When an insured is pursuing a representation and warranty insurance (“RWI”) claim, a critical consideration is whether diminution in value damages (“DIV Damages”) can be asserted as Loss covered by the RWI policy.^[1] This article, being published in four parts, discusses Delaware mergers and acquisitions (“M&A”) damages law regarding DIV Damages and describes how an insured can pursue them as part of an RWI claim.

This is Part II of this article; it addresses the evolution of cases involving DIV Damages calculated using a discounted cash flow methodology (“DCF Methodology”) under Delaware M&A damages law. Part I of this article addressed (i) the principal differences between DIV Damages calculated using a multiple of EBITDA methodology (“MOE Methodology”) and DIV Damages calculated using a DCF Methodology and (ii) the evolution of cases involving DIV Damages calculated using an MOE Methodology under Delaware M&A damages law. Part III of this article will discuss the requirements for a DIV Damages award as part of an RWI claim. Part IV of this article will discuss the limitations on, and other matters regarding, a DIV Damages award as part of an RWI claim.

Each part of this article contains practice tips for attorneys for insureds seeking recovery of DIV Damages as part of an RWI claim.

Calculating DIV Damages Using a DCF Methodology Rather Than an MOE Methodology

Several different situations exist in which DIV Damages calculated using a DCF Methodology may be preferable to, or even required instead of, DIV Damages calculated using an MOE Methodology. These principally include the following:

• when the buyer used a DCF Methodology to calculate the purchase price it offered or paid for the target business
• when the buyer is trying to claim the loss of future profits, including future synergistic profits, of the target business through DIV Damages
• when the revenues or expenses impacted by the R&W Breach (or by the fraudulent misrepresentation or deceit, in the case of noncontractual representations^[2]) were not reflected in the Measurement Period EBITDA but were reflected in the projected financial results of the target business

A discounted cash flow methodology^[3] can also be used to calculate damages in other scenarios, such as (i) when a prospective seller jilts a prospective buyer by breaching one or more of its binding covenants in a letter of intent or an Acquisition Agreement, or (ii) when a prospective joint venturer or joint development party jilts its prospective counterparty by breaching one or more of its binding covenants in a letter of intent or a joint venture agreement or joint development agreement. However, in those scenarios, the discounted cash flow methodology is being used to calculate the jilted buyer’s or jilted counterparty’s damages in the form of lost anticipated profits resulting from such breach or breaches rather than DIV Damages, and RWI coverage is not implicated because of the absence of an R&W Breach covered by an RWI policy.^[4]

While there are differences between DIV Damages calculated using a DCF Methodology versus those calculated using an MOE Methodology, it is still important for attorneys for an insured that is pursuing DIV Damages calculated using either methodology to be familiar with the case law involving the other methodology.^[5]

Evolution of Cases Involving DIV Damages Calculated Using a DCF Methodology Under Delaware M&A Damages Law

The Case That Began the Line: Tam v. Spitzer

The seminal case involving DIV Damages calculated using a DCF Methodology under Delaware M&A damages law is the 1995 Delaware Chancery Court case of Tam v. Spitzer.^[6] Tam involved the sale of the assets of a business known as Data Works, a data processing company owned by Lisa A. Spitzer, to Tam Management, Inc., a corporation owned by Coretta C. Tam, for a purchase price of $103,500. The purchase price was calculated by Tam’s accountant, Robert L. Siegfried Jr., using a DCF Methodology and certain valuation data.^[7]

After finding that Spitzer had committed fraud with respect to the sale of Data Works to Tam by failing to disclose the erosion of the business and the impending loss of Data Works’ largest customer, St. Francis Hospital, Vice Chancellor Jacobs awarded Tam DIV Damages of $45,290, based on the difference between (i) the valuation of the Data Works business as represented to Tam, in the form of the purchase price paid by Tam to acquire the assets of the target business, and (ii) the valuation of the Data Works business without St. Francis Hospital as a customer, with the valuation in each case calculated using the same DCF Methodology and valuation data that Siegfried had used in calculating the purchase price paid by Tam for the target business, but excluding the St. Francis Hospital business in the latter calculation.^[8]

In support of the award of DIV Damages to Tam, Vice Chancellor Jacobs made a number of factual and legal findings, including the following:

• Tam was entitled to “damages measured by the ‘benefit of the bargain,’ i.e., the difference between the actual and the represented values of the object of the transaction.”^[9]
• “The only credible valuation of Data Works without St. Francis is that of Siegfried, who employed the same discounted cash flow methodology and valuation data he had previously used to arrive at the 1991 purchase price, but then deducted the revenue and expenses attributable to St. Francis. By that method, Siegfried arrived at an adjusted value for Data Works of $58,210.”^[10]
• “Spitzer offer[ed] no independent, alternative valuation of her own. Instead, she rest[ed] upon her challenges to certain of Siegfried’s valuation assumptions.”^[11]
• “Because Spitzer has offered no credible alternative to the valuation performed by Siegfried, and has not demonstrated that Siegfried’s valuation assumptions were either unreasonable or erroneous as a matter of law, I accept Siegfried’s valuation of $58,210 as the actual value of Data Works at the time of the sale to Tam. Because Tam overpaid for Data Works by $45,290 ($103,500 – $58,210), the $103,500 purchase price must be downwardly adjusted by that amount, to $58,210.”^[12]

Tam continues to stand as the preeminent Delaware M&A damages law case involving an award of DIV Damages calculated using a DCF Methodology.^[13]

The Case That Was Reversed on Other Grounds: S.C. Johnson v. DowBrands

A Delaware M&A damages law case involving DIV Damages calculated using a DCF Methodology and relying on Tam is the 2003 U.S. District Court for the District of Delaware case of S.C. Johnson & Son, Inc. v. DowBrands, Inc.^[14] S.C. Johnson involved the sale by DowBrands of a home products business (principally, plastic bags and wraps) to S.C. Johnson for an aggregate purchase price of $1.125 billion, which was calculated using a DCF Methodology.^[15] Judge Farnan held that (i) DowBrands had committed fraudulent misrepresentation with respect to diversion to the United States of Latin American revenues of the target business, notwithstanding (a) the inclusion in the Acquisition Agreement of an independent review provision with respect to S.C. Johnson’s due diligence of the target business and (b) DowBrands’ contentions with respect to S.C. Johnson’s lack of reasonable reliance on DowBrands’ purported noncontractual representations regarding such diversion; and (ii) as a result, S.C. Johnson was entitled to DIV Damages in the form of the difference between (a) the value of the target business as represented to S.C. Johnson, in the form of the purchase price it paid to acquire the target business, and (b) the value of the target business after “backing out” the value of the Latin American portion of the target business.^[16]

However, the U.S. Court of Appeals for the Third Circuit reversed Judge Farnan’s holding of justifiable reliance by S.C. Johnson on DowBrands’ purported noncontractual representations with respect to the Latin American portion of the target business, thereby reversing the holding that DowBrands had committed fraudulent misrepresentation with respect to the Latin American portion of the target business.^[17] As a result, Judge Farnan’s holding with respect to DIV Damages was rendered inapplicable.

Because the Third Circuit’s reversal of Judge Farnan’s fraudulent misrepresentation holding in S.C. Johnson means that his DIV Damages holding has no precedential import, S.C. Johnson may be overlooked in the line of cases beginning with Tam. Nevertheless, Judge Farnan’s factual and legal findings with respect to DIV Damages calculated using a DCF Methodology are still instructive for practitioners evaluating an RWI claim including such DIV Damages. Among such findings were the following:

• “[S.C. Johnson] was harmed as a result of DowBrands’ misrepresentations regarding the profitability of the Latin American business, and therefore, is entitled to the benefit of its bargain. . . . The . . . most commonly accepted measure [of damages for fraud or deceit under Delaware law] is the benefit of the bargain rule, [u]nder [which] the plaintiff recovers the difference between the actual and represented values of the object of the transaction.”^[18]
• S.C. Johnson calculated its damages by using the same DCF Methodology it had used in preparing its final bid for the target business, to arrive at a $23.6 million figure for the Latin American portion of the target business lost due to DowBrands’ fraudulent misrepresentations.^[19]
• However, because S.C. Johnson’s final bid of $1.125 billion was only 93 percent of the $1.2 billion valuation of the target business that S.C. Johnson had calculated in preparing its final bid, Judge Farnan proportionately reduced S.C. Johnson’s $23.6 million figure to $21.948 million as its DIV Damages (in other words, Judge Farnan proportionately reduced the DIV Damages award to correspond to the purchase price that S.C. Johnson paid DowBrands for the entire target business).^[20]
• The fact that S.C. Johnson did not make any sales of the target business products in Latin America in the five months, and sold less than $1 million of plastic bags and wraps in the seventeen months, after the Acquisition was considered persuasive evidence of the effect of diversion on the Latin American portion of the target business.^[21]
• None of the following contentions by DowBrands merited a reduction of the DIV Damages award to S.C. Johnson:
  • S.C. Johnson had “improperly assumed that the diverted sales were worth nothing at all”
  • S.C. Johnson would not have reduced its bid for the target business by $23.6 million had it known of the diversion because its bid already was $63.4 million below its calculated valuation for the entire target business and because the purchase price that S.C. Johnson paid was within the range of purchase prices authorized by its board of directors
  • the overall target business sales and operating profit reported in the first full calendar year after the Acquisition were $45 million and $14 million, respectively, above what S.C. Johnson had anticipated.^[22]

In summary, while the Third Circuit’s reversal of Judge Farnan’s holding regarding fraudulent misrepresentation rendered his DIV Damages holding of no precedential import, his findings described above may still be instructive to an insured that is evaluating the assertion of DIV Damages as part of an RWI claim, particularly if calculated using a DCF Methodology.

The Case in Which the Buyer’s Assertion of Synergistic Losses Was Rejected: NetApp v. Cinelli

This brings us to the 2023 Delaware Chancery Court case of NetApp, Inc. v. Cinelli.^[23] NetApp involved the sale by Albert E. Cinelli and other equity holders of Cloud Jumper, LLC, a company that provided virtual desktop infrastructure, storage, and data management across cloud-based programs, to NetApp, Inc., for a purchase price of $35 million.^[24]

After holding that the target Cloud Jumper had committed R&W Breaches and fraud with respect to a number of representations and warranties in the Acquisition Agreement, centered around Cloud Jumper’s failure to disclose that it had been recording internal software transactions as if they were sales to unrelated external customers, Vice Chancellor Will devoted the remainder of her opinion in NetApp to the appropriate measure and quantification of damages to NetApp with respect to the R&W Breaches and fraud.^[25]

Both NetApp and Cinelli proposed an award of DIV Damages based on the difference between the value of Cloud Jumper as represented and the value of Cloud Jumper after giving effect to the R&W Breaches and fraud. What makes the NetApp case unusual and therefore significant is that the buyer NetApp chose not to treat the purchase price it had paid to acquire Cloud Jumper as the value of Cloud Jumper as represented,^[26] but instead chose to treat a DCF Methodology valuation of the future synergistic value to NetApp of Cloud Jumper as the value of Cloud Jumper as represented.^[27] In essence, NetApp was contending that Cloud Jumper was worth more to NetApp than the purchase price NetApp paid to acquire Cloud Jumper because of the synergies that NetApp anticipated achieving in the future operation of Cloud Jumper as part of NetApp (discounted to present value by the application of a discount factor).

It is important to note that Vice Chancellor Will did not simply reject out of hand NetApp’s assertion that Cloud Jumper was worth more to NetApp than it had paid to acquire Cloud Jumper because of such synergies. Instead, Vice Chancellor Will found that NetApp’s synergistic DCF Methodology valuation of Cloud Jumper did not satisfy applicable Delaware M&A damages law, both because (i) the valuation was speculative, and thus did not meet the certainty limitation of applicable law,^[28] and because (ii) the loss of synergies that NetApp was asserting was not the proximate result of the R&W Breaches and fraud committed by Cloud Jumper, at least not in its entirety.^[29]

After rejecting NetApp’s assertion of synergistic DIV Damages of $37.7 million calculated using a DCF Methodology, Vice Chancellor Will did award NetApp DIV Damages of approximately $4.6 million, based on the difference between (i) the purchase price paid by NetApp to acquire Cloud Jumper, treating that as the as-represented value of Cloud Jumper, and (ii) the defendants’ expert’s calculation of the actual value of Cloud Jumper using a multiple of revenues methodology derived from guideline comparable public companies’ stock values and reported revenues.^[30]

NetApp continues to stand as the preeminent case under Delaware M&A damages law rejecting an assertion of lost synergies as DIV Damages.

Practice Tips for Attorneys for Insureds

In the policy arrangement and negotiation phase, consider the following:

• Ensure that “diminution in value,” “multiple of EBITDA,” “multiplier damages,” “lost profits,” or the like are not excluded by the definition of Loss in the policy or in an exclusion to the policy (whether or not set forth in the “Exclusions” clause of the policy).
• Ensure that any provision in the Acquisition Agreement that purports to disclaim or waive “diminution in value,” “multiple of EBITDA,” “multiplier damages,” ”lost profits,” or the like, or “consequential” or “indirect” damages or the like, is excluded from application under the policy (for example, as “Limitation Provisions” to be disregarded for purposes of the policy).
• Try to ensure that the mitigation provision of the policy only requires “mitigation to the extent required by law” or the like, and that reasonable costs and expenses incurred in pursuing mitigation efforts are treated as Loss under the policy.^[31]

This article is the second in the RWI Practice Insights series by John T. Capetta.

1. This article focuses on buyer-side RWI policies and U.S. law (principally Delaware case law). For purposes of this article:

   • DIV Damages are a form of expectation damages in which the amount of the damages is the difference between (i) the value of the target business as represented to the buyer, almost always the purchase price paid for the target business by the buyer, and (ii) the value of the target business after giving effect to the diminution in the target business resulting from a breach of the Acquisition Agreement representations and warranties (“R&W Breach”) or from fraudulent misrepresentation or deceit regarding the target business.
   • Although there are other methods to calculate DIV Damages, this article focuses on those calculated by using either (i) in the case of a multiple of EBITDA methodology (“MOE Methodology”), (a) an actual or deemed shortfall in the EBITDA of the target business for a specified measurement period (“Measurement Period EBITDA”) caused by the R&W Breach or the fraudulent misrepresentation or deceit, times (b) the multiple applied by the insured to the Measurement Period EBITDA in determining the purchase price to pay for the target business; or (ii) in the case of a discounted cash flow methodology (“DCF Methodology”), the loss of future cash flows and of terminal value over a specified period caused by the R&W Breach or the fraudulent misrepresentation or deceit, discounted to present value by the application of a discount factor.
   • As used in this article:
     • the term Loss has the definition set forth in the RWI policy;
     • the term Acquisition Agreement includes stock purchase agreements, merger agreements, asset purchase agreements, and other types of business combination agreements by which a buyer acquires a target business from a seller;
     • the term Acquisition refers to the business combination contemplated by the Acquisition Agreement;
     • the term the buyer and the term the insured are often used interchangeably;
     • the term target and the term target business are used interchangeably;
     • the term R&W Breach also includes a claim under an RWI policy with respect to a tax indemnification provision in the Acquisition Agreement; and
     • the phrase without required disclosure by the seller refers to a failure by the seller to make a disclosure to the buyer even though required to do so by a representation and warranty in the Acquisition Agreement.

   ↑

2. At least two of the leading Delaware M&A damages law cases involving DIV Damages calculated using a DCF Methodology concerned a holding of fraudulent misrepresentation or deceit with respect to noncontractual representations regarding the target business, with the court also holding that no breach of representation or warranty in the Acquisition Agreement had occurred relevant to DIV Damages. Although the M&A damages case law regarding DIV Damages applies to either a breach of representation and warranty in the Acquisition Agreement or to fraudulent misrepresentation or deceit with respect to a noncontractual representation regarding the target business, an RWI claim can only be made with respect to an R&W Breach covered by the RWI policy. ↑

3. The phrase “discounted cash flow methodology” is used here and subsequently in this Part II rather than the defined term “DCF Methodology” to differentiate the use of that methodology to calculate damages in contexts not involving the calculation of DIV Damages, such as the calculation of lost anticipated profits. ↑

4. This distinction between DIV Damages and lost profits damages can be critical in a situation in which the Acquisition Agreement contains a waiver by the buyer of “lost profits” or “consequential or indirect damages.” See, e.g., Powers v. Stanley Black & Decker, Inc., 137 F. Supp. 3d 358, 385–86 (S.D.N.Y. 2015) (under New York M&A damages law, DIV Damages are not “lost profits” or “consequential or indirect damages”). Note, however, if such a waiver is not applicable to recovery under an RWI policy, and the policy itself does not exclude such damages, this distinction may not be relevant to the insured. ↑

5. For example, as will be discussed in Part III and Part IV of this article, the requirements for and the limitations on DIV Damages are addressed in cases under Delaware M&A damages law involving DIV Damages calculated using either type of methodology, MOE or DCF. ↑

6. Tam v. Spitzer, No. 12538, 1995 WL 510043 (Del. Ch. Aug. 17, 1995). ↑

7. Id. at *12. ↑

8. Id. Forensic accountants often refer to this as running the DCF analysis “with” and “without” the revenues or expenses in question to ascertain the difference. ↑

9. Id. (citations omitted). ↑

10. Id. ↑

11. Id. ↑

12. Id. ↑

13. For an example of a recent case involving the use of a DCF Methodology to calculate DIV Damages, see Surf’s Up Legacy Partners, LLC v. Virgin Fest, LLC, No. N19C-11-092, 2024 WL 1596021 (Del. Super. Ct. Apr. 12, 2024). ↑

14. S.C. Johnson & Son, Inc. v. DowBrands, Inc., 294 F. Supp. 2d 568 (D. Del. 2003), rev’d on other grounds, 111 F. App’x 100 (3d Cir. 2004). ↑

15. S.C. Johnson, 294 F. Supp. 2d at 576–77, 594. ↑

16. Id. at 577. ↑

17. S.C. Johnson, 111 F. App’x 100, 108–10. ↑

18. S.C. Johnson, 294 F. Supp. 2d at 593–94 (citations omitted). ↑

19. Id. at 594. ↑

20. Id. at 595–96. ↑

21. Id. at 588. ↑

22. Id. at 594–95. ↑

23. NetApp, Inc. v. Cinelli, No. 2020-1000, 2023 WL 4925910 (Del. Ch. Aug. 2, 2023). ↑

24. Id. at *1, *5. The NetApp opinion did not identify one specific methodology by which the purchase price was calculated. ↑

25. Id. at *17. ↑

26. Id. Indeed, the buyer NetApp unsuccessfully argued that using the purchase price it paid to acquire Cloud Jumper as the as-represented value of Cloud Jumper would only measure NetApp’s out-of-pocket damages, not its expectation damages. Id. ↑

27. Id. at *17, *21. ↑

28. Id. at *23–26. ↑

29. Id. at *26–27. ↑

30. Id. at *29. Because Cloud Jumper was not profitable, an MOE Methodology could not be used. ↑

31. It is a judgment call whether or not to try to expressly include in the RWI policy’s mitigation provision the treatment of costs and expenses incurred in unsuccessfully attempting to mitigate losses as Loss covered by the policy. Particularly if applicable law may allow for the recovery of such costs and expenses, discretion may be the better part of valor in resisting trying for such an express inclusion since it may only cause the RWI carrier or its counsel to expressly exclude such costs and expenses. ↑

Editors

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Contributors

Introduction

This year we have seen notable updates to trade secret and employee mobility laws, with a continued trend toward limiting noncompete agreements and expanding legislative efforts to regulate restrictive covenants across various industries. These changes highlight the ongoing development of trade secret and restrictive covenants laws in response to the continued shift towards a globalized market. To that end, 2024 saw updates to trade secret laws addressing key issues impacting the use of restrictive covenants with respect to healthcare professionals. While Rhode Island banned noncompete agreements for advanced practice registered nurses, other states clarified the enforcement of restrictive covenants in this industry.

Updates in this area have clarified the parameters of trade secret protection, particularly concerning the interstate application of state noncompete laws and the Federal Trade Commission’s April 2024 Final Rule. Various Circuits and courts have declined to uniformly restrict noncompete agreements, instead issuing rulings that reinforce state-specific approaches to enforceability, choice-of-law provisions, and geographic limitations.

As businesses navigate the increasing complexities of the marketplace, the evolving framework for trade secrets and employee mobility laws provides critical guidance for businesses in safeguarding their valuable assets. This Trade Secrets and Employee Mobility chapter provides an overview of the key developments for 2024, highlighting the implications for businesses and practitioners.

First Circuit

In 2024, two notable cases came out of the First Circuit. The first case resulted in the largest trade secret verdict to date under the Defend Trade Secrets Act (DTSA). The second case challenged California’s authority to invalidate noncompete agreements signed outside the state. On the legislative front, Rhode Island banned noncompete agreements for advanced practice registered nurses (see R.I. Gen. Laws § 5-34-50). However, the governor vetoed a bill that would have prohibited all noncompete agreements. Similarly, Maine’s governor vetoed legislation that would have significantly restricted the use of noncompete agreements.

In Insulet Corp. v EOFlow, Co. Ltd., No. 23-11780-FDS (D. Mass. 2024), a Massachusetts jury awarded $452 million in damages to Insulet in a trade secret misappropriation case. Insulet is the maker of a wearable insulin pump called OmniPod. In 2017, six employees left to join EOFlow, a maker of wearable drug delivery systems. EOFlow’s competing product, EOPatch 2, was released in South Korea in 2019, and Europe in 2022. Insulet inspected the EOPatch 2 in February 2023, concluded that its trade secrets related to OmniPod’s design history, CAD files, and occlusion detection algorithms were misappropriated, and promptly filed suit against its former employees and EOFlow.

Insulet faced a significant statute of limitations hurdle. In 2018, Insulet attended a conference where the EOPatch 2 was demonstrated. However, the jury found that the limitations clock did not start ticking until Insulet inspected the device in 2023.

The damages award is also notable for two reasons other than its dollar amount. First, it demonstrates the ability under the DTSA to recover damages based on sales of infringing products outside of the U.S. when “an act in furtherance” of misappropriation occurs in the U.S. Second, the jury was asked to provide an advisory opinion on the amount of punitive damages that should be awarded for willful and malicious misappropriation. While the decision to award punitive damages and their amount is often reserved for the judge, juries are increasingly being asked to provide advisory opinions on these matters.

California law’s ability to invalidate a noncompete agreement negotiated, performed, and governed by the law of another state was tested for the first time in Draft Kings, Inc. v. Hermalyn, 118 F. 4th 416 (1st Cir. 2024). Hermalyn, a DraftKings, Inc. executive, left for a similar position with rival Fanatics, Inc. that required him to live and work in Los Angeles. The Massachusetts federal district court found Hermalyn’s noncompete agreement with DraftKings was enforceable under Massachusetts law (the agreement had a Massachusetts choice of law provision) and enjoined him from competing against DraftKings. Hermalyn appealed, arguing that California law should apply because he had become a California resident. Unlike Massachusetts law, California bans noncompetes “regardless of where the contract with signed” and “whether . . . the employment was maintained outside of California.” See Cal. Bus. & Prof. Code §16600.5(a), (b). If applicable, California law would have invalidated Hermalyn’s noncompete. The First Circuit Court of Appeals affirmed the application of Massachusetts law, concluding that California did not have a materially greater interest in pursuing its noncompete public policy. This case raises questions about whether simply relocating an employee to California can effectively invalidate an otherwise enforceable noncompete agreement executed outside of California.

Second Circuit

In 2024, the Second Circuit did not significantly change how courts address noncompete and trade secret litigation. However, three New York cases stood out.

New York

Restrictive Covenants

Spotlight Ticket Management, Inc., et al. v. James Daigle, No. 23-CV-10035 (JPO), 2024 WL 3966900 (S.D.N.Y. Aug. 28, 2024). Spotlight Ticket Management (“Spotlight”) and SSSI Acquisition, Inc. (“SSSI”) sued James Daigle (“Daigle”), a former Spotlight employee, for breach of contract, breach of the implied warranty of good faith and fair dealing, and tortious interference with prospective business relations based on Daigle’s alleged violations of restrictive covenants that were part of a sale of business as well as an employee separation agreement. The Court granted in part and denied in part Daigle’s motion to dismiss. The Court reasoned that Daigle incorrectly interpreted BDO Seidman v. Hirschberg, 93 N.Y.2d 382 (1999) to “impose an affirmative pleading requirement, insisting that a plaintiff seeking to enforce a restrictive covenant ‘plead[ ] . . . an absence of overreaching [or] coercive use of dominant bargaining power[,] or show that it has in good faith sought to protect a legitimate business interest’ when BDO Seidman imposes no such rule.” (internal citation omitted).

Non-Recruitment Clause

St. Joseph’s Hospital Health Center v. American Anesthesiology of Syracuse, P.C., et al., No. 5:24-CV-276 (BKS/ML), 2024 WL 4930688 (N.D.N.Y. Dec. 2, 2024). St. Joseph’s Hospital Health Center (“St. Joseph’s”) sued American Anesthesiology of Syracuse, P.C., American Anesthesiology, Inc., NMSC II, LLC, and North American Partners in Anesthesiology, L.L.P. (collectively “NAPA”), asserting antitrust claims under the Sherman Act, 15 U.S.C. § 1 et seq. and the Donnelly Act, N.Y. Gen. Bus. Law § 340 as well as a breach of contract claim based on a non-recruitment clause in the parties’ business agreement. NAPA subsequently filed counterclaims alleging breach of contract, tortious interference with a contract, and claims for injunctive and declaratory relief. The Court granted in part and denied in part St. Joseph’s motion to dismiss counterclaims and denied NAPA’s partial motion to dismiss.

The Court explained that in the Second Circuit a “restrictive covenant preventing an employee from pursuing his livelihood” differs from an “anti-raiding provision in a commercial agreement between two sophisticated parties,” and that anti-raiding provisions/non-recruitment clauses are typically more reasonable. Omni Consulting Group, Inc. v. Pilgrim’s Pride Corp., 488 F. App’x 478, 480 (2d Cir. 2012). The Court concluded that the nonsolicitation clause at issue here posed a hardship and “[w]hether the non-solicitation clause at issue here was reasonable will rest ‘on the particular facts and circumstances giving context to the agreement.’” Reed Elsevier v. TransUnion Holding Co., Inc., No. 13-cv-8739, 2014 WL 97317, at *7, 2014 U.S. Dist. LEXIS 2640 (S.D.N.Y. Jan. 8, 2014) (quoting BDO Seidman).

Misappropriation of Trade Secrets

Rocket Pharmaceuticals., Inc. v. Lexeo Therapeutics, Inc., et al., No. 23-CV-9000, 2024 WL 3835264 (S.D.N.Y. Aug. 14, 2024). Rocket Pharmaceuticals, Inc. (“Rocket”) sued Lexeo Therapeutics, Inc. (“Lexeo”) and two employees that left Rocket to work at Lexeo. Rocket asserted trade secret misappropriation under the Defend Trade Secrets Act (“DTSA”), 18 U.S.C. § 1836(b)-(c), and New York law. Rocket also asserted breach of contract against the individuals, tortious interference with contractual relations against Lexeo, and unfair competition against all defendants. The Court denied Lexeo and the employees’ motion to dismiss. Although the Second Circuit has yet to define the required specificity for trade secret misappropriation claims, the Court found the complaint appropriately identified the purported trade secrets and related misappropriation by plausibly alleging the employees transferred thousands of emails and documents containing identified trade secrets to their personal computer, person email, and USB drives prior to leaving Rocket.

Third Circuit

Over the last year, the Third Circuit has seen two significant developments in the laws relating to employee mobility and restrictive covenants.

Beginning on January 1, 2025, Pennsylvania’s Fair Contracting for Health Care Practitioners Act went into effect. While limited in scope, the Act has a major impact: prohibiting most new noncompete covenants for “health care practitioners” after the Act’s effective date. As defined by the Act, covered “health care practitioners” includes medical doctors, osteopaths, certified registered nurse anesthetists, certified registered nurse practitioners, and physician assistants. However, the Act includes several exceptions, including most notably, a carveout allowing for enforcement of noncompete covenants covering health care practitioners so long as the noncompete does not last for more than one year and the health care practitioner was not fired by the employer.

Outside of the statutory realm, the Third Circuit saw a major decision regarding the enforceability of certain restrictive covenants. In January 2024, the Delaware Supreme Court issued its ruling in Cantor Fitzgerald, L.P. v. Ainslie, ultimately finding that “forfeiture for competition” clauses are enforceable. Cantor Fitzgerald, L.P. v. Ainslie, 312 A.3d 674, 692 (Del. 2024). The Court reasoned that such clauses are not actually a restraint of trade, and instead, they are actually a “condition precedent” which excuses the employer from future payment obligations. Cantor Fitzgerald, L.P., 312 A.3d at 687. The Court also noted that because forfeiture for competition clauses are not a restraint of trade, they do not need to meet Delaware’s regular standards for enforcing a restrictive covenant, which includes a review whether such restrictive covenants are “reasonable in geographic scope and temporal duration, advance legitimate economic interests of the party seeking enforcement, and survive a balancing of the equities.” Cantor Fitzgerald, L.P., 312 A.3d at 684.

Fourth Circuit

The Fourth Circuit has seen some developments relating to noncompetes in the last year. In 2023, Maryland prohibited noncompete and conflict of interest clauses in employment contracts for workers earning 150 percent or less of the minimum wage. In 2024, the state expanded these prohibitions through HB 1388, which targeted such provisions in employment contracts for licensed veterinary practitioners, veterinary technicians, and licensed health care professionals providing direct patient care. On June 1, 2024, the law voided any noncompete and conflict of interest provisions in employment contracts for licensed veterinary practitioners and technicians. Restrictions on such clauses for health care professionals providing direct patient care are divided by salary and apply to all contracts executed on or after July 1, 2025. These provisions will be unenforceable for such professionals earning salaries of $350,000 or less. For healthcare professionals earning salaries exceeding $350,000, these provisions will no longer be enforceable if they exceed one year from the last date of employment or have a geographic scope of greater than 10 miles from the professional’s primary place of employment. Finally, for healthcare professionals earning salaries exceeding $350,000, employers will be required to inform patients upon request of a former employee’s new place of practice.

The Fourth Circuit also had a notable case relating to the misappropriation of trade secrets. In Pegasystems Inc. v. Appian Corp., No. 1399-22-4 (July 30, 2024), a jury had found that Pegasystems, Inc. (“Pegasystems”) had used improper means to misappropriate trade secrets from Appian Corporation (“Appian”). The jury awarded over two billion dollars—the largest damages verdict in the history of the Commonwealth of Virginia. Pegasystems appealed, contending that as a matter of law, there was insufficient evidence that it had misappropriated any trade secrets. While the Court of Appeals of Virginia rejected Pegasystems’ argument that it was entitled to judgment as a matter of law, the appellate court found that “the trial court committed a series of errors that require [the court] to reverse the judgment as to Appian’s trade secret claims.” First, the appellate court noted that the trial court improperly instructed the jury as to Appian’s burden in demonstrating damages causation from the misappropriation by instructing the jury to apply a burden-shifting approach. This created a presumption that Appian’s trade secrets were the but-for cause of all of Pegasystems’ sales. Second, the appellate court found that the trial court erred in foreclosing Pegasystems from presenting its own damages evidence as to total sales, which was consequential given the burden-shifting instruction on damages. The appellate court concluded that this “exponentially increased the likelihood of a runaway damages verdict that had no correlation to proximate cause.” The appellate court remanded this matter for a new trial. While this case is under the Virginia Uniform Trade Secrets Act, it is instructive as to the use of jury instructions and evidentiary issues in trade secret cases.

Fifth Circuit

The Fifth Circuit was closely watched this past year for noncompete law because of the high-profile case Ryan, LLC v. Federal Trade Commission (FTC), No. 3:24-CV-00986 (N.D. Tex. Aug. 20, 2024). This case challenged the enforceability of the FTC’s April 2024 Final Rule, which sought to ban post-employment noncompete agreements nationwide. The U.S. District Court for the Northern District of Texas held that the FTC lacked statutory authority to promulgate such a rule and that the rule was arbitrary and capricious under the Administrative Procedure Act. The court enjoined enforcement of the Final Rule nationwide, but the FTC has appealed this ruling to the Fifth Circuit.

Two Louisiana Court of Appeal decisions provided further guidance on the enforceability of restrictive covenants in Louisiana. In Arthur J. Gallagher & Co. v. Annison, So.3d 1089 (La.App. 1 Cir., 2024), the court clarified that a prospective employee may sign a noncompete agreement if it expressly contains an effective date on or after the employee’s first day of work. In Brown & Root Industrial Services, LLC v. Farris, 392 So.3d 424 (La.App. 1 Cir., 2024), the court held that a nonsolicitation of employees provision is not subject to the Louisiana noncompete statute but must be reasonable in duration and scope to be enforceable. The court concluded that the nonsolicitation of employees covenant at issue was unenforceable because it lacked any durational limit.

Louisiana enacted new noncompete legislation (S.B. 165; Act 273, modifying La. Rev. Stat. § 23:921; eff. Jan. 1, 2025), which limits noncompetes for primary care physicians to three years from the effective date of the initial agreement and five years for all other physicians. Noncompetes also cannot exceed two years from the termination of employment and are limited to the parish of principal practice and two contiguous parishes where the employer carries on a similar business. Mississippi and Texas saw failed legislation that would have limited the use of noncompetes for healthcare providers and physicians, respectively, although the Texas legislation is expected to be reconsidered.

Two Texas federal district court cases showed the importance of secrecy efforts and ensuring clarity in settlement agreements to protect trade secrets. In Thompson Safety LLC v. Jones, No. 4:24-cv-2483 (S.D. Tex., Sept. 6, 2024) the court ruled against the plaintiff, a fire extinguisher servicing business, in its motion for a preliminary injunction. The court found that the alleged trade secrets, including pricing information and customer lists, were ascertainable through publicly available sources. Specifically, the customers freely disclosed prices they paid for plaintiff’s services, and the relationship between the plaintiff and customers must be disclosed on tags attached to fire extinguishers that the plaintiff installs or services. In MSHB Restaurant, LLC v. Nepal Business Investment, LLC, No. 4:24-cv-1973 (S.D. Tex., Nov. 15, 2024) the court allowed the plaintiff to amend its complaint to add a fraudulent concealment claim and denied the defendants’ motion to dismiss. The court found that the misappropriation of trade secrets claims were not time-barred because the alleged misappropriation occurred after a prior settlement agreement; thus there was no continuing misappropriation of settled claims. Additionally, the court rejected defendants’ argument that the settlement agreement’s broad release covered future claims, emphasizing that the agreement did not grant permission to use plaintiff’s trade secrets.

Sixth Circuit

Over the past year, the Sixth Circuit rendered notable verdicts pertaining to trade secret and employee noncompete statutes.

The Sixth Circuit recently addressed the interplay between the Ohio Uniform Trade Secrets Act (OUTSA) and breach of contract claims. A recurring issue of the Uniform Trade Secrets Act (UTSA) has been whether violations of the UTSA can be alleged alongside breach of contract claims or whether the UTSA preempts breach of contract claims, given that the statute is meant to provide an exclusive legal remedy for the misappropriation of trade secrets. In Metron Nutraceuticals, LLC. v. Cook, No. 23-3596, 2024 WL 3877388 (6th Cir. Aug. 20, 2024) the Sixth Circuit addressed this question when a nutritional supplement company sued defendants for both violating the OUTSA and breach of contract. The supplement company had developed a supplement, which it asserted to be a trade secret, then made various consultants sign a nondisclosure agreement before sharing details of the supplement with them. Metron alleged that one consultant, Cook, developed a product that appropriated its proprietary formula. The trial court dismissed the breach of contract claim on summary judgment because of preemption by OUTSA. But the Sixth Circuit reversed. The Sixth Circuit found that because the language of OUTSA allows for breach of contract remedies, it would be impractical and untenable for the statute to preempt breach of contract claims. The appellate court also took into consideration the primary aim of the UTSA as a means of creating consistency across states, and how the trial court’s interpretation would have made Ohio an outlier in this regard. The Sixth Circuit’s ruling reaffirmed the significance of breach of contract claims for protecting trade secrets.

Additionally, the Sixth Circuit made a long-awaited ruling upon the NLRB’s McLaren Macomb decision. Nat’l Lab. Rels. Bd. v. Macomb, No. 23-1335, 2024 WL 4240545 (6th Cir. Sept. 19, 2024). In June 2020, the McLaren Macomb hospital had furloughed 11 employees and directly discussed terms of severance agreements with them without first bargaining or consulting their union. While an Administrative Law Judge ruled that the broad confidentiality and nondisparagement provisions in these severance agreements were lawful, the NLRB ruled otherwise. The NLRB decided that nondisparagement clauses in severance agreements with nonsupervisory employees violate Section 7 of the National Labor Relations Act, which protects the right of employees to engage in concerted activity for their mutual aid and protection. The Sixth Circuit took up the review of the NLRB’s decision this year. The Sixth Circuit easily affirmed that the hospital’s actions were unlawful. But it decided this based on only violations of the employees’ Section 7 rights, without taking a stance on the pressing question of the case: the validity of the severance language itself. The Sixth Circuit did not resolve whether confidentiality and nondisparagement clauses in severance agreements are valid. This remains an uncertainty which employers will want to consider when drafting language in their severance agreements. The NLRB may continue to find broad confidentiality and nondisparagement clauses in severance agreements to nonsupervisory employees to be unlawful, given that the Sixth Circuit did not explicitly decide otherwise.

Seventh Circuit

Over the past year, the Seventh Circuit has seen expanded protections for employees against post-employment restrictive covenants through case law, as well as newly enacted laws. Illinois recently amended the Illinois Freedom to Work Act to include amendments that limit the enforceability of noncompetes and nonsolicits in specific industries. First, under Senate Bill 2737, noncompetes and nonsolicits for mental health professionals serving veterans and first responders are unenforceable if it “is likely to result in an increase in cost or difficulty for any veteran or first responder seeking mental health services.” Second, Senate Bill 2770 provides that noncompetes and nonsolicits are void with respect to individuals employed in construction, whether the individual is covered by a collective bargaining agreement or not. These amendments are effective as of January 1, 2025. Similarly, in 2023, Indiana enacted a law restricting the enforceability of both existing and future noncompetes for physicians that became effective July 1, 2023.

The Indiana Court of Appeals recently considered whether a former executive’s noncompete was enforceable where it prohibited her from working for any competitor in any capacity. In MED-1 Solutions, LLC. V. Taylor, No. 24A-PL-450, 2024 WL 4876906 (Ind. Ct. App. Nov. 25, 2024), the employer brought an action against a former COO alleging breach of the covenant not to compete. The noncompete agreement barred the former COO—in plain language, the court noted—from becoming employed in any role for a business that performs the same services as MED-1. The court rejected this language and found the covenant unenforceable because, inter alia, the scope of activity restricted was overly broad. Notably, the court emphasized, “We have found covenants not to compete prohibiting an employee from working for a competitor in any capacity or from competing with portions of the business with which the employee was never associated to be unreasonable because they extend beyond the scope of the employer’s legitimate interests.”

In Midwest Lending Corp v. Horton and PrimeLending Co. (220 N.E.3d 422, 468 Ill. Dec. 114), an Appellate Court of Illinois weighed in on the heavily litigated issue of what constitutes valid consideration for a post-employment restrictive covenant to be enforceable. In this case, the employer—Midwest—brought suit against a former employee for the breach of a confidentiality agreement and a nonsolicitation agreement. Midwest’s argument, inter alia, was that a pre-employment “signing bonus” constituted valid consideration for the nonsolicitation agreement. The court rejected this argument, finding that there was no consideration because the nonsolicitation agreement itself expressly limited the scope “to the subject matter hereof” instead of expressly mentioning and identifying the pre-employment payment as consideration.

In a recent case, Motorola Solutions, Inc. v. Hytera Communications Corporation Ltd, 108 F.4th 458 (7th Cir. July 2, 2024), the Seventh Circuit Court of Appeals held that the Defend Trade Secrets Act (“DTSA”) has extraterritorial reach and that the law applies to conduct occurring outside of the U.S. if “an act in furtherance of the offense was committed in the United States.” In this case, Motorola filed suit against Hytera, a Chinese competitor. Its claims, which included violations of the DTSA and the Illinois Trade Secrets Act, stemmed from Hytera’s hiring of multiple engineers from Motorola, who allegedly stole trade secrets and source code on their way out the door, and then used the stolen information and code to create competing products. At trial in the Northern District of Illinois, a jury awarded compensatory and punitive damages, which were subsequently reduced by the district court. Hytera appealed as to damages. The appellate court held, as a matter of first impression, that the DTSA does apply extraterritorially so long as “an act in furtherance of the offense was committed in the United States,” and allowed Motorola to recover Hytera’s foreign sales on that basis. In its ruling, the court noted that while an act in furtherance of the offense needed to be committed in the U.S. to allow for recovery of foreign sales, the act in furtherance need not be a “completed act of domestic misappropriation” and the rule did not “impose a specific causation requirement.”

Additionally, in My Fav Electronics, Inc. v. Currie, 24-c-1959, 2024 WL 4528330 (N.D. Ill. Oct. 18, 2024), a district court in Illinois complicated matters on the topic of whether inevitable disclosure relief is available under the DTSA. The inevitable disclosure doctrine seeks to protect trade secrets by providing a legal remedy—the court may prevent a former employee from working in a position where it is deemed inevitable that trade secrets from their previous employer will be revealed or used. In this case, the former employees joined a competitor, and strong evidence indicated the use of the previous company’s confidential information. The Court found that the inevitable disclosure doctrine supported granting a preliminary injunction on the defendant, even though the parties did not negotiate a noncompete agreement.

Eighth Circuit

Over the past year, the Eighth Circuit has seen expansion in statutory movements against noncompete and nonsolicitation laws. Yet, courts have stayed the course without rapidly increasing or decreasing the enforcement of such restrictive covenants.

In 2023, Iowa expanded its noncompete laws to cover mental health professionals. See Iowa Code § 135Q.1. In 2024, House File 2391, a bill proposing modifications of requirements for healthcare employment agencies, would have applied Iowa’s noncompete laws to health care technology platforms. Though it died in committee, the bill would have prohibited healthcare agencies that utilize technology platforms to deliver their services from restricting the employment opportunities of agency workers through noncompete clauses. H.F. 2391, 90th Gen. Assemb. (2024). In May 2024, Governor Walz of Minnesota approved S.F. 3852, which functions to ban service providers from restricting, restraining, or prohibiting customers from directly or indirectly soliciting or hiring an employee of the service provider. Minn. Stat. § 3852 (2024). The bill primarily targets staffing agencies and grants customers the ability to hire employees they were connected with through an agency.

There are a couple of interesting cases that have been decided in 2024. In Cigna Corp. v. Bricker, 103 F.4th 1336 (8th Cir. 2024), the Eighth Circuit took on the question of whether businesses can be deemed to be in competition if they are serving virtually the same customers but have separate business models. Bricker, an accomplished executive, changed teams when she moved from Cigna Corporation to CVS Pharmacy, Inc. in 2023. Id. at 1341. Cigna immediately moved to block her transition, as she had signed a noncompete agreement during her time at Cigna. Id. at 1342. The fight was centered on the question of whether Cigna and CVS could actually be considered business competitors—Cigna focuses on home-delivery of prescription medications while CVS is a brick-and-mortar pharmacy. Id. The Eighth Circuit ultimately upheld the noncompete agreement, finding that even though there may have been an attempt to distinguish the types of customers that both businesses serve, the customers they were competing for were in fact drawn from the same base. Id. at 1345.

In Constructors, Inc. v. Butler, No. 4:22-CV-3217, 2024 U.S. Dist. LEXIS 57432, at *13 (D. Neb. Mar. 29, 2024), the District of Nebraska dismissed a Racketeer Influenced and Corrupt Organizations Act (“RICO”) claim based on allegations of trade secret theft. Plaintiffs, Constructors, Inc. and NEBCO Inc., filed suit against Ted Butler, a former corporate officer, and his alleged accomplices, accusing them of misappropriating confidential information. Id. at *3–6. After resigning from his position, Butler allegedly took confidential documents and proprietary information from plaintiffs to assist in the establishment of a new company he joined after his resignation. Id. at *3. Plaintiffs claimed that defendants, leveraging the stolen information, engaged in a series of fraudulent activities to divert business away from plaintiffs, thereby breaching their fiduciary duties and stealing corporate opportunities. Id. at *3–6. The central focus of the motion to dismiss was the plaintiffs’ RICO claim, which alleged that the defendants’ actions—specifically the theft of trade secrets and other fraudulent schemes—constituted a racketeering activity. Id. at *11–12. The court found that the plaintiffs’ RICO claim lacked sufficient allegations of continuity. Id. at *11. RICO plaintiffs must demonstrate not just isolated instances of illegal conduct, but either (1) a continuous and ongoing pattern of criminal activity over time or (2) a pattern of related criminal activity that occurred over a period of time lasting at least one year. Id. at *11. While plaintiffs argued that the defendants’ repeated misuse of stolen trade secrets qualified as this pattern, the court disagreed. Rather, the court found that plaintiffs’ vague allegations amounted to isolated acts that did not constitute criminal racketeering activity, let alone a pattern of criminal racketeering activity. Id. at *12. As a result, the RICO claim was dismissed.

Ninth Circuit

Case law in the Ninth Circuit remains largely unchanged with respect to matters regarding employee mobility, restrictive covenants, and trade secrets. That said, there were two matters of first impression around the awarding of damages in trade secret cases that were addressed by courts in the Ninth Circuit during 2024:

In Applied Medical Distribution Corp. v. Jarrells, 100 Cal.App.5th 556 (2024), the California Court of Appeal for the Fourth District addressed whether a plaintiff may recover the costs of stopping or mitigating the misappropriation of trade secrets under the California Uniform Trade Secrets Act. There, the defendant objected at trial to the plaintiff’s damages expert’s inclusion of $80,000 in fees the Plaintiff paid to its forensic computer expert in the calculation of the plaintiff’s damages. The trial court sustained the objection on the ground that “expert fees traditionally and typically are not an item of damage that is recoverable in litigation, but rather, it’s a cost of the litigation, which may or may not be recoverable at the end of the case by the prevailing party.” Id. at 587.

The Court of Appeal noted that “[n]o California case addresses whether ‘actual loss caused by misappropriation’” under California’s UTSA “includes the cost of investigating trade secret misappropriation,” and that the UTSA’s permitting of “an award of costs to include fees paid to retained experts to prepare for or testify at trial after a ‘willful and malicious’ finding” was a “strong indication that the Legislature did not intend such fees to be awarded as ‘actual loss[es]’ caused by misappropriation” under the California UTSA.

Additionally, the Court noted that there was a nationwide split on whether expert fees are awardable as “actual loss” damages: “A number of courts in other jurisdictions, applying the Uniform Act, have drawn a distinction between expenses incurred to investigate a possible misappropriation and expenses incurred to stop or mitigate the misappropriation, and have held only the latter are recoverable damages.” By contrast, “[o]ther jurisdictions have held that any expenses incurred to investigate potential misappropriation are recoverable as ‘actual loss’ damages.” Id. at 588–99.

Ultimately, the Court of Appeals adopted the narrower interpretation and held that “a plaintiff may recover, as damages on a claim of misappropriation under the California UTSA, the costs of stopping or mitigating the misappropriation, but not the costs of investigating to determine whether and how any misappropriation occurred.” Id. at 590.

In EchoSpan, Inc. v. Medallia, Inc., 2024 WL 3431337 (N.D. Cal. July 2, 2024), the U.S. District Court for the Northern District of California addressed whether plaintiff must apportion damages among trade secrets. According to the Court, this was an issue on which “[t]he Ninth Circuit has not ruled.” There, following an 8-day trial, EchoSpan proved that Medallia misappropriated one of EchoSpan’s trade secrets and the jury awarded EchoSpan over $25 million. The issue was that EchoSpan had sued over nine separate trade secrets (two of which never went to the jury) and sought damages for them all as one group. The Court concluded that the jury could not distill damages for the whole group of nine down to one because EchoSpan had failed to apportion those damages. Consequently, the Court granted Medallia’s motion for judgment as a matter of law on damages.

In reaching this conclusion, the Northern District embraced the ruling in O2 Micro Int’l Ltd. v. Monolithic Power Sys., Inc., 399 F.Supp.2d 1064 (N.D. Cal, 2005), aff’d, 221 F.App’x 996 (Fed. Cir. 2007)—calling it “a near-perfect bullseye”—and distinguished the matter from Caudill Seed & Warehouse Co. v. Jarrow Formulas, Inc., 53 F.4th 368 (6th Cir. 2022) on the grounds that the evidence submitted fell “far short of the ‘options’ presented” to the jury there. Id. at *9.

Outside of damages, courts also addressed the application of statutes in Washington and Oregon to noncompete provisions in employment agreements:

In Culver v. 3M Company, 2024 WL 2279293 (W.D. Was. May 20, 2024), the U.S. District Court for the Western District of Washington concluded that amendments to RCW §49.62.080 that went into effect in June 2024 do not appear to apply retroactively.

In Isosceles Holdings, LLC v. Alliance Environmental Group, LLC, 2024 WL 279008 (D. Or. Jan. 25, 2024) the U.S. District Court for the District of Oregon held that ORS § 15.360 was not designed to override a choice of law provision and apply to make all noncompetition agreements voidable.

Beyond these matters, however, the applicable law remained relatively unchanged.

Tenth Circuit

The Governor of Colorado signed House Bill 24-1324, titled “Attorney General Restrictive Employment Agreements,” putting into place a law to toughen protections for employees who are subject to unreasonable contracts that require repayment to employers for education and training expenses upon termination of employment (Training Repayment Agreement Provisions, or “TRAPs”). The new law, effective as of August 7, 2024, attempts to curb potential abuses by employers who use TRAPs to exact repayments or employ penalties that are not reasonably tethered to the actual training expenses incurred by the employer. Potentials for abuse typically occur when an employer attempts to collect amounts in excess for the investment cost in training the employee, seeks repayment well after the training was completed, demands repayment where training provided did not result in transferrable skills to another employer (no actual certification for the employee), or imposes burdensome repayment terms. The new law expands upon previous restrictions in the state of Colorado for TRAPs and increases penalties for violating agreements. Specifically, the new bill considers TRAPs to be a “consumer credit sale” under Colorado Consumer Credit Code (which imposes specific requirements and enforcement mechanisms), grants the Attorney General enforcement authority and the ability to promulgate rules to implement and enforce the new bill, and provides recovery that may be three times the amount of the attempted recovery by the employer.

A court in the Tenth Circuit state of Oklahoma underscored that plaintiffs must provide clarity when asserting a trade secret claim in the case of Double Eagle Alloys, Inc. v. Michael Hooper; Ace Alloys, LLC, 19-cv-243-JDR-CDL (N.D. Okla. June 25, 2024). Here, plaintiff filed against a former employee and a competitor, alleging that the employee’s notes from his time working for plaintiff, as well as over 2,600 digitally downloaded files, constituted trade secrets. Although litigation lasted for over five years, the Northern District of Oklahoma ultimately dismissed plaintiff’s lawsuit, citing decisions from several circuits (including the 1st, 7th and 10th Circuits) to assert that vague, overly inclusive “catchall” language to describe what constitutes a trade secret did not evidence the need for afforded protections. The Oklahoma court further reasoned that the lack of specificity would allow plaintiffs to “shift[] the goalposts (or fail[] to define them)” during litigation and would render defendants ineffective, as the ability to defend becomes virtually unbounded. The case is now on appeal before the U.S. Court of Appeals for the Tenth Circuit, whose review may very well set the tone for how meticulous trade secret claims will need to be moving forward.

Eleventh Circuit

Employment and Noncompete Agreements

In 2023, the Eleventh Circuit affirmed a Georgia district court’s decision to “blue pencil,” i.e., judicially rewrite, a noncompetition agreement by altering its geographic scope. Baldwin v. Express Oil Change, LLC, 584 F. Supp. 3d 1253, 1266 (N.D. Ga. 2022) aff’d in relevant part and vacated in part, 87 F.4th 1292 (11th Cir. 2023). A year later, in Acousti, a Georgia district court refused to blue-pencil a seemingly comparable noncompete to alter its geographic scope, averring that it had “inadequate information about the scope of Acousti’s business,” and that doing so “would require rewriting the [n]on-[c]ompete [c]lause or supplying additional material terms,” which the court was unwilling to do. Acousti Engr. of Fla. v. Jernigan, No. 1:23-CV-02917-VMC, 2024 WL 4535279, at *6 (N.D. Ga. Aug. 27, 2024). The Acousti opinion is thus at least somewhat at odds with the broad language the Eleventh Circuit used in affirming Baldwin in 2023, where it emphasized that “Georgia common law bolsters our conclusion that the district court’s blue-pencil authority authorized it to reduce the geographic scope of the covenant.”

On the state side, the Georgia Supreme Court determined, in a landmark ruling, that restrictive covenants can be “geographically reasonable” within the meaning of the Georgia Restrictive Covenants Act (“GRCA”) without explicit geographic limitations. North American Senior Benefits, LLC v. Wimmer, 319 Ga. 641 (2024). Previously, Georgia courts had interpreted that requirement of the GRCA to mean that boundary-less restrictive employment covenants were inherently unreasonable. See, e.g., CarpetCare Multiservices v. Carle, 347 Ga. App. 497, 819 S.E.2d 894 (2018) (holding as unenforceable a provision that did not have an express geographic restriction). In Wimmer, the Georgia Supreme Court unanimously applied a different standard for reasonableness of a geographic competition limitation. Specifically, the Court held that the question of whether a given covenant is reasonable in geographic area under the GRCA “is not dependent on whether its geographic scope is expressly stated,” but instead turns on the individual facts and circumstances of each case. Wimmer, 319 Ga. at 649. This decision meaningfully relaxes the restrictions on drafting an enforceable restrictive covenant under Georgia law.

Trade Secrets

In a long-running dispute between a life insurance software company and its competitors, the Eleventh Circuit affirmed the district court’s determination that the competitors misappropriated the company’s trade secret, its database of insurance quotes. In Compulife Software Inc. v. Newman, the Eleventh Circuit affirmed the district court’s conclusion that the misappropriators used improper means to acquire Compulife’s trade secret by “scraping,” i.e., using software to automatically extract data. 111 F.4th 1147 (11th Cir. 2024). The court explained that, although “scraping” (and its related concept “crawling”) are often used perfectly legitimately, the defendants improperly “copied the order of Compulife’s copyrighted code and used that code to commit a scraping attack,” thereby using improper means to acquire the trade secret. And although the exact number of stolen insurance quotes (and therefore the total percentage of the database stolen) could not be determined, the evidence of record showed that in the months after the scraping attack, Compulife’s revenue and number of recurring customers declined. This was enough, in the Court’s view, to affirm the district court’s finding that the defendants had indeed acquired Compulife’s trade secret. In a partial win for Compulife,^[1] the Eleventh Circuit therefore affirmed that the defendants were jointly and severally liable for their misappropriation of Compulife’s trade secret. Compulife’s win, however, was not without a drawback. Compulife had sought repayment from one of the defendant’s insurers under an agreement that required the insurer to indemnify the defendant for certain conduct. In a related case released the same day, the Eleventh Circuit explained that the relevant insurance agreement only obligated the insurer to indemnify the misappropriation defendant for negligent acts. But because the court had determined the defendant’s acts were intentional, Compulife could not seek payment from the defendant’s insurer under that agreement. Compulife Software Inc. v. Zurich Am. Ins. Co., No. 22-12909, 2024 WL 3618439 (11th Cir. Aug. 1, 2024).

