (“NIA”) provides that “[n]o purchase, grant, lease, or other conveyance of lands, or of any title or claim thereto, from any Indian nation or tribe of Indians, shall be of any validity in law or equity, unless the same be made by treaty or convention entered into pursuant to the Constitution.”^[192]

Applying the Rooker-Feldman Doctrine, the district court ruled that it lacked subject matter jurisdiction to decide question of whether there was a waiver of sovereign immunity in the contract between the developers and the gaming and casino operation. The court further ruled that neither the specific grant of jurisdiction to district courts over civil actions brought by an Indian tribe nor NIA contained statutory language permitting federal courts to issue injunctions in state court proceedings. Accordingly, absent some other explanation, the injunction requested by Plaintiffs to enjoin state court proceedings did not fall within the “expressly authorized” exception to the AIA. However, the temporary restraining order was granted because there was a potential for irreparable harm if the sovereign immunity of Plaintiffs was violated.

§ 1.5. The State Sovereign

With billions of dollars being exchanged in Indian Country, state government is naturally looking for a piece of the action, giving rise to tax clashes between tribes and their business partners, and states and counties. These conflicts are primarily decided under the “federal preemption doctrine,” which asks whether a state’s attempted regulation or taxation of non-Indian activities in Indian Country is preempted by federal statutes or treaties, taking into account overarching notions of tribal sovereignty.^[193]

Generally, state taxes apply to everyone “outside a tribe’s reservation” and are “federally preempted only where the state law is contrary to express federal law.”^[194] Within Indian Country, on the other hand, “the initial and frequently dispositive question in Indian tax cases is who bears the legal incidence of the tax.”^[195] When the legal incidence falls on tribes, tribal members, or tribal corporations,^[196] “[s]tates are categorically barred” from implementing the tax.^[197]

When the legal incidence falls on non-Indians, however, a more nuanced analysis applies. Although, historically, the U.S. Supreme Court asked whether any assertion of state power on Indian land would impinge on the tribal right to make its own laws and be ruled by them, in recent years, the High Court has moved away from that inherent tribal sovereignty analysis in favor of a federal preemption regime.^[198] Because Congress does not often explicitly preempt state law,^[199] the Supreme Court and the lower federal courts engage in a balancing act to determine whether tribal self-governance rights, bolstered by federal laws, preempt state laws.^[200] This balancing act weighs a state’s interest in policing non-Indian conduct against combined federal and tribal interests in regulating affairs that arise out of tribal lands within the state’s boundaries.^[201]

In New Mexico v. Mescalero Apache Tribe,^[202] the Supreme Court explained that “state jurisdiction is preempted by the operation of federal law if it interferes or is incompatible with federal and tribal interests embodied in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.”^[203] In Mescalero, the Court held that New Mexico could not impose its own fishing and hunting regulations on non-Indians on the reservation because of strong federal interests in “tribal self-sufficiency and economic development” and a lack of state interests.^[204]

When non-Indian parties operate in Indian Country, lawyers must proactively evaluate whether, or to what extent, a state or local government’s interest in policing or taxing conduct that relates to neighboring tribal lands outweighs relevant federal and tribal interests pertaining to that same conduct arising within those lands.

The issues of preemption and infringement are regularly litigated in the federal courts. The following highlights several of the more relevant cases decided in the last year.

S. Point Energy Ctr. LLC v. Arizona Dep’t of Revenue, 253 Ariz. 30 (2022). The Arizona Supreme Court examined whether the Indian Reorganization Act of 1934 (the “Act”) preempts a county ad valorem property tax on a power plant where the power plant is owned by non-Indian lessees of land, and the land is held in trust for the benefit of an Indian tribe. The Court held that the tax is not preempted.

South Point Energy Center LLC (“South Point”), a non-Indian entity, leases land from the Fort Mojave Indian Tribe (the “Tribe”), upon which South Point owns and operates a power plant. The power plant does not supply any energy to the Tribe or persons located on the reservation. Since the power plant was put into operation, Mohave County assessed ad valorem property taxes against the power plant. South Point initiated a lawsuit seeking a refund of payments for property taxes imposed from 2010 to 2018 and argued that Section 5 of the Act expressly preempts states from imposing property taxes on any real property improvements located on land held in trust by the federal government for the benefit of Indian tribes or individual Indians.

A federal law, such as the Act, may preempt application of state law by express terms, which is known as “express preemption.” The relevant part of the Act states that land held in trust for an Indian tribe “shall be exempt from State and local taxation.”^[205] Interpreting this statute, the Court reasoned that to fall under this tax exemption, the power plant must be an “interest in lands, water rights, or surface rights to lands.”^[206] The Court ruled that the power plant does not satisfy this definition because the land held in trust for the Tribe does not include the actual power plant. In addition, the Tribe has no ownership interest in the power plant and derives no benefit from the power plant. Therefore, taxation of the power plant does not infringe upon or burden the Tribe’s use of the land. In sum, the Court held that while Section 5 of the Act preempts state and local taxes imposed on land held in trust for Indian tribes, such preemption does not extend to permanent improvements affixed to that land when the lessee is non-Indian and the Indian tribe and lessee agree that the lessee owns the improvements.

The Court remanded the case to the court of appeals to determine whether the power plant is impliedly exempt from taxation under the balancing test stated in White Mountain Apache Tribe v. Bracker which requires a review of the “nature of the state, federal, and tribal interests at stake . . . to determine whether, in the specific context, the exercise of state authority would violate federal law.”^[207]

Lac Courte Oreilles Band of Lake Superior Chippewa Indians of Wisconsin v. Evers, 46 F.4th 552 (7th Cir. 2022). The Seventh Circuit held that tribal land owned by tribe members is exempt from state property tax even though the land was previously sold to non-Indians before coming back into tribal ownership.

Tribal members living within four Ojibwe Indian reservations brought an action challenging whether the State of Wisconsin could assess property taxes on land within the reservation. Unlike the traditional makeup of such a lawsuit, the parcels of land in question are fully alienable, meaning that the current owners of the at-issue land can sell the land at will. Furthermore, although the at-issue land is currently owned by Ojibwe tribal members, the land had previously been sold by tribal members to non-Indians before being sold back to tribal members. The State argues that the sale of the land to non-Indians before being sold back to tribal members eliminates the land’s tax immunity for all time.

The Court rejected this argument. Rather than performing the traditional analysis under the Bracker balancing test, which involves weighing “tribal interests, federal interests, and state interests,”^[208] the Court analyzed the issue of state taxation of Indians living in Indian country under a categorical approach. Under this categorical approach, “absent cession of jurisdiction or other federal statutes permitting it, . . . a State is without power to tax reservation lands and reservation Indians.”^[209] The categorical approach begins with the threshold question of “who bears the legal incidence of the tax.”^[210] If the tax falls on non-Indians, the tax will be upheld so long as “the balance of federal, state, and tribal interests favors the State, and federal law is not to the contrary.”^[211] If the tax falls on Indians on Indian land, it is presumptively invalid unless Congress has authorized it in “unmistakably clear” terms. Here, the parties agreed that no act of Congress authorized the taxation of these lands.

Nonetheless, the State argued that the fact of non-Indian ownership in the chain of title supports its authority to tax reservation lands held by Ojibwe tribal members. However, the Court again highlighted the fact that the at-issue land did not become alienable because of a Congressional act, but rather as a result of a treaty. The at-issue land became freely alienable under the 1854 Treaty, which is not a legislative act. Rather, a treaty is in its nature a contract between nations. Therefore, the at-issue land became freely alienable under the 1854 Treaty by mutual assent of the contracting parties—the Ojibwe tribes and the President of the United States—without Congress’ input.^[212] Because the land did not become alienable by an act of Congress, the categorical rule that a tax falling on Indians on Indian land is presumptively invalid applies.

Oklahoma v. United States Dep’t of the Interior, 577 F. Supp. 3d 1266, 1269 (W.D. Okla. 2021). In this case, the Court indicates that the U.S. Supreme Court’s decision in McGirt v. Oklahoma^[213] may have far-reaching implications. In McGirt, the Supreme Court held that the Muscogee (Creek) Nation’s reservation in eastern Oklahoma had not been disestablished and continued to be reservation land. The McGirt decision led to the Department of the Interior and the Office of Surface Mining and Enforcement stripping Oklahoma of its ability to regulate surface mining on the Creek Nation’s Reservation. Contending that McGirt’s impact is limited to federal criminal jurisdiction under the Major Crimes Act, Oklahoma filed this action challenging defendants’ actions. Pending before the Court in this action is Oklahoma’s motion for preliminary injunction to enjoin the Department of Interior from enforcing their decision to strip Oklahoma of its regulatory authority over surface mining on the Creek Reservation.

The Court held that Oklahoma did not show a likelihood of success on the merits of its claims. The Court emphasized that this case turns on the narrow issue of the interpretation and application of federal statute, not whether inhabitants of the newly-confirmed Creek Reservation should enjoy immunity from local regulation or whether McGirt’s holding should apply generally in the civil context.

The relevant statute in this matter is the Surface Mining Control and Reclamation Act (the “Act”). The Court stated that the language of the Act is clear in that a State does not have authority to regulate Indian land. Because the land at issue qualifies as reservation land for the purposes of the Major Crime Act, as decided in McGirt, it also qualifies as “Federal Indian reservation” for the purposes of the Act. Therefore, Oklahoma failed to show a likelihood of success on the merits. This case is one which the McGirt court suggested could be triggered by the finding that the Creek Reservation persists today, and demonstrates how a state’s ability to regulate is diminished on Indian land.

State v. On-Auk-Mor Trade Ctr., LLC, No. 1 CA-TX 21-0005, 2022 WL 1256617 (Ariz. Ct. App. Apr. 28, 2022). This case examines whether a limited liability company duly organized under Arizona law, but owned and operated by a tribal member solely on tribal land, is subject to Arizona’s unemployment insurance tax. The Court held that such a company is subject to Arizona’s unemployment insurance tax.

On-Auk-Mor Trade Center, LLC (“OAM”) is an LLC organized under Arizona law. OAM’s sole member is a trust whose sole trustee and manager, David Montiel, is a member of the Salt River Pima-Maricopa Indian Community (the “Community”). OAM argues that it is not subject to Arizona’s unemployment insurance tax because it is an excise tax on a member of the Community doing business entirely on Tribal land.

The dispositive question is who bears the legal incidence of the tax. Where the “legal incidence of an excise tax rests on a tribe or on tribal members for sales made inside Indian country, the tax cannot be enforced absent clear congressional authorization.”^[214] When the legal incidence of the tax rests on non-Indians, “no categorical bar prevents enforcement of the tax; if the balance of federal, state, and tribal interests favors the State, and federal law is not to the contrary, the State may impose its levy.”^[215]

Here, the parties agree that the legal incidence of the tax falls on employers. The question is whether the tax rests on OAM as an LLC or on Montiel as the sole manager of OAM. The Court reasoned that LLCs exist by virtue of state law, and, under Arizona law, an LLC is an entity distinct from its owners. Furthermore, the Community’s constitution provides that only natural persons are considered enrolled members of the Community. As an LLC, OAM is not a member of the Community, and the State is not categorically barred from enforcing the tax. Therefore, the legal incidence of the tax falls upon OAM and not Montiel. OAM also waived any arguments as to whether the balancing of federal, state, and tribal interests favor barring the tax because OAM did not raise this issue with the lower court. In conclusion, because OAM is an LLC organized under Arizona law, is taxed as a corporation for unemployment insurance tax purposes, and is not an enrolled member of the Community, it is subject to Arizona’s unemployment insurance tax.

§ 1.6. Conclusion

Economic growth and development throughout Indian Country have spurred many businesses to engage in business dealings with tribes and tribal entities. Confusion may arise during these transactions because of the unique sovereign and jurisdictional characteristics attendant to business transactions in Indian Country. As a result, these transactions have prompted increased litigation in tribal and nontribal forums. Accordingly, counsel assisting in these transactions, or any subsequent litigation, should conduct certain due diligence with respect to the pertinent tribal organizational documents and governing laws that may collectively dictate and control the business relationship.

To maximize the client’s chances of a successful partnership with tribes and tribal entities, counsel should ensure that the transactional documents contain clear and unambiguous contractual provisions that address all rights, obligations, and remedies of the parties. Therefore, even if the deal fails, careful negotiation and drafting, and, in turn, thoughtful procedural and jurisdictional litigation practice, will allow the parties to more expeditiously litigate the merits of any dispute, without jurisdictional confusion. As business between tribes and nontribal parties continues to grow, ensuring that both sides of the transaction fully understand and respect the deal will lead to a long-lasting and beneficial business relationship for all.

* Ryan D. Dreveskracht is an attorney with Galanda Broadman, PLLC. Ryan practices out of the firm’s Seattle office, focusing on representing businesses and tribal governments in complex litigation. He is also devoted to defending individuals’ constitutional rights and handles civil rights and intentional tort cases.

† Heidi McNeil Staudenmaier is the Partner Coordinator of Native American Law & Gaming Law Services for Snell & Wilmer, L.L.P., where she is based in the firm’s Phoenix, Arizona office. Heidi is the past Chair of the State Bar of Arizona Indian Law Section, past President of the Maricopa County Bar Association, a member of the Executive Council for the ABA Business Law Section, past Chair of the Business and Corporate Litigation Committee, and has held numerous other leadership positions within the Section. She is also a Lifetime Honorary Director for the Iowa College of Law Foundation Board.

‡ Paloma Diaz is an attorney in the Commercial Litigation Group at Snell & Wilmer, L.L.P. Paloma has assisted in the representation of a variety of clients across multiple industries, including matters involving breach of contract, intellectual property disputes, gaming, and financial services litigation. Special thanks to Snell & Wilmer, L.L.P. Commercial Litigation attorney Christian Fernandez for his assistance in drafting this chapter.

1. The Honorable Sandra Day O’Connor, Lessons from the Third Sovereign: Indian Tribal Courts, 33 TULSA L.J. 1 (1997). ↑

2. Jack F. Williams, Integrating American Indian Law into the Commercial Law and Bankruptcy Curriculum, 37 TULSA L. REV. 557, 560 (2001). See also Frank Pommersheim, What Must Be Done to Achieve the Vision of the Twenty-First Century Tribal Judiciary, 7 Kan. J.L. & Pub. Pol’y 8, 11–12 (1997). ↑

3. Frank Pommersheim, What Must Be Done to Achieve the Vision of the Twenty-First Century Tribal Judiciary, 7 Kan. J.L. & Pub. Pol’y 8, 17 (1997). ↑

4. Worcester v. Georgia, 31 U.S. (1 Pet.) 515, 559 (1832). ↑

5. Id. ↑

6. United States v. Kagama, 118 U.S. 375, 381–82 (1886). ↑

7. Grant Christensen, A View from American Courts: The Year in Indian Law 2017, 41 Seattle U.L. Rev. 805 (2018). ↑

8. Grant Christensen, A View from American Courts: The Year in Indian Law 2017, 41 Seattle U.L. Rev. 805 (2018). ↑

9. 140 S. Ct. 2452 (2020). ↑

10. United States v. McBratney, 104 U.S. 621, 623–624 (1882). ↑

11. 448 U.S. 136 (1980). ↑

12. See Ysleta Del Sur Pueblo v. State of Tex., 852 F. Supp. 587 (W.D. Tex. 1993), rev’d, 36 F.3d 1325 (5th Cir. 1994). ↑

13. The Tribe’s view was that state permission was not necessary, pursuant to IGRA’s classification of bingo as a Class II game, so long as the State permitted the game to be played on some terms by some persons. ↑

14. Ysleta del Sur Pueblo, 36 F.3d 1325 (holding that the Restoration Act’s gaming provision, rather than IGRA, governed whether the Tribe’s proposed gaming activities were allowed under Texas law and thus Texas’s law would apply to the Tribe’s gaming operations), abrogated by Ysleta Del Sur Pueblo v. Texas, 142 S. Ct. 1929 (2022). ↑

15. Tribal Court Systems, U.S. Department of Interior, Indian Affairs, https://www.bia.gov/CFRCourts/tribal-justice-support-directorate (last visited Nov. 3, 2022). ↑

16. Justice Systems of Indian Nations, Tribal Court Clearinghouse, http://www.tribal-institute.org/lists/justice.htm (last visited Nov. 3, 2022). ↑

17. B.J. Jones, Role of Indian Tribal Courts in the Justice System, Native American Monograph Series, 7 (Mar. 2000), http://www.nrc4tribes.org/files/Role%20of%20Indian%20Tribal%20Courts-BJ%20Jones.pdf. ↑

18. Id.; Steven J. Gunn, Compacts, Confederacies, and Comity: Intertribal Enforcement of Tribal Court Orders, 34 N.M. L. REV. 297, 306 (2004). ↑

19. Kristen Carpenter and Eli Wald, Lawyering for Groups: The Case of American Indian Tribal Attorneys, 81 Fordham L. Rev. 3085, 3159 (2013). ↑

20. See Montana v. United States, 450 U.S. 544, 566 (1981) (“Indian tribes retain inherent sovereign power to exercise some forms of civil jurisdiction over non-Indians on their reservations . . . .” (emphasis added)); Means v. Navajo Nation, 432 F.3d 924, 930 (9th Cir. 2005) (holding that the tribe had jurisdiction over defendant because he was an Indian by political affiliation). ↑

21. Indian Country includes: (1) all land within the limits of any Indian reservation; (2) “dependent Indian communities” within the borders of the United States; and (3) all Indian allotments, including rights-of-way. 28 U.S.C. § 1151 (2000). “Although [that] definition by its terms relates only to . . . criminal jurisdiction . . . it also generally applies to questions of civil jurisdiction. . . .” Alaska v. Native Vill. of Venetie Tribal Gov’t, 522 U.S. 520, 527 (1998). ↑

22. “The ownership status of land . . . is only one factor to consider in determining whether [tribal courts have jurisdiction over non-members]. It may sometimes be a dispositive factor.” Nevada v. Hicks, 533 U.S. 353, 360 (2001) (emphasis added). ↑

23. Water Wheel Camp Recreational Area, Inc. v. LaRance, 642 F.3d 802 (9th Cir. 2011); see also Iowa Mut. Ins. Co. v. LaPlante, 480 U.S. 9, 14 (1987) (“We have repeatedly recognized the Federal Government’s long-standing policy of encouraging tribal self-government. . . . This policy reflects the fact that Indian tribes retain ‘attributes of sovereignty over both their members and their territory . . . .’”) (quoting United States v. Mazurie, 419 U.S. 544, 557 (1975)). ↑

24. Lesperance v. Sault Ste. Marie Tribe of Chippewa Indians, 259 F. Supp. 3d 713, 716 (W.D. Mich. 2017) (a non-Indian sued the tribe in tribal court but provided notice in a letter to a customer representative and not to the tribal Secretary as required under the tribe’s waiver authority. The tribal trial court and appellate court upheld dismissal and the federal district court affirmed.). ↑

25. Water Wheel, 642 F.3d 802; Washington v. Confederated Tribes of the Colville Indian Reservation, 447 U.S. 134 (1980) (power to tax transactions on trust lands). Indian land in this context includes land owned by the tribe or its members as well as land owned in fee by the United States but held in trust for the benefit of the tribe or its members. Notably, the land beneath a navigable waterway is not “Indian land,” Montana v. United States, 450 U.S. 544 (1981); neither is land owned by the United States but with a right-of-way granted to a state for the purposes of the construction and use of a state highway, Strate v. A-1 Contractors, 520 U.S. 438 (1997). ↑

26. 450 U.S. 544 (1981). ↑

27. Id. ↑

28. Plains Commerce, 554 U.S. 316 (2008). Although Montana originally pertained to civil jurisdiction over non-Indians on non-Indian fee lands within reservation boundaries (450 U.S. at 564), the Ninth Circuit Court of Appeals has previously maintained “that the general rule of Montana applies to both Indian and non-Indian lands.” Ford Motor Company v. Todeecheene, 394 F.3d 1170, 1178-79 (9th Cir. 2005), overruled on other grounds, 488 F.3d 1215 (9th Cir. 2007). More recently, however, the Ninth Circuit has indicated a reversion to its original rule. See Water Wheel, 642 F.3d 802. ↑

29. Plains Commerce, 554 U.S. at 340. ↑

30. Id. It appears, however, that courts have become more sympathetic to the second exception as of late. See, e.g., Knighton v. Cedarville Rancheria of N. Paiute Indians, 922 F.3d 892, 905 (9th Cir.), cert. denied, 140 S. Ct. 513 (2019); Norton v. Ute Indian Tribe of the Uintah & Ouray Reservation, 862 F.3d 1236, 1246 (10th Cir. 2017). ↑

31. Kelsey Haake helped research and summarize the cases in this section. Kelsey is a rising third-year law student at the University of Pennsylvania Carey Law School and expects to graduate in May 2023. ↑

32. 450 U.S. 544 (1981). ↑

33. Exhaustion is not always required. See Nat’l Farmers Union Ins. Co. v. Crow Tribe of Indians, 471 U.S. 845, 857 n. 21 (1985) (“We do not suggest that exhaustion would be required where an assertion of tribal jurisdiction is motivated by a desire to harass or is conducted in bad faith, or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction.”). ↑

34. Id. at 857. (“Until petitioners have exhausted the remedies available to them in the Tribal Court system . . . it would be premature for a federal court to consider any relief.”); Progressive Advanced Ins. Co. v. Worker, No. CV-16-08107-PCT-DJH, 2017 U.S. Dist. LEXIS 19283 (D. Ariz. February 8, 2017) (“Progressive issued an insurance policy that listed a tribal member as a named insured and covered vehicles that were kept on tribal lands . . . however Progressive never mailed anything to an address on tribal lands. To the extent that factor is dispositive, it may be that the tribal court lacks jurisdiction. But this is a question that must be answered first by the tribal courts of the Navajo Nation.”). ↑

35. Whitetail v. Spirit Lake Tribal Ct., Civ. No. 07-0042, 2007 U.S. Dist. LEXIS 87312, at *4–5 (N.D. Nov. 28, 2007). The doctrine applies even to federal habeas corpus actions filed under 25 U.S.C. § 1303. See, e.g., Valenzuela v. Silversmith, No. 11-2212, 2012 WL 5507249 (10th Cir. Nov. 14, 2012). ↑

36. See Rincon Mushroom, 490 Fed. Appx. 11, 13 (9th Cir. 2012) (“[H]old[ing] that the district court abused its discretion in dismissing the case rather than staying it.”); but see Progressive Advanced Ins. Co. v. Worker, No. CV-16-08107-PCT-DJH, 2017 U.S. Dist. LEXIS 19283 (D. Ariz. February 8, 2017) (dismissing the case); Window Rock Unified School District v. Reeves, 2017 U.S. App. LEXIS 14254 (9th Cir. August 3, 2017) (same). ↑

37. Nat’l Farmers Union, 471 U.S. at 852. ↑

38. Iowa Mut. Ins. Co. v. LaPlante, 480 U.S. 9, 19 (1987) (“If the Tribal Appeals Court upholds the lower court’s determination that the tribal courts have jurisdiction, petitioner may challenge that ruling in the District Court.”). ↑

39. See Ford Motor Co. v. Todecheene, 474 F.3d 1196, 1197 (9th Cir. 2007), amended and superseded by 488 F.3d 1215, 1216 (9th Cir. 2007); Duncan Energy Co., Inc. v. Three Affiliated Tribes of the Fort Berthold Reservation, 27 F.3d 1294, 1300 (8th Cir. 1993); Plains Commerce Bank, 128 S. Ct. at 2726. It is unclear whether state courts must likewise abstain from hearing a matter arising on tribal lands until the tribal court has determined the scope of its own jurisdiction and entered a final ruling. In Drumm v. Brown, 245 Conn. 657, 716 A.2d 50 (Conn. 1998), the Connecticut Supreme Court held that “[o]ur analysis, which is based primarily on the three United States Supreme Court exhaustion cases, persuades us that the courts of this state must apply the exhaustion of tribal remedies doctrine.” 245 Conn. at 659. However, the Drumm Court found that exhaustion was not required in the absence of a pending action in tribal court. Id. at 684. ↑

40. Nat’l Farmers Union, 471 U.S. at 857; see, e.g., Evans v. Shoshone-Bannock Land Use Policy Comm’n, 4:12-CV-417-BLW, 2012 WL 6651194 (D. Idaho Dec. 20, 2012) (requiring plaintiff to exhaust its tribal court remedies). ↑

41. See, e.g., Bruce H. Lien Co. v. Three Affiliated Tribes, 93 F.3d 1412, 1421 (8th Cir. 1996). ↑

42. Iowa Mutual, 480 U.S. at 16. ↑

43. See id. at 17 (“At a minimum, exhaustion of tribal remedies means that tribal appellate courts must have the opportunity to review the determinations of the lower tribal courts.”); see also Whitetail v. Spirit Lake Tribal Ct., No. 07-0042, 2007 U.S. Dist. LEXIS 87312, at *4 (D.N.D. Nov. 28, 2007) (declining review of the case because the plaintiff had failed to exhaust his tribal court remedies). ↑

44. See Nat’l Farmers Union, 471 U.S. at 853 (reasoning that “a federal court may determine under § 1331 whether a tribal court has exceeded the lawful limits of its jurisdiction”). ↑

45. Iowa Mutual, 480 U.S. at 19. ↑

46. Id. (“Unless a federal court determines that the Tribal Court lacked jurisdiction . . . proper deference to the tribal court system precludes relitigation of issues raised . . . and resolved in the Tribal Courts.”). A thorough analysis of post-judgment proceedings is beyond the scope of this chapter, but there is case law on the issue. See, e.g., AT&T Corp. v. Coeur d’Alene Tribe, 295 F.3d 899, 903–04 (9th Cir. 2002); Burrell v. Armijo, 456 F.3d 1159, 1168 (10th Cir. 2006), cert. denied, 549 U.S. 1167 (2007); Brenner v. Bendigo, No. 13-0005, 2013 WL 5652457 (D.S.D. Oct. 15, 2013); Bank of America, N.A. v. Bills, No. 00-0450, 2008 WL 682399, at *5 (D. Nev. Mar. 6, 2008); First Specialty Ins. Corp. v. Confederated Tribes of Grand Ronde Community of Oregon, No. 07-0005, 2007 WL 3283699, at *4 (D. Or. Nov. 2, 2007); U.S. ex rel. Auginaush v. Medure, No. 12-0256, 2012 WL 5990274 (Minn. Ct. App. Dec. 3, 2012). ↑

47. Nat’l Farmers Union, 471 U.S. at 857 n. 21. ↑

48. Nevada v. Hicks, 533 U.S. 353, 369 (2001); Strate v. A-1 Contractors, 520 U.S. 438, 459 n. 14 (1997). ↑

49. El Paso Natural Gas v. Neztsosie, 526 U.S. 473 (1999). ↑

50. Miranda Martinez helped to research and summarize the cases in this section. Miranda is a rising third-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2023. ↑

51. Stanko v. Ogala Sioux Tribe, No. 22-1266, 2022 WL 1499817, at *1 (8th Cir. May 12, 2022). ↑

52. Id. (quoting Strate v. A-1 Contractors, 520 U.S. 438, 459 (1997)). ↑

53. 25 U.S.C. § 450 (2000). ↑

54. See Santa Clara Pueblo v. Martinez, 436 U.S. 49, 57–58 (1978). ↑

55. Tribal immunity can be abolished via federal statute. Alvarado v. Table Mountain Rancheria, 509 F.3d 1008, 1015–16 (9th Cir. 2007) (“[The] cornerstone of federal subject matter jurisdiction is statutory authorization.”); E.F.W. v. St. Stephen’s Indian High School, 264 F.3d 1297, 1302 (10th Cir. 2001) (“Tribal sovereign immunity is a matter of subject matter jurisdiction.”); McClendon v. United States, 885 F.2d 627, 629 (9th Cir. 1989) (“The issue of sovereign immunity is jurisdictional in nature.”). Tribal immunity can be voluntarily waived. Kiowa Tribe of Okla. v. Mfg. Techs., 523 U.S. 751, 755–56 (1998); Filer v. Tohono O’odham Nation Gaming Enters., 129 P.3d 78, 83 (Ariz. Ct. App. 2006) (applying for a liquor license did not waive the tribe’s sovereign immunity); Seminole Tribe of Fla. v. McCor, 903 So. 2d 353, 359-60 (Fla. Dist. Ct. App. 2005) (purchasing liability insurance is not a clear waiver of a tribe’s sovereign immunity); Furry v. Miccosukee Tribe of Indians of Fla., 685 F.3d 1224, 1234 (11th Cir. 2012) cert. denied, 133 S. Ct. 663, 184 L. Ed. 2d 462 (U.S. 2012) (tribe did not waive its immunity from private tort actions by applying for a state liquor license). ↑

56. Plains Commerce Bank v. Long Family Land & Cattle, 554 U.S. 316 (2008). ↑

57. Id. ↑

58. Kiowa Tribe, 523 U.S. at 760. The U.S. Constitution provides a basis for suits to enforce state election and campaign finance laws. The U.S. Supreme Court has yet to take a position on this matter. ↑

59. Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978). ↑

60. Id.; United States v. Oregon, 657 F.2d 1009, 1013 (9th Cir. 1981); Filer, 129 P.3d at 86; Bellue v. Puyallup Tribe of Indians, No. 94-3045 (Puyallup 1994); Colville Tribal Enter. v. Orr, 5 CCAR 1 (Colville Confed. 1998). ↑

61. Miccosukee Tribe of Indians v. Tein, 2017 Fla. App. LEXIS 11442 (Fla. App. August 9, 2017) (holding that evidence of vexatious and bad faith litigation did not amount to a waiver of immunity “even where the results are deeply troubling, unjust, unfair, and inequitable”). ↑

62. In re Greektown Holdings, LLC, No. 12-12340, 2012 WL 4484933 (E.D. Mich. Sept. 27, 2012), aff’d, 728 F.3d 567 (6th Cir. 2013) (holding that for Congress to waive the tribe’s immunity the waiver must be “express, unequivocal, unmistakable, unambiguous, clearly evident in statutory language, and allow the Court to conclude with perfect confidence that Congress intended to waive sovereign immunity”). See also Demontiney v. United States ex rel. Bureau of Indian Affairs, 255 F.3d 801, 811 (9th Cir. 2001); Sanchez v. Santa Ana Golf Club, Inc., 104 P.3d 548, 551 (N.M. Ct. App. 2004) (reasoning that ambiguity within an immunity waiver should be interpreted in favor of the Tribe). ↑

63. Contour Spa at the Hard Rock, Inc. v. Seminole Tribe of Fla., 692 F.3d 1200, 1206 (11th Cir. 2012) cert. denied, 133 S. Ct. 843 (2013) (holding Indian tribe’s removal of action to federal court did not waive its sovereign immunity). But see Guidiville Rancheria of California v. United States, 2017 U.S. App. LEXIS 14394 (9th Cir. August 4, 2017) (holding that raising the issue of attorneys’ fees in the first instance was sufficient to constitute a waiver of the Tribe’s right to claim sovereign immunity when defendant subsequently claimed for fees against the tribe). ↑

64. Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978) (internal quotation marks and citations omitted); see also Gilbertson v. Quinault Indian Nation, 495 F. App’x 779 (9th Cir. 2012) (holding language in the Quinault Indian Nation’s employee handbook indicating that employees were protected by Title VII was not a sufficiently clear waiver of the Nation’s sovereign immunity). ↑

65. See, e.g., Memphis Biofuels, L.L.C. v. Chickasaw Nation Indus., Inc., 585 F.3d 917 (6th Cir. 2009) (holding that the presence of a sue-and-be-sued clause in the charter of a tribal corporation, alone, was “insufficient” to waive the corporation’s immunity because it made approval by the corporation’s board of directors a prerequisite to legal action by the corporation); accord Ninigret Dev. Corp v. Narragansett Indian Wetuomuck Hous. Auth, 201 F.3d 21, 30 (1st Cir. 2000) (holding that “the enactment of such an ordinance . . . does not waive a tribe’s sovereign immunity [where the ordinance] authorize[d] the [tribal corporation] to shed its immunity ‘by contract’” because “these words would be utter surplusage if the enactment of the ordinance itself served to perfect the waiver”); cf. Rosebud Sioux Tribe v. Val-U Constr. Co., 50 F.3d 560, 562 (8th Cir. 1995) (holding that the mere presence of an arbitration provision in the agreement represented a waiver of immunity from a judgment being enforced in federal court). ↑

66. 532 U.S. 411 (2001). ↑

67. Id. at 418; see Trump Hotels and Casino Resorts Dev. Co. v. Rosow, No. X03CV034000160S, 2005 Conn. Super. LEXIS 1224, at *41 (Conn. Super. Ct. May 2, 2005) (concluding that the tribe “clearly and unequivocally waived sovereign immunity” in its contract). ↑

68. C & L Enterprises, 532 U.S. at 415–16. ↑

69. Id. at 423. ↑

70. Calvello v. Yankton Sioux Tribe, 584 N.W.2d 108, 114 (S.D. 1998) (holding that the chairman of the tribal business committee did not have authority to waive immunity); see also Sandlerin v. Seminole Tribe of Fla., 243 F.3d 1282, 1286–87 (11th Cir. 2001) (reasoning that the tribal chief did not have authority to waive the tribe’s immunity through contract where the tribal code provided procedure for effecting a waiver); Chance v. Coquille Indian Tribe, 963 P.2d 638, 639 (Or. 1998) (reasoning that the tribal corporation president did not have authority to bind the corporation to a contract waiving tribal immunity); Harris v. Lake of the Torches Resort and Casino, 363 Wis. 2d 656 (2015) (holding that a third-party workers compensation administrator lacked the authority to waive the tribe’s immunity). But see Rush Creek Solutions, Inc. v. Ute Mountain Ute Tribe, 107 P.3d 402, 407 (Colo. App. 2004) (holding that the tribal chief financial officer had apparent authority to waive immunity when the tribal law was silent). ↑

71. Maxwell Herath helped to research and summarize the cases in this section. Maxwell is a

    rising third-year law student at Moritz College of Law, The Ohio State University, and expects to graduate in May 2023. ↑

72. 509 F.3d 1008, 1015–16 (9th Cir. 2007). ↑

73. 116 F.3d 1315, 1324 (10th Cir. 1997). ↑

74. Davila v. United States, 713 F.3d 248, 264 (5th Cir. 2013). ↑

75. See 28 U.S.C. § 2671. ↑

76. Id. ↑

77. Lewis v. Clarke, 137 S. Ct. 1285, 1292 (2017). ↑

78. Id. ↑

79. 11 U.S.C. § 101(27) (emphasis added). ↑

80. 25 U.S.C. §§ 461–79 (2000). ↑

81. Id. § 476. ↑

82. Id. § 477. ↑

83. Id. ↑

84. Id. ↑

85. See Jack F. Williams, Integrating American Indian Law into the Commercial Law and Bankruptcy Curriculum, 37 Tulsa L. Rev. 557, 562–63 (2001). ↑

86. Id. at 563. ↑

87. Id. ↑

88. Native American Distrib. v. Seneca-Cayuga Tobacco Co., 546 F.3d 1288, 1295 (10th Cir. 2008) (holding that, because the tribal enterprise was not a corporation with a “sue-and-be-sued clause,” the tribal enterprise was immune from suit, as it did not explicitly waive its sovereign immunity). C.f. Grand Canyon Skywalk Dev. LLC v. Cieslak, 2015 U.S. Dist. LEXIS 73186 (D. Nev. June 5, 2015) (holding that, while sovereign immunity may protect the tribal corporation, it does not extend to an employee of the tribal corporation to allow the employee to refuse to comply with a federal subpoena). ↑

89. See Seaport Loan Products v. Lower Brule Community Development Enterprise LLC, 2013 NY slip op. 651492/12 [Sup Ct. NY County 2013] (concluding that an independent, state-incorporated, for-profit tribal enterprise that was principally operating in the financial services markets, with separate assets, liabilities, purposes, and goals could not claim immunity); Arrow Midstream Holdings v. 3 Bears Construction LLC, 873 N.W.2d 16 (N.D. 2015) (holding that a corporation wholly owned by tribal members but incorporated under state law was a non-member entity for the purposes of litigation and therefore subject to state jurisdiction). ↑

