Despite legal and ethical concerns, many business leaders are still bullish on generative artificial intelligence (AI), and the industry is accelerating at a rapid pace. In fact, according to a UBS study, ChatGPT reached over 100 million monthly active users in the two months following its initial launch—making it the fastest-growing consumer application in history.
Unfortunately, as the use of generative AI surges, so too have the legal questions surrounding it. Copyright and trademark disputes regarding AI-generated material are on the rise—thrusting intellectual property (IP) law into uncharted territory. The cases being decided today, barely two years into the generative AI boom, may establish legal precedent that shapes the future of law for decades to come.
In the past several months, several high-profile legal cases have tested the boundaries of IP in the age of artificial intelligence, highlighting key issues.
Copyright Infringement When Using Content Created by AI
In Alcon Entertainment, LLC v. Tesla, Inc., Alcon Entertainment, the exclusive rights holder of the 2017 film Blade Runner 2049, has accused Tesla and Warner Bros. Discovery of using AI-generated imagery that closely mimics an iconic image from its film without prior permission. The image—depicting a man next to a futuristic-looking vehicle—was used at Elon Musk’s Cybercab launch event.
The suit claims that Tesla initially requested to use an actual image from the film. When Alcon Entertainment denied the request, the suit alleges Tesla and Musk used generative AI to create similar visuals, using Blade Runner images as a close reference.
Interestingly enough, whether a work is generated by AI or created by humans is irrelevant in this case. The question of fact will remain the same irrespective of how the image was created: Does this work infringe on Alcon Entertainment’s intellectual property?
But this case still provides attorneys with a valuable lesson. We will likely see these types of cases grow exponentially. AI tools can now produce images or written works in seconds, much more quickly than a human could. However, the images are not created from the “mind” of the AI; they are based on the information the AI has been exposed to already. Therefore, the “new” content the AI is creating is, most of the time, based on a human’s work.
Many day-to-day users of generative AI platforms are unaware of the potential risks associated with how these tools are trained. They may believe that the work they have asked generative AI to create is truly “original.” In many instances, individuals may not realize that their generated content mirrors copyrighted material until it’s too late.
For this reason, IP attorneys must continue to educate their clients about the risks involved in using generative AI and encourage them to rely on original, human-created content when possible. While AI can certainly aid the creative process, it should not be relied on as the primary source for public-facing materials. Of course, any AI-generated works should be reviewed by legal experts with scrutiny, as any prudent attorney would with work created by a human.
Copyright Infringement When Using Content to Train AI
The rapid adoption of generative AI has given rise to legal disputes not only about the output of these tools, but also concerning how these tools are trained.
For example, in Toronto Star Newspapers Ltd. v. OpenAI, Inc., more than five of Canada’s most prominent news outlets, including the Toronto Star newspaper, have filed a suit against OpenAI, alleging that OpenAI “scraped” content from their websites to train ChatGPT without their consent. The plaintiffs argue that this constitutes copyright infringement.
Similarly, in another landmark case filed this June, UMG Recordings, Inc. v. Uncharted Labs, Inc., several major record labels have teamed up to file a suit against Uncharted Labs for copyright infringement. The plaintiffs allege that the company’s AI model, Udio, illegally copies digital sound recordings to train its system. The tech then generates music that imitates the qualities of genuine, human-made recordings.
One potential outcome of both of these cases could be the establishment of licensing agreements. In the early days of music streaming platforms, similar legal battles ensued. The result? Licensing agreements that compensated artists for their music. Such license agreements laid the foundation for today’s major streaming platforms like Spotify, Apple Music, and Pandora. Today’s legal battles could similarly shape how generative AI companies acquire legal consent to use content generated by human artists in their training models.
For example, newspapers could provide AI companies with a license to scrape their news articles so long as the company pays a fee for the content and links back to the newspapers’ original article to credit the source of the answer or new material created. OpenAI has already announced licensing deals with The Associated Press and News Corp, among others.
Likewise, owners of music could potentially provide an AI platform with a license to train on their songs and create new music so long as a royalty is paid for using the music and users are notified that using any “new” music is subject to the copyright rights of the original owners.
When it comes to generative AI, Pandora’s box has been opened. Like it or not, this technology is here to stay. For this reason, attorneys should continue to closely monitor the ongoing cases surrounding generative AI to keep abreast of the rapidly evolving legal landscape. As the legal framework solidifies, those who stay informed will be best positioned to serve their clients.
This article provides a comparative analysis of two prominent business structures: the limited liability company (“LLC”) in the United States, with a focus on Florida and Delaware, and the Sociedad de Responsabilidad Limitada (“SRL”) in Bolivia. This analysis aims to delve into the fundamental similarities and distinctions that exist between two prominent legal systems: common law and civil, or continental, law. By examining these entities, we seek to uncover how they function within their respective frameworks and the implications of those differences. However, it is important to note that this exploration is not exhaustive,[1] as the scope of this article is inherently limited. Thus, the aspects discussed here relate to the structural elements and characteristics of these types of business entities within their unique legal systems.
Legal Framework
The basis of the U.S. legal system is a combination of foundational principles and key legal documents. At its core is the U.S. Constitution, the supreme law that establishes the framework of the federal government, its relationship with the states, and the rights of its citizens. Rooted in English common law, it relies on judicial precedents to guide decisions. Statutes enacted by legislative bodies and regulations issued by administrative agencies provide specific rules across various domains. These laws are interpreted by courts, whose decisions contribute to case law, further shaping the legal landscape. Together, these elements create a comprehensive and dynamic legal system that governs the United States.
The Constitution does not directly govern LLCs in the United States but derives their existence and regulation from state laws, reflecting the decentralized nature of U.S. governance. The Tenth Amendment[2] reserves to the states the power to regulate LLCs, resulting in diverse frameworks like the Delaware Limited Liability Company Act (“DLLCA”)[3] and the Florida Revised Limited Liability Company Act (“FRLLCA”).[4] However, federal constitutional principles indirectly shape LLC operations. The Commerce Clause[5] allows Congress to regulate interstate business activities, affecting LLCs with cross-state operations. The Contracts Clause[6] protects LLC operating agreements from retroactive state interference, while the Fourteenth Amendment[7] ensures fair treatment under state laws. Additionally, LLCs benefit from First Amendment[8] protections for commercial speech, such as advertising,[9] though regulations must meet the criteria established in the U.S. Supreme Court’s Central Hudson Test.[10] These constitutional influences underscore the balance between state-level autonomy and federal oversight in the regulation of LLCs.
Bolivia’s legal system is grounded in the civil law system, which draws its influence from the Roman Corpus Juris Civilis. Bolivia’s legal framework operates under the principles of civil law, which it inherited from Spanish and Napoleonic legal traditions. The civil law system emphasizes codified statutes, and legal decisions are often guided by applying these codes rather than judicial precedents.
Bolivia’s legal framework establishes a strong foundation for economic activity and business organization, emphasizing both individual and collective rights. The Bolivian Constitution[11] ensures the right to engage in commerce, industry, or lawful economic activities, provided they do not harm the public good. It also guarantees freedom of business association, recognizing the legal status of such entities and supporting democratic business structures aligned with their statutes.[12] Complementing this, the Commercial Code[13] governs relationships arising from commercial activities, offering a broad definition that includes both the nature of activities and the individuals or entities conducting them.[14]
Nature and Characteristics
In the United States, each state has its own laws governing the formation of LLCs. The first statute authorizing LLCs was adopted in Wyoming in 1977, and as late as 1988, only Florida had followed suit.[15]
An LLC is a popular business structure in the United States that combines the liability protection of a corporation with the tax benefits and operational flexibility of a partnership or sole proprietorship.[16] LLCs are hybrid business entities with a unique combination of favorable legal, business, and tax attributes that do not exist in any other single entity.[17] In short, the LLC is an eclectic mixture of features drawn from several different traditional business forms that create an attractive package for many enterprises.[18]
In Bolivia, the SRL is a relatively modern business entity, originating in nineteenth-century Germany with the Reich’s special law of 1892.[19] From there, it spread to other jurisdictions, including Portugal in 1901, Austria in 1906, and England in 1907,[20] eventually gaining global recognition.
The SRL occupies a hybrid position between capitalist and personalist corporate models. Like corporations, the SRL offers limited liability tied to members’ capital contributions but differs in not issuing freely transferable shares. Instead, it emphasizes the intuitu personae principle,[21] prioritizing trust and personal relationships among members, as seen in the restricted transferability of quotas. This dual nature allows the SRL to combine the financial security of a corporation (Sociedad Anónima) with the personalized dynamics of a partnership (Sociedad Colectiva), making it a versatile and unique business entity.
Similarities
Limited Liability of Its Members
In the United States, one of the most appealing aspects of the LLC is the limited liability afforded to its owners and operators. For instance, in both Florida[22] and Delaware,[23] no member or manager is liable personally for any debt, obligation, or liability of an LLC solely by virtue of such party’s status as a member or manager. Furthermore, the individual assets of LLC members may not be used to satisfy the LLC’s debts and obligations; hence, a member’s risk of loss is limited to the amount of capital invested in the business.
In Bolivia, the SRL also provides limited liability to its members. According to Article 195 of the Commercial Code, members are liable only up to the amount of their contributions. This ensures that each partner’s personal assets remain protected, even if the company needs to cover debts or suffers losses during a given management period.[24]
Separate Legal Entity
Under most LLC statutes, including under the DLLCA[25] and the FRLLCA,[26] an LLC is explicitly characterized as a separate legal entity whose identity is distinct from that of its members. As a separate “legal person,” an LLC can exercise rights and powers in its own name. Consequently, parties doing business with an LLC must look to the company, and not to the LLC’s members or managers, to satisfy any obligations owed to them.
Likewise, in Bolivia, SRLs are recognized as distinct legal entities from their members, meaning that they can enter into contracts, sue, and be sued independently from the individuals involved in ownership or management.
Flexible Management Structure
In the United States, LLCs can be member-managed or manager-managed, offering more flexibility for structuring control, especially for larger or multistate LLCs. The operating agreement typically sets the management terms. Most LLC statutes default to a member-managed structure, such as under the DLLCA[27] and the FRLLCA,[28] where all members have management rights, similar to a general partnership.[29] Some statutes, however, default to a manager-managed structure, where management is centralized in a smaller group of managers, akin to a corporation.[30] Both member-managed and manager-managed structures can be elected, regardless of the jurisdiction’s default rule.[31]
In Bolivia, the management of an SRL may consist of one or more managers, who can be either one or more of the members, similar to a member-managed LLC, or third parties who are nonmembers,[32] similar to a manager-managed LLC. In any case, there must be a management structure, as it is the body that constitutes the “typical representation of that company.”[33]
Differences
Perpetual Existence
LLCs often have perpetual existence and do not dissolve with member exit unless specified in the operating agreement.[34] For instance, the DLLCA presumes a perpetual life.[35] Likewise, under the FRLLCA,[36] an LLC is presumed to have perpetual duration unless otherwise stated in its articles of organization or operating agreement.
In Bolivia, SRLs do not have an indefinite duration and are never presumed to have perpetual life; rather, its articles of formation must specify a lifespan in years. In practice, SRLs generally specify a ninety-nine-year duration, which may be renewed before its lifespan terminates.
Cap on Membership
In both Florida and Delaware, there are no minimum or maximum limits on the number of members an LLC can have. In both states, LLCs can have a single member or multiple members. There is no limit on the number of members in an LLC unless the LLC opts to be taxed as an S corporation, which has a maximum of one hundred members.
Membership limits are significantly different in Bolivia, where an SRL must have at least two members and no more than twenty-five members.[37] This stems from the conception that defines a business entity (sociedad comercial) as a contractual agreement between two or more individuals to contribute resources toward a common goal. Consequently, it is inconceivable to have a business entity with only one member; thus, under Bolivian law, the legal minimum for forming such an entity is two members. On the other hand, the cap on the number of members of an SRL responds to its closely held nature, with both capitalist and personalist elements.
Operating Agreements
The governance of an LLC is outlined in a nonpublic document known as the “operating agreement” or “limited liability company agreement,” which, like a partnership agreement or corporate bylaws, is not filed with any state official.[38] This document specifies the rights, duties, and obligations of members and managers and serves as the framework for the LLC’s operations. LLC members have considerable flexibility to tailor the operating agreement to their unique needs, often superseding default statutory provisions.[39] Thus, the operating agreement controls relationships between members and between members and the company.[40]
Contrary to the LLC, an SRL only requires one solemn document (testimonio de constitución) specifying the rights, duties, and obligations of members and managers and serving as the framework for the SRL’s operations, and it is made public through the Commercial Registry. Hence, an operating agreement is not required. However, on rare occasions, members of an SRL may choose to have a parasocial agreement (acuerdo parasocial),[41] essentially a private contract among the members that provides specific terms and conditions governing the relationships between those members. A parasocial agreement differs from an operating agreement in that the former is very specific and limited to the laws and regulations that govern SRLs.
Taxation
By default, Florida[42] and Delaware[43] LLCs are taxed as pass-through entities, meaning that they do not pay income taxes themselves. Instead, their owners or members pay personal income tax on the LLC’s revenue after it passes through the business to members. This is advantageous because it avoids double taxation, which occurs when both the entity and the owners are taxed.
The tax regime in Bolivia is regulated by the Tax Code[44] and Law No. 843.[45] The SRL, which is governed by Bolivian tax law, does not support pass-through taxation for SRLs, so they are typically taxed as separate entities.
Conclusion
In comparing LLCs in Florida and Delaware with SRLs in Bolivia, several similarities and differences emerge, shaped by the distinct legal frameworks and business environments of these regions.
One of the key similarities between LLCs and SRLs is the concept of limited liability, which protects the personal assets of members or owners from the debts and obligations of the entity. Both business structures are also recognized as separate legal entities, capable of entering into contracts and engaging in litigation independently of their members. Additionally, both LLCs and SRLs offer flexibility in management structure, allowing for member-managed or manager-managed options, depending on the specific needs of the business.
However, notable differences exist between the two. LLCs in Florida and Delaware typically enjoy perpetual existence unless otherwise stated in their operating agreements, whereas SRLs in Bolivia must specify a finite duration in their formation documents. Another major difference is the membership structure: LLCs can have a single member or an unlimited number of members, while Bolivian SRLs are limited to a minimum of two and a maximum of twenty-five members. Furthermore, LLCs benefit from pass-through taxation, which avoids double taxation, while SRLs in Bolivia are taxed as separate entities, subject to different tax rules under Bolivian law.
The contrasting legal traditions in which these structures exist—common law in the United States and civil law in Bolivia—play a significant role in shaping these differences. While LLCs have a high degree of flexibility and autonomy, particularly in their internal governance through operating agreements, SRLs rely more on codified laws and public documentation, such as the testimonio de constitución. These structural and legal contrasts reflect the broader distinctions between the decentralized, case-law-driven approach of the United States and the codified, statute-based framework of Bolivia.
Thus, while LLCs and SRLs share common features like limited liability and separate legal status, the differences in membership, governance, duration, and taxation highlight how each entity is adapted to the legal and economic systems in which it operates. These distinctions can significantly influence the decision-making process for entrepreneurs and investors when choosing between these two business structures.
The author intentionally focuses on seven aspects to distinguish the similarities and differences between LLCs and SRLs: limited liability, separate entity status, management structure, perpetual existence, cap on members, operating agreements, and taxation. ↑
The Supreme Court developed a four-part test, also known as “The Central Hudson Test,” in Central Hudson Gas & Electric Corp. v. Public Service Commission of New York to evaluate the constitutionality of regulations on commercial speech. 447 U.S. 557 (1980). ↑
Constitución Política del Estado (2009) (Bolivia). ↑
Article 47(I) states that all have the right to engage in commerce, industry, or any lawful economic activity, under conditions that do not harm the collective good. Id. art. 47(I). Likewise, Article 52(I) acknowledges and protects the right to freedom of business association. Id. art. 52(I). Additionally, Article 52(II) states that the State shall guarantee recognition of the legal personality of business associations, as well as democratic forms of business organizations, according to their own statutes. Id. art. 52(II). ↑
Código de Comercio (promulgado por Decreto Ley No. 14379 de 25 de Febrero de 1977) (Commercial Code (promulgated by Decree Law No. 14379 of Feb. 25, 1977)) (Bolivia) [hereinafter Code Com.]. ↑
Robert W. Hamilton & Richard A. Booth, Business Basics for Law Students: Essential Concepts and Applications 263 (Aspen L. & Bus., 3d ed. 2002). ↑
K. Wieland, La Sociedad de Responsabilidad Limitada, 19 Revista de Derecho Puertorriqueño 241 (1932). ↑
Raul Anibal Etcheverry, The Mercosur: Business Enterprise Organization and Joint Ventures, 39 St. Louis L.J. 979, 992 (1995). ↑
Intuitu personae refers to contracts or obligations that are entered into with specific consideration of the personal qualities, skills, or trustworthiness of the individual involved. ↑
Code Com. art. 195 (Characteristics). In SRLs, the partners are liable only up to the amount of their contributions. The common fund is divided into capital shares that, in no case, may be represented by stocks or securities. ↑
Code Com. art. 203 (Management of the Company). The management of the SRL shall be entrusted to one or more managers or administrators, whether they are partners or not, appointed for a fixed or indefinite term. ↑
Richard E. Hugo & Muiño O. Manuel, Derecho Societario 370 (Astrea, Buenos Aires, 2002). ↑
Lee Harris, Mastering Corporations and Other Business Entities 96 (Carolina Acad. Press 2009). ↑
The Uniform Special Deposits Act (“USDA” or the “Act”) is a product of the Uniform Law Commission and was approved at its 2023 Annual Meeting. After consideration and deliberation by the Uniform Law Commission’s Special Deposits Committee, the Uniform Special Deposits Act was drafted to provide clarity on an area of law that has been subject to uncertainty for a number of years.