DC Circuit

Key employee mobility cases over the past year in the District of Columbia could best be summed up as “back to the basics,” serving as a reminder of the importance of careful drafting when pleading claims in litigation based on trade secrets, noncompetes, and confidential information, as well as when crafting enforceable liquidated damages provisions related to restrictive covenants in employee contracts.

Litigation involving myriad legal claims related to employee mobility issues continued in Clevinger v. Advocacy Holdings, Inc., 2024 U.S. Dist. LEXIS 120712 (D.D.C. July 10, 2024), a case in which Advocacy’s CEO had resigned to join a competing company, resulting in Advocacy obtaining a TRO that was extended three times. In this decision, the court delivered a series of rulings on dueling motions to dismiss multiple noncompete and trade secret causes of action, providing reminders of key standards for setting forth viable claims that can withstand early dismissal. These include the following: (1) The D.C. Non-Compete Clarification Amendment Act of 2022 only regulates noncompetes executed “on or after October 1, 2022,” not before that date; (2) the two basic elements of trade secret misappropriation—the existence of trade secrets and their misappropriation—are identical under the federal Defend Trade Secrets Act and the D.C. Uniform Trade Secrets Act, and Advocacy properly alleged both by pleading that its former CEO took confidential plans to redesign an online platform and customer “contact lists” when he resigned and started a competitor company; (3) a claim specifically under subsection (a)(5)(A) of the federal Computer Fraud and Abuse Act does not turn on proper access to protected computers, but punishes intentionally causing damage without authorization as the CEO was alleged to have done by deleting multiple company user accounts and associated email, files, calendar entries and contacts; and (4) the D.C. Consumer Protection Procedures Act applies only to consumer-merchant relationships and authorizes suits only by consumers or organizations acting on their behalf, none of which was involved in this case.

In HIRECounsel DC, LLC v. Connolly, 2024 U.S. Dist. LEXIS 134835 * (D.D.C. July 31, 2024), the District Court granted summary judgment against HIRECounsel, a legal staffing firm, against its former Managing Director of Client Relations who had signed a one-year noncompete agreement, resigned, and days later began work with a competitor. Yet the court rejected the claim for liquidated damages based on breach of Connolly’s noncompete agreement as an unenforceable penalty. Liquidated damages clauses are enforceable under D.C. law if they are crafted to have a reasonable relation to any probable damage that would follow a breach—typically based on the former employer’s lost profits—as of the time the parties contracted. Yet HIRECounsel’s contract simply stated liquidated damages would be “significant and difficult to ascertain” and set forth the arbitrary amount of $40,000 per breach along with alternative calculations “unmoored” from any relationship to lost profits. Separately, no genuine issue of material fact existed as to whether HIRECounsel could establish actual damages on its claims for breach of noncompete and confidentiality provisions and for misappropriation of trade secrets under the D.C. Uniformed Trade Secrets Act. No proof existed to show that HIRECounsel suffered damages, including no showing that Connolly’s involvement at the competitor with certain HIRECounsel clients had impacted its business, or that such clients were exclusive to HIRECounsel, and no testimony that a client had stopped working with HIRECounsel and gone to Connolly’s new employer. All claims were dismissed, and the case closed.

1. Although the Eleventh Circuit affirmed the district court’s favorable determinations for Compulife related to the trade secret issues, the court remanded the case in part for the district court to further address issues of copyright infringement. ↑

Editor

Contributors

§ 5.1. Introduction

Laws and regulations relating to cannabis and the cannabis industry continue to evolve at a rapid pace. The current state of cannabis law is both confusing and complex. In order to put the latest developments in context, an explanation of the current state of the law regarding marijuana is in order.

The starting point is the Controlled Substances Act, 21 U.S.C. § 801 et. seq. (“CSA”), passed in 1970 to regulate the manufacture, use, and distribution of certain controlled substances for medical, scientific and industrial purposes and to prevent these substances from being used for illegal purposes. The CSA classified various drugs and chemicals into five categories, or schedules. Marijuana, along with heroin, cocaine, LSD and other substances, was placed on the most restrictive schedule, Schedule 1. The CSA prohibits the manufacture, distribution, sale possession or use of marijuana. The Drug Enforcement Agency has agreed to review the current scheduling of marijuana from Schedule 1 to less restrictive Schedule 3. Hearing on rescheduling originally slated to take place in December 2024 have been delayed until 2025. In the meantime, different groups have sued the DEA both to stop rescheduling and to challenge being excluded from the hearings.

The CSA also operates to prohibit the transportation of marijuana across state lines, even between states that have passed laws legalizing marijuana, as well as international borders, so the interstate and international transportation of marijuana remains illegal.

Despite the existence of the CSA, as of today, forty-one states plus the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands have laws legalizing marijuana for medical use, and twenty-four of those states, plus D.C. and Guam have legalized marijuana for recreational use, as well. According to one source, 54% of the US population lives in states with legal recreational adult use marijuana and 74% of the US population lives in states where marijuana is legal for either medial or recreational use. There have been some setbacks, however. In the 2024 election cycle, legislation to legalize adult use marijuana failed in Florida, North Dakota and South Dakota. Since the CSA is the law of the land, the question remains as to how states can “legalize” marijuana consistent with the preemption doctrine.

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

One development that has further complicated the laws regarding hemp is the emergence of intoxicating hemp, hemp from which psychoactive substances are derived to create a variety of intoxicating consumer products. Federal law on intoxicating hemp is unclear, and states are all over the place in how they deal with intoxicating hemp products.

While hemp is technically legal under federal law, the Food and Drug Administration maintains jurisdiction over hemp (and therefore CBD) to the extent it is marketed as a food or dietary supplement or as a drug. The FDA, however, declined to issue regulations on CBD as a food supplement due to what it referred to as “safety concerns.” Also, the state statutory and regulatory framework for hemp and CBD derived from hemp remains very confusing and is rapidly evolving.

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

§ 5.2. Bankruptcy

In re Callaway, 663 B.R. 109 (Bankr. N.D. Cal. 2024)

Date: June 26, 2024

Facts: On February 12, 2024, an individual Debtor filed for chapter 7. The bankruptcy estate largely only included ownership of cannabis dispensaries and claims for distributions from one of the cannabis dispensaries. The bankruptcy estate did not list any tangible assets that bear a connection to marijuana that are covered by the CSA and does not include the Debtor’s post-petition income from the marijuana business. Creditor and United States Trustee for Region 17 filed Motions to Dismiss the case pursuant to 11 U.S.C. 707(a) alleging only that the chapter 7 trustee cannot lawfully administer assets in this case because the Debtor’s business involves cannabis and thus administration would violate the Controlled Substances Act.

Held: The Court denied the Dismissal Motions.

Reasoning: The Court finds there is no basis for dismissal from chapter 7 where the only cause asserted is that the Debtor owned interests in marijuana businesses when he filed and thus the chapter 7 trustee will have difficulty administering the bankruptcy estate. The Court further reasons that the possible sales of intangibles related to marijuana, but not directly referenced in the Controlled Substances Act, such as contractual rights, domain names relating to marijuana and ownership interests in LLCs, are not enough to bar the debtor from chapter 7 relief as they are not necessarily equivalent to administering marijuana assets. For the ownership interest in the marijuana businesses that Debtor holds singly, the Court reasons that since the Debtor is the named operator of the marijuana business, the trustee may cease operations. For the ownership interests where the Debtor is a minority owner, the Court reasons that (i) the potential sale of a membership interest in an LLC is just that rather than the proceeds of a marijuana business; and (ii) a claim for proceeds are a claim for entitlements owed to holder of ownership interests rather than a claim for proceeds of marijuana business. The Court buttresses this decision by explaining that under California law, shareholders only have an expectancy interest in corporate property and earnings. The Court also distinguishes this case from other chapter 7 cases by reasoning that (i) the Debtor does not receive rental income from the marijuana business; (ii) the Debtor does not cultivate marijuana; and (iii) the trustee would not have to administer tangible marijuana assets held by the businesses.

In re Blumsack, 657 B.R. 505 (B.A.P. 1st Cir. 2024)

Date: March 5, 2024

Facts: A United States Trustee (UST) objected to the confirmation of a Chapter 13 plan filed by a debtor who was a cannabis dispensary worker in Massachusetts. Particularly, the debtor’s filed plan proposed paying off creditors with funding sourced by his income from working at the dispensary. The UST moved to dismiss the case, arguing that the debtor was engaged in criminal activity proscribed by the federal Controlled Substances Act (CSA) by virtue of his employment in the marijuana industry. The United States Bankruptcy Court for the district of Massachusetts denied the confirmation and dismissed the case. The debtor appealed.

Held: Motion to Dismiss affirmed, but not for reasons based on the categorical prohibition of individuals employed in the cannabis industry seeking Chapter 13 relief.

Reasoning: The nature of a debtor’s employment in the cannabis industry, by itself, does not categorically render the debtor unable to file a Chapter 13 petition in good faith, for plan-confirmation purposes. This is because Congress has not articulated a “zero-tolerance” policy that requires dismissal of a bankruptcy case involving violation of the CSA. However, a Chapter 13 plan must be filed in good faith. Here, the debtor lacked good faith in his plan proposal, which consisted of paying creditors a certain amount every month that was funded by his income from his work at the dispensary. This proposal was not in good faith because the plan would have placed the UST in the untenable position of knowingly administering assets derived from illegal activity under federal criminal law. In fact, bankruptcy relief is generally unavailable where the trustee will be required to possess and administer assets that are illegal under the CSA or constitute proceeds of activity criminalized by the CSA.

Furthermore, when given the chance to re-file the proposal with a different means of funding the plan than his income from the dispensary, the debtor failed to provide alternative sources of funding. Thus, the plan proposal was not proposed in good faith and the bankruptcy court did not abuse its discretion in denying the debtor an opportunity to file a modified plan. In sum, although the bankruptcy court erred in fashioning a rule of law that categorically prohibits an individual employed in the cannabis industry from seeking Chapter 13 relief, this debtor’s case was properly dismissed for cause.

§ 5.3. Contracts

BRCC Enters. LLC v. Skie, 697 S.W.3d 417 (Tex. App. 14th 2024)

Date: August 13, 2024

Facts: Defendant orally agreed to pay Plaintiff a $100,000.00 bonus if Plaintiff harvested 1,400 pounds of dry cannabis crop. Defendant did not honor the agreement and Plaintiff sued for breach of contract. The trial Court found that Defendant breached the contract and ordered $100,000.00 in damages. On appeal, Defendant asserted the contract is void under the illegal contract defense.

Held: Trial court decision reversed.

Reasoning: The Court of Appeals of Texas found that the contract is illegal under federal law and is therefore unenforceable. The Court reasoned that the contract is illegal because the Plaintiff contracted to manufacture marijuana, an activity which is illegal under the Controlled Substances Act (CSA). The Court noted that the legality of manufacturing marijuana under Oregon law is irrelevant because Oregon law itself gives the Controlled Substances Act preemptive authority. This means the contract could not be performed legally and is therefore unenforceable in the absence of an exception. The pari delicto exception was found to be inapplicable because both parties knew that manufacturing marijuana was illegal when they entered into the contract.

The public policy exception was found to be inapplicable because Congress has a strong public policy underpinning the Controlled Substances Act. The public policy set forth by Congress is to protect general health and welfare by conquering drug abuse and controlling the traffic in controlled substances. Plaintiff alleges that the public policy exception should still apply because the difference between the federal government’s de jure and de facto public policy renders federal public policy ambiguous. The Court rejects Plaintiff’s assertion of ambiguity in the federal public policy for two reasons. First, Plaintiff incorrectly treats discretionary acts by members of the executive branch as alterations in public policy. The Court explains that Congress is the final authority as to public policy. Second, the acts of Congress that Plaintiff asserts establish ambiguity relate only to medical marijuana and thus do not apply to recreational marijuana cases like this one.

Plaintiff asserts that the illegality defense should be limited to cases where it is the remedy sought that requires a violation of law. The Court found this argument to be inconsistent with Texas law. In Texas, if the illegal act and contractual obligation to pay are inseparable, then they “must fall together.” As the Court explains, the right to payment here arose from the manufacture of marijuana. Furthermore, the Court rejected Plaintiff’s argument that the contract should be enforceable to prevent BRCC from obtaining a windfall. The reasoning is that Texas illegality law does not grant much weight to the windfall argument when the parties are in pari delicto.

Finally, Plaintiff cites cases where federal courts held that the illegality of the marijuana business is not a valid defense to a Fair Labor Standards Act (FLSA) claim. The Court distinguishes these cases by reasoning that this is not a FLSA claim and the FLSA does not require this bonus. Rather, the obligation to pay arises from a contract and the illegality defense does apply to contract cases.

HMLL LLC v. MJM Holdings Limited, 558 P.3d 1006 (Colo. Ct. App. 2024)

Date: August 8, 2024

Facts: Plaintiff set up a plan to avoid the residency requirement in the Colorado marijuana regulatory regime without changing its domicile. The plan was organized as follows: (i) a resident owner obtained the marijuana license; (ii) the resident owner owned and operated the business on paper; (iii) Plaintiffs (domiciled in Florida) provided the funding and actually ran the business; and (iv) the parties agreed that Plaintiff would buy the business if and when the Colorado Marijuana Enforcement Division (MED) approved them for their own licenses in Colorado. MED was only aware that Plaintiff was an unsecured creditor of the business. In 2018, Plaintiff replaced the resident owner with the Defendants who agreed to the same terms. The Defendant filed a change of ownership application that explained Plaintiff’s intent to acquire the company. The MED withheld approval until Plaintiff’s future ownership was removed. The approved application contained an unsecured promissory note for the purchase price. When the residency requirement was lifted, Defendants refused to transfer the business to Plaintiff. Lawsuits ensued. The trial court denied all relief to both parties. Plaintiff appealed the Trial Court’s decision to (i) apply the doctrine of unclean hands to preclude equitable relief and (ii) decline to enforce the promissory note on the basis of illegality.

Held: The decision of the trial court to deny relief is affirmed.

Reasoning: The Court upholds the Trial Court’s decision to deny equitable relief based on the doctrine of unclean hands. The Court rejected Plaintiff’s defense that they were relying on the advice of their counsel because their attorney advised them of the risks. Plaintiff also argued tha the doctrine of unclean hands is inapplicable because they were merely an unsecured creditor rather than an illegal undisclosed owner. The Court finds that Plaintiff was an undisclosed owner reasoning that (i) the Plaintiff acted as the owner in practice; (ii) the Plaintiff’s behavior falls under the relevant Colorado regulations’ definition of owner and (iii) the agreement of the parties entitled Plaintiff to ownership rather than repayment of the debt. Finally, Plaintiff argued that the Trial Court’s decision creates a substantial injustice because it grants the Defendants, who were also wrongdoers, a substantial windfall. The Court rejects this argument by reiterating that equitable remedy is not available to a party with unclean hands.

The Court upholds the decision of the trial court to deny enforcement of the promissory note. The Court applies the rule that agreements which violate the law or a regulatory scheme are unenforceable because their enforcement would violate public policy. The Court considers the promissory note to be such an agreement because it was essential in furthering the illegal arrangement that violated the Colorado regulatory scheme and therefore cannot be separated from it.

Bartch v. Barch, 111 F.4th 1043 (10th Cir. 2024)

Date: July 29, 2024

Facts: The Parties were partners in a marijuana business licensed to operate in Maryland. Creditor relinquished his ownership in the business after Debtor agreed Creditor would be able to rejoin later. Debtor did not uphold this agreement and blocked Creditor’s efforts to rejoin. Creditor sued for breach of contract. Debtor did not assert the defense of contract illegality and the district court found Debtor liable for breach of contract. Creditor was awarded a judgment of $6.4 million against Debtor.

When Debtor failed voluntarily to pay any of the damages, Creditor sought enforcement of the judgement in the District Courts for the District of Maryland and the District of Colorado. On May 9, 2023, the District Court of Colorado ordered Debtor to (i) sell their equity interests in the business; (ii) direct the proceeds to Debtor until the judgment is satisfied and (iii) not take any action that would undermine value. On June 29, 2023, Debtor appealed the District of Colorado’s judgment enforcement order.

On September 5, 2023, Debtor moved the district court to reconsider the judgment under Federal Rule of Civil Procedure 60(b)(4). The Court denied the motion. Debtor also appeals this judgment.

Held: The district court’s original judgment reconsideration order is upheld. The district court’s judgment enforcement order is remanded to district court.

Regarding the judgment enforcement order, the Court rejects Debtor’s arguments that Creditor lacks standing and the district court lacked authority. However, the Court vacates the order and remands for the district court to consider whether the order violates public policy.

Reasoning:

Original Judgment Reconsideration Order

Debtor argues that the Court should find the original judgment was void because Creditor lacked standing as the redress sought would violate the Controlled Substances Act. The Court rejects this argument and upholds the original judgment reasoning that finality relief is available only for a total want of jurisdiction or a violation of due process. The Court rules that Debtor’s argument is not actually a standing argument. Rather, Debtor is just trying to frame the contract illegality defense as a standing issue to make it fit as a lack of jurisdiction. The Court rules that Debtor’s failure to assert the contract illegality defense before is not a reason to reverse the district court’s decision. In addition, the Court reasons that the standing argument fails because: (i) Creditor had standing and (ii) the judgment does not require Debtor to violate the law because it does not specify the damages must be paid from a particular source.

Judgment Enforcement Order

Debtor argues the district court lacked authority to enter the judgment enforcement order under C.R.C.P. 69(g) for two reasons. The first is that a charging order is the exclusive remedy for applying LLC member’s equity interest to a judgment. The Court finds that the case law is unclear and decides that the Colorado Supreme Court would not find that a charging order is the exclusive remedy. The second argument Debtor makes is that they lacked sufficient control over the business’s equity for the court to order them to divest it since they cannot freely divest it. The Court finds that Debtor has sufficient possession as actual possession is not required under C.R.C.P. 69(g) and the order accounted for their limitations.

Debtor appeals from the judgment enforcement order arguing that Creditor lacked standing because the order would violate the Controlled Substances Act. The Court rules that the Creditor meets the test for standing and notes that the property specified in the order does not affect standing.

The Court rejects Debtor’s argument that Creditor lacked standing because the order would violate the Controlled Substances Act by reasoning that the Creditor meets the test for standing. The Court notes that the property specified in the order does not affect standing.

Debtor also alleges that the order violates the CSA and therefore would violate public policy. The Court decides that while the order does not specifically require the Debtor to cultivate, sell or process marijuana in violation of the CSA, more information is needed to decide if the order would effectively require them to do so. The Court acknowledges that the order would be invalid if the district court finds the order violates public policy. The Court notes that the requirement not to undermine value of the equity may require Debtors to cultivate, process or sell marijuana.

Subsequent Developments: As of January 2025, the remand is still under consideration by the Colorado Trial Court. At present, the Colorado trial court has taken these actions to resolve the case: (i) held a status conference that ended with an order requiring the parties to submit briefs; (ii) ordered that if Debtor liquidates any of his interests or the business’ holdings then the proceeds from that liquidation must be given to Creditor and (iii) ordered Debtor not to encumber their interests in the business. On December 17, 2024, the United States District Court for the District of Maryland granted the Creditor’s motion for release of funds held in Court’s registry and denied Creditor’s request for a rehearing as moot.

Bartch v. Barch, 721 F.Supp.3d 380 (D. Md. 2024)

Date: March 5, 2024

Facts: The facts are the same as above. When Debtor failed to make voluntary payments for the damages, Creditor sought enforcement of the judgement in the District of Maryland. The Court granted Creditor a charging order against Debtor’s membership interests in the business on May 16, 2023. Debtor moved to vacate the charging order.

Held: Debtor’s motion is denied.

Reasoning: Debtor argues that the Court lacked subject matter jurisdiction to enter the charging order directing the business to give Debtor’s payments to Creditor because those payments come from the sale of a federally illegal substance. The Court rejects this argument because (i) Debtor’s cited case law is not applicable; (ii) Creditor has standing and (iii) even if Courts could not enforced a contract based on a cannabis business, the fact that the order is related to cannabis does not preclude the court from enforcing a valid judgment of another court.

The Court rejects Debtor’s claim that the charging order is an extraordinary circumstance that merits relief under 60(b)(b) because it facilitates ongoing violations of the CSA and thus relief is necessary to accomplish justice. Their reasoning is that the lack of agreement among courts on how to treat cases concerning marijuana businesses that are legal in their states does not rise to the level of an extraordinary circumstance.

§ 5.4. Federal vs. State Law

Fejes v. Fed. Aviation Administration, 98 F.4th 1156 (9th Cir. 2024)

Date: April 22, 2024

Facts: Fejes, a Federal Aviation Administration (FAA) licensed pilot and owner of an Alaskan marijuana cultivation facility, transported marijuana by aircraft within Alaska. The consumption and sale of marijuana is legal in Alaska. However, marijuana is still a controlled substance under federal law. In some remote parts of Alaska, aircraft are the only mode of delivering goods, including marijuana. Nonetheless, the FAA revoked Fejes’s pilot certificate under 49 U.S.C.A. § 44710(b)(2), which mandates that the FAA Administrator “shall” revoke a certificate when a pilot knowingly uses an aircraft for an activity punishable by more than a year’s imprisonment under a federal or state controlled substance law. Correspondingly, distributing marijuana via aircraft is a federal crime under 21 U.S.C. § 841(a), punishable by a term of imprisonment for more than one year. Fejes appealed the Administrator’s order to an Administrative Law Judge and the National Transportation Safety Board, admitting that he piloted an aircraft to distribute marijuana within Alaska, but argued that his conduct fell outside of § 44710(b)(2)’s reach. Both respectively affirmed the revocation. Fejes petitioned the ninth circuit court for review.

Held: Petition for Review denied.

Reasoning: The court held that the intrastate transportation of marijuana had sufficient effect on interstate commerce to fall within scope of Congress’ power under the Commerce Clause. This is because the Commerce Clause covers: (1) “the use of the channels of interstate commerce,” (2) the protection of “instrumentalities of interstate commerce,” and (3) “activities having a substantial relation to interstate commerce.” The court finds that “the interstate transportation routes through which persons and goods move” are “channels of commerce.” Similarly, navigable airspace is an interstate route through which goods move. Aircraft is also an instrumentality of interstate commerce. Furthermore, growing marijuana for personal use had a substantial effect on interstate commerce. Thus, this case fell within the scope of § 44710(b)(2)’s reach.

Additionally, Fejes argued that: (1) the FAA abused its discretion by revoking his pilot certificate when his conduct did not fall into enforcement priority categories identified in a memorandum from the then-Deputy Attorney General, on marijuana-related prosecutions; (2) § 44710(b)(2) requires a conviction before the FAA can revoke a certificate; and (3) § 44710(b)(2) requires the individual to know that his or her activity was punishable under the law.

The court found clear fault in all of those arguments. Fejes’s first argument failed because an agency’s enforcement discretion is generally not judicially reviewable. In fact, the court found agencies have enforcement discretion because an agency generally cannot act against each technical violation of the statute it is charged with enforcing. Essentially, an agency is far better equipped than the courts to deal with variables involved in the proper ordering of its priorities; and even upon review of the agency’s actions, the court finds that the FAA did not exceed its statutory power by revoking the pilot license. The second argument failed because the court found that an actual conviction of an activity punishable by more than a year’s imprisonment under federal controlled substances law is unnecessary for certificate revocation. Lastly, the third argument failed because the court concluded that Fejes was not required to know his activity was punishable by law, only that he knowingly engaged in the activity that is punishable. Fejes admitted to knowingly engaging in his act. Accordingly, the FAA’s revocation was not an abuse of discretion.

Cocroft v. Graham, 122 F.4th 176 (5th Cir. 2024)

Date: November 22, 2024

Facts: The owner of a medical-marijuana dispensary and the dispensary itself brought a § 1983 action against the Commissioner of the Mississippi Department of Revenue, the Mississippi Alcoholic Beverage Control Bureau, and the Mississippi Department of Health, in their official capacities. The plaintiffs alleged that Mississippi’s near-total restriction on the advertising of medical marijuana violated the plaintiffs’ First Amendment free speech rights. The plaintiffs claim that Mississippi’s rules prevent them from effectively reaching new customers, informing the public about Mississippi’s medical marijuana program, and informing the public about the dispensary’s location, product, and prices. The plaintiffs revealed that if it were not for the restriction, they would advertise through print, broadcast, and other media. The United States District Court for the Northern District of Mississippi granted the defendants’ Motion to Dismiss. The plaintiffs appealed.

Held: Motion to Dismiss affirmed.

Reasoning: Speech that is commercial receives no First Amendment protection if the underlying commercial conduct is illegal. The court recognized that under Mississippi state law, the sale and use of marijuana for certain medical purposes is authorized. However, the advertisement of medical marijuana is strictly regulated to listings in business directories, appropriate signage on dispensary property, advertisements on the dispensary website, and sponsorship for advocacy events and non-profit charity. However, the plaintiffs took issue with the fact that the state law prohibited dispensaries from advertising and marketing in any broadcast, electronic, and print media. The prohibition against distributing mass text and email communications, displaying medical cannabis products in public view, paying for reviews, and endorsements were also parts of state legislation that the plaintiffs took issue with.

By contrast, the federal Controlled Substances Act (CSA), prohibits the sale of marijuana altogether. Consequently, the Supremacy Clause establishes that federal law supersedes state law. Thus, the CSA is the reigning law in Mississippi, regardless of state law. Therefore, marijuana is illegal in Mississippi, and the state will not face a constitutional obstacle for restricting commercial speech relating to all unlawful transactions concerning the sale of it. In conclusion, the state is authorized to prevent the advertisement of medical marijuana under the Supremacy Clause.

§ 5.5. Patents

§ 5.5.1. Staying Overlapping Patent Claims and Trade Dress Claims

Sunshine Enclosures LLC v. Final Bell Corp., 2:23-cv-08466-CAS (AGRx) (C.D. Cal. Oct. 18, 2024)

Date: October 18, 2024

Facts: Sunshine Enclosures specializes in innovative packaging, and it filed suit against Final Bell for patent infringement of its ’604 design patent, and for trade dress infringement over the same design. Final Bell offers outsourcing services for packaging and finishing cannabis-infused products using “state-of-the-art hardware and child-resistant packaging.” Final Bell filed for reexamination of the ’604 design patent at the U.S. Patent and Trademark Office (USPTO) based on prior art references not considered before. Final Bell then sought to stay proceedings on all claims in the lawsuit, pending the reexamination of the ’604 patent by the PTO. The parties agreed that the claim for patent infringement should be stayed, but they disagreed about the remaining claims, including those relating to trade dress infringement.

Held: Stay was granted for all claims in the lawsuit because the design patent reexamination would simplify the remaining issues in the case. Trade dress protection requires that the trade dress be unique, which would be addressed by the reexamination of the ’604 design patent.

Reasoning: The Court weighed all of the factors regarding staying litigation: (1) stage of litigation, (2) simplification of issues, and (3) undue prejudice to the non-moving party. In discussing the “simplification of the issues” factor, the Court considered whether the patent claim and the other claims have overlapping issues. The defendant argued that plaintiff’s trade dress claims “arise from the allegedly patented products that are covered under its patent claim” and are thus “intertwined.” In opposition, the plaintiff argued that most of its claims are non-patent related and thus “‘will be completely unaffected by the patent reexamination proceedings.’”

The defendant argued that because the trade dress claims require that the packaging at issue has “acquired distinctiveness, meaning it serves to identify the source of the product,” an invalidation of the patent due to prior art “implies that the design was already known and in use before the patent was filed.” Plaintiff argued the defendant was conflating novelty and obviousness, and that obviousness does not undermine the distinctiveness required for a trade dress claim, as a finding that the design was not novel might. The court found that because the ’604 design patent is for the same packaging that is at issue for the trade dress claims, the patent infringement and trade dress claims are sufficiently related. The Court contrasted the facts of this case with Mophie, Inc. v. uNu Elecs. Inc., 8:13-cv-01705-CAS (JCGx) (C.D. Cal. Dec. 1, 2014), which found that it was “unclear how claims relating to nonfunctional trade dress design elements, packaging, and naming of products [were] ‘intertwined’ with the patents in suit,” which were utility patents, not design patents. Mophie, 2014 U.S. Dist. LEXIS 166930, 2014 WL 6775768, at *7.

§ 5.5.2. Judgement as a Matter of Law and Apportionment by Activities Inside versus Outside the United States

Shopify Inc. v. Express Mobile, Inc., No. 19-439-RGA (D. Del. May 17, 2024)

Date: May 17, 2024

Facts: After a five-day trial, the jury found that Shopify infringed all of the asserted claims and awarded Express Mobile $40 million in damages. Shopify sought judgement as a matter of law (JMOL) for non-infringement of the asserted patent claims and a new trial. The asserted claims related to technology that allows merchants to build their own online websites. While Shopify’s servers are generally in the U.S., Shopify’s servers and stores for Canadian cannabis stores are hosted outside of the United States.

Held:

JMOL motion: Shopify’s JMOL motion was granted. The evidence the jury heard with regard to infringement was unclear, and the Court found that there was insufficient evidence to support a finding of infringement. The Court found that there was insufficient evidence for the jury to find infringement because the evidence did not show that Shopify’s system has a singular UI object that both receives input values and displays output values.

Damages: The revenue from Canadian cannabis stores could be included in the calculation of the $40 million dollar damage award, as the jury could reasonably conclude that Canadian cannabis servers led to a de minimis contribution to Shopify’s total revenues.

Reasoning:

JMOL motion: At the core of the parties’ disagreement is whether a “defined UI object,” as claimed, can include multiple UI objects. “A defined UI object” was not interpreted prior to the trial or raised at the trial, so any argument based on its interpretation was considered moot. Without testimony identifying Shopify’s product pages as “defined UI objects,” the jury had no basis to find that there were any defined UI objects that both received input values and produced output values.

Damages: Since only infringing activities inside the United States are actionable, Shopify argues that the royalty base included revenues from non-infringing conduct, and therefore the damages award was too high. The jury heard evidence that the servers outside of the U.S. were only for restricted goods sold in Canada, so the Court found that they could conclude that if there was any error, and if a proper objection was preserved, the error was de minimis and had no impact on the amount of damages awarded.

§ 5.5.3. Attorney Fees

Townsend v. Brooks Sports, Inc., No. 2:17-cv-01322-LK (W.D. Wash. Mar. 31, 2024)

Date: March 31, 2024

Facts: Herbert E. Townsend sued Brooks Sports, Inc. for infringing claim 1 of his U.S. Patent No. 7,490,416 (the ’416 Patent), which covers a running shoe with a midsole containing a dilatant compound for improved cushioning and energy return. Brooks Sports counterclaimed for a declaratory judgment of noninfringement and invalidity. The case was initially filed in the Middle District of Florida but was transferred to the Western District of Washington. Brooks Sports successfully petitioned for inter partes review (IPR) of the ’416 Patent, and the Patent Trial and Appeal Board (PTAB) found claim 1 unpatentable. The Federal Circuit affirmed this decision.

Held: The court denied Brooks Sports’ motion for over $1 million in attorney fees under Section 285 of the Patent Act. The court found that Townsend’s conduct did not make the case exceptional, which is required for awarding attorney fees.

Reasoning:

Pre-Suit Investigation: The court found that Townsend conducted an adequate pre-suit investigation. His patent counsel performed a good faith infringement analysis based on Brooks Sports’ advertisements and marketing materials, which described the Brooks DNA material in a manner consistent with the ’416 Patent’s dilatant compound.

Strength of Claim 1: Although the PTAB found claim 1 unpatentable, the court noted that not all of Brooks Sports’ challenges to the claim were successful. The court emphasized that the reasonableness of Townsend’s position, not the ultimate outcome, is what matters for determining exceptionality.

Litigation Conduct: The court did not find Townsend’s litigation conduct to be unreasonable. His opposition to the motion to transfer venue was based on a legitimate interpretation of the law, and his actions during discovery were typical of litigation disputes.

Overall, the court concluded that the case did not stand out from other patent infringement cases in a way that would justify awarding attorney fees to Brooks Sports.

United Cannabis Corp. v. Pure Hemp Collective Inc., 66 F. 4th 1362 (Fed. Cir. 2023)

Date: May 8, 2023

Facts: United Cannabis Corp. (“UCANN”) sued Pure Hemp Collective Inc. (“Pure Hemp”) for infringement of its U.S. Patent ’9,730,911 (the “’911 Patent”). The ’911 Patent claims specific formulations of cannabis extracts including THC, defined during claim construction as the decarboxylated form of tetrahydrocannabinolic acid (THCa). Pure Hemp sought an early dismissal on the basis that the asserted claims were invalid under 35 U.S.C. § 101. Pure Hemp argued that the ’911 Patent claimed the natural phenomenon of cannabinoids, terpenes, and flavonoids included in the cannabis plant, and was therefore invalid. However, the District Court denied the motion, finding the ’911 Patent was directed to a non-naturally occurring delivery method of naturally occurring chemicals in non-naturally occurring proportions and concentrations.

The District Court held a Markman hearing and construed the disputed terms of the ’911 Patent’s asserted claims. UCANN filed for bankruptcy shortly after the Markman Order issued. A joint Stipulation of Dismissal, which was silent regarding attorney’s fees, was filed and granted. Pure Hemp then sought attorney’s fees, which were denied. Pure Hemp appealed, seeking reversal on the grounds that the District Court did not find: (1) Pure Hemp to be the prevailing party; (2) the undisputed facts established inequitable conduct; and (3) UCANN’s attorneys had a conflict of interest meriting sanctions.

Held: The Court found that while Pure Hemp was the prevailing party, the case was not exceptional. The District Court was affirmed, and attorney’s fees were denied.

Reasoning: Pure Hemp was found to be the prevailing party because UCANN’s efforts to impose liability on Pure Hemp failed. Pure Hemp rebuffed UCANN’s lawsuit and successfully had the infringement claims dismissed with prejudice. The Court found that dismissal with prejudice has sufficient judicial imprimatur to make Pure Hemp a prevailing party. Because Pure Hemp successfully argued it was the prevailing party, the Court found the appeal was not frivolous. Therefore, UCANN’s request for sanctions was denied. However, the District Court’s mistake in finding Pure Hemp was not a prevailing party was harmless as the case was affirmed as unexceptional.

Pure Hemp explicitly did not ask for any evidentiary hearings on its counterclaim of inequitable conduct—even informing the District Court that Pure Hemp did not seek a hearing. Instead, Pure Hemp pointed to the undisputed facts in an attempt to satisfy its burden. However, the Court identified genuine disputes of facts regarding both elements needed to establish inequitable conduct. The Court of Appeals declined Pure Hemp’s invitation to make its own findings of fact. And so, Pure Hemp’s argument failed.

Pure Hemp’s final argument for reversal was found to be waived because Pure Hemp failed to cite the Rule on which its conflict contention was based before the District Court. Therefore, the Court found the argument was waived. Nevertheless, the Court found the predominant feature of Pure Hemp’s argument was the lack of evidence and noted the argument would have been rejected on the merits.

§ 5.6. Real Estate

Aldot Holding Corp. v. Ninth Ave. Organic Deli & Convenience Corp., 83 Misc. 3d 1269(A) (Civ. Ct. N.Y. Cnty., Aug. 9, 2024)

Date: August 9, 2024

Facts: In this case the court addressed a dispute over the illegal use of leased premises for the unlicensed retail sale of cannabis. Aldot Holding Corporation, the petitioner and landlord (the “Landlord”), sought to recover possession of the premises located at 852 9th Avenue, New York, NY 10019, from the respondent, Ninth Avenue Organic Deli & Convenience Corp. d/b/a Herbal House (the “Tenant”). The Landlord filed a holdover petition on April 22, 2024, alleging that the respondent was using the premises for the unlicensed sale of cannabis. The Tenant filed an answer with counterclaims on May 10, 2024. Both parties moved for summary judgment. The Landlord provided evidence, including affidavits, lease agreements, and photographs, to support its claim of illegal use. The Tenant argued that it had not received proper notice and that the Landlord had waived any default by accepting rent.

Held: The court granted the Landlord’s cross motion for summary judgment, awarding a final judgment of possession of the premises to the Landlord and issuing a warrant of eviction. The Tenant’s motion for summary judgment was denied. The court also dismissed the Tenant’s counterclaims based on a lease provision that waived the right to interpose counterclaims in a summary proceeding for possession. The Landlord’s request for a money judgment was denied without prejudice due to lack of supporting documentation.

Reasoning: The court found that the Landlord had made a prima facie case of illegal use of the premises by providing sufficient evidence, including affidavits and photographs, showing that the Tenant was selling cannabis products without a license. The Tenant failed to produce sufficient evidence to rebut the Landlord’s prima facie case. The court determined that a termination notice was not required for an illegal use proceeding unless a governing regulatory scheme required it, which was not the case here. The Tenant’s argument regarding improper service was rejected due to lack of evidence. The court also rejected the Tenant’s argument that the Landlord waived any default by accepting rent, as the only rent paid was for March 2024. The court found that the Tenant’s illegal use of the premises violated the lease agreement, which required compliance with all laws and regulations, and granted a final judgement of possession of the premises to Landlord and ordered an eviction of the Tenant.

Lasa Extract, LLC v. Town of Suffield Zoning Bd. of Appeals, No. HHD-CV-236166972-S (Conn. Super Ct., Apr. 10, 2024)

Date: April 10, 2024

Facts: In the case the court examined whether the cultivation and processing of cannabis could be considered a lawful continuation of a nonconforming use of property previously used for cultivating and processing hemp. Here, Lasa Extract, LLC and The Crosswalk, LLC (the “Plaintiffs”) owned and operated a property in Suffield, Connecticut, used for cultivating and processing hemp. The property, located in an R-45 residential zone, had been used for manufacturing tobacco products since the 1920s, which was deemed a nonconforming use. In 2019, the town’s zoning enforcement officer (the “ZEO”) determined that processing hemp was similar enough to tobacco processing to be allowed as a continuation of the nonconforming use. Plaintiff then used the property to grow Cannabis sativa L. plants and process them into hemp oil, which initially contained THC levels above 0.3 percent. The THC concentration was then reduced by adding coconut oil to comply with legal limits for hemp. In 2021, Connecticut legalized the adult recreational use of marijuana and established a regulatory regime for licensing the micro-cultivation of cannabis. In 2022, Plaintiff sought to expand its operations to include cannabis cultivation and processing, arguing that it was a continuation of the existing nonconforming use. The ZEO denied this request, and the Zoning Board of Appeals (the “ZBA”) upheld the decision, leading to the Plaintiffs’ appeal.

Held: The court reversed the ZBA’s decision, allowing the plaintiffs to cultivate and process cannabis on the property as a lawful continuation of the existing nonconforming use. The court found that the ZBA acted unreasonably and contrary to law in affirming the ZEO’s determination.

Reasoning: The court’s reasoning focused on whether the cultivation and processing of cannabis would change the character of the property’s use. The court noted that both hemp and cannabis come from the same plant, Cannabis sativa L., and that the only difference between them is the concentration of THC. The court found that the existing process of extracting hemp oil already involved producing cannabis-level THC concentrations, which were then diluted to legal hemp levels. Therefore, the proposed use of the property for cannabis cultivation and processing did not fundamentally change the character of the use. The court decision specifically distinguishes this case from the legal precedent cited by the ZBA, including Salerni v. Scheuy (finding that the permitted sale of beer only in a restaurant does not permit expansion to the sale of all liquors, as they are two kinds of business), Macaluso v. Zoning Board of Appeals (held that the sale of liquor in a package store is an enterprise of substantially greater magnitude than the sale of liquor in a drug store), and Helicopter Associates, Inc. v. Stamford (finding that expansion of a helipad from the unlicensed maximum of 36 flights per year to an unlimited use was deemed a fundamental change to the character of the existing use), but determined that those cases did not support the ZBA’s broad interpretation that differing statutory treatment alone (here, hemp vs. cannabis) constituted a change in character. The court concluded that the administrative record did not contain substantial evidence that cultivating and processing cannabis for wholesale and mail order sales (specifically providing that retail sales would not be permitted) would change the character of the existing nonconforming use and that the ZBA’s decision was unreasonable and contrary to law.

§ 5.7. State Law

Peridot Tree WA Inc. v. Washington State Liquor and Cannabis Control Bd., No. 3:23-cv-06111-TMC (W.D. Wash., Jan. 5, 2024)

Date: January 5, 2024

Facts: Washington established a social equity program designed to award retail cannabis licenses to parties who experienced detrimental impacts when cannabis was illegal in the state. This program assessed candidates based on a set of eligibility criteria and a scoring rubric. To qualify, candidates also needed to have resided in Washington for at least six months. Plaintiff’s application was rejected because he did not meet the residency requirement despite the fact that he was otherwise an ideal candidate for the program. Plaintiff (i) claims the program’s residency program violates the dormant commerce clause because it discriminates against out of state applicants and (ii) moved for injunctive relief to enjoin the Cannabis board from issuing licenses to successful applicants.

Held: Plaintiff’s motion for a preliminary injunction denied.

Reasoning: The Court rejects Plaintiff’s motion for preliminary injunction finding that Plaintiff’s possibility of irreparable harm does not outweigh the hardship to the Defendants, the public and interested parties if the injunction were to pass. First, the Court ruled that it is possible, but not likely that Plaintiff would suffer irreparable harm without the injunction. The only irreparable harm here that might be sufficient is Plaintiff’s argument that a constitutional violation is de facto an irreparable harm. However, the constitutional violation alleged here is that the residency requirement violates the CC. The Court ruled that Plaintiff likely cannot use the dormant Commerce Clause (CC) to assert a constitutional right to participate in the cannabis market because the CC does not protect a right to participate in a federally illegal interstate market. The Court found that the injunction would impose significant harms on the selected applicants of the program.

Cocroft v. Graham, 122 F.4th 176 (5th Cir. 2024)

Date: November 22, 2024

Facts: Plaintiff, a medical-marijuana dispensary, appealed the trial court’s decision to dismiss their First Amendment challenge to the near complete ban on medical marijuana advertisements.

Held: Judgment of dismissal is affirmed.

Reasoning: The Court finds that the Mississippi commercial speech restrictions do not violate the First Amendment because: (i) the First Amendment does not protect commercial speech where the underlying commercial conduct is illegal; (ii) medical marihuana is illegal under federal law and (iii) an activity is not a “lawful activity” for purposes of commercial speech if it violates federal law even where the activity is legal under the applicable state law. The Court rejects Plaintiff’s argument that the First Amendment does not authorize states to exercise its concomitant power to regulate commercial speech related to federally regulated transactions when that state itself has not also independently prohibited the transaction. Their reasoning is that this argument is unsupported by law and that the distinction Plaintiff attempts to draw is constitutionally irrelevant.

§ 5.8. Tax

Robust Missouri Dispensary 3, LLC v. St. Louis County, No. ED112642 (Mo. Ct. App. E.D, Nov. 12, 2024)

Date: November 12, 2024

Facts: The Missouri Constitution provides that “the governing body of any local government is authorized to impose, by ordinance or order, an additional sales tax in an amount not to exceed three percent on all tangible personal property retail sales of adult use marijuana sold in such political subdivision.” In 2023, Plaintiff paid the 3% retail sales tax imposed by the City of Florissant (an incorporated city). Then Plaintiff received a tax change notification letter requiring them to also pay a 3% retail sales tax to St. Louis County. Plaintiff filed a declaratory judgment suit alleging that the Missouri Constitution (i) does not authorize a county to declare an additional sales tax on a dispensary within an incorporated town, city or village and (ii) only allows counties to install retail taxes in unincorporated regions. Defendants filed motions for summary judgment. Plaintiff appealed the circuit court’s ruling that St. Louis County and St. Charles Counties impositions of 3 percent retail sales taxes on marijuana dispensaries in their counties are constitutional under Article XIV of the Missouri Constitution.

Held: The Court reverses the circuit court’s ruling, sustaining the Counties’ motions for summary judgment and overruling Plaintiff’s motion for summary judgment. The Court enjoins the practice of collecting retail sales taxes by multiple local governments.

Reasoning: The Court reverses the circuit court’s judgment, reasoning that “local government” as used in Article XIV of the Missouri Constitution means the village, town or city in an incorporated area and the county in an unincorporated area. The Court further rejects the Defendants’ arguments that the Missouri Constitution makes not only incorporated cities, towns and villages but also counties the local government in incorporated areas and that a county’s ability to tax unincorporated areas should mean that they are able to tax anywhere in their geographical boundaries. The reasoning is that these arguments do not align with the plain language of the section.

Patients Mut. Assistance Collective Corp. v. Comm’r, T.C. Memo. 2024-98 (2024)

Date: October 21, 2024

Facts: Petitioner is a medical cannabis dispensary in the state of California that would have received deductions on its 2016 tax return if not for Section 280E. Petitioner filed a petition for redetermination of its tax deficiency on the basis that (i) Section 280E is not constitutional because it is an unapportioned direct tax or an excessive fine in violation of the Eighth Amendment; and (ii) the Controlled Substances Act is not constitutional when applied to intrastate cultivation and distribution of cannabis that is legal in that state.

Held: The Internal Revenue Commissioner’s motion for summary judgment was granted, and the taxpayer’s motion for summary judgment was denied.

Reasoning: The Court rejected Petitioner’s arguments that 280E and the Controlled Substances Act are unconstitutional based on precedent.

§ 5.9. Trademarks

§ 5.9.1. Unlawful Use and Invalidating Trademark Applications

Ashh Inc. v. DJ Imp. Inc., No. 4:21-cv-03169 (S.D. Tex. Dec. 21, 2022)

Date: December 21, 2022

Facts: Ashh Inc. (“Ashh”) distributes vaporizer pens and batteries under its OOZE trademark. Ashh alleged that DJ Import Inc. (“DJ”) infringed its trademark by offering counterfeit vaporizer batteries and chargers under the trademark OOZE. DJ moved for summary judgment on the grounds that Ashh’s trademark rights were invalid because the goods are used in connection with unlawful products.

The court recognized that the Fifth Circuit has not adopted the “unlawful use” doctrine for trademarks. The doctrine stems from the recognition that trademarks are invalid under the Lanham Act if used in commerce in connection with unlawful goods. And so, the issue was whether Ashh’s goods are illegal under federal law.

The parties disagreed whether Ashh’s goods are “drug paraphernalia” as defined in 21 U.S. Code § 863 (“Section 863”). Drug paraphernalia are illegal goods under federal law.

Held: Motion for summary judgement denied because fact issue existed as to whether Ashh’s goods are drug paraphernalia.

Reasoning: Subsection (d) of Section 863 defines drug paraphernalia as products “primarily intended or designed for use” in manufacturing, ingesting, or inhaling illicit drugs, including marijuana. Subsection (e) of Section 863 lists several factors to determine whether goods are drug paraphernalia including instructions and descriptive materials on the item; advertising concerning the item’s use; the existence and scope of legitimate uses of the item; and expert testimony concerning the item’s use.

The court considered evidence showing Ashh’s OOZE goods are primarily used for ingesting marijuana, including: articles and social media posts showing a connection between OOZE goods and the marijuana industry; the statement of an expert that concluded Ashh’s OOZE goods are primarily used with marijuana; and the fact that Customs and Border Patrol had seized Ashh’s OOZE goods as drug paraphernalia. Ashh alleged that its OOZE goods may be used to consume marijuana. But offered manuals and webpages showing the goods may be used for lawful purposes, e.g., ingesting essential oils and hemp derived CBD. Because an issue of material fact existed as to whether OOZE vaporizers are drug paraphernalia, the court denied DJ’s motion for summary judgment.

§ 5.9.2. Analogous Trademark Use

Cosmic Crusaders LLC v. Andrusiek, No. 2023-1150 (Fed. Cir. Oct. 19, 2023)

Date: October 19, 2023

Facts: Cosmic Crusaders, LLC, and Lewis Davidson (collectively “Appellants”) appealed the final order of the Trademark Trial and Appeal Board (the “Board”) granting Laverne J. Andrusiek’s (“Andrusiek”) petition to cancel Appellants registration for the CAPTAIN CANNABIS trademark for comic books. Appellants argued that the Board erred in determining that the parties had tried the issue of Andrusiek’s analogous trademark use to establish priority in the CAPTAIN CANNABIS mark and the evidence did not support that Andrusiek established priority.

Both parties use the CAPTAIN CANNABIS mark in connection with comic books. Lewis Davidson filed an application for the CAPTAIN CANNABIS mark with the United States Patent and Trademark Office on April 2, 2014, based on intent to use. This allowed Appellants to use the filing date as its constructive first use date, i.e., priority date, of the mark. Conversely, Andrusiek could establish priority as early as 2006 based on analogous trademark use and engaged in actual trademark use in 2017.

Held: The court affirmed the Board’s decision because it found that the Board did not abuse its discretion by considering the analogous trademark use issue and the record supported the findings regarding analogous trademark use.

Reasoning: The court noted that a party may rely on analogous trademark use to establish priority if the uses create an association in the minds of consumers between the mark and the goods despite the absence of “technical” or “actual” trademark use. Andrusiek’s petition to cancel Appellants’ registration included claims of marketing activities, i.e., analogous trademark use, on the one hand and bona fide commercial trade, i.e., technical trademark use, on the other. The Board also read Andrusiek’s reference to “common-law usage” in the petition to encompass both technical and analogous use. Taking the petition as a whole, the court held that Appellants were provided fair notice of the claims at issue. And so, the Board did not abuse its discretion when considering Andrusiek’s analogous use to establish priority.

Appellants also argued that the analogous use was not sufficient to impact the purchasing public and Andrusiek did not engage in actual trademark use within a reasonable time of the analogous use. Regarding the first argument, Appellants relied on Federal Circuit precedent that held a mark displayed to seven customers for a handful of print articles was insufficient to establish analogous use. T.A.B. Sys. v. Pactel Teletrac, 77 F.3d 1372 (Fed. Cir. 1996). But the court noted that T.A.B. emphasizes that direct evidence of a public association is not required and indirect evidence regarding a mark’s use in advertisements, brochures, newspapers, and trade publications may be sufficient to establish analogous trademark use. As to the second argument, Appellants argued that use of the CAPTAIN CANNABIS mark as the title of a single comic book was insufficient for actual trademark use. This is because trademark rights are typically not provided for the title of a single creative work.

The Board had relied on Andrusiek’s use of the CAPTAIN CANNABIS mark at trade shows, in social media posts, and in news and magazine articles associating the mark with Andrusiek to support analogous use. The court determined that the record was amply greater than that in T.A.B. Also, the Board relied on Andrusiek’s use of the CAPTAIN CANNABIS mark on a series of creative works namely, a movie, a screenplay, and a comic book. This led to the conclusion that the mark was used as more than a title of a single creative work and supported actual trademark use. And so, the court held that the Board did not abuse its discretion and affirmed the appeal.

§ 5.9.3. Attorney’s Fees and Non-Exceptional Trademark Claims

Edible IP, LLC v. MC Brands, LLC, No. 20-cv-05840 (N.D. Ill. Sept. 28, 2023)

Date: September 28, 2023

Facts: Edible IP, LLC, and Edible Arrangements (collectively, “Edible”) brought an action for trademark infringement and unfair competition under the Lanham Act against MC Brands, LLC, and Green Thumb Industries Inc. (collectively “GTI”) alleging the GTI infringed Edible’s rights in its EDIBLE and INCREDIBLE EDIBLES trademarks. GTI filed counterclaims requesting a declaration that Edible’s marks were generic and not entitled to trademark protection, its use of edibles was descriptive and therefore non-infringing, and there was no likelihood of confusion between GTI’s use of EDIBLES or INCREDIBLES and Edibles’ marks. The parties entered into a stipulation of dismissal of the case whereby Edible agreed to dismissal with prejudice and GTI agreed to dismissal of its counterclaims without prejudice. Subsequently, GTI moved for an award of attorney’s fees under 15 U.S.C. § 1117(a) (“Section 1117(a)”).

Edible owns several registrations for its EDIBLE mark for fruit, flowers, and candy, and arrangements thereof. It also registered its INCREDIBLE EDIBLES mark for similar arrangements as well as dietary and nutritional supplements. The additional goods were an attempt to enter a new market for CBD. Edibles first applied to register the INCREDIBLE EDIBLES mark in 2015. GTI uses its INCREDIBLES mark in connection with chocolates and candies that contain marijuana. And it alleged to have done so since 2010.

After dismissal, GTI moved for an award of attorney’s fees alleging that Edible’s choice to litigate the matter was objectively unreasonable and Edible’s litigation conduct made the case exceptional.

Held: The motion for attorney’s fees was denied because Edible’s claims were not objectively unreasonable, and its litigation conduct did not make the case exceptional.

Reasoning: Section 1117(a) allows a court to award attorney’s fees to a prevailing party in exceptional cases. The court noted that an exceptional case is one that stands out from others with respect to the substantive strength of a party’s litigation position or the unreasonable manner in which the case was litigated.

GTI argued that Edible’s litigation position was objectively unreasonable because Edible: did not have rights in the cannabis industry at the time of filing of the lawsuit, knew the term “edible” was generic in the cannabis industry, did little to promote its goods between 2010 and 2019, and did not provide credible evidence of likelihood of confusion. The court noted that Edible intended to expand to the CBD market by way of its application to register INCREDIBLE EDIBLES for CBD-related goods. Edible relied on its rights in both EDIBLE and INCREDIBLE EDIBLES as the basis for its claims. The former could arguably be generic in the cannabis industry while the inclusion of the term INCREDIBLE would perhaps make the INCREDIBLE EDIBLES mark at least descriptive. The court determined that Edible’s delay in promoting CBD products was in part because CBD remained a controlled substance until the enactment of the 2018 Farm Bill. Finally, the court determined that Edible’s inability to produce evidence of a likelihood of confusion did not make the case so weak as to label it frivolous or objectively unreasonable.

GTI also argued that Edible’s litigation conduct made the case exceptional because it delayed key discovery. Edible sought extensions of fact discovery six times, GTI filed five motions to compel Edible to produce discovery, Edible failed to disclose relevant witnesses in its Rule 26 disclosures, and allegedly sought deposition of GTI’s CEO for an improper purpose. Nevertheless, GTI admitted that it had obtained over one hundred thousand pages of documents during discovery. The court did not side with GTI on all of its motions to compel, which suggests that Edible did not have unreasonable positions on all discovery disputes. The court also found that Edible set forth a sufficient basis to depose GTI’s CEO.

In sum, the court did not find the case exceptional based on Edibles litigation position or conduct. And so, the court denied GTI’s motion to award attorney’s fees.