90. Savannah Wix helped to research and summarize the cases in this section. Savannah is a rising third-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2023. ↑

91. Uniband, Inc. v. Comm’r of Internal Revenue, 140 T.C. 230, 262–63 (T.C. 2013). ↑

92. Cully Corp. v. United States, 160 Fed. Cl. 360, 376 (Fed. Cl. 2022) (quoting 41 C.F.R. § 102-75.990). ↑

93. Id. at 375 (internal quotation marks omitted). ↑

94. Id. at 376–77 (quoting 41 C.F.R. § 102-71.20) (internal quotation marks omitted). ↑

95. Id. at 383. ↑

96. 25 U.S.C. § 463 (2000) (transferred to 25 U.S.C. § 5103); see TOMAC v. Norton, 433 F.3d 852, 866–67 (D.C. Cir. 2006) (upholding Congress’s delegation of power to the Secretary to acquire land in trust for the tribe under § 1300j-5). ↑

97. Carcieri v. Salazar, 555 U.S. 379 (2009). ↑

98. Id. at 386. ↑

99. Record of Decision, Trust Acquisition of, and Reservation Proclamation for the 151.87-acre Cowlitz Parcel in Clark County, Washington, for the Cowlitz Indian Tribe (Dec. 2010), https://www.standupca.org/off-reservation-gaming/Cowlitz%20Record%20of%20Decision%2012-17-2010.pdf/at_download/file. The Cowlitz Indian Tribe was not federally-recognized until 2002, but, in 2010, the BIA nonetheless approved a fee-to-trust application, determining that the tribe was “under Federal Jurisdiction” in 1934, even though the federal government did not believe so at that time. Id. The D.C. District Court upheld the BIA’s Record of Decision, Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 75 F. Supp. 3d 387 (D.D.C. 2014) and the D.C. Circuit upheld the District Court, Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 830 F.3d 552 (D.C. Cir. 2016); see also Record of Decision, Trust Acquisition and Reservation Proclamation for 151 Acres in the City of Taunton, Massachusetts, and 170 Acres in the Town of Mashpee, Massachusetts, for the Mashpee Wampanoag Tribe (Sept. 2015), https://www.bia.gov/sites/bia.gov/files/assets/public/oig/pdf/idc1-031724.pdf. Although the Interior Department did not federally acknowledge the Mashpee Wampanoag Tribe until 2007, Interior applied M-37029 Memorandum’s two-part test to determine that the Tribe was “under federal jurisdiction” in 1934, which provided the legal basis for the trust acquisition outlined in the 2015 Record of Decision and circumvented the Tribe’s Carcieri issues. However, the District Court of Massachusetts rejected the Secretary’s interpretation and has returned the decision to take land into trust on behalf of the Mashpee to the Secretary of Interior. Littlefield v. U.S. Dept. of Interior, 2016 U.S. Dist. LEXIS 98732 (D. Mass. July 28, 2016). ↑

100. BIA Weighs Land-Into-Trust after Supreme Court Ruling, (Mar. 26, 2009) https://www.indianz.com/News/2009/03/26/bia_weighs_landintotrust_after.asp (last visited Nov. 3, 2022). ↑

101. See, e.g., Stand Up for California! v. U.S. Dep’t of the Interior, 204 F. Supp. 3d 212 (D.D.C. 2016) (challenging the Department’s fee-to-trust decision for the benefit of the North Fork Rancheria of Mono Indians on the basis that the tribe wasn’t a “federally-recognized tribe under jurisdiction” in 1934 as required under Carcieri). ↑

102. Memorandum from Hilary C. Tompkins, U.S. Dep’t of the Interior, Office of the Solicitor, to Sally Jewell, Secretary of the Interior, U.S. Dep’t of the Interior (Mar. 12, 2014) https://www.doi.gov/sites/doi.opengov.ibmcloud.com/files/uploads/M-37029.pdf (hereinafter “M-37029 Memorandum”). ↑

103. Id. ↑

104. Id. ↑

105. 850 F.3d 552 (D.C. Cir. 2016). ↑

106. \132 S.Ct. 2199 (2012). ↑

107. 5 U.S.C. §§ 551–59. ↑

108. 28 U.S.C. § 2409a. ↑

109. The decision thus did not upset the rule that the “QTA provides the exclusive remedy for claims involving adverse title disputes with the government.” McMaster v. United States, 731 F.3d 881, 899 (9th Cir. 2013). ↑

110. The statute of limitations under the APA is six years. See, e.g., Cachil Dehe Band of Wintun Indians of Colusa Indian Cmty. v. Salazar, No. 12-3021, 2013 WL 417813, at *4 (E.D. Cal. Jan. 30, 2013) (holding that under Patchak, “federal district courts do have the power to strip the federal government of title to land taken into trust for an Indian tribe under the APA so long as the claimant does not assert an interest in the land.”). ↑

111. Land Acquisitions: Appeals of Land Acquisitions, 78 Fed. Reg. 67,928, 67,929 (Nov. 13, 2013) (codified at 25 C.F.R. pt. 151). ↑

112. See 25 C.F.R. § 2.6(c). ↑

113. See 25 C.F.R. Part 2. ↑

114. Id. ↑

115. See 25 C.F.R. § 2.9. ↑

116. Courtney Moore helped to research and summarize the cases in this section. Courtney is a rising second-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2024. ↑

117. Cnty. of Amador, 872 F.3d at 1020–31. ↑

118. Id. at n.5. ↑

119. Birdbear, No. 16-75L at *4 (quoting United States v. Navajo Nation (“Navajo I”), 537 U.S. 488, 506 (2003)) (internal quotation marks omitted). ↑

120. Id. (citing United States v. Navajo Nation (“Navajo II”), 556 U.S. 287, 290–91 (2009)). ↑

121. Id. (quoting Navajo I, 537 U.S. at 506). ↑

122. Id. (quoting U.S. v. Mitchell, 463 U.S. 206, 218 (1983)). ↑

123. Id. at *8 (internal quotation marks omitted). ↑

124. Id. at *3–9. ↑

125. Id. at *9. ↑

126. Id. at *3–6, *9–10. ↑

127. 25 U.S.C. § 81 (2000) (Section 81). For a list of contracts that are exempt from secretarial approval, see 25 C.F.R. § 84.004 (2008). ↑

128. 25 C.F.R. § 84.004. ↑

129. Id. ↑

130. 25 U.S.C. § 81. ↑

131. Id. § 415. ↑

132. Id. § 81. ↑

133. The approval process for alternative energy projects on tribal lands has been particularly burdensome. See Ryan Dreveskracht, The Road to Alternative Energy in Indian Country: Is It a Dead End?, 19 Indian L. Newsl. 3 (2011). For a jurisdictional analysis of the complications created by real property transactions in Indian Country see Grant Christensen, Creating Brightline Rules for Tribal Court Jurisdiction Over Non-Indians: The Case of Trespass to Real Property, 35 Am. Indian L. Rev. 527 (2011). ↑

134. Outsource Servs. Mgmt., LLC. v. Nooksack Bus. Corp., 198 Wash. App. 1032 (2017) (tribal business defaulted on a $15 million loan secured by future profits generated from tribal land on which the tribe intended to build a casino. When the tribe subsequently used the land—not for a casino but for other revenue raising operations—the creditor sought those profits to satisfy the loan obligation. The tribe claimed that the Creditor’s attempt would unlawfully encumber their lands in violation of 25 U.S.C. 81. The court disagreed, holding that “[t]he pledged security is not a legal interest in the land itself. Nor does [creditor]’s right interfere with the tribe’s exclusive proprietary control over the land” and that “[b]ecause the tribe retains complete control over the casino building and property and can use the facilities for any purpose, there is no encumbrance for purposes of Section 81, and thus the agreements did not require preapproval.”). ↑

135. 25 U.S.C. §§ 2701–21 (1988). The jurisdictional and regulatory powers of the NIGC have received criticism in several court decisions. In October 2006, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the IGRA did not confer authority upon the NIGC to promulgate operational control regulations for Class III gaming operations. See Colo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 466 F.3d 134, 140 (D.C. Cir. 2006); Colo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 383 F. Supp. 2d 123, 137 (D.D.C. 2005). The Colorado River Indian Tribes cases are significant because some Indian tribes have interpreted the trial court’s decision to mean that the NIGC has no regulatory authority whatsoever over Class III gaming. Indeed, in the wake of the decision, several tribes advised the NIGC that they believe the decision strips the NIGC of all regulatory power over Class III gaming and therefore will not permit any NIGC auditors or other oversight into their casinos. As a result, the NIGC filed a petition for a panel rehearing in late December 2006. This petition was denied per curiam on Dec. 27, 2007. Colo. River Indian Tribes, 466 F.3d 134 (denying the motion for rehearing). ↑

136. 25 U.S.C. § 2711; First Am. Kickapoo Oper. v. Multimedia Games, Inc., 412 F.3d 1166, 1172 (10th Cir. 2005); United States v. President, 451 F.3d 44, 50 n.5 (2d Cir. 2006). ↑

137. 25 U.S.C. § 264 (1882); 25 C.F.R. §§ 140–41 (1996). “Trading” is broadly defined as “buying, selling, bartering, renting, leasing, permitting and any other transaction involving the acquisition of property or services.” 25 C.F.R. § 140.5(a)(6) (1984). For an example of tribal business license requirements, see Navajo Nation Code, 5 N.N.C. § 401, et seq. (2005). ↑

138. See 25 C.F.R. § 140.3. Dahlstrom v. Sauk-Suiattle Indian Tribe, NO. C16-0052JLR, 2017 U.S. Dist. LEXIS 40654 (W.D. Wash. March 21, 2017) (a former employee brought a qui tam action against the tribe and against a medical clinic for filing false claims through the Indian Health Service (IHS)). The court barred the action against the tribe; “Like a state, a Native American tribe ‘is a sovereign that does not fall within the definition of a ‘person’ under the FCA.’” However, the court held that the medical clinic was not “an arm of the tribe” and so it was ineligible to claim sovereign immunity. ↑

139. Pub. L. No. 112-151 (2012). ↑

140. Any failure of a federal agency to complete its obligations in relation to Indian lands can be catastrophic to businesses operating under federal permits. See, e.g., Tribe v. U.S. Forest Serv., No. 13-0348, 2013 WL 5212317 (D. Idaho Sept. 12, 2013). ↑

141. 25 C.F.R. § 162. ↑

142. United States Department of Interior, Approved Hearth Act Regulation, https://www.bia.gov/service/HEARTH-Act/approved-regulations (last visited Nov. 3, 2022). ↑

143. Cynthia Murrieta helped to research and summarize the cases in this section. Cynthia is a rising second year law student at the William S. Boyd School of Law, University of Nevada – Las Vegas, and expects to graduate in May 2024. ↑

144. Against the Federal Defendants: United States Department of the Interior (“DOI”); Bryan Newland, in his official capacity as Assistant Secretary—Indian Affairs; and Darryl LaCounte, in his official capacity as Director of the Bureau of Indian Affairs (“BIA”). Kiowa Tribe v. United States Dep’t of the Interior, No. CIV-22-425-G, 2022 WL 1913436, at *1 (W.D. Okla. June 3, 2022). ↑

145. Against the FSA Defendants who are each sued in both their individual and official capacities: Lori Gooday Ware, Fort Sill Apache Tribe (“FSAT”) Chairwoman; Pamela Eagleshield, FSAT Vice-Chairman; James Dempsey, FSAT Secretary-Treasurer; FSAT Committee Members Jeanette Mann, Jennifer Heminokeky, and Dolly Loretta Buckner; Philip Koszarek, FSAGC (“Fort Sill Apache Gaming Commission”) Chairman; Naomi Harford, FSAGC Vice-Chairman; and FSAGC Commissioners Michael Crump, Lauren Pinola, and Debbie Baker. Kiowa, 2022 WL 1913436, at *1. ↑

146. Against FSA Defendants. ↑

147. 25 U.S.C. § 2710(d)(1)(A)(i), (d)(2)(A); see also id. §§ 2710(b)(2), (d)(1)(A)(ii). ↑

148. Cnty. of Amador v. United States Dep’t of the Interior, 872 F.3d 1012 (9th Cir. 2017). ↑

149. In County of Amador, the Ninth Circuit considered two challenges to the same 2012 ROD at issue in the present case, based on whether: (1) the Tribe qualified to have land taken into trust for its benefit under the IRA; and (2) the Tribe may conduct gaming on the parcels pursuant to IGRA. Id. As a preliminary matter, the court affirmed Laverdure “was empowered to take the Plymouth Parcels into trust” and therefore had the authority to approve the ROD. Id. Then, the Ninth Circuit held “the Band is a recognized Indian tribe that was ‘under Federal jurisdiction’ in 1934, and [DOI] did not err in concluding that the Band is eligible to have land taken into trust on its behalf under 25 U.S.C. § 5108.” Id. With respect to recognition under 25 C.F.R. Part 83, the court stated, “the Band was effectively recognized without having to go through the Part 83 process” because “a tribe could be ‘restored’ to Federal recognition outside the Part 83 process.” Id. Thus, as a federally recognized Tribe, the court held DOI “did not err in allowing the Band to conduct gaming operations on the Plymouth Parcels” in accordance with IGRA. Id. ↑

150. Fla. Stat. § 849.14. ↑

151. In August 2002, the Estom Yumeka Tribe of the Enterprise Rancheria (“Tribe”) applied to the Department of Interior (the “Department”) to have the Yuba Parcel taken into trust for the purposes of constructing a casino, hotel, and related infrastructure pursuant to the IRA. They were successful in their application and the Yuba Parcel was taken into federal trust for the Tribe on May 14, 2013. The California legislature took no action toward ratifying the gaming compact during 2013 or early 2014, and the compact became ineligible for legislative ratification by its own terms on July 1, 2014. The Tribe then filed suit under 25 U.S.C. § 2710(d)(7)(A)(i) of the IGRA’s remedial scheme.

     In that action, this Court ordered the State and the Tribe to proceed under 25 U.S.C. § 2710(d)(7)(B)(iii) to conclude a gaming Compact within 60 days. The parties failed to do so, which triggered IGRA’s requirement that the parties submit to a court-appointed mediator. The mediator found the Tribes’ proposed Compact best comported with IGRA and forwarded it to the State for its consent. The State failed to consent within the IGRA-mandated 60 days, and the Tribe’s Compact was then submitted to the Secretary. On August 12, 2016, the Secretary issued Secretarial Procedures prescribing the parameters under which the Tribe may conduct Class III gaming activities on the Yuba Parcel. ↑

152. 959 F.3d 1142, 1145 (9th Cir. 2020), cert. denied, sub nom. Club One Casino, Inc. v. Haaland, 141 S. Ct. 2792 (2021). ↑

153. Id. ↑

154. Fl. Stat. § 849.14 (2020). ↑

155. Michigan v. Bay Mills Indian Cmty., 572 U.S. 782, 795 (2014). ↑

156. 5 U.S.C. § 706(2)(A). ↑

157. See 25 U.S.C. § 2710(d)(1)(C) (providing that “[c]lass III gaming activities shall be lawful on Indian lands only if . . . [they are] conducted in conformance with a Tribal-State compact . . . that is in effect”). ↑

158. Under the Indian Gaming Regulatory Act (IGRA), 25 U.S.C. § 2701 et seq., Indian tribes must enter a compact with the state in order to conduct high-stakes Las Vegas-style casino gambling, known as Class III gaming. ↑

159. The list includes: “(i) the application of the criminal and civil laws and regulations of the Indian tribe or the State that are directly related to, and necessary for, the licensing and regulation of such activity; (ii) the allocation of criminal and civil jurisdiction between the State and the Indian tribe necessary for the enforcement of such laws and regulations; (iii) the assessment by the State of such activities in such amounts as are necessary to defray the costs of regulating such activity; (iv) taxation by the Indian tribe of such activity in amounts comparable to amounts assessed by the State for comparable activities; (v) remedies for breach of contract; (vi) standards for the operation of such activity and maintenance of the gaming facility, including licensing; and (vii) any other subjects that are directly related to the operation of gaming activities.” 25 U.S.C. § 2710(d)(3)(C). ↑

160. See, e.g., Middletown Rancheria of Pomo Indians v. Workers’ Comp. Appeals Bd., 71 Cal. Rptr. 2d 105, 114–15 (Cal. Ct. App. 1998) (holding that the Workers’ Compensation Board has no jurisdiction over tribe); Tibbets v. Leech Lake Reservation Bus. Comm’n, 397 N.W.2d 883, 890 (Minn. 1986) (holding Minnesota workers’ compensation law inapplicable to tribal employer); see generally New Mexico v. Mescalero Apache Tribe, 462 U.S. 324, 332-33 (1983) (discussing applicability of state laws to tribes). ↑

161. See generally Steven G. Biddle, Indian Law Theme Issue: Labor and Employment Issues for Tribal Employers, 34 Ariz. Att’y 16 (1998) (discussing the applicability of federal labor and employment laws to tribal employers); but see State ex rel. Indus. Comm’n v. Indian Country Enters., Inc., 944 P.2d 117 (Idaho 1997) (applying 40 U.S.C. § 290 to require the application of state workers’ compensation laws to tribal companies incorporated under state law); State i Workforce Safety & Ins. v. J.F.K. Raingutters, 733 N.W.2d 248, 253–54 (N.D. 2007) (same); Martinez v. Cities of Gold Casino, Pojoaque Pueblo, and Food Industries Self-Insurance Fund, No. 28,762, slip op. at ¶ 27 (N.M. Ct. App. filed Apr. 24, 2009) (holding that a tribal corporation waived immunity from claims brought under the Workers’ Compensation Act by voluntarily complying with other provisions of the act and submitting to the jurisdiction of the Workers’ Compensation Administration). ↑

162. 42 U.S.C. §§ 2000e–2000e-17 (1991). Bruguier v. Lac du Flambeau Band of Lake Superior Chippewa Indians, 237 F. Supp. 3d 867 (W.D. Wis. 2017) (“Title VII expressly does not authorize suits against tribes; “the term employer . . . does not include . . . an Indian tribe . . . .”). ↑

163. Id. §§ 12101–17 (1990). ↑

164. Id. §§ 2000e(b)(1), 12111(5). Additionally, discrimination based on tribal affiliation is often not considered unlawful national origin discrimination. See, e.g., E.E.O.C. v. Peabody W. Coal Co., No. 12-17780, 2014 WL 6463162 (9th Cir. Nov. 19, 2014) (discrimination based on tribal affiliation as it relates to lease agreements containing a Navajo reference in hiring provision does not constitute unlawful national origin discrimination but is a political classification and, thus, not within the scope of Title VII of the Civil Rights Act). See also Morton v. Mancari, 417 U.S. 535 (1974) (holding that the United States Department of Interior may affirmatively hire and promote American Indians because the preference is based on a political classification (membership in a federally recognized tribe) and not a racial classification and is, therefore, subject only to rational basis scrutiny to avoid constitutional challenge). ↑

165. See, e.g., ARIZ. REV. STAT. ANN. § 41-1464 (2005) (exempting tribes from Arizona’s discrimination laws). Even if a state’s antidiscrimination laws do not provide an express exemption, the doctrine of sovereign immunity will ordinarily operate to achieve the same effect. See Sanchez v. Santa Ana Golf Club, Inc., 104 P.3d 548, 554 (N.M. Ct. App. 2004) (affirming dismissal of employee’s state law discrimination claim based on tribal employer’s sovereign immunity); see also Aroostook Band of Micmacs v. Ryan, 404 F.3d 48, 67–68 (1st Cir. 2005) (discussing the probable inapplicability of state antidiscrimination laws to a tribal employer). ↑

166. See Hardin v. White Mountain Apache Tribe, 779 F.2d 476, 479 (9th Cir. 1985) (extending the tribe’s sovereign immunity to tribal officials acting in a representative capacity). ↑

167. 29 U.S.C. §§ 651–78 (1998). ↑

168. Id. §§ 1001-61. Congress amended ERISA in 2006 to apply Indian tribal commercial enterprises, but tribal governments remain exempt. 29 U.S.C. §§ 1002(32) (as amended by Pension Protection Act of 2006, 29 U.S.C. § 1002(32)). ↑

169. Id. §§ 201–19. ↑

170. Id. §§ 151–69. ↑

171. Id. §§ 621–34. ↑

172. N.L.R.B. v. Pueblo of San Juan, 276 F.3d 1186, 1200 (10th Cir. 2002) (holding NLRA inapplicable to tribes); E.E.O.C. v. Fond du Lac Heavy Equip. & Const. Co., 986 F.2d 246, 248 (8th Cir. 1993) (refusing to apply the ADEA to an Indian employed by the tribe); Donovan v. Navajo Forest Prods. Indus., 692 F.2d 709, 712 (10th Cir. 1982) (holding OSHA inapplicable to the tribe partly because enforcement “would dilute the principles of tribal sovereignty and self-government recognized in the treaty”). ↑

173. Menominee Tribal Enter. v. Solis, 601 F.3d 669 (7th Cir. 2010) (applying OSHA); Lumber Indus. Pension Fund v. Warm Springs Forest Prods. Indus., 939 F.2d 683, 683 (9th Cir. 1991) (applying ERISA); U.S. Dep’t of Labor v. OSHA Rev. Comm’n, 935 F.2d 182, 182 (9th Cir. 1991) (applying OSHA); Smart v. State Farm Ins., 868 F.2d 929, 935 (7th Cir. 1989) (stating the “argument that ERISA will interfere with the tribe’s right of self-government is over-broad,” and applying ERISA); Donovan v. Coeur d’Alene Tribal Farm, 751 F.2d 1113, 1116-17 (9th Cir. 1985) (right of self-government is too broad to defeat applicability of OSHA); see also Reich v. Mashantucket Sand & Gravel, 95 F.3d 174 (2d Cir. 1996) (following Ninth and Seventh Circuits to apply OSHA). ↑

174. See, Reich v. Great Lakes Indian Fish and Wildlife Comm’n, 4 F.3d 490, 493-94 (7th Cir. 1993) (holding that the tribe’s law enforcement officers were exempt from FLSA, but noting that not all employees of tribes are exempt); Solis v. Matheson, 563 F.3d 425, 434-35 (9th Cir. 2009) (applying FLSA to retail business on tribal land because business did not involve tribal self-governance and was not protected by treaty rights). ↑

175. Reich, 4 F.3d at 493-94; Lumber Indus. Pension Fund, 939 F.2d at 683; U.S. Dept. of Labor, 935 F.2d at 182; Smart, 868 F.2d at 935; Donovan, 751 F.2d at 1113; see also Mashantucket Sand & Gravel, 95 F.3d at 174. ↑

176. 29 U.S.C. §§ 2601–54 (1993). ↑

177. The Family and Medical Leave Act of 1993, 60 Fed. Reg. 2180 (Jan. 6, 1995). ↑

178. Casino Pauma v. NLRB, 888 F.3d 1066 (9th Cir. 2018). ↑

179. Chayoon v. Chao, 355 F.3d 141, 142-43 (2d Cir. 2004); Garcia v. Akwesasne Hous. Auth., 268 F.3d 76, 84–86 (2d Cir. 2001). ↑

180. Cf. Multimedia Games, Inc. v. WLGC Acquisition Corp., 214 F. Supp. 2d 1131, 1131 (N.D. Okla. 2001) (holding that the federal Copyright Act of 1976 was inapplicable to tribes). ↑

181. Lucinda Iheaso helped to research and summarize the cases in this section. Lucinda is a rising third-year law student at Southern University Law Center in Baton Rouge, Louisiana, and expects to graduate in May 2023. ↑

182. Mashantucket Pequot Gaming Enter. v. Scheller, CV-AA-2013-109, 2014 WL 465814, at *3 (Mash. Pequot Tribal Ct. Jan. 28, 2014) (quoting Mashantucket Pequot Gaming Enterprise v. Christison, 6 Mash.Rep. 41, 46 (2013). ↑

183. 28 U.S.C. § 1331 (“Federal Question: The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.”). ↑

184. Id. § 1332 (“Diversity of Citizenship: The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between—(1) citizens of different states . . . .”). ↑

185. See Peabody Coal Co. v. Navajo Nation, 373 F.3d 945, 945 (9th Cir. 2004) (dismissing a complaint against the Navajo Nation that sought enforcement of an arbitration agreement for lack of federal question jurisdiction); accord, TTEA v. Ysleta Del Sur Pueblo, 181 F.3d 676, 681 (5th Cir. 1999) (“The federal courts do not have jurisdiction to entertain routine contract actions involving Indian tribes.”); Gila River Indian Cmty. v. Henningson, Durham & Richardson, 626 F.2d 708, 714–15 (9th Cir. 1980) (finding “no reason to extend the reach of the federal common law to cover all contracts entered into by Indian tribes”). See also Burlington N. & Santa Fe Ry. Co. v. Vaughn, 509 F.3d 1085, 1089 (9th Cir. 2007) (holding that a federal court may review a denial of sovereign immunity by interlocutory appeal). ↑

186. See Ysleta Del Sur Pueblo, 181 F.3d at 681 (holding that “an anticipatory federal defense is insufficient for federal jurisdiction”). ↑

187. See Payne v. Miss. Band of Choctaw Indians, 159 F. Supp. 3d 724, 726-27 (S.D. Miss. 2015); Am. Vantage Cos. v. Table Mountain Rancheria, 292 F.3d 1091, 1095 (9th Cir. 2002); Akins v. Penobscot Nation, 130 F.3d 482, 485 (1st Cir. 1997); Romanella v. Hayward, 114 F.3d 15, 16 (2d Cir. 1997); Gaines v. Ski Apache, 8 F.3d 726, 728–29 (10th Cir. 1993); Oneida Indian Nation v. Cnty. of Oneida, 464 F.2d 916, 923 (2d Cir. 1972), rev’d and remanded on other grounds, 414 U.S. 661 (1974); Standing Rock Sioux Indian Tribe v. Dorgan, 505 F.2d 1135, 1040–41 (8th Cir. 1974); Tenney v. Iowa Tribe of Kan., 243 F. Supp. 2d 1196, 1198 (D. Kan. 2003); Victor v. Grand Casino-Coushatta, No. 02-2348, 2003 U.S. Dist. LEXIS 24770, at *4 (D. La. Jan. 21, 2003); Worrall v. Mashantucket Pequot Gaming Enter., 131 F. Supp. 2d 328, 329-30 (D. Conn. 2001); Barker-Hatch v. Viejas Group Baron Long Capitan Grande Band of Digueno Mission Indians of the Viejas Group Reservation, 83 F. Supp. 2d 1155, 1157 (D. Cal. 2000); Abdo v. Fort Randall Casino, 957 F. Supp. 1111, 1112 (D.S.D. 1997); Calvello v. Yankton Sioux Tribe, 899 F. Supp. 431, 435 (D.S.D. 1995); Whiteco Metrocom Div. v. Yankton Sioux Tribe, 902 F. Supp. 199, 201 (D.S.D. 1995); Weeder v. Omaha Tribe of Neb., 864 F. Supp. 889, 898-99 (N.D. Iowa 1994); GNS, Inc. v. Winnebago Tribe, 866 F. Supp. 1185, 1191 (D. Iowa 1994). But see Cook, 548 F.3d at 723 (holding that, for diversity purposes, a tribal corporation is “a citizen of the state where it has its principal place of business”). Cf. R.J. Williams Co. v. Fort Belknap Hous. Auth., 719 F.2d 979, 982 (9th Cir. 1983) (stating that the tribal corporation had its principal place of business in Montana); R.C. Hedreen Co. v. Crow Tribal Hous. Auth., 521 F. Supp. 599, 602–03 (D. Mont. 1981) (stating that a tribal corporation had its principal place of business in Montana and “[a]ccordingly, it is a citizen of the state for purposes of diversity jurisdiction”); Parker Drilling Co. v. Metlakatla Indian Cmty., 451 F. Supp. 1127, 1138 (D. Alaska 1978) (“As [the tribal corporation’s] only major business activities, and situs, are located in Alaska, it is an Alaskan corporation for diversity purposes.”). ↑

188. See Inglish Interests LLC v. Seminole Tribe of Florida, 2011 U.S. Dist. LEXIS 6123 (M.D. Fla. January 21, 2011) (describing this split). ↑

189. Sean Howard helped to research and summarize the cases in Section 8.4.4. Sean is a rising third-year law student at the University of Illinois Chicago School of Law and expects to graduate in May 2023. ↑

190. Pursuant to 28 U.S.C. § 1362. ↑

191. 28 U.S.C. § 2283. ↑

192. 25 U.S.C.A. § 177. ↑

193. White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 143 (1980). ↑

194. Mescalero Apache Tribe v. Jones, 411 U.S. 145, 148–49 (1973); Cabazon Band of Mission Indians v. Smith, 388 F.3d 691, 694–95 (9th Cir. 2004). ↑

195. Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 101 (2005). ↑

196. There has been some question as to what exactly constitutes a tribally-owned corporation. The general rule is that “[a] subdivision of tribal government or a corporation attached to a tribe may be so closely allied with and dependent upon the tribe that it is effectively an arm of the tribe. It is then actually a part of the tribe per se” and is nontaxable. Uniband, Inc. v. C.I.R., 140 T.C. 230, 252 (U.S. Tax Ct. 2013) (quotation omitted). Although preemption of state taxes “is most assured for tribal corporations organized pursuant to federal or tribal law,” Cohen’s Handbook of Federal Indian Law § 8.06 (2012 ed.), “the mere organization of such an entity under state law does not preclude its characterization as a tribal organization as well.” Duke v. Absentee Shawnee Tribe of Okla. Housing Auth., 199 F.3d 1123, 1125 (10th Cir. 1999). ↑

197. Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 101 (2005); see also Bercier v. Kiga, 103 P.3d 232, 236 (Wash. Ct. App. 2004) (“[T]he State may not tax Indians or Indian tribes in Indian country . . . .”) (citing Wash. Admin. Code § 458-20-192(5)); Pourier v. S. D. Dept. of Revenue, 658 N.W.2d 395, 403 (S.D. 2003), aff’d in relevant part and rev’d in part on other grounds on reh’g, 674 N.W.2d 314 (S.D. 2004) (“If the legal incidence of a tax falls upon a Tribe or its members . . . the tax is unenforceable.”). See also Seminole Tribe of Florida v. Stranburg, 799 F.3d 1324, 1345–46 (11th Cir. 2015) (reaffirming the legal incidence test but determining that a gross receipts tax more properly fell on utility companies instead of the tribe and, therefore, the tax was not preempted). ↑

198. See McClanahan v. Ariz. State Tax Comm’n, 411 U.S. 164, 172-–73 (1973). ↑

199. Williams v. Lee, 358 U.S. 217, 220 (1959); but see 25 C.F.R. § 162.415(c) (“Any permanent improvements” on business leased Indian land “shall not be subject to any fee, tax, assessment, levy, or other such charge imposed by any State or political subdivision of a State, without regard to ownership of those improvements.”). See also California v. Cabazon Band of Mission Indians, 480 U.S. 202, 216 (1987) (“Decision in this case turns on whether state authority is pre-empted by the operation of federal law; and “[state] jurisdiction is pre-empted . . . if it interferes or is incompatible with federal and tribal interests reflected in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.”). ↑

200. Bracker, 448 U.S. at 143. ↑

201. Id. at 144; see also Aroostook Band of Micmacs v. Ryan, No. 03-0024, 2007 WL 2816183, at *4, *9–11 (D. Me. Sept. 27, 2007) (discussing whether federal law or state law affects the Aroostook Band, even though the tribe is exempt from state civil and criminal laws). ↑

202. New Mexico v. Mescalero Apache Tribe, 462 U.S. 324 (1983). ↑

203. Id. at 334. ↑

204. Id. at 344. ↑

205. 25 U.S.C. § 5108. ↑

206. Id. ↑

207. 448 U.S. 136, 144–45 (1980). ↑

208. White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 145 (1980). ↑

209. Cnty. of Yakima v. Confederated Tribes & Bands of Yakima Indian Nation, 502 U.S. 251, 257 (1992). ↑

210. Okla. Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 458 (1995). ↑

211. Id. at 459. ↑

212. Keweenaw Bay Indian Cmty. v. Naftaly, 452 F.3d 514, 530 (6th Cir. 2006) (concluding that “[a] treaty is not a federal statute or an act of Congress” for purposes of the Cnty. of Yakima v. Confederated Tribes & Bands of Yakima Indian Nation analysis). ↑

213. 140 S.Ct. 2452 (2020). ↑

214. Oklahoma Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 457 (1995). ↑

215. Id. ↑

Editor Emeritus and Editor

Contributors

§ 1.1. Introduction

The 2023 Recent Developments describes developments in business courts and summarizes significant cases from a number of business courts with publicly available opinions.^[2] There are currently functioning business courts of some type in cities, counties, regions, or statewide in twenty-five states: (1) Arizona; (2) Delaware; (3) Florida; (4) Georgia; (5) Illinois; (6) Indiana; (7) Iowa; (8) Kentucky; (9) Maine; (10) Maryland; (11) Massachusetts; (12) Michigan; (13) Nevada; (14) New Hampshire; (15) New Jersey; (16) New York; (17) North Carolina; (18) Ohio; (19) Pennsylvania; (20) Rhode Island; (21) South Carolina; (22) Tennessee; (23) West Virginia; (24) Wisconsin; and (25) Wyoming.^[3] States with dedicated complex litigation programs encompassing business and commercial cases, among other types of complex cases, include California, Connecticut, Minnesota, and Oregon.^[4] The California and Connecticut programs are expressly not business court programs as such.^[5]

§ 1.2. Recent Developments

§ 1.2.1. Business Court Resources

American College of Business Court Judges. The American College of Business Court Judges (ACBCJ) provides judicial education and resources, in terms of information and the availability of its member judges, to those jurisdictions interested in the development of business courts.^[6] The ACBCJ’s Seventeenth Annual Meeting took place in Glen Cove, New York from October 26, 2021, to October 28, 2022.^[7] Among other topics, the meeting addressed economic analysis for lawyers, discovery proportionality and cost allocation issues, bankruptcy law and mass tort litigation, the American Law Institute’s Restatement of the Law, Corporate Governance, scientific methodology and the admissibility of expert testimony, public nuisance litigation, and the management of ADR, expert witnesses and special masters in complex litigation.

Section, Committee, and Subcommittee Resources. The ABA Business Law Section provides a Diversity Clerkship Program that sponsors second year law students of diverse backgrounds in summer clerkships with business and complex court judges.^[8] The Section of Business Law Section has created a pamphlet, Establishing Business Courts in Your State, which is available among other resources in the online library for the Business and Corporate Litigation Committee’s community web page.^[9] The Business and Corporate Litigation Committee’s Subcommittee on Business Courts provides documents and/or hyperlinks to business court resources.^[10] This includes links to public sources and legal publications, as well as business court related materials and panel discussions presented at ABA Section of Business Law meetings. The Section’s Judges Initiative Committee also provides links to business court resources, such as annual meeting materials, articles relating to business court initiatives in various states, and other selected resources.^[11] The Section also has established a Business Courts Representatives (BCR) program,^[12] where a number of specialized business, commercial, or complex litigation judges are selected to participate in and support Section activities, committees, and subcommittees. These BCRs attend Section meetings, and many have become leaders within the Section. Judge Elizabeth Hazlitt Emerson of the Supreme Court of the State of New York Commercial Division and Judge John E. Jordan of Florida’s Ninth Judicial Circuit will serve as BCRs for the 2021-2023 term, and Judge Julianna Theall Earp of the North Carolina Business Court and Judge Anne C. Martin of the Chancery Court of Davidson County, Tennessee will serve as BCRs for the 2022-2024 term.^[13] Finally, this publication has included a chapter on updates and developments in business courts every year since 2004.