Special deposits, as the name suggests, are a “special” type of deposit that has different characteristics than other deposits, such as checking or savings deposits. Unlike deposits that are payable on a customer’s order, special deposits are established for a particular purpose, and a beneficiary becomes entitled to payment after a determination is made that a specified contingency has occurred. Special deposits play an important role in commerce and industry and ensure that funds deposited will be available to the person entitled to them in the future once their established purpose has been satisfied. They can serve a variety of parties in a range of contexts, but their use has been diminished by a small number of legal uncertainties, the collective significance of which is large. For example, in the past, case law has described special deposits or special accounts as akin to trust, bailment, or custody arrangements, but they are not used that way in practice.
The USDA establishes a framework under state laws for interested parties to utilize special deposits with a greater understanding of how such deposits will be treated under various circumstances. The Act was drafted utilizing a “minimalist” philosophy, and the drafters sought only to address specific uncertainties that exist under current law. As a result, the Act does not disrupt existing law but rather builds on it, and it leaves matters not addressed by the Act to be governed by general laws already governing deposits or contractual arrangements.
Importantly, the USDA is an “opt-in” statute, which means that parties intending to enter into a special deposit must specify in the agreement establishing the special deposit that they intend to be covered by the USDA as enacted in a particular state. This feature of the Act permits existing relationships to continue undisturbed, and permits parties to choose to utilize the protections provided by the USDA when they wish, so parties can choose to utilize the protections for certain deposit products and not others. Parties are also permitted to amend existing agreements to be covered by the USDA after enactment if they satisfy the criteria to establish a special deposit under the Act.
There are four key legal uncertainties that the USDA is designed to remedy by establishing rules to eliminate those uncertainties without interfering with other aspects of laws governing deposits.
First, the “opt-in” characteristic performs a kind of double duty in the USDA. As described above, it enables freedom of contract—the parties establishing the special deposit decide whether the arrangement will be governed by contract law or by the USDA. In addition, the “opt-in” is the mechanism identifying the deposit as “special” and subject to the select set of rules set out in the USDA. A deposit designated as “special” and subject to the USDA must satisfy the objective criteria in Section 5 of the Act, which include that it be (i) designated as “special” in an account agreement governing the deposit at a bank, (ii) for the benefit of at least two beneficiaries (one or more of which may be a depositor, which also has a specific definition in the Act that could include a person who establishes the special deposit even without funding it), (iii) denominated in money (defined in the Act as “a medium of exchange that is currently authorized or adopted by a domestic or foreign government,” which is borrowed from the Uniform Commercial Code), (iv) for a permissible purpose identified in the account agreement, and (v) subject to a contingency specified in the account agreement that is not certain to occur, but if it does occur, creates the bank’s obligation to pay a beneficiary.
The permissible purpose requirement is an important feature of the USDA that prevents the special deposit from being used inappropriately for fraudulent or abusive purposes—for example, to defraud creditors. A permissible purpose is defined in Section 2 as “a governmental, regulatory, commercial, charitable, or testamentary objective of the parties stated in the account agreement.” A special deposit must serve a permissible purpose from creation until termination. In addition, a deposit or transfer that is fraudulent would not be for a permissible purpose, and the voidability of the deposit under other law would not be affected by the USDA.
Second, the USDA provides clarity on the treatment of a special deposit in the event of the bankruptcy of a depositor. Under current law, there may be uncertainty as to whether funds deposited into a special deposit could be “swept” into the bankruptcy estate of the person who deposited them. A special deposit under the USDA is “bankruptcy remote” because Section 8 provides that neither a depositor nor a beneficiary has a property interest in a special deposit. The only property interest that may arise with respect to a special deposit is in the right to receive payment from the bank after the occurrence of a contingency. The USDA protects the special deposit, but not the accrued “payable” to a beneficiary after the contingency is determined.
Third, the Act provides clarity on the applicability of creditor process to a special deposit. Currently, the uncertainty as to whether a creditor can “freeze” a special deposit pending an adjudication by a court undermines the utility of the special deposit, because it could interfere with the purpose that the special deposit is designed to achieve. At the time the special deposit is established, the identity of the ultimate beneficiary has not yet been determined because the contingency has not yet occurred. Section 9 of the USDA provides that creditor process is not enforceable against the bank holding the special deposit, except in limited circumstances. Instead, creditor process may be enforceable against the bank holding a special deposit with respect to any amount that it must pay after the determination of a contingency, but not on the special deposit itself. Section 10 provides a similar limitation on using an injunction or temporary restraining order to achieve the same or a similar outcome. Like the provisions dealing with bankruptcy, the provisions dealing with creditor process protect the special deposit, but not an accrued payable to a beneficiary after the contingency is determined.
Fourth, the USDA provides clarity on the legality of the bank exercising a set off or right of recoupment against a special deposit that is unrelated to any payment to a beneficiary or the special deposit itself. Section 11 prohibits set off or recoupment except in limited circumstances. And, as with the provisions dealing with bankruptcy and creditor process, the provisions dealing with setoff protect the special deposit but not an accrued payable to a beneficiary after the contingency is determined.
The USDA creates a mechanism for parties to a commercial transaction to obtain a low-cost and safe return of earnest money and provides protection to parties seeking to deposit funds for particular purpose to be determined at a future point in time. The USDA also provides clarity to other aspects of a special deposit relationship that have been muddled in the case law, for example, by expressly providing that the relationship between the bank and a beneficiary is a debtor-creditor relationship and that a bank does not have a fiduciary duty to any person in connection with a special deposit. Section 12 of the Act includes additional clarifications on the scope of a bank’s duties and liabilities, and to provide incentives such that banks will offer a special deposit product.
The four uncertainties described here require statutory solutions because they relate to third parties’ interactions with a special deposit and cannot easily or effectively be addressed by contractual agreements between the parties. The USDA is narrowly tailored to cure these four mischiefs and eliminate uncertainty so that parties can utilize special deposits with greater confidence that their expectations will be met. In addition, creating clear rules should reduce litigation risks and expenses for the parties and banks.
The Act is intended to provide needed benefits to depositors, beneficiaries, and banks, and also to be fair to other creditors of the participants in the arrangement. The drafters considered a wide range of potential arrangements where a special deposit governed by the Act may be useful, and the statute was drafted to allow flexibility for the parties to create an account agreement reflecting the circumstances of their particular transaction. The USDA includes a list of sample permissible purposes that highlights some of the use cases for special deposits, and for the avoidance of doubt as to the permissibility of those use cases. But it is not an exclusive list, and in the time since the USDA was approved by the Uniform Law Commission, additional potential uses have been raised as well.
Canadian courts are set to make another ruling on the legality of using artificial intelligence (“AI”) technology to scrape data from websites. Data scraping is the practice of automatically extracting data from online sources using software. While Canadian courts have previously determined that scraping data without permission is not permissible, the rise of AI and its growing accessibility have led to continued commercial use of AI technology to illegally obtain data and train AI systems.
OpenAI, Inc. Litigation
On November 29, 2024, a precedent-setting claim was brought forward in the Ontario Superior Court of Justice by several Canadian news companies (“Plaintiffs”) against OpenAI, Inc. and its related companies—including OpenAI GP, LLC; OpenAI, LLC; OpenAI Startup Fund I, LP; OpenAI Startup Fund GP I, LLC; OpenAI Startup Fund Management, LLC; OpenAI Global, LLC; OpenAI OpCo, LLC; OAI Corporation; and OpenAI Holdings, LCC—that work to develop, commercialize, and fund OpenAI’s AI products (collectively, “Defendants”) for allegedly data scraping copyrighted content.[1] The Plaintiffs represent Canada’s leading news outlets that are responsible for publishing journalistic content and media across various platforms, including the Toronto Star, the Vancouver Province, the Calgary Sun, the Calgary Herald, the Daily Herald, the Edmonton Journal, the Edmonton Sun, the London Free Press, the National Post, the Ottawa Citizen, the Ottawa Sun, the Daily Observer, the Daily Press, the Winnipeg Sun, the Globe and Mail, the Canadian Press, and CBC.
The Plaintiffs, all well-known players in the Canadian media landscape, argue that the works that each Plaintiff has produced are highly valuable and a product of significant creative efforts and monetary investment. These works are widely distributed across Canada, including on websites, on mobile apps, and through print media. Together, the Plaintiffs host millions of works across various platforms, both owned and licensed by the Plaintiffs.
The Plaintiffs allege that the Defendants have used their intellectual property without proper authorization as a means of building a commercially successful business that has generated enormous profits through the sale of AI-powered products and services. The legal basis of the Plaintiffs’ claim is rooted in copyright infringement and breach of contract, specifically alleging that the Defendants’ use of the Plaintiffs’ works violates Canadian copyright law and amounts to a breach of the Plaintiffs’ applicable terms and conditions governing the use of each respective work.
In the claim, the Plaintiffs allege that the Defendants are liable for the following: (a) the alleged unauthorized use of the Plaintiffs’ copyrighted works by the Defendants in violation of sections 3 and 27 of the Copyright Act;[2] (b) the alleged circumvention of protection measures by the Defendants used by the Plaintiffs to prevent unauthorized copying and access of its works, specifically in violation of sections 41 and 41.1 of the Copyright Act;[3] (c) the Defendants’ breach of the Plaintiffs’ online terms and conditions governing their respective websites; and (d) the unjust enrichment received by the Defendants for the misappropriation of the Plaintiffs’ intellectual property.
The Plaintiffs have deployed myriad technical measures to restrict access to their copyrighted works on their websites, including the robot exclusion protocol used to prevent automated scraping of data. Despite this, the Plaintiffs allege, the Defendants have subverted these technical protection measures to gain access to their works and exploit them for commercial purposes.
Additionally, each of the Plaintiffs has endeavored to control how users could interact with and use their works by means of various legal terms and conditions. When accessing the Plaintiffs’ works online, users must accept the applicable terms and conditions, which specify that the use of the works is for personal, non-commercial use only and specifically prohibit the reproduction or distribution of the works without express authorization of the Plaintiffs. By allegedly using the Plaintiffs’ works for profit through the commercialization of products like ChatGPT Plus and ChatGPT Enterprise, the Plaintiffs assert, the Defendants have breached the Plaintiffs’ applicable terms and conditions.
The Plaintiffs further contend that the Defendants have been, and continue to be, unjustly enriched by using the works of the Plaintiffs without their knowledge, consent, or appropriate license. The Defendants have generated billions of dollars in annual revenue through the sale of their products and services: As of October 2024, the Defendants have been valued at a staggering $157 billion. The Plaintiffs allege that they have been deprived of significant potential revenue generated by their works.
The Plaintiffs are seeking substantial compensation from the Defendants. The order for compensation requested by the Plaintiffs includes a portion of the profits earned by the Defendants from the alleged infringement of the Plaintiffs’ copyright works and circumventing protections; statutory damages set at CAD 20,000 per work; damages for unjust enrichment; and, further, punitive damages for the Defendants’ willful misconduct. In addition to the damages sought, the Plaintiffs are requesting both prejudgment and post judgment interest, along with the costs of the legal proceedings.
The Defendants have released public statements stating that, based on the principle of fair use, it is fair or in the public interest to use publicly available information to train and improve its AI systems.[4] The “fair use” of public content remains a highly debated practice in the Canadian technology sector.
In a joint statement released by a subset of the Plaintiffs, including Torstar, Postmedia, the Globe and Mail, the Canadian Press, and CBC, the news media companies indicated that while they “welcome technological innovations,” the act of data scraping of journalistic content for commercial gain is illegal and not in the public’s best interest.[5] The Plaintiffs maintained that this case is about upholding Canadian journalism and protecting the substantial investments made by organizations across the country to produce fact-checked, sourced, reliable, and trusted news and information by, for, and about Canadians. The rapid spread of unverified content has eroded public trust, making it essential for credible outlets to uphold rigorous standards of fact-checking, transparency, and accountability. In an era where anyone can publish content, with or without assistance from an AI system, the role of professional journalists in verifying facts and maintaining ethical standards has never been more vital.
Other Data Scraping Litigation
This is not the first instance of a claim being brought forward through the Canadian legal system addressing the legality of data scraping. In 2019, the Federal Court of Canada ruled on the legality of data scraping in Toronto Real Estate Board v. Mongohouse.com, where it found that web scraping activities of the defendant were unlawful and upheld the plaintiff’s copyright in website content.[6]
On November 4, 2024, the Canadian Legal Information Institute (“CanLII”) filed a notice of claim with the Supreme Court of British Columbia against 1345750 B.C. Ltd., Clearway Management Ltd., Alistair Vigier doing business as Caseway AI Legal, Caseway AI Legal Limited, and John Doe Corporation.[7] The claim alleges that the defendants violated CanLII’s terms of use, which prohibited bulk downloading and scraping of the CanLII website without express permission or a license. CanLII is also seeking an injunction against Caseway AI Legal to prohibit the use of any material obtained from its website without authorization.
Conclusion
The allegations contained in the claim brought forward by the Plaintiffs have not been proven in Court, and the Defendants have not yet filed their defense to the allegations made. It is fair to say that the claim brought forward by these Canadian news companies against OpenAI, Inc. among others, has generated considerable public interest in Canada, and we await further guidance from the Ontario Superior Court of Justice regarding the legality of mass data scraping by AI systems.
Section 3 of the Copyright Act deems that copyright, “in relation to a work, means the sole right to produce or reproduce the work or any substantial part thereof in any material form” and the right to authorize such acts. Copyright Act, R.S.C. 1985, c C-42, § 3 (Can.). Section 27 of the Copyright Act deals with copyright infringement generally and secondary infringement. “It is an infringement of copyright for any person to do, without the consent of the owner of the copyright, anything that by [the Copyright Act] only the owner of the copyright has the right to do.” Id. § 27(1). It is considered secondary copyright infringement for any person to:
(a) sell or rent out, (b) distribute to such an extent as to affect prejudicially the owner of the copyright, (c) by way of trade distribute, expose or offer for sale or rental, or exhibit in public, (d) possess for the purpose of doing anything referred to in paragraphs (a) to (c),or (e) import into Canada for the purpose of doing anything referred to in paragraphs(a) to (c), a copy of a work . . . that the person knows or should have known infringes copyright or would infringe copyright if it had been made in Canada by the person who made it. Id. § 27(2). ↑
Sections 41 and 41.1 of the Copyright Act prohibit the circumvention of technological protection measures and deem that the owner of a copyright in a work subject to the Copyright Act is “entitled to all remedies—by way of injunction, damages, accounts, delivery up and otherwise—that . . . may be conferred by law for the infringement of copyright against the person” that has circumvented technological protection measures. Id. §§ 41–41.1(2). ↑
In In re Mindbody, Inc.,[1] the Delaware Supreme Court (“Supreme Court”) affirmed in part and reversed in part a posttrial decision by the Delaware Court of Chancery (“Court of Chancery”),[2] which had garnered significant attention. The Supreme Court affirmed the Court of Chancery’s rulings that a CEO breached his fiduciary duties of loyalty (by tilting the sale process in a specific buyer’s favor out of his own self-interest) and disclosure (by failing to disclose material aspects of his participation in, and his motivations for, the sale). The Supreme Court reversed, however, the Court of Chancery’s ruling that the private equity acquirer had aided and abetted the CEO’s disclosure breach, disagreeing with the Court of Chancery that the acquirer’s contractual right to review U.S. Securities and Exchange Commission (“SEC”) filings provided a sufficient basis to conclude that the acquirer had substantially participated in the breach. In doing so, the Supreme Court provided guidance for the first time as to the applicability of the Restatement (Second) of Torts (“Restatement”) factors in examining the “substantial assistance” portion of an aiding and abetting analysis.