Ak Futures LLC v. TBH Supply LLC, No. 8:23-cv-01030-JVS-ADS (C.D. Cal. Oct. 11, 2023)

Date: October 11, 2023

Facts: Delta-9 Tetrahydrocannabinol (“THC”) is the primary psychoactive cannabinoid responsible for the “high” associated with marijuana. But other cannabinoids, like Delta-8 THC also have psychoactive effects. The 2018 Farm Bill kept marijuana illegal and defined it based on its Delta-9 THC concentration: “the plant Cannabis sativa L. and any part of that plant, including . . . all derivatives, extracts, cannabinoids, . . . with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”

Ak Futures, LLC (“Futures”) began selling disposable vaporizers for Delta-8 THC under its CAKE trademark in October 2020. TBH Supply LLC (“TBH”) began selling cannabis products, including vaporizers, under its CAKE SHE HITS DIFFERENTLY trademark on September 15, 2020. Futures brought this action for false designation of origin and unfair competition under the Lanham Act and moved for a preliminary injunction. Both parties provided competing declarations concerning the lawfulness of the goods offered under the respective marks. And so, each party alleged that the other had not established trademark rights in their respective marks because the goods offered under the marks are unlawful.

Held: The motion for preliminary injunction was denied because Futures did not establish a likelihood of success on the merits.

Reasoning: Futures argued that TBH’s goods are unlawful because of the high potency of up to 84% THC included in its goods. But it did not rely specifically on the Delta-9 THC concentration of TBH’s goods. Futures also argued that TBH’s distribution of its products is unlawful because it is not licensed by the California Department of Cannabis Control (“CDCC”). But TBH alleged that it sells its CAKE SHE HITS DIFFERENT branded goods to its sister company, which is licensed by the CDCC, and that its goods are in total compliance with the CDCC’s regulations.

TBH obtained samples of Futures’ CAKE products and had them tested by third parties for their Delta-9 THC concentration. These tests disclosed that the CAKE branded goods included Delta-9 THC concentrations above 0.3%, which would make them unlawful under the Farm Bill. However, Futures’ independent testing disclosed that its goods were in compliance with the Farm Bill. Also, Futures argued that TBH did not use laboratories that comply with the USDA’S rules for Hemp Analytical Testing. And so, the results were therefore unreliable.

The court determined that Futures would only be successful if TBH’s goods are unlawful, and its CAKE goods are in compliance with the Farm Bill. Because a credibility determination concerning the parties’ competing declarations was not proper on a motion for preliminary injunction, the court denied Futures’ motion.

§ 5.9.4. Unlawful Use and Invalidating Trademark Applications

BBK Tobacco & Foods LLP v. Cent. Coast Agric., Inc., 97 F.4th 668 (9th Cir. 2024)

Date: April 1, 2024

Facts: BBK Tobacco & Foods LLP (“BBK”) distributes rolling papers and other smoking-related products under its RAW trademark. Central Coast Agriculture, Inc. (“Central”) began selling cannabis products under its RAW GARDEN trademark and sought to register the mark with the United States Patent and Trademark Office (“USPTO”). BBK alleged that Central’s use of the RAW GARDEN mark infringed on BBK’s rights in its RAW trademark and brought several claims against Central, including trademark infringement. BBK also sought to cancel four of Central’s trademark applications for the RAW GARDEN mark based on a lack of bona fide intent to use the RAW GARDEN mark. Central filed counterclaims and sought to cancel BBK’s registrations for its RAW mark based on unlawful use. The district court entered summary judgement in favor of BBK on its claim to invalidate Central’s applications.

Held: The Ninth Circuit affirmed the district’s court grant of summary judgement.

Reasoning: The court held that that when an action involves a registered trademark, a district court has jurisdiction to consider challenges to trademark applications of parties to the action. The court cited 15 U.S.C. § 1119, which states that “any action involving a registered mark the court may determine the right to registration, order the cancelation of registrations, in whole or in part, restore canceled registrations, and otherwise rectify the register with respect to the registrations of any party to the action.”

The court found that “determine the right to registration” and “rectify the register” includes the power to determine disputes over trademark applications because a challenge to an application affects the applicant’s right to a registration. Accordingly, the plain language of § 1119 grants a district court jurisdiction to consider challenges to the trademark applications of a party to the action if the action involves a registered mark.

Because the action involved BBK’s registered mark, the district court had jurisdiction to “determine the right to registration” of Central’s applications.

The district court determined that Central lacked a bone fide intent to use its mark in commerce because its goods were illegal under federal law. Therefore, it ordered invalidation of the applications at the USPTO. Because the district court had jurisdiction pursuant to § 1119, the Ninth Circuit affirmed.

§ 5.9.5. Fraud and Goods Related to Cannabis

TIW Holdings LLC v. Hotbox Farms LLC, No. 3:24-cv-00126-AN (D. Or. Sep. 30, 2024)

Date: September 30, 2024

Facts: TIW Holdings LLC (“TIW”) began using the trademarks HOTBOX, HOTBOX 7500, and PUFF HOTBOX 7500 (“TIW Marks”) in connection with e-cigarettes and e-liquid products. TIW licenses the TIW Marks to Puff Labs, LLC (“Puff”), which is a wholesaler, distributor, and retailer of the goods offered under the TIW Marks. TIW and Puff Labs (“Plaintiffs”) alleged that use of the TIW Marks commenced in June 2022.

Hotbox Farms LLC (“Hotbox”) sells marijuana and non-marijuana goods under its HOTBOX trademark. Hotbox registered its HOTBOX mark with the USPTO for among other things, stickers, clothing, buttons, lighters, and corresponding retail services. Hotbox’s constructive use date of its HOTBOX mark was the filing date included in its intent to use based application, October 28, 2020.

Plaintiffs brought the action alleging that Hotbox committed fraud on the USPTO during the registration process of its HOTBOX mark and sought a declaratory judgement that the TIW Marks did not infringe Hotbox’s mark. Plaintiffs alleged that Hotbox purposefully withheld from the USPTO that it sells cannabis goods. Plaintiffs also alleged that Hotbox applied stickers to BIC branded lighters to obtain the HOTBOX registration and USPTO records established that Hotbox stated the HOTBOX mark was “printed” on each lighter.

Hotbox filed counterclaims alleging federal trademark and unfair competition and common law trademark infringement. Plaintiffs moved to dismiss the counterclaims because of Hotbox’s alleged fraud.

Held: The court denied Plaintiffs’ motion to dismiss because the heavy burden of demonstrating fraud was not met and Hotbox sufficiently plead likelihood of confusion.

Reasoning: The court held that the evidence regarding the stickers affixed to lighters was insufficient to meet the “heavy burden” of demonstrating fraud. The court noted that Hotbox alleged that its business includes the sale of marijuana and non-marijuana products. Further, the non-marijuana products are sold in Oregon to customers that include Idaho residents that travel over the nearby border. The court held that these allegations were sufficient to plausibly plead use in commerce.

The court noted that it was evident from the pleadings that the TIW Marks and the HOTBOX mark were similar. Moreover, Hotbox alleged that its lighters were “substantially related” to Plaintiffs’ e-cigarettes and the parties target consumers include smokers and vapers. The pleadings therefore addressed several of the factors to determine a likelihood of confusion, including similarity of the marks, relatedness of the goods, and target consumers.

Accordingly, the court held that Hotbox sufficiently plead that it had a valid and protectable trademark registration and a claim of likelihood of confusion.

§ 5.9.6. Establishing Valid Trademark Rights

Ak Futures LLC v. TBH Supply LLC, No. 8:23-cv-01030-JVS-ADS (C.D. Cal. Jan. 19, 2024)

Date: January 19, 2024

Facts: AK Futures, LLC (“AK”) sells vaporizes containing the cannabinoid Delta-8 THC under its CAKE mark. TBH Supply LLC (“TBH”) sells cannabis products under its CAKE SHE HITS DIFFERENT mark. TBH allegedly licenses its mark to third parties to distribute and sell CAKE SHE HITS DIFFERENT goods in California and Arizona in state-licensed retail shops. AK brought this action alleging that TBH infringed its rights in its CAKE mark. In its first amended complaint, TBH brought four counterclaims including California and Arizona trademark infringement. AK filed a motion to dismiss TBH’s counterclaims.

Held: The court granted AK’s motion because TBH could not establish trademark rights in its CAKE SHE HITS DIFFERENT mark.

Reasoning: TBH did not own federal or state registrations or applications for its CAKE SHE HITS DIFFERENT mark. Therefore, TBH would have to rely on unregistered common law trademark rights to succeed on its counterclaims.

In TBH’s initial complaint, it alleged that it manufactured and distributed CAKE SHE HITS DIFFERENT goods that contain Delta-9 THC. In its amended complaint TBH sought to clarify its original allegations. TBH subsequently alleged that it sells empty CAKE SHE HITS DIFFERENT vaporizers to licensed third parties that fill the goods with Delta-9 THC. The court found the amended counterclaims implausible because TBH’s amended allegations directly contradicted its unambiguous admissions in the first complaint that its goods contain Delta-9 THC. The court concluded that TBH’s CAKE SHE HITS mark is used in connection with Delta-9 THC goods.

Delta-9 THC is illegal under federal law. Because TBH’s CAKE SHE HITS DIFFERENT goods are used with a federally illegal substance, it could not lawfully use its mark in federal commerce. Further, public records established that TBH did not hold state-required licenses to manufacture or distribute cannabis goods in California or Arizona. Accordingly, the court held that TBH could not establish federal or state trademark rights in its CAKE SHE HITS DIFFERENT mark and granted AK’s motion to dismiss.

Many aspects of the work of a United States federal judge are profoundly gratifying. Sometimes, they are almost overwhelmingly so. I became a United States bankruptcy judge, sitting in the Eastern District of New York, in Brooklyn, more than twenty years ago, and in that time, I have presided over more than 56,000 cases filed in our court, from no-asset Chapter 7 bankruptcy cases to multibillion-dollar global corporate Chapter 11 restructurings. Many cases are filed by large or middle market businesses that need the restructuring toolkit to get through a bumpy patch. Others are filed by small and even micro businesses, and entrepreneurs, for the same reasons. And still others—many others—are filed by individuals or couples who are seeking a fresh start, or to save their home through a Chapter 13 repayment plan. When these cases succeed, everyone wins. Homes and jobs are saved, and creditors get paid.

But as satisfying as that work is, if you ask me—or most any federal judge—what they find to be the most gratifying aspect of their work, the answer may surprise you: For me, and for many of my colleagues, the judicial work that may move us to tears of joy is presiding at a naturalization ceremony.

A naturalization ceremony is the final step on the path to becoming a United States citizen. That path is a long one, and it requires hard work and determination. An immigration lawyer could explain what is involved; and an immigration judge may well have a role. But in many federal judicial districts, and certainly here in the Brooklyn courthouse of the Eastern District of New York—encompassing Brooklyn and Queens, two of the most diverse counties in the country, as well as Staten Island—that last step is an oath administered in a federal courthouse, by a federal judge. And we hold these ceremonies four days a week, fifty-two weeks of the year.

There might be fifty new citizens in the courtroom—or more than two hundred and fifty. It’s the rule of law in action—working for individuals, families, communities, and the country. I have been privileged to swear in thousands of new citizens, from sixty or more countries of origin. And every time, it’s special.

When I enter the ceremonial courtroom, a court officer calls out, “All rise!” Usually, when I take the bench, I smile, greet the parties, and say, “Please be seated”—but not on this occasion. Instead, the citizenship candidates remain standing, and the ceremony begins with the Oath of Allegiance. This Oath includes a promise made by each new citizen, to “support and defend the Constitution and laws of the United States of America against all enemies, foreign and domestic.” At the close of the Oath, the new citizen declares that they “take this obligation freely, without any mental reservation or purpose of evasion.” Then, we clap, and maybe we cry a little bit, and as the newest United States citizens, we recite together the Pledge of Allegiance.

Many years ago, when I first presided at a naturalization ceremony, I decided that I had three things I wanted to say—and over the nearly twenty years since then, these have three things have not changed. They are congratulations, and thank you, and welcome.

I begin with congratulations, and I say, “Congratulations, my brothers and sisters, my fellow American citizens, on the great honor that you have achieved today by becoming citizens of the United States of America. You have worked hard for this honor—you have earned it—and you deserve it. This is your day—enjoy it! This is your country—cherish it!—as your newly adopted country cherishes you.”

Next is, thank you! “Thank you, my brothers and sisters, my fellow American citizens, for your gift to our country of your citizenship. What do I mean by your gift? My country is now our country. Your culture is now part of our culture. Your history, your traditions, now enrich America’s history and traditions. We are all richer together as a country because of you. Each of you. All of you.”

And then I reflect on the promises kept that each one of those new American citizens represents: “You are the fulfillment of a very important promise that another group of immigrants made more than 200 years ago in the United States Constitution. What promise was that? The promise made in Article I of the Constitution that Congress would establish a uniform rule of naturalization, so that anyone who wished, and wanted, and worked, to become an American citizen could do so, and have a day for themselves like today is for you. That promise means that every person who arrives on these shores has the opportunity to become as much an American as the person whose parents, or grandparents, or great-grandparents were born here. So you are the measure and the fulfillment of the promise made by the founders of our country, immigrants themselves. By your oath of allegiance today, you keep that promise in the Constitution alive.”

Finally, the heart and soul of a naturalization ceremony is not only the promises kept, but the promises made. I remind them that “today, you also made a promise—you pledged allegiance to these United States. You promised to be outspoken advocates of liberty, and justice—not just for some, but for all. Not only when it is easy, but when it is hard. To be a full citizen in our democracy, you must embrace it. Do not let others make decisions for you! Study the issues, and vote! When you care deeply about an issue, write the mayor, your city council person, your representative, your senator. Write the president! Serve on a jury, maybe in this very building. Your voice counts—but only if you use it. Your voice can make a difference—but only when it can be heard.”

At my very first naturalization ceremonies, there were often children—and even grandchildren—in attendance. Sometimes I have invited them to join me on the big bench in the ceremonial courtroom. Always, whether they are in the courtroom or just in the thoughts of the new citizens, I speak to them too: “Finally, a special word to the children: could you please stand? You are the future. You are the love, and the light, and the energy, and the enthusiasm, of our country. You inspire your families, your teachers, your neighbors. Today, you inspire me. To your parents, you are the best part of every day. You are the beacon and the promise of peace, and of better days ahead. I welcome you especially, and I have great hopes for you in your adopted country.”

And then I welcome them, with all of the warmth that I can muster, and maybe again a tear or two. “So, from my head and from my heart, on behalf of all of the citizens who you join today in these United States, congratulations, and thank you, and welcome. You will be wonderful and wise citizens, and I am so proud and happy to share this day with you.”

Finally, I want them to know that they have left nothing behind—but instead, they have brought everything that makes them who they are to our neighborhoods and communities as the newest citizens of the United States. So, I read out the names of their countries of origin in alphabetical order, beginning with Afghanistan, Albania, Angola, and Australia, all the way to Venezuela, Yemen, Yugoslavia, and Zimbabwe. As I read the name of each citizen’s home country, they rise. And when I finish, I say one more country’s name—their adopted country, our shared country, the United States of America. More tears, maybe. And when everyone in the courtroom is standing, we sing together, loudly if not well, our national anthem.

This article is part of a series on the rule of law and its importance for business lawyers created by the American Bar Association Business Law Section’s Rule of Law Working Group. Read more articles in the series.

Editor

Byeongsook Seo is a member of Snell & Wilmer L.L.P.’s commercial litigation practice. He represents clients in handling complex and, often, heated disputes related to failed business ventures and disputes among business partners, executives, owners, and directors. Byeongsook is a member and Vice-Chair of the Business Divorce Subcommittee of the ABA Business Law Section Committee on Business and Corporate Litigation. His honors include Colorado Super Lawyers, Litigation Counsel of America Fellow, and The Best Lawyers in America. Byeongsook graduated from the United States Air Force Academy and obtained his law degree from the University of Denver, Sturm College of Law.

Contributors

Yitzchak L. Besser

Yitzchak L. Besser is a member of Stevens & Lee’s Litigation Department, assisting its teams with a range of due diligence, trial, and research matters. He has handled case analysis and draft opinions in an array of federal criminal and civil matters at both the appellate and trial court levels. Prior to joining Stevens & Lee, Yitzchak served as a staff attorney with the U.S. Court of Appeals for the Third Circuit. He also served as a judicial law clerk for the Hon. Glen H. Davidson of the U.S. District Court for the Northern District of Mississippi. He graduated magna cum laude from the University of Baltimore School of Law and received his undergraduate degree from New York University.

Kyle A. Cooper

Kyle Cooper is a business litigation partner at Tabet DiVito & Rothstein in Chicago, Illinois, where he focuses on complex business disputes and commercial litigation. He is a highly skilled and dedicated litigator with extensive experience in both federal and state courts. Since 2021, he has been recognized annually as a Super Lawyers Rising Star. Beyond his litigation practice, Kyle serves as outside general counsel for several businesses, providing strategic legal and business advice on a variety of matters. He is also actively engaged in civic matters and currently serves as the president of the Chicago Police Board.

Melissa Donimirski

Melissa N. Donimirski is a partner with Stevens & Lee in Wilmington, Delaware. She concentrates her practice in the area of corporate and commercial litigation in the Delaware Court of Chancery and has been involved with many of the leading business divorce cases in that Court. Melissa is a Co-Vice-Chair of the Business Divorce Subcommittee of the ABA Business Law Section, Business and Corporate Litigation Committee. She received her undergraduate degree from Bryn Mawr College and her law degree from the Delaware Law School of Widener University. Melissa has also co-edited and co-authored a treatise on business divorce, Litigating the Business Divorce, which is published by Bloomberg BNA.

Janel M. Dressen

Janel Dressen has over twenty-three years of experience as a business trial lawyer and is the CEO of her business litigation boutique law firm in Minneapolis, Minnesota. Ms. Dressen’s clients, co-workers, colleagues and competitors remark that she is a tenacious business litigator who will advocate tirelessly and creatively to resolve her client’s business disputes. She has been named as one of the “Top 50 Women Minnesota Super Lawyers” since 2019. Janel has an impressive list of significant victories for her clients, both plaintiffs and defendants. While she represents business owners and businesses in all types of complex business disputes, her “sweet spot” involves shareholder, ownership, fiduciary duty, owner/executive employment and business valuation disputes, i.e., “business divorces” for closely held and private businesses, business owners and executives.

Jennifer Hadley Catero

Jennifer Hadley Catero is based in Snell & Wilmer’s Phoenix office where she serves as Co-Chair of the firm’s Corporate Governance Litigation Group. Jennifer handles complex commercial litigation with an emphasis on corporate governance litigation, banking, consumer financial services and securities litigation, shareholder derivative litigation, D&O litigation, class actions and internal investigations. Jennifer also advises clients on compliance issues regarding consumer financial products and services. Jennifer has been named one of the top 100 Lawyers in Arizona and repeatedly named to The Best Lawyers in America for Commercial Litigation.

Brian C. Haussmann

Brian C. Haussmann is a partner at Tabet DiVito & Rothstein, LLC, a litigation boutique in Chicago, Illinois. Brian is a trial lawyer and business litigator who focuses on disputes between owners and other stakeholders in privately held businesses. He often litigates and resolves disputes involving the dissolution of private companies (sometimes referred to as “business divorces”), partner, owner, and shareholder rights, fiduciary duty claims, corporate governance, fraud and other business torts, and contracts. Brian is also active in his community and the legal profession generally. He currently serves on the Board of Managers for the Chicago Bar Association (CBA) and is Co-Chair of the Business Divorce and Complex Ownership Disputes Committee of the CBA. Brian also serves on the governing board of Legal Aid Chicago, the largest provider in Chicago of free legal services to those living in poverty.

Eric C. Milby

Eric Milby is a shareholder at Lundy Beldecos and Milby with offices in the Philadelphia area. For more than 25 years, he has focused his practice on Business Divorce, regularly handling direct and derivative disputes between business owners including control disputes, minority oppression, information demands, misappropriation, withholding distributions/phantom income, usurpation of corporate opportunities and other contractual and fiduciary duties. Eric regularly speaks on Business Divorce topics, is rated AV Preeminent by Martindale-Hubbel and has been selected by SuperLawyers annually since 2012. Eric is the immediate past chair of the Philadelphia Business Litigation committee and the incoming co-Chair of the ABA Business Divorce subcommittee.

Oderah C. Nwaeze

Oderah C. Nwaeze is an experienced trial attorney who helps clients resolve complex corporate and commercial disputes. For over a decade, he has led or worked on matters involving shareholder rights; actions arising under Delaware General Corporation Law and Delaware common law; lawsuits stemming from mergers, acquisitions and other corporate transactions; business divorces; and breach-of-contract matters. To be specific, Oderah has experience with “books-and-records” demands and litigation, actions to compel an annual meeting, stockholder appraisal litigation, derivative lawsuits, and judicial dissolution of an entity.

Tyson Prisbrey

Tyson Prisbrey is based in Snell & Wilmer L.L.P.’s Salt Lake City, Utah office and is a member of the firm’s commercial litigation practice group. He focuses his practice in complex commercial and corporate litigation, including litigation in corporate governance and general contractual disputes. He has experience advising public and private companies in disputes stemming from mergers and acquisitions, corporate financing, corporate control, and alternative entity dissolutions. Prior to joining Snell & Wilmer, Tyson gained significant experience in representing clients in the Delaware Court of Chancery litigating commercial and corporate governance matters.

Emma Sander

Emma is an Associate in Aronberg Goldgehn’s Business Litigation and Insurance Coverage practice groups. She represents clients, from individuals to large businesses, in breach of contract cases, fraud cases, regulatory matters, and other disputes.

John C. Sciaccotta

John C. Sciaccotta, Esq., Sr., Partner at Aronberg Goldgehn in Chicago serves on the firm’s executive management committee. John has litigated and resolved numerous complex business divorce cases. He is the President Elect of the Chicago Bar Association (will be installed as President in June of 2024). John is also an Arbitrator and Mediator of complex commercial disputes.

Victor Vital

Victor Vital is the Global Chair of Haynes Boone’s Trials Practice Group. Clients turn to Victor to handle high-stakes trials of all kinds, matters that are consequential such as cases involving significant dollar amounts and cases with the potential to damage major reputations or brands. Because of his broad trial experience, clients and lawyers turn to Victor regardless of the subject matter when they need a trial lawyer for their important cases. Victor is ranked in Band 1 by Chambers USA, Chambers and Partners, for Litigation: Trial Lawyers, 2024. Clients report to Chambers that Victor is “very versatile and can handle a lot of types of cases.” Victor’s trials and verdicts have been nationally recognized. For instance, he secured a jury verdict in a business dispute that was listed in the National Law Journal Top 100 list. Another one of his jury verdicts was listed in the Courtroom View Network’s list of Top 10 Most Impressive Defense Verdicts of 2022.

§ 4.1. Introduction

The term “business divorce” includes disputes that cause business partners/investors to end their partnership, situations that require owners to separate, or circumstances where a business partner/investor wishes to change the composition of management. This chapter provides summaries of developments related to such business divorce matters that arose from October 1, 2023, to September 30, 2024, from thirteen states.

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

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

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

§ 4.2. Access to Books and Records

§ 4.2.1. Pennsylvania

SWRP, LLC, v. Westwood Condominium Association Inc., 2024 WL 4601603. In an unreported opinion, the Pennsylvania Commonwealth Court reversed the trial court’s order permitting SWRP, LLC (“SWRP”), a member of the nonprofit Westwood Condominium Association (“Westwood”), to inspect redacted records of Westwood. SWRP sought the records that Westwood was required to maintain for the stated purpose to “unveil any mismanagement of [Westwood’s] operations.” Under the Pennsylvania Nonprofit Corporation Law, “[e]very nonprofit corporation shall keep minutes of the proceedings of the incorporators, members, the directors and any other body, and a membership register. The corporation shall also keep appropriate, complete and accurate books or records of account.” The trial court, directed Westwood to release the W-2 forms of all employees with “all information except name, address, title and gross/net incomes redacted.” The trial court did not order the release of the names of all members in good standing. Westwood did not challenge SWRP’s stated purpose for the inspection so the only issues on appeal were whether email addresses and phone numbers constitute part of the member register that is subject to inspection and whether a member is in good standing is subject to inspection under the Nonprofit Corporation Law. The Court remanded for the trial court to consider whether (i) Westwood could place limits or conditions on the inspections based on the members right to privacy and (ii) disclosing whether a member is in good standing is limited by considerations of privacy, privilege, or confidentiality or by the Fair Debt Collection Practices Act, and the Fair Credit Extension Uniformity Act.

Edenfield v. ECM Energy Services Inc., 300 A.3d 506 (Pa. Super. 2023). Plaintiff Edenfield appealed from an order denying his demand to inspect the records of ECM Energy Services, Inc. (“ECM”) and AdTrak 360 LLC (“AdTrak”). As to ECM, the court rejected Edenfield’s argument that the language of the statue permitting a shareholder to inspect the books and records did not preclude access by former shareholders and found that the plain language of the statute, defining shareholder as “record owner of shares of a corporation” meant only current shareholders. As such, Edenfield lacked standing to demand inspection of the books and records of ECM. As for AdTrak, a Delaware corporation, it was dormant and had closed its offices in Pennsylvania. At the trial court level, AdTrak had given a Pennsylvania accountant access to the QuickBooks records and permitted the accountant to access and supply records accessible from Pennsylvania to Edenfield. The court, however, did not require AdTrak to collect and produce records from Delaware. The Superior Court balanced public policies explaining that “while our courts will not take jurisdiction for the purpose of a regulating or interfering with the internal affairs of a foreign corporation, it is equally well settled that the granting of a right to inspect a foreign corporation’s books and records, which are within the jurisdiction, does not so offend.” Because the court concluded that AdTrak was neither operating nor storing records in Pennsylvania, it affirmed the trial court’s decision not to compel additional records finding that Pennsylvania lacked jurisdiction to do more.

§ 4.2.2. Texas

Gilbreath v. Horan, 682 S.W.3d 454 (Tex. App.—Houston [1st Dist.] 2023, pet. denied), reh’g denied (Apr. 20, 2023). In 1964, Wesley Gilbreath, Sr., the patriarch of the Gilbreath family, founded an advertising company focused on constructing, owning, and leasing billboards throughout Texas and parts of Louisiana. The company was first a sole proprietorship, but was later incorporated, and then converted into a family limited partnership. In 2000, a Texas limited liability company was formed in connection with the corporate conversion to act as the general partner. Over the years, Wesley Gilbreath transferred his original ownership interests in the business in equal parts to his six children through nearly identical irrevocable trusts. The Gilbreath family business then consisted of nine Texas limited partnerships, each with a general partner organized as a Texas limited liability company. The general partner LLCs were managed by a Board of Managers, consisting of four of Wesley’s children, each serving a lifetime appointment. The various trusts were each limited partners in the limited partnerships, each owning a one-sixth interest.

Shortly after Wesley’s passing, his daughter Lisa began asking questions about her father’s will, the various trusts, and the business overall. Lisa expressed concerns that one of the business entities had been paying for personal and nonbusiness expenses. Lisa accused her siblings of taking “millions of dollars,” informed her siblings that she would hold them to the highest fiduciary responsibility and made various requests to inspect company books and records. The situation deteriorated, and eventually prolonged litigation ensued.

In the trial court, Lisa pleaded in part for a declaration of her rights to access company books and records and for prospective injunctive relief. She also sought declarations that her siblings had failed to provide her with access to the relevant records in the past and pleaded for costs and damages resulting from those breaches. The trial court entered a declaratory judgment in Lisa’s favor and granted injunctive relief based on Lisa’s contractual and statutory claims for access to the books and records.

On appeal, the defendants articulated several challenges to the trial court’s adjudication of the books and records issues. First, defendants argued that because Lisa received the requested books and records before trial, the trial court lacked subject matter jurisdiction to enter the declaratory judgment because there was no justiciable controversy among the parties. Second, defendants argued that there was no evidence that Lisa had not been provided with the books and records to which she was entitled. Third, defendants argued that the jury questions concerning books and records were submitted with respect to a breach of contract claim and that the jury’s answers were “immaterial” because they were not tied to any damage question. Fourth, defendants argued that Lisa was not entitled to declaratory relief because she “couched her books and records claims, in part, in terms of a breach of the limited partnership agreements” and her claims for declaratory relief were based on the same theories. And fifth, defendants argued that various limitation-of-liability clauses in the limited partnership agreements precluded any finding of wrongdoing against the general partners—and further that Lisa never “properly pleaded any of those legal theories.”

The court of appeals was not persuaded by any of these arguments, and so overruled defendants’ challenge to the books and records claims. As to the first issue, the court of appeals reasoned that Lisa’s request for declaratory relief was not moot because it was—at least in part—prospective. Lisa requested a declaration that she had the right to access the books and records under the partnership agreements and Texas law prior to the litigation, but also in the future. As to the second issue, the court of appeals determined that there was some testimonial evidence that Lisa’s access to the pertinent books and records had been restricted. As to the third issue, the court of appeals determined that the jury questions in dispute “were material because the jury’s answers to those questions formed the basis of the injunctive relief the trial court granted, specifically the questions of imminent harm.” As to the fourth issue, the court of appeals concluded that Lisa’s claims that the defendants violated her statutory rights would not have been the proper subject of a breach of contract claim, and did not encompass issues already before the court. Moreover, Lisa did not seek damages for a breach of contract claim. Lastly, as to the fifth issue, the court of appeals reasoned that because the theories of “fraud, deceit, or a wrongful taking” and “gross negligence, bad faith, [and] willful breach” were pleaded by the general partners as part of their affirmative defenses and presented to the jury at their request, it was not necessary for Lisa to plead these affirmative defenses or any exceptions to the same. Additionally, according to the court of appeals, to the extent that the defendants contended that the limitation-of-liability clauses precluded Lisa’s declaratory judgment action, nothing in the clauses precluded such relief.

§ 4.3. Business Judgment Rule

§ 4.3.1. Pennsylvania

Matthew Serota, Derivatively on Behalf of London Towne Homeowners Association v. Matthew J. Mager, 304 A.3d 828 (Pa. Commw. Ct. 2023). Receiver appointed for homeowners’ association was entitled to deference under the Business Judgment Rule where receiver was disinterested, prepared written report, was independent, conducted adequate investigation and rationally believed his decision was in the HOA’s best interest. The court’s decision was based, in part, on a determination that any potential benefit would be negligible. The court reasoned that the receiver should be entitled to the same deference as the non-functioning executive board that the receiver was appointed to replace.

§ 4.4. Dissolution

§ 4.4.1. Delaware

Walter v. McManus, C.A. No. 2024-0412-NAC (Del. Ch. June 7, 2024) (ORDER). The Court of Chancery held that Petitioner Andrew C. Walter sufficiently pleaded the existence of convincing factors for judicial dissolution, and therefore denied Respondent Geraldine F. McManus’s Motion to Dismiss Walter’s Verified Petition for Judicial Dissolution.

Walter and McManus each owned a 50% interest in Class A Membership Interest of Granger Management Holdings LLC (“Granger” or “the Company”). Citing Fisk Ventures, LLC v. Segal, 2009 WL 73957 (Del. Ch.), aff’d, 984 A.2d 124 (Del. 2009), the Court noted that “convincing factors” for judicial dissolution include circumstances in which there is a board-level voting deadlock and the operating agreement gives no means of navigating around said deadlock. The Court found that Walter had well-pleaded such circumstances.

It further stated that a deadlocked LLC need not be “metaphorically ablaze” and that a deadlock over “serious managerial issues, such as strategic visions,” is sufficient for pleading a judicial dissolution claim. The Court also rejected McManus’s arguments that (1) Walter needed to allege additional deadlocked votes and (2) dismissal of his Petition was warranted because he could sell his interest to a third party.

Gibson v. Konick, 2024 WL 3370927 (Del. Ch. Jul. 10, 2024). The Court of Chancery ordered the dissolution of 23 West Bayard Street, LLC (the “Company”) under 6 Del. C. § 18-802 and appointed a liquidating trustee. The Court also ruled on various issues related to the membership interests and claims for indemnification and advancement.

The Company was formed in August 2020 to own residential property in Fenwick Island, Delaware. Plaintiff and Defendant are the Company’s only members, and Defendant is the Company’s sole manager. At some point the parties’ personal relationship deteriorated, leading to increased hostility. Plaintiff asserted that Defendant excluded her from management, failed to provide annual reports, and did not maintain proper financial transparency. And although she contributed significantly to property improvements and loan payments, Plaintiff was denied access to property and financial records. Plaintiff further claimed that Defendant failed to maintain the property or complete agreed-upon improvements, impacting its market value.

Because the Company’s LLC Agreement lacked a mechanism for resolving disputes or allowing Plaintiff to withdraw or transfer her interest, Plaintiff filed suit, seeking: (a) judicial dissolution of the Company; (b) declaratory judgment that Plaintiff was entitled to a 50% interest in the Company; (c) a decision as to Plaintiff’s entitlement to indemnification or advancement; and (d) specific performance of fiduciary duties.

The Court found that the LLC was deadlocked, with the two members unable to agree on critical management and operational decisions, justifying judicial dissolution under 6 Del. C. § 18-802. Accordingly, the Court ordered the dissolution of the LLC and appointed a liquidating trustee to manage the process. Plaintiff originally claimed that she and Defendant held equal 50% interests in the LLC, but based on the parties’ conduct and respective contributions, the Court of Chancery concluded that Plaintiff’s and Defendant’s membership interests were 39.49% and 60.51%, respectively. The Court denied Plaintiff’s request for declaratory judgment on indemnification or advancement because the LLC Agreement did not provide for such entitlements. Consistent with that, Defendant was not authorized to indemnify himself or advance his legal fees using LLC funds because that would be a misuse of the Company’s financial resources. The Court of Chancery found that neither party was entitled to recover for personal or renovation-related services rendered to the Company.

Benoliel v. Bombard, 2024 WL 3044641 (Del. Ch. Jun 15, 2024) (Order). The Court of Chancery granted the motion to dismiss the Verified Petition for Judicial Dissolution under 6 Del. C. § 18-802. The Court found that Petitioner failed to state a claim upon which relief could be granted.

GH Channel Holding LLC (“HoldCo”) was created as a passive holding company with its primary purpose being ownership and oversight of its subsidiary, OpCo. OpCo was responsible for the actual business operations, including managing agreements and financial transactions. HoldCo is equally owned by two families: the Franco Family and the Bombard brothers. HoldCo’s board of directors is comprised of two directors, one appointed by each family, requiring consensus for any action.

Due in part to distrust of Respondent’s family, Petitioner sought judicial dissolution of HoldCo, alleging that the company was in a deadlock and lacked an equitable exit mechanism, making it impracticable for the company to continue its business in conformity with its operating agreement. Petitioner highlighted three main areas of disagreement: (1) keeping minutes; (2) retaining an accountant for evaluating transactions; and (3) whether to amend OpCo’s operating agreement.

The Court analyzed whether the actions that cannot be carried out due to deadlock are essential to the company’s business purpose. In doing so, it emphasized that HoldCo’s purpose was limited and primarily passive, with governance and operational matters being the responsibility of OpCo’s board. Ultimately, the Court found that Petitioner’s claims did not sufficiently demonstrate that HoldCo could not carry out its business because of the stalemate. In particular, the Court of Chancery concluded that:

1. The failure to keep minutes did not frustrate HoldCo’s business purpose;
2. the retention of an accountant was beyond HoldCo’s purpose and pertained to OpCo; and
3. the potential to amend OpCo’s operating agreement eliminated likelihood of actual deadlock.

The Court also noted that because Petitioner’s allegations regarding governance and operational issues were mainly related to OpCo, those issues did not justify the dissolution of HoldCo. Without factual allegations sufficient to establish that the alleged deadlock impeded HoldCo’s ability to carry out its business, the Court dismissed, with prejudice, Petitioner’s request for judicial dissolution.

§ 4.4.2. Massachusetts

Clarke v. Murphy, 104 Mass. App. Ct. 1118 (2024), review denied, 494 Mass. 1108 (2024). This case arose from the dissolution of a partnership between two individuals who co-owned a property through a trust and operated a catering business on the premises. The partnership agreement stipulated that one partner provided the initial capital investment for the trust, while the other partner’s contributions would increase over time through rent payments made by the catering business.

Over the years, disputes emerged regarding financial management, unpaid rent and ownership interests. One partner alleged breaches of fiduciary duties, failure to meet financial obligations and misuse of partnership assets. The other partner sought dissolution of the partnership and an equitable division of proceeds from the property sale.

The trial court ruled in favor of the partner seeking dissolution, finding that they had fulfilled their financial obligations under the partnership agreement. Specifically, the court determined that the partner had met their role as a guarantor for the trust’s promissory note and mortgage. It also rejected claims regarding unpaid rent, as the parties had orally agreed to waive certain payments during periods of financial difficulty. Furthermore, the court concluded that the sale of catering equipment and fixtures did not harm the partnership, as the proceeds were properly accounted. The court dissolved the partnership, ordered the sale of the property and directed that the proceeds be equally divided.

On appeal, the Massachusetts Appeals Court affirmed these findings. It emphasized that the partnership agreements were correctly interpreted and that the partner’s actions complied with their obligations. The appellate court also dismissed additional claims for damages, concluding that they were unsupported or resolved by the terms of the dissolution.

§ 4.4.3. New Jersey

AC Ocean Walk, LLC v. Blue Ocean Waters, LLC, 478 N.J. Super. 515, 316 A.3d 955 (App. Div. 2024). In this interlocutory appeal, the Appellate Court addressed several matters of first impression in New Jersey: (1) whether a failure to respond warranted dissociation from a partnership under the Uniform Partnership Act and (2) what the proper effective date of dissolution of a partnership is.

In 2018, Plaintiff, AC Ocean Walk partnered with Defendants to operate clubs, sharing ownership and financial responsibilities, including renovation costs, pre-opening expenses, and covering revenue shortfalls for lease payments. Disputes arose over renovation costs, financial contributions, recordkeeping, and control. In 2020, Plaintiff sent a breach notice alleging that Defendants failed to meet financial obligations, owed over $2.4 million, and warned of termination if the breaches were not cured. After receiving no response, Plaintiffs filed a complaint in February of 2021 seeking judicial dissociation and damages. In January 2023, the court granted judicial dissociation and dissolution, citing the Defendants’ silence as evidence of their inability to meet partnership obligations.

Defendant partner’s conduct in not responding to plaintiff partner’s notice of breach of partnership agreement warranted dissociation from the partnership under the Uniform Partnership Act (UPA), although trial court did not find that defendant breached partnership agreement; defendant’s refusal to respond to notice of breach after two years of unquestionable discord in partnership prejudicially affected business and made it impracticable for partnership to continue, and defendant’s conduct evinced irreparable deterioration of the partnership relationship and impasse regarding important business because of lack of communication between partners.

Further, judicial dissolution is also allowed under the same “not reasonably practicable standard” that applies to the dissociation of individual partners. However, the Court did find that the dissolution effective date was incorrect. The “presumptive” dissolution date is the date it is ordered by a court according to the UPA. There was no New Jersey precedent addressing this matter, so again the Court looked to other jurisdictions. Case law indicated there is nothing in the statute that permits retroactive dissociation, and dissociation occurs when a partner is “actually expelled.” Even though Defendants enjoyed no powers, they were “formally” still a partner until the date of dissolution. This confirmed the effective date should be the date of the dissociation order and should not be backdated.

§ 4.4.4. Pennsylvania

Estate of Caruso v. Caruso, 322 A.3d 885, 897–98 (Pa. 2024). Widow of partner in general partnership sought to enforce buy-out provision in the partnership agreement requiring a surviving partner to buy out the interest of a decedent partner within 90 days after death. Husband died in 2003, and the remaining partner did not seek to buy his share of the partnership, nor did widow, as executrix, seek to enforce it. The estate was finalized in 2006. Widow remained a 50% owner but became dissatisfied and, in 2013, she filed a lawsuit to compel access to information and participation in the operation of the partnership. But, in 2015 the surviving partner died, and widow sought to exercise the buy-out provision against the surviving partners estate, tendering a check for the book value of his interest. The estate of the surviving partner refused the check arguing that the partnership dissolved when the first partner died, and the current partnership was not bound by the partnership agreement. The court agreed and rejected the lower courts’ conclusion that widow acquired her husband’s rights under the Partnership Agreement, or put another way, that she “stepped into his shoes.” Rather, the court found that caselaw does not support the argument that a party steps into the shoes of an existing partner unless that party has been explicitly assigned the rights under the partnership agreement. Here, widow could not force a buyout upon the death of the remaining shareholder.

Toth v. Toth, 324 A.3d 469 (Pa. Super. 2024). In Toth, the court granted dissolution and ordered a detailed plan of dissolution under the court’s statutory authority to fashion equitable relief where the management of the company was hopelessly deadlocked. The court declined Appellant’s request that the court use its equitable power to force a buyout of Appellee because Appellants had engaged in considerable wrongful conduct, including trying to reorganize the company as a Florida entity with them in control, locking Appellee out of the company offices, email and computers, and spreading rumors within the company that Appellee was mentally unwell. The court found that granting the Appellant’s request for a forced buyout would have effectively given them the result they sought to achieve through their wrongful conduct.

§ 4.4.5. Texas

Holdridge v. Wallace Ryne, O.D., P.C., No. 02-23-00420-CV, 2024 WL 3455838 (Tex. App.—Fort Worth July 18, 2024, no pet.). Lyons and Ryne co-owned an eyecare partnership where Holdridge worked. Lyons also owned a related surgical center that worked together with the eyecare partnership, transferred its income to that partnership, and relied on it for administrative functions. As Ryne’s retirement neared, he, Lyons, and Holdridge entered a contract which provided for Lyons’s purchase of Ryne’s 50% interest in the eyecare partnership for the “partnership fair market value” and for Lyons’s subsequent sale of half of that interest to Holdridge. The parties later disputed the meaning of “partnership fair market value” and things deteriorated from there. Following a bench trial, the court—among taking other actions and making other declarations—dissolved the eyecare partnership.

The court of appeals, among other actions, reversed the trial court’s order of dissolution. The trial court originally dissolved the partnership in large part due to the actions of one partner that were alleged to have created a “toxic” or “poisonous” workplace. The court of appeals determined that, while “‘[t]oxic’ workplaces are no doubt unpleasant . . . they do not warrant the extraordinarily harsh remedy of judicial dissolution. See Nerium SkinCare, Inc. v. Nerium Int’l, LLC, No. 3:16-CV-1217-B, 2018 WL 2323243, at *7 (recognizing that ‘[S]ection 11.314 requires more than just a disagreement between owners’ and holding ‘strained relationship’ did not conclusively establish grounds for dissolution when owners disagreed regarding scope of products sold by company).”

The court of appeals further articulated that, “[g]iven Texas’s longstanding commitment to the promotion of economic development and the freedom of contract, courts are loath to shut down profitable, contract-governed businesses by judicial fiat.” In the court’s view, the Texas Legislature had provided limited grounds on which such involuntary dissolution is permitted, and, in this case, there was no evidence to satisfy any of those grounds. See Tex. Bus. Orgs. Code Ann. § 11.314. Hence, the evidence was legally insufficient to support the trial court’s dissolution of the partnership.

Jafar v. Beach & Beaches, Inc., No. 01-22-00412-CV, 2024 WL 3107684 (Tex. App.—Houston [1st Dist.] June 25, 2024, no pet.). Two partners jointly purchased a gas station and convenience store business but later had a falling out which resulted in litigation. At the end of the trial court proceedings, the court judicially dissolved the partnership and ordered that the business as well as the land on which the business sat be equitably partitioned. The trial court then determined that one partner owned 49% of the business and 15% of the land, while the other partner owned 51% of the business and 85% of the land. After concluding that an order “compelling the sale of the property would be futile,” the trial court ordered that the partner with greater interest in the business and land could purchase the interests of the other partner. The trial court also allowed the “total amount of all judgments” awarded to the purchasing partner to offset the purchase price.

On appeal, the parties focused on two statutory bases for the dissolution and subsequent compulsory sale—the Texas Property Code and the Texas Business Organizations Code. The court of appeals first determined that the trial court’s order of partition and compulsory sale were not supported by Tex. Prop. Code § 23.001, which contemplates partition by sale. See also Tex. R. Civ. P. 770. The court of appeals then determined that Tex. Bus. Org. Code § 11.314 and § 11.054 similarly did not support the trial court’s order of partition and compulsory sale because “construing Section 11.054 to permit the trial court to force a sale of [one partner’s] interests to [another partner] would directly conflict with the requirements of a winding up process under Section 11.052.” Lastly, the court of appeals held that the purchasing partner in this case could not rely on Tex. Bus. Org. Code § 152.602 (providing that a partnership has an automatic right to redeem a partner’s interest if a partner wrongfully withdraws) because the purchasing partner made no claim to expel his partner from the partnership. Instead, quite to the contrary, his counterclaim was for “dissolution.” Accordingly, the court of appeals reversed and remanded in part.

§ 4.5. Special Litigation Committee

§ 4.5.1. Pennsylvania

MBA Development, LP v. Miller, 316 A.3d 51 (Pa. 2024). Statute permitted judicial review of the decisions of a special litigation committee (“SLC”). Limited partner could not compel mandatory arbitration of his challenges to the SLC determination under the partnership agreement’s arbitration clause because the partnership agreement incorporated the provisions of the Pennsylvania Uniform Limited Partnership Act that clearly and unambiguously calls for “judicial” review of SLC determinations.

§ 4.6. Jurisdiction, Venue, and Standing

§ 4.6.1. California

Lew-Williams v. Petrosian, 320 Cal. Rptr. 3d 59 (2024). Physician’s surviving spouse and physician’s professional corporation filed suit against physician’s former business partner and others, arising out of defendants’ alleged embezzlement of physician’s and corporation’s funds. The trial court granted defendants’ motion to compel arbitration, and then subsequently issued order to show cause after plaintiffs failed to initiate arbitration and dismissed complaint for plaintiffs’ failure to arbitrate. Plaintiffs appealed. The appellate court reversed the dismissal because once the trial court issued order compelling arbitration of plaintiffs’ claims, it lacked jurisdiction to dismiss for failure to prosecute. If a party fails to diligently prosecute an arbitration, the appropriate remedy is for the opposing party to seek relief in the arbitration proceeding (and, if necessary, the opposing party may need to initiate the arbitration for this purpose).

§ 4.6.2. Pennsylvania

Larikov, LLC v. Cao, 314 A.3d 1283 (Pa. Super. 2024). In Larikov, the court dismissed the appellant’s fourth amended complaint finding that appellant, a purchaser of the LLC’s interests, did not have standing under the Pennsylvania Uniform Limited Liability Company Act. First the court found that because the LLC operating Agreement had no provisions governing the transfer of membership interests; therefore, statutory provisions apply. The court then noted that “one of the most fundamental characteristics of limited liability company law [is] its fidelity to the ‘pick your partner’ principle.” Under that principle, an LLC member cannot transfer membership rights and obligations to a third party other than the statutory defined “transferable interest” unless expressly provided for in the operating agreement. A transferable interest entitles the member to distributions but not to participate in company management.

§ 4.6.3. Texas

Wendt v. Moore, No. 01-23-00128-CV, 2024 WL 3528437 (Tex. App.—Houston [1st Dist.] July 25, 2024, no pet.). This case arose from a dispute among four sisters over management of a family partnership and ownership of land used for farming. Laurel sued her sisters—Evalyn, Amilee, and Jackie—for breach of fiduciary duty, fraud, embezzlement/theft, and breach of contract. Evalyn, Amilee, and Jackie moved for summary judgment, arguing that Laurel’s claims were barred by res judicata because they were, or could have been, litigated in a prior suit between the parties in Fort Bend County. Shortly before the summary judgment hearing, Laurel amended her petition to raise new factual allegations and claims. The trial court granted summary judgment and dismissed Laurel’s claims with prejudice.

On appeal, Laurel contended that (1) the trial court’s judgment, which was based on res judicata, improperly failed to reflect that it was “subservient to any final decision” made by another appellate court in its review of the Fort Bend County judgment; (2) the trial court erred by granting summary judgment and dismissing Laurel’s claims because her amended petition raised factual allegations and claims that were not addressed by the summary judgment motion; and (3) the trial court erroneously failed to recognize that Laurel’s breach of contract claim could not have been litigated in the Fort Bend County suit because that claim was not ripe until after the Fort Bend County court rendered its judgment against Laurel.

The court of appeals overruled Laurel’s first and third issues but agreed with Laurel that her second amended petition raised new factual allegations and claims that were not raised in her first amended petition and were not addressed in her sisters’ summary judgment motion. Accordingly, the court of appeals held that the trial court erred to the extent that it granted summary judgment on Laurel’s breach of fiduciary duty and embezzlement/theft claims based on certain allegations.

§ 4.6.4. Utah

Reed v. Tintic Consolidated Metals, LLC, 2024 WL 3952760 (D. Utah Aug. 27, 2024). The court found that the law of the forum state governed whether a cancelled LLC could be sued for tort liability, not the law of the state under which the LLC was originally organized.

In a claim resulting from a workplace injury, the plaintiff sued the former operators of a mine located in Utah in state court. The former operators of the mine were Delaware LLCs. Months before the plaintiff brought suit, the two Delaware LLCs were acquired by a Canadian corporation. The defendant, the Canadian corporation, removed the lawsuit to federal court, asserting diversity jurisdiction. The plaintiff moved to remand the case because the defendant failed to assert the citizenship of the Delaware LLCs. The defendant contended that it could satisfy the diversity jurisdiction requirement without alleging the citizenship of the Delaware LLCs because those entities were cancelled a few months before plaintiff initiated the lawsuit. Indeed, defendant claimed, under Delaware law, a plaintiff cannot establish a cause of action against a cancelled LLC. The court disagreed because the defendant failed to demonstrate that under Utah law a cancelled LLC is immune from suit. A cancelled LLC’s tort liability to a third party is not an internal affair. Just as Delaware could not confer nationwide tort immunity to LLCs formed under Delaware law, it may not eliminate liability for a cancelled LLC or set the conditions for bringing a lawsuit for a tort committed in another state. While Delaware law governs the procedure for cancelling a Delaware LLC, the effect that cancellation has on third-party plaintiffs asserting tort claims against the cancelled LLC is controlled by the law of the forum state.

§ 4.7. Claims and Issues in Business Divorce Cases

§ 4.7.1. Alternative Entities

§ 4.7.1.1. Delaware

Gurney-Goldman v. Goldman, 321 A.3d 559 (Del. Ch. 2024). In a matter of first impression, the Court of Chancery determined that under 6 Del. C. § 18-705: (1) the estate of a deceased member of an LLC does not automatically become a member and instead only holds an assignee interest, and (2) the executor of the estate can, for the purpose of administering and settling the estate, exercise the member rights associated with the member interest. The Court stated that, as interpreted above, § 18-705 reflects a compromise between two policies: the non-mandatory pick-your-partner principle and a desire to treat an LLC member fairly after an adverse life event.

The case relates to the estate of billionaire real estate mogul Sol Goldman, who left behind four children: Jane, Diane, Amy, and Allan. Each child ended up with a 25% member interest in the two LLCs managing the Goldman family empire’s real estate holdings. Sol chose Jane and Allan to serve as co-executors, and the two eventually transitioned into ongoing roles managing the family business. When Allan died, he appointed his son Steven as executor of his estate. Steven sought to step into his father’s position with the business, but Jane rebuffed his efforts and viewed herself as the sole, remaining decisionmaker.

Amy and Stephen subsequently sought to exercise put rights that they held under the operating agreement for one of the LLCs managing the family’s property. After securing a third-party appraisal, Jane offered to redeem 5% of Amy and Steven’s equity for $91 million. Amy and Steven considered this figure to be facially inadequate, and attempts to settle the dispute foundered. Amy and Steven brought a lawsuit in New York state court against Jane and Diane, and then initiated the instant case in Delaware seeking declaratory relief as to the above-referenced issues.

To solve the question of whether the estate was a member or an assignee, the Court noted that an LLC member interest is personal property that transfers by operation of law to the estate. Thus, under the Delaware Limited Liability Company Act (the “LLC Act”), the recipient of a member interest only receives the rights of an assignee. In seeking to interpret the language of § 18-705 of the LLC Act, the Court turned to the history of analogous limited partnership law, and revealed a steady expansion of the scenarios in which a personal representative could exercise rights.

This statutory progression supported a plain-language reading of § 18-705 that authorizes a personal representative to exercise full governance for a proper purpose. The Court discussed the possibility that this statutory interpretation may clash with the pick-your-partner principle—which states that one is generally entitled to choose their own business associates in a closely held enterprise like an LLC—and held that, to the extent § 18-705 conflicts with this principle, the statute controls. Consequently, even where an estate remains an assignee, the executor of the estate can nevertheless exercise the governance rights that a member possessed, so long as the executor acts for the proper purpose of settling the estate or administering its affairs.

§ 4.7.2. Breach of Contract

§ 4.7.2.1. Colorado

Bartch v. Barch, 111 F.4th 1043 (10th Cir. 2024). Former co-owner of limited liability company (“LLC”), a marijuana business licensed to operate under Maryland law, brought action against LLC’s president and president’s corporation, which owned minority membership share in LLC, for breach of contract and other claims. President and his company never raised illegality as an affirmative defense. The trial court entered judgment in favor of co-owner on contract claim, awarding him $6.4 million in damages. The president and president’s corporation never appealed this judgement or paid the judgment. Co-owner sought to enforce judgment, and the trial court granted relief, ordering defendants to use best efforts to sell corporation’s equity interest in LLC, to turn over proceeds from any such sale, and to avoid devaluing equity until sale (“Judgment Enforcement Order”). Defendants appealed, and pending appeal, moved for relief from judgment on ground that it was void, arguing district court lacked subject matter jurisdiction to enter original judgment which compelled violation of Controlled Substances Act (“CSA”). The trial court denied motion, and defendants appealed. Appeals were consolidated.

This case presented a question about the nature and extent to which a federal court may act to resolve a dispute related to a marijuana business that operates legally under state law. The Circuit Court first determined that an illegality defense goes to whether co-owner had a meritorious contract claim, not whether co-owner has standing. President and his company, therefore, did not properly challenge jurisdiction of the original jurisdiction.

Under Colorado state law, C.R.C.P. 69(g), a creditor may request that a court order a debtor “to apply [certain] property . . . towards satisfaction of [a] judgment.” Since federal courts follow state procedures when enforcing a federal money judgment, the Circuit Court ruled that the trial court had authority to enter the Judgment Enforcement Order. However, the Circuit Court remanded the question of whether compliance of the Judgment Enforcement Order can be accomplished without violating the CSA because the Judgment Enforcement Order is a form of injunctive relief which is subject to equitable considerations, including public policy concerns about violating the CSA, which makes it a crime “to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance.” 21 U.S.C. § 841(a)(1). Marijuana is a Schedule I controlled substance.

§ 4.7.2.2. Delaware

Sunder Energy, LLC v. Jackson, 305 A.3d 723 (Del. Ch. 2023). The Court of Chancery refused to enter a preliminary injunction against Sunder Energy, LLC’s (“Sunder”) co-founder and former head of sales, Tyler Jackson, enjoining him from breaching the restrictive covenants contained in Sunder’s LLC Agreement.

In Fall 2019, two of Sunder’s co-founders had a law firm draft an LLC agreement that included broad restrictive covenants without involving the other co-founders in the process. The operating agreement contained restrictive covenants prohibiting Jackson from: (1) engaging in competitive activities; (2) soliciting Sunder’s current and former employees and contractors; (3) engaging with Sunder’s customers; and (4) influencing Sunder stakeholders to terminate their relationship with Sunder (together, the “Restrictive Covenants”). The LLC agreement was presented to the minority members on New Year’s Eve without proper disclosures noting that the LLC agreement would alter their rights and internal governance dramatically. Nevertheless, Sunder sought to enjoin Jackson pursuant to the LLC agreement’s terms.