Other Resources. “The National Center for State Courts (NCSC) and the Tennessee Administrative Office of the Courts have developed an innovative training curriculum^[14] and faculty guide^[15] – along with practical tools – to help state courts establish and manage business court dockets more efficiently and effectively.”^[16] The Business Courts Blog^[17] aims to serve as a national library to those interested in business courts, with posts on past, present, and future developments. This includes posts on reports and studies going back twenty years,^[18] as well as recent developments in business courts. In 2022, there were articles and reports addressing some aspects of business courts.^[19] There are also various legal blogs with content relating to business courts in particular states.^[20]

§ 1.2.2. Developments in Existing Business Courts

§ 1.2.2.1. Cook County, Illinois Circuit Court Law Division Commercial Calendar

The Chicago business court, the Commercial Calendar Section of the Circuit Court of Cook County, issued an updated Uniform Standing Order, effective August 29, 2022.^[21] Among other items, the Uniform Standing Order covers scheduling, zoom appearances, motion procedures, requirements for briefs and citations, and a list of materials required to be exchanged before trial and then submitted to the court.

§ 1.2.2.2. Florida’s Complex Business Litigation Courts

As it was last year, Florida is lucky enough to have six circuit court divisions dedicated to resolving complex business litigation (“CBL”). Florida’s six CBL judges are spread across Orange County (Ninth Judicial Circuit), Miami-Dade County (Eleventh Judicial Circuit), Hillsborough County (Thirteenth Judicial Circuit), and Broward County (Seventeenth Judicial Circuit). The judges currently assigned to hear CBL cases are: Judge John E. Jordan (Division 2-43) in Orlando,^[22] Judges Michael A. Hanzman (Division 43) and Alan Fine (Division 44) in Miami,^[23] Chief Judge Jack Tuter (Division 07) and Judge Patti Englander Henning (Division 26) in Fort Lauderdale,^[24] and Judge Darren D. Farfante (Division L) in Tampa.^[25] Judge Fine was newly-assigned to a CBL division in 2022.

There are two upcoming changes to the Ninth Circuit’s CBL court, which it refers to as the “Business Court.” First, the Business Court is expanding to include an additional division in Osceola County, Florida, to complement the existing division in Orange County, Florida. This will bring Florida up to a total of seven circuit court divisions dedicated to CBL matters. Judge Jordan will preside over the new division initially. Second, the Business Court will likely see a new face next year upon the anticipated completion of Judge Jordan’s CBL term in 2023.^[26]

Cases may be directly filed or reassigned/transferred to a complex business division based on a number of factors, including: the nature of the case, complexity of the issues; complexity of discovery; number of parties in the case; and specific criteria enumerated by each circuit.

§ 1.2.2.3. State-wide Business Court in Georgia

Georgia’s inaugural judge for the State-wide Business Court, Judge Walter W. Davis, returns to private practice. After nearly three years of service, Judge Walter W. Davis, the first judge to serve on Georgia’s State-wide Business Court, resigned in June 2022.^[27] Nominated by Governor Brian P. Kemp in July 2019, Judge Davis was unanimously confirmed by the Judiciary Committees of both houses of the General Assembly.^[28] His initial term was set to last for five years.^[29]

The Georgia State-wide Business Court began accepting cases in August 2020, and at the time of Judge Davis’s resignation, 72 cases had been directly filed in, or transferred to, the Court. ^[30] Judge Davis explained that “[t]he vast majority (87%) of those cases involve[d] disputes between and among small businesses from 22 different counties across the State[.]”^[31] Judge Davis authored more than 130 substantive opinions during his time on the Bench.^[32] Judge Davis has now returned to private practice as a partner at the Atlanta office of Jones Day.^[33]

In August 2022, Governor Kemp appointed Judge William “Bill” Hamrick III to succeed Judge Davis at the Georgia State-wide Business Court.^[34] Judge Hamrick, who previously served on the Superior Court for the Coweta Judicial Circuit since 2012, was sworn into office on September 26, 2022.^[35]

§ 1.2.2.4. Iowa Business Specialty Court

Iowa Business Specialty Court will soon be evaluated by state court administration every two years. Starting in 2023, the Iowa Business Specialty Court will be evaluated by state court administration every two years.^[36] The evaluation is expected to ensure the court continues to accomplish its mission and to identify opportunities to improve its operations.^[37] The first report, which will be prepared in July 2023, will evaluate the court for calendar years 2021 and 2022.^[38] Subsequent reports will be prepared by the state court administration every two years.^[39]

§ 1.2.2.5. Maryland Business and Technology Court

Maryland revises General Corporation Law to codify method of ratification for defective corporate acts. On October 1, 2022, a new subtitle to the Maryland General Corporation Law (“MGCL”) became effective that sets forth a procedure by which corporations can retroactively ratify corporate acts that were defective at the time such acts were enacted. See Md. Code Ann., Corps. & Ass’ns §§ 2-701–707. This ratification subtitle applies to corporate acts that would have been in the corporation’s power to execute had there not been a defective aspect of the act’s adoption. Id. at § 701(d). These defective acts include, but are not limited to, the unauthorized issuance of stock, failure to adopt board resolutions approving a corporate action, and failure to file a required charter document with the State Department of Assessments and Taxation (“SDAT”). In order to ratify the defective act, the corporation’s board of directors must adopt a resolution that states: (1) what the defective corporate act is and whether it involved the issuance of putative stock; (2) the date of the defective act, as best determined under Section 2-701(c); (3) the nature of the failure to authorize the defective act; and (4) whether the act would have required authorization of just the board of directors or of the stockholders, and that the board of directors and/or the stockholders will be ratifying the action, as applicable. Id. at § 2-702(a).

In order to ratify the defective corporate act, the MGCL requires the affirmative vote under either the requirements for approval of the corporate act at the time of the ratification or the requirements for approval of the corporate act on the date of the defective act, whichever portion of votes is greater. Id. at § 2.702(c). Holders of putative stock on the record date that determines which stockholders are entitled to vote on ratification are not entitled to cast a vote in consideration of ratification. Id. If the defective corporate act that requires ratification involves filing a charter document with SDAT, the corporation must file articles of validation in place of the charter document that should have been filed. Id. at § 2-705. These articles of validation must include: (1) the title and date of filing of the charter document to be corrected; (2) a description of the defective corporate act; (3) the date of the defective act; (4) a statement that the defective act was properly ratified; (5) the time the ratification became or becomes effective; and (6) a statement that either (i) a charter document was previously filed regarding the defective corporate act that requires no change, (ii) a charter document was previously filed regarding the defective corporate act and does require changes, or (iii) no charter document was previously filed regarding the defective corporate act. Id. While this new MGCL subtitle outlines a procedure to ensure valid ratification of a defective corporate act, it specifies that this is a nonexclusive remedy, and a defective corporate act can be otherwise lawfully ratified by a corporation. Id. at § 2-707.

Maryland simplifies limited liability company and partnership ownership transfers upon death. Also effective as of October 1, 2022, the Maryland legislature made a series of amendments to existing code provisions that declare that transfers of an equity interest in either a limited liability company or a partnership upon death of the equity holder that are made pursuant to the business’s governing documents are not testamentary transfers. See Md. Code Ann., Est. & Trusts § 1-401(c). These amendments were a direct response to a 2021 Maryland appellate court opinion holding that such equity transfers upon death were subject to estate and probate laws. See Potter v. Potter, 250 Md. App. 569 (2021). Under these modifications, an holder of an interest in a limited liability company or partnership may transfer a membership interest, an economic interest, a noneconomic interest, or a partnership interest, as applicable, to another person upon the interest holder’s death, even if the transferee does not have their own interest in the business at the time of the interest holder’s death. Md. Code Ann., Corps. & Ass’ns §§ 4A-402(a)(9), 9A-503(g). Such transfers will not be treated as testamentary transfers so long as these transfers are consistent with the business’s governing documents and/or agreements. Id. at §§ 4A-402(a), 10-702(d).

§ 1.2.2.6. Massachusetts Business Litigation Session (BLS)

On March 2, 2022, the Massachusetts Business Litigation Session (“BLS”) issued Formal Guidance of BLS Regarding Hearings, Trials, and Electronic Filings (“Guidance”). In the Guidance, the BLS explained that it will continue to hold remote hearings when appropriate, noting that counsel can request that a hearing be conducted remotely. At the same time, the BLS explained that it has a “strong preference” for conducting trials and evidentiary hearings in person. Regarding electronic filings, the BLS explained that an attorney electronically filing an item that needs immediate court attention should alert the session clerk of the filing. If the filing exceeds 20 pages, a courtesy hard copy should be provided to the court. More generally, the BLS also encouraged counsel to provide digital courtesy copies of “complex filings” by a thumb drive or disc, with each document or exhibit included as a separate PDF. Finally, the BLS affirmed its commitment to encouraging the participation of less senior attorneys in all court proceedings. To this end, the BLS explained that it will allow two or more attorneys to handle different parts of a hearing. When a less senior attorney is arguing a motion, the BLS will also allow the less senior attorney to confer with a senior attorney during the hearing and the senior attorney can make additional points when the less senior attorney finishes arguing the motion.

In April 2022, the BLS also published BLS Bench Notes, MBA Complex Commercial Litigation Section, Business Litigation Session Practice Guide (“Bench Notes”). The Bench Notes describe each BLS judges’ practices and preferences regarding case management, discovery, motion practice, and trial.

§ 1.2.2.7. Michigan Business Courts

Michigan Business Courts’ 10-Year Anniversary. October 16, 2022, marked the 10th anniversary of then-Governor Rick Snyder’s signing of Michigan’s business court legislation, which took effect on January 1, 2013. Since their inception, Michigan’s business courts have held an important place in the state’s jurisprudence and have established numerous protocols that circuit courts throughout Michigan have adopted (e.g., early case management conferences and early mediation). Attorneys throughout the state hold the business courts in high regard, finding that the business courts are responsive, efficient, and fulfill their legislatively prescribed purpose of enhancing “the accuracy, consistency, and predictability of decisions in business and commercial cases.”^[40] 

2022 Business Court Appointments. The makeup of Michigan’s business court bench changed significantly in 2022 as Judge Christopher P. Yates (formerly a business court judge in Kent County) was appointed to the Michigan Court of Appeals and several judges were newly appointed to the business courts. The new appointees are Judges Annette J. Berry (Wayne County), Curt A. Benson (Kent County), Timothy P. Connors (Washtenaw County), Kenneth S. Hoopes (Muskegon County), and Victoria A. Valentine (Oakland County). These new appointees will all serve for a term expiring April 1, 2025. 

Michigan’s New Videoconferencing Court Rules. In July 2021, the Michigan Supreme Court responded to the lingering impacts of the COVID–19 pandemic by adopting interim court rules relating to remote proceedings that, inter alia, required trial courts to employ videoconferencing or telephone conferencing “to the greatest extent possible.” Mich. Ct. R. 2.407(G). The court invited public comment on the efficacy of the interim rules and ultimately received 41 written comments and heard feedback from 49 individuals at a public hearing on March 16, 2022. Thereafter, on September 9, 2022, the court issued a new order making the interim rules permanent, thereby solidifying videoconferencing as an important tool available to Michigan courts to increase efficiency, lower costs, and promote access to the judicial system. The most pertinent modification in the 2022 order affecting business court litigants is the court’s adoption of a new rule: Mich. Ct. R. 2.408.^[41]

Under Mich. Ct. R. 2.408, “the use of videoconferencing technology shall be presumed” for virtually all civil proceedings besides evidentiary hearings and trials. Nevertheless, courts have discretion to determine the manner and extent to which videoconferencing technology is used. Indeed, even where the presumption applies, the court may require the proceeding to be conducted in person if it determines that the “case is not suited for videoconferencing.”^[42] In making this determination, the court must consider twelve factors, including the technological capabilities of the court and the parties, whether “specific articulable prejudice” would occur, and the potential to increase access to courts through the use of videoconferencing.^[43] On the other hand, the court generally can also require participants to attend proceedings remotely.^[44] An exception to this grant of authority lies in Mich. Ct. R. 2.407(B)(4), which provides that a participant can request to appear in person for any proceeding. If the participant so requests, the participant’s attorney and the presiding judge must appear in person with the participant; however, the court must allow the other participants to participate remotely using videoconferencing technology if they so choose, assuming the court determines that the case is well-suited for videoconferencing.^[45]

Beyond the new presumption in favor of videoconferencing for most civil proceedings, the Michigan Supreme Court’s 2022 order instituted numerous additional procedural rules related to remote participation. Among these new rules are the requirements that courts must provide participants with reasonable notice of the time and mode of proceedings, permit parties and their counsel to engage in confidential communications during a videoconferencing proceeding (including, for example, through the use of a virtual “break-out room”), and generally make videoconferencing proceedings accessible to the public.^[46] Counsel litigating in Michigan’s business courts should familiarize themselves with the changes made in the 2022 order, which is available on the Michigan One Court of Justice website.^[47]

§ 1.2.2.8. New York Commercial Division

Commercial Division promulgates new rule regarding mandatory settlement conferences. On January 7, 2022, the Commercial Division amended Rule 30 of section 202.70(g) of the Rules of the Commercial Division of the Supreme Court. Rule 30 is titled “Settlement and Pretrial Conferences,” and the amendment, effective as of February 1, 2022, adds a new provision to the rule that provides for mandatory settlement conferences in Commercial Division cases following the filing of a Note of Issue. The new provision, which will become Rule 30(b), greatly expands the scope of Commercial Division cases for which settlement conferences will be held. The amendment is aimed at recognizing: “a) the need to respect the authority and discretion of the justice assigned to each case; (b) the benefit of allowing the parties and counsel to provide input to the assigned justice as to which settlement conference procedure they think will be best suited to their particular matter; and (c) [Office of Court Administration] budget constraints that preclude the hiring of additional settlement neutrals.” See Memorandum from Subcommittee on Procedural Rules, entitled “Proposal to amend Commercial Division Rule 30 to provide for a mandatory settlement conference,” dated September 25, 2020.

New York State Unified Court System adopts new rules and guidelines for e-discovery. On April 11, 2022, the New York State Unified Court System adopted additional rules and guidelines for Electronically Stored Information (“ESI”). Under the amended Rule 11-c, parties are required to confer regarding electronic discovery prior to the initial conference. The rule further provides that any topics upon which the parties cannot reach agreement are to be addressed with the Court at the preliminary conference.

The amended Rule 11-c also adopts a cost-benefit analysis similar to the standard in federal court and requires that “[t]he costs and burdens of ESI shall not be disproportionate to its benefits.” To that end, the parties are required to consider “the nature of the dispute, the amount in controversy, and the importance of the materials requested to resolve the dispute.” The amended rule also encourages the parties to use technology-assisted review when appropriate, and the parties are required to confer regarding “technology-assisted review mechanisms” throughout the discovery period. Lastly, the amended rule adds a claw-back provision for inadvertently produced ESI that is subject to either attorney-client privilege or the work product doctrine.

§ 1.2.2.9. West Virginia Business Court Division

In the past year, eighteen motions to refer cases to the West Virginia Business Court Division were filed, and there were three pending motions to refer from 2020. Of these, eleven were granted, nine were denied, and one was pending as of year’s end. Since the Court’s inception in 2012, there have been 219 motions to refer filed, with a total of 127 of those motions granted. The Business Court Division has resolved 101 of these. At the end of 2021, there were twenty-six cases pending before the Business Court Division with an average age of 397 days. The average age of the ten cases disposed of in 2020 was 675 days.

The past year has also been a period of transition for the West Virginia Business Court Division. New judges have been appointed to the Division and the method of assigning judges has been tweaked to reflect the focus of much of the Division’s work. Judge Michael Lorensen of the 23^rd Judicial Circuit was reappointed as Chair of the Business Court Division by Chief Justice John Hutchison of the Supreme Court of Appeals. The Administrative Offices of the Division continues to be in Martinsburg, Berkeley County, West Virginia, with law clerk support for each of the Division’s judges located in Martinsburg as well. The current judges assigned to the Business Court Division are:

1. Judge Michael D. Lorensen (Chair), 23^rd Judicial Circuit
2. Senior Status Judge Christopher C. Wilkes (former Chair)
3. Judge Paul T. Farrell, 6^th Judicial Circuit
4. Judge Joseph K. Reeder, 29^th Judicial Circuit
5. Judge Shawn D. Nines, 19^th Judicial Circuit
6. Judge Maryclaire Akers, 13^th Judicial Circuit
7. Judge David M. Hammer, 23^rd Judicial Circuit

When originally formed, the Business Court Division divided the judge’s assignments up geographically, with each judge representing a region of a certain number of counties. Experience has shown that the cases assigned to the Business Court Division are not necessarily spread across the state. The north-central part of West Virginia, with a burgeoning energy industry, has been the focus of a number of Business Court Division cases. As a result, the Division is less focused on geographic assignments and more on matching the case with the best judge who can handle the matter.

It is also important for practitioners who might be handling a matter before the Business Court Division to understand that the judges appointed to the Division by the Supreme Court of Appeals are not only trained in handling these complex, commercial disputes, but also that they have a full docket in their home circuits of criminal, civil, and abuse and neglect cases. Unlike in some states, assignment to the West Virginia Business Court Division is an additional part of the judge’s workload, which they voluntarily take on to better serve the judicial needs of parties in complex commercial matters.

§ 1.2.2.10. Wisconsin Commercial Docket Pilot Project

In 2022, the Wisconsin Supreme Court extended Wisconsin’s Commercial Docket Pilot Project for another two years, with a new end date of July 30, 2024. The Court originally approved the Project in 2017. The Court also ordered that, on or before July 1, 2023, the Business Court Advisory Committee must file a formal rule petition asking the Court to adopt a permanent business court or advise the Court that it recommends the Court permit the Project to expire. The Court also amended the Interim Commercial Court Rule related to the mechanism for selecting judges to participate in the Project to reflect existing practice. Under the amended Rule, the Chief Justice of the Wisconsin Supreme Court assigns judges to the Project after considering the recommendation of the chief judge in the relevant Judicial Administrative District. Currently, twenty-six counties in Wisconsin participate in the program: Waukesha, Dane, Racine, Kenosha, Walworth, Brown, Door, Kewaunee, Marinette, Oconto, Outagamie, Waupaca, Ashland, Barron, Bayfield, Burnett, Chippewa, Douglas, Dunn, Eau Claire, Iron, Polk, Rusk, St. Croix, Sawyer, and Washburn. The state’s largest county—Milwaukee—has not yet been added to the Project.

§ 1.2.2.11. Wyoming Chancery Court

December 1, 2022, marked the Wyoming Chancery Court’s first anniversary. Born of legislation enacted in 2019, the Wyoming Chancery Court resolves commercial, business, and trust cases on an accelerated schedule using active case management practices, expedited discovery, and bench trials.^[48] The Court has jurisdiction over actions seeking equitable or declaratory relief and actions seeking monetary relief over $50,000 exclusive of punitive or exemplary damages, interest, and costs and attorney fees.^[49] The underlying cause of action must fall within a list of 20 case types involving business and trust subjects.^[50] And the court must seek to resolve the cases as expeditiously as possible, within 150 days in most cases.^[51]

During its first year, the Chancery Court saw 15 new cases filed. These 15 cases involved 36 different parties, 29 unique attorneys, and six primary case types—breach of contract, internal business affairs, trust code, business agreements, breach of fiduciary duty, and business transactions involving financial institutions.^[52] Two Wyoming district court judges experienced in business litigation—Judges Richard Lavery and Steven Sharpe—handled these cases and will continue to handle cases until a full-time Chancery Court judge is appointed.^[53] Wyoming statute requires a full-time judge to be appointed by January 2024.^[54] On two occasions, however, the Wyoming Legislature has extended this deadline.^[55] It may do so again.

§ 1.2.3. Other Developments

§ 1.2.3.1. Texas Judicial Council’s Civil Justice Committee

The Texas Judicial Council’s Civil Justice Committee issued its 2022 Report and Recommendations,^[56] which included a recommendation that the Supreme Court create a pilot business court program. The recommendation included the following subparts:

• The Supreme Court should establish a pilot business court program to permit consideration of implementation details prior to statewide implementation.
• This pilot business court should be a part of or parallel to the existing court structure, and the Supreme Court should establish qualifications to determine who can be designated as a business court judge.
• The business court should hold proceedings regionally to ensure that parties throughout the state with complex litigation have access to the court.
• Parties to complex litigation should be given the opportunity to opt-in to the business court.
• The business court should be provided sufficient resources to handle the complex litigation, including technology and staff attorneys.

§ 1.3. 2022 Cases

§ 1.3.1. Arizona Commercial Court

State v. Google L.L.C.^[57] (Examining the scope of the Arizona Consumer Fraud Act). The State of Arizona filed suit against Google alleging that Google misled consumers about how and when Google collects location information from the devices it sells. Specifically, the State of Arizona alleged that the Android devices marketed and sold by Google are sold pre-loaded with functions and applications that collect and store a user’s location information. The State of Arizona argued that Google violated the Arizona Consumer Fraud Act (“ACFA”) because, for example, before selling its devices Google programed them with the ability to track a user’s location and did not disclose to the user at the time of sale that the tracking settings could not be completely disabled. Google moved for summary judgment, arguing that any alleged fraud or deceit was not made in connection with the sale or advertisement of merchandise, a requirement under the ACFA. For example, Google argued that the subsequent act of setting up an account and/or using an app, which would be when location tracking begins, cannot be characterized as being “in connection” with the sale of a previously purchased device.

The ACFA specifically addresses deceptive or unfair practices employed “in connection with” the sale or advertisement of merchandise. The commercial court acknowledged that the scope of “in connection with” under the ACFA is unclear, but after examining authority from varying sources the commercial court concluded that “in connection with” is not limited solely to specific actions taken at or before the purchase or sale of merchandise. Rather, a deceptive or unfair practice occurring after a sale may still be considered “in connection with” the sale. Whether an alleged deception is in connection with the sale of merchandise is ultimately a question of fact to be decided at trial. Here, there were issues of fact to be determined by the trier of fact, such as whether the alleged post-sale deceit involving location information had some connection with the sale of the devices such that Google violated the ACFA.

World Egg Bank Inc v. Weiss^[58] (Examining whether the sale of a company is consummated merely by the execution of a sales contract). In this case, the majority shareholder of a company sought to sell the company over the minority shareholder’s objection. In addition to objecting, the minority shareholder subsequently disputed the fair market value of the company. The issue before the commercial court was the determination of the fair market value of the company, which required the commercial court to determine when, if ever, the sale of the company actually occurred.

The commercial court explained that the consummation or effectuation of the sale of a company is triggered by the occurrence of the sale, not by the entry of a contract for sale. Here, the majority shareholder argued that the sale was consummated on April 17, 2015, which was the effective date identified in the contract for the sale of the company. The commercial court rejected this argument, finding that there was no evidence that the sale of the company was actually consummated at that time, or at any time thereafter, because the majority shareholder did not provide evidence that the transaction ever closed or was completed. For example, the commercial court determined that the company’s share price for purposes of the sale was not even finalized until November 2015. Therefore, the sale could not have been consummated as of April 17, 2015. The court granted the minority shareholder’s motion for summary judgment holding the majority shareholder failed to carry its burden of establishing the consummation of the transaction.

Beazer Homes Holdings LLC v. DCOH Development LLC^[59] (Examining whether a condition under a contract occurred such that duty to perform was triggered). In this case, Defendant filed a motion for partial summary judgment on the issue of whether a condition under a purchase agreement occurred such that the Defendant’s obligation to sell real property to Plaintiffs arose. Defendant entered into a written purchase agreement with Plaintiffs to sell real property to Plaintiffs. The purchase agreement contained a provision titled “Determination of Buyer’s Estimated Improvement Costs and Schedule,” under which the parties were required to agree in writing upon the final amount of Estimated Improvement Costs (“EICs”) prior to closing. Defendant argued that this provision was an express condition that never occurred because any EICs Defendant provided to Plaintiffs were not based on “fixed/guaranteed prices and actual bids,” and, therefore, were not final. As a result, Defendant argued that its obligation to sell the property to Plaintiffs never arose.

In response, Plaintiffs raised several arguments. First, Plaintiffs argued that Defendant sent Plaintiffs proposed EICs that Plaintiffs accepted, thereby satisfying requirement in the purchase agreement. Second, Plaintiffs argued that if the proposed EICs did not satisfy the requirement in the purchase agreement, the failure to satisfy the requirement was caused by Defendant’s failure to provide “final” EICs acceptable to defendant that Plaintiffs could then accept. Third, Plaintiffs argued that Defendant anticipatorily repudiated the purchase agreement because by failing to provide EICs that Defendant deemed acceptable, Defendant clearly indicated that it would not perform under the purchase agreement. Finally, Plaintiffs argued that Defendant breached the implied covenant of good faith and fair dealing because Defendant’s purported terminations of the purchase agreement were shams intended to secure a higher price for the property.

The commercial court started off by acknowledging that the purchase agreement contained ambiguities. While the EIC provision did refer to “actual bids” and “fixed/guaranteed” amounts, the very item at issue— EIC —contains the word “estimated.” Therefore, the nature of the EICs themselves are estimates and not fixed or guaranteed prices. The commercial court doubted that the parties intended to enter into a purchase agreement defining EICs in such a manner that they could never complete. Next, the commercial court indicated that questions of fact remained as to whether the EICs that Defendant proposed to Plaintiffs were accepted such that Plaintiffs could accept them. In addition, the commercial court noted that Defendant’s argument ignored the fact that it was its obligation to provide proposed EICs to Plaintiffs. Therefore, questions of fact remained as to whether Defendant itself prevented the fulfillment of the condition or if Defendant intended to never perform. The commercial court denied the partial motion for summary judgment.

§ 1.3.2. Delaware Superior Court Complex Commercial Litigation Division

Diamond Fortress Techs., Inc. v. Everid, Inc.^[60] (Cryptocurrency assets are treated as a security when evaluating contract damages). Pursuant to a licensing agreement and an advisor agreement, Plaintiffs contracted to provide Defendant with patented identification software and as-needed assistance with the integration of the software. Defendant developed a block-chain based identity and financial platform which needed Plaintiffs’ identification software to verify and confirm its users’ identities. The agreements provided that the Plaintiffs would be paid in cryptocurrency token distributions when Defendant eventually held its Initial Coin Offering (“ICO”) (the cryptocurrency equivalent of an initial public offering) and at subsequent Token Distribution Events (“TDEs”). The ICO and several TDEs occurred but Defendant never paid Plaintiffs as agreed. Plaintiffs sued Defendant for breach of the agreements and moved for default judgment based on Defendant’s failure to defend itself in the lawsuit.

In deciding the damages to award Plaintiffs for the Defendant’s breach, the court recognized that the classification and valuation of cryptocurrency, along with the calculation of damages resulting from the breach of a cryptocurrency-paid contract, are novel matters to Delaware. First, the court held that it would rely on CoinMarketCap as a reliable cryptocurrency valuation tool for determining the USD value of cryptocurrency tokens. Then, the court ascertained the proper method for calculating damages such that it would place Plaintiffs in the same position they would have been had the agreements been fully performed. The court held that, because cryptocurrency constitutes a security, it would follow the “New York Rule” previously adopted by Delaware courts to calculate damages in wrongful stock conversion litigation. Accordingly, the court calculated the damages by multiplying the total tokens awarded under the agreements by the tokens’ highest intermediate value within three months of the discovery of Defendant’s breach.

Greentech Consultancy Co., WLL v. Hilco IP Servs., LLC^[61] (Preliminary agreements to agree are binding and enforceable contracts). In Greentech Consultancy Company, WLL, the parties agreed to enter into a joint venture to develop and commercialize intellectual property owned by Plaintiff. Their agreement was set forth in a term sheet which indicated that there would be a subsequent agreement “setting forth the specific terms and conditions of the proposed transaction in more detail.” Defendant ultimately backed out of the joint venture before closing and Plaintiff sought to recover damages for Defendant’s failure to meet its obligations pursuant to the term sheet.

Although the term sheet did not expressly state that the parties would exercise “good faith” in negotiating the open issues, the court held that the term sheet nevertheless contained an implied obligation to negotiate in good faith. The court further clarified that preliminary agreements in which the parties agree on certain major terms, but leave other terms open for further negotiation are in fact binding and enforceable contracts. The difference between such preliminary agreements and normal contracts is simply which obligations bind the parties. The court held that Defendant was obligated to negotiate with Plaintiff in good faith in an effort to reach final agreement within the scope that had been settled in the term sheet. Ultimately, the court denied the parties’ motions for summary judgment on the issue of whether Defendant satisfied its obligation to negotiate the open issues under the term sheet in good faith because reasonable minds could differ as to whether Defendant’s conduct amounted to bad faith.

Simon Prop. Grp., L.P. v. Regal Ent. Grp.^[62] (Enforcing a broad force majeure provision between sophisticated parties). In Simon Property Group, L.P., the parties entered into several leasing agreements for commercial properties. The leasing agreements contained clauses in which Defendants guaranteed performance by the tenants of all agreements, covenants, and obligations, including guaranteeing the full and prompt payment of rent. Each of the leasing agreements also contained a force majeure provision, obligating the tenants to pay rent in full despite the occurrence of a force majeure event. Due to COVID-19, the tenants were required to adhere to their respective state’s restrictions and began to default on their rent obligations in April 2020. Plaintiff sought more than $5.5 million in unpaid rent and other charges, and moved for partial summary judgment on the counts for breach of the guaranties.

The court rejected Defendants’ argument that they were excused by the COVID-19 pandemic and related governmental restrictions. Specifically, it held that the leasing agreements contained broad force majeure provisions which allocated the risk of impossibility and impracticability to the tenants. Based on the great weight of authority in Delaware and other jurisdictions, the court held that Plaintiff was entitled to partial summary judgment on liability. Acknowledging that the ruling may be considered harsh, the court noted that the leasing agreements involved sophisticated parties which freely contracted and allocated risk to the tenants. Moreover, it recognized that the COVID-19 pandemic was neither unprecedented nor unforeseeable noting the Spanish Flu pandemic and the 1988 film industry strike.

§ 1.3.3. State-wide Business Court in Georgia

Insight Global, LLC v. Marriott Intern., Inc.^[63] (Contract termination under force majeure provisions). This contract dispute arose from an event cancellation due to the COVID-19 pandemic. Under a 2019 contract, Defendant Marriott International, Inc. agreed to host an annual sales conference in January 2021 for Plaintiff Insight Global, LLC at one of Marriott’s Florida hotels. Insight paid Marriott a $40,000 deposit. In June 2020, as the COVID-19 pandemic unfolded, Florida state and county officials issued short-term executive orders limiting, among others, restaurant capacity and encouraging the public to avoid large gatherings. In July 2020, Insight sent Marriott a “termination notice” and requested the return of its deposit, stating that it was ending the agreement under the contract’s “Impossibility Provision.” Insight argued that the executive orders under the pandemic rendered the agreement impossible. Marriott disputed this contention, however, and demanded $695,000 under the contract’s liquidated damages, which provided damages at varying percentages based on the date of termination. Soon after Insight sent the termination email, new executive orders were issued that allowed business to reopen and only required face coverings. Insight’s counsel then asked Marriott to provide a plan for performance, but Marriott did not respond. After the performance dates passed, Insight sued seeking (1) a declaration that it properly terminated the agreement because of the pandemic; (2) a declaration that Marriott failed to provide reasonable assurances; (3) a declaration that the liquidated damages provision was unenforceable; and (4) relief under two Florida statutes. Marriott counterclaimed for breach of contract and failure to pay liquidated damages. Insight moved for summary judgment on the counterclaim, and Marriott cross-moved for summary judgment on all claims, including its own counterclaim.

The court granted Marriott’s motion. First, because the contract contained no choice of law provision, the court conducted a choice of law analysis, holding that Georgia’s “traditional rule” for contracts involving out-of-state performance requires application of Georgia law to common law claims and state-of-performance law to statutory claims. Second, the court held that, although the Impossibility Provision contemplated situations like the COVID-19 pandemic and pandemic-related government regulations, Insight did not prove that the pandemic ultimately made its performance impossible or illegal. The court rejected Insights’ argument that impossibility should be measured at the time of termination; impossibility must be determined instead at the time of performance. Third, the court held that, although case law is unclear on the availability of demands for “adequate assurances” under service contracts, Insight’s communications did not even constitute demands because its requests for a “plan of performance” merely sought information and came after repudiation of the contract. As a result, Insight breached the agreement. Fourth, the court rejected Insight’s argument that even if it breached the agreement, its breach was excused because Marriott could not perform. The court concluded that, unlike Florida law, Georgia does not require non-repudiating parties to prove they were “ready, willing and able” to perform after an anticipatory repudiation. Finally, the court held that as the non-breaching party Marriott is entitled to liquidated damages because (a) Marriott’s lost profits are difficult to predict, (b) the contract contained language stating that liquidated damages (which are common in the industry) are not intended to be a penalty, and (c) the sums provided are reasonable and not arbitrarily set.

Elavon, Inc. v. People’s United Bank, Nat. Ass’n^[64] (Personal jurisdiction of out-of-state defendants). This action involves an out-of-state successor in interest’s attempted termination of a referral agreement. Plaintiff Elavon, Inc. is a Georgia corporation that provides global processing services for merchants in credit card and other transactions. In 2018, Elavon entered into a five-year referral agreement with United Bank, N.A. (“United”), a Connecticut corporation. Defendant People’s United Bank (“People’s United”) became United’s successor in interest after a stock-purchase merger in 2019. Upon completion of the merger, People’s United transmitted a letter to Elavon purporting to terminate the referral agreement. Elavon sued, claiming People United’s letter amounted to a wrongful anticipatory repudiation and failure to perform under the contract. People’s United then moved to transfer the case from the State-wide Business Court. While that petition was pending, People’s United filed its answer and moved to dismiss for lack of personal jurisdiction. Although the parties’ agreement included a jurisdictional provision that required disputes to be pursued “exclusively in the state courts located in Fulton County, State of Georgia,” People’s United insisted that because the jurisdiction provision also contained an impermissible jury-waiver clause, the entire provision was unenforceable. Elavon responded that the inclusion of a severability provision in the contract made the jurisdictional clause enforceable despite its jury-waiver language.

The court held that, under Georgia precedent, the entire jurisdiction provision was unenforceable. While the severability provision allowed an unenforceable provision to be severed from the agreement, the jury waiver and forum selection language, though separate clauses, were part of a single provision. Next, the court determined that an independent basis of personal jurisdiction over People’s United was just as unavailable. Under Georgia law, a court has jurisdiction over nonresident defendants if the defendants purposefully act or transact business in the state, the cause of action arises out of those transactions, and the exercise of jurisdiction is reasonable. By itself, signing a contract cannot support the court’s exercise of personal jurisdiction. The court noted that preliminary negotiations did not take place in Georgia, and the record did not reveal that People’s United performed any services in Georgia. Thus, under Georgia law, it was clear that unilateral acts by Elavon did not confer jurisdiction, and the mere transmittal of the termination letter did not subject People’s United to personal jurisdiction.

§ 1.3.4. Indiana Commercial Court

deGorter v. Devlin II et al.^[65] (Approving the Commercial Court Master’s Recommendations regarding Plaintiff’s Motion to Compel). Indiana’s Commercial Court Rules outline the process for appointment of a commercial court master in a specific case, as well as the requirements that a commercial court master must follow.^[66] DeGorter is a prime example of the use of masters in Indiana’s commercial courts. On November 1, 2021, Plaintiff filed a motion to compel production of documents, which Defendants opposed. Following additional briefing and a hearing, the Court issued an order on June 23, 2022, finding that there was insufficient information to determine whether any privilege applied to the documents at issue without conducting a full review of the documents, and recommending that the matter be resolved by a commercial court master. After both parties consented, the Court issued an order on July 18, 2022, appointing a commercial court master to review the withheld/redacted documents, determine when the parties became adverse, and prepare a written report and recommendation on the motion to compel for the Court’s review. On August 15, 2022, the Court issued a subsequent order clarifying the scope of its prior order to note that certain categories of documents were not covered by the master’s review.