Background
Neither party challenged the trial court’s factual findings. As a result, the Supreme Court adopted the posttrial opinion’s factual recitation practically verbatim.
In 2018, three years after going public, Mindbody, Inc. (“Mindbody” or “Company”) endured numerous failed initiatives, which, coupled with the need of Richard Stollmeyer (the CEO and founder of Mindbody) for liquidity and a board-represented venture capital (“VC”) firm’s desire for a near-term sale, caused Stollmeyer to shop the Company.
By August of 2018, Stollmeyer commenced an informal sale process without the board’s consent or knowledge, which the trial court found ultimately allowed Vista Equity Partners Management, LLC (“Vista”) to obtain a competitive advantage over other potential acquirers. For example, Stollmeyer engaged an investment banker to set up a meeting with a Vista principal and a senior vice president, where Stollmeyer informed the two of his desire to “find a good home for his company,” information that he did not have authorization to disclose.[3] Shortly after that meeting, Stollmeyer advised the board of his conversation but failed to mention any discussion of a potential sale. At the request of the Vista representatives, Stollmeyer attended Vista’s CXO Summit. During a one-on-one meeting with Vista’s founder at the Summit, Stollmeyer stated his intent to explore a sale of Mindbody, something he admitted to not having board authorization to say and information that was not otherwise available to the market.
Based on Stollmeyer’s statements, Vista commenced its acquisition process, requesting a market study from Bain & Co. nearly one month before Mindbody contacted other potential acquirers. Ultimately, Vista provided an oral expression of intent to Stollmeyer by stating that it “would pay a substantial premium to Mindbody’s recent trading price.”[4] Stollmeyer then waited two days before informing his management team and another eight days before notifying the entire board.
By the end of October, the board appointed a transaction committee—with the VC firm’s designee serving as chair—to interview financial advisers and to make a recommendation. Notably, the committee adopted guidelines that required management to obtain authorization before communicating with strategic partners or financial advisers.
In November, the Company lowered guidance for Q4 earnings during an earnings call, which Stollmeyer acknowledged would affect a potential acquirer’s desire to purchase the Company. Vista viewed the downgrade as an opportunity for a lower deal price and higher exit profit. After the earnings call, Stollmeyer’s investment banker told Vista’s representative that Stollmeyer wanted a $40 per share minimum. Vista was then able to run that number into its financial models. By mid-November, Stollmeyer informed Vista of the upcoming sales process. A few days later, Mindbody formally hired the investment banker that Stollmeyer had been using during the informal deal process. They planned to solicit strategic bidders on November 29 and financial sponsors on November 30. Yet, the investment banker “formally” contacted Vista on November 30 but waited until December 3 and 4 to contact other financial sponsors.[5] With this leg up, Vista received its final market study two days before other financial sponsors had access to Mindbody’s data room. At this point, Stollmeyer still had not informed the board of key information regarding the process: the VC firm’s desire to sell, Vista viewing Mindbody’s stock downturn as a buying opportunity, Vista’s intent to make an offer on a premium over its trading price, the fact that Stollmeyer had already met with Vista more than once, Stollmeyer’s conversation with a Vista portfolio company CEO, and Stollmeyer’s plan to step down in two or three years.
Vista submitted an offer to acquire Mindbody for $35 per share, with a twenty-four-hour deadline, three days after the data room opened to the remaining bidders on December 18. However, the other bidders were further behind in diligence and unprepared to make an offer. Two days later, Mindbody made a counteroffer of $40 per share, and Vista countered with a $36.50 best and final. With all other bidders out, the entire board convened and directed management to accept the bid. Following the merger agreement, Stollmeyer bragged that Vista was “able to conduct all of our outside-in work before the process launched[.]”[6]
The merger agreement provided for a thirty-day go-shop and gave Vista the contractual right to review Mindbody’s proxy materials. Under the merger agreement, if Vista became aware of material facts that were omitted from the proxy information, Vista had an obligation to inform Mindbody. That obligation was a key component of the Court of Chancery’s conclusion that Vista provided substantial assistance and thus aided and abetted the CEO’s disclosure breaches.
On January 4, 2019, Mindbody determined it had beaten Wall Street consensus estimates for Q4 revenue. It did not include that information in its January 9 preliminary proxy related to the deal. After discussing whether to disclose the Q4 earnings while stockholders deliberated over approving the deal, Mindbody’s audit committee voted against disclosure. Mindbody’s initial proxy also omitted references to some of Stollmeyer’s meetings with Vista and Vista’s expression of interest in mid-October. The definitive proxy and supplemental disclosures told stockholders about Stollmeyer’s additional meetings with Vista representatives and attendance at the summit but failed to include the substance of his conversations.
Litigation ensued. After trial, the Court of Chancery found Stollmeyer liable for damages of $1 per share for breaching his duty of loyalty under Revlon.[7] Also, it awarded damages of $1 per share against Vista and Stollmeyer jointly and severally for the disclosure violations.
Defendants’ Appeal
On appeal, the defendants challenged the Court of Chancery’s (1) holding that Stollmeyer breached his fiduciary duty of loyalty under Revlon, (2) holding that Stollmeyer breached his fiduciary duty of disclosure, (3) holding that Vista aided and abetted Stollmeyer’s disclosure breach, (4) award of $1 per share in damages for Stollmeyer’s Revlon breach, and (5) refusal to apply a settlement credit under the Delaware Uniform Contribution Among Tortfeasors Act (“DUCATA”).
Duties of Loyalty and Disclosure
Regarding the first and second arguments concerning Stollmeyer’s liability, and the resulting damages, the Supreme Court affirmed the chancellor’s holdings that he breached his duties of loyalty and disclosure and owed $1 per share in damages. As to loyalty, the “paradigmatic” Revlon claim entails a “conflicted fiduciary who is insufficiently checked by the board and who tilts the sale process toward his own personal interests in ways inconsistent with maximizing stockholder value.”[8] The trial court’s factual findings supported that Stollmeyer’s subjective intent surrounding his financial position, favoritism for Vista, and desire to sell fast resulted in disabling conflicts. The same was true as to the disclosure violations, with the Supreme Court agreeing that his omissions, in aggregate, were material, with the strongest claims concerning his tips to Vista regarding pricing and process timing that violated transaction committee guidelines. The Supreme Court believed any reasonable stockholder would find those tips favoring one potential acquirer “indicative of a potentially flawed sale process” and “important in considering whether to vote to approve the merger.”[9] Because such material information was withheld, the Supreme Court agreed with the chancellor that the Corwin cleansing defense was unavailable.[10] The evidence also supported the $1 per share in damages for Stollmeyer’s duty of loyalty breach. And the Supreme Court agreed that the defendants waived their right to seek settlement credit under DUCATA by failing to adequately apprise the plaintiffs pretrial that they intended to pursue a settlement credit.
Aiding and Abetting
The Supreme Court then analyzed the various novel issues implicated by the chancellor’s holding that Vista aided and abetted Stollmeyer’s disclosure breach, noting “how thin the case law” was on the issues.[11] That included when the Supreme Court can hold third-party buyers liable for aiding and abetting fiduciary breaches (which the Supreme Court explained it had never done), whether contractual duties in a merger agreement could create for third parties fiduciary duties to the target’s stockholders, and whether a passive failure to act may give rise to liability. In total, for the reasons discussed below, the Supreme Court concluded that Vista had not substantially assisted the disclosure breaches to warrant aiding and abetting liability.
Focusing on the disputed “knowing participation” element, the Supreme Court reaffirmed that the knowledge (scienter) prong contains two distinct concepts: the plaintiff must prove that the aider and abettor knew that “the primary party’s conduct constitute[d] a breach” and “that its own conduct regarding the breach was legally improper,” which is distinct from knowledge of the primary party’s conduct.[12]
The Supreme Court began its discussion by acknowledging that “participation should be the most difficult to prove” against a potential acquirer who negotiated at arm’s length.[13] Such an acquirer is protected in its attempt to reduce the sale price through arm’s-length negotiations as long as it is not exploiting conflicts, and the court noted that a different rule might deter third parties from deals altogether.
Turning to the aiding and abetting analysis, the Supreme Court adopted the Restatement § 876(b) factors to determine whether conduct amounts to “substantial assistance.” Under those factors, one must actively participate in the breach, rather than have “mere passive awareness.”[14] In reviewing the Restatement factors, the Supreme Court held that Stollmeyer’s November tips supported the trial court’s conclusion that Vista likely knew that Stollmeyer’s conduct constituted a breach but reversed the chancellor’s finding that Vista knew of the wrongfulness of its own conduct. Considering Vista’s awareness of its own misconduct, the Supreme Court stated that the chancellor’s finding that Vista participated in the drafting of the proxy materials was not supported by the record evidence, and the trial court did not find that Vista actively contributed to drafting or editing the proxy materials. The Supreme Court held that passive awareness of a fiduciary’s disclosure breach that would come from reviewing draft proxy materials did not amount to taking actions to facilitate or assist Stollmeyer’s breach. Rather, Vista stood by passively while Stollmeyer breached his own duty of disclosure.
As part of this analysis, the Supreme Court took on perhaps the most interesting portion of the Court of Chancery’s ruling: what obligations did Vista undertake by negotiating for a contractual obligation in the merger agreement to review and comment on public disclosures for the deal? It was here that the Supreme Court parted company with the Court of Chancery on both a factual issue and a legal conclusion. Factually, the Supreme Court concluded the finding that Vista had participated in drafting the proxy was not supported by record evidence. Legally, the contractual obligation in the merger agreement did not impose on Vista an independent duty of disclosure to Mindbody’s stockholders. That meant there was no basis for the trial court’s ruling that Vista had “withheld information from the stockholders.”[15] One of the bases for this conclusion was “compelling public policy reasons” of not collapsing the arm’s-length distance between the third-party buyer and target to make the buyer consider duties to target stockholders, meaning that the third-party buyer could potentially have to “second-guess the materiality determinations and legal judgment of the target’s board, which already owes fiduciary duties to its stockholders.”[16]
Finally, the Supreme Court analyzed the Restatement’s “state of mind” factor and the evidence that the Court of Chancery had evaluated below.[17] To the Supreme Court, the evidence pointed to below—scrubbing of “incriminating” information from investment committee materials that related to communications with the CEO—was insufficient given the timing of when it occurred (almost a month before the drafting of the proxy); and it pointed to the fact that the primary violator may have violated his Revlon duties, not his disclosure duties.[18] Given that the aiding and abetting claim focused on the disclosure breaches, the plaintiffs needed to show that Vista knew its own conduct was wrongfully assisting the CEO in those specific breaches, and the evidence did not do so.
Together, the record analyzed through the Restatement’s factor did “not sufficiently support a determination that Vista’s conduct [rose] to the level of ‘substantial assistance’ or ‘participation’ in” the CEO’s breach.[19] That warranted reversing the holding below that Vista aided and abetted Stollmeyer’s disclosure violation. Because the plaintiffs were only entitled to one recovery of $1 per share, and with the Revlon damages award affirmed, the ruling also meant that the Supreme Court did not need to analyze damages for the disclosure violation.
Conclusion
The Supreme Court’s opinion covers both old and new ground. It reminds sell-side fiduciaries and advisers about the importance of both disclosing and aligning the interests of executives/founders under Revlon in change-of-control situations, and the pitfalls associated with failing to do so. And it provides fresh guidance concerning (1) how Delaware courts should evaluate the Restatement factors in an aiding and abetting analysis, and (2) the scope of an acquirer’s obligations under contractual provisions to review deal-related disclosures—all of which indicates a reluctance to impose aiding and abetting liability on a third-party acquirer negotiating at arm’s length.
Nicholas D. Mozal and Ryan M. Crowley are attorneys with Potter Anderson & Corroon LLP in Wilmington, Delaware. The views expressed herein are those of the authors alone and do not necessarily represent the views of their firm or clients.
Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173 (Del. 1986). Revlon duties, or scrutiny, apply in the context of a change of control, requiring directors to try to maximize the sale value of the company. ↑
Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015). Under the Corwin cleansing defense, “the business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders.” Id. at 305–06. ↑
The Responsible Investor Model Clauses (“RIMC”) Task Force of the American Bar Association (“ABA”) Business Law Section’s Corporate Sustainability Law (“CSL”) Committee and the Responsible Contracting Project (“RCP”) out of Rutgers University, School of Law, in collaboration with the UN Principles for Responsible Investing (“PRI”), is launching a consultation to receive feedback on the Zero Draft of the RIMCs, a set of model contract clauses to operationalize human rights and environmental (“HRE”) policies in investment documentation. The RIMCs, which are editable and modular, are intended to provide guidance to members of the investment community on how to integrate HRE performance goals directly into their agreements. While the general audience is diverse, the RIMCs may be of particular use to private equity and venture capital firms, portfolio companies (including public benefit corporations), and the growing number of portfolio managers who seek to distinguish themselves as responsible investors. The RIMCs include provisions for multiple industry-standard capital financing documents between investors and portfolio companies, such as charters, right of first refusal and co-sale agreements, shareholder and voting agreements, investor rights agreements, purchase agreements, and side letters.
The RIMCs are designed to reflect significant legislative developments. The clauses help investors, and their portfolio companies meet evolving global data collection, disclosure, and human rights and environmental due diligence (“HREDD”) obligations. In particular, the RIMCs can assist in addressing legal requirements contained in the EU Corporate Sustainability Reporting Directive (“CSRD”) and the EU Corporate Sustainability Due Diligence Directive (“CSDDD”). The RIMCs are also essential for investors working to integrate soft law principles found in the United Nations Guiding Principles on Business and Human Rights (“UNGPs”), the Organisation for Economic Co-operation and Development (“OECD”) Guidelines for Multinational Enterprises on Responsible Business Conduct (2023), the revised U.S. National Action Plan for Responsible Business Conduct, and other social responsibility principles in their investment portfolios.
Feedback on the Zero Draft is essential to improve the clauses and ensure the first official version is a product of an inclusive, balanced, and legitimate process. Feedback may be submitted via email, an online form, or by participating in one or more of the upcoming consultation sessions noted below. Please email RCP at [email protected] to register or visit the RCP website for more information.
Session 1: February 25, 2025, Noon to 1:30 PM EST: Members of the ABA Business Law Section CSL Committee Task Force and other attorneys.
Session 2: March 19, 2025, 10–11:30 AM EST: Civil society organizations and Business and Human Rights (“BHR”) consultancies.
Session 3: March 24, 2025, 1–2:30 PM EST: Investors who identify as responsible investors, including impact investors, ethical investors, mission-driven, and ESG investors.
Session 4: April 2, 2025, Noon to 1:30 PM EST: Development and public finance institutions (“DFIs”) and their legal advisors.
The consultation period for the RIMCs will conclude in Spring 2025, with the final version set to be published in Summer 2025. Following publication, the RIMCs Working Group will collaborate with members of the ABA Business Law Section CSL Committee Task Force on implementation alongside PRI, a United Nations–supported network of investors that promotes sustainable investment.
Introduction
The Responsible Contracting Project (“RCP”), in conjunction with the Responsible Investor Model Clauses (“RIMCs”) Working Group (“Working Group”), as part of the broader American Bar Association (“ABA”) Business Law Section, has prepared the following model contract clauses to address human rights and environmental (“HRE”) performance issues in investment documentation. Because the intended audience for these clauses is varied, there is no one-size-fits-all list of clauses. Instead, the following clauses are intended to provide guiding principles to members of the investment community, in particular, private equity and venture capital firms, portfolio companies (including public benefit corporations), and the growing number of portfolio managers that seek to implement the guidance on responsible investing released by multilateral and industry-focused organizations, as well as development finance institutions.[1]
The RIMCs include provisions for agreements between investors and portfolio companies (e.g., for inclusion in shareholder agreements, investor rights agreements, purchase agreements, and side letters). Our hope is that the RIMCs can serve as a basis for adapting template investor agreements, such as those developed by the National Venture Capital Association (“NVCA”).
Certain RIMCs, such as those addressing indemnification, are variations of standard contract provisions with slight revisions to reflect human rights and environmental due diligence (“HREDD”) concepts.