The Court denied Sunder’s motion for a preliminary injunction, finding that Sunder did not demonstrate a reasonable probability of success on the merits due to the overbreadth and unreasonable nature of the restrictive covenants and the breach of fiduciary duty by Sunder’s co-founders. Delaware courts do not automatically enforce restrictive covenants. Instead, such covenants are scrutinized to determine whether they are reasonable in geographic scope and temporal duration, advance a legitimate economic interest, and balance the equities involved.

In this case, the Court of Chancery found the Restrictive Covenants to be overly broad and unreasonable because, among other things, the noncompete and non-solicitation provisions purported to restrict Jackson from working in the entire door-to-door sales industry without regard to whether Sunder markets or sells similar product. The LLC Agreement also purported to prohibit Jackson from working with any current or former Sunder employee or independent contractor irrespective of why the person left Sunder’s employ or the industry in which Jackson might work with such person. In addition, the Restrictive Covenants as written may apply in perpetuity. Worse yet, the Restrictive Covenants were embedded in the LLC agreement without proper disclosure or explanation to the minority members, constituting a breach of fiduciary duty by Sunder’s majority members.

Davis v. Tristar Claims Management Services, Inc., 2024 WL 885440 (Del. Super. Ct. Feb. 29, 2024). In this case, the Delaware Court of Chancery ruled in favor of Tristar Claims Management Services, Inc. (“Tristar”), granting its motion for judgment on the pleadings, finding that Tristar did not breach what was essentially an earn-out provision in the subject Asset Purchase Agreement.

In 2017, James Paul Davis and Thomas Williams (referred to as “Sellers”) sold the assets of their insurance business (“PCS”) to Matrix Absence Management, Inc. (“Matrix”) through an Asset Purchase Agreement (the “APA”). Under the APA, Sellers received cash consideration of $10,000, and each signed five-year Employment Agreement with Matrix. The Employment Agreement entitled Sellers to salary, benefits, bonuses, and performance payments based on revenue growth and operating profit growth during a five-year period. For the performance payments to be triggered, operating profit growth must exceed 8%. PCS did not produce any profits until the fifth year after it was sold to Matrix. In 2021, Tristar acquired Matrix, assuming the latter’s obligations to Sellers under the APA.

Sellers sued Tristar for breach of contract, asserting that they were entitled to $3,195,896 after achieving the operating profit growth required under the APA in the fifth year following PCS’s sale to Matrix. Tristar, Matrix successor-in-interest, disagreed, arguing that there could be no recognizable increase in profit in a year following one where there were no profits. Sellers also claimed that Tristar violated the Delaware Wage Payment and Collection Act by withholding the same performance payments.

The Court of Chancery construed the APA’s definition of Operating Profit Growth to be an increase in operating profit made in one year in relation to the operating profit of the next, presupposing that profits must have been recorded in each year in order for an increase to be considered Operating Profit Growth. The Court additionally took judicial notice of the commonly accepted method of calculating percentage increase, where 0% profit in the preceding year results in a 0% profit increase in the following year, even where a net profit is posted. Accordingly, the Court ruled in Tristar’s favor, finding that the operation profit growth condition was not satisfied because PCS did not have profit in the fourth year.

§ 4.7.2.3. Florida

N. Bay Green Investments, LLC v. Cold Pressed Raw Holdings, LLC, 388 So. 3d 266 (Fla. Dist. Ct. App. 2024). In case, the Florida Third District Court of Appeal affirmed the trial court’s final judgment in favor of Cold Pressed Raw Holdings, LLC (“CPR Holdings”), which included awarding damages and attorneys’ fees. The appellate court also addressed a cross-appeal regarding the trial court’s decisions on the election of remedies and the dismissal of certain counterclaims. This case involves a dispute between LLC members who agreed to dissolve their business, after one of the members failed to satisfy the terms of the dissolution.

In this case, CPR Holdings and Defendants/Appellants North Bay Green Investments, LLC (“North Bay”) entered into a joint venture agreement involving the operation of a business manufacturing organic juices—Green Holdings, LLC (“Green Holdings”). The joint venture faced operational challenges due to various disputes over management of and financial obligations to the joint venture. As a result, the parties later decided to end the joint venture, executing a Settlement Agreement that included terms for payments and the transfer of ownership interests. Under the Settlement Agreement, CPR Holdings transferred its 50% ownership interest in Green Holdings to North Bay, and in return, North Bay agreed to pay CPR Holdings $200,000 in installments pursuant to a promissory note.

North Bay, however, failed to make the first payment under the Promissory Note, so CPR Holdings filed a breach of contract claim. In turn, North Bay filed a fraudulent inducement counterclaim seeking recission of the Settlement Agreement because CPR Holdings allegedly failed to transfer certain of its assets to North Bay. Based on the same alleged conduct, North Bay also asserted that CPR Holdings breached its fiduciary duties and the implied covenant of good faith and fair dealing.

The trial court found in CPR Holding’s favor on several counts, after concluding that North Bay breached the Settlement Agreement and the Promissory Note because it failed to make certain payments required by those agreements. That court also found that North Bay was not entitled to money damages because it elected to sue for recission of contract, therefore waiving the right to money damages. And North Bay’s counterclaims for fraudulent inducement and breach of fiduciary duty were dismissed because they were not adequately supported by the evidence. Finally, because CPR Holdings prevailed on its claims, the trial court awarded attorneys’ fees, as contemplated by the Settlement Agreement. The appellate court affirmed each of the foregoing holdings.

§ 4.7.2.4. Massachusetts

Basani v. Cygilant, Inc., 104 Mass. App. Ct. 1109 (2024). This case concerned a protracted conflict between two minority shareholders and the cybersecurity company they founded. In 2019, the shareholders stepped down from operational roles but retained a 28.14% interest in the company’s preferred stock and contractual rights designed to protect their interests. These rights included veto powers over certain equity financing transactions and provisions to prevent stock dilution.

In 2020, the company sought additional operating capital through equity financing, which required the consent of its minority shareholders. The shareholders refused to grant their consent or waive their anti-dilution rights, citing inadequate financial disclosures and claiming that the proposed financing would harm their interests. Instead, they demanded that the company buy out their shares. When the company rejected the buyout proposal, it pursued alternative financing at a higher cost. As a result, the shareholders filed a breach of contract lawsuit against the company. The company filed counterclaims, accusing the shareholders of acting in bad faith by withholding their consent to the equity financing.

The Massachusetts Appeals Court affirmed the dismissal of the company’s counterclaims. It held that under applicable Delaware law, fiduciary duties arise only for shareholders who exercise actual control over the corporation’s affairs. As minority shareholders, the individuals lacked control over the company’s board or strategic decisions. The court also determined that the shareholders’ actions—refusing to waive contractual rights and requesting further disclosures—were a proper exercise of the protections provided to them under their stock agreements.

§ 4.7.2.5. New York

Behler v. Kai-Shing Tao, 227 A.D.3d 121 (2024). Plaintiff and defendant entered into an oral agreement in which plaintiff would invest $3 million in an LLC with the opportunity to cash out of his investment upon certain conditions being met. When a condition was met, plaintiff demanded he be cashed out, but defendant refused. After the oral agreement was executed and before plaintiff’s demand, the LLC agreement was amended, which included membership interest and distribution clauses. The amended LLC agreement also contained an integration and merger clause. The court held that, pursuant to Delaware law, the amended LLC agreement, by virtue of the merger clause, superseded the oral agreement. The plaintiff, as a member, was bound by the LLC agreement. The court also denied the plaintiff’s claim for promissory estoppel because the LLC agreement governed.

§ 4.7.3. Breach of Fiduciary Duty

§ 4.7.3.1. Delaware

In re Sears Hometown and Outlet Stores, Inc. Stockholder Litig., 309 A.3d 474 (Del. Ch. 2024). The Court of Chancery held that a majority shareholder did not breach his fiduciary duties as a controlling stockholder where he believed in good faith that his actions were in the best interests of the subject company. The Court further held, however, that the transaction pushed through by the majority stockholder was not entirely fair and therefore awarded damages to the minority stockholders.

Sears Hometown and Outlet Stores, Inc. (“SHOS” or “the Company”) conducted business through two segments: (1) the Sears Hometown and Hardware Segment (“Hometown”) and (2) the Sears Outlet Segment (“Outlet”). A committee of independent directors sought to liquidate Hometown and continue operating Outlet. The Company’s controlling stockholder, believing that the liquidation plan would destroy the Company’s value, used his voting power as the controlling stockholder to adopt a bylaw that required that any Hometown liquidation plan receive approval from 90% of the Board at two separate votes taken at least thirty business days apart.

The controller also removed two members of the Board—thereby removing them from the committee as well—and replaced them with two individuals that would likely support his plan even though there were no direct ties between them and the controller. The sole remaining member of the committee and the controller subsequently agreed to an end-stage transaction that eliminated the minority stockholders’ interests in the Company.

A group of minority stockholders filed a complaint against the controller arguing that he breached his fiduciary duties by blocking the liquidation plan. The Court of Chancery held that when exercising stockholder-level voting power, a controller owes (1) a duty of good faith that demands that the controller not intentionally harm the corporation or its minority stockholders and (2) a duty of care that demands that the controller not harm the corporation or its minority stockholders through grossly negligent action. However, a controller is not required to meet the higher standards demanded of directors, who must act affirmatively to promote the best interests of the corporation and must subjectively believe that the actions they take further that objective.

The Court also established that enhanced scrutiny is the appropriate standard of review in cases where “the controller took actions that invaded the space typically reserved for the board of directors.” The Court then held that the controller acted consistent with his fiduciary duties by blocking the liquidation plan, since he (1) believed in good faith that the plan was fundamentally flawed and (2) had sufficient information to make an assessment that was not grossly negligent.

But the Court found that the end-stage transaction failed to meet the requirements of the entire fairness standard, even though the controller sincerely believed that the transaction was fair. The Court noted that when a conflict transaction is not entirely fair, a self-dealing fiduciary is liable without regard to his or her mental state. It therefore awarded damages to the minority stockholders equal to the difference between what they received through the transaction and the fair value of the Company.

Lebanon Cty. Employees’ Retirement Fund v. Collis, 311 A.3d 773 (Del. 2023). The Supreme Court of Delaware reversed and remanded a decision by the Court of Chancery in which the lower court found that the plaintiffs had sufficiently articulated a claim under In re Caremark Intern. Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996), but nevertheless dismissed their complaint after concluding that demand would not have been futile, and the plaintiffs therefore lacked standing.

After AmerisourceBergen Corporation (“AmerisourceBergen” or “the Company”) incurred liability for over $6 billion in a 2021 global settlement related to the Company’s role in the opioid epidemic, the stockholder plaintiffs filed a derivative suit in the Court of Chancery alleging that the company’s directors and officers failed to adopt oversight measures and reasonable policies for preventing the unlawful distribution of opioids. Plaintiffs did not serve a demand on the board prior to filing suit.

The Court of Chancery found that the plaintiffs had sufficiently articulated a claim under Caremark, but dismissed their complaint having determined that demand would not have been futile due to a holding by the United States District Court for the Southern District of West Virginia in opioid-related multidistrict litigation in which that court found that AmerisourceBergen had complied with the law on preventing the diversion of controlled substances. As a result, the Court of Chancery reasoned that the Board did not face a substantial likelihood of liability under the pleaded claims. The West Virginia decision was issued after the plaintiffs had filed their complaint.

On appeal, the Delaware Supreme Court determined that the Court of Chancery had erred by using D.R.E. 202—which provides for judicial notice of law—to effectively adopt the factual findings of another court adjudicating another case, and thereby accept a contradictory version of the well-pleaded facts in the plaintiffs’ complaint, which are presumed to be true under Delaware’s rules of procedure. Furthermore, the Supreme Court found that the Court of Chancery’s reliance on the West Virginia Decision changed the date at which demand futility should be considered to a date six months after the filing of the complaint. Such a change impermissibly deviated from the precedent established in Rales v. Blasband, 634 A.2d 927 (Del. 1993), that demand futility is evaluated as of the time the complaint is filed.

§ 4.7.3.2. Florida

Kinchla v. Ran Investments, LLC, 2024 WL 4096229 (Fla. App. 6 Dist. Sept. 6, 2024). The District Court of Appeal of Florida, Sixth District, affirmed in part and reversed in part the trial court’s decision regarding claims of breach of fiduciary duty, breach of the operating agreement, and indemnification. The appellate court remanded for entry of a revised damages award. This case arose after an LLC member failed to make the capital contributions required and interfered with the LLC’s business opportunity.

Kilgore Properties, LLC (“Kilgore”) was formed to develop and sell real property. Its members were Mark 48, LLC (“Mark 48”), who held a 35% ownership interest, and Nanlann, Inc. (“Nanlann”), which held a 65% ownership interest. Under Kilgore’s operating agreement, Mark 48 was obligated to make a $350,000 capital contribution, but it failed to do so.

Kilgore obtained a mortgage loan to acquire property to be developed and sold. But when Kilgore attempted to sell the property to Saibaba of Orlando, Inc. (“Saibaba”) for $1.6 million, but Mark 48 objected. Mark 48’s alleged conduct caused the sale to fall through, resulting in financial losses for Kilgore when it could not pay its mortgage and defaulted on the loan. Nanlann then filed an action to dissolve Kilgore and force the sale of its property. During litigation, Kilgore’s property was sold to LG 2121 S. Orange, LLC (“LG”) for $1.75 million, and the amounts owned on the mortgage were paid from the proceeds. Having to delay the property’s sale caused Kilgore to pay an additional $173,927 to the bank.

Based on the foregoing facts, Nanlann asserted three claims against Mark 48 and its sole member, Mark Kinchla: (1) breached its fiduciary duty by objecting to the sale of Kilgore’s property to Saibaba; (2) breached the Operating Agreement by failing to make the required $350,000 capital contribution; and (3) failed to make its capital contribution, entitling Nanlann to indemnification. The trial court found in Nanlann’s favor with respect to all three claims, entering judgment against Mark 48 and awarding damages to Nanlann for its breach of contract and fiduciary duty. The trial court also pierced the corporate veil, holding Kinchla personally liable for Mark 48’s misconduct.

The Florida appellate court affirmed the trial court’s rulings on Nanlann’s breach of fiduciary duty and contract claims, but the appellate court reversed the indemnification decision, after finding that Nanlann’s claim was time-barred. The appellate court also found that the trial court was right to pierce the corporate veil and hold Kinchla personably liable for Mark 48’s wrongdoing.

§ 4.7.3.3. Massachusetts

Barr v. Swenson, 104 Mass. App. Ct. 1117 (2024), review denied, 494 Mass. 1108 (2024). This case involved a dispute among shareholders of a closely held family corporation that operates a motel. The plaintiff, a minority shareholder, alleged that her uncles, who served as the corporation’s only board members, breached their fiduciary duties.

The conflict arose when one of the uncle’s children decided to sell shares in the company. Under the corporation’s bylaws, shareholders were required to first offer their shares to the corporation before selling them to another party. However, the company’s bylaws also provided that the board could waive this requirement, which the board routinely did.

In keeping with this practice, the company’s board waived this requirement with respect to the child’s sale of shares. This enabled one of the uncle’s children to sell their shares to the other uncle’s family members, who were also shareholders of the corporation, at $85,000 per share. The plaintiff had previously expressed interest in purchasing shares and claimed she was willing to pay $100,000 per share. She argued that the board’s decision deprived the corporation of a potential profit and accused her uncles of breaching their fiduciary duties. She also alleged that one of the uncles diverted corporate resources to other motels owned by his family.

The Massachusetts Appeals Court upheld the dismissal of the plaintiff’s claims. In doing so, it ruled that the plaintiff failed to establish actionable harm. Her theory, that the company could have profited by buying the shares at an artificially low price and reselling them at a higher price, was, according to the appellate court, speculative and unsupported by corporate law. The court emphasized that fiduciary duties require directors to act in the best interests of the corporation and shareholders but do not obligate them to design transactions that exploit shareholders for corporate gain. Additionally, the court found no evidence to support the plaintiff’s allegations of resource diversion.

§ 4.7.3.4. Minnesota

Absolute Sports Cards, LLC v. Thornton, 2024 WL 4260268 (Minn. Ct. App. Sept. 23, 2024). In considering the duty of loyalty, including the duty not to compete that members owe to one another in a limited liability company, the Minnesota Court of Appeals found that a term of the parties’ Operating Agreement was “manifestly unreasonable” and therefore it was unenforceable and void in Absolute Sports Cards, LLC v. Thornton, 2024 WL 4260268 (Minn. Ct. App. Sept. 23, 2024). The three members of the LLC, which was formed to trade sports cards and other sports memorabilia, agreed to the terms of an Operating Agreement that both prohibited the members from competing with the company while members and for two years thereafter and provided that the noncompetition obligations did not “apply to or be binding upon any Member’s same or similar business in existence at the time of the execution of this Agreement.” Id. at 1. Following formation of the company, two of the three members ended their individual sports- collectibles businesses and transferred their inventory and the proceeds from the final sales to the company. The third member, the defendant in the action, did not stop his individual sports collectible business. The two members ultimately removed the defendant member from the company primarily because he would not discontinue operating his individual competing business.

In defense of his competition, defendant-member argued that the Operating Agreement allowed him to compete. The company argued that the competition exception provided in the Operating Agreement, which they also agreed to, was “manifestly unreasonable” under Minn. Stat. § 322C.0110, subd. 4(1)(iii), which allows members of an LLC to restrict or eliminate the duty to refrain from competing with the company so long as the restriction or limitation is not “manifestly unreasonable.” Ultimately, the Minnesota Court of Appeals held that the “purported agreement to eliminate the members’ duty not to compete with ASC is manifestly unreasonable and, therefore, void” reasoning that the scope of the non-competition obligations in the Operating Agreement were “comprehensive” and the exception to the competition restrictions created an “irreconcilable conflict.” Id. at *3.

For further discussion of Absolute Sports Cards, LLC. v. Thornton, see also sections herein relating to damages.

§ 4.7.4. Civil Theft/Conversion

§ 4.7.4.1. Delaware

Gulf Aviation Services Group WLL D/B/A/ United Aviation v. Wilmington Trust Company, C.A. No. N20C-05-128 AML CCLD, 2023 WL 9118772 (Del. Super. Ct. Dec. 29, 2023). The Delaware Superior Court found that Plaintiff Gulf Aviation Services (“Gulf”) satisfied its burden with respect to its conversion claim, in that Defendant Wilmington Trust Company (“WTC”) had wrongfully sold Gulf’s helicopter after the legal title was passed to WTC through a Trust Agreement.

Gulf had placed its air ambulance helicopter in a trust with WTC as trustee so that Gulf could operate the helicopter under an FAA registration overseas. After the relationship between Gulf and WTC fell apart, the trust agreement was terminated. Subsequently, WTC transferred the helicopter to a third party, who claimed to have an ownership interest in the helicopter pursuant to a foreign court’s order, without investigation of the third party’s claim or notice to Gulf.

The Court held that Gulf’s conversion claim was not a breach of contract claim improperly bootstrapped onto a tort claim because (1) WTC’s powers under the Trust Agreement terminated before it sold the helicopter and (2) Gulf’s claim arose from general common law tort principles independent of any contractual relationship between the parties. The Court also noted that demand for the return of the property is not required before pursuing a conversion claim when the claim arises from the disposal of the property through a lease, pledge, or sale. After articulating these principles, the Court found that WTC was liable for converting the helicopter through a wrongful sale following WTC’s resignation from its position as the Owner Trustee and the termination of its rights to sell the helicopter under the Trust Agreement.

With respect to valuation, the Court noted that the ruling in Segovia v. Equities First Holdings, LLC, 2008 WL 2251218 (Del. Supr. May 30, 2008), “does not stand for the broader proposition that the amount of any encumbrance must be subtracted from the converted property’s fair market value.” It then rejected WTC’s argument that the amount of any third-party encumbrance must be subtracted from the property’s fair market value and noted that Segovia was distinguishable because it related to a loan made by the defendant in that case.

The Court also found that, with respect to WTC’s counterclaim for breach of contract, (1) Gulf had failed to plead the statute of limitations as an affirmative defense under 10 Del. C. § 8106, and (2) was liable for breaching the Trust Agreement by failing to pay WTC’s fees from 2010 to 2015.

Lastly, the Court held that WTC’s indemnification claim for costs and attorneys’ fees failed because (1) litigants in Delaware are generally responsible for their own litigation costs and (2) the relevant section of the Trust Agreement did not explicitly and unequivocally operate as a fee-shifting provision for litigation.

§ 4.7.5. Declaratory/Equitable/Statutory Relief

§ 4.7.5.1. California

Samuelian et al. v. Life Generations Healthcare, LLC, et al., 104 Cal. App. 5th 331 (Cal. Ct. App. 2024). The California Court of Appeals held that a noncompetition provision included in an operating agreement adopted after the sale of a partial business interest cannot be considered inherently anticompetitive under Cal. Bus. & Prof. Code, § 16600, subd. (a) and must be scrutinized under the reasonableness standard to determine whether it has any procompetitive benefits, in light of the selling owner’s continuing connection to the business. When applying this standard, courts can assess the reasonableness of any contractual fiduciary duties imposed on a member in a member-managed or manager-managed company through the adoption of an operating agreement.

The Court’s ruling here does not nullify the rule, articulated in Ixchel Pharma, LLC v. Biogen, Inc., 9 Cal. 5th 1130 (Cal. 2020), that noncompetition restraints following the sale of a business interest are invalid per se. Instead, the Court concluded that this rule related to circumstances in which noncompetition restraints following the sale of an entire business do not contain any goodwill, such as where the seller did not own a substantial interest in the company or where goodwill was not included in the sale price.

§ 4.7.5.2. Delaware

In re Triple S Minerals Resources Corporation, C.A. No. 2024-0262-JTL (Del. Ch. Mar. 20, 2024) (Order). The Court of Chancery denied the petition by Tronox LLC (“Tronox”), the sole stockholder of Triple S Minerals Resources Corporation (“Triple S”), for the appointment of a limited purpose receiver for the dissolved Delaware corporation, Triple S.

Even after it was allegedly dissolved, Triple S still held assets, specifically a royalty interest in Canadian mineral exploration properties originally acquired in 1997. Tronox executed a royalty purchase agreement to sell its royalty interest and claimed that appointing a receiver was necessary to meet certain closing conditions of the purchase agreement. Accordingly, Tronox filed a verified petition seeking the appointment of a receiver under Section 279 of the Delaware General Corporation Law (“DGCL”) to manage Triple S’s dissolution and transfer its remaining assets, including a royalty interest in Canadian mineral exploration properties. Tronox also moved to expedite the proceeding because of deadlines associated with the royalty purchase agreement and proposed a Tronox officer as the receiver.

The Court denied Tronox’s petition, finding that the petition and the affidavit of Tronox’s officer did not provide sufficient factual information about the proposed receiver to assess their suitability. Among other failings, the petition failed to identify an agent for service of process in Delaware and did not comply with Court of Chancery Rule 150, requiring the receiver to be a Delaware resident or seek an exemption under Rule 148. The petition also failed to address whether service of process on other potentially interested parties, such as B2Gold Corp., was warranted.

The Court of Chancery ordered Tronox to supplement the record with the needed detail about the proposed receiver and to identify all assets that the receiver would transfer.

§ 4.7.5.3. Florida

Ganiban v. McManus, 372 So. 3d 319 (Fla. Dist. Ct. App. 2023). The District Court of Appeal of Florida, Fifth District, dismissed the petition for certiorari review as moot and held that the motion for reconsideration did not toll the deadline to file the petition. This case involves a dispute among physicians in an optometry practice over their respective ownership interests in entities related to their practice and investments.

Plaintiff/Respondent Dr. James N. McManus initially sued Defendants/Petitioners Dr. Gary J. Ganiban, Dr. Michael N. Mandese, Dr. Jason K. Darlington, Dr. Eric Straut, and Dr. Hetal Vaishnav to resolve disputes over (1) their respective ownership interests in corporate entities formed to manage and operate their optometry practices and related investments and (2) Defendants/Petitioners’ alleged breaches of fiduciary duty. Plaintiff/Respondent also sought to enjoin Defendants/Petitioners’ allegedly improper efforts to dissolve and wind down the entities in which the parties share ownership.

While Plaintiff/Respondent’s motion for injunctive relief was pending, the parties agreed to a court order to maintain the “status quo” for a period of 100 days to allow for a potential resolution or until the court could hear the preliminary injunction motion. The trial court granted Plaintiff/Respondent’s motion to preserve the status quo, and the related order prevented Defendants/Petitioners from terminating or not renewing Plaintiff/Respondent’s employment contract so that he could continue to see patients and run his practice. The trial court also held Defendants/Petitioners in contempt for violating a prior court order related to preserving the status quo.

Defendants/Petitioners filed a petition for certiorari to review the trial court’s rulings. The appellate court found that the petition for certiorari was moot because the 180-day extension period in the status quo order had expired, and the trial court had denied Plaintiff/Respondent’s renewed motion for a preliminary injunction. The appellate court further held that Defendants/Petitioners’ motion for reconsideration of the contempt order did not toll the 30-day deadline to file a petition for writ of certiorari. Since the petition for certiorari was not filed within this timeframe, the appellate court dismissed the petition for lack of jurisdiction.

Haskell v. PCP Grp., LLC, 386 So. 3d 644 (Fla. Dist. Ct. App. 2024). The District Court of Appeal of Florida, Second District, reversed the trial court’s summary judgment in favor of PCP Group, LLC, and remanded with instructions to enter final summary judgment in favor of Unni Haskell. This case arose after the plaintiff received ownership interests in an LLC as part of her divorce settlement, and the LLC attempted to force her to sell the ownership interest back to the company.

In this case, Unni Haskell was awarded membership units in PCP Group, LLC (“PCP”), as part of the resolution of divorce proceedings with John Haskell, her former husband. John Haskell initially failed to transfer his PCP units to Unni Haskell, attempting to sell those units to another member of PCP. The divorce court invalidated that sale, and Unni Haskell was declared the rightful owner of the units.

PCP responded by filing a declaratory judgment action against Unni Haskell, arguing that PCP’s operating agreement required Unni Haskell to sell her units back to PCP under its “Deemed Offers to Sell” (“DOTS”) provision. That provision states that “[n]otwithstanding anything in [the operating agreement] . . . the Company and the Non-Selling Class A Members shall have the right to purchase” all of a member’s units, even if the member or his or her spouse are transferring units pursuant to a court-ordered property settlement agreement, after a divorce. The DOTS provision also required the member to give written notice to PCP and the non-selling Class A members in the event of a divorce, or other triggering event.

The trial court granted summary judgment in favor of PCP, requiring Unni Haskell to sell her units back to the company. Unni Haskell appealed, and applying de novo review, the appellate court concluded that the DOTS provision did not apply to Unni Haskell’s situation since the transfer of ownership had already been completed through the divorce judgment. That court found that the DOTS provision language imposed obligations on a member seeking to transfer his units, not on the transferee, after the transfer has been completed. Because Unni Haskell was the undisputed owner of the membership units at issue, the DOTS provision did not impose a burden on her to sell the units back to PCP. The appellate court further concluded that interpreting the DOTS provision to require Unni Haskell to sell her units to PCP would rewrite the operating agreement, which was not permissible.

The appellate court reversed the summary judgment in favor of PCP and remanded the case with instructions for the trial court to enter final summary judgment in favor of Unni Haskell.

§ 4.7.5.4. Illinois

Machnicki v. Nowobilski, 2024 IL App (3d) 230306-U (Feb. 29, 2024). Plaintiff Richard Machnicki and defendant John Nowobilski each owned 50% of the shares of Northstar Foods, Inc., a meat processing business. The corporation had three directors—Richard, John, and John’s wife Donna. John and Donna were the corporation’s only officers and were primarily responsible for its operations.

While the business was quite successful, the relationship between Richard and John deteriorated. Disputes arose as to, among other things, director and officer compensation and certain real estate-related matters. Richard requested books and records pursuant to section 7.75 of the Business Corporation Act of 1983, but John refused to provide the requested records.

Richard filed suit, claiming misuse of corporate funds and seeking books and records. Among other claims, he asserted a derivative claim for oppression under section 12.56 of the Business Corporation Act. John filed a counterclaim. He, too, asserted oppression under section 12.56 of the Business Corporation Act, and he sought an order valuing the company and requiring a buyout.

During the litigation, the company received a letter of intent (LOI) from a third-party to purchase the company’s assets for $30 million. John refused to share the LOI with Richard, however, and Richard refused to agree to the proposed sale.

John thereafter filed a motion for a preliminary injunction. He argued the shareholders were deadlocked and sought an order forcing a company sale or a buyout of shares.

Following an evidentiary hearing, the circuit court granted John’s motion for a preliminary injunction. In its order, the court found that the fair value of the company was $35 million and ordered John to buy out Richard’s interest for $17.5 million. Richard filed an interlocutory appeal.

On appeal, Richard argued that the preliminary injunction order was improper because it altered the status quo and because the parties did not have the opportunity for full discovery or a trial regarding the fair value of the company.

The appellate court agreed. It reversed the circuit court’s preliminary injunction order. The appellate court noted that a preliminary injunction should ordinarily preserve the status quo pending a final resolution on the merits of the case. The court noted that a preliminary injunction may alter the status quo in rare circumstances where maintaining it would cause irreparable harm to the company. In this case, however, it found that the company was performing well and that John was free to sell his 50% interest to any third party. It therefore held that there was no compelling reason to change the parties’ relationship by forcing a buyout without conducting a full trial regarding the fair value of the company.

Casas v. Ferrarini, 2024 IL App (1st) 220511-U (Mar. 29, 2024). Plaintiff Christopher Casas and defendant Marco Ferrarini operated multiple businesses together, including a restaurant, a coffee shop, and a vintage motorcycle dealership. The businesses were conducted through FerCas, LLC, an Illinois limited liability company. Casas owned his interest in FerCas through KS&T, a sole proprietorship that was later registered as an LLC. Ferrarini owned his interest through MLL, Ltd., an Illinois corporation. Both companies were identified in FerCas’s founding documents as members of FerCas.

Eventually, MLL purported to notify KS&T that it was dissociated from FerCas because KS&T had never been legally formed as an Illinois LLC, as the parties had intended when they began the business. Ferrarini used this as a basis to exclude Casas from the business.

Casas brought suit, individually and derivatively on behalf of FerCas. He sought a declaratory judgment as to his ownership in FerCas through KS&T, judicial supervision of the windup of FerCas pursuant to section 35-4 of the Illinois Limited Liability Company Act, an accounting, and damages for alleged breaches of contract, breaches of fiduciary duty, and unjust enrichment.

The circuit court granted summary judgment on standing. It found that although KS&T was not a registered entity at the beginning of the parties’ relationship, it could be considered a sole proprietorship, and that Casas was entitled to exercise KS&T’s rights and receive its benefits as a member of FerCas. The circuit court further found that by excluding Casas from the business on this basis, Ferrarini had violated his fiduciary and other legal obligations to Casas.

The case proceeded to trial on damages. The circuit court awarded compensatory damages of approximately $1.6 million and punitive damages of double that amount.

The appellate court affirmed the circuit court’s judgment. After addressing a number of purported procedural errors, the court turned to the damages award. Defendant argued that the award of compensatory damages was against the manifest weight of evidence because it failed to account for certain expenses of the business. The circuit court, however, relied on the fact that defendant withheld documents in discovery and that plaintiff deducted the expenses to which he had access from his proposed award. The appellate court affirmed, holding that the award was sufficiently based on the available evidence.

The appellate court also affirmed the circuit court’s award of punitive damages. The appellate court relied on the circuit court’s findings that Ferrarini’s exclusion of Casas from the business was “willful and outrageous” and that it was done so that Ferrarini could use the business as his personal “piggy bank.”

Kodryan v. Lukaszewicz, 2023 IL App (1st) 231280-U (Nov. 9, 2023). Plaintiff Edward Kodryan and defendant Daniel Lukaszewicz were each 50% owners and the sole members and managers of NorthShore Car Center, LLC. Formed in 2017, NorthShore offered automotive repair and car wash services.

By 2020, the members’ relationship had deteriorated. In his complaint, Kodryan alleged that Lukaszewicz denied Kodryan access to the company’s bank accounts and financial information, that he obtained a loan without Kodryan’s consent and the Lukaszewicz was making personal use of company assets. Kodryan asserted a claim for breach of fiduciary. He sought dissolution of the company and an accounting.

Lukaszewicz counterclaimed, alleging that Kodryan withdrew company funds for personal use and otherwise wasted company resources. He also sought dissolution and an accounting.

During the litigation, the appellate court permitted Kodryan to amend his complaint to add allegations that Lukaszewicz withdrew company funds from its accounts, that certain assets were unaccounted for, and that Lukaszewicz had begun operating a separate business at the same location under the name “NorthShore Car Care.”

Kodryan sought appointment of a receiver. Following briefing and argument, the appellate court granted the motion to appoint a receiver. Thereafter, the parties suggested potential receivers and the Court entered an order appointing one. Lukaszewicz thereafter filed a notice of interlocutory appeal.

The appellate court first determined that the appeal was timely because the time within which to appeal ran from the order appointing a specific receiver, rather than the earlier order granting the motion to appoint a receiver.

The appellate court next turned to the merits. It noted that a motion to appoint a receiver is a drastic remedy, available only in cases of “urgent necessity.” Lukaszewicz argued that the circuit court abused its discretion in appointing a receiver because (1) it failed to make detailed findings in its written order, and (2) it did not conduct an evidentiary hearing.

The appellate court rejected these arguments and affirmed the circuit court. It held that because there was no transcript of the hearing at which the receiver was appointed, it could not determine the circuit court had failed to make the requisite findings. The court also rejected the argument that an evidentiary hearing was required. It found it significant that Kodryan had attached affidavits and documents showing that Lukaszewicz was running a competing business out of their facility. This, the court held, was sufficient to support the circuit court’s order.

§ 4.7.5.5. New Jersey

Patel v. New Jersey Dep’t of Treasury, Div. of Revenue & Enter. Servs., 479 N.J. Super. 26, 318 A.3d 685 (App. Div. 2024). This case resolved a matter of first impression in New Jersey: the proper way to rescind a certificate of dissolution and termination of a New Jersey LLC filed erroneously and without authorization. In this action, a sole member of an LLC filed a complaint against the Division of Revenue and Enterprise Services to compel it to reinstate the LLC. The Department terminated the LLC in response to a former member’s filing of a certificate of dissolution and termination. The remaining member alleged this was done without authorization and asked that the LLC be reinstated to prevent loss of its business licenses.

New Jersey has no statutory authority on LLCs to resolve the issue or authorize the Department of Treasury to perform a recission. Despite the silence on the matter in the LLC statutory scheme, the Court reasoned the longstanding principle of statutory interpretation is to construe laws in a “sensible manner,” which at times may mean interpreting “literal contents of a statute in a manner that advances its manifest purposes.” Here, the Court found that the manifest purpose of the RULLCA “is to assure that the filings with the Division concerning the status of an LLC are up-to-date and duly authorized,” which imposes an obligation to correct erroneous information. All counsel in this matter agreed there should be a clear avenue to pursue rescission of a dissolution and termination on equitable grounds in the instance, such as this one, where the certificate is filed improperly. The Court held that the appropriate mechanism to do so is through civil action in trial court. Accordingly, this matter was remanded to the trial court for further proceedings and findings of fact.

§ 4.7.5.6. New York

Weinstein v. Wallace, 219 N.Y.S.3d 172 (2024). The plaintiff and his siblings executed an operating agreement for a funeral services business. The operating agreement designated the plaintiff’s brother as the manager of the company. The plaintiff and his brother eventually each owned 50% of the membership interest in the company. The plaintiff instituted this action after his brother died to be declared the sole voting member and manager of the company. The court held that the operating agreement unambiguously provided that a deceased member’s estate shall have all of the rights of the member, which would include voting rights. Therefore, the deceased’s estate became a voting member of the company. Plaintiff also did not become the manager of the company upon his brother’s death as the operating agreement required a manager be elected by the members.

§ 4.7.5.7. Pennsylvania

In re Mt. Vernon Tenants Association, Inc., 322 A.3d 1002 (Pa. Commw. Ct. 2024). A board member, Lundy, filed a Complaint for Dissolution and applied for the appointment of a receiver. The trial court granted the application for appointment of a receiver on grounds not included in the application and the association appealed. The Commonwealth Court held that the trial court was not limited to considering only the grounds raised in the application and affirmed the appointment of the receiver.

§ 4.7.5.8. Texas

Multi-Hous. Tax Credit Partners XXXI v. White Settlement Senior Living, LLC, No. 05-22-00721-CV, 2024 WL 301916 (Tex. App.—Dallas Jan. 26, 2024, pet. denied). The partnership was formed and organized to construct, own, operate, and sell residential units in a housing property to qualify for federal tax credits pursuant to the low-income housing tax credit program. The governing document—the limited partnership agreement—included an option provision for White Settlement Senior Living, LLC to purchase Multi-Housing Tax Credit Partners XXXI’s interest in the partnership. The partnership agreement also included an arbitration provision. White Settlement exercised its option, a valuation dispute ensued, the parties engaged in contested arbitration, and an appeal followed.

On appeal, Multi-Housing Tax Credit Partners argued in part that White Settlement Senior Living, LLC’s “unclean hands” supported a conclusion that it breached its fiduciary duties. The court of appeals, however, noted that the arbitrator’s award included findings that there was no evidence that the parties had a special relationship establishing a fiduciary duty. Instead, “[b]oth sides [were] sophisticated business entities represented by numerous attorneys and experts in the field. The industry involved here [was] one where sharp dealing is the norm and no expectation arises that good faith and fair dealing is the standard when it comes to compliance with contractual obligations.”

Chow v. McIntyre, No. 01-21-00658-CV, 2023 WL 7778602 (Tex. App.—Houston [1st Dist.] Nov. 16, 2023, no pet.). The parties were members and managers of two companies that own and operate a business park. The parties settled an internal business dispute by executing an agreement under which one group of parties had the right to buy out another group at a specified price within 60 days. If the first group failed to do so, the second group was obligated to buy the first group out at a specified price. A buyout never occurred by either group. The first group then filed a suit in which they alleged that the second group breached the settlement agreement by unreasonably refusing to cooperate in settlement—thwarting their attempted buyout. The second group countersued alleging that the first group had breached the agreement by refusing to be bought out after failing to complete a timely buyout themselves.

The parties’ breach-of-contract claims were tried to a jury, which sided with the second group. The parties did not submit a question on damages to the jury. Instead, based on the jury’s finding, the second group asked the court to enforce the settlement agreement through the equitable remedy of specific performance (i.e., they requested a judgment compelling the first group to sell their interests at the specified price). The first group opposed specific performance by arguing that the second group had not complied with the terms of the agreement and also by arguing that the second group’s “unclean hands” precluded them from invoking or obtaining equitable relief of any kind. The trial court rendered judgment that both parties take nothing on their respective claims. The trial court also denied all requests for attorney’s fees and all other requested relief. Both sides appealed.

The court of appeals upheld the jury’s findings after determining that the evidence was factually sufficient to support the jury’s verdict. As to the “unclean hands” argument, the court of appeals determined that, reduced to its essence, the first group’s position was that the trial court could deny specific performance to the second group because they breached the settlement agreement, even though the jury found otherwise. However, even an admitted breach of contract—in and of itself—will not generally support an invocation of the unclean hands doctrine. E.g., Stewart Beach Condo. Homeowners Ass’n, Inc. v. Gili N Prop Invs., LLC, 481 S.W.3d 336, 351–52; LDF Constr. v. Bryan, 324 S.W.3d 137, 149–50 (Tex. App.—Waco 2010, no pet.). Here, in stark contrast, the jury found that the second group did not breach the settlement agreement, and the court of appeals separately affirmed that verdict. Hence, the court of appeals determined, the “the trial court could not rely on the doctrine of unclean hands to deny [the second group] specific performance without abusing its discretion.” Accordingly, the court of appeals reversed and rendered in part.

§ 4.7.6. Statute of Limitations

§ 4.7.6.1. Nevada

Urb. Outfitters, Inc. v. Dermody Operating Co., LLC, 705 F. Supp. 3d 1174, 1177 (D. Nev. 2023). The federal district court declined to read into the statute of limitations on post-dissolution actions the “discovery rule”—wherein the three-year limitation commenced only after discovery of the claim—and found that the three-year limitation commenced the day of the corporation’s dissolution.

In a breach of contract action involving the construction of a distribution center, which was completed in 2012, plaintiff brought claims against the developer and the general contractor in 2021. The developer brought third-party claims against a subcontractor for indemnification and contribution. The subcontractor, however, dissolved as a corporation in 2014. In response to the third-party claim, the subcontractor filed a motion to dismiss contending that the three-year statute of limitations commenced the date of the subcontractor’s dissolution and therefore the claims were time barred. The subcontractor argued that the plain language of the statute requires any cause of action against a dissolved corporation be commenced within three years of its dissolution. In response, the developer claimed that because it did not learn of any alleged harm until it was sued, the applicable statute of limitation did not begin to run until the developer “discovered” the facts giving rise to the claims. The court agreed with the subcontractor and found that the third-party claims were time barred. While other statutes of limitation apply the discovery rule, i.e., the clock begins when plaintiff learns or should have learned about the claim, such language is notably absent in the statute of limitation on post-dissolution actions. Had the legislature intended for the deadline to bring post-dissolution claims well beyond three years, as the developer advocates, the statute would have included the discovery rule. Moreover, the legislative minutes provided helpful insight wherein the stated goal was to have an absolute stop-date on when claims may be brought post-dissolution.

§ 4.7.6.2. Pennsylvania

Matthew Serota, Derivatively on Behalf of London Towne Homeowners Association v. Matthew J. Mager, 304 A.3d 828 (Pa. Commw. Ct. 2023). Two-year statute of limitations for interference with contractual relations against member of a homeowner’s association was tolled by the derivative demand letter.

§ 4.8. Valuation and Damages

§ 4.8.1.1. California

Shah v. Skillz Inc., 320 Cal. Rptr. 3d 175 (2024). Former employee brought action against employer, a startup, for breach of contract, retaliation, and wrongful termination, alleging employer lacked cause to terminate him two years before its initial public offering (“IPO”) and thereby wrongfully prevented him from exercising stock options. Following trial and grant of employer’s motion for directed verdict as to claims for retaliation and wrongful termination, the trial court entered judgment on jury’s verdict awarding employee $11,557,173 for breach of contract, then denied employer’s motion for judgment notwithstanding the verdict (“JNOV”), denied its motion for new trial on condition that employee accept remittitur in the amount opined by the company’s expert witness or $4,358,358, and after employee did so, entered amended judgment for employee in such amount. Employee appealed and employer cross-appealed on several grounds, including the appropriate measure of damages. Employer appealed the damages awarded as being contrary to law because they were not measured as of the date of breach. While the employee contended that the jury verdict in excess of $11.5 million should be reinstated because of errors in the trial court’s new trial orders and remittitur, which predicated on the opinion of employee’s expert who opined that value is based on employee holding on to shares from his option until after the IPO.

The Court of Appeals ruled that damages for lost stock options in a breach of contract action may be measured from a date other than the date of breach based on equitable considerations, including whether a reasonably available market for the stock exists at the time of breach. The appellate court found that at the time of the employee’s termination, the shares in the company, a private company, could not be sold on the open market. There was no public market for those shares until the IPO. Meanwhile, the record showed that the employee joined the company with hopes that the company goes public. The trial court using the price of company stock after the IPO is essentially the equivalent of the benefits of bargain the employee agreed to and deemed proper. A contrary ruling under these circumstances would allow a private startup company to take away stock options earned by a terminated employee with relative impunity before the company has been sold or goes public because the financial consequences of doing so would be negligible. The appellate court was aware of no California case law that contemplates such an inequitable result solely because the employee is limited to breach of contract damages.

§ 4.8.1.2. Illinois

Schultz v. Sinav Ltd., 2024 IL (4th) 230366 (Apr. 5, 2024). Plaintiffs were the minority owners in a Delaware limited liability company, Illinois River Energy Holdings, LLC (IREIH or the “company”), which was formed to operate an ethanol plan in Rochelle, Illinois. Plaintiffs brought suit against the majority owner, GTL Resources USA (GTL USA) following a cash-out merger in which GTL USA acquired all interests in the company. Following the merger, GTL sold the company to a third-party.

Plaintiff also sued four individual members of the company’s board of managers appointed by GTL USA, together with certain investors and merger-related entities that facilitated the two corporate transactions. Plaintiffs did not seek to unwind the transactions. Rather, they sought only damages.

Following two bench trials, the circuit court found that the majority owner and board members breached their fiduciary duties to the plaintiffs in approving the cash-out merger. The circuit court held that the appropriate remedy was compensatory damages, which were computed by determining the fair value of the shares before the merger ($2.78 per share) and subtracting the price obtained in the merger ($1.10 per share). This resulted in a damages award of approximately $11.9 million.

The circuit court also held that the investor and merger-related defendants were not liable for tortious interference, among other claims. Both plaintiffs and certain defendants appealed.

On appeal, the appellate court focused on four issues: (1) the contractual and common law duties owed to plaintiffs by the defendants; (2) whether liability was established; (3) the appropriate remedy; and (4) the valuation of the company as it related to plaintiffs’ remedy.

The appellate court held that GTL USA controlled the cash-out merger and that while it owed no express contractual duty to the minority under the company’s operating agreement, it owed common law fiduciary duties. Relying on decisions of the Delaware Supreme Court and Delaware Court of Chancery, the appellate court applied the “entire fairness” doctrine, under which the majority owner in a cash-out merger bears the burden of demonstrating that the merger was the result of a fair process and that it obtained a fair price for the company’s shares. The court affirmed the circuit court’s decision that GTL USA failed to meet this burden, and it affirmed judgment on liability against it.

Likewise, the appellate court affirmed the circuit court’s finding that GTL USA’s individually appointed board members violated their legal duties to the minority owners. However, the court remanded for a determination of whether the individual defendants were excused from paying damages under exculpatory language in the company’s operating agreement.

As to the measure of damages, the appellate court remanded for the circuit court to consider whether rescissory damages were appropriate or whether such damages—in the form of an increased price of the stock after the merger—should be taken into account in assessing the compensatory damages to be awarded to the plaintiffs.

On valuation, the appellate court rejected plaintiffs’ argument that the circuit court was required to appoint an independent appraiser. Although the rulings were moot because the court ordered a new trial on damages, the appellate court also noted that the circuit court’s reliance on a discounted cash flow method of valuing the company’s shares, and its calculation of the weighted cost of capital rate, were not per se unreasonable.

Finally, the appellate court held that because certain investor-defendants and merger-related defendants were not party to the company’s operating agreement, which contained a jury-trial waiver, the circuit erred in striking plaintiffs’ jury demand against those defendants. It therefore reversed the circuit court’s judgment in favor of those defendants on plaintiffs’ claim for tortious interference with contract, and it remanded the case for a jury trial on that claim.

§ 4.8.1.3. Minnesota

Absolute Sports Cards, LLC v. Thornton, 2024 WL 4260268 (Minn. Ct. App. Sept. 23, 2024). Appellant and two other men formed Absolute Sports Cards, LLC (“ASC”) for the purpose of trading sports cards and other sports collectibles in 2016. They executed an Operating Agreement that included a broad prohibition against competing with ASC while a member and for the following two years after membership ends. However, a separate provision in the Operating Agreement stated that the competition prohibition would not be applicable to any member’s “same or similar business in existence at the time of the execution of the Agreement.”

After executing the Operating Agreement, the other two members concluded their sports-collectibles businesses and transferred inventory to ASC. Appellant did not do so and continued to operate his own business without transferring any of his sales to ASC. In 2018, the other two members voted to remove Appellant because of his competition with ASC.

ASC initiated an action against the competing member alleging competition in violation of the Operating Agreement, seeking expulsion, damages, and an injunction. The competing member argued that the district court abused its discretion in awarding lost profits as damages. Appellant also disputed the district court’s valuation of his share on the effective date of his expulsion.

The Minnesota Court of Appeals rejected the competing member’s arguments. ASC did not need to use the exact phrase “lost profits” in the pleadings. Because ASC alleged the competing member breached the Operating Agreement and requested the amount “equal to the amount [the competing member] derived by competing with the Company,” the Court found this sufficient to put the competing member on notice. The competing member also disputed the calculation of the award because it was based on his competing company’s sales. The district court found that the causal link was sufficient, because he otherwise would have sold those cards through ASC as his fellow ASC members did.

The competing member also contended that the district court erred in its choice of valuation date for his membership interest as of the effective date the other members voted to remove him from the company arguing that he was still a member at that point until there was a judicial order removing him. The Court found no error because the competing member did not contribute to the growth from the date he was voted out by the other members until the court-ordered expulsion. The Court reasoned that the competing member “should not be able to capitalize upon gains and value realized during [the] lawsuit.”

For further discussion of Absolute Sports Cards, LLC v. Thornton, see also sections herein relating to breach of fiduciary duty.

§ 4.8.1.4. Texas

Hernandez v. Ayala, No. 05-23-00549-CV, 2024 WL 3040409 (Tex. App.—Dallas June 18, 2024, no pet.). Hernandez and Ayala purchased a farm together in 2014. According to Hernandez, the farm belonged to Hernandez. Hernandez believed that Ayala was just a cosigner and had no idea Ayala’s name was on the deed, or that he owned fifty percent of the farm, until the underlying dispute arose in 2021. According to Ayala, they intended to purchase the farm together, as Hernandez was helping him with cattle on his land nearby and they thought it would be a good investment.

Following a dispute in 2021, the parties discussed Hernandez purchasing the farm from Ayala, but Ayala believed the offers were too low and communication stopped between them. Ayala went out to the farm to discuss the matter, but the gates were locked, and he could not enter the property. He retained counsel, and counsel sent a demand letter stating that Ayala was offering to sell his one-half interest in the farm for $250,000 in lieu of pursuing litigation. Hernandez did not accept Ayala’s offer and filed suit to recover the farm.

Ayala filed a separate suit against Hernandez, alleging claims for breach of fiduciary duty, conversion, and theft of property. Specifically, Ayala alleged that Hernandez breached his fiduciary duties by seizing partnership property, locking Ayala out of partnership assets, taking partnership funds for personal use, and seeking to deny the partnership after openly participating and benefiting from the partnership. Ayala further alleged that the breach injured him by depriving him of the benefits of the partnership, which resulted in lost revenues and opportunities of at least $250,000. Ayala also sought to partition the partnership property by sale, as the buildings and improvements could not be physically divided, and for expulsion of Hernandez from the partnership or the dissolution of the partnership. Hernandez answered, generally denying all allegations asserted by Ayala and specifically denying that a partnership existed between the parties.

The jury found that a partnership, as well as a relationship of trust, existed between the parties and that Ayala complied with his fiduciary duty to Hernandez, but that Hernandez did not comply with his duties owed to both Ayala and the partnership. The jury found that $104,000 would fairly and reasonably compensate Ayala for his damages that were proximately caused by the conduct of Hernandez. The jury further found that Hernandez was liable for theft and conversion; however, found $0 in damages for each of those causes of action. The trial court ordered the partnership to be dissolved and appointed a receiver to dispose of the real and personal property in dispute.

The court of appeals held that the evidence was legally insufficient to support the award of damages—and so reversed and rendered. During the trial, Ayala was asked to list the partnership assets he believed remained on the property when he was locked out, and counsel asked him how much he thought each item was worth. He listed many items—and estimated each item’s value—but provided no basis for nearly all the valuations.

The court explained that, generally, market value is established through expert testimony. See Reid Rd. Mun. Util. Dist. No. 2 v. Speedy Stop Food Stores, Ltd., 337 S.W.3d 846, 851–52 (Tex. 2011). However, a property owner may testify to property value if certain requirements are met. The Supreme Court of Texas has explained:

Because property owner testimony is the functional equivalent of expert testimony, it must be judged by the same standards. Thus, as with expert testimony, property valuations may not be based solely on a property owner’s ipse dixit. An owner may not simply echo the phrase “market value” and state a number to substantiate his diminished value claim; he must provide the factual basis on which his opinion rests. This burden is not onerous, particularly in light of the resources available today. Evidence of price paid, nearby sales, tax valuations, appraisals, online resources, and any other relevant factors may be offered to support the claim.

Nat. Gas Pipeline Co. of Am. v. Justiss, 397 S.W.3d 150, 159 (Tex. 2012). This requirement is typically met if the property owner testifies that he is familiar with the market value of his property. Id. at 155–56. However, failure to meet this standard renders the evidence of value legally insufficient, even when unchallenged by the opposing party, because it amounts to no evidence at all. Id. at 156–58. Because Ayala provided no basis for his valuations, and because he did not testify that he was familiar with the market value of the property or otherwise explain how he determined the value of each item, his testimony was insufficient to support the award of damages.

The unanimous June 5, 2025, U.S. Supreme Court decision in Ames v. Ohio Department of Youth Services struck down a standard that required a heightened burden of proof for plaintiffs in reverse discrimination cases.^[1] This decision, along with recent private and government actions, has brought reverse discrimination into the spotlight. Among many examples, theories of reverse discrimination have been given priority in recent executive orders and federal government action about diversity, equity, and inclusion (“DEI”) programs;^[2] the Department of Justice’s (“DOJ”) Civil Rights Fraud Initiative;^[3] the DOJ’s investigation into the City of Chicago for discrimination based on race;^[4] litigation concerning Special Purpose Credit Programs;^[5] and a recent reverse discrimination case brought by the Missouri attorney general against Starbucks.^[6]

Reverse discrimination cases involve claims that nonminority individuals were discriminated against “on the basis of race, or other characteristics or attributes.”^[7] A key theory used in recent reverse discrimination litigation is that DEI and affirmative action programs assume without a basis that members of minority groups are unfairly disadvantaged relative to those in the majority group. Programs that are based on this alleged assumption purportedly lead to the favorable treatment of minority groups at the expense of the majority group.^[8]

Reverse discrimination may seem to flip questions traditionally confronted in employment discrimination and fair lending cases on their head; fundamentally, however, the questions being asked are still about disparities between groups after conditioning on the relevant factors that explain between-group differences. Consequently, the concept of equal treatment and the associated statistical techniques applied in traditional discrimination cases are also applicable to reverse discrimination cases. Moreover, these techniques can be applied in the design of special programs that focus on economically disadvantaged populations instead of race, ethnicity, and gender, which is seen as a likely direction of future DEI and affirmative action programs.