Shortly thereafter, the commercial court master submitted an initial report, providing his recommendations on seven different categories of documents based on their varying characteristics. On September 23, 2022, the Court accepted all the master’s recommendations, granting in part and denying in part Plaintiff’s motion to compel. Three of the determinations adopted by the Court are particularly noteworthy:

• First, the commercial court master determined that Plaintiff was entitled to privileged documents that were created during his tenure on Defendant’s board, as former directors or board members of corporations are entitled to privileged documents created during their tenure as they are individuals within the mantel of privilege. As such disclosure of those documents to the former directors does not eliminate the privilege.
• Second, the commercial court master determined that Plaintiff was entitled to documents that were part of his application before a government entity, as the common interest principle applied due to the same attorney acting as counsel for both Plaintiff and Defendants during the application process. The master also determined that the lack of clear boundaries explaining the scope of the attorney’s representation of the parties further supported the application of the common interest exception to privilege.
• Third, the commercial court master noted that non-privileged attachments to privileged communications should generally be treated as privileged, but only when they are attached to communications with counsel. Other copies of the same non-privilege attachment do not share that privilege and are discoverable.

Parkview Health Sys. Inc. v. Am. Guar. And Liab. Ins. Co.^[67] (Denying Defendant’s motion to dismiss). In Parkview Health, Plaintiff, a health care system, purchased an insurance policy from Defendant which contained an Interruption by Communicable Disease Coverage (ICD Coverage). The ICD Coverage provided that Defendant would pay for losses sustained by Plaintiff resulting from suspension of business activities at covered locations due to any government orders regulating communicable diseases. Plaintiff alleged that a series of executive orders issued by Indiana’s Governor during the COVID-19 pandemic, impacted Plaintiff’s ability to provide access at its locations, thus requiring payment under the policy. Defendant argued that the complaint should be dismissed because it failed to sufficiently plead facts that satisfied the requirements to establish coverage, in that the executive orders did not prevent access to Plaintiff’s locations, and that admissions of coverage in other cases was irrelevant. In response, Plaintiff argued that discovery was necessary to under the effect of the executive orders.

While the Indiana Trial Rules (specifically Rules 8(A) and 12(B)(6)) generally mirror their federal counterparts, Indiana’s motion-to-dismiss procedure is different than federal practice. Rather than adopting the “plausibility standard” as found in federal case law, Indiana is a notice-pleading state. As such, a complaint filed in Indiana state court is not required to state all the elements of a cause of action but it must inform a defendant of the claim’s operative facts so the defendant can prepare to meet it. The intention of this practice is to “discourage battles over mere form of statement.”

The Court found that there was no clear Indiana appellate case law that provided specific guidance on this rare type of policy. The Court also noted that any ambiguities in the policy must be read in a light most favorable to the non-moving party, Plaintiff. The Court held that the motion to dismiss was premature and that the case should proceed as (1) Plaintiff had met the notice pleading requirements regarding the issue of whether the executive orders impacted the policy, and (2) discovery should be conducted on the issue of whether Defendant had admitted coverage in other cases. The Court noted that it might consider those issues upon summary judgment motions at an appropriate time.

Indianapolis Power & Light Co. (d/b/a AES Indiana) v. American States Insurance Co., et al.^[68] (Granting Defendant’s motion to dismiss). In Indianapolis Power & Light Co., AES Indiana brought an action against the Home Insurance Company (“Home”) related to insurance coverage for AES Indiana’s alleged actual and potential liability for claims arising from coal combustion residuals or ash. AES Indiana asserted that Home has a duty to defend and/or reimburse AES Indiana for ongoing costs related to these claims. AES Indiana brought claims for (1) breach of contract; (2) declaratory judgment; and (3) unfair claims practices and breach of the duty of good faith. Home moved to dismiss under Indiana Trial Rules 12(b)(1), (2), and (6). Home also moved to transfer venue under Indiana T.R. 12(B)(3). AES Indiana did not contest Home’s motion to dismiss the breach of contract or unfair claims practices claim, and thus the claims were dismissed. The Court addressed the motion to dismiss as to the declaratory judgment claim.

Here, Home contended that AES Indiana’s claims should be dismissed because Home was declared insolvent and ordered liquidated by a New Hampshire Superior Court in 2003. The New Hampshire Order also directed that all actions and proceedings against Home, whether in New Hampshire or elsewhere, should be abated. Home argued that the New Hampshire Court’s Order must be honored under fundamental principles of full faith and credit and comity. Indiana Code § 27-9-3-12(b) requires Indiana courts to “give full faith and credit to injunctions against the liquidator or the company or the continuation of existing actions against the liquidator or the company, when those injunctions are included in an order to liquidate an insurer issued under similar provisions in other states.” Indiana has also codified the concept of full faith and credit at Ind. Code § 34-39-4-3(b). The Court found that the concept of full faith and credit is central to the system of jurisprudence. Similarly, Indiana courts have described comity, while not a constitutional requirement, as representing a willingness to grant a privilege out of deference and goodwill. Under principles of comity, as the Court notes, Indiana courts may respect final decisions of sister courts as well as proceedings pending in those courts. Factors considered in addressing comity questions include (1) whether the first filed suit has been proceeding normally, without delay, and (2) whether there is a danger the parties may be subjected to multiple or inconsistent judgments. Where an action concerning the same parties and the same subject has been commenced in another jurisdiction capable of granting prompt and complete justice, comity ordinarily should require staying or dismissal of a subsequent action filed in a different jurisdiction, in the absence of special circumstances. Here, the Court found that denying Home’s Motion to Dismiss would cause inconsistency throughout the lawsuits. Because this principle of preventing inconsistency is the reason that comity exists, the Court granted Home’s Motion to Dismiss in its entirety.

New Era Constr., LLC v. Brendonshire Cts. Ass’n, Inc.^[69] (Denying Plaintiff’s motion for award of expenses). On April 19, 2021, Plaintiff served discovery requests on Defendant, simultaneously with its Complaint and summons. On September 17, 2021, Plaintiff filed a Motion to Compel due to Defendant’s failure to respond to the discovery requests, despite Defendant’s attorney having filed an appearance and an Answer. After Defendant’s attorney withdrew from the case and Defendant failed to respond to Plaintiff’s motion, the Court granted the Motion to Compel on October 12, 2021. On October 27, 2021, Defendant filed a letter, which the Court construed as a Motion to Reconsider and Motion for Protective Order. Plaintiff filed a response, and the Court denied Defendant’s motion to reconsider and for protective order.

Plaintiff then filed a Motion for Award of Expenses seeking $1,140.00 in attorneys’ fees for its response to Defendant’s Motion to Reconsider and Motion for Protective order, which Plaintiff argued was not substantially justified and was meritless. Defendant argued that he filed the motion in good faith on limited issues and that the motion was not meritless. Trial courts have wide discretion in resolving discovery disputes between parties, and any decision by trial court will only be overturned on appeal if the appealing party can show that the trial court abused its discretion. Such an abuse of discretion is only found where the result reached by the trial court is clearly against the logic and effect of the facts and circumstances before the court. Ind. T.R. 37(A)(4) states:

(A) Motion for order compelling discovery. A party, upon reasonable notice to other parties and all persons affected thereby, may apply for an order compelling discovery as follows:

***

(4) Award of expenses of motion…If the motion is denied, the court shall, after opportunity for hearing, require the moving party or the attorney advising the motion or both of them to pay to the party or deponent who opposed the motion the reasonable expenses incurred in opposing the motion, including attorneys’ fees’, unless the court finds that making of the motion was substantially justified or that other circumstances make an award of expenses unjust.

Here, the Court found that there was at least one question over whether Defendant had the documents sought in discovery or if he was obligated to turn them over. Thus, the Motion to Reconsider and Motion for Protective Order was substantially justified, and the Motion for Award of Expenses was denied, accordingly.

Midwest Service & Supply, Inc., et al. v. Auto-Owners Insurance Co.^[70] (Granting in part and denying in part Defendant’s motions to strike and the parties’ cross-motions for partial summary judgment). In Midwest Service, the parties filed partial cross-motions for partial summary judgment to determine whether Plaintiffs had demonstrated their entitlement to additional insurance coverage within the policy issued by Defendant after a fire occurred at a commercial warehouse building. Defendant also filed motions to strike portions of testimony for two of Plaintiffs’ witnesses, including an expert.

In determining that the declaration of Plaintiff’s expert was admissible, the Court explained the intersection between Indiana Rule of Evidence 702 and the federal Daubert factors. “In Indiana, there is no specific test or set of prongs which must be considered [to] satisfy Indiana Evidence Rule 702.” While Indiana courts consider the federal Daubert factors to be helpful, they are not considered controlling. “Rather, a witness qualifies as expert under Rule 702 if two elements are met: (1) the subject matter is distinctly related to some scientific field, business or profession beyond the knowledge of the average lay person; and (2) the witness is shown to have sufficient skill, knowledge, or experience in that area so that the opinion will aid the trier of fact.”

In determining the parties’ cross-motions for summary judgment regarding Plaintiff’s declaratory judgment claim, the Court explained Indiana’s standard for the interpretation of insurance policies. An insurance policy should be construed to further the policy’s basic purpose of indemnity. If there is an ambiguity, an insurance contract is construed strictly against the insurer, and the language of the policy is viewed from the insured’s perspective. While a division between courts as to the meaning of the language in an insurance contract is evidence of ambiguity, it does not establish that a particular clause is ambiguous and Indiana courts are not obliged to agree that other courts have construed the policy correctly. A policyholder need not prove that its interpretation of a policy term is the only reasonable interpretation—only that it is a reasonable interpretation. For those reasons, the Court found that the policy at issue should be construed in favor of providing coverage, as “an ordinary policyholder of average intelligence-the standard for interpreting policy terms in Indiana-… would reasonably expect coverage for any lost income or extra expense suffered because of the fire.”

§ 1.3.5. Iowa Business Specialty Court

RSS COMM2015-CCRE27-DE WMC, LLC v. WC MRP Des Moines Center, LLC, et al.^[71] (Discharge of receivership). Plaintiff filed a lawsuit to foreclose on two mortgages it held over rental properties owned by mortgagors WC MRP Des Moines Center, LLC and WC MRP Waterloo Plaza, LLC (together “the WC MRP Defendants”). In addition to the petition, Plaintiff also filed an emergency application for the appointment of a receiver over properties located in Des Moines, Iowa (“Des Moines property”) and Waterloo, Iowa (“Waterloo property”), claiming that one of the properties needed a receiver to avoid imminent harm. Plaintiff specifically argued the WC MRP Defendants were instructed by a fire department to immediately repair a broken fire suppression system, which constituted a fire hazard, or cease all business operations. Plaintiff also asserted that a lack of adequate lighting resulted in increased vandalism on the Des Moines property and conditions on the property were so inadequate that a tenant sued the WC MRP Defendants over said conditions. The Court ultimately granted the application for receiver.

The WC MRP Defendants filed a motion to discharge the receiver and argued, among other things: (1) they were working diligently to repair the fire suppression system, (2) the receiver caused delays and extra expenses, (3) repair of the fire suppression issue was complex and the receiver made no greater progress than the WC MRP Defendants had before the receiver was appointed, and (4) the receivership over the Waterloo property was unnecessary because all of Plaintiff’s management complaints related to the Des Moines property.

The Court found there was lack of evidence showing a continuing need for the receivership and the costs of the receiver significantly outweighed the benefit of continued appointment. The establishment of the receivership was no longer supported because either the issues were resolved by the receiver or the receiver was no better positioned to resolve the issue than the WC MRP Defendants. Accordingly, the Court granted Defendants’ motion to discharge the receiver.

Rupert v. Elplast America, Inc.^[72] (Breach of fiduciary duties for corporate officers). Plaintiff, the former president of Defendant Elplast America, Inc., filed a lawsuit alleging breach of contract and a claim for unpaid wages relating to Plaintiff’s separation from the company after he was asked to step down as president. Defendant asserted a breach of fiduciary duty counterclaim alleging Plaintiff breached his duty to shareholders in various ways, including failing to properly account for the transfer of funds, failing to repay company debt, and failing to report accurate company data to the board of directors. Plaintiff filed a motion for summary judgment asserting (1) Defendants failed to support a breach or damages, (2) expert testimony is necessary establish a breach of fiduciary duty claim, and (3) Plaintiff was immune to liability pursuant to Iowa statutory law.

The Court denied Plaintiff’s motion for summary judgment on all arguments. First, the Court determined that there was sufficient evidence, if believed by a jury, to demonstrate that Plaintiff breached his fiduciary duty to the company, which resulted in damages. Second, the Court rejected that Iowa Code § 490.842(3), a statutory provision that may immunize officers for delegated responsibilities if there is no knowledge of the incompetent or improper conduct related to the delated task, provides an absolute defense. The Court further noted that the defense was not available to Plaintiff because evidence suggested that there were no delegated tasks related to the purported breach. Third, the Court rejected that expert witness testimony was necessary to establish a breach of a fiduciary duty as the claims concerned the failure to take action, which, unlike legal and medical malpractice cases, are within the common understanding of a layperson.

§ 1.3.6. Kentucky Business Court Docket

Wen-Parker Logistics, Inc. and WPL Brokerage Inc. vs. Two Canoes, LLC and Mesh Gelman^[73] (Contract dispute involving forum selection clause, personal guaranty and unjust enrichment claim). Plaintiffs, a parent that is a New York corporation and its wholly owned subsidiary that is a Kentucky corporation, provide end-to-end cargo transportation with the subsidiary handling custom clearances for importers. Gelman executed Terms of Service with the Kentucky subsidiary on behalf of Two Canoes to handle shipments of personal protective equipment. Plaintiffs brought the action to recover more than $2,000,000 in unpaid invoices, and Defendant made a motion to dismiss. Defendants argued that the Web Site Terms applied, requiring a New York forum rather than the Terms of Service signed by it, which chose a forum in Kentucky. The court found that the appropriate forum was in Kentucky. The court dismissed the claims against Gelman for breach of a personal guaranty finding that Gelman signed the documents on behalf of the company, and not individually, among other things. The court did not dismiss the Plaintiffs’ unjust enrichment claim finding that discovery would be needed determine if the contract were controlling or an unjust enrichment claim may be made.

§ 1.3.7. Maine Business and Consumer Docket

Morgan v. Townsend^[74] (Restrictive Covenants). Short-term rentals are a source of much controversy in Maine, and have been the focus of several ballot measures, ordinances, and referendums across the state. A recent BCD case highlights one neighborhood’s attempt to regulate short-term rentals using its restrictive deed covenant. In Morgan v. Townsend, two neighbors (“Plaintiffs”) moved for summary judgment against a third neighbor (“Defendant”) for violating the neighborhood’s restrictive covenant and for nuisance because he operated a short-term rental on his property. The parties all own real property in a neighborhood in Cushing, Maine, a popular summer vacation destination. Cushing has no noise ordinances or zoning restrictions on rental properties, but the neighborhood properties were subject to identical restrictive covenants, stating that properties could “not be used or occupied for any purpose other than for private residential purposes and no trade or business shall be conducted therefrom,” and allowed no structure other than “for use and occupancy by one family.” Defendant’s property contained two separate residences that he rented out on short-term vacation rental websites. He advertised the structures as jointly sleeping up to 32 people and described the property as the “[b]est oceanfront property for large groups on the coast of Maine!” He had not lived on the property since the late 1970s and had not visited it since early 2019. He employed a property manager who was responsible for renting it out. Between May 2019 and September 2021, the property was rented to 59 groups who, according to Plaintiffs, played loud music; trespassed; left trash on neighboring properties; set off fireworks; left flood lights on all night; and generally disrupted the neighborhood.

The Plaintiffs claimed that Defendant’s operation violated the restrictive covenant because: 1) he was not using the property for solely residential purposes; 2) he was conducting business on the property; and 3) he used the structures on the property in a manner inconsistent with its intended use as a private residence by a single family. Plaintiffs also asserted a private nuisance claim. The BCD first assessed whether Defendant’s rentals violated the restrictive covenant. It observed that, in Maine, renting out a property is not necessarily a commercial use that is inconsistent with a restrictive covenant limiting a property to use for residential purposes. A party may, however, violate a residential use restriction where the party’s use is inconsistent with the purpose of the restriction. While a residential use restriction, on its own, encompasses a wide range of property uses beyond use as a long-term or primary home, qualifying language in the covenant can tighten the restriction. Finally, the BCD noted that Maine case law does not limit one-family properties to hold a single structure where multiple structures are intended for use by one family. The Court found that although the neighborhood covenant did not entirely prohibit rentals—or even short-term rentals—its use of “private” to modify the term “residential purposes,” along with its limitation to “occupancy by a single family,” narrowed the rental pool to familial units only. Further, the BCD found that the circumstances of Defendant’s rental operation, including his arms-length relationship with the property and employment of a property manager, rose to the level of a full-scale commercial enterprise. As such, his conduct violated the restrictive covenant. The Plaintiffs’ motion for summary judgment was granted on the first count.

§ 1.3.8. Massachusetts Business Litigation Session

Healey v. Uber Technologies, Inc.^[75] (Privilege dispute). In 2020, the Attorney General (“AG”) of Massachusetts, Maura Healy, filed a lawsuit against the ride-share companies Uber Technologies, Inc. (“Uber”) and Lyft, Inc. (“Lyft”), alleging that Uber and Lyft have violated Massachusetts wage and hour laws by incorrectly classifying drivers who use these ride-share apps as independent contractors. Uber moved to compel the AG’s response to various discovery requests, arguing that the AG could not rely on the investigatory privilege to withhold documents or redact information identifying individual Uber and Lyft drivers who shared information with the AG during its investigation. Some of these drivers were interviewed by the AG. Others supplied information through a website the AG created to gather drivers’ stories. The AG argued that disclosure of the drivers’ identities would chill the willingness of individuals to “come forward and speak freely” with law enforcement in future investigations.

The Court disagreed. The Court concluded that the investigatory privilege did not bar discovery of the drivers’ identities. As the Court explained, the drivers’ testimony was plainly relevant. Drivers who provided information to the AG were more likely to be called as witnesses at trial. Uber and Lyft were entitled to know the identities of these drivers to help prepare for their testimony or to consider calling some of these drivers as defense witnesses. Moreover, according to the AG, more than 600 drivers provided information. Given the large number of drivers that provided information, the Court concluded that the drivers could not have reasonably expected their identities to remain confidential. In fact, the AG had warned the drivers that their identities might eventually be disclosed. The Court also reasoned that, given the number of drivers that came forward, it was unlikely these individuals would face retaliation from Uber or Lyft. In any event, these drivers would have a “considerable remedy” if any such retaliation were to follow. Finally, the Court noted that this information would be produced subject to a protective order. Thus, based on the “unique circumstances” of the case, the Court overruled the AG’s objections based on investigatory privilege.

In its decision, the Court also addressed several other discovery disputes. Among other things, the Court sustained the AG’s objections that Uber’s requests for production purportedly seeking information relevant to its “constitutional” defenses were overbroad. In essence, these “constitutional” defenses sought to show that the AG had been selective or inconsistent in deciding to bring litigation against Uber and Lyft as opposed to the many other companies involved in the “gig-economy.” At the same time, the Court noted that the AG enjoys broad prosecutorial discretion and a presumption that she has properly discharged her duties. Uber had failed to present the “clear evidence” of selective prosecution needed to rebut this presumption.

FTI, LLC v. Duffy^[76] (Non-solicitation; unfair and deceptive trade practices). FTI, LLC (“FTI”), a consulting company, brought a lawsuit against three of its former employees—Robert Duffy (“Duffy”), Stephen Coulombe (“Coulombe”), and Elliot Fuhr (“Fuhr”) (collectively, the “Former Employees”), alleging that they violated their employment agreements and fiduciary duties by going to work for a competitor, Berkley Research Group, LLC (“BRG”). BRG was also named as a defendant. In 2022, the Court presided over a two-and-a-half-week trial where, among other things, the Former Employees were found to have breached their employment agreements, and BRG was found to have engaged in unfair and deceptive trade practices in violation of M.G.L. c. 93A. The jury awarded FTI over $21 million in damages, and the Court, deciding certain claims against BRG, awarded FTI $18 million in punitive damages.

Defendants moved for a new trial and to amend the judgment. The Court denied these motions. The Court concluded that it properly granted a directed verdict for FTI on Defendants’ defense that the Former Employees were constructively discharged by FTI. Defendants did not provide any evidence to show that Duffy had been improperly demoted or that working conditions at FTI had become so intolerable as to constitute constructive discharge. The Court reaffirmed that the non-competition and non-solicitation clauses in the subject employment agreements were reasonable in scope. And the Court rejected Defendants’ argument that “solicit” should have been defined to the jury to require the initiation of a client contact.

As to the c. 93A claim, the Court rejected BRG’s argument that the disputed events did not occur “primarily and substantially” in Massachusetts, as the statute requires. At trial, BRG had the burden of proof on this issue. As the Court explained, although Fuhr worked out of FTI’s New York office, he supervised FTI employees in Boston, and Duffy and Coulombe both worked in FTI’s Boston office. Half of the other FTI employees that left for BRG with Duffy, Coulombe, and Fuhr were also located in the Boston office. Moreover, over half of the client revenues that left FTI with the departure of Duffy had originated in the Boston office. All told, Massachusetts provided the requisite “center of gravity” for the culpable conduct. The Court rejected BRG’s argument that the dormant Commerce Clause prohibited regulation of conduct occurring outside Massachusetts. Because c. 93A does not discriminate against interstate commerce, any incidental effects on interstate commerce would not violate the constitution unless they were “clearly excessive” in relation to the putative local benefits of the law. Here, the c. 93A verdict was based on culpable conduct squarely aimed at and caused in Massachusetts, and the interstate effects of the verdict were not excessive. The Court also rejected the argument that a Maryland choice-of-law provision in the Former Employees’ FTI employment agreements in any way barred the c. 93A claim against BRG.

Katopodis v. Plainville Gaming and Redevelopment, LLC^[77] (Consumer protection). In a putative class action, Plaintiffs alleged that Plainville Gaming and Redevelopment, LLC d/b/a Plainridge Park Casino (“PPC”) violated the Massachusetts Gaming Act, M.G.L. c. 23K, § 29, and its related regulations, by failing to send its rewards cardholders statements notifying them of their bets, wins, and losses (“win/loss statements”). Based on these allegations, Plaintiffs asserted a single claim for violation of Massachusetts’ consumer protection statute, M.G.L. c. 93A. PPC moved to dismiss the case under Rule 12(b)(6).

The Court denied PPC’s motion, concluding that Plaintiffs had alleged a plausible claim under c. 93A. The Gaming Act and its regulations require casino operators, like PPC, to provide a monthly win/loss statement to patrons with rewards cards. The statement can be sent to a patron’s physical address, or it can be sent by email unless the patron opts out of electronic notifications. As alleged, PPC failed to provide any win/loss statement to its rewards cardholders for several years and then only provided electronic statements, regardless of whether a patron had provided an email address or had opted out of electronic notifications. Because of this, Plaintiffs claimed they had not received the monthly win/loss statements required by law.

PPC relied on a line of cases holding that a claim under c. 93A requires a plaintiff to show “injury” “separate” and “distinct” from the statutory or regulatory violation itself. Based on this authority, PPC argued the case should be dismissed because its alleged failure to provide the win/loss statement did not, by itself, constitute “injury” to Plaintiffs under c. 93A. The Court disagreed. According to Plaintiffs, without the win/loss statements, they were deprived of the opportunity to make an “informed decision” about their gambling habits. A demand letter sent to PPC – which the Court considered on the motion to dismiss – further claimed that Plaintiffs had gambled less at other casinos when these casinos provided the required win/loss statements. And some of Plaintiffs further claimed that they had suffered financial hardships as a result of their gambling habits. All told, the Court concluded that Plaintiffs had adequately alleged an “injury,” i.e., “gambling in the absence of a required consumer protection,” that was “separate” and “distinct” from the alleged violation itself.

§ 1.3.9. Michigan Business Courts

Main St. Real Est., LLC v. Conifer Holdings, Inc.^[78] (Insurance; contract interpretation). This case involved an insurance coverage dispute in which Defendant Conifer Holdings, Inc. refused to defend Plaintiff Main Street Real Estate, LLC in a lawsuit concerning Main Street’s alleged involvement in a fraudulent real estate transaction. In that underlying suit, the adverse party brought numerous claims against Main Street, including breach of contract, breach of fiduciary duty, and vicarious liability for an independent contractor’s criminal misconduct. Main Street sought indemnity from Conifer, its insurer. Conifer, however, denied coverage for all the claims against Main Street, asserting that: (1) only claims pertaining to “real estate services” were covered under Main Street’s insurance policy, and none of the allegations against Main Street fell within the scope of this term; and (2) all the claims fell under the policy’s list of coverage exclusions. 

The court rejected Conifer’s arguments and granted Main Street’s motion for summary disposition (i.e., summary judgment) as to Conifer’s duty to defend and indemnify Main Street against all the claims. In addressing Conifer’s first argument, the court applied the rules of contract interpretation and read the contract to provide that Conifer was required to defend Main Street against claims relating to “real estate services.” The court found that while the term “real estate services” was defined in the policy as services rendered by a “real estate agent” or “real estate broker,” the policy did not define “real estate broker” or “real estate agent.” As such, the court turned to Black’s Law Dictionary for guidance and used the dictionary’s definitions of “real estate broker” and “real estate agent” to find that several of the claims brought against Main Street related to “real estate services.” This included the claim in the underlying suit that Main Street did not draft accurate purchase agreements or properly advise its client regarding escrow funds. Therefore, these claims fell within the scope of the insurance policy such that Conifer had a duty to defend Main Street.

Since at least some of the claims were covered, Conifer’s duty to defend extended to all the claims: “Michigan case law is clear that when theories of liability which are not covered are raised with theories of liability that are covered under the policy, the insurer has a duty to defend.” The court also relied on this principle to dispose of Conifer’s second argument––that the claims against Main Street fell within the policy’s list of coverage exclusions. Because the court had already found that some of the claims were covered under the policy, Conifer had a duty to defend Main Street on all claims regardless of whether some of the claims were on the exclusion list. 

LiftForward, Inc. v. SimonXpress Pizza, LLC, et al.^[79] (Breach of Credit Agreement, COVID–19). Plaintiff LiftForward, Inc. extended a secured loan to Defendant SimonXpress Pizza, LLC for business purposes pursuant to a credit agreement and an accompanying promissory note. After several months of nonpayment, LiftForward sent a letter of default to SimonXpress, accelerating the unpaid principal balance due, together with accumulated interest and other fees and charges. LiftForward sued SimonXpress and moved for summary disposition, asserting that SimonXpress breached the parties’ credit agreement by failing to make required payments. SimonXpress also moved for summary disposition, alleging, inter alia: (1) that LiftForward had first breached the parties’ agreement by charging an unlawful interest rate; and (2) frustration of purpose due to the COVID–19 pandemic.  

The court first found that there was no genuine issue of material fact that SimonXpress was in default and that LiftForward was therefore entitled to the unpaid principal, accrued interest, and any other charges or fees payable pursuant to the parties’ credit agreement and promissory note. The court then rejected SimonXpress’s affirmative defenses. First, LiftForward had not materially breached the contract first by charging an unlawful interest rate; the promissory note, which SimonXpress had signed, agreed to fix the interest rate such that it would not exceed the “maximum interest rate permitted by applicable law.” Additionally, the loan qualified under a statutory exception (Mich. Comp. L. 438.31c(11)) to the criminal usury interest rate provisions, which permits “the parties to a note, bond, or other indebtedness of $100,000.00 or more, the bona fide primary security for which is a lien against real property other than a single family residence…[to]…agree in writing for the payment of any rate of interest.”

As to the other affirmative defense—COVID–19 frustration of purpose—SimonXpress failed to demonstrate that it was unable to perform its obligations under the agreement or even that its business was closed during the time period at issue. Moreover, the pandemic did not render LiftForward’s performance “virtually worthless” to SimonXpress, as is required under the frustration of purpose doctrine. The funds were intended for business-related purposes, and SimonXpress did not allege that it had stopped operating its business during the pandemic. Finally, SimonXpress’s frustration of purpose argument was undermined by the fact that it had allegedly stopped making the required payments more than two months before the COVID–19 shutdown commenced.  

Pioneer Gen. Contractors, Inc. v. 20 Fulton St. E. Ltd. Dividend Hous. Ass’n Ltd P’ship, et al.^[80] (Construction liens). Plaintiff Pioneer General Contractors, Inc. served as general contractor for the construction of a building in downtown Grand Rapids, Michigan. Pursuant to its contractual relationship with Defendants, the property owners, Pioneer began work on the project in 2015 and provided various services for Defendants, including supervising the work of various subcontractors. In 2017, a certificate of use and occupancy was issued, and tenants began to occupy the building. Defendants, however, failed to pay the $3.6 million outstanding balance that they owed to Pioneer and the subcontractors. Pioneer and some of the subcontractors then executed a “liquidating agreement,” in which they agreed to file construction liens on the property. The contractors ultimately carried out their agreement; each filed separate liens that totaled, in aggregate, approximately $6 million. In 2018, the parties entered a settlement agreement wherein Pioneer agreed to discharge all outstanding construction liens in exchange for Defendants’ payment of $1 million. Defendants failed to pay this amount, however, so Pioneer sued, seeking to foreclose on its construction liens.  

Defendants contended that the construction liens were invalid, raising three arguments to support this assertion. First, Defendants argued that Pioneer and the subcontractors had filed their liens for an amount (about $6 million total) that far exceeded the amount owed under the contract ($3.6 million total), which violated Michigan law (Mich. Comp. L. 570.1107(6)) and should therefore be void ab initio. The court disagreed and found that the statutory amount restriction applies to each lien claimant individually, rather than to lien claimants in the aggregate. Thus, while the aggregate lien amount did exceed the total amount Defendants owed to all the lien claimants, this did not invalidate the liens because, on an individual basis, each contractor’s construction liens did not exceed the amount that Defendants owed to that contractor. A discrepancy (here of about $2.3 million) between the aggregate lien and individual debt amounts may occur when, as here, a general contractor (Pioneer) and the subcontractors all have valid claims against Defendants for “the same unpaid obligations arising from work on the same construction project.” This discrepancy did not render the liens void ab initio.

Defendants next argued that the construction liens were invalid because Pioneer had filed them in bad faith. Specifically, Defendants alleged that Pioneer’s and the subcontractors’ execution of the “liquidating agreement” shortly before they filed their construction liens evinced a bad-faith scheme. The court rejected this claim, finding “nothing untoward” about the agreement or its timing. Indeed, the court noted that such agreements are commonplace within the construction industry as a mechanism to provide some security to subcontractors who lack privity of contract with the property owner. Defendants lastly argued that the parties’ master contract obligated Pioneer to refrain from encumbering the property with construction liens. The court flatly rejected this argument, noting that the plain terms of the contract authorized the filing of construction liens and required Pioneer to discharge the liens only if Defendants had paid for the completed work or payment was not yet due. This discharge requirement did not apply since the liens arose from Defendants’ failure to pay. The court also noted that a contractual lien forbearance obligation would be functionally equivalent to a contractual waiver of the right to a construction lien, which is expressly prohibited under Michigan law (Mich. Comp. L. 570.1115(1)). Having rejected all three of Defendants’ arguments, the court granted partial summary disposition in Pioneer’s favor.

Crown Enter., Inc. v. Bounce House KRT, LLC^[81] (Commercial lease; COVID–19). Beginning in 2019, Plaintiff Crown Enterprises, Inc. leased a 26,000 square-foot commercial property to Defendant Bounce House KRT, LLC. Shortly after the parties’ contractual relationship began, the COVID–19 pandemic’s emergence prompted federal and state governments to order business closings. On March 23, 2020, the Michigan government ordered a statewide shutdown of non-essential businesses like Bounce House. Beginning in October 2020, the government allowed businesses to reopen at limited capacity. The permissible level of capacity percentage gradually increased (besides a period of complete closure between November and December) until the restrictions were fully lifted on June 17, 2021. Throughout the shutdown, Bounce House paid rent to Crown pro rata based upon the capacity percentage allowed by the government. Crown accepted these partial rent payments. Eventually, however, Crown sued Bounce House for breach of the parties’ lease, seeking, inter alia, unpaid rent, utilities, and late fees. Bounce House raised the following defenses: (1) the COVID–19 shutdown order triggered the lease’s force majeure clause; (2) impossibility; and (3) frustration of purpose.  

As to the force-majeure-clause argument, the court noted that the lease contained a provision stating that Bounce House was required to pay rent “without any deduction or set off whatsoever.” The court found that this language, rather than the force majeure clause, governed Bounce House’s obligation to pay rent. Further, the clause did not authorize rent abatement in consequence of a triggering event. Next, the court summarily rejected the frustration of purpose and impossibility arguments. It noted that frustration of purpose applies only where the purpose of the “entire lease” is frustrated, which was not the case here since Bounce House had partial or complete access to the premises for much of the lease’s term. Likewise, the impossibility doctrine was inapposite because the premises were not destroyed; performance was not literally impossible.  

The court did, however, find that Bounce House could obtain rent abatement under the doctrine of “temporary frustration of purpose” (also known as impracticability). Under this doctrine, a party to a contract is excused from performance where: (1) the contract is executory; (2) the party’s purpose was known at the time it entered into the contract; and (3) the purpose was temporarily frustrated by an event that was not reasonably foreseeable when the contract was created and which was not the party’s fault. The court noted that while jurisdictions are split on whether COVID–19 shutdown orders can excuse a party’s contractual performance, the Michigan federal district court in Bay City Realty, LLC v. Mattress Firm, Inc. applied temporary frustration of purpose to a similar set of facts.^[82] The court found the Bay City court’s approach persuasive and adopted it. Specifically, the court emphasized that both parties suffered a loss—Bounce House, in the form of “temporarily worthless” premises; Crown, in the form of lost income––caused by an unforeseeable governmental shutdown that was neither party’s fault. Moreover, the parties’ lease failed to allocate the risk of such a loss to either party. As such, the court determined that the best solution was to allocate some of the loss to each party by only requiring Bounce House to pay Crown “the applicable pro rata percentage of the allowable occupancy” levels under the state’s COVID–19 orders. Since Bounce House had already made rental payments on this pro rata basis, the court dismissed Crown’s claim for breach of contract.

§ 1.3.10. New Hampshire Commercial Dispute Docket

Fisher Cat Development, LLC. v. Stephen Johnson^[83] (Breach of contract; contractual ambiguity; extrinsic evidence). Seller argued that, while the Parties’ Purchase and Sales Agreement contained two inconsistent closing date provisions, an executed addendum resolved such ambiguity. The addendum extended the closing date “to no later than 4/28/21,” but also stated “[a]ll other aspects of the aforementioned Purchase and Sales Agreement shall remain in full force and effect.”

The Court was not persuaded by Seller’s argument that this addendum resolved the ambiguity, due to it incorporating all other provisions of the Agreement. The Court thus found that, because the provisions were ambiguous, the Court could reference extrinsic evidence to interpret the Agreement. The Court determined the extrinsic evidence created a material dispute as to: (1) whether the Parties ever agreed to a closing date; (2) whether the Seller breached the Agreement; and (3) whether the Seller breached the implied covenant of good faith. As a result, summary judgment was denied.

N.H. Elec. Coop., Inc. v. Consol. Communs. of N. New Eng., LLC.^[84] (Impracticability and frustration of purpose defenses). After Defendant moved to amend its answer and counterclaims to include the doctrine of impracticability as an affirmative defense, Plaintiff argued an affirmative defense of impracticability is futile and that New Hampshire does not recognize impracticability as a breach of contract defense. Plaintiff asserted that New Hampshire law recognizes frustration of purpose, which Defendant had already pled. Defendant argued that impracticability is synonymous with impossibility, which New Hampshire courts recognize.

The Court agreed with Defendant. Further, the Court found that frustration of purpose is distinguishable from impossibility, and is thus also distinguishable from impracticability.

Finally, the Court determined that, even though impracticability was substantively different from Defendant’s original affirmative defenses, Defendant’s impracticability argument restates its longstanding position. Thus, the Court allowed Defendant’s amended defense of impracticability.

Vt. Tel. Co., Inc. v. FirstLight Fiber, Inc.^[85] (Consequential damages limitations and alleged bad faith). Plaintiff brought a number of claims due to Defendant’s termination of a lease between the Parties, and Defendant moved for summary judgment. The enforceability of the Limitation Clause of the lease was of particular issue, which barred recovery of consequential damages entirely, and limited monetary recovery to the charges payable to Plaintiff during the term of the lease. Plaintiff argued that the Limitation Clause was unenforceable because Defendant acted in bad faith.