These clauses will help investors in connection with their commitment to HREDD.[2] In particular, the RIMCs may be useful to investors (and companies) concerned with meeting evolving legal requirements contained in the EU Corporate Sustainability Reporting Directive and the EU Corporate Sustainability Due Diligence Directive. The RIMCs can also be utilized by investors who are interested in integrating the United Nation Guiding Principles on Business and Human Rights (“UNGPs”) (2011), the Organisation for Economic Co-Operation and Development (“OECD”) Guidelines for Multinational Enterprises on Responsible Business Conduct (2023), and other social responsibility principles in their investment portfolios.
Throughout the RIMCs, references are made to Schedule A and/or Schedule B (collectively, the “Schedules”) as follows:
Schedule A, or the Company Code of Conduct, refers to the code of conduct that sets out the portfolio company’s (“Company’s”) commitments to the Company’s HRE performance and HREDD process expected by a given investor (“Investor”). Schedule A provides a common understanding between the Company and the Investor of the meaning and scope of the agreed-upon HRE performance standards and operational, industry-specific guidance for the HREDD process to meet those standards.
Schedule B, or the Investor Code of Conduct, refers to the code of conduct that sets out the Investor’s commitments to supporting the Company’s HRE performance and HREDD process. We treat the Schedules as separate codes, but an Investor may opt to have a joint code of conduct that combines both its and its portfolio companies’ commitments to upholding HRE standards. In addition to containing commitments pertaining to the post-investment phase of the Investor/Company relationship, Schedule B also may contain commitments by the Investor to carry out pre-investment HREDD to determine whether to make the initial investment, or follow-on investments, in the Company.
The below RIMCs were also drafted with a goal of maintaining alignment with three core principles (or “Rs”) of responsible contracting:
Responsible allocation of risks and obligations: First, the parties should abandon static, one-sided, portfolio company–only promises (“representations & warranties”) of HRE compliance. Such promises are both unrealistic and risk-aggravating, as they incentivize portfolio companies and their suppliers and sub-contractors to hide HRE problems rather than address them. Instead, investors and portfolio companies should make a joint commitment to cooperate in conducting ongoing, risk-based HREDD that can better prevent adverse HRE impacts and, as needed, respond to and remedy such impacts if and when they occur.
Responsible investment and purchasing practices: Second, the investors should agree to responsible investment practices to support their investees’ HRE performance. Likewise, the investee companies should agree to actively manage their own HRE risks and support their suppliers’ HRE performance and, by extension, the HREDD process, by engaging in responsible purchasing practices where relevant.
Remediation first and responsible exit: Third, if an adverse impact occurs, the parties should prioritize victim-centered human rights remediation over traditional contract remedies. Measures should be taken to stop the impact and prevent its recurrence. As a general principle, suspending payments, canceling orders, terminating the contract, or otherwise withdrawing the investment should be pursued only as a last resort, after remediation efforts have failed or it becomes clear that staying engaged will further aggravate HRE risks. Regardless of the reason for exit (e.g., changed market conditions, a force majeure event like a pandemic or a war, a severe human rights violation), the party wanting to exit should do so responsibly, by taking measures to mitigate related adverse HRE impacts for which it is responsible.
The RIMCs advocate a model of shared responsibility and risk prevention that supports robust HREDD processes, promotes cooperation and transparency, and will ultimately lead to better HRE outcomes. Engaging with portfolio companies as recommended here will help equip investors to better adhere to the Principles for Responsible Investment and to other Responsible Business Conduct standards and guidance included in Annex 1.
Finally, a few notes from the authors in reviewing the below RIMCs:
The RIMCs consist of modular and individual provisions that are intended to be selected, adapted, and edited to suit a party’s particular needs in a particular transaction in consultation with internal or external counsel.
[Provision] indicates an optional provision that may be included in a particular RIMC.
[Provision 1][Provision 2] indicates optional provisions that the author may select between for inclusion in a particular RIMC.
[Capitalized Terms] indicate something that will be a defined term in a given agreement; however, the definition of such term will need to be customized to a particular deal/industry category.
[Group of words] indicate instructions for the drafter in how to customize/utilize a particular RIMC.
Responsible Investor Model Clauses
Part 1: The Pre-Investment Phase
1. Pre-Investment HREDD Requirements
1.1 Mutual Pre-Investment Commitments
1.1.1 Disclosure. The Company shall require, and shall cause, each of its [shareholders/partners, officers, directors, employees,] agents and all subcontractors, consultants and any other person under its control to disclose information to the Investor on all matters relevant to the Investor’s HREDD in a timely and accurate fashion as requested by the Investor.
1.1.2 HREDD Plan. Prior to the Investment, the Company will develop an HREDD plan (HREDD Plan), reviewed by and deemed, in writing, to be acceptable to the Investor. The Company shall develop the HREDD Plan in accordance with the criteria and the timelines set out in [Appendix X].
1.1.3 Equivalent Document. Where Investor seeks to employ due diligence measures such as, but not limited to, questionnaires, audits, and scorecards in its HREDD processes, Company may provide Investor with a recent equivalent document (e.g., questionnaires completed for another investor or audit reports prepared by a reputable third-party) provided that the respective document does not contain competitively sensitive information regarding relationships with other investors, and Investor shall accept such equivalent document or a portion of the equivalent document to the extent that it meets the Investor’s minimum standards, unless it reasonably considers that such equivalent document [entirely] fails to satisfy Investor’s minimum standards. At the request of Company, Investor shall, to the extent permissible under competition laws, coordinate with Company and other investors to minimize inconsistencies between various due diligence measures employed. Failure to comply with this Section [X] shall be an HREDD-Related Default.
1.1.4 Investor Review. The Investor shall review the information provided under this Clause and ensure that it is satisfactory prior to moving forward with the investment.
1.2 HREDD Request List. [The Investor to provide customized diligence request list targeting HREDD matters].[3]
Part 2: Measures to Prevent Adverse Impacts
2. HREDD Provisions During Life of Purchase/Investment Agreement[4]
2.1 HREDD-Related Covenants.
2.1.1 Company’s HREDD Process. The Company covenants, in line with the HREDD Plan, to establish and maintain, in cooperation with its direct and indirect business partners (collectively, “Business Partners”) and the Investor, an on-going HREDD process appropriate to its size and circumstances. This process shall be designed to accurately and effectively identify, prevent, mitigate, and account for how the Company addresses the Adverse Impacts[5] of its activities on the individuals affected by its supply chains. Such HREDD shall be consistent with Schedule A, which tracks the HREDD process described in the United Nations Guiding Principles on Business and Human Rights (2011) (“UNGPs”), the Organisation for Economic Co-operation and Development (“OECD”) Due Diligence Guidance for Responsible Business Conduct (2018), the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (2023), and any sector-specific due diligence guidance.
2.1.2 Investor’s HREDD Support. The Investor covenants to carry out its own ongoing due diligence to determine whether the Company can implement effective HREDD measures. The Investor further covenants to support and cooperate with the Company in implementing such measures, [as reasonable and appropriate] [with direct and indirect costs not to exceed X% of the investment]. Such support shall include [performing its obligations under this [Agreement] in line with Schedule B][,] [providing training and other forms of non-financial support, strengthening management systems, and making additional investments to upgrade facilities to ensure that the Company has the resources and capacities necessary to implement effective HREDD measures][,] [and] [participating in a regular process to review and support upgrading the Company’s HREDD processes, as necessary]. The Investor shall designate an officer as its HREDD contact point responsible for HREDD functions [and granted with authority to use resources adequate to regularly perform those functions] (an “HREDD Officer”).
2.1.3 No Waiver. The Investor’s assistance shall not be deemed a waiver by the Investor of any of its rights, claims or defenses under this [Agreement] or under applicable law, provided that the Investor obligations under Part 3 (Comparative Fault) are preserved.
2.1.4 Preparation of Plans. With respect to Adverse Impacts identified by HREDD conducted before the [Effective Date] that have not yet been fully addressed, the Company covenants to prepare (if not already done), implement, and monitor the key performance indicators (“KPIs”) contained in a “Prevention Action Plan” to address identified potential Adverse Impacts and a “Corrective Action Plan” to address identified actual Adverse Impacts within a reasonable time [not exceeding ][X days][Y weeks][Z months] from the date of the [occurrence][discovery] of such Impacts]. Any action plans and progress reports documenting the implementation of such plans shall be shared with the Investor in a timely and accurate fashion.
2.1.5 Performance of Obligations. The Company and the Investor covenant to work together in good faith to achieve [HREDD/Performance Targets], as further set forth herein, including without limitation abiding by policies and procedures governing [Committees] and [using best efforts to perform their respective obligations in line with] the provisions of Schedule A [and Schedule B].
2.1.6 HREDD- Related Default. Failure by either party to comply with this Section shall be an HREDD-Related Default.[6]
3. Company-Level HREDD Obligations
3.1 Performing in Line with Schedule A.
3.1.1 HREDD Implementation Across the Company’s Supply Chain. As part of meeting its HREDD obligations, the Company shall make best efforts to ensure that each of its [Business Partner(s)][Representatives, Suppliers, Sub-suppliers, Agents and Subcontractors] acting in connection with this [Agreement] engages in and supports its HREDD process. The Company shall designate an HREDD Officer to coordinate efforts with its [Business Partner(s)][Representatives, Suppliers, Sub-suppliers, Agents and Subcontractors]. Where appropriate, based on the length and intensity of the commercial relationship and the HREDD-related risks involved, the relationship between the Company and its [Business Partner(s)][Representatives, Suppliers, Sub-suppliers, Agents and Subcontractors] will be formalized in a written contract that includes HREDD obligations appropriate to the size and circumstances of the parties.[7] The Company shall keep records of such written contracts and of any failed attempts to obtain such contracts, making the same available to the Investor upon request.
3.1.2 Company Purchasing Practices. As part of meeting its HREDD obligations, the Company commits to engaging in responsible business conduct as defined in the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct and the OECD Due Diligence Guidance for Responsible Business Conduct. This shall include a review of its purchasing practices to ensure that they are not triggering or contributing to Adverse Impacts.[8]
3.2 Operational-Level Grievance Mechanism.[9] During the term of this [Agreement], the Company [and the Investor] shall [implement and] maintain an adequately funded and governed Operational-Level Grievance Mechanism (“OLGM”) to assist with addressing, preventing, and remedying any Adverse Impacts that may occur in connection with the Company’s operations. The Company [and the Investor] shall ensure that the OLGM is [legitimate, accessible, predictable, equitable, transparent, rights-compatible, a source of continuous learning, and] based on engagement and dialogue with affected individuals or groups potentially or actually affected by an Adverse Impact, such as workers and/or local communities and/or their representatives (e.g., civil society organizations, non-governmental associations, and trade unions) (collectively, “Stakeholders”), including [employees, contractors, consultants, etc.]. The Company [and the Investor] shall [first establish and then] maintain open channels of communication with those individuals or groups of Stakeholders that are likely to suffer Adverse Impacts so that the occurrence or likelihood of Adverse Impacts may be reported without fear of retaliation. The Company’s HREDD Officer shall demonstrate that its OLGM is functioning by providing [monthly] [quarterly] [semi-annual] written reports to the Investor on its OLGM’s activities, describing, at a minimum, the number of grievances received and processed over the reporting period, documentary evidence of consultations with affected Stakeholders, and all actions taken to address and remedy such grievances.
4. In the Case of Actual Adverse Impact
4.1 Corrective Action. The Company shall perform its HREDD-related obligations and maintain its HREDD process to prevent the occurrence of Adverse Impacts. If an actual Adverse Impact nevertheless occurs, the Company shall collaborate with the implicated Business Partner(s) to remedy the issue in the shortest delay possible. Remediation efforts shall be facilitated through the preparation and implementation of a “Corrective Action Plan,” as described below.
4.2 Contents of Corrective Action Plan. The Corrective Action Plan should:
(i) include reasonable steps to ensure that the affected Stakeholders are, to the extent possible, put in the position they would have been in had the actual Adverse Impact not occurred;
(ii) enable remediation that is proportionate to the actual Adverse Impact, noting that such remediation could take the form of apologies, restitution, rehabilitation, and financial or non-financial compensation;
(iii) include reasonable steps to ensure that the actual Adverse Impact in question does not recur and that additional Adverse Impacts are prevented.
4.3 Company Obligations to Support Remediation. Regardless of whether the Company caused or jointly caused the actual Adverse Impact, it shall provide adequate assistance, including expertise, financial, and technical assistance, as appropriate under the circumstances, to ensure that the grievances of adversely impacted Stakeholders are effectively remediated.
4.4 Notification of Investor. If the Company has reason to believe or has actual knowledge of [a material Adverse Impact] [a severe Adverse Impact] [an Adverse Impact], it shall promptly, within no more than seven (7) calendar days, notify the Investor specifying the nature of the incident, accident, or circumstance of the Adverse Impact, and the measures the Company and/or the Company’s [Customer/Supplier] is taking or plans to take to address such impact, including to prevent any future similar event.
4.5 Notification by Investor. If the Investor notifies the Company of its concern that there may be or has been [a material Adverse Impact] [a severe Adverse Impact] [an Adverse Impact] , the Company shall cooperate in good faith with the Investor and the Investor’s HREDD Officer to determine whether such a violation has occurred, and respond promptly and in reasonable detail to any notice from the Investor, with documentary support for such response, upon the Investor’s request. In the event the Company and the Investor are unable to come to a resolution as to whether a violation has occurred, such matter shall be decided by [include specific dispute resolution mechanism] with a view to providing remediation if an Adverse Impact has occurred.[10]
4.6 Right to Cure and Breach. Failure to satisfy an HREDD obligation shall constitute a default of this [Agreement], which must be cured. If the HREDD-Related Default is not cured within [an appropriate period][X days][Y weeks][a period agreed by the parties in this [Agreement]] after receipt of a written notice, such failure to cure shall constitute a breach of this [Agreement]. In such a case, the Investor shall have the right to exercise any remedies, including but not limited to, its own good faith attempt to cure the HREDD-Related Default on behalf of and at the expense of the Company [using a multiple for any reasonable direct or indirect costs of 150% of the initial equity investment], litigation, and/or termination of the [Agreement], subject to Section [*] (Responsible Exit).
Part 3: Indemnification, Disclaimers, and Responsible Exit
5. Investor Indemnification and Comparative Fault
5.1 Indemnification. The Company shall indemnify, defend and hold harmless the Investor and its stockholders, general partners, limited partners, members, officers, directors, employees, agents, affiliates, successors and assigns (each an “Indemnified Party” and collectively, the “Indemnified Parties”) against any and all [direct][11] losses, damages, liabilities, deficiencies, claims, actions, judgments, settlements, interest, penalties, fines, costs or expenses of whatever kind, including, without limitation, audit fees that would not have been incurred but for the Company’s breach of its HREDD obligations, and the costs of enforcing any right under this [Agreement] or applicable law,[12] in each case, that arise out of the violation by the Company or any of its Representatives.
5.2 Comparative Fault Calculation. Notwithstanding Section [*] (Indemnification), the Company’s obligation to indemnify the Investor shall be reduced proportionately to the degree that the Investor caused or contributed to the Company’s breach of its HREDD obligations; in other words, for the avoidance of doubt, damages shall be borne by the Investor directly to the extent the Investor has materially caused or contributed to the breach, as determined by an independent third party mutually agreed to by the Parties. The costs related to such third-party determination shall be shared equally by both Parties.
6.1 Negation of Investor’s Contractual Duties Except as Stated. Notwithstanding any other provision of this [Agreement], the Investor does not assume a duty under this [Agreement] to monitor the Company or its [Representatives], including, without limitation, for compliance with laws or standards regarding working conditions, pay, hours, discrimination, forced labor, child labor, or the like, except as required under applicable law and as stated in Section [*].
6.1.1 No Control. The Investor does not have the authority and disclaims any obligation to control (i) the manner and method of work done by the Company or its [Representatives], (ii) implementation of safety measures by the Company or its [Representatives], or (iii) employment or engagement of employees and contractors or subcontractors by the Company or its [Representatives]. The efforts contemplated by this [Agreement] do not constitute any authority or obligation of control. They are efforts at cooperation that leave the Investor and the Company each responsible for its own policies, decisions, and operations. The Investor and the Company and its [Representatives] remain independent and are independent contractors. They are not joint employers, and they should not be considered as such.
6.1.2 Disclosure. The Investor assumes no duty to disclose the results of any audit, questionnaire, or information gained pursuant to this [Agreement] other than as required by applicable law, except to the extent the Investor must disclose information to the Company as expressly provided in this [Agreement].