Recent Developments Related to Reverse Discrimination

Federal

From the start of the current presidential administration, DEI programs and related diversity initiatives have received a substantial amount of negative federal attention. First, on January 20, 2025, the newly sworn-in president signed the executive order titled “Ending Radical and Wasteful Government DEI Programs and Preferencing,” which called for the end of “all discriminatory programs, including illegal DEI and ‘diversity, equity, inclusion, and accessibility’ (DEIA) mandates, policies, programs, preferences, and activities in the Federal Government.”^[9] Then, on January 21, 2025, the president signed another executive order, titled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” with a stated policy to “combat illegal private-sector DEI preferences, mandates, policies, programs, and activities” at the individual institution level within the private sector.^[10] The second executive order potentially sets up a possible tsunami of federal investigations and litigation into allegedly discriminatory DEI programs and initiatives in the private sector by requiring the attorney general to submit a report within 120 days of the signing of the order that proposes a “strategic enforcement plan” and individual targets developed with the goal of eliminating allegedly illegal discrimination practices in the private sector.^[11]

Subsequently, both the Equal Employment Opportunity Commission (“EEOC”) and the Federal Trade Commission (“FTC”) set out guidance on their respective agency’s anti-DEI enforcement focus. In its advisory document, “What You Should Know About DEI-Related Discrimination at Work,” the EEOC states its position that reverse discrimination against a majority group is no different from discrimination against a minority group, asserting that “there is no such thing as ‘reverse’ discrimination; there is only discrimination.”^[12] Accordingly, the EEOC says that it “applies the same standard of proof to all race discrimination claims, regardless of the victim’s race.”^[13] The Supreme Court’s decision in Ames applies a similar argument, as we discuss further below. The FTC’s February 26, 2025, “Directive Regarding Labor Markets Task Force” presents a novel theory that connects DEI to antitrust injury: “[c]ollusion or unlawful coordination on DEI metrics, which may have the effect of diminishing labor competition by excluding certain workers from markets, or students from professional training schools, on the basis of race, sex, or sexual orientation.”^[14] It remains to be seen how the FTC will argue this theory of harm. One potential argument would be that exclusion of majority group workers resulting from the use of “DEI metrics” is a mechanism through which competition is harmed.

The DOJ also issued a memorandum on February 5, 2025, establishing that its “Civil Rights Division will investigate, eliminate, and penalize illegal DEI and DEIA preferences, mandates, policies, programs and activities in the private sector and in educational institutions that receive federal funds.”^[15] The DOJ took further action in May by (1) opening an investigation into whether the City of Chicago “made hiring decisions solely on the basis of race” in favor of Black applicants^[16] and (2) issuing the Civil Rights Fraud Initiative Memorandum, which states that the False Claims Act “is implicated when a federal contractor or recipient of federal funds knowingly violates civil rights laws—including but not limited to Title IV, Title VI, and Title IX, of the Civil Rights Act of 1964—and falsely certifies compliance with such laws.”^[17] Such investigation and litigation are pursued under the Civil Rights Fraud Initiative, which is co-led by the Civil Division’s Fraud Section and the Civil Rights Division.^[18] Given the administration’s directive to eliminate reverse discrimination, it is likely that investigations into violations of the False Claims Act and resulting litigation will focus on federal contractors’ use of DEI initiatives. The DOJ also encouraged private parties to file lawsuits and litigate claims under the False Claims Act.^[19] Purported evidence of discrimination presented in government and private-plaintiff suits related to the Civil Rights Fraud Initiative will almost surely include economic or econometric analysis.

State

At the state level, the Missouri attorney general filed a lawsuit against Starbucks on February 11, 2025, alleging that Starbucks “ties compensation to racial and sex-based quotas, discriminates on the basis of race and sex in training and advancement opportunities, and discriminates on the basis of race and sex with respect to its board membership,” violating federal and state laws prohibiting discrimination.^[20] Among other demands, the State of Missouri seeks compensatory damages,^[21] which, based on the allegations in the complaint, appear to require assessments of the extent to which White and/or male Missourians were differentially affected by the policies at issue compared to other groups.

Private Plaintiffs

There has also been private litigation related to reverse discrimination. A bellwether case is Ames v. Ohio Department of Youth Services, which was decided by the Supreme Court on June 5, 2025, and centered on the heightened standard of evidence that plaintiffs who are members of a majority group must put forth in order for their cases to proceed.^[22] Through this case, brought by a heterosexual woman claiming that she “faced bias in the workplace after she was passed over for positions that went to gay colleagues,”^[23] the Supreme Court decided that the burden of proof to demonstrate discrimination for majority groups is the same as the burden of proof for minority groups.^[24] The unanimous decision states, “[T]he standard for proving disparate treatment under Title VII does not vary based on whether or not the plaintiff is a member of a majority group.”^[25] Because it lowers the bar for claims by majority plaintiffs, this decision will likely increase the number of private-plaintiff reverse discrimination cases. As we discuss further below, this decision also has implications for the statistical methods used to prove reverse discrimination in court.

In private-plaintiff cases, theories of reverse discrimination have been filed in settings involving fair lending,^[26] employment,^[27] and in other domains like college admissions.^[28] The Students for Fair Admissions, Inc. v. President & Fellows of Harvard College decision, in which the U.S. Supreme Court “struck down affirmative action in college admissions,”^[29] was cited in the second DEI-related executive order^[30] and the Civil Rights Fraud Initiative Memorandum,^[31] with the latter noting that the Supreme Court stated that “[e]liminating racial discrimination means eliminating all of it.”^[32] In addition, this case has been followed by a number of lawsuits brought by legal strategist Edward Blum, who initiated the Students for Fair Admissions case, including cases related to college admissions, supplier diversity programs, private-sector hiring, and Southwest Airlines’ free ticket program for Hispanic students.^[33]

Econometric Techniques for Assessing Discrimination and Reverse Discrimination

From a legal perspective, discrimination arises when individuals who are “similarly situated” based on relevant characteristics, such as their job skills and experience in an employment matter or their credit score and debt-to-income ratio in a fair lending matter, have different experiences or outcomes based only on their protected group status (e.g., race, ethnicity, gender, age, religion, and/or national origin).^[34] Statistical models are used by experts to identify and hold these characteristics constant so that differences between one group relative to another can be measured. Because the standard statistical model compares the average difference between a protected group and another group of similarly situated people, the tools that we apply to measure disparities in one direction can also be used to assess disparities in the opposite direction.

Application 1: Assessing Black/White Borrower Loan Pricing Disparities with Regression Analysis

To make this more concrete, suppose we run a regression to assess the disparities in loan pricing between Black and White borrowers.^[35] If we were to consider White borrowers the control group,^[36] the regression would take the form:

interest rate_i = β₀ + β₁ Black_i + γ X_i+ ε_i

where Black_i is an indicator for whether the borrower is Black, X_i is a set of factors that could plausibly explain between-group differences in interest rates (e.g., credit score or loan-to-value ratio), and ε_i is an error term. If one were to assume that controlling for the X_i factors captures all variation in loan pricing except for disparities attributable to whether an applicant is Black, then β₁ would measure the average difference in interest rates between similarly situated Black and White applicants. A positive and statistically significant value of β₁ would indicate a disparity; more specifically, it would indicate that Black borrowers face higher interest rates, on average, than similarly situated White borrowers.

On the other side of the coin, a negative and statistically significant value of β₁ would indicate that Black borrowers face lower interest rates, on average, than similarly situated White borrowers—or, put another way, that White borrowers face higher interest rates than similarly situated Black borrowers. As White borrowers comprise the majority of borrowers, this would support a claim of reverse discrimination against the lender. In our example, the same model may be used to assess the question of disparity when inquiring about both discrimination and reverse discrimination, and it is generally true that one may use the same statistical framework to test for disparities consistent with discrimination and reverse discrimination, with the sign of the β₁ coefficient indicating the direction of any disparity.^[37]

A corollary is that statistical significance in either direction could be cause for concern, as one direction would indicate discrimination against the White group and the other would indicate discrimination against the Black group. Thus, an employer or a lender must walk a proverbial knife’s edge when auditing its practices for disparities across groups. Indeed, in our experience, employers are mindful of reverse discrimination. For example, if a thorough audit reveals that male nurses earn less than similarly situated female nurses, the employer will typically adjust pay practices to eliminate statistically significant differences. When there are multiple groups to consider, the knife has more than two edges but balancing across all groups is possible when similarly situated people are consistently treated the same by employers and lenders.

Application 2: Assessing Discriminatory Quotas with the 4/5^th Rule

The same duality of testing for disparities using statistics exists for claims of (reverse) discriminatory quotas, like that alleged by the Missouri attorney general against Starbucks. Discriminatory quota claims typically allege that selections by a lender or employer are based on reaching a goal of a certain number or percentage of people in a protected group, rather than based on merit.^[38] Experts use a variety of statistical techniques to identify discrimination in “yes-or-no” decisions, such as for hiring, termination, promotion, or denying a loan, by employers and lenders. A simple approach is to apply the EEOC’s four-fifths, or 80 percent, rule.^[39]

The rule states that the selection rate of a protected group (e.g., the percentage of the group members selected for a promotion) should be at least 80 percent of the nonprotected group’s selection rate. In other words, the impact ratio (i.e., the ratio of one group’s selection rate over the other group’s selection rate) should be 80 percent or more. In reverse discrimination, the protected group would be defined as White and/or male and placed in the numerator of the equation. Applying the four-fifths rule in both directions implies a group’s selection rate should be 80 percent to 125 percent of the selection rate of the group to which it is being compared.^[40]

For instance, assume that a bank decides to investigate its acceptance of mortgage applications by race. An analyst puts the counts of Black and White applications accepted and rejected into the following table (table 1) and calculates the impact ratio with Black applicants in the numerator and then with White applicants in the numerator. The analyst finds that mortgage selection by the bank fails the four-fifths rule because the Black selection rate is 62.5 percent of the White selection rate, or, put in terms of reverse discrimination, the White selection rate is 160 percent of the Black selection rate, which is over 125 percent.

Table 1: Example Impact Ratio Analysis

The four-fifths, or 80 percent, rule is a rule of thumb rather than a formal test. It does not assess the statistical significance of the difference between the groups’ selection rates or even the difference between the impact ratio and the 80 percent target. To determine the statistical significance of a difference in selection rates, a simple approach used by experts is to test the hypothesis of independence between the selection rate and membership in a group. In essence, this statistical technique compares the number of selections/rejections expected based on the overall selection rate to the actual number of selections/rejections by group to identify differences that are more extreme than expected under equal treatment.^[41] Because the test asks whether group membership matters for selection, it will identify disparities that favor or disfavor White and/or male group members.

A limitation of the four-fifths rule and tests of independence is that they do not control for characteristics of the individuals being analyzed other than group membership. When there are characteristics that are expected to explain differences in selection rates for all applicants or employees, it is necessary to use a regression approach. The regression approach used to test for disparities in outcomes that are binary (yes-or-no decisions) is similar to the model presented above. Experts can use linear probability models, which are the same as the model above, or they can use logit or probit regression models to better fit the binary outcome data. With logit or probit models, the coefficient of interest can be interpreted as the change in the odds of being selected that can be attributed to group membership (i.e., the difference in the probability of being selected, divided by the probability of not being selected across groups). Estimates from these models are often reported as log odds or odds ratios.^[42] Thus, when estimating whether Black borrowers are less likely to be selected for a loan offer, the regression coefficient B_i estimates how the odds of being selected for a Black borrower differ from those of a White borrower, all else being equal. As in the case of nonbinary outcomes discussed above, the estimated difference between the two groups can reveal either discrimination or reverse discrimination, should either exist.

However, even when relying on a regression model to provide evidence for or against a claim of a discriminatory quota, litigation parties disagree about what makes individuals perform better or worse at a loan or job. Membership in a protected group must be explicitly proven to be relevant to doing a job or the profitability of a loan before it can be used to justify a difference in treatment relative to individuals in a majority group. Likewise, this concept may be similarly used in allegations of reverse discrimination to justify the alleged preferential treatment of a protected group relative to the majority group.

Takeaways

In conclusion, with the recent focus on reverse discrimination in the federal government and the spate of legal cases involving allegations of reverse discrimination, legal practitioners and regulators, as well as employers, lenders, and other decision-makers, should be aware of the conceptual analyses and statistical tools available to assess disparities. The fact that the same approaches can be used to assess discrimination and reverse discrimination simplifies the job of experts tasked with assessing ex post disparities in this environment. It also streamlines the job of employers, lenders, and other decision-makers seeking to minimize risk and ensure equitable treatment proactively, through an audit of their practices.

1. Ames v. Ohio Dep’t of Youth Servs., 145 S. Ct. 1540 (2025). ↑

2. See, e.g., Presidential Actions: Ending Radical and Wasteful Government DEI Programs and Preferencing, Whitehouse.gov (Jan. 20, 2025) [hereinafter DEI EO 1]; Presidential Actions: Ending Illegal Discrimination and Restoring Merit-Based Opportunity, Whitehouse.gov (Jan. 21, 2025) [hereinafter DEI EO 2]; Mark, Julian, Trump Administration Moves to Upend $37B Affirmative Action Program, Wash. Post (May 28, 2025). ↑

3. Memorandum from Tom Branch, Deputy Att’y Gen., U.S. Dep’t of Just. (May 19, 2025) (Subject: Civil Rights Fraud Initiative) [hereinafter Civil Rights Fraud Initiative Memorandum]. ↑

4. Letter from Harmeet K. Dhillon, Assistant Att’y Gen., U.S. Dep’t of Just., to Brandon Johnson, Mayor, Chi., Ill. 1 (May 19, 2025) (Re: Investigation of the Employment Practices of the City of Chicago, Illinois, Pursuant to Section 707 of Title VII of the Civil Rights Act of 1964, as Amended) [hereinafter Chicago Letter]. ↑

5. See, e.g., Found. Against Intolerance & Racism Inc. v. Walker, No. 2:24-cv-01770, 2025 WL 1756875 (W.D. Wash. June 24, 2025) (granting motion to dismiss). ↑

6. Complaint, State of Missouri ex rel. Bailey, Att’y Gen. of Mo. v. Starbucks Corp., No. 4:25-cv-00165 (E.D. Mo. Feb. 11, 2025). ↑

7. Reverse Discrimination, Cornell L. Sch. Legal Info. Inst. (last visited Mar. 18, 2025). ↑

8. The heightened burden of proof challenged in Ames required plaintiffs to prove that they were discriminated against despite being in a majority group. In a July 19, 2023, ruling in Ultima Services Corp. v. Department of Agriculture, the U.S. District Court for the Eastern District of Tennessee decided that the Small Business Administration’s 8(a) Business Development Program could not determine eligibility of applicants through a presumption of social disadvantage based on simply being a member of a minority group. See Updates on the 8(a) Business Development Program, U.S. Small Bus. Admin. (last visited June 27, 2025). ↑

9. DEI EO 1, supra note 2, sec. 4. ↑

10. DEI EO 2, supra note 2, sec. 4. ↑

11. DEI EO 2, supra note 2, sec. 4 (b).

    To further inform and advise me so that my Administration may formulate appropriate and effective civil-rights policy, the Attorney General, within 120 days of this order, in consultation with the heads of relevant agencies and in coordination with the Director of OMB, shall submit a report to the Assistant to the President for Domestic Policy containing recommendations for enforcing Federal civil-rights laws and taking other appropriate measures to encourage the private sector to end illegal discrimination and preferences, including DEI. The report shall contain a proposed strategic enforcement plan identifying:

    (i) Key sectors of concern within each agency’s jurisdiction;

    (ii) The most egregious and discriminatory DEI practitioners in each sector of concern;

    (iii) A plan of specific steps or measures to deter DEI programs or principles (whether specifically denominated “DEI” or otherwise) that constitute illegal discrimination or preferences. As a part of this plan, each agency shall identify up to nine potential civil compliance investigations of publicly traded corporations, large non-profit corporations or associations, foundations with assets of 500 million dollars or more, State and local bar and medical associations, and institutions of higher education with endowments over 1 billion dollars;

    (iv) Other strategies to encourage the private sector to end illegal DEI discrimination and preferences and comply with all Federal civil-rights laws;

    (v) Litigation that would be potentially appropriate for Federal lawsuits, intervention, or statements of interest; and

    (vi) Potential regulatory action and sub-regulatory guidance. ↑

12. What You Should Know About DEI-Related Discrimination at Work, U.S. Equal Emp. Opportunity Comm’n (last visited Apr. 17, 2025). ↑

13. Id. ↑

14. Memorandum from Andrew N. Ferguson, Chairman, U.S. Fed. Trade Comm’n, to Daniel Guarnera, Dir., Bureau of Competition, et al. (Feb. 26, 2025) (Subject: Directive Regarding Labor Markets Task Force). ↑

15. Memorandum from Pamela Bondi, Att’y Gen., U.S. Dep’t of Just. (Feb. 5, 2025) (Subject: Ending Illegal DEI and DEIA Discrimination and Preferences). ↑

16. Chicago Letter, supra note 4, at 1. ↑

17. Civil Rights Fraud Initiative Memorandum, supra note 3, at 1. ↑

18. Id. at 2. ↑

19. Id. ↑

20. Complaint, State of Missouri ex rel. Bailey, Att’y Gen. of Mo. v. Starbucks Corp., No. 4:25-cv-00165, ¶ 1 (E.D. Mo. Feb. 11, 2025). ↑

21. Prayer for Relief, Starbucks, No. 4:25-cv-00165, ¶ 4. ↑

22. See, e.g., Justin Jouvenal, Supreme Court Sides with Woman Claiming Anti-Straight Job Discrimination, Wash. Post (June 5, 2025). ↑

23. Id. ↑

24. Id. ↑

25. Ames v. Ohio Dep’t of Youth Servs., 145 S. Ct. 1540, 1542 (2025). ↑

26. Plaintiffs claim that the Washington State Housing Finance Commission’s Covenant Homeownership Program’s eligibility criteria violate the Equal Protection Clause of the Fourteenth Amendment by facially discriminating on the basis of race. See Found. Against Intolerance & Racism, Inc. v. Walker, No. 2:24-cv-01770 (W.D. Wash. Oct. 29, 2024) (complaint for declaratory and injunctive relief); 2025 WL 1756875 (W.D. Wash. June 24, 2025) (granting motion to dismiss). ↑

27. Palmer v. Cognizant Tech. Sols. Corp., No. 2:17-cv-06848 (C.D. Cal. Sept. 18, 2017). On October 4, 2024, a California federal jury found “that Cognizant Technologies engaged in a ‘pattern or practice’ of intentional discrimination against a class of non–South Asian and non-Indian employees who were terminated.” Craig Clough, Jury Finds Cognizant Biased Against Non-Indian Workers, Law360 (Oct. 4, 2024). ↑

28. Students for Fair Admissions, Inc. v. President & Fellows of Harvard Coll., No. 1:14-cv-14176 (D. Mass. Boston Div. Nov. 17, 2014). ↑

29. Chris Villani, The Man Who Ended Affirmative Action Is Just Getting Started, Law360 (May 13, 2025). ↑

30. DEI EO 2, supra note 2. ↑

31. Civil Rights Fraud Initiative Memorandum, supra note 3, at 1. ↑

32. Students for Fair Admissions, Inc. v. President & Fellows of Harvard Coll., 600 U.S. 181, 205 (2023). ↑

33. Villani, supra note 29. ↑

34. The concept of comparing to those “similarly situated” to a plaintiff in a discrimination case resulted from two decisions by the U.S. Supreme Court. See Lewis v. City of Union City, Georgia, 918 F.3d 1213, 1217 (11th Cir. 2019) (“Faced with a defendant’s motion for summary judgment, a plaintiff asserting an intentional-discrimination claim under Title VII of the Civil Rights Act of 1964, the Equal Protection Clause, or 42 U.S.C. § 1981 must make a sufficient factual showing to permit a reasonable jury to rule in her favor. She can do so in a variety of ways, one of which is by navigating the now-familiar three-part burden-shifting framework established by the Supreme Court in McDonnell Douglas Corp. v. Green, 411 U.S. 792 . . . (1973). Under that framework, the plaintiff bears the initial burden of establishing a prima facie case of discrimination by proving, among other things, that she was treated differently from another ‘similarly situated’ individual―in court-speak, a ‘comparator.’ Texas Dep’t of Cmty. Affairs v. Burdine, 450 U.S. 248, 258–59 . . . (1981) (citing McDonnell Douglas, 411 U.S. at 804 . . .).”). ↑

35. One can generalize this to include other races, but we are assuming two groups to simplify exposition. To maintain consistency between group labels, we have used uppercase for both Black and White. ↑

36. In this example, there are only two race groups being analyzed: Black and White borrowers. When there are more than two race categories, multiple regression models must be run to do a complete comparison of loan pricing. For example, comparing the prices offered to White borrowers to the prices received by all other groups could be one framework. However, this type of model compares the average interest rate of White borrowers to the average interest rate received by all non-White borrowers. But, if White borrowers receive a higher interest rate, on average, relative to Black borrowers, this fact will not be observed. Moreover, if the number of Black borrowers is small or very different from other non-White borrowers, the impact of Black borrowers on the overall average for non-White borrowers will be “noisy,” producing a result that may not show a statistically significant difference between the White and non-White applicants’ average interest rate. ↑

37. Due to this duality, an alternative approach to analyzing disparities between Black borrowers and White borrowers would be to change the omitted race category from White borrowers to Black borrowers. ↑

38. For an interesting discussion of the legality of racial quotas, see Atinuke O. Adediran, Racial Targets, 118 Nw. U. Legal Rev. 1455 (2024). ↑

39. Questions and Answers to Clarify and Provide a Common Interpretation of the Uniform Guidelines on Employee Selection Procedures, U.S. Equal Emp. Opportunity Comm’n (last visited July 16, 2025). ↑

40. Let be the selection rate of group A and be the selection rate of group B. Applying the four-fifths rule in both directions requires that a ≥ ⅘ b and b ≥ ⅘ a. This implies ⁵⁄₄ a ≥ b ≥ ⅘ a. ↑

41. In independence tests, selections or any general sets of mutually exclusive categories are arranged in a contingency table. For example, a 2 x 2 table might have employees grouped by Black or White race categories and whether or not the employee was hired. A chi-square test statistic (one of many possible statistics) compares the actual number to the expected number in each cell of the table (i.e., Black/hire, Black/rejected, White/hire, and White/rejected) to determine whether a hypothesis of independence across all categories cannot be rejected using the traditional measure of statistical significance. See Chi-Square Independence Test, Nat’l Inst. Standards & Tech. (last visited July 16, 2025). ↑

42. See, e.g., Fair Lending Report of the Consumer Financial Protection Bureau, April 2016, 81 Fed. Reg. 29,547 (2016) (“One traditional method involves odds ratios, which measure the ratio of the odds of two different events. In the context of an underwriting analysis, the ratio reflects the odds of a loan application denial between groups of borrowers.”). ↑

Editor

§ 3.1. Supreme Court

Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024).

In a landmark 5–4 decision, the Supreme Court ruled that non-debtors can no longer use a debtor’s chapter 11 plan to secure for themselves non-consensual third-party releases.

Purdue Pharma is the maker of OxyContin, an opioid pain relief drug. Purdue was owned and controlled by the Sackler family, with members of that family serving as president and chief executive officer, dominating the board, and being heavily involved in the firm’s marketing strategy. In 2007, an affiliate of the company pled guilty to a federal felony for misbranding OxyContin. Thousands of lawsuits ensued. Following the plea agreement, the Sacklers began to take as much as 70% of the company’s revenue per year, with distributions between 2008 and 2016 totaling approximately $11 billion. These distributions left Purdue Pharma in a significantly weakened state.

In 2019, Purdue Pharma sought chapter 11 bankruptcy protection. In connection with this bankruptcy, the Sacklers proposed to return to the estate $4.325 billion of the $11 billion they had withdrawn from the company. This repayment was to be made over the course of a decade. In exchange for this prepayment, the Sacklers sought to end the lawsuits brought against them by opioid victims. This latter relief was termed by the Supreme Court as the “Sackler Discharge.” The Sackler Discharge included both a release and an injunction barring not just current claims, but future ones, whether or not the claimant participated in the bankruptcy proceeding. Purdue, as debtor in possession, agreed to these terms and included them in its proposed plan of reorganization. This plan sought to reorganize the company as a “public benefit” company, dedicated to opioid education and abatement. The plan also proposed payments of between $3,500.00 and $48,000.00 to those harmed by the company’s products.

While most of the creditors who returned ballots supported the plan, fewer than 20% of eligible creditors participated. The United States Trustee, along with eight states, the District of Columbia, the City of Seattle, and various Canadian municipalities and tribes joined with a number of opioid victims in opposing the plan. The bankruptcy court overruled these objections and confirmed the plan, including its provisions relating to the Sackler Discharge. The district court promptly vacated that decision, holding that nothing in the law authorized the bankruptcy court to extinguish claims against the Sacklers without the consent of the victims who brought those claims. The plan proponents and others appealed that decision to the Second Circuit.

While the appeal was pending, the plan proponents advised that the Sacklers were willing to contribute an additional sum if the eight states and the District of Columbia would be willing to withdraw their objections. Even with this additional sum, the Sacklers’ proposed contribution still fell short of the $11 billion amount they received pre-bankruptcy and would still be structured as installment payments. Nonetheless, the states and the District of Columbia agreed to drop their objections. However, a number of individual victims, the Canadian creditors, and the U.S. Trustee persisted with their objection. A divided panel of the Second Circuit reversed and revived the bankruptcy court’s order confirming the plan. The U.S. Trustee then filed an application for certiorari and the Supreme Court granted it to resolve a circuit split.

The Court began its analysis with section 1141 of the Bankruptcy Code. Section 1141(d)(1)(A) provides that a bankruptcy court’s order confirming a plan “discharges the debtor from any debt that arose before the date of [] confirmation.” 11 U.S.C. § 1141(d)(1)(A). In addition, section 524(e) of the Bankruptcy Code provides that a discharge “does not affect the liability of any other entity” beyond the debtor. 11 U.S.C. § 524(e). The Court noted that, “The Sacklers have not filed for bankruptcy and have not placed virtually all their assets on the table for distribution to creditors, yet they seek what essentially amounts to a discharge.” 603 U.S. at 215.

The Court framed the question before it as: “whether a court in bankruptcy may effectively extend to nondebtors the benefits of a [c]hapter 11 discharge usually reserved for debtors.” Id. (emphasis in original). To answer that question, the Court turned to section 1123 of the Bankruptcy Code, which addresses the contents of a plan, both mandatory and optional. No party argued that anything like the Sackler Discharge was required to be included in a plan. Instead, the plan proponents suggested that the Sackler Discharge was a provision that a debtor was allowed to include and that a bankruptcy court was permitted to approve under section 1123(b). The first five items addressed by section 1123(b), which simply addressed the scope of claims and property belonging to a debtor or its estate and the rights of creditors of such claims, were easily disregarded by the Court as potential sources of authority for the Sackler Discharge. Nothing in any of the first five paragraphs authorized the client to extinguish claims against third parties without the consent of the affected claimants.

The only possible source of authority for the Sackler Discharge in section 1123(b) would have to be found in subparagraph 6, which provides that a plan may “include any other appropriate provision not inconsistent with the applicable provisions of this title.” 11 U.S.C. § 1123(b)(6). It was that provision that the Second Circuit cited in support of its decision. Because the Bankruptcy Code does not expressly forbid a non-consensual non-debtor discharge, the plan proponents argued that the bankruptcy court was free to authorize such relief after finding it appropriate. The Court rejected this reasoning. First, subparagraph (6) “is a catchall phrase tacked on the end of a long and detailed list of specific directions. When faced with a catchall phrase like that, courts do not necessarily afford it the broadest possible construction it can bear.” 603 U.S. at 217 (citing Epic Sys. Corp. v. Lewis, 584 U.S. 497, 512 (2018)). Instead, such catchall provisions are generally “interpreted in light of its surrounding context and read to ‘embrace only objects similar in nature’ to the specific examples preceding it.” Id. (quoting Epic Sys. Corp., 584 U.S. at 512). With that principle in mind, the Court held that subparagraph (6) does not afford a bankruptcy court the blanket authority proposed by the plan proponents. In this case, the various plan provisions listed in the first five subparagraphs of section 1123(b) concerned the debtor, its rights, responsibilities, and relationship with creditors. While subparagraph (6) clearly operates to confer additional authority on bankruptcy courts, the Supreme Court held that “the catchall cannot be fairly read to endow a bankruptcy court with the ‘radically different’ power to discharge the debts of a nondebtor without the consent of affected nondebtor claimants.” Id. at 218 (quoting Epic Sys. Corp., 584 U.S. at 513). The majority decision then rejected the dissent’s argument that the purpose of bankruptcy law was to solve collective action problems. While the majority acknowledged that bankruptcy may serve to address some of those problems, it noted that the Bankruptcy Code does not provide a bankruptcy court “with a roving commission to resolve all such problems” that it happens to encounter. Id. at 220.

As further support for its conclusion that the Sackler Discharge was impermissible, the Court went beyond section 1123(b) and looked at other provisions of the Bankruptcy Code. It noted that the Code reserves the benefit of a discharge for the debtor that actually files for bankruptcy. Id. at 221 (citing 11 U.S.C. §§ 1141(d)(1)(A), 524(e), 727(a)-(b)). Moreover, the discharge afforded a debtor is not unlimited. Id. at 221–22 (citing 11 U.S.C. §§ 523(a)(2), (4), (6)). The Court emphasized that the Sacklers had not agreed to place anything approaching the entirety of their assets on the table, but nonetheless sought a judicial order arguably broader than that available in the form of a discharge.

The Court then noted that the Bankruptcy Code contains a significant exception to the foregoing rules. In the asbestos context, bankruptcy courts are expressly authorized to issue an injunction barring any action directed against a third party under certain specified circumstances. The fact that the Code “does authorize courts to enjoin claims against third parties without their consent, but does so in only one context, makes it all the more unlikely that [section] 1123(b)(6) is best read to afford courts that same authority in every context.” Id. at 222 (emphasis in original). The final nail in the coffin of the Sackler Discharge was pre-Code practice, which confirmed the Court’s reasoning. Every bankruptcy statute cited to the Court, ranging from 1800 to 1978, “generally reserved the benefits of discharge to the debtor who offered a ‘fair and full surrender of [its] property.’” Id. at 223–24 (quoting Sturges v. Crowninshield, 4 Wheat. 122, 176 (1819)).

Although both sides of the debate raised policy-based arguments, the Supreme Court held that it was “the wrong audience for them.” Id. at 226. “Congress may choose to add to the [B]ankruptcy [C]ode special rules for opioid-related bankruptcies as it has for asbestos-related cases. Or it may choose not to do so. Either way, if a policy decision like that is to be made, it is for Congress to make.” Id.

Finally, the Court noted the limits of its decision. “Nothing in what we have said should be construed to call into question consensual third-party releases offered in connection with a bankruptcy reorganization plan; those sorts of releases pose different questions and may rest on different legal grounds than the nonconsensual release at issue here.” Id. (citing In re Specialty Equip. Cos., 3 F.3d 1043, 1047 (7th Cir. 1993). Nor did the Court attempt to address what constitutes a consensual release or what is the full satisfaction of a claim against a third-party non-debtor. Chief Justice Kavanaugh dissented, in which the Chief Justice, Justice Sotomayor and Justice Kagan joined.

Truck Ins. Exch. v. Kaiser Gypsum Co., 602 U.S. 268 (2024).

Truck Insurance Exchange (“Truck”) was the primary insurer of companies that manufactured and sold products containing asbestos. Many of those companies sought chapter 11 bankruptcy protection after facing thousands of lawsuits. Truck objected to one such company’s bankruptcy plan. The Fourth Circuit Court of Appeals concluded that Truck was not a “party in interest” in accordance with section 1109(b) because the plan was “insurance neutral.” Truck sought review at the Supreme Court and the Supreme Court granted certiorari. The question before the Court was whether an insurer with financial responsibility for a bankruptcy claim was a “party in interest” within the meaning of section 1109(b).

Under the relevant insurance contracts, the debtors had an obligation to pay a $5,000 deductible per claim and to “assist and cooperate with Truck in defending against the claims.” Id. at 275. In confirming the plan, the bankruptcy court made a finding that the debtors’ conduct in the bankruptcy proceedings neither violated this duty to assist and cooperate nor breached any implied covenant of good faith and fair dealing. Further, the confirmed plan treated insured and uninsured claims differently. Insured claims were left to the tort system, where lawsuits would be filed and Truck would be compelled to defend. If the claimant prevailed, the trust created by the plan would pay the deductible and Truck would be left to pay up to $500,000 per claim. Uninsured claims, on the other hand, were submitted directly to the trust for resolution. As part of this latter process, claimants were required to identify all other related claims and file a release authorizing the trust to obtain documentation for other asbestos trusts that others submitted claims.

Truck was the only party before the bankruptcy court to object to the plan. Its objection was threefold: First, Truck contended that the plan was not proposed in good faith, as required by section 1129(a)(3) of the Bankruptcy Code, both because the plan was the result of a collusive agreement between the debtor and the claimants and because the plan did not require the same disclosures for insured and uninsured claims. Second, the finding required by the plan—that the debtors’ conduct during the bankruptcy did not violate its duty to assist and cooperate—impermissibly altered Truck’s rights under its policies by relieving the debtors of their assistance and cooperation obligations and by barring Truck from raising the debtors’ bankruptcy conduct as a defense to its own payment obligations. Third, Truck contended that the trust did not comply with various provisions of section 524(g) of the Bankruptcy Code. The district court, based on a recommendation by the bankruptcy court, confirmed the plan and held that Truck had limited standing to object solely on the grounds that the plan was not “insurance neutral.” Because the district court found that the plan was insurance neutral, it overruled all of Truck’s objections. The Fourth Circuit affirmed.

The Court began its analysis with the text of section 1109(b), which provides an illustrative, but not exhaustive, listing of parties in interest. The listed parties share a common thread in that each could be directly affected by a confirmed plan of reorganization, either because it had a financial interest in the estate’s assets, or it represented parties that do. In the Court’s view, these illustrations made clear that anyone holding a direct financial stake in the outcome of the case should have an opportunity to participate. This understanding aligned with the Court’s prior observation that the term “party in interest” is used when Congress intends a broad application of the term. Id. at 278 (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 7 (2000)). The Court then noted that this reading of the statute was also consistent with the ordinary meaning of the term “party in interest,” as well as the historical context and purpose of the statute. “Congress consistently has acted to promote greater participation in reorganization proceedings.” Id. at 279.

Given these broad principles, the Court held that insurers, such as Truck, with financial responsibility for bankruptcy claims are “parties in interest.” Put simply, “an insurer with financial responsibility for bankruptcy claims can be directly and adversely affected by the reorganization proceedings.” Id. at 281. The Supreme Court rejected the Fourth Circuit’s focus on whether the plan altered Truck’s contract rights or its quantum of liability, holding that such approach, known as the insurance neutrality doctrine, “is conceptually wrong and makes little practical sense.” Id. at 283. In essence, the Court said, the doctrine conflated the merits of an objection with the threshold “party in interest” inquiry. Section 1109(b) asks whether reorganization might affect a prospective party, not how a particular plan might affect that party. Section 1109(b), the Court held, could not depend on a plan-specific rule as it would be unusable given that the Bankruptcy Code authorizes a party in interest to request acts unrelated to a specific plan or before a plan is confirmed or even proposed. Accordingly, the judgment of the appellate court was reversed.

§ 3.2. First Circuit

Fin. Oversight & Mgmt. Bd. for P.R. v. U.S. Bank N.A. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 104 F.4th 367 (1st Cir. 2024).

Reversing the court (the “Title III Court”) overseeing the proceedings under Title III of the Puerto Rico Oversight Management and Economic Stability Act (“PROMESA”), the First Circuit delivered a partial win to certain holders of municipal bonds issued by the Puerto Rico Electric Power Authority (“PREPA”). In its June 2024 decision, the First Circuit ruled that PREPA’s obligation to repay the bonds was secured by the bondholders’ perfected, unavoidable security interests in PREPA’s net revenues. However, the court also reversed the Title III Court when it determined that the payment obligations were nonrecourse and that the bondholders were not entitled to recover an unsecured claim against other PREPA assets.

The facts of the case are simple. In 1941, Puerto Rico passed the Puerto Rico Electric Power Authority Act, which not only authorized the creation of PREPA, but also granted PREPA the authority to raise funds by issuing bonds secured by its “entire gross or net revenues and present or future income.” P.R. Laws Ann. tit. 22, § 206(e)(1). In 1974, PREPA entered into a Trust Agreement pursuant to which it exercised its authority under to raise funds by issuing bonds (“Revenue Bonds”) purportedly secured by “the revenues of [PREPA] . . . and other moneys to the extent provided in this [Trust] Agreement.” Id. at 382. Then, in 2017, in the midst of the Puerto Rican government-debt crisis, PREPA defaulted on its Revenue Bond payment obligations. Because of the enactment of PROMESA in 2016, the Financial Oversight and Management Board for Puerto Rico (the “Board”) was empowered to place PREPA into Title III proceedings following this default.

In the course of those proceedings, the Board commenced an adversary proceeding “to define the rights and remedies that bondholders had against PREPA.” Id. at 379. The Board asserted that: (i) the bondholders were secured by revenues only to the extent that such revenues had flowed into certain funds designated by the Trust Agreement; (ii) the bondholders had failed to perfect their security interest in certain of the designated funds, such that their security interests were voidable pursuant to 11 U.S.C. § 544(a); and (iii) the Revenue Bonds were nonrecourse such that the bondholders were not entitled to a deficiency claim to the extent that the value of their security interest was less than the face value of the Revenue Bonds. The Title III Court agreed with the Board that bondholders were secured only to the extent that revenues were actually deposited in the designated funds and that the bondholders’ security interest in certain of the designated funds were avoidable, but determined that the bondholders were entitled to an unsecured claim against PREPA in the amount of approximately $2.4 billion.

On appeal, the First Circuit largely reversed the Title III Court. Turning first to the question of whether the Trust Agreement itself in fact granted the bondholders a security interest, the court considered whether the granting language, which appeared in the Trust Agreement’s preamble, was merely prefatory. Disagreeing with the Title III Court, the First Circuit held that, under Puerto Rico law, there is no “magic language” required to grant a security interest. The language in the preamble evinced a clear intent to grant a security interest. Next, to determine the scope of the bondholders’ security interest, the First Circuit considered whether the bondholders’ lien extended to PREPA’s gross or net revenues. After analyzing the language of the Trust Agreement, the court concluded that the security interest must extend to PREPA’s net revenues only. However, the court noted that, even if the language of the Trust Agreement had not indicated that the bondholders’ interest extended only to net revenues, section 928(b) of the Bankruptcy Code subordinated the bondholders’ lien to PREPA’s reasonable and necessary postpetition operating expenses. Third, the First Circuit rejected the Board’s argument that the bondholders’ lien extended only to net revenues that had flowed into certain designated funds. Finding the language in the Trust Agreement ambiguous, the court instead determined that such a result would have misled a reasonable investor. Finally, the court considered whether the bondholders’ lien extended to future net revenues. Looking to both Puerto Rican law and the Bankruptcy Code, the First Circuit held that the pledge of net revenues made under the Trust Agreement included future net revenues that PREPA acquired.

After determining that the bondholders held a security interest in PREPA’s current and future net revenues, the First Circuit then considered whether the bondholders had perfected their security interest. Concluding that the bondholders’ interest in the net revenues was an interest in an “account” under the Uniform Commercial Code, rather than “money” or “deposit accounts,” the court held that the bondholders were properly perfected by filing of a financing statement. As a result, the Board could not avoid the bondholders’ lien under section 544(a) of the Bankruptcy Code.

Finally, the First Circuit examined the Title III Court’s estimation of the bondholders’ unsecured claim. The Title III Court had found that the bondholders were entitled to an unsecured claim as a result of the bondholders’ rights, under the Trust Agreement, to certain equitable remedies in the event PREPA breached its performance obligations. See 11 U.S.C. § 101(5)(B). The Title III Court then estimated the amount of the bondholders’ unsecured claim arising from such equitable remedies, in accordance with section 502(c)(2) of the Bankruptcy Code, to be approximately $2.4 billion. The First Circuit, however, disagreed that the bondholders’ right to payment arose from the equitable rights afforded to the bondholders under the Trust Agreement. Instead, the First Circuit held that, because the amount of the bondholders’ claim could be easily determined by the terms of the Trust Agreement, the claim was more similar to a liquidated claim, and thus could not be estimated under section 502(c). The First Circuit further held that, under section 927 of the Bankruptcy Code, the bondholders were not entitled any recourse from PREPA’s other assets. See 11 U.S.C. § 927.

Milk Indus. Regul. Off. of Commonwealth of P.R. v. Ruiz (In re Ruiz), 83 F.4th 68 (1st Cir. 2023).

In this case, the First Circuit addressed the applicability of the “capable of repetition” exception and the “collateral consequences” exception to the doctrine of constitutional mootness. Holding per curiam that neither exception applied at the time the case was decided by the Bankruptcy Appellate Panel for the First Circuit (the “BAP”), the First Circuit vacated the BAP’s decision, but left undisturbed the bankruptcy court’s orders underlying the appeal.

This case arises from the decision of the Milk Industry Regulatory Office of the Commonwealth of Puerto Rico (“ORIL”) to suspend the license of a chapter 12 debtor, Luis Manuel Ruiz Ruiz (“Ruiz”), to produce and sell a certain quota of milk. While Ruiz was appealing ORIL’s suspension of his license to the Puerto Rico Court of Appeals, Ruiz sought an order from the bankruptcy court authorizing Ruiz to lease a portion of his milk quota to a willing lessee for six months. Although ORIL received notice of Ruiz’s motion, ORIL failed to object to the relief sought. The bankruptcy court granted Ruiz’s motion and Ruiz executed the lease, which Ruiz then submitted to ORIL for registration. Twelve days after the bankruptcy court’s order approving the lease was granted, ORIL asked the bankruptcy court to reconsider. The bankruptcy court denied the reconsideration request. ORIL then appealed both the bankruptcy court’s order authorizing Ruiz to enter into the lease and the order denying reconsideration to the BAP. Notwithstanding the BAP’s request for supplemental briefing regarding mootness, the BAP affirmed both bankruptcy court orders on the merits.

The First Circuit, by contrast, considered the question of mootness to be a threshold question affecting the court’s jurisdiction over the appeal. But more than its own jurisdiction, the First Circuit examined as well whether the BAP had jurisdiction to issue a judgment on the merits. Because the original six-month term of the lease expired while the appeal was pending before the BAP, the First Circuit held that the bankruptcy court orders became moot prior to the BAP’s decision. The court then considered whether either of two exceptions to constitutional mootness applied. The first exception—the “capable of repetition” exception—permits a court to review an action without controversy where “(1) the challenged action is in its duration too short to be fully litigated prior to its cessation or expiration, and (2) there is a reasonable expectation that the same complaining party will be subjected to the same action again.” Id. at 74 (quoting United States v. Sanchez-Gomez, 584 U.S. 381, 391 (2018)). Because ORIL had not demonstrated that Ruiz, or any other milk producer, would seek approval of a short-term lease of its license, despite pending revocation of said license, the court held that the exception was inapplicable. The second exception—the “collateral consequences” exception—requires a party to demonstrate that it would suffer adverse consequences in another proceeding if a lower court’s decision were permitted to stand on grounds of mootness. Id. at 75–76 (quoting ConnectU LLC v. Zuckerberg, 522 F.3d 82, 88 (1st Cir. 2008)). The First Circuit held that ORIL had waived its argument under this exception by failing to brief it.

Having determined that ORIL’s appeal was moot at the time of the BAP’s decision, the First Circuit then considered the appropriate disposition of the appeal. “When a civil case becomes moot pending appeal, the ‘established practice . . . is to reverse or vacate the judgment below and remand with a direction to dismiss.’” Id. at 77 (quoting United States v. Munsingwear, 340 U.S. 36, 39 (1950)). While the First Circuit easily concluded that the BAP judgement should be vacated and the appeal dismissed, the decision as to whether the bankruptcy court’s orders should be vacated required more consideration. Ultimately, the court held that, because ORIL “‘slept on its rights’ in several respects throughout the course of th[e] litigation,” id. at 78 (quoting Munsingwear, 340 U.S. at 41), the balance of equities weighed against vacatur of the bankruptcy court’s orders.

§ 3.3. Second Circuit

In re Nine W. LBO Sec. Litig., 87 F.4th 130, 139 (2d Cir. 2023), cert. denied sub nom. Stafiniak v. Kirschner, 144 S. Ct. 2551 (2024).

Clarifying its decision in In re Tribune Co. Fraudulent Conv. Litig., 946 F.3d 66 (2d Cir. 2019) regarding the scope of the safe harbor outlined in section 546(e) of the Bankruptcy Code, the Second Circuit held that whether a bank customer may be considered a “financial institution” under section 101(22)(A) must be evaluated on a “transfer-by-transfer” basis rather than a “contract-by-contract” basis. As a result, the mere fact that a qualifying bank acts as agent on behalf of a customer in connection with one segment of a transaction does not imbue an entire consolidated transaction, such as the leveraged buyout at issue here, with the protections afforded under section 546(e).

In 2013, private equity firm Sycamore Partners (“Sycamore”) proposed to acquire Jones Group, Inc. (“Jones Group”), a footwear and apparel company, through a leveraged buyout (the “LBO”). Pursuant to the merger agreement, the former public shareholders of Jones Group would receive $15 per share of Jones Group, which payments would be effectuated by Wells Fargo, as paying agent. The merger agreement also provided for payments to former directors, officers and employees of Jones Group on account of their restricted shares in Jones Group, although Wells Fargo was not involved in such payments. Through the LBO, Jones Group was ultimately merged into a subsidiary of Sycamore, which was then renamed Nine West Holdings, Inc. (“Nine West”). Upon the closing of the LBO, Sycamore caused Nine West to sell three of its allegedly most valuable brands to Sycamore affiliates.

In 2018, Nine West commenced bankruptcy proceedings. Following confirmation of Nine West’s plan of reorganization, certain creditors (the “Trustees”) brought suit against the former directors, officers, and shareholders of Jones Group, seeking to avoid the payments they had received in connection with the LBO as fraudulent conveyances. The cases were then consolidated in multidistrict proceedings before the Southern District of New York. Following the consolidation, the public shareholders, forming one group of defendants known as the “Public Shareholders,” moved to dismiss the fraudulent conveyance claims under section 546(e)’s safe harbor provision. The former directors, officers, and employees of Jones Group, forming a separate group of defendants known as the “Individual Shareholders,” joined the motions. The district court, relying in part on Tribune, granted the defendants’ motion to dismiss the fraudulent conveyance claims. It held that Nine West qualified as a “financial institution” within the meaning of section 101(22)(A) due to its retention of Wells Fargo as a paying agent with respect to the payments made to certain of the public shareholders. As a result, the district court found that all of the transfers in connection with the LBO were safe harbored by section 546(e). In doing so, the district court failed to consider whether Wells Fargo had a role in each of the transfers made to shareholders, including the Individual Shareholders.

On appeal, the Second Circuit determined that the district court erred by using a “contract-by-contract” interpretation of section 101(22)(A)’s definition of “financial institution” with respect to bank customers. Instead, the Second Circuit held that whether a bank customer qualifies as a “financial institution” within the meaning of section 101(22)(A) must be analyzed on a “transfer-by-transfer” basis for three reasons. First, the Second Circuit found that the plain language of section 101(22)(A) required a transfer-by-transfer analysis in order to afford meaning to the phrase “when any such [bank] . . . is acting as agent or custodian for a customer . . . in connection with a securities contract.” By contrast, a contract-by-contract approach would lead to an absurd result wherein every transfer made in connection with an LBO would be safe harbored as long as a bank served as agent for at least one component of the transfers. Second, the court looked to the structure of the Bankruptcy Code itself. Because the Bankruptcy Code grants to trustees the power to avoid certain transfers, it defied logic to conclude that the shield to such avoidance powers under section 546(e) was not similarly limited to a transfer-by-transfer limitation. Finally, the Second Circuit considered the legislative purpose behind section 546(e)’s safe harbor. In enacting the safe harbor, Congress sought to avoid triggering systemic risks in securities markets by precluding the trustee from unwinding certain qualifying transactions. To extend that protection to transfers that did not implicate those same concerns would likely exceed Congress’s intention in enacting the safe harbor.

In his dissent, Judge Richard J. Sullivan rejected the majority’s “transfer-by-transfer” approach. Adopting instead the “contract-by-contract” approach, Sullivan argued that the majority’s interpretation would render the inclusion of bank customers in the definition of “financial institution” superfluous. Accordingly, Sullivan would have affirmed the district court’s judgment in its entirety.

Worms v. Rozhkov (In re Markus), 78 F.4th 554 (2d Cir. 2023).

Adding to the corpus of case law surrounding a bankruptcy court’s inherent authority to impose sanctions, as articulated in Rosellini v. U.S. Bankr. Ct. (In re Sanchez), 941 F.3d 625 (2d Cir. 2019) (per curiam), the Second Circuit explicitly condoned a bankruptcy court’s imposition of non-nominal, civil contempt sanctions. In so doing, the court articulated the requirements for when such sanctions could be imposed.

In April 2016, the Moscow Arbitration Court commenced bankruptcy proceedings against Russian citizen Larisa Ivanovna Markus (“Markus”) and appointed Yuri Vladimirovich Rozhkov (the “Foreign Representative”) to liquidate Markus’ assets. Because Markus was alleged to have significant assets in the United States, in January 2019, the Foreign Representative filed a petition for recognition of the Russian bankruptcy proceedings against Markus pursuant to chapter 15 of the Bankruptcy Code. On April 1, 2019, the U.S. bankruptcy court granted the Foreign Representative’s request for recognition.

In the course of conducting discovery regarding Markus’ U.S.-based assets, the Foreign Representative soon encountered resistance from attorney Victor A. Worms (“Worms”), who appeared on Markus’ behalf. Worms had failed to respond to all efforts of the Foreign Representative to obtain discovery from Markus, arguing that the recognition of the Russian bankruptcy proceedings against Markus was null and void. Notwithstanding Markus’ motion to vacate the recognition order, the bankruptcy court issued multiple orders directing Worms, on Markus’ behalf, to comply with the discovery requests. After repeated failures to comply with the bankruptcy court’s orders, the bankruptcy court warned Worms that he was at risk for being sanctioned. On September 11, 2019, on the bankruptcy court’s advice, the Foreign Representative filed a motion for sanctions against Worms and Markus, seeking both (i) attorneys’ fees and costs and (ii) pursuant to the bankruptcy court’s inherent authority, civil contempt sanctions against Worms in the amount of $1,000 for each day until he produced documents responsive to the discovery requests. After a hearing, on October 8, 2019, the bankruptcy court issued an order, pursuant to its inherent authority, imposing sanctions on Worms for his repeated failure to comply with the discovery orders. The bankruptcy court also awarded the Foreign Representative attorneys’ fees against Worms personally. After multiple appeals to the district court, the amount of the contempt sanctions was fixed in the amount of $55,000 and the attorneys’ fees, in the amount of $36,600.

On appeal, Worms argued that the imposition of civil contempt sanctions was outside of the bankruptcy court’s inherent authority to issue sanctions, relying in part on the Second Circuit’s decision in Sanchez. The Second Circuit flatly rejected this argument.

Nowhere in Sanchez did the Court say, as Worms argues, that a bankruptcy court’s inherent sanctioning authority was limited to non-contempt sanctions. In fact, Sanchez suggests that the opposite is true by recognizing that bankruptcy courts, like Article III courts, possess inherent sanctioning powers, and it is beyond dispute that Article III courts have inherent contempt authority.

Id. at 565 (first citing Sanchez, 941 F.3d at 628; then Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991); and then Anderson v. Dunn, 19 U.S. 204, 227 (1821)).

Nonetheless, the Second Circuit continued to hold that, although a bankruptcy court’s inherent authority to impose sanctions extends beyond those sanctions at issue in Sanchez, such inherent authority was not unlimited. The court articulated a multi-prong framework for considering when sanctions issued pursuant to a bankruptcy court’s inherent authority are warranted: first, any express authority for imposing sanctions must be insufficient; second, the bankruptcy court cannot override statutory directives and prohibitions in imposing sanctions; third, the court must be explicit about its invocation of its inherent authority and must otherwise adhere to the principles of due process; fourth, a finding of bad faith may be required in certain circumstances, including when an attorney is acting in his or her capacity as an advocate, rather than an officer of the court; and finally, the imposition of civil contempt sanctions must comply with other established legal principals, such as the prohibition against punitive contempt sanctions under Gucci Am., Inc. v. Weixing Li, 768 F.3d 122, 144 (2d Cir. 2014) and the requirement for a movant to provide clear and convincing evidence that contempt sanctions are warranted as provided under King v. Allied Vision, Ltd., 65 F.3d 1051, 1058 (2d Cir. 1995). Because all of these requirements were met, the Second Circuit upheld both the bankruptcy court’s imposition of the contempt sanctions and the award of attorneys’ fees against Worms as proper exercises of the bankruptcy court’s inherent sanctioning authority.

§ 3.4.  Third Circuit

In re FTX Trading Ltd., 91 F.4th 148 (3d Cir. 2024).

In a precedential opinion, the Third Circuit reversed the ruling of the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) and held that the plain text and congressional intent of section 1104(c)(2) of the Bankruptcy Code mandate the appointment of an examiner in cases upon the request of a party where the debtor’s unsecured debts exceed $5 million.

In November 2022, FTX Trading Ltd. and its affiliates (collectively, the “Debtors”), a cryptocurrency exchange, suffered a rapid collapse as reports of numerous corporate failures came to light and customers scrambled to withdraw billions of dollars. Consequently, the Debtors filed voluntary petitions in the bankruptcy court seeking relief under chapter 11 of the Bankruptcy Code. The Debtors’ newly appointed CEO, John J. Ray, III, an experienced restructuring professional, reported that he had never “seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information.” Due to these failures, which included faulty regulatory oversight, cash management failures, and inadequate record keeping, the Debtors were only able to locate a fraction of the Debtors’ digital assets at the time of the filing.

In the wake of this disorganization, the Office of the United States Trustee (the “U.S. Trustee”) moved to appoint an examiner under section 1104(c) of the Bankruptcy Code. The U.S. Trustee asserted that an examiner would be better positioned to examine the implications of the Debtors’ collapse and would allow Mr. Ray to concentrate on stabilizing the Debtors’ business. The U.S. Trustee contended that the language in section 1104(c) is mandatory, requiring the appointment of an examiner if either condition within subsection (1) or (2) is met. The U.S. Trustee argued that because the Debtors’ unsecured debts substantially exceeded the $5 million threshold in section 1104(c)(2), appointment of an examiner was required.

The Debtors and other interested parties objected to the U.S. Trustee’s motion. They argued that the phrase “as is appropriate” within section 1104(c) left the decision of whether to appoint an examiner to the discretion of the Bankruptcy Court. The Bankruptcy Court agreed with the objectors and ruled that appointment of an examiner was discretionary under the Bankruptcy Code.

The U.S. Trustee appealed the Bankruptcy Court’s decision to the District Court and sought certification for direct appeal to the Third Circuit. The District Court granted, and the Third Circuit authorized, the direct appeal.

The Third Circuit acknowledged at the outset that question before it was primarily a question of statutory interpretation; accordingly, the Third Circuit looked to the plain language of section 1104(c). Section 1104(c) provides:

[O]n request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of an examiner to conduct such an investigation of the debtor as is appropriate . . . if

(1) such appointment is in the interests of creditors, any equity security holders, and other interests of the estate; or

(2) the debtor’s fixed, liquidated, unsecured debts . . . exceed $5,000,000.