Although the New Hampshire Supreme Court has not definitively ruled on this issue, the Court found that New Hampshire law would adopt the rule that a limitation clause may not be enforceable if the party seeking to enforce it has acted in bad faith, and therefore denied summary judgment due to the factual dispute that bad faith exists.

§ 1.3.11. New Jersey’s Complex Business Litigation Program

Jenkinson’s Nik Lamas-Richie and Relic Agency, Inc. v. Matthew Richards and Mars Media, LLC^[86] (Jurisdiction). In this case involving a dispute concerning the parties’ agreement relating to unpaid loan amounts and consulting fees, the New Jersey Superior Court clarified that New Jersey’s “first-filed rule” extends not only to actions brought in New Jersey and a neighboring state, but also to actions brought in New Jersey state and Federal court. Following a dispute regarding Lamas-Richie and Relic’s alleged failure to compensate Richards and Mars for Richards’ consulting work, the parties entered into an Agreement where Lamas-Richie would serve as a consultant to Mars and Lamas-Richie, and Relic would satisfy outstanding financial obligations for unpaid compensation and outstanding loan amounts, in addition to agreeing to certain restrictive covenants. In March 2022, Richards and Mars filed an action in the U.S. District Court for the District of New Jersey alleging breach of the Agreement and tortious conduct committed by Lamas-Richie and Relic (the “Federal Action”).

A month later, Lamas-Richie and Relic commenced an action in New Jersey state court alleging tortious conduct by Richards and Mars relating to the Agreement (the “State Court Action”). Despite requests by Richards and Mars that Lamas-Richie and Relic pursue their claims in the first-filed Federal Action and voluntarily dismiss the State Court Action, Lamas-Richie and Relic did not respond. Richards and Mars then moved to dismiss Lamas-Richie and Relic’s complaint in the State Court Action, citing New Jersey’s “first-filed rule” which states that the court which first acquires jurisdiction over an action has precedence in the absence of special equities.

The Court granted Richards and Mars’ motion to dismiss Lamas-Richie and Relic’s complaint in the State Court Action and ordered the parties to litigate their disputes in the Federal Action. In so doing, the Court rejected Lamas-Richie and Relic’s argument that New Jersey’s first-filed rule applies only to lawsuits filed in New Jersey and a neighboring state, and held that the first-filed rule warrants dismissal in instances where a defendant in a federal action asserted what would be a compulsory counterclaim under F.R.C.P. 13(a) in a subsequent state court action. The court also rejected Lamas-Richie and Relic’s argument that the first-filed rule was inapplicable because “special equities” existed as a result of the “extreme delays plaguing” the Federal court in New Jersey, and ruled that even if the parties would experience a near-six-year delay due to the backlog of cases in the New Jersey Federal courts as Lamas-Richie and Relic claimed, any prejudice to the parties stemming from such a delay would be outweighed by the prejudice that resulted from the parties being forced to litigate in two forums and the risk of receiving inconsistent judgments in either action. Thus, the Court concluded that: (i) New Jersey’s first-filed rule obligated the parties to litigate their disputes in the Federal Action, which first acquired jurisdiction; and (ii) the delays present in the New Jersey Federal courts were insufficient to render the first–filed rule inapplicable.

NVL, Inc. and Hooman Nissani d/b/a Hooman Automotive Group v. Volvo Car USA LLC^[87] (Contract; liability waiver). In this case involving a dispute over the enforceability of a covenant not to sue provision contained in a Letter of Intent, the Court found that the covenant not to sue was enforceable and granted Defendants’ motion for summary judgment. The parties in the case entered into a series of letters of intent (LOIs) which contained the steps that Plaintiff was required to take in order to be approved as an authorized Volvo dealer. The final version of the LOI, which was drafted by Defendant’s legal counsel, contained a waiver of liability wherein Plaintiff covenanted not to sue Defendant Volvo. Following multiple extensions of the construction deadlines contained within the LOI, Defendant elected to terminate the LOI, citing a pattern of failed deadlines by Plaintiff. Plaintiff filed suit and Defendant moved for summary judgment, citing the waiver of liability provision in the LOI.

In its decision, the Court reiterated New Jersey’s two-pronged approach to determine whether a waiver of liability is unconscionable: (1) determining the relative bargaining power of the parties, i.e., whether the parties could actually negotiate regarding the waiver of liability provision; and (2) whether the challenged provision is substantively unreasonable, i.e., whether the exchange of obligations was so one-sided that it shocks the court’s conscience. The court concluded that, although Defendant is a major automobile manufacturer, which “certainly gave it some leverage over Plaintiffs,” there was not a procedurally unconscionable disparity in the bargaining power of the parties as Mr. Nissani was a sophisticated businessman with significant experience negotiating with automobile manufacturers in the course of opening dealerships, and Plaintiffs had an attorney review the LOI before it was executed. Furthermore, the Court concluded that the LOI did not contain substantive terms that were so one-sided as to shock the Court’s conscience as liability waivers are commonly included in contracts between sophisticated commercial parties, and the parties engaged in negotiation and mutually assented to all terms included in the LOI. Thus, the court concluded that the liability waiver was valid and enforceable, and granted Defendants’ motion for summary judgment.

§ 1.3.12. New York Supreme Court Commercial Division

Walk v. Kasowitz Benson Torres LLP^[88] (Malpractice). In Walk v. Kasowitz Benson Torres LLP, the New York County Commercial Division, relying on “documentary evidence” under CPLR 3211(a)(1), concluded that a legal malpractice claim brought by former president of Universal Music Group’s (“UMG’s”) Republic Records, Charlie Walk, was based on a “false narrative” and consequently dismissed the complaint pursuant to CPLR 3211(a)(1) and (a)(7).

On March 25, 2021, Walk initiated an action against the Defendants for legal malpractice. The complaint alleged that Walk had entered into the settlement agreement with UMG without being fully informed by counsel as to the agreement’s meaning and his alternatives to settlement. Specifically, Walk contended that he was never advised that: (i) he was entitled to receive certain bonuses for fiscal year 2017, regardless of whether he was terminated for cause; (ii) UMG breached Walk’s employment agreement by threatening to fire him for “cause” for alleged conduct occurring outside the scope of his employment and by failing to conduct an adequate investigation of the allegations against him; (iii) he could have terminated his employment for “good reason” when UMG put him on leave, which would have entitled him to more compensation than a “cause” termination; and (iv) the confidentiality provisions in his agreement with UMG prevented him from discussing the terms of the settlement and disputing the facts of his departure.

Defendants moved to dismiss pursuant to CPLR 3211(a)(1) (defense founded on documentary evidence) and (a)(7) (failure to state a cause of action). In support of their 3211(a)(1) argument, Defendants submitted certain letters and emails, along with Walk’s settlement agreement, employment agreement, and certain press coverage of his alleged misdeeds.

CPLR 3211(a)(1) allows a defendant to “move for judgment dismissing one or more causes of action asserted against him on the ground that . . . a defense is founded upon documentary evidence.”  The statute itself does not define “documentary evidence” and the First and Second Departments have taken conflicting approaches to this issue—whereas the Second Department has repeatedly held that letters and emails “fail to meet the requirements for documentary evidence,” the First Department will consider such correspondence under CPLR 3211(a)(1), but only if their factual content is “essentially undeniable.” Compare Gawrych v. Astoria Fed. Sav. & Loan, 148 A.D.3d 681, 682 (2d Dep’t 2017) with Amsterdam Hospitality Grp., LLC v. Marshall-Alan Assoc., Inc., 120 A.D.3d 431, 432 (1st Dep’t 2014); WFB Telecomms., Inc. v. NYNEX Corp., 188 A.D.2d 257, 259 (1st Dep’t 1992).

The Court found that the documentary evidence in the record, including the letters and emails submitted by Defendants, “unequivocally establish[ed] that the Defendants did in fact make the very arguments that Mr. Walk assert[ed] were not made to UMG,” and demonstrated that “the entire premise of [Walk’s] lawsuit [was] based on a false narrative.” The Court held that the emails and letters in the record established that Walk was “well aware of the very issues that he now feigns a lack of knowledge of and that these very issues were discussed with the Defendants and his other lawyers.” Furthermore, Walk failed to allege facts that would suggest that he could prove his “case within a case” and show he would have achieved a better result than the settlement agreement absent his counsel’s alleged negligence—a requirement for prevailing on a claim of legal malpractice under New York law. See Katz v. Essner, 136 A.D.3d 575, 576 (1st Dep’t 2016) (“Plaintiff failed to . . . meet the ‘case within a case’ requirement, demonstrating that ‘but for’ defendants’ conduct he would have obtained a better settlement.”). As a result, the Court dismissed the action pursuant to both CPLR 3211(a)(1) and CPLR 3211(a)(7).

Real Estate Webmasters Inc. v. Rodeo Realty, Inc.^[89] (Jury waiver). In Real Estate Webmasters Inc. v. Rodeo Realty, Inc., the Albany County Commercial Division granted a motion to strike a jury demand on the basis that the counterclaim-plaintiff waived its right to a jury trial by interposing an equitable defense of rescission and a related counterclaim for fraudulent inducement arising from the same transaction underlying Plaintiff’s complaint.

Real Estate Webmasters Inc. (“REW”) filed a single-count complaint to recover damages for Rodeo’s alleged anticipatory repudiation of the parties’ contract, which set forth the terms of Rodeo’s engagement of REW to develop Rodeo’s website. As an affirmative defense in its answer, Rodeo alleged that it was entitled to rescission of the contract “due to [REW’s] own fraud and/or misrepresentations,” and Rodeo also asserted a counterclaim for fraudulent inducement, among other affirmative defenses and counterclaims. Following discovery, REW moved for partial summary judgment seeking to dismiss Rodeo’s affirmative defenses and counterclaims. After dismissing most of the defenses and counterclaims at issue, the Court held that Rodeo had raised triable issues of fact as to its affirmative defense seeking rescission and as to its counterclaim for fraudulent inducement. When REW filed a note of issue requesting a bench trial, Rodeo responded by serving a jury demand. REW then moved to strike Rodeo’s jury demand.

The Court began its analysis of REW’s motion to strike by explaining that CPLR 4101 provides that “issues of fact shall be tried by a jury unless a jury trial is waived…, except that equitable defenses and equitable counterclaims shall be tried by the court.” Under New York law, a defendant waives the right to a jury trial when it asserts “equitable counterclaims which relate to and emanate from the same set of facts as does the main claim.” The Court noted that claims for rescission are equitable in nature. Applying that legal standard, the Court held that Rodeo waived its right to a jury trial by asserting an affirmative defense of rescission to unwind the same transaction underlying REW’s complaint. The Court reasoned that Rodeo did not deny repudiating the parties’ agreement. Rather, Rodeo contended that the repudiation was not wrongful because it possessed “a valid rescission defense based on fraud.”

The Court also found that because Rodeo chose to defend against REW’s claim of anticipatory breach by asserting the equitable defense of rescission, Rodeo’s counterclaim for money damages for fraudulent inducement of the same contract was also “equitable in nature.” It explained that while claims for money damages ordinarily constitute “legal” relief, restitution damages awarded incidental to equitable relief are not legal in nature. Here, the Court concluded that the only damage identified in Rodeo’s counterclaim—the return of money paid under the parties’ contract—was “restitutionary in nature and incidental to the equitable remedy of rescission.” Having asserted the equitable defense of rescission and a counterclaim for fraudulent inducement incidental to that equitable defense, the Court held that Rodeo was not entitled to maintain a claim at law for fraud damages and waived its right to a jury trial.

Castle Restoration LLC v. Castle Restoration & Construction, Inc.^[90] (Contract modification). In Castle Restoration LLC v. Castle Restoration & Construction, Inc., the Suffolk County Commercial Division determined after a bench trial that New York’s statute of frauds rendered an oral modification of a contract unenforceable and, ultimately, left the enforcing party with no remedy in its commercial dispute.

In March 2012, Castle Inc. and Castle LLC entered into an asset-sale agreement pursuant to which Castle Inc. transferred its equipment and client list to Castle LLC, in exchange for $1.2 million. Castle LLC paid $100,000 at the closing and gave Castle Inc. a promissory note for the balance of $1.1 million. The note was payable in consecutive monthly installments commencing on April 15, 2012. Castle LLC immediately defaulted on the note by failing to make the first payment, and litigation ensued.

At issue in the litigation was an oral modification claimed by Castle LLC. Castle LLC argued that under the asset-sale agreement, Castle Inc. was obligated to complete all work-in-progress that remained unfinished as of the closing date, and that the parties entered into a subsequent oral agreement in which Castle LLC agreed to provide Castle Inc. with labor and materials for the completion of that work-in-progress, the value of which would offset Castle LLC’s obligation under the promissory note.

After a prior action had been commenced by Castle Inc., Castle LLC brought a separate action asserting claims for breach of the asset-sale agreement and breach of the subsequent oral agreement, among others. After all other claims were dismissed on summary judgment, the parties proceeded to a bench trial on those two claims.

On the cause of action for breach of the oral agreement—under which Castle LLC allegedly would be compensated for providing labor and materials for the completion of Castle Inc.’s work-in-progress—the Court determined the statute of frauds rendered that oral agreement unenforceable. The Court observed that the parties’ asset-sale agreement contained a no-oral-modification provision, which meant that the parties were “protected by the statute of frauds.” The Court explained that “[a]ny contract containing such a clause cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement is sought.” Accordingly, the default presumption was that the parties’ written agreement controlled.

On the cause of action for breach of the asset-sale agreement—under which Castle Inc. had an obligation to complete all work-in-progress that remained unfinished as of the closing date—the Court determined that Castle LLC was entitled to no recovery due to its failure to perform its own material obligations under the agreement. Here, the Court observed that “a party is relieved of its duty to perform under a contract when the other party has committed a material breach,” such as “[f]ailure to tender payment.” As applied here, the Court observed that Castle LLC’s failure to make any payments on the promissory note for the $1.1 million balance due on the purchase price excused Castle Inc.’s obligation to further perform its obligations.

Amherst II UE LLC v. Fitness Int’l, LLC^[91] (Commercial lease; COVID 19). In Amherst II UE LLC v. Fitness Int’l, LLC, the Erie County Commercial Division granted summary judgment in favor of the plaintiff-landlord in a case involving a commercial lease for a gym that was closed due to COVID-19 restrictions.

The Defendant operated an LA Fitness facility and health club in a shopping center owned by Plaintiff. On March 18, 2021, the Plaintiff brought a breach of contract claim against the Defendant for unpaid rent and common area charges for those months, as well as late charges. The Defendant answered—with affirmative defenses including impossibility, impracticability, frustration of purposes and failure of consideration— and counterclaimed for, inter alia, the Plaintiff’s failure to abate rent for the closure periods and in light of the restrictions.

In its decision, the Court determined that Defendant was bound by the lease and that Plaintiff had demonstrated prima facie entitlement to the relief requested. The Court rejected Defendant’s argument that it was not bound by a lease provision stating that rent “shall be paid without notice, demand, counterclaim, offset, deduction, defense, or abatement,” because the lease did not also include language stating that payment of rent is “absolute and unconditional.” It also rejected the argument that the COVID closures constituted a “force majeure” that excused the Defendant’s obligation to pay rent. Although the lease defined force majeure to include “any causes beyond the reasonable control of a party . . . [,]” it also explicitly stated “[n]otwithstanding anything herein contained, the provisions of this Section shall not be applicable to . . . Tenant’s obligations to pay Rent . . . or any other sums or charges payable by Tenant hereunder after the Rent Commencement Date.” Therefore, the Court held that even if the closures and restrictions constituted force majeure events, they did not eliminate the Defendant’s obligation to pay under the lease. The Court also cited two recent Commercial Division decisions involving similar provisions—with respect to leases for Valentino and Victoria’s Secret stores—where the courts reached the same conclusion.

With respect to the Defendant’s affirmative defense of frustration of purpose, the Court explained that this doctrine “has been ‘limited to instances where a virtually cataclysmic, wholly unforeseeable event renders the contract valueless to one party.’” The Court held that Defendant couldn’t meet this standard “because the Pandemic did not render the Lease ‘valueless;’” instead, the closures and restrictions were only temporary. Indeed, the Defendant was operating at full capacity by the time the decision was rendered.

The Court also quickly dispatched Defendant’s affirmative defenses with respect to impossibility and impracticability. It observed that the defenses are one in the same under New York law, and only applicable when the means of performance are destroyed by an act of God, vis major, or by law. As the Court previously noted, performance had “not been rendered completely impossible or impracticable” by the pandemic; therefore, those affirmative defenses did not apply.

Finally, the Court found meritless Defendant’s counterclaims for failing to provide credit on rent for closures and restrictions, breaches of the lease stemming from the Defendant’s inability to use the premises, and unjust enrichment as a result of the closures and restrictions. The Court reasoned that they were “based on the same legal theories as the Affirmative Defenses, such as, inter alia, frustration of purpose, impossibility of performance, and commercial impracticability.”

In re New York State Dept. of Health (Rusi Tech. Co., Ltd.)^[92] (International law; choice of law). In In re New York State Dept. of Health (Rusi Tech. Co., Ltd.), the Albany County Commercial Division permanently stayed an arbitration before the China International Economic and Trade Arbitration Commission (“CIETAC”) brought by a Chinese company (“Rusi”) against the New York State Department of Health (“DOH”) regarding a purchase contract for KN-95 masks.

The underlying purchase contract consisted of three written instruments: (1) the contract that was drafted, in both English and Chinese, by Rusi (the “Contract”), (2) the subsequent purchase order that was drafted by DOH (the “Purchase Order”), and (3) the written amendment to the contract (the “Amendment”).

The English version of the Contract provides that it “shall prevail” if there are “any discrepancies between the two versions [English and Chinese]”, and that disputes “shall be settled through friendly consultation.” If a dispute cannot be resolved through friendly consultation, the Purchase Order provides that the dispute shall be resolved through binding arbitration in New York administered by the International Chamber of Commerce. Further, the Purchase Order states that the Contract “shall be governed by and construed in accordance with the law of the State of New York[.]”

Conversely, the Chinese version of the Contract provides that if there is a discrepancy between the versions, the Chinese version shall prevail, and disputes not resolved through friendly consultation shall be resolved by binding arbitration administered by CIETAC. Additionally, the Chinese version further provides that the Contract shall be governed by Chinese law and the United Nations Convention on Contracts for the International Sale of Goods (Vienna 1980) (“CISG”) shall not apply.

After DOH rejected the delivery of the masks for not complying with the standards specified in the Contract, Rusi commenced an arbitration before CIETAC. DOH commenced a special proceeding under CPLR 7503 (b) to permanently stay the CIETAC arbitration.

First, the Court addressed which substantive laws would govern the dispute. It noted that both the United States and China have adopted the CISG, which establishes provisions that govern international sales contracts. While parties can choose to exclude the CISG, the Court explained that such an election must be “clearly and unequivocally” expressed in the contract to establish mutual agreement. Rusi argued that the dispute is governed by Chinese law and that the parties elected not to be governed by the CISG because the Chinese version of the Contract expressly states where there is a conflict between the versions, the Chinese version shall prevail. The Court rejected this argument, finding that there was not “clear mutual intent” to exclude the CISG because there was not even a mutual agreement as to which version of the Contract would be controlling. Therefore, the Court ruled that the CISG principles would apply because any reasonable purchaser under the same circumstances would intend for the English version of the Contract to control.

Next, the Court turned to the question of whether the parties agreed to binding arbitration before CIETAC. Similar to its reasoning regarding the choice of law, the Court concluded that there was no meeting of the minds between the parties that the Chinese text was controlling. The Court explained that by proposing to draft parallel versions of the Contract, Rusi knew (or should have known) that DOH’s intentions would be formed based on the English version. Furthermore, DOH’s actions were consistent with the parties’ prior course of dealing. Therefore, having determined that the English version of the Contract controlled, and consequently, that New York law applied, the Court ruled to permanently stay the arbitration in the absence of an agreement on the part of DOH to submit to binding arbitration before the CIETAC.

Salesmark Ventures, LLC v. Jay Singh, JJHM Trading Corp.^[93] (Piercing the corporate veil). In Salesmark Ventures, LLC v. Jay Singh, JJHM Trading Corp., the New York County Commercial Division dismissed, inter alia, the Plaintiff’s claim to pierce the corporate veil of the Defendant and impose personal liability on the Defendant’s sole principal. Underlying the dispute was a contract to purchase millions of synthetic nitrile gloves during the outbreak of COVID-19.

In this case, Plaintiff paid the Defendant the contracted purchase price, but the gloves were never delivered. Afterwards, Defendant only refunded a portion of the purchase price. To recover the remainder of the purchase price, Plaintiff sought to pierce the corporate veil of Defendant. Additionally, Plaintiff asserted claims against both Defendant and its sole principal for breach of contract, unjust enrichment, and fraud.

As to the veil-piercing claim, the Court explained that “New York law disfavors disregard of the corporate form” and the party seeking to pierce the corporate veil “bear[s] a heavy burden.” To meet that burden, a party must demonstrate that the individual dominated the corporate form for personal use and that a wrongful or unjust act was conducted toward the plaintiff. Here, the Court found that Plaintiff’s allegations—that the company has no assets and its website has minimal information about the company—did not meet the heavy burden or provide “specific factual assertion[s] to substantiate” piercing the corporate veil and dismissed the claim. Likewise, the Court dismissed the breach of contract claim against the principal because, without veil-piercing, the principal cannot be held liable for liabilities incurred by the corporate Defendant.

The Court also dismissed the unjust enrichment and fraud claims, reasoning that because there was a valid contract, the Plaintiff could not recover from Defendant’s sole principal without a showing that the services were performed for the principal and that those services resulted in the alleged unjust enrichment. Moreover, the Plaintiff could not recover from Defendant for a quasi-contract claim—i.e., unjust enrichment—where a valid contract for the same subject matter existed between the parties. Finally, the Court dismissed the fraud claim because it essentially restated the breach of contract claim. As the Court explained, a fraud claim does not lie under New York law where the only alleged misrepresentation is of “intent or ability to perform under the contract.”

Cascade Funding LP – Series 6 v. Bancorp Bank^[94] (Contract; “market disruption” clauses). In Cascade Funding LP – Series 6 v. Bancorp Bank, the New York County Commercial Division found that where contractual clauses are included to permit termination in instances of market disruption, to the extent such a clause contains an objective benchmark by which to determine disruption, the counterparty cannot defeat the clause’s operation through actions deemed to be “off-market.”

Plaintiff Cascade Funding LP (“Cascade”) is an investment fund formed for the purpose of purchasing and securitizing mortgage loans. Defendant The Bancorp Bank (“Bancorp”) is a commercial bank that, among other things, originates commercial mortgage loans and sponsors commercial real estate collateralized loan obligations (“CLOs”). On the eve of the COVID-19 pandemic, on February 24, 2020, Cascade agreed to purchase from Bancorp a pool of more than $825 million in commercial mortgage loan assets, with the intention of packaging and securitizing those assets into commercial real estate CLOs that would be marketed and sold to investors no later than April 15, 2020. As part of the deal, Cascade paid Bancorp an initial $12.5 million deposit in advance of the target April 15 closing date.

At the center of the dispute was a “Market Disruption” clause in the parties’ agreement that, as the Court explained, effectively gave Cascade a “securitization out” based on an objective change in market conditions between contract execution and the securitization closing date. In addition to termination of the transaction, the “Market Disruption” clause also provided for return of Cascade’s initial $12.5 million deposit.

On March 31, 2020, fifteen days before the closing date, Cascade exercised the “Market Disruption” clause, provided Bancorp with notice of termination, and demanded return of the $12.5 million deposit. Cascade included with its notice a written determination of market conditions prepared by the underwriter. For reasons discussed below, however, Bancorp rejected the notice. Cascade ultimately filed suit, seeking among other things recovery of the initial deposit.

In opposing Cascade’s motion for summary judgment, Bancorp argued that (1) before concluding that the bonds could not be priced at or below LIBOR+200bp and invoking the “Market Disruption” clause, Cascade should have gone through the process of soliciting actual bids; and (2) had it done so, it would have learned that Bancorp itself was willing to buy the bonds (if offered) at LIBOR+199bp.

The Court rejected Bancorp’s arguments and granted Cascade summary judgment. With respect to Bancorp’s argument that Cascade was required to solicit actual bids, the Court reasoned that the clause—as written—provided an objective metric by which to determine disruption and did not expressly state that “actual bids” were the “only acceptable evidence of market disruption.” The Court concluded that the clause therefore did not require Cascade to “proceed with objectively futile marketing efforts to prove the market potential of the bonds in an admittedly frozen market.”

With respect to Bancorp’s argument about its own willingness to bid on the offering, the Court noted “some logic” to the theory but concluded that the “problem” was that it “clashe[d] with the language and clear purpose of the contract, which focuses on whether there has been a market disruption measured against an objective standard.” As the Court explained, Bancorp’s interpretation—if accepted—would give counterparties with an “off-market” financial incentive the “unilateral option to extinguish [a] termination right regardless of market conditions.” The Court noted that the consequence of such an interpretation—i.e., “locking Cascade into a 99-bp adverse change in LIBOR spreads,” with untold spillover effects to lower tranches of the bond—was not what the parties intended or agreed to.

§ 1.3.13. North Carolina Business Court

Lee v. McDowell^[95] (Director liability for lack of executive oversight). Investors brought derivative and individual claims against several members of the board of directors of the defunct corporation rFactr, alleging that Defendants failed to monitor the corporation’s finances and operations properly, which allowed the company’s President and Vice President to engage in mismanagement and malfeasance. Plaintiffs brought derivative claims against board members Chris McDowell, Chris Lau, and Robert Dunn for breach of fiduciary duty and individual claims against McDowell for breach of fiduciary duty, constructive fraud, and securities fraud under North Carolina law, Section 10(b) of the Exchange Act, and Rule 10(b)(5). Defendants moved for summary judgment on all claims.

The court granted summary judgment with respect to the derivative claims based on failure to monitor and oversee rFactr. Applying Delaware law, the court determined that although they could have done more, McDowell and Dunn had, among other things, requested financial information about the company and obtained a cash flow statement, thereby meeting the minimum burden established by In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996). In contrast, the court denied the motion based on claims against McDowell and Dunn for failing to prevent excessive compensation payments. The court refused to conclude their actions fit within the Business Judgment Rule as a matter of law because McDowell and Dunn, despite acknowledging they were shocked and horrified at the outrageous executive compensation, pursued no formal board action to lower compensation levels and had even rejected an offer by President Richard Brasser to reduce his own salary. Therefore, questions of fact existed as to whether their actions amounted to corporate waste. The court also concluded there were triable issues of fact on whether Defendants Lau and Dunn violated their duty of loyalty when they cancelled a potential deal to sell rFactr while simultaneously contemplating a purchase of the company themselves. However, summary judgment was still appropriate on that claim, as Plaintiffs failed to offer any evidence that the deal would have been completed but for Defendants’ self-dealing.

On the individual claims against McDowell, the court granted summary judgment on the fiduciary duty and constructive fraud claims, concluding that even if McDowell owed a special duty to Plaintiffs, that duty was not a fiduciary one. McDowell did not control all the financial power or technical information in his relationship with Plaintiffs amounting to a de facto fiduciary relationship. Instead, Plaintiffs were highly sophisticated investors themselves. Additionally, the court granted summary judgment based on Plaintiffs’ claims that McDowell failed to correct the alleged misrepresentations about the health and status of the company made by Brasser. The Court concluded that McDowell had no duty to Plaintiffs to correct Brasser’s statements, nor did the evidence show McDowell was aware those statements were false. In contrast, however, the court denied the motion as it related to McDowell’s failure to disclose to Plaintiffs that he would be compensated if they invested in the company.

Davis v. HCA Healthcare, Inc.^[96] (Antitrust). Plaintiffs are several citizens of Western North Carolina with commercial insurance plans who brought antitrust claims arising out of the activities of Defendant Mission Hospital in Asheville. Mission operated for years under state Certificate of Public Advantage (COPA) laws, protecting it from antitrust claims in exchange for state oversight. During this time, Mission acquired numerous competitors in the area. After the repeal of the COPA laws, Florida-based HCA Healthcare, Inc. acquired Mission. Plaintiffs alleged that because of Mission’s “must have” status as the premier hospital in Western North Carolina, coupled with its recent freedom from government oversight, Defendants were able to force insurers to include Defendants’ other facilities in their network in order to include Mission, an unlawful practice known as “tying.” Plaintiffs also alleged Defendants used other anticompetitive tactics, such as including “antisteering” clauses in their contracts to prevent insurers from sending patients to lower cost options, and including “gag” clauses that forbid insurers to release the terms of their contracts with Defendants to regulators or the public. Plaintiffs alleged these practices allowed Defendants to offer lower quality service at monopolistic prices, forced patients into unnecessary services, prevented the introduction of insurance products to lower prices for consumers, and deprived consumers of a competitive marketplace for inpatient hospital services. Plaintiffs brought monopolization, attempted monopolization, and restraint of trade claims under Chapter 75 of the North Carolina general statutes and the anti-monopoly provision of the North Carolina Constitution.

Defendants initially moved to dismiss for lack of standing, which the court rejected, citing North Carolina law recognizing indirect purchaser standing. Additionally, the court rejected Defendants’ motion to dismiss Plaintiffs’ restraint of trade claim under Rule 12(b)(6). Analyzing the claim under the “rule of reason” test, the court determined that Plaintiffs had adequately alleged “an unreasonable restraint of trade . . . by alleging the existence of sufficient market power held by Defendants in the Asheville Inpatient Services market, coupled with the potential for anticompetitive effects stemming from unwanted contractual provisions unilaterally imposed by Defendants on insurers.” However, the court dismissed all of Plaintiffs’ monopolization claims. With respect to the constitutional claim, well-settled North Carolina law requires that such claims be against a state actor, not private companies. Additionally, Plaintiffs’ Chapter 75 claims failed because (1) HCA did not own any other hospitals in North Carolina to support a monopoly acquisition claim; (2) Plaintiffs failed to allege any conduct “specifically designed to prevent competitors from entering the Asheville Region” to support a monopoly maintenance claim; and (3) Plaintiffs “failed to allege a sufficient market share held by Defendants” to support a monopoly leveraging claim. Plaintiffs’ market share allegations were based solely on Medicare data, which the court found irrelevant in the private insurance market. Finally, for the same reasons, the court dismissed Plaintiffs’ attempted monopolization claims for failure to show a “dangerous likelihood” that Defendants would establish a monopoly in the region.

Aspen Specialty Ins. Co. v. Nucor Corp.^[97] (Discoverability of insurance reserve amounts). This case involved a declaratory judgment action brought by twelve insurance companies to construe the relevant policies covering property damage and loss to Defendant Nucor Corporation. Nucor is a manufacturer who produces iron ore into “sponge iron” for use in steel production. Following an accident at Nucor’s Convent, Louisiana facility, where iron ore leaked into a cement lined reactor and solidified, Nucor suffered losses of the ruined iron ore, damage to the reactor, and business interruption losses. In the ensuing discovery, Plaintiffs all objected to Nucor’s interrogatories and requests for production of documents seeking information related to each Plaintiff’s insurance reserve amount. After exhausting the Business Court discovery resolution procedures, Nucor filed a motion to compel.

The court first considered the variety of ways in which insurers determine their reserve amounts. Given the multitude of methods and philosophies insurers have in calculating reserves, the court noted that “it is folly to generalize about the meaning of a particular reserve.” Instead, courts must make an individualized determination based on each case, which largely depends on the type of claims involved. Surveying a wide body of federal law, the court concluded that although “the weight of authority is that reserve information is generally not discoverable in coverage cases, which turn largely on an interpretation of the language of the policy,” discovery of reserve amounts can be appropriate in cases where claims of bad faith and misrepresentation are present. The court then examined and distinguished the only relevant North Carolina authority on insurance reserves, Wachovia Bank, N.A. v. Clean River Corp., 178 N.C. App. 528, 631 S.E.2d 879 (2006), determining that it established “only that reserves are not categorically off limits in discovery as long as they are not shielded by privilege or qualified immunity.” Unlike Wachovia, the present case did not deal with claims of misrepresentation or bad faith, but instead, was limited to breach of contract and declaratory judgment claims. Therefore, discovery into the insurance reserves was inappropriate. The court also rejected Nucor’s argument that discovery of the reserve amounts may lead to a bad faith claim, considering that possibility too “hypothetical.” Accordingly, the court denied Nucor’s motion to compel.

Emrich Enters., LLC v. Hornwood, Inc.^[98] (Fiduciary duty owed by an LLC majority member and application of the business judgment rule in the LLC context). This case involved a dispute between the two sole members of a North Carolina LLC. Among other claims, the minority member asserted breach of fiduciary duty claims, individually and derivatively on behalf of the LLC, against the majority member. The majority member and the LLC moved for summary judgment on these claims, arguing that the majority member did not owe a fiduciary duty directly to the minority member and that the business judgment rule shielded the majority member (also a manager of the LLC) from liability.

The general rule in North Carolina is that LLC members do not owe a fiduciary duty to each other. An exception to this rule is that “a holder of a majority interest who exercises control over the LLC owes a fiduciary duty to minority interest members.” Here, the majority member was a manager of the LLC, and the operating agreement (which was silent on fiduciary duties) provided that all decisions regarding the management and affairs of the LLC would be made by the majority interest of the members. There was also evidence that the majority member owned all of the manufacturing facilities where the LLC’s products were manufactured, that the minority member could not manufacture the LLC’s products without the majority member, and that the majority member unilaterally took action on certain financial matters concerning the business and controlled the LLC’s bank account. Thus, there was sufficient evidence of the majority member exercising the type of control that could give rise to a fiduciary relationship between the majority member and the minority member.

As for the business judgment rule, the court explained that this rule’s protection extends to certain “business decisions” by LLC managers. The court determined that the majority member’s challenged conduct fell within the business judgment rule’s protection, except for the member’s alleged failure to correctly provide a contractor of the LLC with the product specifications needed to pass quality testing by a customer of the LLC. The majority member’s conduct concerning the specifications was not a business decision, but rather a “ministerial act that did not involve either judgment as to whether to enter into a course of conduct, or a weighing of the risks and rewards of future.”

North Carolina ex rel. Stein v. Bowen^[99] (Personal jurisdiction over corporate officers and directors). The State of North Carolina sued five nonresident officers and directors of JUUL Labs, Inc., an e-cigarette company based in California. The State alleged that Defendants had engaged in unfair or deceptive trade practices in North Carolina while supervising and directing the marketing of JUUL’s products. Defendants moved to dismiss the lawsuit for lack of personal jurisdiction and failure to state a claim. The court concluded that it lacked personal jurisdiction over Defendants.

In its analysis, the court disregarded many of the allegations in the State’s unverified complaint because they grouped Defendants together, which was contrary to the necessary “individualized inquiry” for personal jurisdiction. The State’s “generalized allegations” were “an attempt to attribute JUUL’s business activities to its corporate officers and directors.” Personal jurisdiction, however, cannot be exercised over a corporation’s officers and directors merely because there is personal jurisdiction over the corporation. And even when the State identified individual conduct, it failed to establish a sufficient connection between the conduct and North Carolina and failed to show that the few forum contacts by some of Defendants were related to the State’s claims.

Relying on the Keeton market-exploitation test,^[100] the State argued that Defendants had purposefully availed themselves of the privilege of conducting activities in North Carolina by reviewing and approving JUUL’s nationwide ads with knowledge that the ads would appear in North Carolina. The market-exploitation test considers factors such as sales volume, customer base, and revenues. The court reasoned that this test, while perhaps suitable for JUUL, was not appropriate for Defendants, particularly because any contacts that Defendants may have had with North Carolina needed to be assessed individually and based on their own activities. The best test for this case’s facts was the Calder effects test.^[101] But the State did not cite Calder, and in any event, the State failed to show that Defendants expressly aimed conduct at North Carolina, a requirement of the effects test.