7. Provisions Relating to Sale of Investor Equity or Sale of the Company
7.1 Responsible Exit.[14] In any termination of this [Agreement] by the Investor, whether due to a failure by the Company to comply with this [Agreement] or for any other reason (including the occurrence of a force majeure event or any other event that lies beyond the control of the parties), the Investor shall (i) consider the potential Adverse Impacts generated by the termination and employ commercially reasonable efforts to avoid or mitigate them; and (ii) provide reasonable notice to the Company of its intent to terminate this [Agreement]. Termination of this [Agreement] shall be without prejudice to any rights or obligations accrued prior to the date of termination.
Schedule A and Schedule B
Codes of Conduct: The Investor and the Company acknowledge that each endeavor to conduct its business in a legal, moral, and responsible manner at all times, based upon a set of guidelines and values enumerated in Schedule A and Schedule B. The Schedules address, amongst other things, responsible and ethical standards of behavior dealing with environmental protection, human rights, and [include any other applicable subject matter (e.g., living/fair wage, etc.)].[15] To the extent that Schedule A and Schedule B promulgate requirements or standards that are different than those required under applicable law, the Investor and the Company agree to meet the strictest requirements and standards.
Appendix X: Company HREDD Plan
Plan Elements
As part of the HREDD Plan, the Company shall, at a minimum, agree to do the following:
Conduct an initial comprehensive risk assessment that identifies and assesses human rights and environmental (“HRE”) risks and impacts by geographic context, and sector throughout the Company’s own operations (including the activities of the Company’s subsidiaries, if any) and business relationships across the Company’s value chain. Update the risk assessment both periodically and as needed in response to stakeholder feedback and potential changes in the Company’s risk profile.
Design an HRE risk management plan that responds to the initial and ongoing risk assessments and sets out prevention, mitigation, and remediation actions to be taken. It shall consider the severity and likelihood of the identified actual and potential adverse HRE impacts associated with the Company’s operations, as well as the nature of such potential adverse impacts. This risk management plan should include a prioritization procedure that prioritizes responses where a delayed response to an actual or potential adverse impact would make the impact irremediable. Such risk management plan should also incorporate the management of new and emerging adverse risks and impacts.
Put in place measures, including remediation, to address instances where the Company actions have caused or contributed to adverse impacts on people, the environment, or society.
Require the training of senior-level Company management, as well as relevant other functions, which may include legal, procurement, and compliance officers on human rights and environmental risks.
Incorporate into the Company’s existing procurement process principles of responsible contracting for the purchase of goods and include a shared approach between buyers and suppliers.
Establish a process for meaningful identification and engagement of stakeholders, including stakeholders potentially or actually negatively affected by the Company operations, defenders of human rights and the environment, trade unions, and grassroots organizations. Such engagement should include ongoing monitoring and designing of grievance mechanisms.
If necessary, adopt key performance indicators (“KPIs”) to assist in the review and reporting of HREDD objectives.
Timeline
The HREDD Plan shall be implemented in accordance with the following timeline:
Annex 2: Sample Generic HRE Due Diligence Request List
Does the Company have an ESG, corporate responsibility, corporate sustainability, or similar program? If so, please describe the program, including the individuals (e.g., Chief Sustainability Officer, Head of ESG, or similar role) and/or groups (e.g., ESG Committee or similar). If the Company does not have such a program, please describe how the Company manages ESG risks, including legal and regulatory risks.
Does the Company’s board of directors and/or senior management oversee ESG risks, including risks related to potential human rights and/or environmental adverse impacts of the Company’s operations? If so, please provide a description of such oversight, including the cadence of management-level meetings and management reports to the board regarding ESG issues and whether a board committee is specifically tasked with ESG oversight.
Does the company have an ESG, corporate responsibility, corporate sustainability, or similar policy? If so, please provide.
Does the company have a policy on diversity, equity, and inclusion (“DEI”)? If so, please provide.
Does the company produce internal or external ESG or sustainability reports? If so, please provide, and please include any reports that focus just on a single aspect, such as an environmental impact report or a social impact report.
Does the Company gather information about its greenhouse gas emissions? If yes, what Scopes are included?
Does the Company have any policies regarding responsible marketing?
Please describe how the Company conducts third-party risk management and provide any Supplier Codes of Conduct.
Does the Company use employee engagement surveys?
Has the Company experienced any ESG-related incidents, including incidents related to potential or actual human rights and/or environmental adverse impacts of the Company’s operations?
[Additional questions to be included based on the portfolio company’s industry, geography, size, etc.]
There are different definitions of “Responsible Investing” to work with, but the one developed by the World Economic Forum can be used as a point of reference. It states: “Responsible investing is the incorporation of environmental and social factors to achieve one or more of the following objectives: Financial returns, Societal impact, and Values alignment.” Alex Edmans, Here’s How We Can Be More Precise About Responsible Investing, World Econ. F. (Apr. 4, 2024). ↑
HREDD is a dynamic, ongoing process whereby companies must identify, prevent, mitigate, account for and, where appropriate, remediate any potential or actual adverse human rights and environmental impacts in their supply chain. HREDD is a valuable approach to risk management for companies and investors with respect to improving environmental, social, and governance (“ESG”) performance, validation, and data reporting. It allows portfolio companies to articulate and address risks, and it allows investors to evaluate the company’s risk management approach. Large institutional investors are leading the call for decision-useful information on a company’s performance on ESG factors. Robust HREDD processes will help companies respond to the significant ESG disclosure drivers, including evolving legislative and regulatory requirements, such as the EU Corporate Sustainability Reporting Directive and the EU Corporate Sustainability Due Diligence Directive; the continuing integration by mainstream investors of ESG factors into investment decisions, ongoing portfolio monitoring, and engagement; and the proliferation of impact funds, or funds that are formed with the intent of achieving a specific ESG-related impact alongside risk-adjusted financial returns. ↑
See Annex 2 for a sample generic section of an HREDD due diligence request list. ↑
Note that, while not included within each particular RIMC herein, each agreement in which these RIMCs are utilized should include (i) language to encourage notification of issues to counterparties, (ii) an opportunity to cure any such issues, and (iii) a period of time to remediate any such issues on a going-forward basis. ↑
A sample definition of Adverse Impact: it “means a potential or actual human rights harm, including human rights harms resulting from harms to the environment, which one or both parties have either caused, contributed to, or are directly linked to (through their products, services, and business relationships).” ↑
Consideration should be given to including a similar provision in an investor rights agreement (“IRA”) orsimilar agreement governing Investor rights during the life of the investment. ↑
In the event that the Company or one or more of its Business Partners use, engage or hire private or public security to monitor, protect or preserve personnel, property or resources, appropriate policies and resources to train and maintain control over such private security shall be established and maintained. The Good Practice Handbook on the Use of Security Forces: Assessing and Managing Risks and Impacts developed by the International Finance Corporation provides practical, project-level guidance. Int’l Fin. Corp., Good Practice Handbook on the Use of Security Forces: Assessing and Managing Risks and Impacts (Feb. 2017); see also Voluntary Principles on Security and Human Rights(last visited Jan. 30, 2025). ↑
Examples of poor purchasing practices that aggravate human rights risks include: imposing prices that are too low to cover production costs (including labor costs); making last-minute changes to orders; requiring suppliers to assume HRE-related costs without providing additional—technical or financial—assistance; making unfair retroactive modifications to payment terms (e.g., asking for steep discounts after the order has been completed or shipped); inaccurate forecasting of how much of suppliers’ production capacity should be reserved and not paying for unused reserved capacity; short turnaround on delivery of goods, accompanied by steep penalties for delays; and irresponsible exit. Interfaith Centre on Corp. Resp., Investor Guidance on Responsible Contracting (Mar. 2024). ↑
Many OLGMs fail to be used by stakeholders at least in part because of fear of animosity and retaliation which necessitates an alternative line of communication to the Investor’s OLGM/HREDD Officer. ↑
Parties to negotiate how disputes will be adjudicated (e.g., arbitration, etc.). ↑
Scope of losses to be negotiated (e.g., lost profits, punitive damages, etc.). ↑
Alternatively, parties may decide to utilize a customized “losses” definition. ↑
Note that some of the concepts in this section will not be acceptable in certain non-US jurisdictions. ↑
Note that the EU Corporate Sustainability Due Diligence Directive (“CSDDD”) does not allow for zero-tolerance exits and requires exits to be a last resort. ↑
Parties to determine appropriate list, as this may be expanded to include other categories (e.g., sexual orientation, other physical characteristics, etc.) that may not otherwise be included as a protected classification. ↑
Timeline to be established depending on the specific facts and circumstances, including the maturity of the Company’s current processes. ↑
This article is Part V of the Musings on Contracts series by Glenn D. West, which explores the unique contract law issues the author has been contemplating, some focused on the specifics of M&A practice, and some just random.
I have always said that the job of a transactional lawyer is not for the faint of heart. The practice of law involves, as Oliver Wendell Homes, Jr., famously said, the art of “prediction.”[1] For a transactional lawyer, that means that you have to predict how a court will interpret the words you use to convey the client’s objectives in a written agreement intended to evidence a deal; and you have to predict the most important of the likely disputes that may arise that will require that interpretive exercise by a court, and then make choices over what to push to change and what is better left as is.
The objective theory of contract dictates that it does not generally matter what was meant by what was said in a written agreement; it only matters what was actually said.[2] But sometimes deal dynamics do not permit you to obtain the clarity you may desire in all of the words used in a negotiated agreement, and you have to choose which are likely to be the most important. And sometimes deal dynamics require ambiguity rather than clarity. A recent case from the Delaware Court of Chancery, Comcast Cable Communications Management, LLC v. CX360, Inc.,[3] illustrates some of these principles.
Comcast Cable involved a dispute over a Master Services Agreement (“MSA”), whereby CX360, as Vendor, provided interactive voice response (“IVR”) services to Comcast. These IVR services were critical to Comcast’s customer service. The process whereby CX360 became the Vendor providing IVR services to Comcast involved an RFP that included a form MSA prepared by Comcast and which required potential service providers to submit a mark-up showing any requested changes. The RFP discouraged changes to the form, and CX360 was apparently strategic in the few changes it suggested (not dissimilar to the process a buyer in an auction of a private company is required to navigate).
The original form MSA prepared by Comcast gave it the sole right to terminate the MSA at its convenience. Specifically, the form stated:
Comcast may, at its election, terminate this Agreement and/or any [statement of work] without cause on ninety (90) days written notice to the Vendor.
CX360’s mark-up made a simple change to this provision as follows:
ComcastEither party may, at its election, terminate this Agreement and/or any SOW without cause on ninety (90) days written notice to the Vendor.
The final version of the MSA kept this change but capitalized the “p” in Party. “Party” was defined elsewhere in the MSA to be Comcast or CX360.
Absolute clarity for CX360, of course, would have required one additional change—i.e., crossing out “Vendor” and replacing it with “other party.” As written, the provision technically requires CX360, if it is the terminating party, “to notify itself upon [exercising its right of] termination.”[4] And, as was pointed out in the subsequent dispute, “[i]t would be absurd to require CX360 to provide notice to itself rather than to Comcast.”[5] But that change was never made or suggested. Other provisions of the MSA focused solely upon Comcast’s right to terminate for convenience, but not on CX360’s. Most of those provisions dealt with the compensation due CX360 if Comcast exercised its right of termination. And those other provisions make perfect sense when you consider the fact that the original form never contemplated a mutual right of termination for convenience by either party—only Comcast was to have that right as originally envisioned.
Comcast’s internal approval memo for the MSA focused on the provisions giving Comcast a termination for convenience right, and it made no mention of CX360 also having such a right. And apparently, the persons responsible for approving and signing the MSA read only the approval memo, not the actual MSA.
Everything went smoothly from 2014 until the end of 2022. The MSA was otherwise set to expire in 2025. But in December of 2022, a malware attack caused the IVR system to cease functioning for about four days. Thereafter Comcast began looking for alternatives to the existing IVR system. In September of 2023, Comcast launched a new RFP to determine its Vendor for IVR services, to commence when the existing MSA expired in 2025. CX360 was among the companies that submitted responses to Comcast’s new RFP. And while CX360 believed it had convinced Comcast to renew the MSA with CX360, Comcast decided to go in another direction. Comcast then requested a transition arrangement with CX360 to bridge to the new Vendor, but the proposed terms of the transition arrangement were very unfavorable to CX360. To level the playing field, CX360 decided to exercise the ninety-day termination right that CX360 believed it had bargained for in the MSA and thereby pressure Comcast into being more reasonable in the negotiation of a transition arrangement—i.e., CX360 was accelerating the end of the MSA with no transition to the new Vendor. But the parties were unable to agree, and litigation ensued.
Comcast’s position was that CX360 did not actually have a termination right—only Comcast did. And that position was based upon the alleged ambiguity created by the language at the end of the otherwise mutual right to terminate—i.e., the language providing for the right to terminate to be exercised by providing “‘written notice to the Vendor’—i.e., CX360.”[6] But according to Vice Chancellor Will, “sloppy drafting does not necessarily create ambiguity.”[7] The only ambiguity here was to whom notice was due, “not the substantive termination right afforded to ‘[e]ither Party.’” Indeed, according to Vice Chancellor Will, “Comcast’s argument that the ‘notice to the Vendor’ language means only Comcast could terminate for convenience would make CX360’s bargained-for termination right ‘illusory or meaningless.’”[8]
This was clearly the right outcome. Whether CX360 considered making a further clarification when it was marking up the original form MSA, and made a calculated decision that requesting fewer changes was strategically the best course, is not known. This “less was enough” approach certainly worked out for CX360, whether it was intentional or not—and who knows if CX360 would have obtained the mutual right to terminate for convenience had it pursued absolute clarity in the context of bidding for the privilege of providing Comcast’s IVR services and being told that changes to the form would be viewed negatively.
Transactional lawyering is more of an art than a science. But make no mistake, words matter; and sometimes the strategically best choice is fewer words, even if those words lack absolute clarity. Could AI make these judgements for you? Time will tell, of course, but I don’t think so.
See Oliver Wendell Holmes, Jr., The Path of the Law, 10 Harv. L. Rev. 457, 457 (1897). ↑
Seeid. at 464 (“the making of a contract depends . . . not on the parties having meant the same thing but on their having said the same thing.”). ↑
In its recent decision in Loper Bright Enterprises v. Raimondo,[1] the U.S. Supreme Court abandoned the “Chevron doctrine,” which generally required courts to defer to the interpretation of an unclear statute by the regulatory agency charged with administering that statute. Instead, courts are now required to exercise their independent judgment on the interpretation of an ambiguous statute. This article will highlight some considerations for the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”), and for lawyers who practice before the SEC, following Loper Bright.
I. Considerations for the SEC
The federal securities laws, like any complex statutory scheme, contain language that is, or that in particular situations can be, ambiguous. As an obvious example, the courts, the Commission, and sometimes Congress have wrestled repeatedly with the meaning of the term “fraud” in Section 10(b) and Rule 10b-5 of the Securities Exchange Act, sometimes in the context of insider trading practices, but also in a host of other contexts. The Commission sometimes adopts rules and regulations that fairly clearly seek to interpret potentially unclear statutory provisions, such as (among many others) the safe harbor provisions governing when an employee of a company assisting that company in a fundraising transaction is not acting as a broker-dealer, when a foreign broker-dealer operating in the United States does not need to register in the United States as a broker-dealer, when an investment adviser can manage a group of virtually identical advisory accounts without being deemed to be operating a registered fund, and when certain insurance products are not deemed to be securities.
In other cases, Commission rules and regulations that are intended to be proscriptive, rather than safe harbors, can also interpret ambiguous statutory provisions. As one example, Commission rules providing definitions for otherwise undefined terms used in the federal securities laws arguably are the poster child for interpreting ambiguous statutory provisions. But rules interpreting other parts of the federal securities laws also can involve interpretations of ambiguous statutory provisions. For example, is the Commission correct that the disclosure requirements of the Securities Act and the Securities Exchange Act are broad enough to require a mandatory disclosure regime focusing on climate change?
In addition, the Commission sometimes issues interpretations, sometimes as stand-alone statements and sometimes in connection with a rulemaking, that are not rules, and are just interpretations. Arguably, the fact that the Commission decided to give its interpretation of a particular statutory provision is evidence of that provision potentially being ambiguous, at least in the particular factual context in which the Commission discussed its interpretation.
a. Application of Loper Bright to Ambiguous Provisions
Under Loper Bright, the salient question ultimately is not whether the Commission thinks that a statutory provision is ambiguous; the question is whether the reviewing court thinks that the statutory provision is ambiguous, either as a whole or as applied to a particular factual situation. A court is no longer required to give deference to SEC rules, regulations, and interpretations that interpret a provision of the federal securities laws that is ambiguous, or that the court determines is ambiguous.