11 U.S.C. § 1104(c). The Third Circuit noted that Congress’ use of the word “shall” is a word of command and serves as the equivalent of “must.” Regarding the objector-appellees’ argument that “as is appropriate” rendered the decision discretionary, the Third Circuit reasoned that under the last-antecedent rule of statutory interpretation, the qualifying phrase is read to apply to the immediately preceding term; here, the Third Circuit held that it modified the phrase “to conduct such an examination of the debtor.” Likewise, the Third Circuit noted that the language “as is appropriate” is not the same as “if appropriate,” with the latter providing a court discretion while the former only empowers a court to determine the scope of the examination.

The Third Circuit also relied on legislative history wherein Congress discussed the inclusion of an examiner in large cases to protect the interests of debtors, creditors, and the public. However, the Third Circuit noted that Congress had made the mandatory appointment of an examiner subject to some discretion: first, a party-in-interest or the U.S. Trustee must move for an examiner’s appointment; second, courts are left discretion to direct the scope, degree, duration, and cost of the examiner’s investigation. The court briefly explained that an examiner was required to be disinterested and to make its findings public, so an examiner’s investigation differs from one undertaken by a debtor or a creditors’ committee. The court concluded the Bankruptcy Court erred in denying the U.S. Trustee’s motion and remanded the proceeding to the Bankruptcy Court with instructions to enter an appropriate order.

In re LTL Mgmt. LLC, Nos. 23-2971, 23-2972, 2024 WL 3540467 (3d Cir. July 25, 2024).

In this non-precedential opinion, the Third Circuit affirmed the Bankruptcy Court for the District of New Jersey (the “Bankruptcy Court”), dismissing the LTL Management, LLC (“LTL”) bankruptcy case (for a second time) due to an absence of financial distress.

LTL, formed by Johnson & Johnson (“J&J”) through a two-step merger transaction to address its mass tort talc liabilities, filed for chapter 11 with a funding agreement from J&J in the amount of $61.5 billion to pay its talc liabilities and bankruptcy expenses. Its chapter 11 case was dismissed because the Third Circuit found that LTL lacked financial distress—principally, its funding agreement provided more than enough funds to address its liabilities. LTL filed a second chapter 11 hours later with a funding agreement from J&J in a substantially reduced amount of approximately $30 billion. The Third Circuit was called upon again to determine whether LTL’s bankruptcy case was filed in good faith—i.e., whether LTL was in financial distress. Three principal issues were raised on appeal.

First, the Third Circuit affirmed the Bankruptcy Court’s factual finding that LTL was not in financial distress. LTL’s own expert estimated a high-end liability not greater than $21 billion against a funding agreement well in excess of that amount.

Second, the Third Circuit affirmed the Bankruptcy Court’s application of its prior ruling on financial distress. The Third Circuit does not require insolvency before filing for bankruptcy, and can consider other factors that may make financial distress apparent—e.g., credit risk, liquidity issues, difficulties with employees, customers, and vendors, etc. However, LTL did not establish that it was suffering from any apparent financial distress and in its worst-case scenario, LTL’s assets exceeded its liabilities. While a solvent company confronted by mass-tort litigation can encounter financial distress that warrants bankruptcy, LTL did not meet its burden.

Finally, the Third Circuit held that section 1112(b)(2) of the Bankruptcy Code, which allows a court to decline to dismiss a bankruptcy case if unusual circumstances establish that it is not in the best interests of the creditors and the estate, did not provide an avenue to keep the cases in chapter 11. The Third Circuit affirmed the Bankruptcy Court in concluding that “lack of financial distress is not the type of ‘bad faith’ that could be subject to the [section] 1112(b) exception[.]” Id. at *4 (quoting In re LTL Mgmt., LLC, 652 B.R. 433, 451–54 (Bankr. D.N.J. 2023)).

Vertiv, Inc. v. Wayne Burt PTE, Ltd., 92 F.4th 169 (3d Cir. 2024).

In a precedential opinion, the Third Circuit vacated the order of the District Court for the District of New Jersey (the “District Court”) dismissing a complaint filed by plaintiffs Vertiv, Inc., Vertiv Capital, Inc., and Gnaritis, Inc. (collectively, “Vertiv”) against defendant Wayne Burt PTE, Ltd. (“Wayne Burt”) on grounds of international comity and remanded to apply a refreshed test for cases involving adjudicatory comity to a foreign bankruptcy proceeding.

Wayne Burt, a Singaporean corporation, was in liquidation proceedings in Singapore (the “Singaporean Liquidation Proceeding”). Prior to the Singaporean Liquidation Proceeding, Vertiv filed two suits alleging breach of contract against Wayne Burt in the District Court. The lawsuits were resolved by a consent judgment for $29 million. However, Wayne Burt, through the Singaporean liquidator, asserted lack of authority to consent to judgment and later moved to dismiss for failure to state a claim under Rule 12(b)(6) based on international comity grounds.

The District Court applied two tests in determining whether the action should be dismissed: the test articulated by the District Court in Austar International, Ltd. v. Austarpharma, LLC, 425 F. Supp. 3d 336 (D.N.J. 2019) and the test articulated by the Third Circuit in Philadelphia Gear Corp. v. Philadelphia Gear de Mexico, S.A., 44 F.3d 187 (3d Cir. 1994). The Austar test applies generally whenever a federal court seeks to determine whether to extend comity to a court of foreign jurisdiction, while the Philadelphia Gear test is specifically tailored to determine whether to extend comity to a foreign bankruptcy proceeding. Under both tests, the District Court determined that extending comity to the Singaporean Liquidation Proceeding was appropriate. Thus, the District Court granted Wayne Burt’s motion to dismiss. Vertiv timely appealed.

The Third Circuit noted that the category of comity at issue was adjudicatory comity, a discretionary act of deference towards a foreign court, so the Austar test was inapplicable. It further commented that it had been nearly three decades since the court addressed the topic in Philadelphia Gear and a “refreshed test” was warranted.

Under Philadelphia Gear, the first inquiry is whether the foreign bankruptcy proceeding is “parallel” to the civil action in the United States court. The foreign bankruptcy proceeding will be “parallel” when: (i) the foreign bankruptcy proceeding is ongoing in a duly authorized tribunal while the civil action is pending before the United States court; and (ii) the outcome of the United States action may affect the debtor’s estate. The court likened this inquiry to “related to” jurisdiction in a United States bankruptcy proceeding. Here, the court ruled that a $29 million judgment would affect the Singaporean Liquidation Proceeding and therefore, the proceedings were parallel.

The second inquiry from Philadelphia Gear is whether the party seeking the extension of comity makes a prima facie case by showing that “(1) ‘the foreign bankruptcy law shares our policy of equal distribution of assets,’ and (2) ‘the foreign law mandates the issuance or at least authorizes the request for the stay.’” Id. at 180 (quoting Phila. Gear, 44 F.3d at 193). The court then cited to a non-exhaustive list of factors that demonstrate principles of equality:

(1) whether creditors of the same class are treated equally in the distribution of assets; (2) whether the liquidators are considered fiduciaries and are held accountable to the court; (3) whether creditors have the right to submit claims which, if denied, can be submitted to a bankruptcy court for adjudication; (4) whether the liquidators are required to give notice to the debtors’ potential claimants; (5) whether there are provisions for creditors’ meetings; (6) whether a foreign country’s insolvency laws favor its own citizens; (7) whether all assets are marshaled before one body for centralized distribution; and (8) whether there are provisions for an automatic stay and for the lifting of such stays to facilitate the centralization of claims.

Id. at 181 (quoting Finanz AG Zurich v. Banco Economico S.A., 192 F.3d 240, 249 (2d Cir. 1999)). Here, the Third Circuit held that Singapore shares the United States’ policy of equal distribution of assets among similarly situated creditors and Singapore law authorizes a stay.

Finally, the last inquiry is the prejudice to the party opposing the extension of comity to the foreign bankruptcy proceeding. In essence, the United States court must assess whether the pending foreign bankruptcy proceedings provide due process protections for the party opposing the extension of comity, utilizing the non-exhaustive factors above. Because the District Court did not evaluate this last part of the test, the Third Circuit remanded to apply the refreshed test.

Wells Fargo Bank, N.A. v Hertz Corp. (In re Hertz Corp.), 117 F.4th 109 (3d Cir. 2024).

In a precedential opinion, the Third Circuit ruled not only that (i) make-whole fees (the “Applicable Premiums”), payable under Hertz’s unsecured bonds issued by The Hertz Corporation and certain of its affiliates (“Hertz” or the “Debtors”), constituted unmatured interest disallowed by section 502(b)(2) of the Bankruptcy Code, but also that (ii) because Hertz ultimately turned out to be solvent, the bondholders were entitled to postpetition interest at the contract rate, including payment of the Applicable Premiums, but not asserted early redemption fees.

The Debtors filed voluntary chapter 11 cases due to the pandemic, but were able to emerge from bankruptcy as solvent, with a plan of reorganization (the “Plan”) that nominally left all creditors unimpaired and provided a return to stockholders valued at approximately $1.1 billion. However, the Plan’s proposed treatment of unsecured bondholders provided for payment of postpetition interest at the federal judgment rate, while leaving the Applicable Premiums and early redemption fees, which were payable under the terms of the bonds, unpaid. Although the bondholders contested this treatment, the Debtors and the bondholders agreed to reserve such issues to resolution until after the Debtors’ emergence from bankruptcy. As a result, the Plan was confirmed. The bondholders later filed a complaint seeking payment of (i) postpetition interest at the contract rate, (ii) the Applicable Premiums, and (iii) the early redemption fees. The Bankruptcy Court dismissed the complaint, but ultimately certified the decision for direct appeal to the Third Circuit in light of intervening rulings from the Fifth and Ninth Circuits.

While the Third Circuit found that the Applicable Premiums constituted “interest” under both the standard “dictionary definition” and the “economic equivalent” approaches—and thus, must be disallowed under Bankruptcy Code section 502(b)(2) as unmatured interest—the Third Circuit also held that postpetition interest, including the Applicable Premiums, must be paid at the contract rate of interest because the Debtors were solvent. The Third Circuit explained that because the stockholders received value of over $1 billion, refusing to pay postpetition interest at the contract rate and the Applicable Premiums to the Noteholders, who were senior in priority to the stockholders, violated the absolute priority rule. Pointing to the Supreme Court’s decision in Czyzewski v. Jevic Holding Corp., 580 U.S. 451 (2017), the Third Circuit opined that “the Bankruptcy Code entitles every creditor—not just dissenting impaired creditors who can invoke [section] 1129(b) [of the Bankruptcy Code]—to treatment consistent with absolute priority absent a clear statement to the contrary.” 117 F.4th at 128 (citing Jevic, 580 U.S. at 465). Accordingly, the Third Circuit established this solvent debtor exception, relying on a long history of cases and codification in the Bankruptcy Code’s absolute priority rule.

Finally, the Third Circuit affirmed the bankruptcy court’s holding that the bondholders were not entitled to early redemption fees because the fee was never triggered as a matter of contract law and thus, not payable.

§ 3.5. Fourth Circuit

Blair v. Bestwall, LLC (In re Bestwall, LLC), 99 F.4th 679 (4th Cir. 2024).

Over the dissent of Circuit Judge Robert Bruce King, a Fourth Circuit panel declined to review a bankruptcy court’s orders (i) holding certain bankruptcy creditors, and their counsel, in contempt for violating a discovery order and (ii) imposing monetary sanctions, finding that both the order for contempt and the order for sanctions were nonfinal, interlocutory decisions for which neither the district court nor the Fourth Circuit had the jurisdiction to review.

In November 2017, Bestwall, LLC (“Bestwall”) commenced chapter 11 proceedings to address its asbestos-related liabilities. To aid Bestwall in estimating its liabilities, Bestwall sought, and was granted, an order directing all claimants asserting liabilities for mesothelioma against Bestwall to complete and submit a personal injury questionnaire (the “PIQ Order”). The Official Committee of Asbestos Claimants, along with various individual claimants, attempted to appeal the PIQ Order to the district court, but the appeal was dismissed for lack of jurisdiction. The district court concluded that the PIQ Order was not a final, appealable order and did not warrant interlocutory review. Thereafter, certain claimants (the “Illinois Plaintiffs”) sought to enjoin Bestwall from enforcing the PIQ Order by seeking an injunction before an Illinois federal district court. In response, Bestwall approached the bankruptcy court, seeking an order to enforce the PIQ Order. The bankruptcy court granted Bestwall’s enforcement motion and found all of the Illinois Plaintiffs and their counsel (together, “Appellants”) in contempt. Instead of sanctions, however, the bankruptcy court offered to purge Appellants’ contempt if the Illinois Plaintiffs dropped their injunction suit. When most of the Illinois Plaintiffs failed to drop their suit, the bankruptcy court imposed joint and several sanctions on Appellants in the amount of approximately $400,000, representing Bestwall’s fees and expenses incurred in defending the injunction action and enforcing the PIQ Order. Appellants appealed both the contempt and sanctions orders to the district court, which concluded that neither order was final and therefore dismissed the appeal for lack of jurisdiction. This appeal followed.

In a 2–1 decision, the Fourth Circuit affirmed the district court’s dismissal. On appeal, Appellants argued that the contempt and sanctions orders were final decisions in a discrete “proceeding” within the meaning of 28 U.S.C. § 158(a), and were therefore appropriate for appellate review by the district court. The Fourth Circuit majority disagreed. Because the contempt and sanctions orders arose from enforcement of the PIQ Order, which was an order for discovery in aid of the overarching goal of putting together a chapter 11 plan, neither the contempt order nor the sanctions order brought any sort of finality to the matter. Moreover, the majority held that construing the “proceeding” to be limited to the final determinations of whether the Illinois Plaintiffs violated the PIQ Order and whether sanctions were warranted would eviscerate the requirement for finality as a threshold for appellate review. “If we accepted Appellants’ formulation of finality, every ruling to enforce a discover order—and, likely, every discovery order itself—would be an appealable final decision supposedly terminating a bankruptcy ‘proceeding.’” Id. at 686 (citing Ritzen Grp., Inc. v. Jackson Masonry, LLC, 589 U.S. 35, 46–47 (2020)).

Judge King, however, agreed with Appellants. In his view, the discrete dispute regarding Appellants’ contempt had been raised by Bestwall in its motion to enforce the PIQ Order. Because the contempt and sanctions orders fully and finally resolved the issue of Appellants’ contempt, they were subject to appellate review pursuant to 28 U.S.C. § 158(a).

§ 3.6. Fifth Circuit

Briar Cap. Working Fund Cap., L.L.C. v. Remmert (In re S. Coast Supply Co.), 91 F.4th 376 (5th Cir. 2024).

The debtor was a distributor of industrial products. When the debtor encountered financial troubles, it borrowed $800,000 from its chief financial officer pursuant to a loan agreement. The debtor made forty-seven payments on that debt totaling in excess of $320,000. Ultimately, the debtor filed a voluntary chapter 11 petition in the Southern District of Texas. Briar Capital Working Fund Capital, L.L.C. (“Briar Capital”) was the debtor’s sole prepetition, secured lender. The debtor ultimately confirmed its plan, which provided, inter alia, for the transfer to Briar Capital of a pending preference action brought by the debtor against the former CFO. Shortly before trial in the preference action, the CFO filed a motion to dismiss pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure, arguing that Briar Capital lacked standing to prosecute the preference action. The district court agreed because a successful recovery would not benefit the debtor’s estate or its creditors.

The appellate court began its analysis by noting that the “appeal turns on whether preference claims—a type of avoidance action—may validly be sold.” Id. at 380. This question was novel for the Fifth Circuit. The court began its analysis with section 363 of the Bankruptcy Code, which provides that a debtor in possession “may use, sell, or lease . . . property of the estate.” 11 U.S.C. § 363(b)(1). “Property of the estate” is defined in section 541 of the Bankruptcy Code to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. 541(a)(1). The Fifth Circuit held that a preference action met this standard. Similarly, the court noted that section 541(a)(7) provides that “property of the estate” includes “any interest in property that the estate acquires after the commencement of the case.” 11 U.S.C. § 541(a)(7). Thus, the Fifth Circuit held that a preference action qualifies as property of the estate under that section as well. Beyond the statutory language, the Fifth Circuit also founds its decision to be in accord with those of other circuit courts. Notably, the Eighth and Ninth Circuits had held that preference claims are property of the estate that can be sold.

The CFO also argued that even if the avoidance actions were property of the estate that could be sold, Briar Capital lacked standing to pursue the claims because it was not a representative of the estate. The Fifth Circuit rejected this argument. Because it found that the preference claims could be sold, the court also held the secured creditor had standing to pursue the claim as a purchaser of the claim regardless of whether it was a representative of the estate.

Charitable DSF Fund, L.P. v. Highland Cap. Mgmt., L.P. (In re Highland Cap. Mgmt., L.P.), 98 F.4th 170 (5th Cir. 2024).

In 2019, litigation pushed the debtor, Highland Capital Management, L.P. (“Highland”), to seek chapter 11 protection. At the time of filing, Highland was controlled by co-founder James Dondero (“Mr. Dondero”). Ultimately, Mr. Dondero and Highland parted ways. Mr. Dondero relinquished control to three independent directors, one of whom was appointed by the bankruptcy court as Highland’s chief executive officer, chief restructuring officer, and foreign representative (the “CRO”). To protect the CRO from vexatious litigation, the bankruptcy court adopted a gatekeeping order, which essentially provided that no claim or cause of action could be brought against the CRO without prior approval of the bankruptcy court. The order specifically noted that the bankruptcy court would have the sole jurisdiction to adjudicate any claim for which approval to proceed had been granted.

Notwithstanding this order, entities controlled by Mr. Dondero, the Charitable DAF Foundation and its affiliate CLO Holdco (collectively “DAF”), brought litigation against Highland in district court, alleging that Highland, through its CRO, had withheld information and engaged in self-dealing. After filing the initial complaint, DAF moved for leave to amend its complaint to add the CRO as a named defendant without seeking bankruptcy court approval, as required by the gatekeeping order. DAF’s theory in so doing was that “the district court sitting over the bankruptcy court would obviate this defect.” Id. at 173. The district court dismissed the motion for leave on procedural grounds. As a result, DAF did not ever actually sue the CRO.

Highland then moved for an order requiring DAF, the persons who authorized the motion for leave, and their attorneys to show cause why they should not be held in civil contempt for violating the bankruptcy court’s gatekeeping order. The bankruptcy court granted that motion, and also required Mr. Dondero, individually, to show cause why he should not be sanctioned. Following extensive discovery and a lengthy evidentiary hearing, the bankruptcy court concluded that the filing of the motion for leave was a violation of the gatekeeping order. It held all of the parties involved in filing the motion, including Mr. Dondero, in contempt and ordered them to pay the debtor nearly $240,000. The bankruptcy court calculated the amount of sanction based on the expenses Highland actually incurred in connection with the contempt motion. The bankruptcy court concluded that Highland’s fee submissions were “conservative,” and added an additional $50,000 “based on mere guesswork.” Id. The bankruptcy court denied Highland’s request for treble damages but imposed, sua sponte, a sanction of $100,000 for failed appeals. On appeal to the district court, the sanctioned parties argued that the sanction was punitive and, therefore, exceeded the bankruptcy court’s civil contempt power. The district court vacated the bankruptcy court’s $100,000 per appeal sanction as excessive, but affirmed the remainder of the award, finding that the bankruptcy court’s award was designed to compensate Highland for costs incurred and was therefore compensatory and civil.

On appeal, the Fifth Circuit began by noting that bankruptcy courts are not Article III courts. As such they lack the inherent power to punish violations of their orders through criminal contempt. Instead, bankruptcy courts only have civil contempt powers. Because civil contempt proceedings are uniquely susceptible to abuse, “civil contempt sanctions may not have the ‘primary purpose’ of ‘punish[ing] the contemnor [or] vindicate[ing] the authority of the court.’” Id. at 174 (alterations in original) (quoting Lamar Fin. Corp. v. Adams, 918 F.2d 564, 566 (5th Cir. 1990)). Instead, civil contempt “must be ‘remedial and for the benefit of the complainant.’” Id. (quoting Int’l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821 (1994)). In other words, civil contempt sanctions must be calculated either to (1) coerce compliance with a court order or (2) compensate another party for the violation of that order. Civil contempt sanctions designed to coerce compliance are permissible only if they are conditional on the offending party’s conduct. In contrast, “contempt sanctions imposed for compensatory purposes are civil only if they are ‘based on evidence of the complainant’s actual loss.’” Id. at 175 (quoting United States v. United Mine Workers of Am., 330 U.S. 258, 304 (1947)). In the context of a fee-shifting sanction, there must be “‘a causal link[] between the litigant’s misbehavior and legal fees paid by the opposing party.’” Id. (alteration in original) (quoting Goodyear Tire & Rubber Co. v. Haeger, 581 U.S. 101, 108 (2017)). In other words, the bankruptcy court may only shift those fees incurred because of the misconduct. Without that causal link, the sanction is punitive and falls outside the bankruptcy court’s authority.

The Fifth Circuit noted that Highland “incurred virtually all its contempt-related expenses because the bankruptcy court permitted extensive discovery and conducted a marathon evidentiary hearing to unearth Dondero[’]s role in filing the [motion for leave].” Id. at 176. However, the Fifth Circuit determined that Mr. Dondero’s intentions were only relevant to criminal contempt, for which the bankruptcy court could not impose sanctions. The only question in a civil contempt proceeding would have been whether and to what extent Highland was harmed by the filing of the motion for leave. Attempting to justify the bankruptcy court’s sanction, Highland argued that the bankruptcy court had “every right and reason to vindicate its own authority by finding out who is responsible for violating its orders.” Id. (emphasis original). The Fifth Circuit found that argument to be outcome-determinative: if the purpose of the sanction was to vindicate the authority of the court, it was criminal and therefore beyond the bankruptcy court’s authority. Accordingly, the Fifth Circuit vacated the judgment of the district court and remanded the case to the bankruptcy court with instructions to limit any sanction award to the damages Highland suffered because the motion was filed in the wrong court. In other words, the sanction should be limited to the expenses Highland reasonably incurred in opposing the motion in the district court, less those it would have spent opposing the motion had it been filed in bankruptcy court.

Excluded Lenders v. Serta Simmons Bedding, L.L.C. (In re Serta Simmons Bedding, L.L.C.), Nos. 23-20181, 23-20450, 23-20363, 23-2041, 2024 WL 5250365 (5th Cir. Dec. 31, 2024).

Prior to filing its bankruptcy petition, the debtor, Serta Simmons Bedding, LLC (“Serta”), in 2016 and 2020 executed a variety of financing deals with multiple lenders. The 2016 transaction involved the refinance of Serta’s debt through a series of syndicated loans, including $1.95 billion of first-lien syndicated loans and $450 million of second-lien syndicated loans. The credit agreement governing the first lien loans (the “2016 Agreement”) specifically provided that all lenders would receive their pro rata share of any payment or recovery. In other words, Serta could not choose to pay its obligations to one lender while offering nothing to the others. Under the 2016 Agreement, the favored lender would be required to share the payment with the others. The 2016 Agreement further required unanimous consent to waive this provision. The 2016 Agreement contained one exception to the ratable-sharing provision that was relevant to the appeal. That section provided that any lender could assign all or a portion of its rights to Serta or certain of its affiliates on a non-pro rata basis.

In the years following the 2016 refinance, Serta struggled. To bolster its financial position, Serta chose to engage in an uptier transaction (the “2020 Uptier Transaction”). The Fifth Circuit described an uptier transaction as follows:

The borrower amends the terms of a credit facility to allow the issuance of new super-priority debt. Because a majority of lenders in the existing facility must typically consent to such an amendment, the borrower purchases consent by allowing these lenders to exchange their existing debt for new super-priority debt, often at an above-market price.

2024 WL 5250365, at *2 (citations omitted). If fewer than all lenders participate in the uptier, it is a non-pro rata transaction. That is exactly what Serta chose to do by engaging in an uptier transaction with some—but not all—of the lenders who were party to the 2016 transaction. As the appellate court described the transaction, Serta “gained cash and lowered its overall debt load, while the Prevailing Lenders slashed the nominal value of their holdings (which were trading far below par) to jump the creditor line and get paid before their erstwhile first- and second-lien comrades.” Id. at *4. Because the 2020 Uptier Transaction was controversial, Serta and the lenders involved in the uptier took a number of steps to protect themselves: first, they amended the 2016 Agreement to expressly allow the 2020 Uptier Transaction based on their bare majority of the first-lien debt; second, Serta and the participating lenders labeled the 2020 Uptier Transaction as an open-market purchase; and finally, Serta agreed to indemnify the participating lenders.

In 2023, Serta filed for bankruptcy protection under chapter 11. Serta and some of the participating lenders filed an adversary proceeding seeking declaratory relief blessing the 2020 Uptier Transaction as not violating the 2016 Agreement’s pro rata provisions. The defendants in this adversary proceeding had opposed the 2020 Uptier Transaction as “lender-on-lender violence.” The bankruptcy court held that the term open-market purchase, which was not defined in the 2016 Agreement to be clear and unambiguous. The bankruptcy court further held that the 2020 Uptier Transaction was a valid open-market purchase and, thus, an exception to the pro rata sharing required by the 2016 Agreement.

In the main bankruptcy case, Serta proposed a plan of reorganization that expressly provided for the survival of Serta’s indemnification obligations related to the 2020 Uptier Transaction, but only as to (i) those participating lenders who had not sold their super-priority debt and (ii) those who did not originally participate in the 2020 Uptier Transaction, but who had later purchased super-priority debt on the secondary market. The plan proponents argued that the original indemnity provided in the 2020 Uptier Transaction for all participating lenders, regardless of whether they still held the super-priority debt, should be disallowed, but that the modified indemnity in the final plan could be justified as part of a settlement. The bankruptcy court found the settlement indemnity to be a fair and equitable component of the plan and confirmed the plan with this new indemnity.

The issue was then appealed directly to the Fifth Circuit. The court began by addressing the open-market issues. Applying established rules of contract interpretation, the circuit held that the 2020 Uptier Transaction was not a permissible open-market purchase. First, an open market is one that is generally open to participation by various buyers and sellers. That market needs to be relevant to the purchased product. As such, the open market in this context would be the secondary market for syndicated loans. The court held that “the words ‘open market’ point to a specific ‘market,’ not merely a general context where private parties engage in non-coercive transactions with each other.” Id. at *13. While the latter might be an “open purchase,” it would not be an “open market purchase.” Competition does not suffice to establish an open market. Instead, an open market is one tied to a specific market and not merely the background concept of “free competition.” Because Serta chose to privately engage individual lenders outside of the established secondary market, it did not qualify for the open-market protection of the 2016 Agreement. The Fifth Circuit, thus, reversed the bankruptcy court’s ruling to the contrary.

Having concluded that the 2020 Uptier Transaction was not permitted under the open market exception, the court remarked that the lenders who had been excluded had a strong case that Serta and the participating lenders had breached the 2016 Agreement. Because there was little substantive discussion of the breach of contract issue in the appellate briefing, the Fifth Circuit remanded for reconsideration of the excluded lenders’ breach of contract counterclaims.

The court then turned to the plan indemnity issues. The court held that the plan improperly included indemnities relating to the 2020 Uptier Transaction. First, the court rejected the argument that the appeal of the settlement indemnity was equitably moot. Even though a stay of confirmation had not been obtained and the plan had been substantially consummated, the circuit held that issue was not equitably moot because excising the indemnity from the plan would not affect the rights of parties not before the court or the success of the plan. The court also forcefully rejected the argument made by the participating lenders that it would be unfair to consider an appeal that allowed the plan to remain confirmed, but excised a portion of the relief for which they bargained. The participating lenders contended that, if the court were to eliminate this bargained-for relief, the parties should be permitted to go back to the drawing board to revisit the entire plan. But the court determined that doing so would amount to a “judge-made, atextual doctrine of pseudo-abstention.” Id. at *20. The court wrote that, “to the extent equitable mootness exists at all, we affirm that it cannot be ‘a shield for sharp or unauthorized practices.’” Id. (quoting In re Pac. Lumber Co., 584 F.3d 229, 244 n.19 (5th Cir. 2009)).

The Fifth Circuit then held that the inclusion of the modified indemnity was “an impermissible end-run around the Bankruptcy Code.” Id. at *21. Section 502(e)(1)(B) requires a bankruptcy court to “disallow any contingent claim for reimbursement where the claiming entity is co-liable with the debtor.” Id. The indemnity claims asserted by the participating lenders were clearly contingent claims for reimbursement where the participating lenders were co-liable with Serta. All parties and the bankruptcy court agreed that section 502(e)(1)(B) disallowed the claims and invalidated the related prepetition indemnity (i.e., the first iteration of the indemnity that indemnified all participating lenders). But Serta and certain lenders attempted to obtain the modified indemnity by calling it a “settlement,” authorized by section 1123(b)(3)(A). While the bankruptcy court approved of this strategy, the Fifth Circuit did not. Section 1123 simply did not provide for the back-end resurrection of claims already disallowed and the bankruptcy court was wrong to approve of this strategy. The court further found that, even if section 1123(b)(3)(A) could have justified the settlement indemnity, section 1123(a)(4), which requires equal treatment of similarly situated creditors, would bar it. Accordingly, the Fifth Circuit chose to excise the offending indemnity from the plan and reversed the bankruptcy court’s final order confirming the plan only insofar as it approved the indemnity.

Finally, the court noted that the 2020 Uptier Transaction was the first major uptier, but was likely not the last. The court wrote that “there are doubtless still many contracts with open market purchase exceptions to ratable treatment.” Id. at *24 (citation omitted). While each such contract should be reviewed on its own terms, the court concluded its opinion by suggesting that such open market purchase exceptions would not often justify uptier transactions.

§ 3.7. Sixth Circuit

Cal. Palms Addiction Recovery Campus, Inc. v. Vara (In re Cal. Palms Addiction Recovery Campus, Inc.), 87 F.4th 734 (6th Cir. 2023).

Joining the Third, Seventh, and Ninth Circuits, the Sixth Circuit became the latest Court of Appeals to hold that a bankruptcy court’s order granting a motion to convert from chapter 11 to chapter 7 is a final, appealable order from which an appeal may arise under 28 U.S.C. § 158.

California Palms Addiction Recovery Campus, Inc. (“California Palms”) was a substance abuse treatment center located in Ohio. However, it was beset by legal problems, including (i) revocation of its operating license by the State of Ohio, (ii) seizure of nearly $600,000 by the U.S. Department of Justice (the “DOJ”), and (iii) a pending eviction action by its landlord. To resolve these issues, California Palms (a) sued the State of Ohio to reinstate its license, (b) sued the DOJ to recover the seized assets, and (c) commenced bankruptcy proceedings under subchapter V of chapter 11. The subchapter V trustee sought to convert the case to chapter 7 due to concerns that California Palms’ continued prosecution of its various litigations would “bleed the estate dry.” Id. at 738. Although the bankruptcy court initially put the subchapter V trustee’s motion on hold, later adverse developments in the DOJ suit and missed deadlines in the bankruptcy case caused the bankruptcy court to schedule a show-cause hearing as to why California Palms’ case should not be converted. Despite California Palms’ objection, the bankruptcy court made factual and legal findings to support conversion of California Palms’ case to chapter 7.

As a gating item, the Sixth Circuit first considered whether it had jurisdiction to review the bankruptcy court’s order converting the case based on the “finality” of the order. The Court of Appeals found that the bankruptcy court’s order converting the proceeding to a chapter 7 case was appealable as a final order because the conversion motion both resolved a “proceeding,” meaning a “‘discrete dispute’ with specific procedural steps.” Id. at 739 (quoting In re Jackson Masonry, LLC, 906 F.3d 494, 500 (6th Cir. 2018)). In addition, the granting of a motion to convert “terminates” the proceeding by eliminating the debtor’s right to reorganize pursuant to chapter 11. Id. at 740. Accordingly, the bankruptcy court’s order converting California Palms’ subchapter V case to chapter 7 was final and appealable, and therefore within the Sixth Circuit’s purview for appellate review. The Court of Appeals then easily concluded that the bankruptcy court had not abused its discretion in finding cause to convert based on the low likelihood of success for California Palms to successfully reorganize in the face of substantial, continuing losses.

§ 3.8. Seventh Circuit

In re Int’l Supply Co., 103 F.4th 478 (7th Cir. 2024).

The Seventh Circuit rejected a lender’s argument that the “sole legally permissible approach to defining solvency,” under the Illinois Uniform Fraudulent Transfer Act, is the balance sheet test. Id. at 481.

In August of 2013, Lee Hofmann (“Hofmann”) agreed to have one of his companies, International Supply Company (“International Supply”), pay Citizens Equity First Credit Union (the “Lender”) $1.72 million as part of a settlement. The settlement was related to the Lender’s judgment against Hofmann for failure to honor his personal guarantee of the debt of another one of his companies.

In 2015, International Supply commenced bankruptcy proceedings, and a trustee (the “Trustee”) was appointed to distribute the proceeds of the sale of its assets to creditors. In September of 2017, the Trustee brought a preference action against the Lender, asserting that International Supply was insolvent when it made the August 2013 payment to the Lender and that it had not received reasonably equivalent value for that payment.

At trial, the bankruptcy court heard expert testimony as to International Supply’s 2013 solvency using each of the balance sheet, cash flow, and adequate capital tests. Ultimately, the bankruptcy court concluded, and the district court affirmed, that International Supply was insolvent in August 2013 because it was unable to keep the business afloat and repay its debts. As a result, the settlement payment by International Supply to the Lender was voidable and the Lender was ordered to pay the estate $1.72 million, plus interest.

On appeal to the Seventh Circuit, the Lender argued that the bankruptcy court had erred when it looked beyond International Supply’s balance sheet in evaluating International Supply’s solvency as of August 2013. However, the Seventh Circuit held that the Illinois Uniform Fraudulent Transfer Act contained no express limitation as to the means of assessing a debtor’s solvency. In fact, the court held that the Illinois statute “set up multiple ways in which a business can be insolvent for the purpose of fraudulent-conveyance liability.” Id. at 482. In addition, the Lender failed to cite any caselaw to support its proposition that the balance sheet test alone was the appropriate method of assessing solvency under the Uniform Fraudulent Transfer Act.

Petr v. BMO Harris Bank N.A., 95 F.4th 1090 (7th Cir. 2024).

The Seventh Circuit made two definitive rulings that fortified the protections provided by Bankruptcy Code section 546(e)’s safe harbor: (i) transactions involving private securities that do not implicate the national securities market are protected by the statute, and (ii) section 546(e) preempts state law claims seeking relief that would be otherwise barred under the Bankruptcy Code.

BWGS, LLC (“BWGS” or the “Debtor”) was a privately held company with its outstanding stock in an Employee Stock Ownership Plan Trust (the “ESOP Trust”). To acquire BWGS, Sun Capital Partners VI, L.P. (“Sun Capital”) entered into a stock purchase agreement (the “SPA”) with the ESOP Trust through which a newly formed subsidiary of Sun Capital, BWGS Intermediate Holding, LLC (“Intermediate Holding”), would acquire the stock of BWGS for approximately $37.8 million. To finance the acquisition, Intermediate Holding borrowed $25.8 million (the “Bridge Loan”) from BMO Harris Bank N.A. (“BMO”), with Sun Capital guaranteeing the loan. The acquisition closed on December 30, 2016.

Subsequently, on January 27, 2017, Sun Capital caused BWGS to enter into two borrowing arrangements, along with Intermediate Holding: (i) a $20 million term loan from LBC Credit Agency Services, LLC (the “Term Loan”); and (ii) a revolving line of credit of up to $20 million from JP Morgan Chase Bank, N.A. (the “Revolver”). On the same day, Sun Capital caused BWGS to pay BMO approximately $20 million borrowed under the term loan, approximately $5 million borrowed under the Revolver, and approximately $400,000 of cash on hand (collectively, the “Transfer”). As a result of the Transfer, Intermediate Holding and Sun Capital were relieved of their obligations under the Bridge Loan, while BWGS, which was already struggling financially, received no value.

BWGS’s creditors ultimately filed an involuntary chapter 7 bankruptcy petition against BWGS. In the bankruptcy proceedings, the chapter 7 trustee (the “Trustee”) filed a complaint against BMO, Sun Capital, and others to (i) avoid the Transfer as a constructively fraudulent transfer pursuant to the Indiana Uniform Voidable Transactions Act (the “IUVTA”) and section 544(b)(1) of the Bankruptcy Code and (ii) recover the value of the Transfer from Sun Capital pursuant to section 550(a) of the Bankruptcy Code and its IUVTA analog, section 18(b)(1), by virtue of the Trustee’s “strong arm” power under section 544(a). BMO and Sun Capital (together, the “Defendants”) moved to dismiss the Trustee’s complaint, arguing that the Transfer fell within section 546(e)’s safe harbor. The bankruptcy court denied the Defendants’ motion, finding that only the SPA was a “securities contract” under section 546(e) and that the Transfer was not made “in connection with” the SPA. The bankruptcy court also held, sua sponte, that the Trustee’s claim to recover the value of the Transfer from the Defendants under the IUVTA did not implicate section 546(e)’s safe harbor and was permissible. The district court reversed, finding that (i) the SPA, the Bridge Loan agreement, and Sun Capital’s guaranty of the Bridge Loan all qualified as “securities contracts” within the meaning of section 546(e) and that the Transfer was made “in connection with” such securities contracts, meaning section 546(e) barred the Trustee’s claims, and (ii) section 546(e) preempted claims brought under section 18(b)(1) of the IUVTA, by virtue of section 544(a). The Trustee appealed.

Affirming the district court entirely, the Seventh Circuit first rejected the Trustee’s argument that section 546(e) only applied to “transactions that implicate the national system for the clearance and settlement of publicly held securities” because Congress intended “to insulate the nation’s financial markets from instability generated by the avoidance of public securities transactions.” Id. at 1097. Because both the terms “securities contract” and “in connection with,” as used in section 546(e), were unambiguous, the Court of Appeals determined that there was no need to turn to legislative history or Congressional intent of section 546(e). Rather, it was plain on the face of the statute that section 546(e) could reach transactions involving privately held securities.

The Seventh Circuit then addressed whether the Trustee could evade the implications of section 546(e)’s safe harbor by using section 544(a) to recover the value of a claim that was avoidable under state law. The Court of Appeals rejected this argument, holding that section 546(e) preempted state law claims seeking to recover the value of transfers that would otherwise be shielded from avoidance by the safe harbor. Joining the Second and Eighth Circuits in so holding, the court said, “[T]o allow a bankruptcy trustee to recover the otherwise-unavoidable payments ‘would render the [section] 546(e) exemption meaningless, and would wholly frustrate the purpose behind that section.’” Id. at 1103 (quoting Contemp. Indus. Corp. v. Frost, 564 F.3d 981, 988 (8th Cir. 2009)).

§ 3.9. Eighth Circuit

Kelley v. BMO Harris Bank N.A., 115 F.4th 901 (8th Cir. 2024).

Aligning with the Second Circuit’s analysis of the in pari delicto doctrine under New York law, the Eighth Circuit concluded that, although Minnesota law may permit a receiver to avoid the defense of in pari delicto, a bankruptcy trustee inherits the right of the debtor corporation subject to any equitable or legal defenses that could have been raised against the debtor.

In 2008, Thomas Petter (“Petter”) was arrested for fraud in connection with a multibillion-dollar Ponzi scheme perpetrated through his company, Petters Company, Inc. (“PCI”). A federal district court subsequently placed PCI into a receivership and appointed Douglas Kelley (“Kelley”) as receiver. As receiver, Kelley then commenced bankruptcy proceedings on behalf of PCI. Kelley was then appointed trustee of the bankruptcy estate.

As the trustee, Kelley filed an adversary proceeding in bankruptcy court against BMO Harris Bank (“BMO”), as successor-in-interest to M&I Bank (“M&I”), alleging that M&I aided and abetted the Ponzi scheme by ignoring signs of the fraud. BMO moved for summary judgment, arguing that the doctrine of in pari delicto barred the PCI estate from recovering against BMO for M&I’s alleged wrongdoing because PCI was equally, if not more, culpable. The bankruptcy court ruled that the doctrine did not apply because, under Minnesota law, PCI was no longer bound by its officers’ previous fraudulent acts when it entered receivership. As the case headed to trial, the district court, at several different points, likewise denied BMO relief based on the doctrine of in pari delicto.

On appeal, the parties disputed whether the placement of PCI into receivership “cleansed” Kelley of PCI’s wrongdoing. Kelley argued that, under Minnesota law, a receiver “is not bound by the fraudulent acts of a former officer of the corporation.” Id. at 905 (quoting Magnusson v. Am. Allied Ins., 290 Minn. 465 (1971)). However, a bankruptcy trustee “steps into the shoes of the debtor and is subject to any defenses that could be raised against the debtor, including the defense of in pari delicto.” Id. (citing Grassmueck v. Am. Shorthorn Ass’n, 402 F.3d 833, 836 (8th Cir. 2005)). The Eighth Circuit held that Minnesota law did not “cleanse” PCI of its wrongdoing, but merely liberated the receiver from such wrongdoing while acting in the capacity of receiver. Accordingly, the in pari delicto defense was not “extinguished” under Minnesota law. When Kelley shifted from receiver to bankruptcy trustee, “the custodian of the claims [against BMO] changed, but the claims did not. The claims entered the bankruptcy estate subject to a defense based on PCI’s previous fraudulent acts.” Id. at 906. As such, the Eighth Circuit distinguished between the rights and obligations of the corporation, which pass into bankruptcy subject to the in pari delicto defense, and the rights and obligations of the receiver, to whom Minnesota law offers a shield. In addition, the court notes the consistency of its ruling with that of the Second Circuit in Picard v. JPMorgan Chase & Co. (In re Bernard L. Madoff Inv. Sec. LLC), 721 F.3d 54 (2d Cir. 2013).

§ 3.10. Ninth Circuit

Mont. Dep’t of Revenue v. Blixseth (In re Blixseth), 112 F.4th 837 (9th Cir. 2024).

In this case, the Ninth Circuit reviewed both the application of the “collateral order doctrine” and the parameters of sovereign immunity in the context of an adversary proceeding against the Montana Department of Revenue (“MDOR”) for damages arising under section 303(i) of the Bankruptcy Code for a dismissed involuntary bankruptcy petition.

Following an audit of the debtor, Timothy Blixseth, and his business entities, three state taxing authorities, including MDOR, commenced an involuntary bankruptcy proceeding against Blixseth for unpaid taxes. After the other two state taxing authorities withdrew as petitioning creditors after settling with Blixseth, the bankruptcy court ultimately dismissed the involuntary petition for lack of the requisite number of petitioning creditors. Blixseth then brought an adversary proceeding against MDOR, seeking attorney’s fees and costs, damages, and sanctions against counsel pursuant to section 303(i) of the Bankruptcy Code. MDOR moved to dismiss on grounds of sovereign immunity. The bankruptcy court denied MDOR’s motion, finding that (i) MDOR had “voluntarily invoked the jurisdiction of [the bankruptcy] court by filing the [i]nvoluntary [p]etition,” id. at 842 (alterations in the original); (ii) MDOR’s counsel had “clear[ly] and unequivocal[ly] waive[d] [the State’s] sovereign immunity under the Eleventh Amendment regarding any future Section 303(i) claims,” id.; and (iii) MDOR’s sovereign immunity was explicitly waived under section 106(a)(1) of the Bankruptcy Code because the section 303(i) action was “ancillary to the bankruptcy court’s in rem jurisdiction,” id. When MDOR appealed to the Bankruptcy Appellate Panel (the “BAP”), the BAP dismissed the appeal for want of jurisdiction, finding that the “collateral order doctrine” did not apply.

On appeal, the Ninth Circuit first analyzed whether it had jurisdiction under the “collateral order doctrine.” Pursuant to the collateral order doctrine, an appellate court may review a non-final order addressing claims collateral to the underlying action if “the collateral claims are ‘too important to be denied review and too independent of the cause itself to require that appellate consideration be deferred until the whole case is adjudicated.” Id. at 843 (quoting Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 546 (1949)). Because both the Supreme Court and the Ninth Circuit had found that denials of sovereign immunity were immediately appealable under the collateral order doctrine, id. (first citing P.R. Aqueduct & Sewer Auth. v. Metcalf & Eddy, Inc., 506 U.S. 139, 144 (1993); and then Childs v. San Diego Family Hous. LLC, 22 F.4th 1092, 1095–96, 1096 n.2 (9th Cir. 2022)), the Ninth Circuit determined that the BAP had erred in failing to consider the merits of MDOR’s appeal.

Turning to the merits of the appeal, the Ninth Circuit found that the bankruptcy court had likewise erred when it concluded that MDOR was precluded from asserting sovereign immunity. First, the Ninth Circuit determined that MDOR only voluntarily invoked the jurisdiction of the bankruptcy court if it asserted a claim against the res of the debtor’s estate. Here, MDOR had not filed a proof of claim, and so a voluntary waiver of immunity could only be found if Blixseth’s section 303(i) claim arose from the same operative facts as MDOR’s filing of an involuntary petition under section 303(b). Because MDOR’s involuntary petition was based on Blixseth’s unpaid taxes, while Blixseth’s section 303(i) claim arose from the fact of the filing of the involuntary petition, the Ninth Circuit determined that the claims did not arise from the same operative facts, and thus, were insufficient to justify a waiver of sovereign immunity.

Next, the Court of Appeals considered MDOR’s supposed unequivocal waiver, made in a statement by MDOR’s counsel in a hearing before the bankruptcy court. The Ninth Circuit determined that an “unequivocal” consent to suit must be statutory, citing United States v. Nordic Vill., Inc., 503 U.S. 30, 37 (1992). Accordingly, MDOR’s counsel was not capable of waiving MDOR’s sovereign immunity through in-court statements.

Finally, the Ninth Circuit considered whether the section 303(i) claim was “ancillary” to the bankruptcy court’s in rem jurisdiction to justify a waiver of MDOR’s sovereign immunity. In so doing, the Ninth Circuit first noted that the bankruptcy court had erred in relying on section 106(a)(1)’s abrogation of sovereign immunity, based on earlier precedent determining that section 106(a) was “an unconstitutional assertion of Congress’s power.” Id. at 845 (quoting Mitchell v. Cal. Franchise Tax Bd. (In re Mitchell), 209 F.3d 1111, 1120 (9th Cir. 2000)). The Ninth Circuit panel then went on to consider whether the adversary proceeding brought by Blixseth, seeking section 303(i) damages, was “necessary to effectuate the in rem jurisdiction of the bankruptcy courts,” as delineated in Central Virginia. Community College v. Katz, 546 U.S. 356 (2006). 112 F.4th at 847 (quoting State of Fla. Dept. of Revenue v. Diaz (In re Diaz), 647 F.3d 1073, 1086 (11th Cir. 2011)). Because an adversary proceeding under section 303(i) did not concern the res of the bankruptcy estate and did not further the debtor’s “fresh start,” the Ninth Circuit held that waiving MDOR’s right to sovereign immunity solely on the basis of filing an involuntary bankruptcy petition was an impermissible expansion of the limited waiver of sovereign immunity. Accordingly, the Ninth Circuit reversed the bankruptcy court, finding that MDOR had properly invoked sovereign immunity.

In re PG&E Corp. Sec. Litig. (Pub. Emps. Ret. Ass’n of N.M. v. Earley), 100 F.4th 1076 (9th Cir. 2024).

In this interlocutory appeal, the Ninth Circuit determined that the district court had abused its discretion when it extended the automatic stay, sua sponte, to certain individual co-defendants of PG&E Corporation and Pacific Gas & Electric Company (together, “PG&E”) to halt a pending putative securities class action.

In the wake of the 2017 and 2018 Northern California wildfires, certain shareholders of PG&E (the “Plaintiffs”) brought a putative class action (the “Class Action”) in district court against PG&E and certain of its current and former officers, directors, and bond underwriters (collectively, the “Individual Defendants”), alleging false or misleading statements pertaining to PG&E’s wildfire-safety policies and regulatory oversight. When PG&E commenced bankruptcy proceedings in January 2019, the Class Action was automatically stayed as to PG&E pursuant to section 362 of the Bankruptcy Code. However, the Class Action continued as to the Individual Defendants, who filed motions to dismiss in October 2019. Despite briefing being completed by January 2020, the district court did not take any further action until April 2021, when it, sua sponte, issued a Notice of Intent to Stay the Class Action pending completion of the claims process established pursuant to PG&E’s plan of reorganization, which had become effective in July 2020. Although the Plaintiffs objected, the district court issued an order in September 2022 staying the Class Action in the name of judicial efficiency, citing the overlap between the securities claims brought in the PG&E bankruptcy proceedings and the claims at issue in the Class Action. The Plaintiffs timely appealed.

As a preliminary matter, the Ninth Circuit first addressed the issue of appellate jurisdiction over an interlocutory appeal. Although appellate jurisdiction typically depends on entry of a final order—which a stay order is not—the Ninth Circuit considered the precedent established in Moses H. Cone Memorial Hosp. v. Mercury Construction Corp., 460 U.S. 1 (1983), which held that “a stay order is appealable as a final decision under 28 U.S.C. § 1291 if the order places the plaintiff ‘effectively out of court.’” 100 F.4th at 1084 (citing Moses H. Cone, 460 U.S. at 9). Here, because the stay was imposed until the PG&E claims process was fully resolved—a process that expert testimony established would take years—the stay was both sufficiently lengthy and indefinite to afford the Ninth Circuit appellate jurisdiction under the Moses H. Cone doctrine.

Having determined that the Ninth Circuit had jurisdiction to review the merits of the district court’s stay order, the Ninth Circuit then turned to the question of whether the district court had abused its discretion by staying the Class Action pending resolution of the PG&E bankruptcy proceedings. Although the district court cited judicial efficiency in its order, the Plaintiffs and the Individual Defendants disputed whether there were any judicial efficiencies to be gained by staying the Class Action. The Ninth Circuit ultimately concluded that, while there were efficiencies in allowing the bankruptcy process to proceed first, the district court was also obligated to analyze any prejudice caused by the imposition of the stay. Because the district court failed to consider the prejudice to the Plaintiffs in delaying their opportunity to litigate the Class Action until the PG&E bankruptcy had been resolved, the Ninth Circuit vacated the stay and remanded for further consideration of the prejudice to the Plaintiffs from imposition of the stay.

§ 3.11. Tenth Circuit

Montoya v. Goldstein (In re Chuza Oil Co.), 88 F.4th 849 (10th Cir. 2023).

Affirming the bankruptcy court and reversing the Bankruptcy Appellate Panel (the “BAP”), the Tenth Circuit analyzed the doctrine of earmarking as a defense to certain avoidance actions brought by the chapter 7 trustee.

The debtor, Chuza Oil Co. (“Chuza”), was a New Mexico petroleum company that was operated by an individual named Bobby Goldstein. In 2012, Goldstein’s father loaned Chuza $500,000 under a promissory note (the “Note”), guaranteed by Goldstein and another of Goldstein’s companies, Bobby Goldstein Productions, Inc. (“BGPI”). After Goldstein’s father passed away, Goldstein’s mother, Paula, held the Note.

In 2014, Chuza filed for protection under chapter 11 of the Bankruptcy Code. The bankruptcy court confirmed a plan of reorganization in March 2016, which provided for the subordination of insider unsecured creditors, like Paula. However, Chuza’s financial situation did not improve after exiting chapter 11. Between September 2016 and December 2017, Goldstein, Paula, and BGPI loaned nearly $500,000 to Chuza to keep the business in operation. Chuza then transferred approximately $50,000 to Paula as payment on the Note, even though it had not paid all remaining claims with higher priorities under the chapter 11 plan. Goldstein later testified that the $50,000 was only loaned to Chuza on the condition that it was used to repay the Note.

In July 2018, Chuza was pushed into an involuntary chapter 7 bankruptcy. The chapter 7 trustee (the “Trustee”) initiated an adversary proceeding to avoid the transfers to Paula as preferential transfers under Bankruptcy Code section 547(b), intentionally fraudulent transfers under Bankruptcy Code section 548(a)(1)(A), and constructively fraudulent transfers under Bankruptcy Code section 548(a)(1)(B). The bankruptcy court ruled against the Trustee, holding, in the first instance, that Chuza did not have an interest in the funds transferred since they were earmarked to repay Paula; and, in the second instance, that (i) the transfers were not preferences because they were part of an contemporaneous exchange for new value; (ii) there was no intent to commit fraud, as require to assert an intentionally fraudulent transfer claim; and (iii) Chuza had received reasonably equivalent value for the transfers, and thus the transfers could not be constructively fraudulent. The Trustee appealed to the BAP, which reversed the bankruptcy court’s ruling, finding that the transfers diminished Chuza’s estate by replacing debt subordinated under the plan with unsubordinated debt. The BAP also found that there was never an “exchange” of value, as required for both the contemporaneous exchange defense to a preferential transfer claim and the reasonably equivalent defense to a constructively fraudulent transfer claim.

On appeal, the Tenth Circuit first analyzed the earmarking doctrine, through which a court analyzes whether a debtor has an “interest” in property it transferred away from itself. Under Tenth Circuit precedent, a debtor must establish that it did not have an interest in the transferred property under both (i) the “dominion and control” test and (ii) the “diminution of the estate” test to establish that the debtor did not have an interest in the property that might be avoidable. Under the “dominion and control” test, the Tenth Circuit found that the bankruptcy court had not erred when it accepted Goldstein’s testimony that the funds loaned to Chuza were loaned on the condition that some of the money would be used to repay Paula. As a result of this condition, Chuza did not have “control” of the funds.

As to the “diminution of the estate” test, the Court of Appeals noted two plausible interpretations of the transfers at issue: either the payments harmed other unsecured creditors because the transfers had the net effect of exchanging Paula’s subordinated debt for non-subordinated debt owed to Goldstein and BGPI, or the payments net benefitted creditors the estate received approximately $450,000 which was not earmarked. The bankruptcy court accepted the latter explanation, and the Tenth Circuit could not find error in such determination.

Finally, the Tenth Circuit considered whether the bankruptcy court erred in finding that there was both a contemporaneous exchange of value and a reasonably equivalent exchange of value for purposes of the statutory exceptions to the preference and constructive fraudulent transfer claims. Again, the Tenth Circuit found that there were two plausible interpretations—that Goldstein loaned the entirety of the borrowed amount to Chuza on the condition that only a portion was paid to Paula versus that Goldstein loaned only the specific amounts that were ultimately earmarked for Paula to Chuza for that purpose. If the former interpretation prevailed, the statutory exceptions applied to the transfers; but not if the latter interpretation prevailed. Determining that both were plausible, the Tenth Circuit found no error in the bankruptcy court’s conclusion that the first interpretation applied.

§ 3.12. Eleventh Circuit

Bay Point Cap. Partners II LP v. Thomas Switch Holding, LLC (In re Virtual Citadel, Inc.), 113 F.4th 1304 (11th Cir. 2024).

In this case, the Eleventh Circuit was confronted with the issue of how to properly value crypto mining assets. In affirming the bankruptcy court’s findings, the Eleventh Circuit held that a property with certain enhancements designed to facilitate the massive energy consumption required attendant to bitcoin mining can qualify as a “special purpose property.”

The debtors were two related crypto businesses that were located on two adjacent properties. One property housed a bitcoin mining operation and the other housed a data storage center. Following the owner’s death, the businesses commenced chapter 11 proceedings, pursuant to which the businesses, including the properties, were sold together for $4.9 million. A transfer tax of $2,450 on each property supported an equal split between the properties of $2.45 million each. The purchaser who had bought the properties specifically intended to make use of the existing bitcoin mining infrastructure.