§ 1.3.14. Philadelphia Commerce Case Management Program

American Mushroom Cooperative f/d/b/a Eastern Mushroom Marketing Cooperative, Inc., et al. v. Saul Ewing Arnstein & Lehr LLP^[102] (Grant of reconsideration and grant of judgment on the pleadings in favor of law firm and against former client on statute of limitations grounds, dismissing legal malpractice claim). Judge Nina W. Padilla held that Pennsylvania’s two-year statute of limitations for negligence, and four-year statute of limitations for breach of contract, barred the American Mushroom Cooperative from pursuing claims that Saul Ewing’s allegedly incorrect legal advice caused past and ongoing harm. The Mushroom Cooperative was a long-time client of Saul Ewing. The Mushroom Cooperative alleged that in 2000 to 2002, Saul Ewing gave erroneous antitrust advice. In 2003, the Justice Department commenced an investigation, and in 2004 the Mushroom Cooperative and the DOJ entered into a consent judgment requiring the Mushroom Cooperative to reverse some of the actions advised by Saul Ewing. Multiple civil antitrust lawsuits followed. In 2009, a federal judge issued an opinion finding that other advice given by Saul Ewing was erroneous. According to the Mushroom Cooperative, this led to thirteen years of antitrust litigation and costly settlements.

The Mushroom Cooperative sued Saul Ewing in March 2020, demanding that its former counsel pay for the settlements and all of the counsel fees the Mushroom Cooperative had incurred because of its ex-lawyers since the outset of the DOJ inquiry in 2003. Judge Padilla granted Saul Ewing’s motions pursuant to Pennsylvania’s occurrence rule for legal malpractice claims. Under the occurrence rule, a breach of duty, and not the realization of a loss, triggers the accrual of a claim. The exception is the equitable discovery rule, which applies if Plaintiff is unaware of the existence of the injury or its cause, despite due diligence.

Judge Padilla noted that Saul Ewing gave its alleged bad advice in 2000 to 2002. Therefore, the Mushroom Cooperative had to file its lawsuit, at the latest, by 2006. Even if the discovery rule applied, then the Mushroom Cooperative was certainly aware of its claim in 2004, when it executed the DOJ consent judgment. That the Mushroom Cooperative may have subsequently sustained more than $50 million in damages, in the form of counsel fees and settlements, and continued to pay, did not result in new or separate legal malpractice claims. “[F]or Statute of Limitations purposes, a client cannot wait until its injuries become overwhelming before bringing suit.”

Federal Realty Investment Trust n/k/a/ Federal Realty OP, LP v. RAO 8 INC. d/b/a Dunkin Donuts, Mital H. Rao and Radha M. Rao^[103] (Denial of commercial tenant’s petition to open confessed judgment due to tenant’s failure to follow requirements in lease to extend term). Judge Nina W. Padilla held that Federal Realty, the landlord, properly confessed judgment against Dunkin Donuts, the tenant, for damages and possession because Dunkin Donuts did not comply with provisions in its lease for sending notice. Dunkin Donuts sent Federal Realty a letter notifying Federal Realty that Dunkin Donuts was exercising an option to remain in the premises for five additional years. However, Dunkin Donuts did not send the letter through a nationally recognized overnight carrier, or by registered or certified mail with a return receipt, as specified in the lease. Federal Realty stated that it did not receive the notice letter. Thereafter, Federal Realty sent Dunkin Donuts a renewal proposal, which Dunkin Donuts did not accept. There were subsequent negotiations, which were inconclusive. In the meantime, the lease had expired, but Dunkin Donuts remained in the premises and continued to pay rent in the amount set forth in the lease. After Dunkin Donuts failed to honor a demand to vacate indicating that Federal Realty had a new tenant, Federal Realty confessed judgment, as allowed by the lease. In Pennsylvania, a confession of judgment (or cognovit or warrant of attorney) clause is a contractual device that allows a commercial party to cause the entry of judgment against a counterparty upon the occurrence of a default under their agreement, without further notice.

Judge Padilla upheld the confessed judgment on the ground that Dunkin Donuts failed to send its notice letter to Federal Realty by he means required in the lease: using a nationally recognized overnight courier, or by registered or certified mail with a return receipt. There was no evidence that Federal Realty received the letter and accepted the exercise of the option. On the contrary, the fact that there were subsequent negotiations confirmed that Federal Realty did not receive the letter. Furthermore, the payment and acceptance of rent post-lease expiration did not extend the term of the lease. Under the lease, Dunkin Donuts became a holdover tenant. That Dunkin Donuts continued to pay rent in the amount set forth for the lease term, and not in the greater amount due from a holdover tenant, was an additional default by Dunkin Donuts justifying the court to allow the confessed judgment to stand. The court ordered Dunkin Donuts to vacate within thirty days.

John J. Dougherty v. National Union Fire Insurance Company of Pittsburgh, PA^[104] (Grant of mandatory preliminary injunction requiring D&O insurer to advance legal expenses for criminal defense of corporate officer). Judge Ramy I. Djerassi held that John Dougherty, the business manager of a labor union, met all six requirements to compel a D&O insurer to pay the counsel fees and costs he had and would incur defending against a criminal indictment. This was so even though Dougherty sought a “mandatory” injunction. In Pennsylvania, a mandatory injunction is a request for affirmative relief (such as the payment of defense expenses), and has an even higher burden than conventional equitable relief intended to maintain the status quo.

Judge Djerassi first concluded that Dougherty had a clear right to relief under the language of the insurance policy. The policy used the mandatory “shall” to impose a duty on the carrier to advance defense costs. Furthermore, even though the government indicted him after the expiration of the policy, Dougherty afforded timely notice by informing the carrier of his claim within thirty days of when the policy expired and just two weeks after the government served a search warrant relating to his indictment, which was prior to the end of the policy. The Court also rejected the carrier’s invocation of a mandatory arbitration clause in the policy. With the criminal trial imminent, Judge Djerassi found that there was inadequate time for the ADR process.

With Dougherty on the verge of trial, the potential prejudice to Dougherty’s constitutionally protected liberty interest was central to Judge Djerassi’s decision and the Court’s finding that Dougherty met the remaining five elements for injunctive relief. Judge Djerassi found that the withholding of the advancement of criminal defense costs purchased through an insurance policy was irreparable harm that damages could not compensate. Greater injury would result to Dougherty’s constitutional interest from denying injunctive relief than the harm to the insurer from granting it. Moreover, injunctive relief would preserve the status quo by upholding Dougherty’s presumption of innocence and preventing prejudice to him while he litigated the merits of the underlying coverage dispute. Additionally, Judge Djerassi found that forcing the carrier to pay was a remedy reasonably tailored to guard Dougherty’s right to counsel, and an injunction would not adversely affect the public interest because “the advancement of defense costs protects constitutional liberty and the rule of law.”

The Court required the carrier to pay Dougherty’s invoices forthwith, through to the final disposition of his criminal case [where, ultimately, the government convicted him].

§ 1.3.15. Rhode Island Superior Court Business Calendar

J-Scape Seasonal Property Care, LLC. V. Schartner^[105] (Before the Superior Court was a Motion to Show Cause filed by the purported landlord and tenant of a real property (collectively the Movants), to which landscape contractor servicing the property objected). “This matter arises from contractor’s complaint to enforce a mechanic’s lien in the amount of $73,300.27 (the Lien) plus interest for work performed and materials furnished to tenant of property located in, Exeter, Rhode Island. The Movants argued that the Lien should be discharged from the landlord owned property because plaintiff/contractor failed to provide notice to the tenant, as required by R.I.G.L. §34-28-4.1 …” “Here, the Movants presented credible evidence to support the existence of the tenant’s status under the lease…” “Given the clear and competent evidence as well as the unwavering testimony regarding [tenant’s] occupation and payment of rent on a monthly basis, the Movants have satisfied their burden to give rise to a rebuttable presumption that the Movants have a landlord-tenant relationship with respect to the Exeter Property…” and the Court thereby confirmed the tenant and landlord relationship at the Exeter Property.

The Court found: “As a tenant of… the Exeter Property, [it] was entitled to receive notice of a possible mechanic’s lien pursuant to §34-28-4.1. …”

The Court concluded: “Contractor clearly did not provide proper notice to tenant at the Exeter Property — and significantly departed from the notice requirements of §34-28-4.1, facts that prove fatal to Contractor’s ability to claim and perfect the Lien with respect to the Exeter Property. … Therefore, pursuant to §34-28-17.1(a), the Movants have satisfied their burden of proof by demonstrating a lack of probability of judgment in [Contractor’s] favor regarding the mechanic’s lien on the Exeter Property because it is void for failure to provide the requisite notice pursuant to §34-28-4.1. …” “For the reasons stated above, this Court deemed the mechanic’s lien currently in place on the Exeter Property to be void and unenforceable based on [Contractor’s] failure to provide the requisite notice pursuant to §34-28-4.1.”

East Greenwich Cove Builders, LLC v. Schnaier ^[106] (Plaintiff brought summary judgment motion to declare a purchase and sale agreement for a condominium unit unenforceable on the grounds that the agreement did not adequately describe the property to be sold). The agreement referenced the property as Unit 8 but at the time Unit 8 had not been declared as a condominium unit or constructed. In addition, the agreement purportedly incorporated plans and specs as an exhibit, but no such exhibit was attached. The Court found that the documents did not satisfy the statute of frauds or the contract principle of the inclusion of essential terms. The Court also found that the description of the unit was so indefinite and uncertain that parol evidence could not be introduced to complete the description. Finally, the Court found that the defendant could not overcome the statute of frauds with the doctrine of part performance exception as the defendant did not take possession of the property or improvements or pay a substantial part of the purchase price.

Green Development, LLC v. Exeter Real Estate holdings ^[107] (Decision of Superior Court following a three-day bench trial). Among other contract interpretation issues at play the court addressed the issues of whether a document sent with a DRAFT watermark is an offer and whether parties can modify a contract’s written terms by subsequent oral agreement even if the contract requires modifications in writing.

Chace IV v. Chace Jr.^[108] (Plaintiffs brought actions against trustees related to their management of a trust). Plaintiffs sought trust accounting, removal of the trustees and appointment of successor trustees. The trust was silent as to the governing law that should apply. Plaintiffs argued that Florida law should apply (testator’s domicile at death), and the defendants argued that Rhode Island law should apply.

Both parties agreed that Rhode Island case law is silent regarding which state’s laws apply to lawsuits arising out of the administration on a trust. Restatement (Second) Conflict of Laws § 271 states that the law of the state where the trust is to be administered governs when there is no local law designated by the testator to govern the administration of the trust. The court adopted this approach because the Supreme Court adopted the Second Restatement’s approach to conflicts of laws. Further, the court found that Rhode Island was the place of administration of the trust based on a number of factors including that one of the trustees was a Rhode Island resident, trust documents list Rhode Island as the address for the trust, Rhode Island lawyers and accountants were employed by the trust for administration tasks, and the family’s entity is based on Rhode Island.

Whelen Corrente & Flanders LLP v. Nadeau ^[109] (In a fee dispute between clients and their law firm, the court upheld an arbitration clause in the fee agreement). In a case of first impression, the court held that, unlike an agreement to arbitrate malpractice claims under Rule 1.8 of the Rules of Professional Conduct, an agreement to arbitrate fee disputes does not require informed consent or client consultation with independent counsel. The court also rejected the clients’ claims that the fee arbitration clause was unconscionable.

Cashman Equip. Corp., Inc. v. Cardi Corp., Inc.^[110] (In a multiparty dispute over a construction project, the court held a trial on the claims between two of the parties). At the conclusion of Plaintiff’s case in chief, the court granted Defendant’s motion for judgment as a matter of law under R.C.P. 52(c). Thereafter, the court granted Defendant’s motion that this constitute a final judgment under R.C.P. 54(b). The court granted the motion after concluding that the judgment resolved the issues between these two parties and there was no just reason for delay. The court rejected Plaintiff’s argument that Defendant’s claim to attorneys’ fees under R.I. Gen. Laws Section 9-1-45 was discharged in Plaintiff’s Chapter 11 bankruptcy. That claim did not arise until the court granted the judgment as a matter of law after the confirmation of Plaintiff’s Chapter 11 plan.

234 Realty, LLC v. First Hartford Realty Corp. and 287 Realty, LLC v. First Hartford Realty Corp.^[111] (The parties entered into an agreement where the defendant was to pay the plaintiff certain referral fees for real estate transactions). Plaintiff brought suit against the Defendant alleging that Defendant failed to report fees received from real estate transactions resulting in fewer payments to Plaintiff. When Plaintiff inquired further about this, Defendant allegedly withheld information from Plaintiff.

Plaintiff sought the appointment of a special master to audit Defendant to determine whether information had been withheld and whether fees were being properly paid. The accountant appointed by the special master incurred significant expenses in auditing Defendant, due in large part to Defendant’s inability to maintain adequate records and reluctance to provide records. Defendant objected to the accountant’s fees as unreasonable on multiple grounds, including that the work was not adequately supervised, involved unnecessary work because the accountant did not rely on third-party data and the accounting firm failed to use less expensive resources on the file. The court found that the fees were fair and reasonable contrary Defendant’s expert’s testimony. Plaintiff also moved the court to shift the fees entirely to Defendant. Defendant countered that it is well-established law in Rhode Island that fee shifting should not occur until a final determination is made on the merits. The court decided to allocate costs before final determination on the merits because Rule 53(g)(3) states “[a]n interim allocation may be amended to reflect a decision on the merits.” Fed. R. Civ. P. 53(g)(3). The entire costs incurred by the accountant were allocated to Defendant largely because the accountant had significant difficulty getting information/documents from Defendant that only added to the amount of fees incurred.

Erskine Flow v. FS Group RI, LLC ^[112] (A receiver obtained a $2.425 million offer to buy the receivership property from an unrelated third party). Another party submitted a higher offer containing terms and conditions that were not in the first offer. The court approved the first offer over the objection of the petitioner in the receivership. The court granted the mortgagee’s motion to require the objecting petitioner to post a $1.25 million surety bond if it appealed the sale order.

Josephson, LLC v. Affiliated FM Ins Co.^[113] (Plaintiff real estate investment company brought an insurance claim for business interruption coverage due to Covid-19). Plaintiff claimed that COVID-19 rendered all of its insured properties (which included hotels, leased residential and commercial properties) “partially or fully unusable for their intended purposes.” The court noted that “the common theme among COVID-19 insurance disputes is that the resolution of the matter depends upon the policy’s language and the facts as alleged by the insured and as applied to the applicable policy at issue.” In this instance the court found that COVID-19 does not constitute a “physical loss of damage” as required by this policy relying largely upon the fact that the policy included clear and unambiguous “communicable disease” coverage that do not require a showing of “physical loss or damage.” Secondly, the court agreed with majority of other jurisdictions in including that COVID-19 cannot cause “physical loss or damage” to property “where no physical alteration or damage has occurred to the property.” The court distinguished COVID-19 from a case of mold contamination as it does not permanently exist on surfaces or otherwise require physical repair to remedy its presence on the property.

§ 1.3.16. West Virginia Business Court Division

JB Exploration 1, LLC v. Blackrock Enterprises, LLC^[114] (Breach of contract bifurcated jury/bench trial). This case was referred to the Business Court Division on April 27, 2018, and involves a dispute related to a lease acquisition agreement to acquire leases and other oil and gas interests in Pleasants County, West Virginia. The court conducted the trial in two phases: a jury trial from March 2-12, 2021, and a bench trial from September 22-23, 2021. In the first phase, the jury was tasked with determining whether Blackrock breached the lease acquisition agreement. Depending on the jury’s findings, the Court would determine in the second phase whether a mining partnership existed and what, if any, damages were appropriate.

Under the lease acquisition agreement, the parties were to work together to acquire various oil and gas leases in a designated area in Pleasants County, West Virginia. The jury determined that Blackrock breached the agreement by, among other things, not timely responding to offers to buy into leases acquired by JB. The court also found that Blackrock failed to pay its share of costs to acquire and develop oil and gas leases and other interests in the designated area.

Following a bench trial for the second phase, the court determined that the lease acquisition agreement was a partnership and that the proper remedy was judicial dissolution of the partnership. The court further held that Blackrock was not entitled to any buyout of its partnership share and must convey its interests to JB. The case has been disposed of as of mid-2022.

Westlake Chem. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA^[115] (Collateral estoppel). This case was referred to the Business Court Division on October 11, 2019, and concerns an insurance coverage dispute involving the alleged failure of several insurance companies to cover Plaintiff Westlake Chemical Corporation for property damage at its Marshall County, West Virginia plant caused by a railroad tank car rupture and resulting chlorine release that occurred in August 2016. In a previous civil action in Pennsylvania, a jury had determined that Axiall Corporation, which Westlake acquired after the accident, was entitled to $5.9 million for property damage to its plant from Defendant which caused the accident. But Axiall submitted claims to Defendants for $278,000,000 for damage to the plant, the exact same damages it claimed in the Pennsylvania litigation.

Defendants moved for partial summary judgment, arguing that the Pennsylvania verdict was binding on this action, because it addressed the same damages Westlake claimed in this action. The court agreed with Defendants and held that Westlake was collaterally estopped from litigating the amount of damages because the same damages were at issue in both actions, and Axiall, Westlake’s predecessor in interest, had a full and fair opportunity to litigate the damages issue in the Pennsylvania action. The case remains pending in the Business Court Division.

Covestro, LLC v. Axiall Corp. et al.^[116] (Non-mutual collateral estoppel). This case was referred to the Business Court Division on May 22, 2019, and involves the same chlorine gas leak as was at issue in the immediately previous case. In this consolidated case, Covestro, which owned a plant nearby the Axiall plant where the railroad car carrying chlorine gas ruptured, sued Axiall and other defendants for damages to its plant caused by the chlorine gas. The leak created a large gas cloud that travelled south to the neighboring Covestro Plant and other lands. Axiall also sued Alltranstek, LLC, Rescar Companies, and Superheat FGH Services, Inc. for their role in causing the leak.

As in the previous case, the court applied the jury verdict in the Pennsylvania action to adjudicate many of the claims at issue. Though Covestro was not a party to the Pennsylvania action, the court held that Axiall—found 40% at fault in that action—could not relitigate the jury’s finding that it was negligent and therefore liable to Covestro for its damages. The court also rejected Axiall’s arguments that it did not have a duty to Covestro or that transporting chlorine gas was not abnormally dangerous.

Similarly, the court held that Axiall could not relitigate its claims against Defendants in the Pennsylvania action. In particular, the court held that Axiall could not hold Superheat liable for any damages, because the Pennsylvania jury had determined that Superheat was 0% negligent. This case remains pending in the Business Court Division.

§ 1.3.17. Wisconsin Commercial Docket Pilot Project

St. Croix Hospice, LLC v. Moments Hospice of Eau Claire, LLC^[117] (Employment agreement; tortious interference with contract). In St. Croix, the court grappled with cross motions for summary judgment related to claims for breach of contract and tortious interference with contract. St Croix Hospice (“SCH”) and Moments were competing hospice companies. When Moments expanded into the SCH’s Wisconsin territory and advertised employment opportunities, SCH’s regional Associate Medical Director (the “Medical Director”) and several SCH employees left SCH to work for Moments. In addition, several of SCH’s patients transferred to Moments. SCH subsequently filed suit, asserting: (1) the Medical Director had breached his Medical Director Services Agreement with SCH—which prohibited him from entering into agreements with or working with any of SCH’s hospice competitors—when he left SCH to work for Moments; (2) claims for tortious interference with contract against the Medical Director and Moments, alleging that Moments had interfered with the confidentiality, non-disclosure, and non-solicitation provisions in the SCH’s agreements with its employees; and (3) a claim for vicarious liability against Moments, alleging that Moments is vicariously liable for the Medical Director and other employees breaching their contracts with SCH.

The court granted SCH summary judgment on its breach of contract claim against the Medical Director, finding that he had breached the clear language of the Medical Director Services agreement when he entered into an agreement to serve as Moments’ medical director. However, the court granted summary judgment to Moments on SCH’s other claims. The court found that the employment agreements that formed the basis of SCH’s tortious interference claim might provide grounds for employee discipline, but were not actionable contractual obligations. Further, because those agreements did not prohibit former employees from soliciting business from patients or recruiting workers, SCH could not show that any violation occurred. Additionally, SCH’s evidence (an e-mail and unauthenticated text message) did not establish that any former SCH employees had in fact breached their employment agreements. The court also found that it would have to take unwarranted inferential leaps to find that the fact that a handful of SCH’s patients had transferred to Moments meant that Moments had interfered with SCH’s patient contracts. Further, there were no facts in the record describing in what way Moments had dissuaded the Medical Director from performing his contractual obligations to SCH. The court also granted Moments’ motion for summary judgment on SCH’s claim for vicarious liability, holding that as a matter of law, Moments could not be vicariously liable for employees’ conduct that predated their hire, nor could Moments be vicariously liable for the Medical Director’s conduct because he was an independent contractor. The court found SCH’s other proffered evidence did not show that any former SCH employee had breached their agreement with SCH.

§ 1.3.18. Wyoming Chancery Court

Wright McCall LLC v. DeGaris Law, LLC^[118] (Personal jurisdiction over nonresident member of resident LLC). This case presents a personal jurisdiction dispute not uncommon to states known for their business-entity-formation industries. A Wyoming LLC sued to expel a nonresident member. The nonresident member moved to dismiss for lack of personal jurisdiction. In response, the Wyoming LLC argued the member consented to personal jurisdiction when it executed an operating agreement containing Wyoming dispute-resolution and governing-law provisions. And, in any case, the nonresident member had sufficient minimum contacts because it executed an operating agreement with Wyoming-centric provisions.

The court disposed of the jurisdiction-by-consent theory. Operating agreement language naming arbitration in Cheyenne or Denver as the “exclusive forum for adjudication of any disputes” constituted agreement to arbitrate in Cheyenne but it did not constitute consent to litigate a merits-based claim in a Wyoming court. The Wyoming LLC pointed to another provision deeming the contract made in Wyoming and governed by Wyoming law. Unmoved, the court held that personal jurisdiction could not be premised on conceptualistic theories of place of contracting and a clause stating Wyoming law would apply is not consent to jurisdiction because the concepts of governing law and personal jurisdiction differ.

As to the specific-jurisdiction theory, the court reasoned personal jurisdiction over an LLC does not extend to its members because an LLC is a distinct entity that insulates its members from company obligations. Independent of the company, the nonresident lacked minimum contacts with Wyoming. Executing an operating agreement mattered not to the minimum contacts analysis because it was part and parcel of LLC membership. And the governing-law and dispute-resolution provisions did not confer jurisdiction for the reasons noted above.

In sum, this case affirms three principles: (1) consent to arbitrate in a particular state is not consent to litigate merit-based claims in the courts of that state; (2) a choice-of-law provision stating a specific state’s law will apply does not constitute consent to personal jurisdiction in that state; and (3) personal jurisdiction cannot be premised on mere membership in a resident LLC.

1. This 2023 chapter marks Lee Applebaum’s 20th year. Lee started this chapter and faithfully has guided it as editor and contributing author. We are grateful for Lee’s decades of dedicated service to this effort and his overall tireless efforts to promote and support business courts throughout the country. Lee continues practicing law at Fineman, Krekstein and Harris, authoring his Business Courts Blog, and his contact information remains as provided above. ↑

2. For a more detailed discussion on what may be defined as a business court, see generally A.B.A. Bus. Law Section, The Business Courts Bench Book: Procedures and Best Practices in Business and Commercial Cases (Vanessa R. Tiradentes, et al., eds., 2019) [hereinafter Business Courts Bench Book]; Mitchell L. Bach & Lee Applebaum, A History of the Creation and Jurisdiction of Business Courts in the Last Decade, 60 Bus. Law. 147 (2004) [hereinafter Business Courts History]. ↑

3. For an overview of business courts in the United States, see, e.g., Business Courts Bench Book, supra note 1, Business Courts History, supra note 1, Lee Applebaum & Mitchell L. Bach, Business Courts in the United States: 20 Years of Innovation, in The Improvement of the Administration of Justice (Peter M. Koelling ed., 8th ed. 2016); Joseph R. Slights, III & Elizabeth A. Powers, Delaware Courts Continue to Excel in Business Litigation with the Success of the Complex Commercial Litigation Division of the Superior Court, 70 Bus. Law. 1039 (Fall 2015); John Coyle, Business Courts and Inter-State Competition, 53 Wm. & Mary L. Rev. 1915 (2012); The Honorable Ben F. Tennille, Lee Applebaum, & Anne Tucker Nees, Getting to Yes in Specialized Courts: The Unique Role of ADR in Business Court Cases, 11 Pepp. Disp. Resol. L. J. 35 (2010); Ann Tucker Nees, Making a Case for Business Courts: A Survey of and Proposed Framework to Evaluate Business Courts, 24 Ga. St. U. L. Rev. 477 (2007); Tim Dibble & Geoff Gallas, Best Practices in U.S. Business Courts, 19 Court Manager, no. 2, 2004, at 25. Further, the Business Courts chapter of this publication has provided details on developments in business courts every year since 2004. Finally, the Business Courts Blog went online in 2019, and serves as a library for past, present and future business court developments, www.businesscourtsblog.com (last visited Jan. 8, 2023). ↑

4. Business Courts Bench Book, supra note 1, at xx. ↑

5. Business Courts History, supra note 1, at 207, 211. ↑

6. American College of Business Court Judges, https://masonlec.org/divisions/mason-judicial-education-program/american-college-business-court-judges/ (last visited Jan. 7, 2023). ↑

7. See Meeting Agenda, Law & Econ. Ctr, https://web.cvent.com/event/f06f6ba1-bc11-4111-9bfa-31315f28630d/websitePage:8deb4542-d9c4-4193-9354-d3f8f3426f81 (last visited Jan. 7, 2023). ↑

8. Diversity Clerkship Program, ABA: Bus. Law Section, https://www.americanbar.org/groups/business_law/initiatives_awards/diversity/ (ABA login required) (last visited Nov. 7, 2022). ↑

9. Establishing Business Courts in Your State, https://communities.americanbar.org/topics/13510/media_center/file/0040887f-858d-41e9-a1a3-b1c1aa1c7440 (ABA login required) (last visited Jan. 8, 2023). ↑

10. These materials are located on the Business Court Subcommittee’s Library web page, https://communities.americanbar.org/topics/13503/media_center/folder/8c312eb8-3c18-4feb-acba-bbce37a8ff97 (ABA login required) (last visited Jan. 8, 2023). ↑

11. A.B.A. Section of Business Law Judges Initiative Committee, https://www.americanbar.org/groups/business_law/committees/judges/ (ABA login required) (last visited Jan. 8, 2023). ↑

12. Business Court Representatives, ABA: Bus. Law Section, https://www.americanbar.org/groups/business_law/initiatives_awards/bcr/ (ABA login required) (last visited Jan. 8, 2023). ↑

13. Id. ↑

14. Business and Commercial Courts Training Curriculum, Nat’l Ctr. for State Courts, https://ncsc.contentdm.oclc.org/digital/collection/traffic/id/92/rec/9 (last visited Jan. 8, 2023). ↑

15. Faculty Guide, Business and Commercial Litigation Courts Course Curriculum, Nat’l Ctr. for State Courts, https://ncsc.contentdm.oclc.org/digital/collection/traffic/id/91/rec/4 (last visited Jan. 8, 2023). ↑

16. New business court docket curriculum developed for courts nationwide, Nat’l Ctr. for State Courts, https://www.ncsc.org/newsroom/at-the-center/2020/new-business-court-docket-curriculum-developed-for-courts-nationwide?SQ_VARIATION_52227=0 (last visited Jan. 8, 2023) [hereinafter Business Courts Curriculum]. ↑

17. www.businesscourtsblog.com. ↑

18. See, e.g., Business Court Studies and Reports 2000–2009, Bus. Courts Blog (Jan. 5, 2019), https://www.businesscourtsblog.com/business-court-studies-and-reports-2000-2009; Business Court Studies and Reports 2010–2018, Bus. Courts Blog (Jan. 5, 2019), https://www.businesscourtsblog.com/business-court-studies-and-reports-2010-2018; New York Commercial Division Advisory Council Report on Business Court Benefits, Bus. Courts Blog (July 10, 2019), https://www.businesscourtsblog.com/category/reports-and-studies. ↑

19. See, e.g., ABA Section of Business Law’s Business and Corporate Litigation Committee, Business Courts (chapter), in Recent Developments in Business and Corporate Litigation (2022), https://businesslawtoday.org/2022/02/recent-developments-in-business-courts-2022/; Weixia Gu, Jacky Tam, The Global Rise of International Commercial Courts: Typology and Power Dynamics, 22 Chi. J. Int’l L. 443 (2022), https://cjil.uchicago.edu/publication/global-rise-international-commercial-courts-typology-and-power-dynamics; Pierluigi Matera, Delaware’s Dominance, Wyoming’s Dare: New Challenge, Same Outcome?, 27 Fordham J. Corp. & Fin. L. 73 (2022) https://ir.lawnet.fordham.edu/jcfl/vol27/iss1/2/; Richard G. Niess, Why The Current Business Court Needs Reform, 95 Wis. Law 42 (Feb. 2022), https://www.wisbar.org/NewsPublications/WisconsinLawyer/Pages/Article.aspx?Volume=95&Issue=2&ArticleID=28904; Douglas L. Toering and Fatima Bolyea, Touring the Business Courts , 42 Michigan Bus. L. J. 11 (Spring 2022), https://higherlogicdownload.s3.amazonaws.com/MICHBAR/ebd9d274-5344-4c99-8e26-d13f998c7236/UploadedImages/pdfs/journal/Spring22.pdf#page=13; Paul G. Swanson, Far from being ‘shadowy,’ Wisconsin’s business court is dispensing justice, serving the public, Milwaukee Journal Sentinel (April 15, 2022), https://www.jsonline.com/story/opinion/2022/04/15/wisconsin-business-court-dispensing-justice-serving-public/7316571001/; Hon. Saliann Scarpula, Julie North & Scott Reents, New York Commercial Division Leads the Way With New E-Discovery Rules, New York Law Journal (May 10, 2022), https://www.law.com/newyorklawjournal/2022/05/10/new-york-commercial-division-leads-the-way-with-new-e-discovery-rules/?slreturn=20230008162847; International Commercial Courts, The Future of Transnational Adjudication, Cambridge University Press (2022), https://www.cambridge.org/us/academic/subjects/law/public-international-law/international-commercial-courts-future-transnational-adjudication?format=HB; Michael I. Green, Crowded at the Top: An Empirical Description of the Oligopolistic Market for International Arbitration Institutions, 31 Minn. J. Int’l L. 281 (2022), https://minnjil.org/wp-content/uploads/2022/06/Green_v31_i1_281_322.pdf; Zhiyu Li, Specialized Judicial Empowerment, 32 U. Fla. J.L. & Pub. Pol’y 491 (Summer 2022), https://ufjlpp.org/wp-content/uploads/2022/11/FL_JLPP_32-3_Li.pdf; Alyssa S. King & Pamela K. Bookman, Traveling Judges, 116 American Journal of International Law 477 (July 2022), https://www.cambridge.org/core/journals/american-journal-of-international-law/article/traveling-judges/265194C20619E88E512064CB2988BC90; Douglas L. Toering, Fatima M. Bolyea, and Brian P. Markham,  Interview with Judge Christopher Yates, Touring the Business Courts , Michigan Bus. L. J.  (Summer 2022), https://connect.michbar.org/businesslaw/newsletter/summer22; Douglas L. Toering, Ian Williamson, and Nicole B. Lockhart, Interviews with Judge Timothy P. Connors and Judge Victoria A. Valentine; Ten Years of Business Courts in Michigan, Touring the Business Courts, Michigan Bus. L. J. (Fall 2022), https://connect.michbar.org/businesslaw/newsletter/fall22; Ben Burningham, A Year of Firsts, 46 Wyo. Lawyer 16 (Dec. 2022), https://digitaleditions.walsworth.com/publication/?m=10085&i=770773&p=16&ver=html5. ↑

20. See, e.g., Delaware Corporate & Commercial Litigation Blog, http://www.delawarelitigation.com (last visited Jan. 8, 2023); Mass Law Blog, http://www.masslawblog.com (last visited Jan. 8, 2023); New York Business Divorce Blog, http://www.nybusinessdivorce.com (last visited Jan. 8, 2023); NY Commercial Division Blog, https://www.pbwt.com/ny-commercial-division-blog/ (last visited Jan. 8, 2023); New York Commercial Division Practice, https://www.nycomdiv.com/ (last visited Jan. 8, 2023); Duane Morris Delaware Business Law Blog, http://blogs.duanemorris.com/delawarebusinesslaw/ (last visited Jan. 8, 2023); Commercial Division Blog: Current Developments in the Commercial Division of the New York State Courts, http://schlamstone.com/commercial/ (last visited Jan. 8, 2023); The North Carolina Business Litigation Report, http://www.ncbusinesslitigationreport.com (last visited Jan. 8, 2023); The Nevada Business Court Report, https://www.sierracrestlaw.com/news-blog/ (last visited Jan. 8, 2023); It’s Just Business (North Carolina), https://itsjustbusiness.foxrothschild.com/ (last visited Jan. 8, 2023); The Westchester Commercial Division Blog, https://www.westchestercomdiv.com/ (last visited Jan. 8, 2023); and the New York Commercial Division Roundup, https://www.newyorkcommercialdivroundup.com/ (last visited Jan. 8, 2023). ↑

21. Uniform Standing Order for All Commercial Calendars (Effective August 29, 2022), available at https://www.cookcountycourt.org/Portals/0/Law%20Divison/General%20Administrative%20Orders/Section/Commercial%20Calenadar%20Uniform%20Standing%20Order%20(effective%208-29-22).pdf?ver=5QWdf7NLsCZ6X7SsX_F_iQ%3d%3d. ↑

22. Ninth Judicial Circuit of Florida, About the Court, Judges, Circuit Judges, Judge John E. Jordan (Dec. 2, 2022), available at https://www.ninthcircuit.org/about/judges/circuit/john-e-jordan. ↑

23. Eleventh Judicial Circuit of Florida, About the Court, Civil Court, Complex Business Litigation (Dec. 2, 2022), available at https://www.jud11.flcourts.org/About-the-Court/Ourt-Courts/Civil-Court/Complex-Business-Litigation. ↑

24. Seventeenth Judicial Circuit of Florida, Circuit Civil (Dec. 2, 2022), available at http://www.17th.flcourts.org/01-civil-division/. ↑

25. Thirteenth Judicial Circuit of Florida, Judicial Directory, Judge Darren D. Farfante (Dec. 2, 2022), available at https://www.fljud13.org/JudicialDirectory/DarrenDFarfante.aspx. ↑

26. Business Court (Dec. 2, 2022), available at https://ninthcircuit.org/divisions/business-court. ↑

27. Katheryn Hayes Tucker, ‘A Solid Foundation’: State-wide Business Court Judge Resigns, Daily Report (June 23, 2022, 01:17 PM), https://www.law.com/dailyreportonline/2022/06/23/a-solid-foundation-statewide-business-court-judge-resigns/. ↑

28. History, Georgia State-wide Business Court, https://www.georgiabusinesscourt.com/history/ (last visited Dec. 14, 2022). ↑

29. O.C.G.A. § 15-5A-7(b)(3)(A). ↑

30. Tucker, supra note 31. ↑

31. Id. ↑

32. Id. ↑

33. Mason Lawlor, Judge Walt Davis Returning to Private Practice at Jones Day Atlanta, Daily Report (Sept. 22, 2022, 6:28 PM), https://www.law.com/dailyreportonline/2022/09/22/judge-walt-davis-returning-to-private-practice-at-jones-day-atlanta/. ↑

34. State-Wide Business Court Welcomes New Judge and Bids Farewell to Inaugural Judge, GACourtsJournal (Sept. 27, 2022), https://georgiacourtsjournal.org/2022/09/27/georgia-state-wide-business-court-welcomes-new-judge-and-bids-farewell-to-inaugural-judge/. ↑