This does not mean, however, that the SEC’s statutory interpretations are irrelevant. The Loper Bright decision makes it clear that a court can decide to rely on or give deference to an agency’s expertise in interpreting an ambiguous statutory provision if the court finds that the agency’s interpretation is well reasoned and persuasive. By contrast, a court might decline to accord much or any weight to a Commission interpretation of an ambiguous statute if the court determines that the Commission’s interpretation was not the best legal interpretation of the relevant statutory provisions, and/or if the Commission’s legal analysis explaining its interpretation does not persuasively explain why that is the best legal interpretation of the relevant statutory provisions.
Loper Bright does not appear to have any direct bearing on an agency’s authority to adopt a rule; presumably that has always been, and remains, governed by long-standing judicial methods of interpreting the congressional intent in the statutes authorizing (and limiting) the agency’s rulemaking authority. In practice, however, the questions of an agency’s rulemaking authority and the validity of its statutory interpretations can at times blur.
The Loper Bright decision also offers the Commission and the Staff, and maybe especially the Staff, an opportunity. Loper Bright should motivate both the Commission and the Staff to seek to make their interpretations, both those that they adopt in the future and those that they have previously adopted, more legally persuasive and, where appropriate, more legally reasonable, in light of the statute or statutes relevant to those interpretations. Post–Loper Bright, the Commission and the Staff have a significant opportunity, through well-reasoned and persuasive legal interpretations, to potentially persuade courts to adopt their interpretations on securities law issues, even when the Commission is not a party to the relevant lawsuit.
b. Relevance of Staff Interpretations
An interesting corollary of the Loper Bright decision is that Staff interpretations, such as through no-action letters, can now be as relevant to a court as Commission interpretations. Following Loper Bright, the Commission’s interpretive views on ambiguous statutory provisions are not necessarily subject to special deference. Rather, the principal question faced by the court is what the court thinks is the correct statutory interpretation. In making this determination, a court might rely on a well-reasoned, persuasive legal discussion in a Staff no-action letter or other Staff interpretation every bit as much as it might rely on a well-reasoned, persuasive legal discussion in a Commission rule-making or interpretive release.
This possibility to some extent undercuts the relevance of the Commission’s oft-stated position that only the Commission, and not the Staff, speaks for the Commission. That statement is, of course, still true true—but at least in a post-Loper Bright court proceeding, a well-reasoned and persuasive Staff legal interpretation can be an important component of a court decision, even though it is not a Commission statement.
c. Importance of Offering the Best Legal Interpretations/Conclusions
Following the Loper Bright decision, the Commission and the Staff should consider taking a number of actions to improve the likelihood that courts will interpret ambiguous securities law provisions consistently with how the Commission and the Staff interpret those provisions. In each case, the actions of the Commission and the Staff should be intended to provide a well-reasoned and persuasive legal interpretation, with a laser focus on why that interpretation is the best legal interpretation of the relevant statute or statutes.
When it is able, the Staff might review and, where appropriate, supplement or revise its more important existing no-action letters and other interpretations. In many cases, the Staff offered very little of its own analysis as to the basis for its interpretations. For example, in a number of no-action letters, the Staff has summarized arguments made by counsel, and stated that it agreed with the conclusion without necessarily agreeing with counsel’s arguments. In relatively few cases did the Staff present a detailed analysis of why its interpretation was the best legal interpretation of the relevant statutory provision. Moving forward, the Staff should consider including in its no-action letters and other interpretations, as a matter of course, a well-reasoned, persuasive legal analysis of why its interpretations are not only consistent with the relevant statutes but also are (in its view) the best legal interpretations of those statutes.
Just as the Staff should consider reviewing its prior no-action and other interpretive positions in light of Loper Bright, the Commission also should consider engaging in a similar revision of its most important prior interpretations, and should consider revising its approach in the releases accompanying interpretations of the securities laws. This is the case both for statements that are unequivocally statutory interpretations and for rules and regulations that involve interpreting a potentially ambiguous statute.
Often, the Commission’s releases in these cases lack significant analysis of why the interpretation the Commission is taking is the best legal conclusion. In many cases, the Commission’s releases seem to focus significantly on why its interpretation is a good policy, or makes economic sense, or on other equally valid considerations. But what the Loper Bright Court appears to require is the best legal interpretation of the relevant statutes.
Moving forward, Commission releases adopting certain rules or interpreting specific statutory provisions might include a “Loper Bright” section that specifically focuses on the relevant statutory language, court cases, and administrative history, and carefully analyzes, as a court might, why the Commission believes its interpretation is the best legal interpretation of the relevant statutory language.
To be fair, Loper Bright presents challenges to the Commission, in part because of specific requirements that the Commission must follow, such as the requirements for the Commission to conduct certain economic and cost-benefit analyses when it adopts rules. These requirements may be somewhat divorced from the question of what the best legal interpretation of a given statute is. The Commission (like many regulatory agencies) also is subject to political interests and pressure that may sometimes affect its decision-making and statutory interpretations.
Courts, however, are not subject to these requirements and pressures; they are bound by the Loper Bright decision. As a result, courts may sympathize with the myriad competing considerations that the Commission is statutorily required to consider, but after Loper Bright, their inquiry likely will focus on the best legal interpretation of an ambiguous statute. Presumably, that must be the Commission’s focus when issuing legal interpretations of the federal securities laws as well. Economic, cost-benefit, and similar considerations, important as they are, presumably must be made after the determination of, and in the context of, the best legal interpretation of the relevant statute or statutes.
II. Considerations for Lawyers Practicing Before the SEC
Loper Bright also may offer lessons to lawyers who practice before the SEC. Perhaps most importantly, lawyers who are, for example, assisting a client in commenting on an SEC rule proposal should consider including a legal analysis and discussion of why their comments reflect the best legal interpretation of the relevant statutory provisions. This is, at least in some cases, a change from how many lawyers typically have sought to persuade the SEC or the Staff to accept their positions. For example, often in rule proposals the SEC specifically seeks comment on industry practices, economic considerations, and other matters that are not purely legal. Presumably, the Commission will, and should, continue to request this information. As discussed above, however, following the Loper Bright decision, the SEC should consider this information in light of what it determines to be the best legal interpretation of the relevant statute. Counsel helping a client respond to such requests for comment should therefore consider including not only the responsive information but also a proposed interpretation of the relevant statute that is consistent with that information, along with a legal analysis of why that interpretation is the best legal interpretation of that statute.
Similarly, a lawyer assisting a client in seeking a no-action or interpretive letter from the Staff should consider including a legal analysis of why the requested relief is the best interpretation of the relevant statute. Often, no-action letter requests focus significantly on relevant past Staff no-action letters and, where available, Commission interpretations. The requests sometimes include relatively little analysis of court cases and principles of statutory interpretation.
Whether addressing the Commission or the Staff, counsel also should consider including a discussion of relevant court cases interpreting statutes outside of the federal securities laws, when those cases are or may be relevant to the way that a court would consider the interpretation of a particular provision of the federal securities laws.
Finally, lawyers may want to reconsider some of their opinion practices following Loper Bright. In the past, lawyers may have been willing to issue “unqualified” opinions based on the existence of a Commission rule or statement interpreting a provision of the federal securities laws. Because legal opinions generally opine on what a court would determine and not on what the SEC would determine, and because a court no longer is necessarily required to defer to SEC interpretations of the federal securities laws, lawyers may want to consider whether a Commission rule interpreting a statute (or other statutory interpretation) is a sufficient basis on which to issue an unqualified opinion.
Benjamin D. Rosenblum is an associate at the law firm Cleary Gottlieb Steen & Hamilton LLP. This article reflects the views only of the authors and does not necessarily reflect the views of Cleary Gottlieb, its other lawyers, or Cleary Gottlieb’s clients.
No. 22-4751, 2024 WL 3208360 (U.S. June 28, 2024). ↑
On January 23, 2025, the U.S. Supreme Court issued an order in McHenry v. Texas Top Cop Shop, Inc.[1] and granted a stay of the preliminary injunction issued by the federal district court, thereby eliminating that injunction’s impediment to enforcement of the reporting requirements of the Corporate Transparency Act (“CTA”) by the Financial Crimes Enforcement Network (“FinCEN”) while the litigation as to the CTA’s constitutionality proceeds.[2]
The Court’s order reads thus:
[A]pplication [No. 24A653] for stay presented to Justice Alito and by him referred to the Court is granted. The December 5, 2024 amended order of the United States District Court for the Eastern District of Texas, case No. 4:24-cv-478, is stayed pending the disposition of the appeal in the United States Court of Appeals for the Fifth Circuit and disposition of a petition for a writ of certiorari, if such a writ is timely sought. Should certiorari be denied, this stay shall terminate automatically.[3]
In his concurring opinion, Justice Gorsuch wrote, “I agree with the Court that the government is entitled to a stay of the district court’s universal injunction. I would, however, go a step further and, as the government suggests, take this case now to resolve definitively the question whether a district court may issue universal injunctive relief.”[4] Justice Jackson, dissenting from the granting of the stay, wrote:
However likely the Government’s success on the merits may be, in my view, emergency relief is not appropriate because the applicant has failed to demonstrate sufficient exigency to justify our intervention. I see no need for this Court to step in now for at least two reasons. First, the Fifth Circuit has expedited its consideration of the Government’s appeal. Second, the Government deferred implementation on its own accord—setting an enforcement date of nearly four years after Congress enacted the law—despite the fact that the harms it now says warrant our involvement were likely to occur during that period. The Government has provided no indication that injury of a more serious or significant nature would result if the Act’s implementation is further delayed while the litigation proceeds in the lower courts. I would therefore deny the application and permit the appellate process to run its course.[5]
However, while the application for stay to the Supreme Court was pending, a second decision in the same federal district court was issued—and in that case, Smith v. Department of the Treasury,[6] a different injunction was imposed. That case is discussed below, but as of this writing, and notwithstanding certain published reports to the contrary,[7] enforcement of the CTA’s Reporting Rules[8] continues to be stayed by the separate preliminary injunction issued in Smith.[9] At this juncture, that is about all we know, which means that there remains significant uncertainty.
Breaking Down the Ruling—or What Happens Next?
It is not entirely clear on what basis the Supreme Court reinstated the CTA (i.e., stayed the preliminary injunction against it): a general dislike of nationwide preliminary injunctions, a belief that the standards for the issuance of a nationwide injunction had not been satisfied, or something else. All of the following prognostication needs to be understood to be just that—a thought experiment as to where matters could proceed without any affirmative suggestion that they will do so:
Presumably, the Texas Top Cop Shop (“TTCS”) case, now being heard on an expedited basis,[10] will be returned to the Fifth Circuit for a decision on the merits as to the CTA’s constitutionality vis-à-vis the Commerce Clause; but in the meantime, viewed within the scope of the TTCS litigation,[11] the CTA remains in effect.
If the government prevails at the Fifth Circuit, the stay of the district court’s preliminary injunction will remain in force pending a decision on any petition for certiorari filed by (presumably) the plaintiffs.
If the plaintiffs prevail at the Fifth Circuit, the stay of the district court’s preliminary injunction will remain in force pending a decision on any petition for certiorari filed by (presumably) the government.[12]
If the Supreme Court is unwilling to grant certiorari to either party dissatisfied with the decision of the Fifth Circuit, then the Supreme Court’s stay of the TTCS preliminary injunction will “terminate automatically.”
If the Supreme Court grants certiorari to either party dissatisfied with the decision of the Fifth Circuit, then the Supreme Court’s stay of the TTCS preliminary injunction will remain in effect until the Supreme Court rules.
Smith v. U.S. Department of the Treasury: Preliminary Injunction
In the Smith case, pending in the same Texas federal district court as TTCS but before a different judge,[13] the court on January 7, 2025, issued a preliminary injunction with two components.[14] First, as to the named plaintiffs—just two individuals—enforcement of the CTA was enjoined. Second, on a nationwide basis, the Reporting Rules[15] were enjoined. For purposes of this discussion, keep in mind that all of the reporting deadlines under the CTA, as well as the required contents of a beneficial ownership information report (“BOIR”), are provided for in the Reporting Rules.
Notwithstanding that it was mentioned in the government’s reply brief to the Supreme Court in TTCS,[16] this suit was not referenced in the Supreme Court’s order imposing the stay of the injunction. Ordinarily, one might suspect that the preliminary injunction in the Smith case would meet the same fate in the Supreme Court or possibly the Fifth Circuit as did the Texas Top Cop Shop case. These are not ordinary times.
First, the government would need either to appeal the injunction from the district court to the Fifth Circuit on an emergency basis, or to ask the district court by motion to lift the injunction given the stay in TTCS.[17] It is also possible that the Smith judge could act sua sponte. Another alternative would be to appeal and request that the appeal in Smith be consolidated with the already scheduled argument of TTCS. No doubt there are other paths. However, as of noon (EST) on February 2, 2025, no notice of appeal or motion to stay or lift the preliminary injunction has been filed in the Smith case. Even assuming that the government decides to continue to defend the CTA, it is entirely possible that it will allow the status quo ante[18] to continue until the constitutionality of the CTA is determined, probably by the Supreme Court.
Other CTA Cases
There are a multitude of cases across the country challenging the CTA’s constitutionality that are pending in various postures. Already before the close of business on January 23, 2025, a copy of the Supreme Court’s TTCS decision was filed in Small Business Ass’n of Michigan v. Yellen.[19] We should expect that similar filings will soon be made with other federal district courts before which CTA challenges are pending.
At the appellate level, in addition to Texas Top Cop Shop, there are appeals pending in the U.S. Courts of Appeals for the Eleventh, Ninth, and Fourth Circuits in National Small Business United v. Yellen,[20]Firestone v. Yellen,[21] and Community Associations Institute v. Yellen, respectively.[22] Only National Small Business United involved injunctive relief, but it was restricted to the parties to that suit. That case has been fully briefed, and oral argument was held on September 27, 2024. Firestone and Community Associations Institute are at far earlier stages, and neither involved the trial court granting injunctive relief; in fact, each is an appeal of the district court’s denial of a preliminary injunction.[23] Whether and how the Supreme Court’s decision in TTCS will impact those appeals remains to be seen. Also, while it is unknown whether the Eleventh Circuit has delayed publishing its decision in National Small Business United in the face of the preliminary injunction issued in TTCS, that factor is now set aside, perhaps affording that court more leeway to proceed. Moreover, new injunctive relief issued at the federal appeals court level could result from the decisions in any of these appeals.
At the trial court level, it is worth noting that on December 30, in the Hotze v. U.S. Department of the Treasury case presently pending in Texas, a motion for preliminary injunction was denied as moot in light of the relief already granted in Texas Top Cop Shop, with the court writing thus:
Accordingly, this Court is aware of no authority where one district court issued a nationwide injunction and parties in a parallel case subsequently urged for the same relief. As a threshold matter of logic, there is no further relief this Court may provide to Plaintiffs responsive to the instant Motion. The CTA and its Rule have already been enjoined to the fullest possible extent. After Texas Top Cop Shop, issuing a preliminary injunction on similar or distinct legal bases would amount to an advisory opinion under this procedural posture.[24]
Filing Deadlines
As a practical matter, especially for companies formed in 2024 that had not yet filed their BOIRs and for pre-2024 companies that had expected to be required to file BOIRs by January 1, 2025, concerns remain, including the CTA’s $606 per day penalty.[25]
Filing deadlines come in essentially four categories: (i) the initial filing deadline for all reporting companies preexisting January 1, 2024 (referred to herein as legacy companies); (ii) the initial filing deadline for reporting companies created on or after January 1, 2024, and before January 1, 2025 (referred to herein as 2024 companies); (iii) the initial filing deadline for companies created on or after January 1, 2025 (referred to herein as 2025 companies); and (iv) the filing deadlines for updating or correcting previously filed BOIRs.[26] Under the Reporting Rules, (i) legacy companies had until not later than January 1, 2025, to file an initial BOIR; (ii) 2024 companies had ninety days from formation (or registration) to file an initial BOIR; (iii) 2025 companies have thirty days within which to file an initial BOIR; and (iv) all companies, having filed a BOIR, have thirty days within which to file an update to any changes from the last filed report.[27] Obviously, the “not later than January 1, 2025” initial filing deadline for legacy companies is in the rearview mirror, as are the initial filing deadlines for many companies created after September 2, 2024, that did not yet make an initial filing.[28] During the brief period in which the TTCS preliminary injunction was stayed by the Fifth Circuit motions panel, FinCEN issued (in retrospect, short-lived) updated reporting deadlines, essentially affording most companies an additional thirteen days within which to make their initial filings.[29] Those modified deadlines are likewise in the rearview mirror.