Pursuant to the sale order, the bankruptcy court ordered the escrow of $700,000 of the sale proceeds, pending determination of the value of the liens of secured creditor, Thomas Switch Holding (“Switch”). If the bitcoin mining property was valued at $700,000 or higher, then Switch would receive the full escrow amount; otherwise, Switch would receive the valuation amount and another creditor, Bay Point Capital (“Bay Point”), would receive the remaining escrow amount.

After a bench trial, which included expert testimony from both Switch and Bay Point, the bankruptcy court determined that the value of the mining property exceeded $700,000, based on a cost approach. This result largely adopted the testimony from Switch’s expert, which the bankruptcy court found was the most reliable because it accounted for improvements to the property that allowed the property to be used for bitcoin mining. Because the highest and best use for the property was as a bitcoin mining operation, the bankruptcy court also determined that the property was a “special purpose property.” The bankruptcy court likewise found that, although the tax stamp valuation was not deserving of much weight, a $2.45 million estimated value militated in favor of a total valuation for the mining property in excess of $700,000. By contrast, Bay Point’s expert valued the mining property at $48,000, based on comparisons to other properties of comparable size that could be put to “light industrial use.” Bay Point appealed to the district court, which affirmed the bankruptcy court’s decision.

On appeal to the Eleventh Circuit, Bay Point argued: (i) the bankruptcy court erred in determining that property was a special purpose property with the highest and best use of bitcoin mining; (ii) the bankruptcy court erred as a matter of law when it selected the cost approach, instead of the sales comparison approach, to value the mining property; and (iii) the bankruptcy court clearly erred when, as part of its valuation, it considered the tax stamp value of the property. First, the Eleventh Circuit found that the mining property was a special purpose property because, among other things, the improvements to the property allowed it to be used for bitcoin mining. While the property could be used for other purposes, valuing the property for generalized “light industrial use” would be a waste of the infrastructure investments to the property. Next, having determined that the property was a special purpose property, the Eleventh Circuit concluded that the bankruptcy court correctly used the cost approach in arriving at its valuation. A comparison approach was disfavored for unique assets. Finally, the Eleventh Circuit found that the bankruptcy court appropriately weighed the evidence concerning the tax stamp value.

Editor

Contributors

§ 2.1. Introduction

Antitrust litigation in 2024 included a number of cases addressing a wide variety of topics, including among other things, the validity of the Merger Guidelines issued jointly by the United States Department of Justice, Antitrust Division, and the Federal Trade Commission, the standard applicable to hybrid arrangements, the anticompetitive effects requirement, reverse payment settlements, and exclusionary conduct. Each of these and other significant antitrust decisions are discussed in this chapter of Recent Developments in Business and Corporate Litigation.

§ 2.2. Sherman Act Developments, Section 1

§ 2.2.1. Overview

The Sherman Act, under Section 1, prohibits “every contract, combination, in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce.” 15 U.S.C. § 1 (2004). The main purpose of the section is to prevent conduct that unreasonably restrains competition. Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 723 (1988). Accordingly, the principal issues often are whether an agreement exists or has been pled adequately, whether a restraint should be examined under the rule of reason or the per se rule, and, if subject to the rule of reason, whether the restraints there are reasonable.

To establish a violation of Section 1, a plaintiff must prove that (1) there is an agreement, (2) the agreement is an unreasonable restraint of trade, and (3) there is an effect on interstate commerce.

To prove an agreement, a plaintiff must also show concerted action. The Supreme Court defined concerted action as a conscious commitment to a common scheme or objective. Monsanto Co. v. Spray-Rite Serv. Co., 465 U.S. 752, 764 (1984). The agreement need not be express, but can be tacit, signified with a wink and nod or handshake, or inferred from circumstantial evidence. Accordingly, plaintiffs may establish concerted action using either direct evidence or indirect evidence.

The Department of Justice, the Federal Trade Commission, state attorneys general, and private plaintiffs may enforce Section 1. Courts routinely examine the issues presented by Section 1 and 2024 was no exception.

§ 2.2.2. United States v. American Airlines Group Inc., 121 F.4th 209 (1st Cir. 2024).

Although an injunction was entered after a bench trial and one of the two airlines involved exited the challenged joint venture, the U.S. Court of Appeals for the First Circuit retained and decided the appeal pursued by the remaining airline. The joint venture at issue dubbed the “Northeast Alliance” (“NEA”) was formed by American Airlines Group, Inc. (“American”) and JetBlue Airways Corporation (“JetBlue”). The First Circuit affirmed the decision of the trial court finding that the NEA arrangement was anticompetitive under Section 1 of the Sherman Act. United States v. Am. Airlines Grp. Inc., 121 F.4th 209, 214 (1st Cir. 2024).

The U.S. Department of Justice (“DOJ”), the District of Columbia, Arizona, California, Florida, Massachusetts, Pennsylvania, and Virginia brought an antitrust action. United States v. Am. Airlines Grp. Inc., 675 F.Supp.3d 65, 74 (D. Mass. 2023), aff’d, 121 F.4th 209 (1st Cir. 2024).

American is arguably the largest airline in the world and, along with three other airlines, controls approximately eighty percent of U.S. air travel. 121 F.4th at 215. JetBlue is the sixth-largest domestic airline and uses a “lower-cost business model” to compete with its comparatively larger competitors. Id. The court observed that the two airlines are “two of the four largest carriers” in New York and “two of the largest three in Boston.” Id. Once direct competitors, American and JetBlue formed the NEA in early 2020, agreeing to operate as one airline for most of their flights in and out of New York City and Boston. Id. at 216–217. The First Circuit affirmed the district court’s finding that the NEA involved substantial coordination by two competitors. Id. at 217. Specifically, the airlines jointly determine and coordinate routes, schedules, and other details and share their revenues within the Northeast region. Id.

“[I]t is beyond dispute that the NEA constitutes an agreement between two separate entities (American and JetBlue) and that it impacts interstate commerce (travel from one state to another).” 675 F.Supp.3d. at 72–73. The court’s Section 1 analysis therefore turned on whether the NEA is an “unreasonable” restraint on trade. 121 F.4th at 219.

In determining which mode of analysis to employ, the district court observed that “[r]estraints arising in the context of joint ventures ordinarily are subject to the rule of reason, which involves some form of burden shifting but is not a rigid framework.” 675 F.Supp.3d at 110. However, “where ‘an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect,’ a more abbreviated [or ‘quick-look’] analysis suffices.” Id. at 111–12 (Cal. Dental Ass’n v. F.T.C., 526 U.S. 756, 770 (1999)). The district court therefore concluded that although “the parties’ presentation of [the] case places it within the realm of the rule of reason[,] . . . no deep and searching analysis is required in order to discern [the NEA’s] unlawfulness.” Id. at 112.

On appeal the First Circuit rejected American Airline’s contention that the district court incorrectly applied a “quick-look” rather than a rule of reason analysis. 121 F.4th at 221–22. Instead, the court explained that even though the lower court wrote that the analysis need not be deep and searching, the district court made “extensive and reasoned findings” regarding the NEA’s impact. Id. at 222. The First Circuit explained a “joint venture” label was not sufficient to rule out application of the per se or quick-look framework:

Our inquiry therefore trains not on American’s label, but rather on the terms and effects of the parties’ agreement. Here, the district court found as fact that this venture reduced output while garnering no competitive benefits that could not otherwise be achieved . . . . The label of “joint venture” does not itself change the analysis, which is “aimed at substance rather than form.” And while it is fair to say that “most joint venture restrictions” are subject to the rule of reason, the level of scrutiny required under that standard exists along a “competitive spectrum.”

Id. at 221–22. Having decided to apply the rule of reason, the appellate court next considered whether the NEA provided sufficient evidence of anticompetitive effects. The First Circuit rejected the notion that “the only way to prove actual anticompetitive harm to consumers in the relevant market is with empirical evidence ‘that tends to prove that output was restricted or prices were above a competitive level.’” Id. at 222 (quoting Ohio v. Am. Express Co., 585 U.S. 529, 549, 138 S.Ct. 2274, 201 L.Ed.2d 678 (2018) (quoting Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 237, 113 S.Ct. 2578, 125 L.Ed.2d 168 (1993)).

Not only did the court conclude that the joint venture negatively impacted competition, but it also found the harms to be “considerable and obvious.” 675 F.Supp.3d at 112. With respect to direct evidence of actual harm, the district court found that (1) the NEA eliminated any competition between American and JetBlue in the northeast and replaced it with “broad cooperation in pursuit of their partnership” Id. at 113; (2) the NEA diminished JetBlue’s role as an independent and low-cost competitor in a concentrated market Id. at 95; and (3) the airlines engaged in horizontal market division by assigning routes whenever possible to one airline or the other to “optimize” the combined NEA network. Id. at 117.

The First Circuit reviewed the district court’s findings. It took note of the finding that the NEA “‘led to decreased capacity, lower frequencies, or reduced consumer choices on multiple routes, including some that are heavily traveled.’” Id. at 222 (quoting 675 F. Supp. 3d at 92). The district court also found that the NEA’s “spirit of partnership” undermined any claim that the carriers would continue to compete on the routes the NEA carved out from its joint schedule. 121 F.4^th at 223. Further, the First Circuit noted that the district court concluded that the NEA reduced the total frequency or capacity in certain NEA markets. Consequently, even assuming arguendo that a showing of reduced capacity was required to find anticompetitive harm, the district court made the requisite findings. Id.

The First Circuit also examined the lower court’s assessment of the alleged procompetitive benefits or efficiencies generated by the NEA. Although the district court concluded that the NEA violated Section 1 based on the first two steps of the test, the court briefly discussed whether any of the NEA’s procompetitive efficiencies could have been reasonably achieved through less anticompetitive means. The court noted that American and JetBlue could have entered a relationship similar to the West Coast International Alliance that American formed with Alaska. Id. at 227. Such an arrangement would include codesharing and loyalty reciprocity enabling the airlines to leverage their networks’ complementary features and better compete with relevant competitors while not requiring the level of anticompetitive coordination seen under the NEA. Id.

The First Circuit cited to the 2000 Antitrust Guidelines for Collaborations Among Competitors (“Collaboration Guidelines”). Id. at 225; 675 F.Supp.3d at 108. In December 2024, the FTC and U.S. Department of Justice jointly withdrew those Collaboration Guidelines. The FTC’s vote to withdraw the Collaboration Guidelines was three-two, with all three Democratic commissioners in favor of the withdrawal. The dissenting Republican FTC commissioners objected to the withdrawal because of the imminent change in administration. The Division and FTC issued a joint statement announcing the withdrawal and asserted, as they had with the three earlier withdrawals, that the Collaboration Guidelines were withdrawn because they were outdated. According to the agencies’ statement, the Collaboration Guidelines:

• do not reflect recent federal appellate case law;
• rely in part on other outdated and withdrawn policy statements, including certain safe harbors that they allege are not based in federal antitrust statutes;
• do not capture advances in computer science, business strategy, and economic disciplines that help enforcers assess, as a factual matter, the competitive implications of corporate collaborations; and
• fail to address the competitive implications of modern business combinations and rapidly changing technologies such as artificial intelligence, algorithmic pricing models, vertical integration, and roll ups.

The majority statement of the FTC refers to the First Circuit’s decision here as “evolving” the analysis that should be applied to competitor collaborations.

§ 2.2.3. Tesla, Inc. v. Louisiana Automobile Dealers Association, 113 F.4th 511 (5th Cir. 2024).

A divided three-judge panel of the U.S. Court of Appeals of the Fifth Circuit reinstated a motor vehicle manufacturer’s complaint alleging antitrust and constitutional claims. Tesla, Inc. v. Louisiana Automobile Dealers Association, 113 F.4th 511, 518 (5th Cir. 2024). The focus of the majority decision was an element frequently contested in Sherman Act litigation—the antitrust injury requirement.

Three Tesla entities sued the Commissioners of the Louisiana Motor Vehicle Commission (“Commission”) and the Louisiana Automobile Dealers’ Association (collectively “defendants”), alleging violations of the Sherman Act, the Due Process Clause, and the Equal Protection Clause. Id. The Commission is charged with enforcing the state law governing the distribution and sale of motor vehicles, and it is composed mainly of members who are direct competitors of Tesla. Id.

Tesla exclusively markets, sells, and leases its cars directly to consumers through its own network of stores, bypassing third-party dealers. Id. In 2017 Louisiana amended its motor vehicle laws to prohibit all sales by manufacturers to consumers in Louisiana, unless made by an independent in-state dealer. Id. Before 2017, state law, as interpreted by Tesla, only prohibited franchising manufacturers from competing with their own franchise dealers. Id. Tesla alleged that the amendment was passed “at the behest of [Tesla’s] competitors.” Id. Defendants argued that even under the pre-2017 law, Tesla was never permitted to sell vehicles directly to Louisiana end-users.

Tesla, concerned that defendants would force it to stop providing warranty services from its New Orleans service center as a putative “fleet owner,” filed the instant litigation. Id. at 519. Tesla alleged that the loss of its ability to perform warranty repairs in the state would make it unable to compete in that market and contends that the 2017 restrictions on direct sales are an example of interference by competitors. Tesla further asserted that its competitors in Louisiana co-opted the Commission. Id.

Tesla alleged that its competitors “pursued every avenue to bar [it] from the market.” Id. Shortly after Tesla opened a service center in 2018, the Commission began investigating Tesla’s operations and issued multiple subpoenas to the service center, which Tesla argued were part of an effort to exclude it from the market. Id. at 520. On numerous occasions, the defendants allegedly met to revise their interpretation of the Louisiana law in a way that was unfavorable to Tesla. Id. Tesla also presented emails from the Executive Director of the Commission to Tesla’s competitors assuring them that Tesla’s entry into the market would be dealt with. See id.

The district court dismissed each of Tesla’s claims. Id. at 522. As for the antitrust claim, the district court reasoned that private defendants were immune from liability under the Sherman Act, and that Tesla failed to plausibly plead a Sherman Act violation. Id. Tesla appealed to the Fifth Circuit. Id.

The Fifth Circuit began its analysis of the antitrust claim by explaining that, to bring suit, an antitrust plaintiff must show (1) injury to Tesla proximately caused by the defendant’s conduct, (2) antitrust injury, and (3) proper plaintiff status. Id. at 528 (citing Sanger Ins. Agency v. HUB Int’l Ltd., 802 F.3d 732, 737 (5th Cir. 2015)). The parties here only contested the second element, antitrust injury, which requires a showing of injury to a plaintiff’s business or property. Id. (quoting Hawaii v. Stand Oil Co., 405 U.S. 251, 261 (1972)).

The Fifth Circuit explained:

The Supreme Court has defined antitrust injury as an injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful. . . . The injury should reflect the anticompetitive effect either of the violation or of the anticompetitive acts made possible by the violation. Typical anticompetitive effects include increased prices and decreased output. This circuit has narrowly interpreted the meaning of antitrust injury, excluding from it the threat of decreased competition.

Tesla, 111 F.4th at 528 (quoting Anago, Inc. v. Tecnol Med. Prods., 976 F.2d 248, 249 (5th Cir. 1992)). 

Tesla’s alleged antitrust injury was based on a pending investigation by the Commission. Id. Tesla alleged that this investigation would (1) exclude Tesla from Louisiana by eliminating its leasing and warranty-services activities, and (2) deter other direct-to-consumer manufacturers from entering Louisiana. Id. at 528–29. The defendants argued that Telsa cannot base an antitrust injury allegation on solely pending investigations because no adverse action was rendered. The Fifth Circuit disagreed, explaining that there is not a per se bar against antitrust injury based on a pending inquiry and competitors are able to prove antitrust injury before a firm is driven from a market. Id. (citing Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 n.14 (1977)).

The investigation pending against Tesla, however, was declared unlawful by the Fifth Circuit under the Due Process Clause because the Commission’s bias was predictable, and the Commission would always be incentivized to exclude new business models from entering the market. Id. at 527. Because the court found that Tesla had set forth enough to plead plausibly actual bias, the Fifth Circuit’s ruling substantially altered the grounds on which Tesla pled its antitrust injury, the district court’s dismissal decision was vacated and the case remanded. Id. at 529.

One member of the Fifth Circuit panel dissented, in part, including with respect to Tesla’s due process challenge to the composition of the Commission and alleged antitrust injury. The concurrence disagreed with the majority’s analysis of the due process claim and concluded that it contravened well-settled precedent. Because the majority’s antitrust injury analysis was based largely on its due process finding, the concurrence also disagreed with reinstating the antitrust claims. 

§ 2.2.4. Shields v. World Aquatics, No. 23-15092, No. 23-15156, 2024 WL 4211477 (9th Cir. Sept. 17, 2024).

The United States Court of Appeals for the Ninth Circuit considered when conduct should be analyzed under the in-depth rule of reason framework or could be declared automatically illegal. It held that the per se rule could apply to a sports league’s restrictions impacting a competing league. Plaintiffs, a group of professional swimmers and a swimming league, sued the defendant, World Aquatics, formerly known as the Federation Internationale de Natation (“FINA”), alleging violations of Sections 1 and 2 of the Sherman Act, as well as several state tortious interference laws. Shields v. World Aquatics, No. 23-15092, No. 23-15156, 2024 WL 4211477, at *1 (9th Cir. Sept. 17, 2024).

FINA is a Swiss organization that governs international and Olympic aquatic sports, including swimming, diving, and water polo. Shields v. Federation Internationale de Natation, 649 F.Supp.3d 904, 912 (N.D. Ca. 2023). It sets rules, maintains world records, and manages Olympic aquatic competitions. Id. FINA’s members include 209 national federations, which must comply with FINA rules and enforce penalties. Id. Member federations can hold international competitions with FINA’s approval, which allows results to be used for Olympic qualification. Id. at 913.

In 2017, the International Swimming League (“ISL”) sought to enter the market for international swimming competitions. Id. It failed, however, to reach an agreement with FINA, which issued a memo stating that ISL competitions were not recognized and emphasizing the rule that FINA’s approval was required before member federations established any kind of relationship with a non-affiliated or suspended body (the “unauthorized relations rule”). Id. at 913–14. If member federations failed to obtain approval from FINA, they would be suspended anywhere from one to two years. Id. at 914. The rule and memo led to some federations ceasing negotiations with ISL, which in turn led to the Sherman Act and tort claims against FINA.

At the district court, the parties filed cross-motions for summary judgment, and plaintiffs moved for class certification. Id. at 915–16. The district court granted defendant’s summary judgment motion on the Section 1 claims. Id. at 926. The court found that a reasonable trier of fact could conclude that a conspiracy or contract existed among FINA and its member organizations, and that the unauthorized relations rule was a horizontal restraint of trade, which are two elements of a Section 1 violation. Id. However, using the rule of reason approach, the court concluded that no reasonable trier of fact could find the restraint unreasonable because plaintiffs did not offer enough evidence to define the relevant market and show the anticompetitive effects. Id. at 925–26.

The lower court found that because plaintiffs did not present sufficient evidence of a relevant market, which is also an element of a Section 2 claim, no reasonable trier of fact could find in the plaintiffs’ favor on the monopoly and monopsony power element of their Section 2 claims. Id. at 927.

The district court also denied plaintiffs’ motion for class certification, explaining that they did not offer a method to determine individual damages in a way that would be fair to all class members. See Shields v. Federation Internationale de Natation, No. 18-cv-07393-JSC, 2022 WL 425359, at *7 (N.D. Ca. Feb. 11, 2022). As a result, plaintiffs failed to meet their burdens to establish that they and their counsel could adequately represent a Rule 23(b)(3) damages class, and that a class action was superior to individual litigation. Id. at *12.

The lower court therefore granted summary judgment to the defendant and denied class certification, and plaintiffs appealed to the Ninth Circuit. Id. at *18.

The Ninth Circuit explained that there are three ways to analyze whether restraints on trade are unreasonable: (1) the per se approach, which generally applies where competitors allegedly entered into a horizontal agreement with no purpose other than disadvantaging the target, (2) the rule of reason approach, where the court assesses the restraint’s effect on competition through factors such as reduced output, increased prices, and decreased quality in the relevant market, and (3) the quick look approach, which requires a showing of a naked restraint on price and output. Shields, 2024 WL 4211477, at *1.

The Ninth Circuit first held that plaintiffs created a genuine dispute of material fact as to whether the unauthorized relations rule constituted a per se unlawful group boycott by preventing federations and swimmers from doing business with ISL without risking draconian sanctions. Id. at *2. A rational trier of fact could conclude that the rule had no purpose other than to disadvantage defendant’s competitors because the plaintiffs presented evidence that the rule had been applied in the context of third parties that sought to replace FINA as the international governing body, and FINA executives discussed plans to thwart future ISL events by punishing member federations for engaging with other organizations. Id. at *2.

The Ninth Circuit also held that the plaintiffs created a genuine dispute of material fact under the quick look standard. Id. A rational trier of fact could conclude that the rule reduced output in the market for swimming competitions by suppressing the number of competitions in 2018, reducing the total pool of price money, and reducing appearance fees. Id.

Defendant argued that the Ninth Circuit should apply the rule of reason approach, like the district court, because sports leagues and joint venture restrictions are unique contexts that are generally analyzed under this approach. Id. However, the Ninth Circuit disagreed, explaining that defendant is not a joint venture sports league, but rather an association of independent national federations. Id. Also, “the likelihood that horizontal price and output restrictions are anticompetitive is generally sufficient to justify application of the per se rule.” Id. Still, even under this approach, a rational trier of fact could conclude that, by threatening to sanction swimmers, the rule prevented ISL from holding events in 2018 and thereby reduced output and wages. Id. at *3.

As for the issue of class certification, the Ninth Circuit held that the district court’s denial was an abuse of discretion. Id. Defendant argued that, since swimmers competed for shares of a fixed pot, a damages formula would disfavor some swimmers. Id. However, the Ninth Circuit explained that “[m]ere speculation as to conflicts that may develop” during the damage calculation is not an appropriate reason to deny certification. Id. The Ninth Circuit also explained that, contrary to the lower court’s holding, a class action was superior to individual actions due to the prohibitive costs of individual prosecution. Id. at *4.

Therefore, the Ninth Circuit reversed and remanded the District Court’s grant of summary judgment to the defendant and denial of class certification. Id. Defendant filed a petition for hearing, which was denied on November 25, 2024. See Shields v. World Aquatics, No. 23-15092, No. 23-15156, 2024 U.S. App. LEXIS 29939 (9th Cir. Nov. 25, 2024). The case will therefore return to the district court, where it will be set for trial in 2025.

§ 2.2.5. United States v. Brewbaker, 87 F.4^th 563 (4^th Cir. 2023), cert. denied, 2024 WL 4743085 (Nov. 12, 2024).

The United States Supreme Court denied the certiorari petition for the United States Court of Appeals Fourth Circuit decision in United States v. Brewbaker, 87 F.4^th 563 (4^th Cir. 2023), cert. denied, 2024 WL 4743085 (Nov. 12, 2024), leaving undisturbed the ruling that heightens the burden on antitrust prosecutors when the target companies have a hybrid horizontal-vertical relationship. The Fourth Circuit’s decision diverges from other circuits.

In Brewbaker, the Fourth Circuit concluded that the rule of reason, not the per se rule, applies when the restraint involves a “hybrid” relationship that contains both vertical and horizontal components. A hybrid relationship might involve, for instance, companies that simultaneously bid on the same contracts and have a manufacturer-distributer relationship with each other. 87 F.4th at 576.

Courts and the government have long distinguished between horizontal and vertical restraints of trade under Section 1 of the Sherman Act. Vertical restraints are agreements between firms at different levels of distribution and are subject to the rule of reason. Courts applying the fact-intensive rule of reason must evaluate “surrounding circumstances” to determine whether the restraint at issue harms competition. See Standard Oil Co. of N.J. v. United States, 221 U.S. 1, 58 (1911). Horizontal restraints, on the other hand, are agreements between firms competing at the same level to fix prices, divide markets, or rig bids. Horizontal restraints are generally subject to the per se rule, meaning they are “necessarily illegal” without inquiry into the specific anticompetitive effects of an action. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 886 (2007). The government generally reserves criminal prosecutions for per se violations, leaving other restraints of trade for civil enforcement. See U.S. Dep’t of Justice, Justice Manual § 7-2.200.

Brewbaker stemmed from an alleged scheme to rig bids for construction contracts awarded by a state agency. The agency paid contracted firms to build aluminum structures to prevent flooding, and Pomona Pipe Products and Contech Engineered Solutions regularly bid for those contracts as direct competitors. A federal grand jury indicted Contech and its sales manager, Brent Brewbaker, on one count of committing a per se violation of Section 1 of the Sherman Act by conspiring to rig bids. Prosecutors alleged that Pomona would share its planned bid price with Contech, and Contech would then submit a higher bid. Contech’s inflated submission helped ensure that Pomona would win the contract. Pomona would then complete the construction projects, in part, using aluminum it purchased from Contech in a vertical supply relationship.

The Fourth Circuit explained that “the relationship of the parties, not just the nature of the limitation imposed” matters when determining whether a restraint is horizontal or vertical. Id. at 577. The court reasoned that a price-fixing agreement between two competing companies “produces different effects on competition” than one between companies that “simultaneously compete and collaborate.” Id. The court applied the rule of reason because the restraint alleged in the indictment “would not invariably lead to anticompetitive effects.” Id. at 582. The court reasoned that if the restraint boosted Contech’s sales of aluminum to Pomona, it could theoretically increase competition between Contech and other aluminum manufacturers.

The Justice Department had urged the Supreme Court to grant certiorari, noting the ubiquity of hybrid relationships in today’s economy. It also pointed to the growing circuit split on the issue; the Second and Seventh Circuits have applied the per se rule to competing firms that agree on how they will compete, even when they simultaneously had vertical relationships. See, e.g., United States v. Apple, Inc., 791 F.3d 290 (2d Cir. 2015); Deslandes v. McDonald’s USA, LLC, 81 F.4th 699 (7th Cir. 2023). Until the Supreme Court resolves the conflict, the Fourth Circuit’s approach will be “far more accommodating to antitrust defendants,” the Justice Department warned. Petition for Writ of Certiorari at 18, United States v. Brewbaker (No. 23-1365).

§ 2.2.6. Winn-Dixie Stores Inc. v. E. Mushroom Mktg. Coop., Inc., 89 F.4th 430 (3d Cir. 2023).

At the end of 2023, an en banc panel of the United States Court of Appeals for the Third Circuit similarly addressed the applicable standard, in the civil context, with respect to an alleged hybrid arrangement, neither purely horizontal nor purely vertical. Winn-Dixie Stores Inc. v. E. Mushroom Mktg. Coop., Inc., 89 F.4th 430 (3d Cir. 2023).

The en banc court reheard a case affirming a jury verdict applying the rule of reason to a “hybrid” agreement with horizontal and vertical components. Id. at 435. After losing the jury verdict, plaintiff grocery store Winn-Dixie appealed arguing that the agreement should have been given “quick-look” treatment. Id. at 438. The agreement involved a cooperative of mushroom growers who agreed to a minimum price at which the members hoped they could coerce distributors to go to market, notably not at which to sell their mushrooms. Id. at 437. The cooperative historically held 90% of mushroom growers, but that figure dropped to 17% by 2010. Id. at 435. Some members were growers only, while others more commonly had exclusive relationships with specific downstream distributors of mushrooms. Id. at 436. Distributors were barred from joining the cooperative. Id.

The quick-look standard is an intermediate standard between the rule of reason and per se treatment, and applies “where per se condemnation is inappropriate, but where no elaborate industry analysis is required to demonstrate the anticompetitive character of an inherently suspect restraint.” Id. at 438 (quoting United States v. Brown Univ., 5 F.3d 548, 659 (3d Cir. 1993)). Thus a court should not use quick look analysis where “the contours of the market . . . are not sufficiently well known or defined to permit the court to ascertain without the aid of extensive market analysis whether the challenged practice impairs competition.” Id. at 439. The court likened the approach to “I know it when I see it,” and cited a Supreme Court warning against giving appropriate cases detailed treatment. Id.

The Third Circuit reviewed precedent analyzing when to apply quick look treatment to hybrid agreements and held that rule of reason analysis applied in this case. Id. at 439–41. In Toledo Mack Sales & Serv. Inc. v. Mack Trucks, Inc., the court bifurcated illegal horizontal agreements from vertical agreements, and as to the vertical agreements held that “rule of reason analysis applies even when . . . the purpose of the vertical agreement between a manufacturer and its dealers is to support illegal horizontal agreements between multiple dealers.” Id. at 439–40. And in a later case, In re Insurance Brokerage Antitrust Litig., quick-look treatment was used to analyze a “hub-and-spoke” conspiracy. Id. at 440.

The court held that it could not bifurcate the vertical agreements in this case because “the ‘complex business arrangements’ in this case preclude such clean line drawing,” nor did the agreements resemble a hub-and-spoke conspiracy. Id. at 440–41. The agreements were in some way similar to the vertical agreements in Toledo and Leegin Creative Leather Products, Inc. v. PSKS, Inc. which “facilitate” or “support” allegedly illegally horizontal agreements. Id. Thus, they were subject to the rule of reason. The court pointed to the jury verdict finding that the agreement did not cause anticompetitive harm to support its reasoning. Id. at 441.

§ 2.2.7. In re January 2021 Short Squeeze Trading Litigation, 105 F.4th 1346 (11th Cir. 2024).

The U.S. Court of Appeals for the Eleventh Circuit examined the question of the required anticompetitive effects of a Sherman, Section 1 violation in In re January 2021 Short Squeeze Trading Litigation, 105 F.4th 1346 (11th Cir. 2024).

Plaintiffs were retail investors who allegedly sold securities at deflated prices due to temporary trading restrictions imposed by Robinhood Markets, Inc. (“Robinhood”) and its affiliates during a period of market volatility. Id. at 1349. Robinhood is a large retail brokerage firm in the United States that derives most of its revenue from market makers, including Citadel LLC (“Citadel”) through payment for order flow (“PFOF”). Id. at *1349–51. In January 2021, the stock prices of certain securities surged due to increased demand from retail investors. Id. at *1349. Robinhood and other brokerage firms suspended retail investors from using their platforms to buy the relevant securities. Id. Sales were not restricted.

Plaintiffs sued Robinhood and Citadel (collectively “defendants”) under Section 1 of the Sherman Act, alleging that Robinhood’s trading restrictions were part of a conspiracy with Citadel to reduce stock prices and protect Citadel’s short positions. Id. After the district court dismissed the original complaint, the plaintiffs filed an amended complaint, and defendants filed a motion to dismiss. Id. at *1350.

The district court held that, even if defendants had an economic motive to conspire, that motive was insufficient to advance the alleged conspiracy from possible to plausible. Id. at *1354. The court also held that, even if plaintiffs plausibly alleged a conspiracy, they failed to plausibly allege an unreasonable restraint of trade. Id. The alleged anticompetitive harm did not occur in the relevant markets the plaintiffs defined, which were the PFOF and No-Fee Brokerage markets. Id. Therefore, the district court granted the defendants’ motion to dismiss, and plaintiffs appealed to the Eleventh Circuit. Id.

The Eleventh Circuit began its analysis by explaining that Section 1 of the Sherman Act outlaws only unreasonable restraints of trade, and that there are two approaches to determining whether restraints are unreasonable. Id. at *1355. Under the per se approach, courts find restraints unreasonable if they always or almost always restrict competition and reduce output. Id. (citing Ohio v. Am. Express Co., 585 U.S. 529, 540 (2018)). Courts typically only use this approach if the restraints are horizontal between competitors. Id. (citing Ohio, 585 U.S. at 540–41). Under the rule of reason approach, courts find restraints unreasonable if the plaintiff has shown that the alleged restraint has an anticompetitive effect on the relevant market. Id. (citing Procaps S.A. v. Patheon, Inc., 845 F.3d 1072, 1084 (2016)).

The Eleventh Circuit applied the rule of reason approach because the defendants operated at two levels within the distribution of securities trading and therefore had a vertical relationship. Id. at *1356. Using this approach, the Eleventh Circuit held that the plaintiffs failed to plausibly allege an unreasonable restraint of trade because they had not alleged anticompetitive effects in a relevant market. Id. Plaintiffs alleged that the conspiracy led to reductions in stock price and supply of relevant securities, but the Eleventh Circuit explained that these allegations point to anticompetitive effects in the stock market, not the PFOF or No-Fee Brokerage markets as defined by the plaintiffs. Id. at *1357. Plaintiffs failed to allege anticompetitive effects among Robinhood’s competitors, restrictions in outputs of services, or reductions in quality of services in the No-Fee Brokerage market. Id. at *1356–57. This was fatal to their Section 1 claim.

Plaintiffs argued that they sustained a foreseeable injury, a reduction in stock price, as a result of the alleged conspiracy, but the Eleventh Circuit explained that this showing is distinct from the required showing that the injury was caused by anticompetitive effects in a relevant market. Id. at *1357–58 (citing Amey, Inc. v. Gulf Abstract & Title, Inc., 758 F.2d 1486, 1493 (11th Cir. 1985)). The court held that plaintiffs must allege, not only an injury to themselves, but also an injury to the relevant market, and they failed to do the latter. Id. at *1358 (citing SD3, LLC v. Black & Decker Inc., 801 F.3d 412, 432 (4th Cir. 2015)). Therefore, the Eleventh Circuit held that plaintiffs failed to state a claim under Section 1 of the Sherman Act, and it affirmed the lower court’s dismissal of the Amended Complaint against Robinhood and Citadel.

§ 2.3. Sherman Act Developments, Section 2

§ 2.3.1. Overview

The statutory language of Section 2 makes unlawful “monopolization,” “attempts to monopolize,” or “conspiracies to monopolize.” The statute itself, however, does not define any of these offenses or explain the importance of key issues such as “relevant market,” “market power,” or “anticompetitive conduct.” Consequently, Section 2 has in recent years been the subject of a number of high-profile antitrust cases.

Section 2 of the Sherman Act makes it unlawful for a firm to “monopolize.” 15 U.S.C. §2. The offense of monopolization has two elements: “(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” United States v. Microsoft Corp., 253 F.3d 34, 50 (D.C. Cir. 2001).

Merely possessing monopoly power is not itself an antitrust violation, but it is a necessary element. Id. at 51. The Supreme Court defines monopoly power as “the power to control prices or exclude competition.” United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391, 76 S.Ct. 994, 100 L.Ed. 1264 (1956). In other words, a firm is a monopolist if it can profitably raise prices substantially above the competitive level. Microsoft at 51. Direct proof of monopoly is rare, so courts typically examine market structure in search of circumstantial evidence. Id.

Even though the Supreme Court appears to have moved the line of scrimmage for Section 2 claims, particularly in the area of certain unilateral pricing conduct, fertile ground remains for Section 2 litigation. Without empirical evidence that the dangers of false positives outweigh the dangers of false negatives, courts and juries will continue to find Section 2 a useful tool for reining in firms with monopoly power.

The courts and government enforcement agencies continue to apply Section 2 flexibly which can present challenges for private businesses. A number of the 2024 Section 2 included are against “Big Tech.” These cases apply equally to all industries.

§ 2.3.2. United States v. Google LLC, No. 20-cv-3010 (APM), No. 20-cv-3715 (APM), 2024 WL 3647498 (D.D.C. Aug. 5, 2024).

After a lengthy bench trial, the U.S. District Court for the District of Columbia issued its decision in the 2020 lawsuit filed by the U.S. Department of Justice, Antitrust Division and a number of State Attorney Generals, against Google, LLC. Although the trial on the merits concluded, the court has yet to issue its ruling on the appropriate remedy or remedies.

On October 20, 2020, the Department of Justice, along with the Attorney Generals representing 11 states Arkansas, Florida, Georgia, Indiana, Kentucky, Louisiana, Mississippi, Missouri, Montana, South Carolina, and Texas. On January 15, 2021, DOJ and state plaintiffs filed an amended complaint adding California, Michigan, and Wisconsin as plaintiffs. (hereafter collectively referred to as “DOJ”), brought this action under Section 2 of the Sherman Act, alleging that Google unlawfully maintained monopolies in the markets for general search services, search advertising, and general search text advertising in the United States through anticompetitive and exclusionary practices. United States v. Google LLC, No. 20-cv-3010 (APM), No. 20-cv-3715 (APM), 2024 WL 3647498, at *4 (D.D.C. Aug. 5, 2024). Two months later, the Attorney Generals of 38 states and territories, Colorado, Nebraska, Arizona, Iowa, New York, North Carolina, Tennessee, Utah, Alaska, Connecticut, Delaware, the District of Columbia, Guam, Hawaii, Idaho, Illinois, Kansas, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Dakota, Vermont, Virginia, Washington, West Virginia, and Wyoming, led by Colorado (hereafter collectively referred to as “Colorado plaintiffs”), filed a separate Complaint alleging unlawful monopoly maintenance in the markets for general search services, general search text advertising, and general search advertising in the United States. Google LLC, 2024 WL 3647498, at *4. On January 7, 2021, the court consolidated both cases under FRCP 42(a). Id. at *5.

The DOJ’s first claim is that Google unlawfully maintained monopolies in several relevant markets through various exclusionary agreements. Id. at *4. The first relevant market, the general search services market, allows consumers to search the internet for a wide range of queries. Id. at *68. General search engines are allegedly distinct from Specialized Vertical Providers (“SVPs”), which are online companies like Expedia or Amazon that provide specialized search services for niche markets, such as travel or shopping. Id. at *69.

The second relevant market, the general search text market, is a subset of general search advertising. Search text advertisements are advertisements sold by general search engines that typically appear just above or below the organic search results on the Search Engine Results Page (“SERP”). See id. at *89.

The third relevant market, the search advertising market, is the broadest alleged advertiser-side market. It includes all advertisements shown in response to a query—whether entered on a general search engine, an SVP, or a social media platform. See id. at *81. Excluded from this market are display ads, retargeted display ads, and non-search social media ads (i.e., those that are integrated into a social media feed). Id. The DOJ claims that the unique level of real-time, expressed intent reflected in a user’s query is what sets search advertisements apart from non-search advertisements. Id.

The DOJ alleged that Google’s exclusionary agreements foreclosed a substantial portion of the relevant markets and harmed competition. Id. at *95. The first type of alleged exclusionary agreements, browser agreements, are between Google and web browser developers and set Google as the default search engine in exchange for monthly payments from Google. Id. at *98. The second type of alleged exclusionary agreements, “Android agreements,” consist of two separate types of agreements: (1) Mobile Application Distribution Agreements (“MADAs”), which require original equipment manufacturers (“OEMs”) who preinstall any of Google’s proprietary apps on their device to also install a complete suite of 11 Google apps and to place the search widget and app suite on their home screen by default, and (2) Revenue Share Agreements (“RSAs”), which prohibit OEMs from preinstalling or promoting alternative search engines on their devices in exchange for a portion of Google’s revenue. See id. at *101–03.

The DOJ alleged that these agreements made Google the default search engine on a range of products in exchange for a share of advertising revenue generated through Google searches. Id. at *128. Nothing in these agreements prevents users from changing their search engine if they desire, but the DOJ contended that because users are so unlikely to change their default search engine, these agreements are de facto exclusive. Id. at *15. The DOJ also argued that occupying the default search engine position on these products is exclusionary conduct that unlawfully prevents other search engines from effectively competing in the relevant markets. Id. at *95.

The Colorado plaintiffs also alleged that Google harmed SVPs by limiting the visibility of SVPs on Google’s SERP and by demanding that SVPs make their data available to Google on terms no less favorable than it does for others. See id. at *11–21. For example, on Google’s SERP, Google’s own search universals (specialized search results organized around a specific query) are increasingly placed above the unpaid general search text results, and Google requires certain SVPs to provide access to their data (which Google then uses for its own purposes). See id. The Colorado plaintiffs also alleged that Google harmed competition by delaying the implementation of various features for Microsoft Ads, thereby harming Microsoft’s ability to compete. Id. at *129.

Although the weight of the DOJ’s claims went to trial, the court granted summary judgment in Google’s favor on some issues. For conduct to be deemed exclusionary, a monopolist’s act must have an anticompetitive effect. United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001) (per curiam). The burden of proof rests on the plaintiff, who must demonstrate that the monopolist’s conduct has the requisite anticompetitive effects. Id. at 58–59. The court agreed with Google that, under Microsoft, courts must evaluate whether each type of alleged exclusionary practice has the requisite anticompetitive effect. United States v. Google LLC, 687 F.Supp.3d 48, 68 (D.D.C. 2023) (citing Microsoft Corp., 253 F.3d at 58–59). “In other words, when determining whether plaintiffs have met their prima facie burden, courts can only aggregate conduct that is itself deemed anticompetitive (even if only minimally so).” Id. The court found that the claims against Google were based on three different types of monopolistic conduct, not merely one type of conduct as in Microsoft. Id. at 69. These types of monopolistic conduct were (1) exclusive distribution agreements, (2) denied or delayed functionality of SA360, Google’s search engine management tool, and (3) the suppression and exploitation of SVPs—not merely one type of conduct as in Microsoft. Id. The court disaggregated the conduct and found that there was a genuine dispute of material fact as to whether Google’s browser and Android agreements were exclusive contracts that substantially foreclosed competition. See id. at 78. As far as the Colorado plaintiffs’ claims regarding Google’s treatment of SVPs and its development of SA360, the court found that there was no genuine dispute of material fact with regards to the former, but that there was a genuine dispute of material fact with regards to the latter. See id. at 83. Therefore, the court denied summary judgment on the claims regarding the browser agreements, Android agreements, and Google’s development of SA360, and granted summary judgment on the claims regarding Google’s conduct directed at SVPs. See id. at 87.

The DOJ presented the following evidence at the bench trial. By 2020, approximately 89% of all general search queries, whether entered on a desktop computer or mobile device, flowed through Google, with mobile devices even higher at 94.9% and desktop devices at 84%. Google LLC, 2024 WL 3647498, at *8. Google also allegedly entered into search distribution contracts with (1) the two major browser developers, Apple and Mozilla, (2) all major OEMs of Android devices, including Samsung, Motorola, and Sony, and (3) the major wireless carriers, including AT&T, Verizon, and T-Mobile in the United States. Id. at *50. In 2021, Google paid $26.3 billion in revenue share or “traffic acquisition costs” under these contracts, which was Google’s greatest expense at almost four times more than all other search-related costs in the aggregate. Id. In exchange for its exclusive and non-exclusive default placements, Google’s revenue share payment to Apple was also an estimated $20 billion, which was then equivalent to 17.5% of Apple’s operating profit. Id. Google also had MADAs with the Android OEMs, including Motorola, Samsung and Sony, all of which were required to preload and prominently place certain Google applications. Id. at *58. Google documents described the Company’s revenue share payments for exclusivity as an important strategy to deter or prevent competition from gaining traction. Id. at *60–63.

In analyzing the remaining claims, the court used the D.C. Circuit’s decision in Microsoft:

The first element—“monopoly power in the relevant market”—consists of two inquiries: (1) market definition, both product and geographic, and (2) power within the relevant market. The plaintiff bears the burden of proof on both. The second element—“willful acquisition or maintenance” of monopoly power—involves a burden-shifting inquiry. The plaintiff bears the initial burden of establishing a prima facie case of anticompetitive effects resulting from the challenged conduct. If the plaintiff makes out its prima facie case, the burden shifts to the defendant to “proffer a ‘procompetitive justification’ for its conduct,” that is, “a nonpretextual claim that its conduct is indeed a form of competition on the merits because it involves, for example, greater efficiency or enhanced consumer appeal[.]” Finally, “[i]f the monopolist asserts a procompetitive justification . . . then the burden shifts back to the plaintiff to rebut that claim.” “[I]f the monopolist’s procompetitive justification stands unrebutted, then the plaintiff must demonstrate that the anticompetitive harm of the conduct outweighs the procompetitive benefit.” Id. at *65 (quoting Microsoft, 253 F.3d at 51, 58, 59).

The court’s decision largely, but not entirely, ruled against Google. The court found that the DOJ had established two relevant markets: (1) search advertising and (2) general search text advertising. Id. at *81, *89. However, the court found that Google possessed monopoly power only in the narrower market for general search text advertising. Id. at *91. Despite its high market share, Google did not have the requisite power in search advertising because of the relative ease of competitive entry. Id. at *89. Specifically, the recent history of new entrants, the strength of those entrants, and their growth showed that barriers to entry are not so high as to compel the conclusion that Google had monopoly power in the market for search advertising. Id. With respect to the search text advertising market, however, Google controlled key inputs to the auctions that influenced the ultimate price that advertisers paid and made changes to its text ads auctions without considering its rivals’ prices because it was able to do so. Id. at *92.

The court then considered whether Google engaged in exclusionary conduct in the general search services and general search text advertising markets. It determined that Google’s agreements with browser developers, OEMs, and carriers were exclusive and contributed to Google’s maintenance of its monopoly power in two relevant markets: (1) general search services and (2) general search text advertising. Id. at *95. The court concluded that the DOJ had demonstrated that Google’s exclusive distribution agreements foreclosed 50% of the general search services market by query volume. Id. at *107. The court further found that Google’s agreements denied rivals access to the user queries, or scale, needed to effectively compete, and the agreements reduced the rivals’ incentives to invest and innovate. Id. at *109. The court considered Google’s proffered procompetitive justifications for its agreements, which were to (1) enhance the user experience, quality, and output in the market for general search services, (2) incentivize competition in related markets that redounds to the benefit of the search market, and (3) produce consumer benefits within the related markets. Id. at *120. However, the court concluded that the record did not support any of these justifications. Id. at *125.

The court accepted the DOJ’s calculations that the challenged agreements foreclosed 45% of the general search text ads market and that a 45% market foreclosure was significant in that market. Id. Google’s monopoly power, maintained by the exclusive distribution agreements, enabled Google to increase text ads prices without any meaningful competitive constraint. Id. at *126–28. The agreements also enabled Google to degrade its text ads by providing advertisers with less information in search query reports and preventing advertisers from opting out of keyword matching. Id.

With respect to the Colorado plaintiffs’ additional theory of exclusionary conduct, that Google caused anticompetitive effects in the proposed markets by purposely advantaging its own advertising platform over Microsoft’s on Google’s SA360, the court found that Google’s SA360-related conduct did not give rise to antitrust liability for two reasons: (1) Google has no duty to deal with Microsoft, and (2) the Colorado plaintiffs did not provide proof of anticompetitive effects. Id. at *130–31. The court declined to analyze whether Google had anticompetitive intent. Id. at *134.

The court has yet to impose a remedy. In October 2024, the DOJ filed a proposed remedy framework for the court to ensure that Google’s alleged violations of antitrust laws are addressed and remedied. See Pls.’ Proposed Remedy Framework, United States v. Google LLC, No. 20-cv-3010 (APM), 2024 WL 3547498 (D.D.C. Oct. 8, 2024). Specifically, the DOJ sought a remedy that would (1) unfetter relevant markets from Google’s exclusionary conduct, (2) remove barriers to competition, (3) deny Google the fruits of its statutory violations, and (4) prevent Google from monopolization of these markets and related markets in the future. See id. at 2–3. In November 2024, the DOJ filed its proposed final judgment, which recommended a list of remedies. Those suggested remedies included (among others) prohibiting Google from entering into exclusionary agreements, requiring Google to divest Chrome, limiting Google’s investments in and acquisitions of competitors, and requiring Google to make its search index available to competitors. See Pls.’ Initial Proposed Final J., United States v. Google LLC, No. 20-cv-3010 (APM), 2024 WL 3547498 (D.D.C. Nov. 20, 2024).

§ 2.3.3. United States, et al. v. Google LLC (the “Google Ad Tech” Case), No. 1:23-cv-00108-LMB-JFA.

During the summer of 2024, the U.S. District Court for the Eastern District of Virginia ruled on two significant motions in an antitrust case filed by the U.S. Department of Justice, Antitrust Division (“DOJ”) and a number of states against Google, LLC, known as the “Google Ad Tech” case.

In January 2023, the DOJ filed a Complaint alleging that Google, through anticompetitive and exclusionary practices, monopolized key digital advertising technologies (referred to as the “ad tech stack”) in violation of Sections 1 and 2 of the Sherman Act. Complaint, United States. v. Google LLC, No. 1:23-cv-00108-LMB-JFA, 2023 WL 398189 (E.D. Va. Jan. 24, 2023). The DOJ identified three relevant product markets: (1) the publisher ad server market, which allows publishers to sell ads on their webpages; (2) the ad exchange market, which acts as an intermediary between sell-side and buy-side advertisers; and (3) the advertiser ad network market, which small and large advertisers use to buy advertisements on the open web. Id. at 124–29. According to the DOJ, Google’s publisher ad server called DoubleClick for Publishers (“DFP”) achieved a 90% share of the alleged publisher ad server market. Id. at 125. The DOJ also alleged that Google’s ad exchange (“AdX”) held approximately 50% of the ad exchange market, and that Google Ads held approximately 80% of the advertiser ad network market. Id. at 127, 130. The DOJ further alleged illegal tying because Google’s acquisition of AdX compelled publishers to use Google’s DFP. Id. at 138–39. The DOJ sought damages and demanded a jury trial, which was an unusual move by the government. Id. at 140. The DOJ also sought a divestiture, at minimum, of the Google Ad Manager suite. Id.

The first product market the DOJ identified was publisher ad servers for open web display advertising, which publishers use to manage the display of ads on their webpages. Id. at 124. Publisher ad servers are responsible for evaluating the potential sources of advertising demand and are the final arbiters of which ads are selected to fill the advertising slots on the publishers’ webpages. Id. The DOJ alleged that Google’s monopoly power in this market is protected by significant barriers to entry, including the prohibitive cost to build a publisher ad server. Id. at 126. The DOJ also alleged that these barriers were reinforced by Google’s anticompetitive conduct, such as its acquisition of publisher ad servers DFP and AdX. Id. Google also allegedly used a series of exclusive deals and features to ensure that competitors could not compete in the market, such as restricting real time access to AdX exclusively to DFP, limiting dynamic allocation bidding exclusively to AdX, and providing a “last look” auction advantage to AdX. Id. at 133.

The second product market the DOJ identified was ad exchanges, which allow publishers to auction display ad inventory to advertisers. Id. at 126. Google’s AdX, which is part of the Google Ad Manager suite, is the largest ad exchange on the market, with a share of over 50% of ad impressions and revenue. Id. at 127. According to the DOJ, Google’s AdX had sufficient market power to coerce publishers to use DFP and thereby unlawfully harm competition. Id. at 138. The DOJ also alleged that Google excluded rivals from the ad exchange market by reducing payouts to publishers, burdening advertisers and publishers with lower quality ad matching, and inhibiting choice and innovation across the tech stack. Id.

The third market the DOJ identified was advertiser ad networks, which provide self-service bidding tools that facilitate ad placement on open web display ad inventory. Id. at 129. Advertiser ad networks typically charge advertisers based on how many users click on the ad, and they are typically used by smaller, less sophisticated advertisers. Id. Larger advertisers typically use demand side platforms, which charge based on how many users see the ad. Id. Google allegedly held approximately 80% of the market share of the advertiser ad network market, and approximately 40% of the demand side platform market. Id. at 130.

Google filed a motion for summary judgment in April 2024. Google argued that it was entitled to summary judgment because the conduct challenged by the DOJ was essentially that Google did not give its ad exchange rivals the same access and features that it provides to its own products. Google LLC’s Mem. of Law in Supp. of its Mot. for Summ. J. at 2, United States v. Google LLC, No. 1:23-cv-00108-LMB-JFA, 2024 WL 3534884 (E.D. Va. Apr. 26, 2024). In response, the DOJ asserted that the case was based primarily on Google’s (1) restricting publishers’ and advertisers’ choice of ad tech providers and (2) manipulating ad tech auctions to favor its own products, thereby shielding Google from competition. Pl.’s Opp’n to Def.’s Mot. for Summ. J. at 19, United States v. Google LLC, No. 1:23-cv-00108-LMB-JFA, 2024 WL 3583978 (E.D. Va. May 17, 2024).

Merely possessing monopoly power is not itself an antitrust violation, but it is a necessary element. United States v. Microsoft Corp., 253 F.3d 34, 51 (D.C. Cir. 2001). A firm violates Section 2 only when it acquires or maintains, or attempts to acquire or maintain, a monopoly by engaging in exclusionary conduct “as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” Id. at 58.

The Supreme Court defines monopoly power as “the power to control prices or exclude competition.” United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391, 76 S.Ct. 994, 100 L.Ed. 1264 (1956). In other words, a firm is a monopolist if it can profitably raise prices substantially above the competitive level. Microsoft, 253 F.3d at 51. Direct proof of monopoly is rare, so courts often examine market structure in search of circumstantial evidence. Id.

The relevant market includes all products reasonably interchangeable by consumers for the same purposes. Id. at 52. Looking solely to current market share can be misleading, so the court looks to the structural barriers that protect the company’s future position. Id. at 55. The court analyzes the alleged monopolist’s efforts to maintain its position through means other than competition on the merits. Id. at 56.

The relevant product markets, as defined by the DOJ, did not include mobile advertisements, video streaming advertisements, smart TV advertisements, advertisements on websites that have their own ad placement services (which includes major social media platforms such as Twitter and Facebook), traditional advertisements such as TV, print, radio, and billboards, or DSPs, which likely encompass a large number of digital advertisements. Complaint at 124–30, United States, et al. v. Google LLC, No. 1:23-cv-00108-LMB-JFA, 2023 WL 398189 (E.D. Va. Jan. 24, 2023). The DOJ argued that their relevant product markets are defined correctly because open web digital advertisements cannot be substituted with these other forms of advertising. Pl.’s Opp’n to Def.’s Mot. for Summ. J. at 3, United States, et al. v. Google LLC, No. 1:23-cv-00108-LMB-JFA, 2024 WL 3583978 (E.D. Va. May 17, 2024). Google, on the other hand, argued that there was no evidence to support the DOJ’s proposed markets, and even if there was, Google did not have monopoly power in those markets. Google LLC’s Mem. of Law in Supp. of its Mot. for Summ. J. at 28–29, United States, et al. v. Google LLC, No. 1:23-cv-00108-LMB-JFA, 2024 WL 3534884 (E.D. Va. Apr. 26, 2024). Because of the conflict in the parties’ expert reports with respect to the relevant product market definition, the court denied Google’s motion for summary judgment. Transcript of Motions Hearing at 20, United States, et al. v. Google LLC, No. 1:23-cv-00108-LMB-JFA (E.D. Va. June 14, 2024).

Despite the DOJ’s claim for monetary damages, Google also moved to strike the government’s jury demand. Google argued that the DOJ failed to demonstrate (1) an adequate nexus between Google’s acts and the government’s alleged injury and (2) that the government had ever even purchased advertisements in the alleged relevant markets. Google LLC’s Mem. in Supp. of its Mot. to Dismiss the United States’ Damages Claim as Moot and to Strike the Jury Demand at 3–4, United States, et al. v. Google LLC, No. 1:23-cv-00108-LMB-JFA, 2024 WL 3534886 (E.D. Va. May 16, 2024). In an effort to thwart the government’s jury demand, Google paid $4 million to cover the total amount of damages sought, including treble damages. The court agreed with Google that the payment mooted the government’s damages claim, and accordingly, dismissed the jury demand. See United States, et al. v. Google LLC, No. 1:23-cv-00108-LMB-JFA (E.D. Va. June 11, 2024).