35. Id. ↑

36. Iowa Judicial Branch, Iowa Business Specialty Court | Iowa Judicial Branch (iowacourts.gov). ↑

37. Id. ↑

38. Id. ↑

39. Id. ↑

40. Mich. Comp. L. 600.8033(3)(c). ↑

41. The scope of Rules 2.407 and 2.408 is not limited to business courts. Rule 2.407 applies generally to all types of cases, and Rule 2.408 applies to civil cases. See Mich. Ct. R. 2.407(B); Mich. Ct. R. 2.408. ↑

42. Mich. Ct. R. 2.407(B)(5). ↑

43. Mich. Ct. R. 2.407(C). ↑

44. See Mich. Ct. R. 2.407(B)(2) (providing that “courts may determine the manner and extent of the use of videoconferencing technology and may require participants to attend court proceedings by videoconferencing technology.”) (emphasis added); Mich. Ct. R. 2.408(A)(1) (“A court may, at the request of any participant, or sua sponte, allow the use of videoconferencing technology by any participant in any civil proceeding.”) (emphasis added). ↑

45. Mich. Ct. R. 2.407(B)(4)–(5). ↑

46. Mich. Ct. R. 2.407(B)(6)–(7), (10). ↑

47. The order is accessible via the following link: https://www.courts.michigan.gov/siteassets/rules-instructions-administrative-orders/proposed-and-recently-adopted-orders-on-admin-matters/adopted-orders/2020-08_2022-08-10_formor_pandemicamdts.pdf. Additionally, practitioners can now monitor proposed Michigan Court Rules at the following webpage: https://www.courts.michigan.gov/openforcomment. ↑

48. Wyo. Stat. Ann.§§ 5-13-101 through -203. ↑

49. Wyo. Stat. Ann. § 5-13-115(b). ↑

50. Id. ↑

51. Wyo. Stat. Ann. § 5-13-104(h). W.R.C.P.Ch.C. 1. ↑

52. Hannah Black, State chancery court marks one year of handling business law, Wyo. Trib. Eagle (Dec. 11, 2022), https://www.wyomingnews.com/news/local_news/state-chancery-court-marks-one-year-of-handling-business-law/article_25b06f74-7811-11ed-ab4b-6f0907104642.html. ↑

53. Ben Burningham, A Year of Firsts: Chancery Court Turns One Year Old, 45 Wyo. Law 6 (Dec. 2022), https://digitaleditions.walsworth.com/publication/?m=10085&i=770773&p=4&ver=html5. ↑

54. Wyo. Stat. § 5-13-109(b). ↑

55. 2021 Wyo. Sees. Laws ch. 6, §1; 2022 Wyo. Sess. Laws ch. 12, § 1. ↑

56. See Texas Judicial Council 2022 Civil Justice Committee Report and Recommendations, https://www.txcourts.gov/media/1455006/2022_civil-justice-report-recommendations.pdf; see also, Lee Applebaum, www.businesscourtsblog.com, https://www.businesscourtsblog.com/texas-committee-recommends-creation-of-pilot-business-court-repost-from-november-2022/. ↑

57. No. CV 2020-006219, 2022 WL 223907 (Ariz. Super. Ct. Jan. 21, 2022). ↑

58. No. CV 2015-095504, 2022 WL 4594545 (Ariz. Super. Ct. Sep. 07, 2022). ↑

59. No. CV 2021-017685, 2022 WL 4594546 (Ariz. Super. Ct. Mar. 28, 2022). ↑

60. C.A. No. N21C-05-048 PRW CCLD, 274 A.3d 287 (Del. Super. Ct. Apr. 14, 2022). ↑

61. C.A. No. N20C-07-052 AML CCLD, 2022 WL 1499828, (Del. Super. Ct. May 11, 2022). ↑

62. C.A. No. N21C-01-204 MMJ CCLD, 2022 WL 2304048 (Del. Super. Ct. June 27, 2022). ↑

63. Insight Global, LLC v. Marriott Intern., Inc., No. 21-GSBC-0017, 2022 WL 2965497 (Ga. Bus. Ct. June 08, 2022). ↑

64. Elavon, Inc. v. People’s United Bank, Nat. Ass’n, No. 21-GSBC-0023, 2022 WL 765096 (Ga. Bus. Ct. Mar. 01, 2022). ↑

65. No. 49D01-1908-PL-035770, (Ind. Comm. Ct., Marion Cnty., Sep. 23, 2022), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

66. See Indiana Commercial Court Rule 5, https://www.in.gov/courts/rules/commercial/index.html#_Toc62198782 ↑

67. No. 02D02-2105-PL-000224, (Ind. Comm. Ct., Allen Cnty., May 18, 2022), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

68. No. 49D01-2108-PL-028354, (Ind. Comm. Ct. Marion Cnty., Mar. 30, 2022), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

69. No. 49D01-2104-PL-013161, (Ind. Comm. Ct. Marion County, Feb. 25, 2022), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

70. No. 49D01-2004-PL-014788, (Ind. Comm. Ct., Marion Cnty., Jun. 9, 2022), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

71. No. EQCE087096 (Iowa Dist. Ct. Polk Co. Mar. 10, 2022). ↑

72. No. CVCV096902 (Iowa Dist. Ct. Scott Co. June 17, 2022). ↑

73. No. 21-CI-004795 (Jefferson Cir. Ct. Div. Ten Bus. Ct. Dkt. April 8, 2022), https://kycourts.gov/Courts/Business-Court/Documents ↑

74. No. BCD-REA-2021-00004, 2022 WL 1539589 (Me. B.C.D. May 09, 2022). ↑

75. No. 20-1519-BLS1 (Feb. 28, 2022) (Krupp, J.). ↑

76. Case No. 1684CV03176-BLS2 (June 22, 2022) (Salinger, J.). ↑

77. Case No. 2184CV01937-BLS1 (Sept. 12, 2022) (Kazanjian, J.). ↑

78. No. 2021-002117-CB (Macomb Cnty. Cir. Ct. May 2, 2022), https://www.courts.michigan.gov/49d861/siteassets/business-court-opinions/c16-2021-2117-cb(may2,2022).pdf. ↑

79. No. 21-187710-CB (Oakland Cnty. Cir. Ct. July 12, 2022), https://www.courts.michigan.gov/4a0143/siteassets/business-court-opinions/c06-2021-187710-cb(07.12.22).pdf. ↑

80. No. 18-11072-CBB (Kent Cnty. Cir. Ct. Mar. 30, 2022), https://www.courts.michigan.gov/496a69/siteassets/business-court-opinions/c17-2018-11072-cbb(march30,2022).pdf. ↑

81. No. 21-011302-CB (Wayne Cnty. Cir. Ct. Apr. 16, 2022), https://www.courts.michigan.gov/49a433/siteassets/business-court-opinions/c03-2021-011302-cb(april16,2022).pdf. ↑

82. No. 20-CV-11498, 2021 U.S. Dist. LEXIS 67054 (E.D. Mich. Apr. 7, 2021). ↑

83. No. 218-2021-CV-0880, 2022 N.H. Super. LEXIS 8 (June 15, 2022) (Anderson, J.). ↑

84. No. 216-2020-CV-00555, 2022 N.H. Super. LEXIS 4 (April 14, 2022) (Anderson, J.). ↑

85. No. 216-2020-CV-00312, 2022 N.H. Super. LEXIS 1. (January 14, 2022) (Anderson, J.). ↑

86. Docket No. UNN-L-1018-22 (N.J. Super. Law Div. August 5, 2022 (unpublished)). ↑

87. Docket No. BER-L-4341-18 (N.J. Super. Law Div. October 17, 2022 (unpublished)). ↑

88. 74 Misc. 3d 1203(A) (Sup. Ct. N.Y. Cty. Jan. 20, 2022) ↑

89. 74 Misc. 3d 1204(A) (Sup. Ct., Albany Cty. Jan. 24, 2022). ↑

90. 74 Misc.3d 1208(A) (Sup. Ct. Suffolk Cty. Feb. 9, 2022). ↑

91. No. 806643/2021, 2021 NY Slip Op 51289(U) (Sup. Ct. Erie Cty. Dec. 8, 2021). ↑

92. 74 Misc.3d 1205 (Sup. Ct. Albany Cty. Jan. 25, 2022). ↑

93. No. 651394/2021, 2022 BL 127452 (Sup. Ct. N.Y. Cty. Mar. 11, 2022). ↑

94. 75 Misc.3d 661 (Sup. Ct. N.Y. Cty. Apr. 21, 2022). ↑

95. No. 19-CVS-17741, 2022 NCBC 28 (Mecklenburg Cnty. Super. Ct. May 26, 2022) (Bledsoe, C.J.), https://www.nccourts.gov/documents/business-court-opinions/lee-v-mcdowell-2022-ncbc-28. ↑

96. No. 21-CVS-3276, 22 NCBC 52 (Buncombe Cnty. Super. Ct. Sept. 19, 2022) (Davis, J.), https://www.nccourts.gov/documents/business-court-opinions/davis-v-hca-healthcare-inc-2022-ncbc-52. ↑

97. No. 19 CVS 19887, 2022 NCBC 19 (Mecklenburg Cnty. Super. Ct. Apr. 22, 2022) (Earp, J.), https://nccourts.gov/documents/business-court-opinions/aspen-specialty-ins-co-v-nucor-corp-2022-ncbc-19. ↑

98. No. 19-CVS-5659, 2022 NCBC 11 (Wake Cnty. Super. Ct. Feb. 15, 2022) (Robinson, J.), https://www.nccourts.gov/documents/business-court-opinions/emrich-enters-llc-v-hornwood-inc-2022-ncbc-11. ↑

99. No. 21-CVS-3727, 2022 NCBC 64 (Durham Cnty. Super. Ct. Oct. 27, 2022) (Conrad, J.), https://www.nccourts.gov/documents/business-court-opinions/north-carolina-ex-rel-stein-v-bowen-2022-ncbc-64. ↑

100. See Keeton v. Hustler Mag., Inc., 465 U.S. 770 (1984). ↑

101. See Calder v. Jones, 465 U.S. 783 (1984). ↑

102. March Term, 2020, No. 02211 (June 13, 2022), 2022 Phila. Ct. Com. Pl. Lexis 18 (Padilla, J.), https://www.courts.phila.gov/pdf/opinions/200302211_1024202214119856.pdf. ↑

103. March Term, 2022, No. 2719 (July 25, 2022), 2022 Phila. Ct. Com. Pl. Lexis 11 (Padilla, J.), https://www.courts.phila.gov/pdf/opinions/220302719_92020221623250.pdf. ↑

104. November Term, 2021, No. 640 (March 17, 2022), 2022 Phila. Ct. Com. Pl. Lexis 4 (Djerassi, J.), https://www.courts.phila.gov/pdf/opinions/211100640_3182022113126751.pdf. ↑

105. No. WM-2021-0323 (R.I. Super. Jan. 21, 2022) (Taft-Carter, J.). ↑

106. No. KC-2020-0521 (R.I. Super. July 14, 2021) (Licht, J.). ↑

107. Nos. WC-2020-0346, WC-2020-0471, WD-2021-0065 (R.I. Super. Jan. 14, 2022) (Licht, J.). ↑

108. No. PC-2021-00953 (R.I. Super. Feb. 28, 2022). ↑

109. 2022 WL 668279 (R.I. Super. Feb. 28, 2022) (Stern, J.). ↑

110. 2022 WL 577873 (R.I. Super. Feb. 18, 2022) (Taft-Carter, J.). ↑

111. No. PC-2019-6794, No. PC-2019-6808 (R.I. Super. Feb. 22, 2022). ↑

112. No. PC-2021-03625 (R.I. Super. Apr. 14, 2022) (Stern, J.). ↑

113. No. PC-2021-03708 (R.I. Super. March 29, 2022) (Stern, J.). ↑

114. No. 18-C-2 (W. Va. Cir. Ct. Pleasants Cnty. Apr. 25, 2022). ↑

115. No. 19-C-59 (W. Va. Cir. Ct. Marshall Cnty. Mar. 3, 2022). ↑

116. No. 18-C-202 (W. Va. Cir. Ct. Marshall Cnty. Aug. 29, 2022). ↑

117. No. 2020CV117 (Wis. Cir. Ct. St. Croix Cnty. Jan 28, 2022). ↑

118. Wright McCall LLC v. DeGaris Law, LLC, 2022 WYCH 2 (Wyo. Ch. Ct. 2022). ↑

Editors

Contributors

§ 1.1. Introduction

We are pleased to present the rapidly growing Chapter on Artificial Intelligence.  This year, we have added a new component by including significant blockchain cases.  Why?  Both AI and blockchain represent emerging technologies that present vexing legal issues for clients, business lawyers, litigators and the judiciary. This Chapter seeks to serve as a guide for those seeking a better understanding of this rapidly evolving legal landscape. 

It is no surprise that the number of cases and complexity of issues are proliferating.  With regard to AI, issues around bias and fairness continue to predominate as use cases and adoption across industries expand.  Questions around IP ownership and registrability, especially with generative AI tools, are also quickly becoming a hot topic. And Mr. Thaler continues to advance the question through  litigation of whether AI software systems can obtain a patent or copyright for its output. See e.g. Thaler v. Vidal, 43 F.4th 1207 (Fed. Cir. 2022) (affirming the district court holding in Thaler v. Hirshfeld, 558 F. Supp. 3d 238 (E.D. Va. 2021) that an artificial intelligence software system cannot be listed as an “inventor” on a patent application given that the language of the Patent Act requires inventors to be “natural persons”. This case arose after plaintiff Stephen Thaler filed two patent applications with the USPTO for which the inventor was identified as an AI machine named “DABUS”.)   And at the moment this Chapter is going to the printer, the Copyright Office just released its first guidance on generative AI. See https://public-inspection.federalregister.gov/2023-05321.pdf.  We will cover this in depth in next year’s Chapter as events continue unfold in this space.

Facial recognition applications, both in the government and private sectors, are raising a host of constitutional, statutory and privacy claims. And biometric-based litigation has also exploded.  Other emerging issues include the role of AI tools in content moderation as part of a broader conversation on internet publisher immunity, and whether software aimed to support aspects of legal services delivery, including software that uses AI, violates rules against the unauthorized practice of law.  With regard to blockchain, the spectacular collapse of FTX has brought into sharp focus the tension between centralized exchanges and the promise of Web 3.0 DeFi applications and protocols, and serves as  a reminder that the nascent blockchain industry is not immune to garden-variety fraud. While there continues to be substantial SEC action claiming various tokens are unregistered securities, practitioners and judges alike can benefit from a deeper understanding of blockchain technology, layer 1-3 protocols, and how, when and why “crypto” matters to blockchains.

We also made certain judgments as to what should be included.  Notably, we added some ongoing cases with particularly interesting AI issues, including two cases recently heard by the United States Supreme Court, and other cases related to recent developments in generative AI.  We omitted cases decided prior to 2022 that were reported in previous iterations of the Chapter after evaluating whether there were any significant updates to those cases with respect to AI; in most cases there were not.s.  With respect to class action lawsuits filed under the Illinois Biometric Information Privacy Act (BIPA) (740 ILCS 14), to the extent the allegations focus more on the data rather than the associated AI applications, we have not included a comprehensive summary of those BIPA cases.[1]  And as AI continues to be a subject of legislative proposals, we omitted the 2021 and 2020 legislative updates that were included in the Chapter in prior years and focus only on 2022.

Finally, I want to thank my colleagues, Adam Aft, Sam Kramer, Alex Crowley, Amarachi Abakporo, Mariana Oliver, and Marcela Pertusi Hernández for their assistance in preparing this chapter.  Adam is a knowledgeable and accomplished AI attorney, Sam is a knowledgeable and accomplished blockchain attorney and Alex, Amarachi, Marcela and Mariana are recent joiners to our team with much exuberance for AI.

We hope this Chapter provides useful guidance to practitioners of varying experience and expertise and look forward to tracking the trends in these cases in future year’s Chapter.

Bradford Newman

Palo Alto, California

§ 1.2. Artificial Intelligence

Cases

United States Supreme Court

There were no qualifying decisions within the United States Supreme Court in 2022.

Pending Cases of Note

Gonzalez v. Google LLC and Twitter v. Taamneh. On February 21 and 22, 2023, the US Supreme Court heard oral arguments for Gonzalez v. Google and Twitter v. Taamneh, which some have called “Cases That Could Break the Internet”.[2] These are the first cases interpreting Section 230 of the Communication Decency Act (47 U.S.C. § 230) ever to be decided by the Supreme Court Both cases arose from an action filed against Google, Twitter, and Facebook by the father of a victim of ISIS-linked terrorism claiming, in part, that the platforms were liable for aiding and abetting international terrorism by not doing enough to keep terrorists off the platforms.[3] Notably, with respect to Google, the plaintiff claimed that Google’s use of machine learning algorithms to analyze and suggest content to users assisted ISIS in propagating terrorism and that Section 230 does not grant immunity to Google from liability for such content.[4] Decisions by the Supreme Court holding the platforms liable for the alleged claims could significantly impact the internet overall as platforms could become less willing to hosting certain kinds of content for fear of incurring liability for that content.  Next year’s Chapter will address the Supreme Court’s opinions in these important Section 230 cases.

First Circuit

There were no qualifying decisions within the First Circuit in 2022.

Second Circuit

There were no qualifying decisions within the Second Circuit in 2022.

Third Circuit

United States v. Turner, No. 19-763 (WJM), 2022 U.S. Dist. LEXIS 17318 (D.N.J. Jan. 31, 2022) (under which the Court found that an evidentiary hearing was warranted to determine the admissibility of a photo array that was generated using facial recognition software that operates by manipulating or normalizing the input image by scaling, rotating, or aligning the image.)

Thomson Reuters Enter. Ctr. GmbH v. Ross Intel. Inc., No. 20-613-LPS, 2022 U.S. Dist. LEXIS 75493 (D. Del. Apr. 26, 2022) (denying Thomson Reuters’ and West Publishing Corporation’s motion to dismiss ROSS Intelligence’s claim alleging that the plaintiffs tied their legal research tool to their public law database in violation of the Sherman Antitrust Act and granting the plaintiffs’ motion to dismiss the counterclaims alleging that 1) the plaintiffs brought anticompetitive sham litigation to the court and 2) that the plaintiffs engaged in unfair competition under Delaware law. ROSS Intelligence had developed an artificial intelligence-based legal research application that the plaintiffs previously alleged was developed using certain Westlaw materials, notably Westlaw’s Headnotes and Key Number System, without the plaintiffs’ authorization. See Thomson Reuters Enter. Ctr. GmbH v. ROSS Intelligence Inc., 2021 U.S. Dist. LEXIS 59945 (D. Del. 2021).)

Pending Cases of Note

Getty Images (US), Inc. v. Stability AI, Inc., D. Del., No. 1:23-cv-00135, filed Feb. 3, 2023 (alleging that Stability AI copied over 12 million of Getty Images’ photographs and associated captions and metadata without authorization and “removed or altered Getty Images’ copyright management information, provided false copyright management information, and infringed Getty Images’ famous trademarks”. Getty asserts that it has licensed its photographs for AI and machine learning purposes to others before, but that Stability AI is using Getty’s photographs without authorization to train its Stable Diffusion machine learning-driven image-generation model. Getty Images filed similar litigation against Stability AI in the United Kingdom in January 2023.)[5]

Fourth Circuit

In re Peterson, Nos. 19-24045, 19-24551, 2022 Bankr. LEXIS 1537, at *103 (Bankr. D. Md. June 1, 2022) (holding that the provision of a software application to assist pro se debtors filing for bankruptcy protection constitutes the practice of law by a non-lawyer as the software provides users with legal advice when it limits the options presented to the user based upon the user’s specific characteristics, thereby affecting the user’s discretion and decision-making. Notably, Upsolve denied that its software did not involve any AI, machine learning, or natural language processing algorithm. The court, however, did not comment specifically on AI in its opinion but focused instead on the software’s functions. This case would appear to put AI tools having functions related to legal services that are more complicated than Upsolve’s software at risk of unauthorized practice of law violations.)

Fifth Circuit

There were no qualifying decisions within the Fifth Circuit in 2022.

Sixth Circuit

Changizi v. HHS, No. 2:22-cv-1776, 2022 U.S. Dist. LEXIS 81488 (S.D. Ohio May 5, 2022) (granting defendant’s motion to dismiss plaintiff’s claims based on Plaintiff’s lack of standing and, in the alternative, on the content of their claims, stating that 1) the plaintiff’s First Amendment claim fails as allegations that defendant exercises coercive power over Twitter to censor certain users based on the information they share about COVID-19 do not satisfy the requirements under the “state compulsion” framework and because Plaintiff did not make a sufficient argument that another exception to the state-action doctrine applies and 2) Plaintiff’s Fourth Amendment claim fails as the Surgeon General’s (defendant) Request for Information from “technology platforms” to provide defendant with data concerning “sources of COVID-19 misinformation” did not constitute a search under the Constitution. As an additional point, the court cited a statement from the Surgeon General, in which he urged social media platforms to improve upon the monitoring of misinformation by “increas[ing] staffing of multilingual content moderation teams” and “improv[ing] machine learning algorithms in languages other than English since non-English-language misinformation continues to proliferate….”)

Bond v. Clover Health Invs., Corp., 587 F. Supp. 3d 641 (M.D. Tenn. 2022) (denying Defendant’s motion to dismiss plaintiff’s claims that defendant defrauded the market by engaging in unlawful activities and making misleading statements about the success and value of its healthcare business and technological developments, including an AI-powered software called the “Clover Assistant”. Defendant suggested that Clover Assistant was intended to improve patient care, but, in practice, the Assistant appeared to merely increase Defendant’s profit from Medicare reimbursements without meaningfully improving care. Furthermore, the operator’s medical expertise and skill (e.g., qualified physician or not) affected the accuracy of the results produced by Clover Assistant. Separately, defendant struggled to even get physicians to use Clover Assistant. This case provides an example of how, in practice, AI tools may not always live up to the hype.)

Ogletree v. Cleveland State Univ., No. 1:21-cv-00500, 2022 U.S. Dist. LEXIS 150513 (N.D. Ohio Aug. 22, 2022) (holding that a university’s scan of plaintiff student’s room using virtual room scanning technology during a remote exam was unreasonable under the Fourth Amendment. Plaintiff argued that test integrity could be preserved by instead using alternatives such as artificial intelligence to detect suspicious movement or plagiarism.)

Seventh Circuit

Trio v. Turing Video, Inc., No. 21 CV 4409, 2022 U.S. Dist. LEXIS 173465 (N.D. Ill. Sept. 26, 2022) (holding that a company’s use of an artificial intelligence algorithm to locate an individual’s forehead and collect the individual’s forehead temperature in conjunction with facial recognition software to determine whether individuals were wearing face masks is enough to state a plausible claim that biometric data has been “collected” and “stored” for purposes of BIPA.)

Carpenter v. McDonald’s Corp., 580 F. Supp. 3d 512 (N.D. Ill. 2022) (holding that plaintiff has a plausible claim under BIPA Section 15(b) based on factual allegations that McDonald’s used a third-party voice assistant technology in its restaurants’ drive-through lanes to collect and use biometrics (voice recordings) directly from customers without their consent.)

Doe v. Apple Inc., No. 3:20-CV-421-NJR, 2022 U.S. Dist. LEXIS 222988 (S.D. Ill. Aug. 1, 2022) (denying Apple’s motion to dismiss plaintiffs’ claim that data sent to Apple’s iCloud Photos Library known as “Sync Data” contains biometric information or biometric identifiers and, thus, falls within the parameters of BIPA. Plaintiffs alleged that Sync Data contains biometric information or biometric identifiers subject to BIPA because it is created by “combin[ing] faceprint data processed on Apple Devices with user-inputted tags, users’ input regarding whether faces belong to particular individuals, and other data including key faces and face crops that are recognized by Apple’s faceprint algorithm.” Plaintiffs further alleged that Apple collected or possessed users’ Sync Data via its automatic iCloud transfer of Sync Data to Apple’s servers. The court concluded that the plaintiffs had provided sufficient facts to state a plausible claim that Sync Data contains biometric information and Apple collects or possesses users’ Sync Data.) See also Sosa v. Onfido, Inc., 600 F. Supp. 3d 859 (N.D. Ill. 2022).

Eighth Circuit

There were no qualifying decisions within the Eighth Circuit.

Ninth Circuit

Angel Techs. Grp. LLC v. Facebook Inc., No. CV 21-8459-CBM(JPRx), 2022 U.S. Dist. LEXIS 116427 (C.D. Cal. Jun. 30, 2022) (granting the defendant’s motion to dismiss the plaintiff’s patent infringement claim because the plaintiff’s patent for its digital photo tagging technology, which uses artificial intelligence algorithms to function, failed to establish an inventive concept in its claims. The patent merely claims that artificial intelligence algorithms will be used as part of the technology without providing details as to how Plaintiff has improved upon the algorithms or how they are implemented, rendering the patents at issue ineligible for patent protection.)

United States ex rel. Osinek v. Permanente Med. Grp., Inc., No. 13-cv-03891-EMC, 2022 U.S. Dist. LEXIS 81890 (N.D. Cal. May 5, 2022) (denying the defendant’s motion to dismiss in part as to the plaintiff’s claim alleging that the defendant fraudulently used its Natural Language Processing Software to identify new diagnosis codes to submit as additional claims to Medicare without reviewing such diagnosis codes before sending out the claims. The Software used an algorithm to search through electronic medical records to identify new diagnoses that could be used for submission of additional risk adjustment Medicare claims.)

Does v. Reddit, Inc., 51 F.4th 1137 (9th Cir. 2022) (granting the defendant’s motion to dismiss the plaintiffs’ child sex trafficking claims as the plaintiffs failed to allege that the defendant knowingly participated in or benefited from a sex trafficking venture through users posting child pornography on its site. Furthermore, the plaintiffs could not directly connect Reddit’s revenue to the child pornography posted on its site, apart from the fact that the subreddits with child pornography posted on them also had advertisements from which Reddit generated revenue. Notably, the plaintiffs pointed out that Reddit was delayed in employing automated image-recognition technologies like “PhotoDNA,” which can detect child pornography and prevent it from being posted on the site.)

Pending Cases of Note

DOE 1 et al v. GitHub, Inc. et al, N.D. Cal., No. 4:22-cv-06823, filed Nov. 10, 2022 (class action lawsuit brought by owners of copyrighted materials published on GitHub against GitHub, Microsoft, and OpenAI (“Defendants”) in which the plaintiffs assert that, among other claims, in developing their machine learning systems using the plaintiffs’ copyrighted materials (software code) without authorization and propagating those systems, defendants violated the Digital Millenium Copyright Act, the Lanham Act, unfair competition law, the California Consumer Privacy Act, and contracts including open-source licenses and GitHub’s Terms of Service.)[6]

Andersen et al v. Stability AI Ltd. et al, N.D. Cal., No. 3:23-cv-00201, filed Jan. 13, 2023 (class action lawsuit brought by three full-time artists (“Plaintiffs”) against Stability AI, Inc., MidJourney, Inc., and DeviantArt, Inc. (“Defendants”) asserting claims of copyright infringement, violation of the Digital Millenium Copyright Act, violation of publicity rights, and violation of unfair competition law against Defendants. The Plaintiffs allege that Stability AI developed its “Stable Diffusion” AI-based image generation product using the Plaintiffs’ copyrighted images without authorization and further that the Defendants each used the Stable Diffusion product for commercial gain by selling images “in the style of” the Plaintiffs’ copyrighted images.)[7]

Tenth Circuit

Young v. Tesla, Inc., No. 1:21-cv-00917-JB-SCY, 2022 U.S. Dist. LEXIS 145747 (D.N.M. Aug. 15, 2022) (granting in part and denying in part the defendant’s motion to dismiss plaintiff’s claims for breach of contract, unjust enrichment, civil conversion, negligence per se, and fraud, in which plaintiff argued that the defendant gave the false impression that the vehicle could drive itself without human intervention, and that it would have this capability by the end of 2019. To determine what the term “Full Self-Driving Capability” means, the Court analyzed the defendant’s description of the term “Full Self-Driving Capability” on its website.)

Eleventh Circuit

There were no qualifying decisions within the Eleventh Circuit.

DC Circuit

There were no qualifying decisions within the DC Circuit.

Pending Cases of Note

Thaler v. Perlmutter, D.C. Cir. No. 1:22-cv-01564, filed June 2, 2022 (asserting that human authorship is not legally required for copyright registration in the US. Similar to Stephen Thaler’s attempts to register patents as invented by the AI machine “DABUS”, Thaler attempted to register a copyright to a two-dimensional artwork titled “A Recent Entrance to Paradise” as created by an AI machine named “Creativity Machine”. The US Copyright Office rejected his application because it had no human author.)[8]

Court of Appeals for the Federal Circuit

Thaler v. Vidal, 43 F.4th 1207 (Fed. Cir. 2022) (affirming the district court holding in Thaler v. Hirshfeld, 558 F. Supp. 3d 238 (E.D. Va. 2021) that an artificial intelligence software system cannot be listed as an “inventor” on a patent application given that the language of the Patent Act requires inventors to be “natural persons”. This case arose after plaintiff Stephen Thaler filed two patent applications with the USPTO for which the inventor was identified as an AI machine named “DABUS”.)

Administrative

US Copyright Office (USCO)

Recent Decision of Note

Cancellation of original copyright registration for Zarya of the Dawn (Registration # VAu001481096)[9] (under which the USCO cancelled the original copyright registration for comic book “Zarya of the Dawn” to Kristina Kashtanova because Ms. Kashtanova had not disclosed as part of her application that the images in the comic book were created using Midjourney’s artificial intelligence technology. Based on the common-law principle and USCO practice that copyright registrations may not be granted to non-human authors, the USCO determined that no copyright registration should have been provided with respect to the comic book images. The USCO rejected Ms. Kashanova’s argument that her efforts to use Midjourney to create the comic book images and her subsequent efforts to edit the images qualified as human authorship of the images overall. The USCO replaced the original copyright registration with a new registration covering only the content authored by a human, “namely, the ‘text’ and the ‘selection, coordination, and arrangement of text created by the author and artwork generated by artificial intelligence.'”)

Legislation

We organize the enacted and proposed legislation into (i) policy (e.g., executive orders); (ii) algorithmic accountability (e.g., legislation aimed at responding to public concerns regarding algorithmic bias and discrimination); (iii) facial recognition; (iv) transparency (e.g., legislation primarily directed at promoting transparency in use of AI); and (v) other (e.g., other pending bills such as federal bills on governance issues for AI).

Policy

2022

• Blueprint for an AI Bill of Rights. US Office of Science and Technology Policy. Lays out protections for Americans in regard to the design, development, and deployment of AI and other automated technologies.

Algorithmic Accountability

2022

• [Fed] Algorithmic Accountability Act of 2022. Bill S 3572 (Pending Feb. 2022). Directs the Federal Trade Commission to require impact assessments of automated decision systems and augmented critical decision processes.
• [Fed] Digital Civil and Human Rights Act of 2022. Bill HB 7449 (Pending Apr. 2022). Establishes prohibitions on the use of automated systems in a discriminatory manner.
• [Fed] Government Ownership and Oversight of Data in Artificial Intelligence Act of 2021. Bill HB7296 (Pending Mar. 2022). Establishes an Artificial Intelligence Hygiene Working Group, among other decrees.
• [Fed] Political BIAS Emails Act of 2022 Political Bias In Algorithm Sorting Emails Act of 2022. Bill SB 4409 (Pending Jun. 2022). Bans email providers from using filtering algorithms with respect to political emails.
• [CA] Social Media Platform Duty to Children Act. Bill CA A.B. 2408 (Pending Jun. 2022). Prohibits a social media platform, as defined in the Act, from using a design, feature, or affordance that the platform knew, or by the exercise of reasonable care should have known, causes a child user, as defined, to become addicted to the platform.
• [CA] The California Age-Appropriate Design Code Act. Bill CA A.B. 2273 (Pending Sep. 15, 2022). Enacts the California Age-Appropriate Design Code Act, which establishes requirements for businesses that provide an online service, product, or feature likely to be accessed by children.
• [DC] Stop Discrimination by Algorithms Act of 2021. Bill B24-0558 (Pending Dec. 2021). Prohibits users of algorithmic decision-making to use the same in a discriminatory manner and requires corresponding notices to individuals whose personal information is used in certain algorithms to determine employment, housing, healthcare and financial lending.
• [IL] Video Interview Demographic. Bill H.B. 53 (Effective Jan. 2022). Seeks to avoid algorithmic discrimination in first-pass hiring interviews conducted using AI.
• [IL] Amendment to the Illinois Human Rights Act. IL H.B. 1811 (Pending Mar. 2022). Amends the Illinois Human Rights Act to provide that an entity that uses predictive data analytics in its employment decisions or to determine creditworthiness may not consider the applicant’s race or zip code when used as a proxy for race to reject an applicant for employment or credit.
• [KY] An Act relating to credit. Bill HB779 (Pending Mar. 2022). Prohibits the violation of a person’s constitutional rights based on predictive behavior analysis.
• [MA] An Act Relative to Algorithmic Accountability and Bias Prevention. Bill MA H.B. 4029 (Pending Jul. 2021). Requires covered entities to conduct impact assessments of existing high-risk automated decision systems and new high-risk automated decision systems prior to implementation.
• [MA] An Act Relative to Data Privacy. Bill MA H.B. 136, see also SB 2687 (Pending Feb. 2022). Creates the Data Accountability and Transparency Agency and requires data aggregators that utilize automated decision systems to perform (i) continuous and automated testing for bias on the basis of a protected class; and (ii) continuous and automated testing for disparate impact on the basis of a protected class as required by the agency.
• [NJ] An Act concerning discrimination and automated decision systems and supplementing P.L.1945, c.169 (C.10:5-1 et seq.). Bill S 1402 (Pending Feb. 2022). Prohibits certain discrimination by automated decision systems.
• [NJ] An Act concerning discrimination in automobile insurance underwriting and supplementing P.L.1997, c.151. Bill A 537 (Pending Jan. 2022). Requires automobile insurers using automated or predictive underwriting systems to annually provide documentation and analysis to the Department of Banking and Insurance to demonstrate that there is no discriminatory outcome in the pricing on the basis of race, ethnicity, sexual orientation, or religion, that is determined by the use of the insurer’s automated or predictive underwriting system.
• [NY] An Act to Amend the Labor Law, in Relation to Establishing Criteria for the Use of Automated Employment Decision Tools. Bill NY A 7244 (Pending Feb. 2022). Amends New York’s labor law to include a provision banning employers from using automated employment decisions tools that have not been subject to a disparate impact analysis.
• [RI] An Act Relating to State Affairs and Government – Department of Business Regulation. Bill RI H 7230 (Pending Jan. 2022). Amends the “Department of Business Regulation” laws to include a section prohibiting discriminatory insurance practices through the use of algorithms or predictive models.
• [WA] Making 2021-2023 Fiscal Biennium Operation Appropriations. Bill WA S 5693 (Enacted Mar. 31, 2022). Allocates part of the budget towards the office of the chief information security officer, who must determine how automated decision making systems will be reviewed before they are adopted. Part of that review will include auditing of those systems.

Facial Recognition Technology

2022

• [AL] Facial recognition technology, use of match as the sole basis of probable cause or arrest, prohibited. Bill SB 56 (Enacted April 6, 2022). Prohibits state or local state or local law enforcement agencies from using facial recognition match results as the sole basis for making an arrest or for establishing probable cause in a criminal investigation.
• [CO] Artificial Intelligence Facial Recognition. Bill CO S 113 (Enacted Jun. 8, 2022). Creates a task force aimed at considering use of facial recognition services.
• [RI] Rhode Island Consumer Protection Gaming Act. Bill H. 7222, S. 2491 (Pending 2022). Prohibits the use of facial recognition technology and biometric recognition technology in video-lottery terminals at pari-mutuel licensees in the state or in online betting applications and prohibits the use of certain other technologies in state gaming operations.