On the morning of January 24, 2025, FinCEN published on its website an updated alert:
Alert: Ongoing Litigation—Texas Top Cop Shop, Inc., et al. v. McHenry, et al., No. 4:24-cv-00478 (E.D. Tex.) & Voluntary Submissions [Updated January 24, 2025]
In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.
****
On January 23, 2025, the Supreme Court granted the government’s motion to stay a nationwide injunction issued by a federal judge in Texas (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). As a separate nationwide order issued by a different federal judge in Texas (Smith v. U.S. Department of the Treasury) still remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop. Reporting companies also are not subject to liability if they fail to file this information while the Smith order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.[30]
So, as of now and until there is a change in circumstances such as the lifting of the Smith preliminary injunction, no BOIR filings are due, and there are no filing deadlines. But what will happen if the Smith injunction is stayed or otherwise lifted? What then will be the filing deadlines? That is a great question, and as of now there is no answer. All else being equal, we would not only expect FinCEN to issue another alert setting forth revised deadlines (as they did following the Fifth Circuit’s December 23 lifting of the TTCS preliminary injunction) but would also expect a scramble among attorneys to contact clients and get them reengaged in the CTA compliance process—followed by a flurry of filings on FinCEN’s BOIT (formerly BOSS) system.
But all things are not equal, and no reader is unaware of the tumult resulting from the new presidential administration and the deluge of executive orders issued beginning on the afternoon of January 20, 2024. One of those executive orders, entitled “Regulatory Freeze Pending Review” provides in part:
I hereby order all executive departments and agencies to take the following steps:
(1) Do not propose or issue any rule in any manner, including by sending a rule to the Office of the Federal Register (the “OFR”), until a department or agency head appointed or designated by the President after noon on January 20, 2025, reviews and approves the rule.[31]
Under the executive order, administrative agencies are not to issue any “rule” without the consent of one of the apparatchiks appointed to the new administration’s nomenklatura. Under the executive order, rule includes “any “regulatory action,” as defined in section 3(e) of Executive Order No. 12866 of September 30, 1993, as amended, and any “guidance document,” as defined in section 2(b) of Executive Order No. 13891 of October 9, 2019. Under this definition, “‘[r]egulatory action’ means any substantive action by an agency (normally published in the Federal Register) that promulgates or is expected to lead to the promulgation of a final rule or regulation, including notices of inquiry, advance notices of proposed rulemaking, and notices of proposed rulemaking.” Under the CTA, the due dates for the filing of BOIRs have been set by the promulgation or amendment of the Reporting Rules, published in the Federal Register.[32] On the other hand, FinCEN has extended these dates informally through “alerts” posted on its website.[33] Thus, it is not entirely clear whether FinCEN can even provide revised filing dates without defying the new executive order.
Whether this prohibition will limit FinCEN’s ability to promulgate new deadlines, in effect amending the Reporting Rules, remains to be seen. It bears noting that FinCEN’s amended alert of January 24, 2025, did nothing more than acknowledge that the situation remains as it was pre–January 20, 2025—namely, that there are no enforceable filing deadlines presently in effect and that all filings are presently voluntary at this time. The imposition of new filing deadlines via an alert is a different matter.
Going Forward: Possible FinCEN Considerations
As noted, as of noon (EST) on February 2, 2025, no notice of appeal or emergency motion to stay the preliminary injunction has been filed in the Smith case. Even assuming that the government decides to continue to defend the CTA, it is entirely possible that it will allow the status quo ante[34] to continue until the constitutionality of the CTA is determined, probably by the Supreme Court. Obviously, it is currently impossible to predict how the government will proceed, or even who will make these decisions. What could it be thinking about the future?
The U.S. regime change implicates the question of whether the new administration wishes the preliminary injunction be lifted before the final adjudication of the validity of the CTA. Discerning what the administration desires in terms of the ultimate resolution of the question of the CTA’s validity is beyond the scope of this article. While some members of the administration, such as Secretary of State Marco Rubio, have expressed a favorable opinion of the CTA, other indications suggest that the new administration may not be entirely supportive of an end to the preliminary injunction. Among these are the following:
Project 2025 expressly calls for the repeal of the CTA.[35]
Senators Tommy Tuberville (R., Ala.) and James E. Risch (R., Idaho) have introduced a bill for the repeal of the CTA.[36]
Several Republican members of Congress have joined in briefs in the Supreme Court in opposition to the government’s petition to stay the preliminary injunction in the Texas Top Cop Shop litigation.[37]
Twenty-four state attorneys general (including the attorney general of Florida, a position formerly held by the U.S. attorney general nominated by the president) have joined in briefs in the Supreme Court in opposition to the government’s petition to stay the preliminary injunction in the Texas Top Cop Shop litigation.[38]
Recently confirmed Secretary of the Treasury Scott Bessent’s response to a question as to the CTA is fairly characterized as ambivalent.[39]
FinCEN’s concern with the emergency nature of temporary injunctions has not been consistent: it has not felt the need to seek emergency relief with respect to each temporary injunction issued against the CTA.[40]
Best Practices: Legal Protection on the CTA Roller Coaster
Initially, to suggest that the recent back and forth as to the CTA is a roller coaster is unfair to roller coasters—on a roller coaster, you know when and where the ride will end, and you intentionally decide to go on the ride. Attorneys and clients have been befuddled by the on-again, off-again drama as the various courts and FinCEN have intervened, and there is understandable fatigue. In addition, much of the fourth quarter of 2024’s momentum toward compliance for legacy companies has been lost.
So, what to do now? The Smith preliminary injunction is, as of this writing, in effect, but that could change at any time, whereupon either (i) FinCEN will issue new guidance as to reporting deadlines or (ii) FinCEN will not be allowed to act, and all reporting companies that did not file either initial or updated BOIRs within the originally applicable deadlines will be in (retroactive) default and subject to the civil penalties and criminal fines detailed in the CTA. While not making a voluntary BOIR filing in the current environment is entirely permitted, you and your clients (or at least some of them) may believe it most expedient to make voluntary filings so as to cut off any potential exposure and “get it out of the way.” Others may decide to continue with assessment of how the CTA and the Reporting Rules apply to particular companies and their beneficial owners, holding off on filings unless and until a filing obligation is reinstated and then filing initial and, in some instances, updated BOIRs. We see merit in both approaches. Others will continue to ignore the CTA, hoping it goes away forever, a mindset that will necessitate a “fire drill” response if filings should again become mandatory. While a possible approach, we cannot recommend it as a best practice.
In closing,[41] stay tuned for further developments.[42]
604 U.S. —, 2025 WL 272062 (U.S. Jan. 23, 2025) (No. 24A653). James McHenry, the acting U.S. attorney general, was substituted in the case style for former U.S. attorney general Merrick Garland. The case docket may be accessed online. See also Letter from Lyle C. Cayce, Clerk, U.S. Court of Appeals for the Fifth Circuit, to All Parties (Jan. 21, 2025) (Doc. No. 204) (giving notice that the case style is now Texas Top Cop Shop, Inc. v. McHenry). The case style was again updated on January 28, 2025, to include the then recently confirmed Secretary of the Treasury Scott Bessent. See Letter from Lyle C. Cayce, Clerk, U.S. Court of Appeals for the Fifth Circuit, to All Parties (Jan. 28, 2025) (Doc. No. 209). ↑
The prior history of the Texas Top Cop Shop case and related litigation challenging the constitutionality of the CTA is recounted in Christina Houston, Robert R. Keatinge, Thomas E. Rutledge & Jim Wheaton, How FinCEN Stole Christmas: The Corporate Transparency Act, Year 1, Bus. L. Today (Jan. 13, 2025). ↑
Tex. Top Cop Shop, No. 24A653, 2025 WL 272062, at *1. ↑
Id. (emphasis in original) (citation omitted). Justice Jackson is correct that there was a multiyear delay in the application of the CTA to companies preexisting January 1, 2024, but some context is in order. The CTA was approved on January 1, 2021. Notwithstanding a change in presidential administration, just three months later FinCEN issued an advance notice of proposed rulemaking (“ANPR”) as to the proposed regulations called for by Congress in the CTA. Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 17,557 (Apr. 5, 2021) (ANPR). There then followed a notice of proposed rulemaking (“NPRM”). Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 69,920 (Dec. 8, 2021) (NPRM). Then, some ten months later, the Reporting Rules were finalized in Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59,498 (Sept. 30, 2022) (final), addressing in the process of drafting the final rules some 240 comments tendered in response to the NPRM. Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. at 59,509. It was only from that point in late 2022 that FinCEN could begin designing the interface through which beneficial ownership information report (“BOIR”) information would be submitted and the database in which it would be stored, a process that required further publication and solicitation of comment. Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifiers for Entities, 87 Fed. Reg. 77,404 (Dec. 16, 2022) (proposed); Beneficial Ownership Information Access and Safeguards, 88 Fed. Reg. 88,732 (Dec. 22, 2023) (final). The proposal received ninety-one comments. Beneficial Ownership Information Access and Safeguards, 87 Fed. Reg. 77,404. While it was not until January 1, 2024, that any reporting company could submit a BOIR, companies formed on or after that date have been obligated to make initial and, if appropriate, updated reports to the effect that the first CTA filing obligations arose three, and not four, years after its passage. The “setting an enforcement date of nearly four years after Congress enacted the law” criticism applies only as to the “not later than” compliance date set for reporting companies preexisting January 1, 2024. Moreover, the CTA legislation contemplated from the beginning a phase-in of up to two years for filings by existing companies; FinCEN shortened that permissible timeline by a full year when it finalized the Reporting Rules. ↑
Smith v. U.S. Dep’t of the Treasury, No. 6:24-cv-00336, 2025 WL 41924 (E.D. Tex. Jan. 7, 2025). ↑
See, e.g., Kelsey Reichmann, Supreme Court Lifts Pause on Corporate Transparency Act,Courthouse News Serv. (Jan. 23, 2025) (“The Supreme Court put a federal financial reporting law back on the books Thursday, forcing companies to disclose information that is used by malign actors to conceal their ownership and facilitate illicit activities.”); Zach Schonfeld, Supreme Court Reinstates Federal Anti-Money Laundering Law, Hill (Jan. 23, 2025) (“The Supreme Court on Thursday agreed to reinstate a federal anti-money laundering law at the federal government’s request as a legal challenge proceeds in a lower court.”); Supreme Court Allows Small Business Registration Rule to Take Effect, Aimed at Money Laundering, Associated Press (Jan. 24, 2025) (“The Supreme Court action allows enforcement of the registration requirement while the Texas case winds through the courts.”); Supreme Court’s Decision Revives Controversial Corporate Transparency Act, Devdiscourse (Jan. 24, 2025) (“The Supreme Court has reinstated a critical requirement for millions of small businesses to register with the Treasury Department, aiming to tackle money laundering and financial fraud.”); Supreme Court Reinstates Corporate Transparency Act Mandate, Se. AgNet (Jan. 24, 2025) (“The U.S. Supreme Court has decided to lift the injunction that temporarily halted enforcement of the Corporate Transparency Act (ACT) reporting requirements, thus now allowing enforcement of the act to move forward.”); NCBA Statement on Supreme Court Decision to Reinstate Dreaded Corporate Transparency Act Mandate, KRVN (Jan. 24, 2025) (“The U.S. Supreme Court’s decision will allow enforcement of the act to move forward.”); SCOTUS Allows Corporate Transparency Act Reporting Requirements to Resume, Morning AgClips (Jan. 24, 2024) (“On Thursday, Jan. 23, 2025, SCOTUS ruled to allow the Government to enforce the CTA, which requires millions of businesses to file BOI reports. The justices stayed, or lifted, the nationwide injunction that had been blocking the CTA’s enforcement. This decision permits the government to proceed with implementing the CTA while its merits are reviewed by the U.S. Court of Appeals for the Fifth Circuit, which is scheduled to hold oral arguments on March 25.”). ↑
On December 27, 2024, the Fifth Circuit granted the motion for expedited consideration of the Texas Top Cop Shop case and set the following briefing schedule: appellants’ brief is due on February 7, 2025; appellees’ brief is due on February 21, 2025; and appellants’ reply brief is due on February 28, 2025. See Letter from Lyle C. Cayce, Clerk, U.S. Court of Appeals for the Fifth Circuit, to Counsel (Dec. 27, 2024) (Doc. No. 163). Oral argument in Texas Top Cop Shop, Inc. v. McHenry has been scheduled for 10:00 a.m. on March 25, 2025. See Letter from Lyle C. Cayce, Clerk, U.S. Court of Appeals for the Fifth Circuit, to Counsel (Dec. 27, 2024) (Doc. No. 165-2) (case calendar). ↑
Alternatively, it is possible that the Fifth Circuit, if it rules against the government, would fashion its own relief that would replace that ordered by the district court, that this relief might include a new injunction, and that the government could again apply to the Supreme Court for a new stay. At that point, to the extent that the stay was granted because of concerns about the ability of federal district courts to issue nationwide injunctions, a different result could obtain. ↑
Smith v. U.S. Dep’t of the Treasury, No. 6:24-cv-00336, 2025 WL 41924 (E.D. Tex. Jan. 7, 2025). ↑
Since the filing of the government’s stay application, another district court has concluded that the Act likely exceeds Congress’s enumerated powers. See D. Ct. Doc. 30, at 33, Smith v. United States Department of the Treasury, No. 24-cv-336 (E.D. Tex. Jan. 7, 2025). That court issued a party-specific injunction prohibiting enforcement of the Act against the plaintiffs alongside a universal stay of the Reporting Rule under Section 705. See id. at 33–34. This Court’s disposition of the government’s application here will likely affect that case as well. ↑
In response, the plaintiffs in that case will argue that the relief they have been awarded in their parallel proceeding is independent of whatever action was taken by the Supreme Court in another case, and that no element of issue preclusion arises. ↑
See the history of the effective date, supra note 5. It is worth noting that the filing requirements of the CTA have been in effect since January 1, 2024, for existing reporting companies created or registered on or after January 1, 2024, but do not come into effect for reporting companies created or formed before that date (referred to in the CTA as existing entities but described in the Reporting Rules, other administrative pronouncements, and this article as existing reporting companies). Under the Reporting Rules, existing reporting companies were scheduled to become subject to the Reporting Rules on January 1, 2025. As a result of the initial injunction issued in Texas Top Cop Shop, existing reporting companies were not required to file initial BOIRs on January 1, 2025, and the requirement for all information reporting for all reporting companies was stayed. For the short hiatus in the preliminary injunction from December 23, 2024, to December 27, 2025, FinCEN issued a revised schedule that extended the filing dates for all initial BOIRs (in the case of existing reporting companies, to January 13, 2024). As the parties to most of the litigation are existing reporting companies, much of the language of the cases speaks of the initial effective date of the CTA as January 1, 2025. Thus, the status quo ante at the time of the initial preliminary injunction in Texas Top Cop Shop was that reporting companies formed after September 3, 2024, and existing reporting companies were not yet obligated to file initial BOIRs. The Smith preliminary injunction appears to stay the obligation on reporting companies that have filed their BOIRs to update those BOIRs. Its effect on reporting companies that were required to file initial BOIRs before December 3, 2024, but had not done so is not clear. See Houston et al., supra note 2 ↑
Small Bus. Ass’n of Mich. v. Yellen, No. 1:24-cv-00314-RJJ-SJB (W.D. Mich. filed Jan. 23, 2025), ECF No. 46 (plaintiffs’ notice of supplemental authority). Likewise, the same order was filed on January 27 in the Boyle case pending in Maine. Boyle v. Yellen, No. 2:24-cv-00081-SDN (D. Me. filed Jan. 27, 2025) (Doc. No. 50) (notice of supplemental authority). Purely as an authorial aside, the Government’s Memorandum in Support of a Motion to Dismiss filed in Small Business Ass’n of Michigan (Doc. No. 31) is a particularly well-written review of why the CTA is a constitutional exercise of Congress’s authority. ↑
Nat’l Small Bus. United v. Yellen, 721 F. Supp. 3d 1260, 2024 U.S. Dist. LEXIS 36205 (N.D. Ala. 2024), appeal filed, Nat’l Small Bus. United v. U.S. Dep’t of the Treasury, No. 24-10736 (11th Cir. Mar. 11, 2024). ↑
Firestone v. Yellen, No. 3:24-cv-1034-SI, 2024 WL 4250192, 2024 U.S. Dist. LEXIS 170085 (D. Or. Sept. 20, 2024), appeal filed, No. 24-6979 (9th Cir. Nov. 19, 2024); see also Firestone, No. 3:24-cv-1034-SI, 2024 WL 5159198, 2024 U.S. Dist. LEXIS 228679 (D. Or. Dec. 18, 2024) (denying injunctive relief pending appeal). ↑
Hotze v. U.S. Dep’t of the Treasury, No. 2:24-cv-00210-Z, 2024 WL 5248148, at *1 (N.D. Tex. Dec. 30, 2024). It is intriguing that the same logic did not foreclose the injunction issued in Smith. In Hotze, the parties on January 30, 2025, filed a joint motion to stay proceedings (Doc. No. 41); and on January 31, the court issued an order staying the proceeding for thirty days, with directors to file a joint status report one week before the expiration of the stay and to update the court (presumably on an ongoing basis) on the status of the Smith preliminary injunction (Doc. No. 42).
In passing, we will reference the status of Midwest Ass’n of Housing Cooperatives v. Yellen (a dispute whose style will likely be updated soon), wherein the plaintiffs seek a declaration that housing cooperatives are exempt from the CTA irrespective of their organizational structure. No. 2:24-cv-12929 (E.D. Mich. filed Nov. 5, 2024). On November 26, 2024, a curious order was entered in this case. Subsequent to a status conference held to discuss matters, including the Plaintiffs’ Emergency Motion for Declarator Relief, or Alternatively, Preliminary Injunctive Relief (Doc. No. 17), and responding to the government’s request to hold the case in abeyance pending the decision of the Eleventh Circuit in National Small Business United, the court agreed to the request for an abeyance “provided the government refrain from arresting, jailing, imprisoning, or imposing civil penalties against plaintiffs or individuals affiliated with plaintiffs for any violation of the statute during the period of abeyance.” Id. (E.D. Mich. Nov. 26, 2024) (Doc. No. 26). ↑
The CTA provides for a $500 per day civil penalty with respect to willful failures to file a required BOIR. CTA, 31 U.S.C. § 5336((h)(1); see also 31 C.F.R. § 1010.380(g). Willfully is itself a defined term—namely, the “voluntary, intentional violation of a known legal duty.” CTA, 31 U.S.C. § 5336(h)(6). That $500 per day amount is adjusted each year for inflation. Federal Civil Monetary Penalties Inflation Adjustment Act of 1990, Pub. L. No. 101-410 (Oct. 5, 1990), as revised by section 701 of the Bipartisan Budget Act of 2015, Pub. L. No. 114-74 (Nov. 2, 2015); see also FinCEN FAQ K.2 (Apr. 8, 2024). Pursuant to a recent release from FinCEN, for 2025 the civil penalty was adjusted (and increased) to $606 per day. SeeFederal Crimes Enforcement Network; Inflation Adjustment of Civil Monetary Penalties, 90 Fed. Reg. 5629 (Jan. 17, 2025) (final rule); see also Jay Adkisson, Fearmongering the Civil and Criminal Penalties of Beneficial Ownership Information Reporting, Forbes (Jan. 27, 2025) (discussing the “willful” element of the penalty and fine/imprisonment provisions of the CTA). ↑
These deadlines are referenced as applied to domestic reporting companies, but they apply equally to foreign reporting companies first registered in those time periods. See 31 C.F.R. § 1010.380(c)(1)(ii) (definition of foreign reporting company). ↑
See 31 C.F.R. §§ 1010.380(a)(1), 1010.380(a)(2); Houston et al., supra note 2, at nn.57–63 and accompanying text. To confirm a point made above, although the preliminary injunction against the Reporting Rules and these deadlines issued in TTCS were set aside by the U.S. Supreme Court, there remains in place as of this writing the similar injunction issued in Smith. ↑
Since December 3, 2024, and the issuance of the TTCS preliminary injunction, FinCEN has permitted voluntary filings of initial and updated BOIRs. ↑
See Houston et al., supra note 2, at n.21 and accompanying text. ↑
Alert: Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) [Updated January 2, 2025]
On Tuesday, December 3, 2024, in the case of Texas Top Cop Shop, Inc., et al. v. Garland, et al., No. 4:24-cv-00478 (E.D. Tex.), the U.S. District Court for the Eastern District of Texas, Sherman Division, issued an order granting a nationwide preliminary injunction. The Department of Justice, on behalf of the Department of the Treasury (Treasury), filed a Notice of Appeal on December 5, 2024 and separately sought a stay of the injunction pending that appeal. . . . On December 31, 2024, the Department of Justice, on behalf of Treasury, sought a stay of the injunction pending the ongoing appeal from the Supreme Court of the United States. In the meantime, as of December 26, 2024, the injunction issued by the district court in Texas Top Cop Shop, Inc. is once again in effect. FinCEN is complying with—and will continue to comply with—the district court’s order for as long as it remains in effect. As a result, reporting companies are not currently required to file beneficial ownership information with FinCEN. Reporting companies may continue to voluntarily submit beneficial ownership information reports.
Other Updates
Texas Top Cop Shop, Inc. is only one of several cases that have challenged the Corporate Transparency Act (CTA) pending before courts around the country.
As noted in a separate alert, on March 1, 2024, [in the case of National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.),] the U.S. District Court for the Northern District of Alabama, Northeastern Division, entered a final declaratory judgment, concluding that the CTA exceeds the Constitution’s limits on Congress’s power and enjoining Treasury from enforcing the CTA against the plaintiffs. As a result, the government, even in the absence of an injunction, is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024).
However, since March 2024, other district courts have denied requests to enjoin the CTA, ruling in favor of Treasury—in particular:
On April 29, 2024, in Small Business Association of Michigan, et al. v. Yellen, et al., No. 1:24-cv-314 (W.D. Mich.), the U.S. District Court of the Western District of Michigan, denied a motion for a preliminary injunction.
On September 20, 2024, in Firestone, et al. v. Yellen, et al., No. 3:24-cv-01034 (D. Or.), the U.S. District Court for the District of Oregon also declined to issue a preliminary injunction on behalf of plaintiffs—seven individuals—challenging the constitutionality of the CTA. In denying plaintiffs’ motion, the district court found that plaintiffs had not shown a likelihood of success on the merits with respect to their claims that the CTA exceeds Congress’ authority under the Constitution and violates the First, Fourth, Fifth, Eighth, Ninth, and Tenth Amendments. In its opinion and order, the district court noted that enjoining enforcement of the CTA “would interfere with Congress’ judgment, supported by extensive factual findings, about how best to combat money laundering, the financing of terrorism, tax fraud, and other serious crimes that affect the national economy or national security.” Plaintiffs have appealed the court’s decision, and that appeal is pending before the Ninth Circuit.
On October 24, 2024, in Community Associations Institute, et al. v. Yellen, et al., No. 1:24-cv-01597 (E.D. Va.), the U.S. District Court for the Eastern District of Virginia likewise denied a motion by plaintiffs, including an organization that represents community associations throughout the country, for a preliminary injunction. In doing so, the district court found that plaintiffs were unlikely to succeed on their claims that (1) Congress overstepped the outer bounds of its commerce power in enacting the CTA; (2) the CTA violates the First and Fourth Amendments; and (3) the statutory exemptions in the CTA relieve community associations of the obligation to report beneficial ownership information. Plaintiffs have appealed the court’s decision, and that appeal is pending before the Fourth Circuit.
The government continues to believe—consistent with the orders issued by the U.S. District Courts for the District of Oregon and the Eastern District of Virginia— that the CTA is constitutional and will continue defending the law as necessary.
Fin. Crimes Enf’t Network, Alert, Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) (updated Jan. 2, 2025) [hereinafter Jan. 2 Alert]. ↑
See, e.g., 31 C.F.R. pt. 1010 (specifically, Use of FinCEN Identifiers for Reporting Beneficial Ownership Information of Entities, 88 Fed. Reg. 76,995 (Nov. 8, 2023) (RIN 1506-AB49); Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024, 88 Fed. Reg. 83,499 (Nov. 30, 2023) (RIN 1506-AB62); and Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59,498 (Sept. 30, 2022) (RIN 1506-AB49)). ↑
Heritage Foundation, Project 2025: Mandate for Leadership: The Conservative Promise 707–08 (2023) (“Congress should repeal the Corporate Transparency Act, and FinCEN should withdraw its poorly written and overbroad beneficial ownership reporting rule. Both are targeted at the smallest businesses in the U.S. (those with 20 or fewer employees) and will do nothing material to impede criminal finance. The FinCEN beneficial ownership reporting rule will impose costs exceeding $1 billion annually and is exceedingly poorly drafted. FinCEN itself estimates that more than 33 million businesses will be affected and that costs will be $547 million to $8.1 billion annually.” (citations omitted)). ↑
S. 100, 119th Cong. (2025). The bill text is not yet posted on Congress.gov, but it is assumed that it will be identical to the text of the bill submitted in the 118th Congress as S. 4297. See also Press Release, Coach Tommy Tuberville, Tuberville Reintroduces Legislation to Repeal Corporate Transparency Act. Protect Small Businesses (Jan. 15, 2025). In the House, parallel proposed legislation has been introduced by Rep. Davidson (R., Ohio). Press Release, Warren Davidson, Rep. Warren Davidson Re-Introduces the Repealing Big Brother Overreach Act (Jan. 15, 2025). In addition, legislation has been submitted to extend to 2025 the initial filing deadline for reporting companies created or first qualified before January 1, 2024. Protect Small Businesses from Excessive Paperwork Act of 2025, H.R. (not yet assigned), 119th Cong. (2025) (introduced by Rep. Zach Nunn (R., Iowa)); see also Tyson Fisher, Bipartisan Bill Seeks to Delay Beneficial Ownership Information Reporting Deadline, Land Line (Jan. 29, 2025). ↑
In a hearing to consider the nomination of Scott Bessent to be secretary of the Treasury, the following exchange occurred:
Question 55: The Corporate Transparency Act requires reporting of beneficial ownership information to prevent criminals from using businesses to conceal their identities and facilitate illicit activity like money laundering, sanctions evasion, and terrorist financing. The first Trump Administration strongly supported the Corporate Transparency Act, which requires many U.S. companies to report their true, or “beneficial,” owners to a confidential database housed at the U.S. Treasury, stating that the law would “assist law enforcement in detecting and preventing illicit activity such as terrorist financing and money laundering.” Now the Trump Administration is in charge of administering that database, including providing access to it for law enforcement and national security officials.
A. Do you see the Corporate Transparency Act as an important new tool for the U.S.’ ability to prevent terrorism and to follow the money that finances it?
B. Do you agree with the authors of Project 2025 that the Corporate Transparency Act should be repealed by Congress?
C. Will you work with Congress to make sure that the office responsible for maintaining the database, the Financial Crimes Enforcement Network (FinCEN), has sufficient staff, technology, and other necessary funding to make the most out of this new tool?
D. Absent such action by Congress, will you commit to fully implementing and enforcing the provisions of the Corporate Transparency Act?
E. Will you commit to retention of FinCEN’s beneficial ownership reporting rule?
Answer: I am committed to reviewing the regulatory implementation of the CTA to ensure that Treasury meets the law’s objective of combating illicit finance without unduly burdening small businesses as Congress directed. I also believe FinCEN should have the resources needed to fulfill its statutory responsibilities. As you know, the CTA has been enjoined by a federal court, so I think it would be premature for me to comment on any specific next steps until, if confirmed, I have the benefit of consulting with Treasury’s lawyers and we have more clarity from the courts.
See Jan. 2 Alert, supra note 30. It is interesting to note that the injunction in National Small Business United v. Yellen was raised in an amicus brief in the Texas Top Cop Shop Supreme Court litigation filed by National Small Business United’s attorney, former solicitor general Paul Clement, which argued that the lack of an emergency is evidenced by the fact that there has been no attempt to obtain emergency relief from the temporary injunction in that case. The brief states:
Either way, a petition for certiorari raising the question whether the CTA is constitutional appears heading this Court’s way—and it should arrive soon, as the Eleventh Circuit expedited its review for the very purpose of issuing a prompt decision.3 In these circumstances, by far the most sensible course is to preserve the preliminary injunction issued by the Eastern District of Texas until this Court can resolve a petition for certiorari arising out of the NSBA’s case in the Eleventh Circuit. The other option on the table—staying the injunction—would pave the way for the government to demand immediate compliance with the CTA even though this Court may declare that very statute unconstitutional on plenary review in a matter of months. It makes no sense for this Court to inflict the very irreparable disclosure-related injury that the CTA’s challengers are seeking to avoid before this Court can review the statute’s constitutionality in the usual course. That is particularly true given the asymmetric nature of the stakes. It would be virtually impossible to un-disclose vast quantities of private information to the federal government if the CTA’s unconstitutionality is eventually confirmed. By contrast, law-enforcement officials have been tackling money laundering for years without access to this information, and the federal government waited 27 months between promulgation of the rule and the initial January 1, 2025 deadline.
If the Eleventh Circuit issues a decision finding the CTA unconstitutional after the change in administration, and if the new administration does not file a petition for certiorari, that too would suggest that no emergency existed here in the first place. ↑
Postscript: As noted above, the analysis herein set forth was through noon on February 2, 2025. Be aware that on February 5 the government filed a Notice of Appeal in Smith, supra note 6 (Doc. No. 32). ↑
All members of the Business Law Section of the American Bar Association are encouraged to join the Committee on LLCs, Partnerships and Unincorporated Entities, and to then join its ListServ. The committee’s ListServ is active and is a go-to resource on matters involving the CTA, including the litigation challenging its constitutionality. ↑
In the fast-paced world of modern law, new technology is constantly emerging, vying for our attention both professionally and personally. From breakthrough software to rapid advancements in artificial intelligence, we are inundated with news of innovation. This was not always the case. A decade ago there were only a few dozen legal technology providers. Today there are literally thousands of legal technology tools out there, with new ones launching weekly. While change unfolds at a breathtaking rate, it is crucial to discern valuable developments from mere hype—deciphering the genuine signals from the incessant noise.
Lawyers take great pride in meticulous craftsmanship. Delivering high-quality, effective service in a timely manner is not merely a goal; it is essential. Today, there is an increasing expectation that such services are also provided in an efficient manner and, in some cases, along with a better client experience. To meet and exceed these standards, law firms are compelled to stay on top of technological advancements. Not only do clients increasingly expect it, but it is also an important factor for attracting and retaining the best talent. A firm falling behind on tech adoption risks obsolescence, as competitors are quick to leverage new tools to gain an advantage.
Yet, key questions remain: Which tech tools genuinely enhance legal practice, and which ones fit for a particular purpose? Identifying the right tools for your firm requires understanding how they integrate with existing practices, gauging the opinions of fellow lawyers, and weighing the costs involved. The corresponding change management lift should also be assessed and not underestimated—spend without an adoption plan often results in failed innovation, regardless of how magnificent the tech might be. These considerations are essential for making informed decisions.
To help legal professionals with these challenges, the Technology in M&A Subcommittee of the American Bar Association Business Law Section’s Mergers and Acquisitions Committee has stepped forward. Our members have been actively exploring ways to facilitate a better understanding of available technology for lawyers. Our efforts have led to the release of an updated Directory of M&A Technology, which now boasts over 130 tools identified by committee members as helpful to the practice of M&A. This resource is designed to assist any M&A lawyer or firm, regardless of firm size or location, in the United States or around the world, by providing an unbiased compilation of the latest legal tech tools across a wide spectrum of categories, all accessible in one place.
In addition, our subcommittee is eager to identify which technologies are being adopted by M&A practitioners and to what extent. Which tools are proving beneficial, and which fall short? In what ways are these technologies being applied to M&A (and transactional) practice? To gather insights, we launched a brief survey, independent of any legal tech vendor, inviting feedback from ABA Business Law Section members. Your participation is invaluable. We urge you to share your experiences: What enhances your practice, what does not, and why? Please take a few minutes to complete the survey.
It is worth noting how technology has significantly altered law firm expenditure patterns. Not long ago, professional and staff compensation dominated budgets, followed by office space costs. That has changed. Technology now often ranks as the second-highest expense. Perhaps this shift underscores the diminished importance of physical office space, thanks in part to the rise of virtual firms and the adoption of remote work arrangements. Or perhaps it is another indication of the rising cost attributed to tech. Regardless, these trends further highlight the constant presence of technology in our professional lives.
Staying informed and making smart, cost-effective technology investments have never been more important. Your insights shared through this survey will help shape our use and understanding of legal tech. We eagerly anticipate sharing the results and providing future updates to the directory.
Authors: W. Ian Palm, Scott Jablonski, Steve Obenski and Daniel Rosenberg.
Additional ABA Technology in M&A Subcommittee Directory of M&A Technologies Working Group members: Thomas Romer, Will Norton, and Evy Marques.
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