Transparency

2022

• [Fed] Justice in Forensic Algorithms Act of 2021. Bill HB 2438 (Pending Oct. 2021). Establishes national standards for the use of computational forensic software in criminal investigations.
• [CA] Platform Accountability and Transparency Act. Bill CA S.B. 1018 (Pending Feb. 2022). This bill would require a social media platform to disclose to the public, on or before October 1, 2024, and annually thereafter, statistics regarding the extent to which, in the 3rd and 4th quarters of the preceding calendar year and first and 2nd quarters of the current calendar year, items of content that the platform determined violated its policies were recommended or otherwise amplified by platform algorithms, disaggregated by category of policy violated.
• [MA] An Act Establishing An Internet Bill of Rights. Bill MA H.B. 4152 (Pending Sep. 2021). Requires businesses, when collecting data from data subjects, to disclose the existence of automated decision-making, including profiling as well as the significance and the predicted consequences of the processing for the data subject, and provides other rights to data subjects concerning their data.
• [MA] An Act establishing the Massachusetts Information Privacy Act. E.g., Bill MA H.B. 4514 (Pending 2022). Requires businesses to disclose in their privacy policies whether they use automated decision systems and if they do, to use them only to the extent necessary for carrying out their purpose.
• [NY] New York Privacy Act. Bill NY S 6701 (Pending May 2022). Includes privacy protections for New York consumers and requires, among other things, “meaningful human review” of algorithmic or automated decision-based outputs and transparency around automated decisions that produce “legal or similarly significant effects.”

Other

2022

• [Fed] AI JOBS Act of 2022 Artificial Intelligence Job Opportunities and Background Summary Act of 2022. Bill HB 6553 (Pending Feb. 2022). Requires the Secretary of Labor, in collaboration with specified individuals and entities, to prepare a report on artificial intelligence and its impact on the workforce.
• [Fed] Artificial Intelligence Training for the Acquisition Workforce Act. Bill S. 2551 (related to H.B. 7683) (Enacted October 17, 2022). This bill requires the Office of Management and Budget (OMB) to establish or otherwise provide an artificial intelligence (AI) training program for the acquisition workforce of executive agencies (e.g., those responsible for program management or logistics), with exceptions.
• [Fed] To include certain computer-related projects in the Federal permitting program under title XLI of the FAST Act, and for other purposes. Bill HB 7870 (Pending – May 2022). Provides for the expedited review of infrastructure projects concerning semiconductors, artificial intelligence and machine learning, high-performance computing and advanced computer hardware and software, quantum information science and technology, data storage and data management, or cybersecurity.
• [IL] Illinois Future of Work Act. Bill IL S.B. 2481 (Pending Feb. 2021). Creates the Illinois Future of Work Act and the Illinois Future of Work Task Force, which is given the responsibility to identify and assess the new and emerging technologies that have the potential to significantly affect employment, wages, and skill requirements and determine how to deploy these technologies to benefit workers and the public good, among other duties.
• [MA] An Act Establishing a Commission on Automated Decision-Making by Government in the Commonwealth. Bill MA H.B. 4512, see also Bill S 60 (Pending Apr. 2022). Establishes a commission within the executive office of technology services and security for the purpose of studying and making recommendations relative to the use by the commonwealth of automated decision systems that may affect human welfare.
• [NJ] An Act Requiring the Commissioner of Labor and Workforce Development to Conduct Study and Issue Report on Impact of Artificial Intelligence on Growth of State’s Economy. Bill NJ A 168 (Pending Jan. 2022). Requires the Commissioner of Labor and Workforce Development to conduct a study and then issue a report with findings assessing the impact of AI tools on labor productivity and economic growth for the state of New Jersey.
• [NY] An Act creating “The Commission to Study the Impact of  Automation and Artificial  Intelligence on the New York Labor Force”; and providing for the repeal of such provisions upon expiration thereof. Bill A 09885 (Pending Apr. 2022). Creates the Commission to Study the Impact of Automation and Artificial Intelligence on the New York Labor Force.
• [PA] An Act amending the act of April 9, 1929 (P.L.177, No.175), known as The Administrative Code of 1929, in powers and duties of the Department of State and its departmental administrative board, providing for artificial intelligence registry.. Bill HB2903 (Pending Oct. 2022). An Act amending The Administrative Code of 1929, providing for the creation of an artificial intelligence registry, a registry of businesses operating artificial intelligence systems in the Commonwealth of Pennsylvania.
• [RI] An Act Relating to State Affairs and Government. Bill RI S 2514 (Pending Mar. 2022). Establishes a commission tasked with reviewing and assessing the uses of and purposes for which AI systems are used by the state.
• [RI] An Act Relating to State Affairs and Government. Bill RI HB 7223 (Pending Feb. 2022). Establishes a commission to study the use of artificial intelligence in the decision-making process of state government.
• [VT] An act relating to the creation of the Artificial Intelligence Commission. Bill H.410 (Enacted May 2022). Creates the Division of Artificial Intelligence, which will be responsible for overseeing anything related to the development, procurement, or use of AI by State government.

§ 1.3. Blockchain

Cases

United States Supreme Court

SEC v. W. J. Howey Co., 328 U.

S. 293, 66 S. Ct. 1100 (1946). The term “security” includes the catch-all term investment, which this court defined as composed of four elements: (i) an investment of money, (ii) in a common enterprise, (iii) with a reasonable expectation of profits, (iv) to be derived from the entrepreneurial or managerial efforts of others.

First Circuit

CFTC v. My Big Coin Pay, Inc., 334 F. Supp. 3d 492 (D. Mass. 2018). My Big Coin Pay Inc. moved to dismiss the case, arguing that the CFTC had no jurisdiction over the particular virtual currency at issue, My Big Coin (MBC). The Court held that the CFTC had sufficiently alleged that MBC “is a virtual currency and it is undisputed that there is futures trading in virtual currencies (specifically involving Bitcoin).” 

United States v. Mansy, No. 2:15-cr-198-GZS, 2017 U.S. Dist. LEXIS 71786 (D. Me. May 11, 2017). The court upheld a virtual currency-related unlicensed money transmitting indictment.

Second Circuit

CFTC v. Hdr Glob. Trading Ltd., No. 1:20-cv-08132, 2022 U.S. Dist. LEXIS 82960 (S.D.N.Y. May 5, 2022). The court found that BitMEX and related entities, operated an unregistered trading platform, violating AML rules, and various CFTC regulations.

Friel v. Dapper Labs, No. 1:21-cv-05837-VM (S.D.N.Y. Oct. 8, 2021). Class action developer of NBA TopShots NFTs for sale of unregistered securities.

Securities and Exchange Commission v. BitConnect, et al., No. 1:21-cv-07349 (S.D.N.Y., filed September 1, 2021). The court entered judgments against Glenn Arcaro and his company, Future Money Ltd., for the promotion of the BitConnect “lending program” because of  the sale of unregistered securities and failing to be registered as broker-dealers with the SEC.

CFTC v. Control Finance-Limited, No 19-cv—5631 (June 17, 2019). CFTC alleged defendant exploited public enthusiasm for Bitcoin by fraudulently obtaining and misappropriating at least 22,858.822 Bitcoin—worth at least $147 million at the time—from more than 1,000 customers. $571,986,589 fine/restitution.

CFTC v. Gelfman Blueprint, Inc., No. 17-CV-07181 (PKC), 2018 U.S. Dist. LEXIS 207379 (S.D.N.Y. Oct. 1, 2018). Defendants, who solicited investments in Bitcoin, were charged with fraud, misappropriation, and issuing false account statements. The CFTC argued that Defendants ran a virtual currency Ponzi scheme by soliciting more than $600,000 from approximately 80 persons. The CFTC stated the respondents’ scheme was a fake strategy, where “payout of supposed profits … in actuality consisted of other customers’ misappropriated funds.”

CFTC v. McDonnell, 332 F.Supp. 3d 641 (E.D.N.Y. 2018). The district court stated that “virtual currency may be regulated by the CFTC as a commodity.” Moreover, the CFTC’s “broad statutory authority… and regulatory authority… extend to fraud or manipulation in the virtual currency derivatives market and its underlying spot market.”

United States v. Murgio, 209 F.3d 698 (S.D.N.Y. 2016). The court concluded that to establish criminal liability under the unlicensed money transmitting business statute, the USAO must prove that a person or business (a) transferred on behalf of the public; (b) funds; (c) in violation of State or Federal licensing and registration requirements, or with knowledge that the funds were derived from a criminal offense.

Third Circuit

We are not including any foundational Blockchain cases from this Circuit.

Fourth Circuit

We are not including any foundational Blockchain cases from this Circuit.

Fifth Circuit

Notable Pending Case

CFTC v. Mirror Trading International, No. 1:22-cv-635, W.D. Tex. (June 30, 2022). CFTC charged defendants with commodity pool fraud, among other violations, arising from defendants’ acceptance of at least 29,421 Bitcoin—with a value of over $1,733,838,372, making this action the largest fraudulent scheme involving Bitcoin charged in any CFTC case.

Sixth Circuit

We are not including any foundational Blockchain cases from this Circuit.

Seventh Circuit

We are not including any foundational Blockchain cases from this Circuit.

Eighth Circuit

We are not including any foundational Blockchain cases from this Circuit.

Ninth Circuit

Securities and Exchange Commission v. Payward Ventures, Inc. (D/B/A Kraken) and Payward Trading, Ltd. (D/B/A Kraken), No. 3:23-cv-00588 (N.D. Cal.). Kraken settled charges with the SEC that its staking-as-a-service program failed to register with the SEC.  Kraken paid a $30M fine and shut down its program.

Notable Pending Case

SEC v. Wahi, et al., No. 2:22-cv-01009 (W.D. Wash. July 21, 2022). The Securities and Exchange Commission brought insider trading charges against a former Coinbase product manager, his brother, and his friend for perpetrating a scheme to trade ahead of multiple announcements regarding certain crypto assets that would be made available for trading on the Coinbase platform. 

Tenth Circuit

We are not including any foundational Blockchain cases from this Circuit.

Eleventh Circuit

CFTC v. Fingerhut, No. 1:20-cv-21887 (S.D. Fla. Nov. 17, 2021). CFTC alleged defendants fraudulently solicited tens of millions of customers and prospective customers to open and fund off-exchange binary options and digital assets trading accounts.

DC Circuit

We are not including any foundational Blockchain cases from this Circuit.

Federal Circuit

We are not including any foundational Blockchain cases from this Circuit.

Administrative

CFTC

• CFTC, In the Matter of Coinbase, Inc., Order, CFTC docket no. 21-03 (Mar. 19, 2021). The CFTC found that Coinbase, Inc. had violated the anti-manipulation rules by reporting false, misleading, or inaccurate transaction information and became subject to secondary, principal-agent liability for wash sales by a former employee.
• In the Matter of Tether Holdings Limited (2021). Order requiring Tether to pay a civil monetary penalty of $41 million and to cease and desist from any further violations of the CEA and CFTC regulations for making untrue or misleading statements and omissions of material fact in connection with the U.S. dollar tether token (USDT) stablecoin.
• CFTC Staff Advisory No. 18-14, Advisory With Respect to Virtual Currency Derivative Product Listings (May 21, 2018). Guidance reiterating that “bitcoin and other virtual currencies are properly defined as commodities.”
• CFTC, Retail Commodity Transactions Involving Virtual Currency, 82 Fed. Reg. 60,335 (proposed Dec. 20, 2017). The CFTC proposed that “actual delivery” occurs when (1) the buyer has the ability to take possession and control of the amount purchased and to use it freely, and (2) the offeror or seller does not retain any interest or control over the commodity purchased on margin, leverage, or other financing at the expiration of 28 days from the date of the transaction.
• In re BFXNA Inc., CFTC No. 16-19 (June 2, 2016). The CFTC found that Bitfinex violated the Commodity Exchange Act (CEA) for failing to register as a Futures Commission Merchant (FCM) and offering margined retail commodity transactions without actual delivery to participants that were not eligible contract participants (ECPs). Actual delivery is not defined in the CEA; therefore, it is subject to CFTC interpretation. Here, participants of Bitfinex did not have access to the private key needed to access or spend these bitcoins. Consequently, the CFTC found the actual delivery requirement had not been met.
• In the Matter of Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29 (2105). The CFTC held, for the first time, that Bitcoin and other virtual currencies are “commodities” subject to regulation under the Commodity Exchange Act: 7 U.S.C. § § 1-27; 17 C.F.R. § 1 et seq.
• In re TeraExchange LLC, CFTC No. 15-33, Sept. 24, 2015. The CFTC brought an enforcement action against Tera for failing to enforce the prohibition against wash trades provided in Tera’s rules. Tera had facilitated a prearranged bitcoin swap transaction, so it settled this enforcement action in September of 2015 with a cease and desist order.

FinCEN

• In the Matter of BTC-e (2017). FinCEN, assessed a civil penalty against Canton Business Corporation (“BTC-e”) for willfully violating U.S. AML laws, arresting a Russian national for his role at the BTC-e exchange. FinCEN argued BTC-e and the Russian national (together with an unnamed co-conspirator) facilitated ransomware, computer hacking, identity theft, tax refund fraud schemes, public corruption, and drug trafficking. The Acting Director for FinCEN, in addressing the indictments, commented that “[t]his action should be a strong deterrent to anyone who thinks that they can facilitate ransomware, dark net drug sales, or conduct other illicit activity using encrypted virtual currency. Treasury’s FinCEN team and our law enforcement partners will work with foreign counterparts across the globe to appropriately oversee virtual currency exchanges and administrators who attempt to subvert U.S. law and avoid complying with U.S. AML safeguards.”
• In the Matter of Ripple Labs Inc. (2015). FinCEN took an action against Ripple Labs Inc., a virtual currency exchanger, and its wholly-owned subsidiary, XRP II, LLC. It assessed a civil penalty for violating the BSA because it failed to implement an adequate AML program. the Department of Justice imposed a $450,000 forfeiture on it.

OFAC

• A Notice by the Foreign Assets Control Office on 12/04/2018. OFAC took action against two Iranian-based individuals involved in the exchange of bitcoin ransom payments. They also identified two digital currency addresses associated with the individuals, marking the first time the division publicly attributed digital currency addresses individuals on the SDN list.

OCC

• Interpretive Letter #1170 July 2020. Letter clarifying national banks’ and federal savings associations’ authority to provide cryptocurrency custody services for customers.
• Comptroller’s Licensing Manual Supplement: Considering Charter Applications From Financial Technology Companies (2018). Manual providing detail on how the OCC would evaluate applications for a special purpose national bank charter from fintech companies and clarifies the OCC’s expectations that companies with a fintech business model demonstrate a commitment to financial inclusion. 

SEC^[10]

• SEC v. Terraform Labs Pte Ltd and Do Hyeong Kwon (2023). SEC is alleging the defendants sold unregistered “crypto asset securities” and securities-based swaps. The Agency also claims that Terras token price was not at all stabilized by the LUNA stablecoin mechanism; rather, the price was artificially maintained by means of an undisclosed firm buying a large amount of UST in exchange for discounted LUNA.
• In the Matter of GTV Media Group, Inc., et al. Admin. Proc. (2021). SEC found that GTV and Saraca solicited individuals to invest in their offering of a digital asset security that was referred to as either G-Coins or G-Dollars. As a result of the unregistered securities offerings the Respondents collectively raised approximately $487 million.
• TurnKey No-action Letter (2019). This letter provides some guidance as to the limited circumstances under which a virtual currency offering will be treated as a security.
• In the Matter of Gladius Network LLC (2019). Gladius Network LLC had raised close to $13 million in 2017. The ICO was not registered under the securities laws and did not qualify for a registration exemption. In 2019, Gladius entered into a settlement with the SEC.
• In the Matter of Block.one (2019). The SEC settled charges against blockchain technology company Block.one for conducting an unregistered initial coin offering of digital tokens (ICO) that raised the equivalent of several billion dollars over approximately one year. The company agreed to settle the charges and paid a $24 million civil penalty.
• In the Matter of CARRIEREQ, INC., D/B/A AIRFOX (2018). Carrier EQ Inc. had raised an estimated $15 million in digital asset sales. The company agreed to return funds to token purchasers, register their tokens as securities, file periodic reports with the SEC, and pay the SEC $250,000 in penalties.
• In the Matter of Paragon Coin, Inc. (2018). Paragon Coin had raised an estimated $12 million in digital asset sales. The company agreed to return funds to token purchasers, register their tokens as securities, file periodic reports with the SEC, and pay the SEC $250,000 in penalties.
• In the Matter of MUNCHEE INC. (2017). Cease and desist order concluding that a “utility token” issued by Munchee Inc. constituted an unregistered offering of securities.
• The DAO Report (2017). The SEC found that some virtual currency tokens that have been created and issued in the context of ICOs (Initial Coin Offerings) are securities, subject to its jurisdiction.

SEC and DOJ

Notable Pending Case

• SEC action and DOJ indictment against Samuel Bankman-Fried, filed or announced Dec. 13, 2022. On December 13, 2022, the SEC charged Samuel Bankman-Fried, founder and CEO of FTX Trading Ltd., a crypto asset trading platform, with defrauding equity investors in the company.[11] According to the SEC, Bankman-Fried diverted customers’ funds to his privately-held crypto hedge fund, raising more than $1.8 billion from investors. The US Department of Justice (“DOJ”) separately charged Bankman-Fried with eight criminal counts, including wire fraud, money laundering, and securities fraud.[12] As of February 13, 2023, the SEC civil suit has been stayed, as the continuation of the suit could potentially allow Bankman-Fried to improperly tailor his defense in the criminal case.

[1] See, e.g., Daichendt v. CVS Pharmacy, Inc., No. 22 CV 3318, 2022 U.S. Dist. LEXIS 217484 (N.D. Ill. Dec. 2, 2022); Vance v. Microsoft Corp., No. C20-1082JLR, 2022 U.S. Dist. LEXIS 189250 (W.D. Wash. Oct. 17, 2022); Rogers v. BNSF Ry. Co., No. 19 CV 3083, 2022 U.S. Dist. LEXIS 173322 (N.D. Ill. Sept. 26, 2022); Wise v. Ring LLC, No. C20-1298-JCC, 2022 U.S. Dist. LEXIS 138399 (W.D. Wash. Aug. 3, 2022); Karling v. Samsara Inc., No. 22 C 295, 2022 U.S. Dist. LEXIS 121318 (N.D. Ill. July 11, 2022); Zellmer v. Facebook, Inc., No. 3:18-cv-01880-JD, 2022 U.S. Dist. LEXIS 60239 (N.D. Cal. Mar. 31, 2022); Gutierrez v. Wemagine.ai LLP, No. 21 C 5702, 2022 U.S. Dist. LEXIS 14831 (N.D. Ill. Jan. 26, 2022); Naughton v. Amazon.com, Inc., No. 20-cv-6485, 2022 U.S. Dist. LEXIS 8 (N.D. Ill. Jan. 3, 2022); In re Clearview AI, Inc., Consumer Priv. Litig., 585 F. Supp. 3d 1111 (N.D. Ill. 2022).

[2] Gonzalez v. Google LLC, Oyez, https://www.oyez.org/cases/2022/21-1333 (last visited Feb 24, 2023); Twitter, Inc. v. Taamneh, Oyez, https://www.oyez.org/cases/2022/21-1496 (last visited Feb 24, 2023); Isaac Chotiner, Two Supreme Court Cases That Could Break the Internet, New Yorker (Jan. 25, 2023), https://www.newyorker.com/news/q-and-a/two-supreme-court-cases-that-could-break-the-internet. See also Amy Howe, “Not, like, the nine greatest experts on the internet”: Justices seem leery of broad ruling on Section 230, SCOTUSblog (Feb. 21, 2023), https://www.scotusblog.com/2023/02/not-like-the-nine-greatest-experts-on-the-internet-justices-seem-leery-of-broad-ruling-on-section-230/; Brian Fung & Tierney Sneed, Takeaways from the Supreme Court’s hearing in blockbuster internet speech case, CNN (updated Feb. 21, 2023), https://www.cnn.com/2023/02/21/tech/supreme-court-gonzalez-v-google/index.html; Johana Bhuiyan & Kari Paul, How two supreme court battles could reshape the rules of the internet, The Guardian (Feb. 21, 2023), https://www.theguardian.com/law/2023/feb/21/us-supreme-court-twitter-google-lawsuit-internet-law. 

[3] Gonzalez v. Google LLC, Oyez, supra note 2; Twitter, Inc. v. Taamneh, Oyez, supra note 2.

[4] Gonzalez v. Google LLC, Oyez, supra note 2; Twitter, Inc. v. Taamneh, Oyez, supra note 2.

[5] See Getty Images Statement, Getty Images (Jan. 17, 2023), https://newsroom.gettyimages.com/en/getty-images/getty-images-statement.

[6] DOE 1 et al. v. GitHub, Inc. et al., Law360, https://www.law360.com/cases/636440b38ffd4c01fca4d260 (last visited Feb. 24, 2023).

[7] Andersen et al. v. Stability AI Ltd. et al., Law360, https://www.law360.com/cases/63c5472a538a25007d823161 (last visited Feb. 24, 2023).

[8] Thaler v. Perlmutter et al., Law360, https://www.law360.com/cases/629911df44c8c20586b4073c (last visited Feb. 24, 2023).

[9] Letter from Robert J. Kasunic to Van Lindberg (February 21, 2023), https://copyright.gov/docs/zarya-of-the-dawn.pdf. See also Zarya of the Dawn, Registration record VAu001480196, US Copyright Office, https://publicrecords.copyright.gov/detailed-record/34309499; Zarya of the Dawn, Registration record TXU002356581, US Copyright Office, https://publicrecords.copyright.gov/detailed-record/34743281.

[10] The SEC also maintains a list of the most recent charges it has brought regarding digital assets, available at https://www.sec.gov/spotlight/cybersecurity-enforcement-actions.

[11] Securities and Exchange Commission v. Samuel Bankman-Fried, No. 1:22-cv-10501, S.D.N.Y. (Dec. 13, 2022), https://www.sec.gov/litigation/complaints/2022/comp-pr2022-219.pdf.

[12] United States Attorney Announces Charges Against FTX Founder Samuel Bankman-Fried, The United States Attorney’s Office for the Southern District of New York (Dec. 13, 2022), https://www.justice.gov/usao-sdny/pr/united-states-attorney-announces-charges-against-ftx-founder-samuel-bankman-fried.

Bloomberg recently reported that some lenders were setting up trading desks focused on private debt. Together with the recent events in the banking market and regulatory capital-driven exposure reductions that have been underway for some time now, this has caused many lenders to examine the restrictions on loan sales imposed by borrowers via assignment consent rights and the disqualified lender list (the “DQ List”)—the list of entities that are disqualified from becoming lenders or participants under the credit agreement.

This once-off list was originally limited to a handful of commonly known “loan to own” funds—those funds purchasing distressed debt with the intention of taking action against the borrower and gaining a controlling stake in the company. Today, it has grown to be a list containing, in many cases, every single competitor in a given sponsor’s market. Long before the Great Financial Crisis, these lists picked up momentum as borrowers became more and more concerned about who owned their debt. Capital markets desks, now eager to trade potentially troubled loans, may be surprised to discover how extensive the DQ Lists have become and how permanent the restrictions on trading are. While DQ lists are not common on many subscription loans, similar concepts do exist in many large sponsor deals via competitor anti-assignment clauses and related consent rights.

Just last year, the Loan Syndications and Trading Association (LSTA) published a market advisory outlining some of the more recent changes to the disqualified institution provisions set forth in the LSTA’s Model Credit Agreement Provisions (the “MCAPs”). It contained certain updates to the 2014 LSTA DQ Structure, which was originally formulated to balance competing interests of borrowers, sponsors, and lenders. For years, market participants grappled with the many issues surrounding the DQ Lists: At what point in the transaction were they required to be delivered? Could the borrower add to the DQ List? Did it go away upon a default? What happened if the loan sale was to an affiliate of an entity on the DQ List? Could the list be publicly disclosed? To whom and how? And the list (no pun intended) went on… Who would be responsible for enforcement? What happened if the loans ended up with an entity on the DQ List who in turn traded the loan to another party? What would be the mechanics of an unwind?

Here is a brief review of the LSTA DQ structure with some commentary about where the market generally landed. Perhaps now is the time to revisit some of the negotiated points to allow the debt to more freely trade. Lengthy DQ Lists negotiated during a period of low interest rates and abundant credit may now cause heartburn when banks want to quickly liquidate and trade their positions.

Creation of the DQ List

Entities included on the DQ List include (i) any entities the borrower identified to the agent at or prior to the closing of the commitment letter, (ii) any other entities that the borrower identified to the agent from time to time that are competitors of the borrower or its subsidiaries, and (iii) any affiliates of those entities that are identified to the agent. Emphasis should be on early delivery of the DQ List because far too often the DQ List is the last thing to be delivered prior to close, leaving very little time for the agent to review the list and determine whether it is reasonable. Does this list contain all or most of the likely purchasers of the debt once it is distressed? Likely it does. Has the trading desk been consulted and reviewed the list? Is there sufficient liquidity in this loan to warrant the size of the list that has been delivered? Don’t overlook the affiliate point: some of the largest credit funds and potential buyers may be affiliates of sponsors on the DQ List.

Additions to the DQ List

Under the LSTA DQ Structure, borrowers are permitted to add competitors to the list with sufficient notice, understanding that the borrower is required to deliver confidential information, such as financial statements and management reports, under the credit agreement, and permitting competitors to see that information is of utmost concern. Borrowers are not, however, typically allowed to add financial institutions, as that should be determined at the outset and they represent the most likely purchasers of debt.

Expiration of the DQ List

Here is where the rubber hits the road. Lenders argue that once there is a default, all bets are off: the list falls away, and the lenders should be able to freely trade the loan because the borrower has stopped performing—the benefit of the bargain has expired. Borrowers, on the other hand, often have the opposite view: a default situation is exactly the time when lenders should be restricted from selling the loans to purchasers and competitors whose interests diverge from the borrower/sponsor. The LSTA DQ Structure permits the DQ List to stay in place, and large cap sponsors are largely successful in the broadly syndicated loan market on this point; however, the same is not true in many fund finance or middle market transactions. While in the broadly syndicated loan market, this approach might make sense given the wide variety of participants, in the middle market, and in certain parts of the fund finance market, these loans do not enjoy the same kind of liquidity, and as a result, the pool of potential purchasers is far fewer. In a newly minted private debt trading platform, participants may want to reexamine their positions on this issue.

Disclosure of the DQ List

Lenders were always hesitant to disclose the existence of DQ Lists because, among other things, the entities on the DQ Lists were also their clients. Sponsors similarly wanted confidentiality around whom they were restricting. Nondisclosure presents challenges in the broadly syndicated market, however. Purchasers of loans need to know at the outset the extent to which there are limitations on the sale of these loans. The MCAPs settled this by making it easier for lenders to see the DQ List by authorizing the administrative agent to post the DQ List on Intralinks or a similar debt platform on the public side.

Liability for Violations of the DQ List

Taking a cue from the LSTA DQ Structure, most documents make clear that the administrative agent has no liability for monitoring the DQ List; the DQ List has no retroactive application, and transferring a loan to a Disqualified Lender does not void the trade but rather allows the borrower to, among other things, “limit the Disqualified Institution’s access to confidential information, engaging in fundamental lender actions or taking part in creditor decisions.” As a remedy, the borrower may also buy back the loans, thereby settling the operational nightmare of unwinding a trade.

***

Is it time to revisit these extensive DQ Lists and the various credit agreement permutations and ask whether the negotiated provisions are the right construct for each segment of the market? Might lenders want more flexibility as they examine the vast portfolios of loans they have amassed over the last decade of low interest rates? Might they be better off with limited lists that fall away upon a default, and certainly, upon a payment default? Should some of these restrictions be applicable in a nearly $3TN broadly syndicated market? Similarly, should the same constructs be applied in the much less liquid middle market fund finance market? There is no time like the present…

Last year, an individual employed by Trulieve Inc., who was responsible for grinding and handling cannabis at Trulieve’s cultivation site in Massachusetts, died due to asthma-related complications following exposure to “occupational quantities of whole and ground cannabis,” according to an Occupational Safety and Health Administration (OSHA) hazard letter issued in June 2022. Under a settlement agreement with OSHA, Trulieve agreed to study the potential hazards of ground marijuana dust.

OSHA Will Regulate the Cannabis Industry

Federal courts and regulating bodies have already demonstrated an interest in enforcing federal employment laws in the marijuana industry, despite the fact that cannabis remains classified as an illegal substance under the federal Controlled Substance Act (CSA). In those cases, instead of addressing the legality of marijuana at all, the federal courts squarely focus on the legal factors an individual must prove to prevail in the litigation.

Now it appears that the federal government intends to take the additional step of regulating the workplace safety of cannabis companies under the Occupational Health and Safety Act (Act) by taking a similar approach, i.e., treating the cannabis company as if it is legitimate, notwithstanding the federal illegality of marijuana.

In other words, cannabis and cannabis-ancillary businesses can no longer hide behind the federal illegality of cannabis to shield against enforcement actions by the federal government when it comes to protecting employees from hazards in the workplace. Cannabis employers are subject to the same OSHA regulations as other industries, and that includes following the general duty clause, which states that employers should provide “a place of employment which [is] free from recognized hazards that are causing or are likely to cause death or serious physical harm to his employees.”

Indeed, Trulieve is not the first or only cannabis-related company on OSHA’s radar. In June 2022, OSHA cited PharmaCann Inc. for potential workplace hazards at a greenhouse in Montgomery, New York. OSHA and PharmaCann settled that case, with PharmaCann agreeing to pay an $18,853 fine. While neither the Trulieve nor the PharmaCann case involved a general duty clause violation, OSHA’s demonstrated interest in regulating this industry opens the door to such a violation in the future if cannabis companies do not comply with OSHA workplace safety regulations.

Further compounding this issue is the fact that many states have their own workplace safety agencies (modeled after OSHA), with their own regulations and enforcement mechanisms separate from and in addition to OSHA. Cannabis employers need to be aware of and compliant with these state laws and state agency regulations as well.

To add an additional layer of complication to the important issues surrounding employee safety in the cannabis context, the cannabis industry is still in its infancy; there are many workplace safety issues that are currently unknown. In Trulieve’s case, the fact that cannabis dust could trigger an asthmatic reaction was likely foreseeable. However, not much is known about the exact scientific or medical correlation between cannabis dust and asthma, which means that there are presently no established permissible exposure levels OSHA regulators can use to determine when exposure becomes a hazard.

Avoiding Workplace Injuries

While all workplace environments pose some dangers for injury, cannabis employees are most likely at the highest risk during the production process. These hazards can include exposure to pesticides, carbon dioxide, carbon monoxide, corrosive materials, cleaning products, and highly flammable materials such as butane. Noisy, heavy, or dangerous equipment and machinery can likewise pose risks. To that end, cannabis employers should have a comprehensive plan in place for federal and state workplace safety compliance.

Recommended safety components of such a plan generally include the following:

Employee Training: First and foremost, cannabis employers must ensure that their employees are properly trained on the use of all equipment and tools, and that proper supervision is provided at all necessary times. Employers should document the training they provide their employees.

Written Safety Program: In addition to proper employee training, a properly written safety program is the blueprint for OSHA (and state-specific regulatory) compliance. Indeed, OSHA requires specific written procedures for safety related to the handling of hazardous materials. This manual should cover, for example, employee and supervisor safety responsibilities, incident reporting, emergency plans, disciplinary action, and proper use of tools and equipment. The safety program should identify all aspects of the company’s operations and the hazards associated with each procedure and set forth measures to mitigate or, preferably, eliminate those hazards.

Accountability: Similar to training, disciplinary actions must be documented, whether for minor infractions or serious violations. In the event of an OSHA citation, disciplinary action records are one of the first pieces of information OSHA will request. Employers should embrace an accountability program, as it protects both the employer and the employees, given that it will provide a significant impact in reducing workplace injuries.

Safety Auditing: Lastly, it is recommended that regular safety audits are performed, which will help an employer identify areas in need of improvement. An employer should be proactive and should not simply rely on an accountability program as a driver to reduce workplace injuries and ensure OSHA compliance.

As the cannabis industry continues to grow and make headlines, it will inevitably attract additional scrutiny from federal agencies such as OSHA. The trend in recent cases addressing these issues demonstrates that cannabis employers must ensure they are providing a safe workplace for their employees and comply with all OSHA regulations (along with state workplace regulations), as if they were operating within any other industry.

This article is related to a Showcase CLE program that took place at the ABA Business Law Section’s Hybrid Spring Meeting on Saturday, April 29, 2023. All Showcase CLE programs were recorded live and will be available for on-demand credit, free for Business Law Section members.

The Wizard of Oz follows the story of Dorothy Gale, Toto the Dog, the Scarecrow, the Tin Man, and the Cowardly Lion as they travel down the Yellow Brick Road to the Emerald City in search of the Wizard of Oz. In some respects, the Scarecrow’s quest for a Brain, the Tin Man’s quest for a Heart, and the Cowardly Lion’s quest for Courage have parallels found in the ABA Model Rules of Professional Conduct (the “Rules”).

The Scarecrow’s quest for a brain implicates Rule 1.1: Competence; it also connects to appreciating the ethical obligations of maintaining the confidentiality of information relating to the representation of the client under Rule 1.6 (and how the lawyer’s Rule 1.6 ethical obligation to maintain confidentiality is related to, and yet distinct from, the attorney-client privilege evidentiary rule). Likewise, understanding is needed to appreciate that, as recognized by Rule 1.2, the client in the attorney-client relationship is the principal and the attorney is the agent; and yet, under Rule 1.4, the lawyer has an ethical obligation to communicate with the client and provide information and guidance to the client so that the client can make informed decisions about the representation.

The Tin Man’s quest for a heart reminds us that, as lawyers, we are also public citizens having special responsibility for the quality of justice. With respect to this special responsibility, the Preamble to the Rules recognizes: “A lawyer should be mindful of deficiencies in the administration of justice and of the fact that the poor, and sometimes persons who are not poor, cannot afford adequate legal assistance. Therefore, all lawyers should devote professional time and resources and use civic influence to ensure equal access to our system of justice for all those who because of economic or social barriers cannot afford or secure adequate legal counsel.” In that regard, Rule 6.1 addresses “voluntary pro bono publico service,” the work that we lawyers should aspire to do, and what efforts and endeavors qualify under the Rule. In addition, Rule 8.4(g) identifies as professional misconduct harassment or discrimination based on “race, sex, religion, national origin, ethnicity, disability, age, sexual orientation, gender identity, marital status or socioeconomic status in conduct related to the practice of law.” These Rules remind us that, as lawyers, we have a higher calling.

The Cowardly Lion’s quest for courage calls us to recognize, among other things, that under Rule 1.2(b), lawyers are sometimes asked to represent unpopular clients or clients from whom the lawyer’s own beliefs and opinions differ greatly. Rule 1.2(b) reminds us that just because a lawyer represents a client does not mean that the lawyer shares their client’s political, social, or moral opinions. Other Rules implicate the need for an attorney to sometimes tell a client “no” or that, as Rule 1.4(a)(5) makes clear, a lawyer cannot and will not take action in representing the client that will be contrary to the Rules of Professional Conduct or other laws. Likewise, Rule 1.2(d) prohibits a lawyer from advising the client to engage in a criminal or fraudulent act or from assisting the client in doing so. The lawyer may—and probably should—not only advise the client against such criminal or fraudulent action, but also advise the client about the possible adverse consequences of their continuing down that criminal or fraudulent path.

In addition, depending on the circumstances, the lawyer may also be permitted to disclose otherwise protected information relating to the representation of a client. At least four of Rule 1.6(b)’s exceptions to a lawyer’s ethical obligation to maintain confidentiality permit disclosure either when third parties are about to be harmed by the client’s actions or when the lawyer is required by other law or court order to make such a disclosure. Furthermore, when a lawyer is representing an organization or entity, it may be necessary—and required—under Rule 1.13(b) for that lawyer to report “up the ladder” when a client constituent is engaging or about to engage in conduct that either violates the law or violates a legal obligation of the organizational client—and such conduct is likely to result in substantial injury to the client. It takes courage to stand up to the client and tell the client no. But sometimes it has to be done, as the Rules of Professional Conduct recognize.