A bench trial took place in the fall and the parties are awaiting the court’s ruling.

§ 2.3.4. Watson Laboratories, Inc. v. Forest Laboratories Inc., 101 F.4th 223 (2d Cir. 2024).

In Watson Laboratories, the Second Circuit rejected antitrust claims alleging that a drug patent holder unlawfully paid off generic manufacturers to delay their market entry. Watson Lab’ys, Inc. v. Forest Lab’ys Inc., 101 F.4th 223, 250 (2d Cir. 2024). The decision, published in May 2024, marked the first time the Second Circuit applied the Supreme Court’s 2013 Actavis decision. F.T.C. v. Actavis, Inc., 570 U.S. 136 (2013).

Watson Laboratories arose out of litigation under the Hatch-Waxman Act, which provides an approval regime to streamline the manufacture of generic drugs while maintaining patent protections to incentivize the development of new drugs. Id. at 229. Forest Laboratories, the brand manufacturer of a high blood pressure drug called Bystolic, settled Hatch-Waxman patent infringement litigation with seven manufacturers that wanted to make generic versions of Bystolic. Id. at 230. The settlement agreements were accompanied by deals in which Forest paid the generic manufacturers for goods and services, such as pharmaceutical ingredients and product development. Id. As part of the settlement agreements, the generic manufacturers agreed to wait several years—until three months before Forest’s Bystolic patent was due to expire—before they could begin marketing their products. Id. Purchasers of Bystolic, including retail companies and health benefit plans, sued Forest and the seven generic manufacturers under Sections 1 and 2 of the Sherman Act, among other counts. Id. at 234. The Federal Trade Commission supported plaintiffs as amicus. Id. at 231.

In a “reverse payment,” the patent-holding plaintiff pays the alleged infringer, rather than the other way around. Id. at 230. The Supreme Court held in Actavis that courts must analyze reverse payments under the rule of reason; they violate antitrust laws only if they are both “large” and “unjustified.” FTC v. Actavis, Inc., 570 U.S. 136, 158 (2013). The court noted in Actavis that settlements allowing earlier launch of generics “bring about competition” and benefit consumers, but a reverse payment made solely to delay generic market entry “simply keeps prices at patentee-set levels” and divides monopoly profits between the patent holder and challenger. Id. at 154. A reverse payment, therefore, may provide evidence that the patentee seeks to “induce the generic challenger to abandon its claim with a share of its monopoly profits that would otherwise be lost in the competitive market.” Id. But reverse payments may be entirely legitimate, representing saved litigation expenses or fair compensation “for other services that the generic has promised to perform—such as distributing the patented item or helping to develop a market for that item.” Id. at 156. In those circumstances, “there is not the same concern that a patentee is using its monopoly profits to avoid the risk of patent invalidation or a finding of noninfringement.” Id.

Applying Actavis, the Second Circuit concluded that plaintiffs failed to plausibly allege that Forest’s reverse payments to the generic manufacturers were “unjustified,” so the court did not reach the issue of whether they were too “large.” Watson Lab’ys, 101 F.4th at 240 & n.8. The court reasoned that the reverse payments, even as alleged, reflected “traditional settlement considerations.” Id. at 240. The court examined each of the reverse payments and accompanying transactions and found they did not raise plausible antitrust claims. Id. at 241–50. For example, one of the generics agreed to manufacture Bystolic to meet part of Forest’s requirements for sales in the United States and Canada. Id. at 244. Plaintiffs pointed to this deal as suspiciously pretextual because Forest was already producing enough Bystolic to meet market demand. Id. The court called that allegation “speculation and conjecture” and noted it was reasonable for Forest to seek additional manufacturing sources to avoid potential supply issues in the future since Forest at the time exclusively relied on its Ireland facilities to make the finished drug product. Id. The court ultimately concluded that all the transactions “reflect[ed] bona fide business considerations,” affirming the district court’s dismissal. Id. at 241.

§ 2.3.5. Duke Energy Carolinas, LLC v. NTE Carolinas II, LLC, 111 F.4th 337 (4th Cir. 2024).

On August 5, 2024, the U.S. Court of Appeals for the Fourth Circuit vacated a district court’s grant of summary judgment to Duke Energy Corporation (“Duke”) in a dispute over Duke’s alleged monopoly over the energy market in the Carolinas. Duke Energy Carolinas, LLC v. NTE Carolinas II, LLC, 111 F.4th 337, 343 (4th Cir. 2024). NTE Carolinas II, LLC (“NTE”), a power company based in St. Augustine, Florida, brought the suit, claiming that Duke, a Charlotte, North Carolina, based power company “willfully maintained that [monopoly] power through anticompetitive conduct to exclude NTE from the market, in violation of Section 2 of the Sherman Act.” Id. at 342–43.

Specifically, NTE claimed that Duke schemed to prevent NTE, “its only serious competitor,” from competing for the business of Fayetteville, North Carolina. Id. at 343. The city was the only one of Duke’s customers whose long-term contract was nearing its expiration, and NTE hoped to compete for its business. Id.

Before the district court, Duke argued that its summary judgment motion should be granted because the conduct NTE accused it of merely constituted legitimate competition to retain Fayetteville’s business, rather than unlawful actions. Id. The lower court found that there was a question of fact as to whether Duke has monopoly power in the Carolinas, but ultimately granted Duke’s motion because it found that the company’s conduct was legitimate competition rather than anticompetitive conduct. Id.

NTE appealed the decision to the 4th Circuit, which vacated the district court’s summary judgment grant and remanded the case for further proceedings. Id. The appellate court held that there existed genuine disputes of material fact, from which a jury could conclude that Duke’s conduct was unlawfully anticompetitive. Id. (The 4th Circuit also ordered that the case be assigned to a different judge on remand. The original district court judge had recused himself because one of his former law partners entered an appearance on behalf of Duke. He was later reassigned the case after the “conflict” abated and he determined that his earlier recusal had not been necessary. The 4th Circuit held “that once a judge recuses himself from a case, he should remain recused from that case, even though his recusal may not have originally been required.”).

In its decision, the 4th Circuit first recounted a significant summary of the facts between the two parties, as the record before the district court was voluminous. Id. at 344. It noted that while Duke is a “vertically integrated power company, meaning that it owns both power plants and transmission lines and serves both wholesale and retail customers,” NTE merely produces power. Id. It has no transmission lines of its own, and therefore must rely on other companies’ transmission networks to serve its customers. Id. Thus, when NTE began constructing a power facility in North Carolina in 2013, it entered into a standard interconnection agreement with Duke, which holds more than 90% of the wholesale power market in the region. Id.

When NTE first entered the picture, Duke executives apparently had little worry that the newcomer would cut into Duke’s business. Id. (“Duke’s Vice President of Wholesale Power Sales remarked at the time that he ‘[thought] it [was] very doubtful that the threat [of Duke customers switching to NTE] [was] real.’”). That quickly changed, however, as NTE began pulling customers away from Duke. Duke eventually lost nine customers to NTE, and only lost one to another competitor. Id. Despite the threat of NTE’s attraction to customers, Duke believed it had an advantage in its long-term power supply contracts, which generally lasted 20 years and required several years of notice to terminate. Id. at 345. (“As a consequence, such contracts limited opportunities for new entrants such as NTE to compete for customers and thus to gain economies of scale.”). The only such contract that was expiring soon, and thus opened an opportunity for NTE to take the customer’s business, was with the city of Fayetteville. Id.

Internally, Duke executives recognized NTE as a threat to its business with Fayetteville, noting that NTEs rates were lower than Duke’s. Id. At the same time, NTE was attempting to expand in the Carolina’s and saw the chance to capture Fayetteville’s business as a key to doing so. Id. at 346. It announced plans to open a second power plant in Reidsville, North Carolina, with the intention of using it to serve Fayetteville. Id. To convey power from this second plant, NTE again entered into an interconnection contract to use Duke’s transmission lines, and in the meantime, persuaded three more of Duke’s customers to move their service over to NTE. Id.

In light of NTE’s growing strength in the market and expansion plans, Duke’s concern about NTE’s power grew. It referred to the fight for Fayetteville’s continued business as Duke’s “biggest upcoming battle.” Id. After offering Fayetteville a temporary discount on rates in exchange for a long-term commitment in an “blend-and-extend” strategy, Duke ultimately won the city’s business once again, even though NTE offered lower rates in the long-term. Id. at 347. Around the same time, Duke also terminated the Reidsville interconnection contract with NTE after some dispute over payments that ended in a lawsuit against NTE for breach of contract, without first notifying FERC, as required. Id. at 349. NTE also claimed that Duke wrongfully interfered with NTE’s application to the North Carolina Utilities Commission. Id. at 358. NTE later alleged that these actions were unlawfully anticompetitive.

In assessing these facts and the district court’s findings, the 4th Circuit first discussed the applicable legal standards. Id. at 353. It noted that for a plaintiff to success on a Section 2 of the Sherman Act claim, they must satisfy two elements: “(1) that the defendant ‘possess[ed] . . . monopoly power in the relevant market,’ and (2) that the defendant willfully acquired or maintained that power through anticompetitive conduct, as opposed to gaining its monopoly status ‘as a consequence of a superior product, business acumen, or historic accident.’” Id. (internal citations omitted).

The first element was not at issue in the appeal, because Duke did not dispute the finding that it holds monopoly power over the relevant market, considering its market share was “at or approaching 90%” at the time of litigation. Id.

In addressing the second element, the court first discussed the parties’ opposing views on the lower court’s choice to analyze Duke’s actions all independently of one another, rather than analyzing them together as a cohesive campaign. Id. The district court applied separate tests to each of NTE’s claims, finding that each was an acceptable form of competition and declined to view them as a single course of conduct. Id. at 352. NTE claimed that the court should have looked at all of Duke’s conduct “holistically” to determine its anticompetitive effect on the market, arguing that when viewed as a whole, Duke effectively denied customers the option of purchasing power from anyone else. Id. at 353. Duke argued that the district court used the correct piecemeal approach, because the U.S. Supreme Court has set forth specific tests for the various types of conduct NTE alleged. Id.

Ultimately, the 4th Circuit agreed with NTE, noting that “it is foundational that anticompetitive conduct must be considered as a whole” when alleged conduct does not all fall clearly into well-defined categories. Id. at 354. The court wrote that “when a plaintiff alleges that a scheme or course of conduct was anticompetitive, the scheme or conduct must be considered as alleged, not in manufactured subcategories.” Id. at 355. With that approach in mind, it held that the evidence of Duke’s alleged anticompetitive conduct should be “based on the combined effect of two main components—Duke’s interference with NTE’s efforts to obtain Fayetteville’s business and Duke’s disruption of NTE’s interconnection efforts.” Id. at 356.

Regarding Duke’s influence over Fayetteville, NTE claimed that Duke’s offer to Fayetteville was “designed only to exclude NTE from competition.” Id. at 356. Duke argued that it was engaged in nothing but “healthy competition” by lowering its prices to retain a customer. Id. The court noted that the district court completely ignored an important part of NTE’s allegations on this point: that the entire structure of Duke’s offer to Fayetteville was exclusionary. Id.

Specifically, NTE argued that Duke’s “blend-and-extend” strategy “hindered a new entrant’s ability to compete on the basis of efficiency with Duke for Fayetteville’s business” after a certain point. Id. at 357. It also claimed that Duke’s strategy was designed to foreclose any new entrant from competing with it, and that it was designed to shift the costs of the temporary discount from the company back onto the customer. Id. at 358. The court compared Duke’s “blend-and-extend” strategy to a traditional predatory pricing framework in which “the monopolist waits to recoup the losses it incurred by pricing a particular product below cost by raising its prices after the monopolist succeeds at excluding its rival from competing on the same product.” Id. Ultimately, it rejected Duke’s suggested standard for analyzing this predatory pricing allegation and held that there were disputed facts as to whether the structure of Duke’s offer was exclusionary. Id. at 360.

Regarding Duke’s alleged interference with NTE’s interconnection efforts, the court analyzed the issue as it would a refusal to deal dispute. Id. at 361. Citing established principles of refusals to deal, Duke argued that NTE failed “to show (1) that both NTE and Duke, as competitors, were engaged in a voluntary course of dealing, and (2) that Duke refused to sell its goods or services to NTE on the same terms as it would to others,” and that failure means NTE could not prove antitrust liability. Id. NTE claimed that while those elements would have been sufficient to establish antitrust liability, they are not necessary. Id.

Rather, NTE argued, the applicable refusal to deal test to assess antitrust liability comes from Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), which held that a party must be able to persuade a jury that a refusal to continue a business agreement is “justified by any normal business purpose,” rather than an unlawful refusal to deal. Duke, 111 F.4^th at 362. The court agreed, holding that there was sufficient evidence for a jury to find that “Duke sought out an opportunity to terminate its [interconnection] agreement with NTE in order to keep NTE from bringing the Reidsville plant online and to avoid having to compete with NTE on the merits,” satisfying the Aspen Skiing standard. Id. at 365. The court noted that NTE further strengthened its case by presenting evidence that Duke deliberately sought to exclude NTE from the market in Carolinas, and that Duke’s mens rea in doing so amounted to “anticompetitive malice.”

§ 2.3.6. Federal Trade Commission v. Amazon, Inc., No. 2:23-cv-01495-JHC (W.D. Wash. Sept. 30, 2024).

In 2024, the Federal Trade Commission (“FTC”) and seventeen state attorneys general (collectively, “plaintiffs”) submitted an Amended Complaint alleging that Amazon, Inc. (“Amazon”) was a monopolist that used anticompetitive and unfair strategies to illegally maintain monopoly power in two markets: (1) the online superstore market used by consumers, and (2) the online marketplace services market used by sellers. Amended Complaint at ¶ 7, Federal Trade Commission v. Amazon.com, Inc., No. 2:23-cv-01495-JHC, 2024 WL 4101978 (W.D. Wash. Mar. 14, 2024).

The first alleged market, the online superstore market, offered reduced time and effort for online shoppers by housing thousands of varied products in one location. Am. Compl. at ¶ 124. Amazon allegedly recognized the importance of the online superstore market in 1998 because its unlimited shelf space allowed Amazon to bring “much more selection than was possible in a physical store . . . and presented it in a useful, easy-to-search, and easy-to-browse format in a store open 365 days a year, 24 hours a day.” Id. at ¶ 145. Plaintiffs asserted that there were no reasonable substitute markets because of Amazon’s breadth (range of product offerings) and depth (product selection within a product category). Id. at ¶¶ 126, 150–59. Plaintiffs argued that Amazon had a dominant share of the market because Amazon’s share of the overall value of goods sold by online stores exceeded 60%. Id. at ¶ 168. Plaintiffs supported their argument using metrics like the Gross Merchandise Value (“GMV”), which measures the total sales value of goods sold to customers during a given period. Id. at ¶ 170. Since 2015, the plaintiffs alleged that Amazon maintained a GMV of at least 69%. Id. at ¶ 172. Plaintiffs asserted that Amazon kept an internal list of potential competitors, but even that list demonstrated that Amazon had a market share of 72.5%. Id. at ¶ 174.

The next alleged market, the online marketplace services market used by sellers, includes (1) access to a substantial customer base, (2) an interface for customer search that supports the discovery of sellers’ products, (3) the ability of sellers to set their own prices, (4) the ability of sellers to create and maintain detailed product pages, and (5) the ability of sellers to display ratings and reviews to potential customers. Id. at ¶ 187. Plaintiffs asserted that Amazon maintained a market share of at least 66% GMV. Id. at ¶ 207.

For both markets, the plaintiffs argued that Amazon protected its dominant position through significant barriers to entry, including scale and network effects (where the value of the service increases as more people use it). Id. at ¶¶ 178, 180, 208–226. plaintiffs alleged that, based on Amazon’s scale, Amazon created a self-reinforcing dynamic where its shoppers leave helpful ratings and reviews, a process that drew in new customers. Id. at ¶ 181. Plaintiffs also claimed that Amazon suppressed its rivals’ abilities to gain scale by bundling its Prime subscription service (“Prime”) with fulfillment services. Id. at ¶ 220. Specifically, regarding Prime, Amazon recognized that decoupling Prime’s offerings “would make it easier for customers to substitute components of a bundle outside Amazon.” Id. at ¶ 228.

Plaintiffs alleged that Amazon illegally maintained its monopolies through two interrelated courses of conduct: (1) Amazon suppressed price competition and pushed prices higher through artificial price floors and penalized sellers that offered lower prices on Amazon’s website, and (2) Amazon coerced sellers to use its fulfilment service to access Prime. Id. at ¶ 259. Plaintiffs also asserted that Amazon’s anticompetitive conduct prevented competition scaling, thereby allowing Amazon to maintain its monopolies. Id. at ¶ 259.

Amazon supposedly maintained a price-surveillance group called the Competitive Monitoring Team, which searched the internet for prices and punished sellers who offered lower prices elsewhere. Id. at ¶ 265. Plaintiffs alleged that Amazon’s CEO of Worldwide Stores stated that the policy was necessary “so Amazon can maintain a reputation of having lower prices, [it] is ‘a dirty job, but we need to do it.’” Id. at ¶ 270. Amazon punished sellers who sold products for a lower price on other online stores by (1) disqualifying those sellers from accessing Amazon’s Buy Box (“Buy Box”), a feature that allowed consumers to add products to their shopping cart, and (2) imposing contractual obligations on sellers, including potential total banishment. Id. at ¶ 271. Plaintiffs contended that losing the Buy Box is an existential threat for many sellers. Id. at ¶ 271. Plaintiffs argued that after a European investigation and a 2018 public letter from U.S. Senator Richard Blumenthal, Amazon stopped using a particular price parity contractual obligation, which hindered sellers from selling their products for lower costs elsewhere without breaching their Amazon contracts. Id. at ¶¶ 275–76. However, Amazon allegedly continued using an algorithm called “Select Competitor—Featured Offer Disqualification” (“SC-FOD”) to enforce its price parity contract provisions. Id. at ¶¶ 277–79. The SC-FOD disqualified sellers who offered lower prices, “even by a penny,” from using Amazon’s Buy Box. Id. at ¶ 279.

Amazon used restrictions to further inhibit sellers through its “Amazon’s Standards for Brands” (“ASB”) program, which designated certain sellers as being Amazon preferred. Id. at ¶ 289. ASB sellers accounted for 55% of all sales in 2021. Id. at ¶ 290. ASB sellers are subject to special controls to ensure that their products are priced higher on other stores than on Amazon’s website. Id. at ¶ 292. Amazon allegedly threatened to revoke ASB sellers’ “privileged” status if any of the sellers violated the ASB agreement, and this revocation included loss of access to the Buy Box. Id. at ¶ 298. Amazon allegedly sanctioned some ASB sellers because “customers considering [their] products could have easily found [the] products cheaper at another major retailer and may have chosen to shop elsewhere.” Id. at ¶ 299. Amazon restored ASB sellers’ privileges, but only if the sellers raised their “Off Amazon” prices at least 95% of the time. Id. In 2021, an ASB seller allegedly told Amazon that ASB is a “Brand Killer” because the program required sellers to keep their prices higher than they would have. Id. at ¶ 302.

Amazon allegedly had another program called “Customer Experience Ambassadors” (“CXA”), which imposed stricter requirements, including a 98% price parity, on sellers. Id. at ¶ 304. CXA sellers did not have a choice of whether to join or not. Id. Plaintiffs asserted that Amazon’s anti-discounting policies forced consumers to purchase goods from Amazon because the price is at least as much as it would be elsewhere. Id. at ¶ 308. Amazon internally recognized that “any seller dependent on Amazon ‘would not have an incentive to lower prices in one of its [less important] outlet[s]/channel[s] because the financial impact would be multiplied’ across sales they also make on Amazon.” Id. at ¶ 313. Plaintiffs, in redacted portions, argued that Amazon’s conduct reverberated through the relevant markets, including that one competitor created a program to ensure that sellers abided by Amazon’s requirements even though the program hurt the rival’s operations. Id. at ¶ 324.

Amazon also allegedly created a similar algorithm to ensure that its products were perceived as being lower in price despite not actually being lower. Id. at ¶ 329. The algorithm allegedly automatically copied any rival’s increase in prices to the penny and applied that price to Amazon’s website offerings, which deterred rivals from competing with Amazon’s products. Id. at ¶¶ 331, 332. Plaintiffs alleged that the combined algorithms compounded the effect that each had on the markets. Id. at ¶ 341.

Plaintiffs pointed to Jet.com (“Jet”), an alleged online superstore rival that would have provided consumers with 10–15% lower priced items than on Amazon. Id. at ¶ 342. In 2016, Amazon allegedly stunted Jet by removing Jet sellers from the Buy Box and deploying its product algorithm against Jet’s popular products. Id. at ¶ 343. Plaintiffs argued that Amazon’s strategy worked; Jet was required to match other online prices and was a bought a year later by Walmart. Id. at ¶ 344. Plaintiffs also argued that Zulily (“Zulily”), a potential entrant, attempted to show lower prices between its prices, Amazon’s prices, and Walmart’s prices during flash sales on steeply discounted products. Id. at ¶ 345. Amazon used similar conduct against Zulily as it did against Jet. Id. at ¶¶ 347–50. Amazon observed dwindling shoppers on Zulily, but Amazon’s Vice President of Pricing allegedly stated: “keep going . . . [e]ven though their traffic is trending down.” Id. at ¶ 350.

Amazon also allegedly used its Prime fulfillment services to force sellers to abide by its policies. Id. at ¶ 354. Amazon’s fulfillment services required sellers to maintain two different fulfillment services—one for Amazon customers and one for non-Amazon customers. Id. at ¶ 357. This allegedly raised costs for sellers and foreclosed the development of an independent fulfillment services provider. Id. Plaintiffs argued that Prime products are more easily discoverable, are brought more frequently, and triple a seller’s sales on Amazon. Id. at ¶¶ 361, 362. A former head of Amazon’s fulfillment services allegedly stated: “‘[s]ellers may not have wanted to buy fulfillment [from Amazon] but they did so in order to ‘buy increased sales’ that come with Prime eligibility.” Id. at ¶ 365. Plaintiffs argued that the combination of Prime and fulfillment services raises sellers’ costs because it requires the sellers to split inventory between Amazon customers and non-Amazon customers. Id. at ¶ 370. Amazon allegedly created a “Seller Fulfilled Prime” (“SFP”) program that allowed sellers to fulfill their own shipments as they wished. Id. at ¶ 400. However, Amazon shuttered SFP after it realized that it allowed other fulfillment services like UPS to fulfill orders. Id. at ¶ 405. Amazon allegedly knew closing SFP would harm consumers, but the plaintiffs argued that Amazon “prioritized excluding rivals and foreclosing competition.” Id. at ¶ 406.

Finally, the plaintiffs alleged that Amazon created a secretive scheme called “Project Nessie” to manipulate other online stores’ prices. Id. at ¶ 418. Amazon allegedly extracted more than a billion dollars using Project Nessie, which is an algorithm that allowed Amazon to raise prices. Id. at ¶¶ 418, 419. Plaintiffs alleged that in April 2018 alone, Amazon used Project Nessie to set prices for more than 8 million products, collectively costing approximately $194 million. Id. at ¶ 424. Plaintiffs asserted that Amazon paused Project Nessie, but that in January 2022, Doug Herrington, CEO of World Amazon Stores, “asked about turning on ‘[o]ur old friend Nessie, perhaps with some new targeting logic’ to juice profits for Amazon’s Retail arm.” Id. at ¶ 433. Plaintiffs alleged that this conduct resulted in Amazon suppressing competition and boosting its own products. Id. at ¶¶ 435–57.

Plaintiffs asserted twenty counts against Amazon. They alleged that Amazon maintained a monopoly of the online superstore and marketplace markets in violation of Section 5(a) of the Federal Trade Commission Act (“FTC Act”) and Section 2 of the Sherman Act (“Section 2”). Id. at ¶¶ 129–130. Plaintiffs also alleged unfair methods of competition through Amazon’s use of Prime and Project Nessie, in violation of Section 5(a) of the FTC Act. Id. at ¶¶ 457, 464. To establish a Section 5(a) claim, the FTC must show three elements: “[1] a representation, omission, or practice, that [2] is likely to mislead consumers acting reasonably under the circumstances, and [3], the representation, omission, or practice is material.” In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 165 (1984). A Section 2 violation requires a plaintiff to prove (1) “the possession of monopoly power” and (2) “the willful . . . maintenance of that power” through “exclusionary conduct as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” United States v. Microsoft Corp., 253 F.3d 34, 50 (D.C. Cir. 2001) (en banc) (quoting United States v. Grinnell Corp., 384 U.S. 563, 570–71 (1966)).

Plaintiffs also asserted several state law antitrust claims, which largely mirror the elements that the plaintiffs were required to prove under Section 2, but the state law claims were restricted to Amazon’s conduct within each state. Plaintiffs alleged violations of Connecticut, Maine, Maryland, Michigan, Nevada, New Jersey, New York, Oklahoma, Oregon, Pennsylvania, Rhode Island, and Wisconsin’s antitrust laws. See Am. Compl. at ¶¶ 134–152.

Amazon filed a motion to dismiss, arguing that the plaintiffs failed to allege anticompetitive conduct and anticompetitive effects. Federal Trade Commission v. Amazon.com, Inc., No. 2:23-cv-01495-JHC, 2024 WL 4448815, at *3 (W.D. Wash. Sept. 30, 2024). For the Section 2 claims, Amazon argued that its conduct was facially procompetitive, and that the plaintiffs’ efforts to obstruct Amazon’s conduct would chill competition and harm consumers. Id. at *5. However, the court found that it was improper to consider Amazon’s procompetitive justifications at the motion to dismiss stage, and it held that the plaintiffs stated a plausible claim for relief under Section 2 since Amazon’s alleged anti-discounting, fulfillment, and Prime practices plausibly impaired competition. Id. at *10.

Amazon argued that the FTC Act claims should be dismissed for the same reasons as the Section 2 claims. Id. at *11. Amazon also argued that the FTC Act claims require the court to “become an administrative policy-maker for the FTC by defining new meanings of ‘unfair’ competition.” Id. Because the court had already determined that the plaintiffs adequately stated a claim for relief under Section 2, it declined to dismiss the FTC Act claims on that basis. Id. The court also declined to dismiss the FTC Act claims on Amazon’s second basis since other courts have laid out standards by which the court could determine whether Amazon’s conduct constituted unfair competition. Id. at *13–14. For example, under E.I. du Pont de Nemours & Co. v. FTC (Ethyl), to state a claim for an “unfair method of competition,” a plaintiff must allege “evidence of anticompetitive intent or purpose.” Id. at *14. The court held that the plaintiffs adequately alleged evidence of anticompetitive intent or purpose by alleging that Amazon charged its shoppers higher prices while minimizing the chance that shoppers would catch on. Id.

The court, however, granted Amazon’s motion to dismiss on some of the state law claims, including Pennsylvania, New Jersey, Oklahoma, and Maryland, for reasons related to the specific elements of the state claims. See id. at *26. The majority of the case will nevertheless proceed.

§ 2.3.7. Federal Trade Commission v. Facebook, Inc., 581 F.Supp.3d 34 (D.D.C. 2022).

In 2021, Meta was sued in two separate lawsuits alleging its policies and acquisitions constituted conduct violative of antitrust law. One suit, FTC v. Facebook, was brought by the Federal Trade Commission (“FTC”) after a 3–2 vote in favor of filing for injunctive relief. Federal Trade Commission v. Facebook, Inc., 560 F.Supp.3d 1 (D.D.C. 2021). The other, New York v. Facebook, was brought by a contingent of forty-six states, the District of Columbia, and Guam. New York v. Facebook, Inc., 549 F.Supp.3d 6 (D.D.C. Jun. 28, 2021).

Facebook is one of the first social networking platforms that has grown—and continues to grow—to be one of the most popular businesses in the digital space. Federal Trade Commission, 560 F.Supp.3d at 6. In 2012, Facebook expanded its reach by purchasing Instagram, a popular photo-sharing app, and in 2014, it purchased WhatsApp, an app for mobile-messaging. Id. at 7–9. In addition to these acquisitions, Facebook announced a series of policies that withheld access to its application programming interface (“API”) from competitors dating back to 2011 (the “interoperability allegations”). Id. at 9. Both the FTC and the state plaintiffs alleged that Facebook’s acquisitions and policies were examples of actions taken to maintain its monopoly in the personal social networking services (“PSN services”) market in violation of Section 2 of the Sherman Act. Id. at 11. The states further alleged that Facebook violated Section 7 of the Clayton Act in its decision to purchase Instagram and WhatsApp. Id. Facebook moved to dismiss in both cases. Id.

The court in the FTC action focused on the lack of monopoly power, and the court in the states’ action focused on the lack of timeliness. To prevail on a monopoly maintenance claim, as outlined in the FTC case, a claimant must show the defendant (1) possesses monopoly power in the relevant market and (2) willfully maintains that power. Id. at 12 (citing United States v. Microsoft Corp., 253 F.3d 34, 50 (D.C. Cir. 2011)). Courts typically infer the existence of a monopoly when there exists “(1) a relevant antitrust market, in which the defendant holds (2) a dominant market share, protected by (3) barriers to the entry of rivals.” Federal Trade Commission v. Meta Platforms, Inc., No. 20-3590, 2024 WL 4772423, at *7 (D.D.C. Nov. 13, 2024) (citing Microsoft, 253 F.3d at 51).

The court narrowly accepted the FTC’s argument that the relevant market could be defined as PSN services, which are online services possessing the core functionality of maintaining relationships and sharing with friends and family. Federal Trade Commission, 560 F.Supp.3d. at 17. The court also accepted the FTC’s argument that Facebook’s services were unique and could not be substituted with other internet services such as LinkedIn, YouTube, and Netflix. Id. Though the FTC’s explanation of the relevant market was plausible, its monopoly power argument failed because it offered no evidence of Facebook’s alleged dominant market share. Id. at 18. Instead, it estimated that Facebook has maintained more than 60% of the PSN services market since 2011, with no explanation of how the FTC reached that calculation. Id. The court noted that while the FTC is not required to explain its calculations, it must provide more than a mere number. Id. at 18.

The court ended its discussion of the FTC’s monopoly maintenance claim after deciding it failed to prove Facebook’s monopoly power, and the court granted Facebook’s motion to dismiss the Complaint. Id. at 20. The court still analyzed the claim that Facebook’s API policies—which revoked access to its interface from competitors—reflected unlawful refusals to deal. It held that Facebook had a right to refuse to deal with its competitors. Id. at 24. The court relied on the same legal framework in both opinions, with heavy emphasis on the Supreme Court’s ruling in Aspen Skiing Co. v. Aspen Highlands Skiing Corp. Id. at 22–24; 472 U.S. 601 (1985). There, the Supreme Court carved an exception for the general no-duty-to-deal rule, which is determined by the following test: (1) a preexisting voluntary course of dealing between the monopolist and rival, (2) products that the defendant already sells in the existing market to other similarly situated customers, and (3) a willingness for the monopolist to forsake short-term profits to achieve its anticompetitive end. Id. at 22–24. As the court determined in both suits, Facebook did not have prior dealings with the excluded competitors—as required by Aspen Skiing—and the company took no overt acts aside from merely announcing the policies. Id. at 24–25; New York, 549 F.Supp.3d, at 27–28. The court also relied on the fact that Facebook revoked the allegedly unlawful policies in 2018 and has yet to reinstate them. Id. at 27.

The court in the states’ action emphasized the doctrine of laches. Facebook purchased Instagram in 2012 and WhatsApp in 2014, and the states’ lawsuit was not filed until 2020. Thus, the court granted Facebook’s motion to dismiss in its entirety. New York, 549 F.Supp.3d, at 49. The D.C. Circuit affirmed dismissal of the states’ lawsuit and ruled that the states are not exempt from laches in suits under the Clayton Act. See generally State of New York, et al v. Meta Platforms, Inc., 66 F.4th 288 (D.C. Cir. 2023). The court suggested a maximum four-year period for the claims seeking unwinding of mergers or else they become subject to laches. Id. at 299, 300 n.11 (“A leading antitrust treatise concludes that when a plaintiff seeks divestiture . . . the four-year time limit derived from the statute of limitations ‘should be absolute.’” (quoting 2 Areeda & Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application ¶ 320g, at 392 (5th ed. 2021)).

The FTC submitted an Amended Complaint in August 2021, again alleging unlawful monopoly maintenance in violation of Section 2 of the Sherman Act. Federal Trade Commission v. Facebook, Inc., 581 F.Supp.3d 34, 42 (D.D.C. 2022). This time, however, the FTC included two counts: Count I, which encompassed only the acquisition-based allegations, and Count II, which incorporated those allegations into the FTC’s interoperability allegations. Id. Facebook sought dismissal on the grounds that the FTC did not allege facts plausibly establishing a monopoly power or legally cognizable exclusionary conduct. Id. at 40.

With regards to Facebook’s monopoly power, the court analyzed whether the FTC adequately alleged (1) a relevant market, (2) that Facebook had a dominant share of that market, and (3) that Facebook’s dominance was protected by barriers to entry. Id. at 44.

The court had already determined in the preceding FTC action that the FTC plausibly alleged PSN services as a relevant market. Id. Facebook’s market share, however, was a point that the FDC did not sufficiently allege in its previous Complaint. Id. at 46. Thus, the FDC included in its Amended Complaint substantial allegations about Facebook’s market share, including average daily and monthly PSN services users, and users’ average time spent on PSN services, all of which exceeded 60% of the market share. Id. Finally, for barriers to entry, which was not a point addressed in the prior FTC proceeding, the FTC included in its Amended Complaint allegations of network effects and high switching costs. Id. at 50. The FTC plausibly alleged network effects through its showing that Meta users come to the platform to connect with friends and family, so as the members of the platform grow, so do the benefits to users. Id. The FTC plausibly alleged switching costs through its showing that users invest time and energy into building their pages and networks on their Meta platforms and would therefore be burdened by rebuilding from scratch on a new platform. Id. at 51. The court found these allegations to be plausible enough to survive a motion to dismiss. Id. at 52.

The court then turned to the second element of the FTC’s Section 2 claim, that Facebook willfully maintained its monopoly power. The key question here was whether the FTC plausibly alleged that Facebook engaged in such anticompetitive conduct by acquiring competitors, harming the competitive process, and harming consumers. Id. at 52. The court first focused on the allegations in Count I, which were centered on Facebook’s acquisitions. The FTC alleged that internal communications of Facebook’s leaders, including Mark Zuckerberg, demonstrate that they viewed Instagram and WhatsApp as threats to Facebook’s dominance. Id. at 54. The FTC also alleged decreased quality and privacy on Facebook since the acquisitions. Id. at 55. The court found the allegations in Count I to be plausible and denied the motion to dismiss. Id. at 57.

The court then turned to the allegations in Count II, the interoperability allegations. The FTC’s allegations in Count II focused on Facebook’s past conduct of adopting and enforcing anticompetitive policies. Id. at 58. The FTC, however, did not plead any ongoing or imminent Section 2 violations in Count II, and the FTC lacks statutory authority to seek an injunction based on long-past conduct. Id. at 58–59. Therefore, the court found issue with the plausibility of the allegations in Count II. Id. at 59. Nevertheless, the court denied the motion to dismiss Count II because the Count encompassed some of the allegations of Count I, which were already held to be plausible. Id. at 60. The court indicated that the interoperability arguments should be “sliced out at summary judgment” instead. Id.

Indeed, Facebook (“Meta”) moved for summary judgment about two years later. Federal Trade Commission v. Meta Platforms, Inc., No. 20-3590, 2024 WL 4772423 at *7 (D.D.C. Nov. 13, 2024). The FTC filed a cross-motion for partial summary judgment on Meta’s asserted procompetitive justifications for the acquisitions. Id.

The crux of the dispute surrounding the FTC’s allegation that Meta possessed monopoly power centered on whether the FTC adequately defined a relevant product market. Id. at *9. The FTC defined that market as PSN services, but Meta argued that no such market exists. Id. The court analyzed the following Brown Shoe factors to determine whether the FTC defined a proper product market: (1) the product’s peculiar characteristics and uses, (2) industry or public recognition of the submarket as a separate economic entity, (3) unique production facilities, (4) distinct customers, distinct prices, and sensitivity to price changes, and (5) specialized vendors. Id. at *10.

The court found that the FTC presented sufficient evidence that PSN services have peculiar characteristics and uses because, unlike other platforms, these services focus on friends-and-family sharing, have tools to foster building connections, and have a shared social space. Id. at *11. The court also found that the FTC presented sufficient evidence of industry and public recognition because it set forth statements from industry executives, ordinary users, and experts showing that market participants understand their products to serve a distinct demand for friends-and-family sharing. Id. at *12. Finally, the court found that the FTC presented sufficient evidence of distinct prices and sensitivity to price changes. Although Meta’s products are free to use, Meta degrades the quality of its platforms for those who use it for friends-and-family sharing by increasing advertisements and decreasing privacy. See id. at *14. The court did not address the third or fifth Brown Shoe factors. Because the FTC presented evidence that PSN services serve a demand for friends-and-family sharing, the court found that other services are not reasonable substitutes, and a reasonable factfinder could therefore find that PSN services is a relevant product market. Id. at *16.

As far as dominant market share, which is the second element of proving monopoly power, the court found sufficient the FTC’s evidence that, between 2011 and 2022, Meta had a market share ranging between 62% and 100% in the PSN services market (a range that exceeds the level typically associated with monopoly power). Id. at *19. Therefore, a reasonable factfinder could find that Meta dominated the relevant product market. Id. at *20.

Finally, for barriers to entry, which is the third and final element of proving monopoly power, the FTC presented evidence of network effects and switching costs, as well as unwillingness to invest in PSN services due to their high capital costs. Id. The court found that this was sufficient evidence of entry barriers, and that the FTC presented enough evidence of the existence of a monopoly, such that a reasonable factfinder could find in its favor at trial. Id. at *22.

The FTC was also required to present evidence that Meta engaged in anticompetitive conduct in order to invoke Section 2 of the Sherman Act. Id. at *23 (citing Microsoft, 253 F.3d at 51, 58). The court explained that there is no better conduct that fits within this term than a monopolist buying out its rivals, and such conduct raises a rebuttable presumption that the conduct is anticompetitive. Id. at *25. The court found sufficient evidence that Instagram was a competitive threat to Meta at the time of its acquisition because it was praised for its speed, reliability, and simplicity, and it was growing faster than Facebook. See id. at *29. The court found sufficient evidence that WhatsApp was a nascent competitor, or one with the potential to expand into the PSN service, at the time of its acquisition because it outperformed Facebook Messenger, especially with message notifications. Id. at *32. Therefore, a reasonable factfinder could conclude that Meta’s conduct was presumptively anticompetitive. Id. at *33.

The burden shifted to Meta to present procompetitive justifications for its acquisitions that (1) were not pretextual and (2) could not have been achieved without the acquisitions in question. See id. at *34. Meta’s procompetitive justifications for its acquisitions included 120 discrete benefits related to Instagram, WhatsApp, and Meta’s strategic position against Apple and Google. Id. at *37. Given Meta’s evidence that its platform was struggling with scaling operations to match its growth, the court found that a reasonable trier of fact could find that the justifications were not pretextual and could not have been achieved without the acquisition. See id. The court, however, was not persuaded by Meta’s justification that its acquisition of WhatsApp was part of a broader strategy to prevent Apple or Google from de-platforming Meta’s applications. Id. at *40. This justification served no purpose other than protecting Meta’s monopoly, and Meta presented no evidence to the contrary. Id.

Because the FTC presented sufficient evidence that Meta’s acquisitions of Instagram and WhatsApp were aimed at maintaining the monopoly in the PSN services market and that these acquisitions had anticompetitive effects, the court denied Meta’s motion for summary judgment. Id. The court, however, granted in part the FTC’s cross-motion for summary judgment as to the specific defense of strategic positioning against Apple and Google. Id. The case will proceed to trial.

§ 2.3.8. United States v. Live Nation Entertainment, Inc., No. 24-cv-3973 (AS), 2024 WL 4381074 (S.D.N.Y. Oct. 3, 2024).

In May 2024, the United States Department of Justice, Antitrust Division (“DOJ”), twenty-nine states, and the District of Columbia (collectively, “plaintiffs”) sued Live Nation Entertainment, Inc. (“Live Nation”) and its subsidiary, Ticketmaster L.L.C. (“Ticketmaster”), alleging violations of Sections 1 and 2 of the Sherman Act and several state laws. Plaintiffs alleged that Live Nation and Ticketmaster engaged in anticompetitive conduct through their control of music management, concert promotion, concert venues, and ticketing. See Complaint at ¶ 5, United States v. Live Nation Entertainment, Inc., No. 24-cv-3973 (AS), 2024 WL 4381074 (S.D.N.Y. Oct. 3, 2024). Plaintiffs sought, among other things, an order requiring Live Nation to divest Ticketmaster. Id. at ¶ 371(f). Plaintiffs also demanded a jury trial because they sought monetary damages for overcharges paid by government agencies. Id. at ¶ 372.

Plaintiffs defined the first relevant market as primary ticketing services, which allow venues to sell, track, and distribute tickets. Id. at ¶ 5. The primary ticketing services market also allows fans to purchase tickets. Id. at ¶ 136. Plaintiffs argued that there were no reasonable substitutes for this market because of the investment and technology required to build and maintain a primary ticketing service, and because of the unique purposes, customers, and platforms for primary ticketing services. Id. at ¶ 153. Plaintiffs defined the second relevant market as concert promotions services, which arrange and coordinate artist performances at venues. Id. at ¶ 178. Plaintiffs argued that there were no reasonable substitutes for this market because of the unique expertise of promoters. Id. at ¶ 180. Plaintiffs’ final alleged relevant market was artist use of large amphitheaters, which are a distinct type of venue. Id. at ¶ 148. Plaintiffs argued that there were no reasonable substitutes for large amphitheaters because they have unique capacity, sight line, acoustic, seating, and staging features. Id. at ¶ 193. Plaintiffs defined the relevant geographic market as the United States. Id. at ¶¶ 152, 166, 172, 181, 189, 196.

Plaintiffs set forth multiple forms of anticompetitive conduct by Live Nation and Ticketmaster, including: (1) exploiting Oak View Group, a potential competitor-turned-partner, (2) threatening financial retaliation against potential entrants, (3) acquiring competitors, (4) threatening venues that work with rivals, (5) locking concert venues into exclusive contracts, (6) preventing venues from being able to use multiple ticketers, and (7) restricting artists’ access to venues. Id. at ¶ 6.

More specifically, the plaintiffs alleged that Oak View Group recognized that it had a significant financial interest in maintaining existing Ticketmaster contracts and converting other venues to Ticketmaster. Id. at ¶ 78. Thus, by advocating for Ticketmaster over rivals, Oak View Group removed any potential competition against Ticketmaster. Id.at ¶ 79. Plaintiffs also presented evidence that Live Nation’s CEO explicitly threatened potential entrants and venues upon learning of rival promotions and potential switches to rival companies. See id. at ¶¶ 80–91. Live Nation also allegedly presented venues with a choice to use Ticketmaster and receive a significant payment for long-term exclusivity, or to use another ticketing service and risk losing access to Live Nation’s assets, including lucrative concerts. Id. at ¶ 87. Plaintiffs also alleged that Ticketmaster renewed the ticketing agreements before they expired, which lessened competitive pressure. Id. at ¶ 101. These threats and exclusive agreements, the plaintiffs alleged, meant that neither artists nor venues were free to choose a ticketing system based on what worked best for them. Id. at ¶ 97. Live Nation also had a long history of acquiring competitors, such as United Concerts, AC Entertainment, Frank Productions, National Shows 2, Red Mountain Entertainment, 313 Presents, ScoreMore Shows, and Logjam Presents. Id. at ¶¶ 120–135. Plaintiffs also alleged that Live Nation had a policy of preventing artists who used third-party promoters from using its venues. Id. at ¶ 111.

Live Nation and Ticketmaster’s anticompetitive conduct, the plaintiffs alleged, created and enhanced barriers for rivals. Id. at ¶ 61. For example, Live Nation and Ticketmaster’s power in promotions, ticketing, and venues disadvantaged rivals who did not have similar portfolios. Id. at ¶ 61. Those rivals would be required to develop sufficient data and working capital to secure business, a process that was made more difficult by Live Nation and Ticketmaster’s exclusive contracts. Id. at ¶ 61. The anticompetitive conduct also allegedly led to non-transparent, non-negotiable fees for fans, fewer choices of concerts for fans, and fewer opportunities for artists to perform. Id. at ¶ 138.

In July 2024, Live Nation and Ticketmaster filed a motion to transfer the case from the Southern District of New York to the District of Columbia (“D.C.”), arguing that a prior consent decree’s retention-of-jurisdiction provision mandated transfer, and that transfer was warranted for the convenience of the parties and in the interests of justice. United States v. Live Nation Entertainment, Inc., No. 24-cv-3973 (AS), 2024 WL 4381074, at *1 (S.D.N.Y. Oct. 3, 2024). In 2010, the DOJ and nineteen states sued Live Nation and Ticketmaster under the Clayton Act in an attempt to block their proposed merger. Id. The parties filed a consent decree that allowed Live Nation and Ticketmaster to merge, so long as they followed certain restrictions. Id. Under the consent decree, the D.C. Court retained jurisdiction “to carry out or construe th[e] Final Judgment, to modify any of its provisions, to enforce compliance, and to punish violations of its provisions.” Id. Thus, the court’s decision on the motion to transfer turned on whether the 2024 case was an effort to (1) carry out, (2) construe, (3) modify, (4) enforce, or (5) punish violations of the consent decree. Id. at *2.

Live Nation and Ticketmaster’s main argument was that this case attempted to modify the consent decree by “unwind[ing] the merger that was the entire subject of the [2010] agreement” and the “core bargain” of the negotiation. Id. That is, the consent decree allowed Live Nation and Ticketmaster to merge in the first place, so by seeking a divestiture of Ticketmaster in 2024, the plaintiffs sought to modify the consent decree. Id. The court, however, was not persuaded. There was no immunity provision or release in the consent decree, so nothing in the decree insulated Live Nation and Ticketmaster from future antitrust challenges. Id. The consent decree did not reach beyond the specific pre-merger challenge that it helped resolve. Id. Therefore, the court held that the retention-of-jurisdiction provision did not apply to this case and a transfer to D.C. was not warranted on this ground. Id. at *3.

Live Nation and Ticketmaster also argued that a transfer to D.C. would serve the convenience of the parties and the interests of justice given the D.C. Court’s experience with the 2010 case. Id. The court was not persuaded here, either. The D.C. case was never litigated, the judge who oversaw the consent decree was inactive, and transferring an already steadily moving case would be inefficient. Id. Therefore, the court denied Live Nation and Ticketmaster’s motion to transfer to D.C., and the case will continue in the Southern District of New York. Id.

§ 2.3.9. Heckman v. Live Nation Entertainment, Inc., 120 F.4th 670 (9th Cir. 2024).

In a related case, a putative class of plaintiffs sued Live Nation Entertainment, Inc. (“Live Nation”) and Ticketmaster L.L.C. (“Ticketmaster”) for violations of the Sherman Act. See Heckman v. Live Nation Entertainment, Inc., 120 F.4th 670, 676 (9th Cir. 2024). Live Nation and Ticketmaster sought to compel arbitration based on an agreement that included a delegation clause, which delegated to the arbitrator the authority to determine the validity of the arbitration agreement. Id. The District Court for the Central District of California found this clause to be procedurally and substantively unconscionable under California law. Id. at 680. The court specifically took issue with four features of the arbitration agreement: (1) the application of precedent from bellwether decisions to the claimants who had no opportunity to participate in those decisions, (2) the lack of discovery, (3) the provisions governing the selection of arbitrators, and (4) the limited right to appeal. Id. The District Court also held that the Federal Arbitration Act (“FAA”) did not preempt the application of California unconscionability law. Id. Live Nation and Ticketmaster appealed to the United States Court of Appeals for the Ninth Circuit.

The Ninth Circuit first analyzed whether the delegation clause itself was unconscionable and therefore unenforceable. Id. Under California law, to demonstrate unconscionability, a plaintiff must show procedural and substantive unconscionability. Id. at 681. When analyzing procedural unconscionability, courts focus on oppression and surprise. Id. The Ninth Circuit held that the delegation clause was oppressive because of the power imbalance between Live Nation, Ticketmaster, and consumers. Id. at 682. It also held that the delegation clause was surprising because of Live Nation and Ticketmaster’s abilities to unilaterally modify terms without notice and apply changes retroactively. Id. The rules for arbitration were also dense, convoluted, and internally contradictory. Id. at 683.

The Ninth Circuit then turned to substantive unconscionability, which pertains to the fairness of an agreement’s actual terms. Id. The Ninth Circuit analyzed the following features of the arbitration rules that were identified by the district court: (1) the application of precedent from the bellwether decisions to other claimants, (2) no right to discovery, (3) unilateral right of the arbitration company to choose arbitrators, and (4) limited rights to appeal denials of injunctive relief. See id. at 683–687. The Ninth Circuit agreed with the district court that all these features were substantively unconscionable. Id. at 684.

For the application of precedent from the bellwether decisions to other claimants, the Ninth Circuit found that it is black-letter law that binding litigants like this violates due process. Id. For the lack of discovery, the Ninth Circuit found discovery to be necessary to decide threshold issues, such as the validity of the delegation clause. Id. For the provisions governing the selection of arbitrators, Live Nation and Ticketmaster did not dispute that these provisions violated the California Arbitration Act (“CAA”), but rather argued that the CAA was preempted by the FAA. Id. at 686. The Ninth Circuit, however, disagreed, holding that the CAA is not intended to obstruct the FAA’s objectives, and that the FAA is not intended to occupy the entire field of arbitration. Id. Finally, for the limited rights to appeal, the Ninth Circuit agreed with the District Court that this feature was substantively unconscionable because only plaintiffs are likely to pursue injunctive relief, which created an unfair advantage for Live Nation and Ticketmaster. Id. at 686–87.

Therefore, the Ninth Circuit held that the delegation clause was procedurally and substantively unconscionable, and because the unconscionability permeated all aspects of the arbitration agreement, the entire agreement was unconscionable under California law. Id. at 688. The Ninth Circuit also held, as an alternate and independent ground, that the FAA does not preempt California’s unconscionability law and does not apply to the type of mass arbitration agreements in question. Id. at 689–90. The Ninth Circuit therefore affirmed the district court’s denial of Live Nation and Ticketmaster’s motion to compel arbitration. Id. at 690.

Judge VanDyke concurred in the judgment, emphasizing that he would have resolved the case by simply concluding that the FAA does not apply to Live Nation and Ticketmaster’s mass arbitration agreements. Id.

The arbitrability of antitrust claims continues to be construed narrowly and this decision is consistent with that trend and a reminder of the importance of drafting fair and reasonable arbitration provisions.

§ 2.3.10. Epic Games, Inc. v. Google LLC, No. 20-05671, 2024 WL 4438249 (N.D. Cal. Oct. 7, 2024), appeal filed, No. 24-6256 (9th Cir. Oct. 15, 2024).

On December 11, 2023, several years after the district court’s ruling in Epic Games v. Apple, Epic Games (“Epic”) achieved against Google what it could not against Apple: a complete victory on its multiple antitrust claims, including its Section 2 monopolization claims. Verdict Form, Epic Games, Inc. v. Google LLC, 20-05671 (N.D. Cal. Dec. 11, 2023), ECF No. 606. After more than fifteen days of trial including the testimony by 45 witnesses, a jury found in favor of Epic on: (1) monopolization under Section 2 of the Sherman Act; 15 U.S.C. § 2 (2) unlawful restraint of trade under Section 1 of the Sherman Act 15 U.S.C. § 1 and the California Cartwright Act; Cal. Bus. & Prof. Code §§ 16700 et seq. and (3) tying under Section 1 of the Sherman Act and the Cartwright Act. The plaintiffs’ California Unfair Competition Law and appropriate remedy were decided by the court in October 2024.

In Epic Games v. Google, Epic alleges that Google imposed illegal restraints on app distribution by restricting the downloading of apps from sources other than its own digital storefront, the Google Play Store. The complaint further claims that Google has maintained an in‑app payment monopoly and engaged in unlawful tying by conditioning developers’ access to the Play Store on the exclusive use of Google’s own in‑app payment tools for digital content. Allegedly, Google unlawfully monopolized both the Android app distribution market and in-app billing services on Android devices market. See generally Second Amended Complaint, Epic Games, Inc. v. Google LLC, 3:20-cv-05671 (N.D. Cal. Nov. 17, 2022), ECF No. 341. Epic’s complaint sought purely injunctive relief to permit alternative options for apps to be downloaded and for payments to be handled.

The difference in outcome in Epic’s cases against Apple and Google may be attributable to several factors, including that the case against Google was decided by a jury rather than a judge, and, notably, that the jury adopted Epic’s narrower definition of the relevant market. Sean Hollister, “The Epic question: how Google lost when Apple won / How is Google running an illegal monopoly with the Play store—while Apple’s App Store is in the clear?” The Verge (Dec. 16, 2023). Specifically, the verdict relies on two product markets: (1) Android app distribution market and (2) Android in-app billing services for digital goods and services transactions market. Verdict Form, Epic Games, Inc. v. Google LLC, 20-05671 (N.D. Cal. Dec. 11, 2023), ECF No. 606, at 4. These markets are narrower than the mobile-gaming transactions market that the district court found in the Apple case and thus make it easier for a fact-finder to find that Google possessed monopoly power in those markets.

Google is not seeking monetary damages. Second Amended Complaint, Epic Games, Inc. v. Google LLC, 20-05671 (N.D. Cal. Nov. 17, 2022), ECF No. 341, at 13. The court, therefore, considered only the requested injunction. Under Section 16 of the Clayton Act, “[a]ny person, firm, corporation, or association” is entitled to “injunctive relief . . . against threatened loss or damage by a violation of the antitrust laws, . . . , when and under the same conditions and principles as injunctive relief against threatened conduct that will cause loss or damage is granted by courts of equity.” A plaintiff “‘need only demonstrate a significant threat of injury from an impending violation of the antitrust laws or from a contemporary violation likely to continue or recur.’” Epic Games, Inc. v. Google LLC, 20-05671, 2024 WL 4438249, at *3 (N.D. Cal. Oct. 7, 2024) (quoting Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 130 (1969)).

The court weighed in on the ongoing debate of whether new laws are necessary to address antitrust violations in a tech-based economy and emphasized that the existing antitrust laws are sufficient, despite their age. “[I]njunctive relief is meant to restore economic freedom in the relevant markets and break the shackles of anticompetitive conduct.” Id. The court explained that it had broad power to restrain acts which are of the same type as unlawful acts committed and that the relief granted must be effective to redress the violations and to restore competition. Moreover, court stated that it is not limited to a remedy that simply prohibits the specific conduct found to be anticompetitive and that it has discretion to fashion a remedy directed to the effect of the anticompetitive conduct. Id. (citing Mass. v. Microsoft Corp., 373 F.3d 1199, 1209 (D.C. Cir. 2004)). In sum, the court described its responsibility as making a reasonable judgment on the means needed to restore and encourage the competition adversely affected by Google’s anticompetitive conduct.

First, the court enjoined Google from sharing Play Store revenues with current or potential Android app store rivals, and from imposing contractual terms that condition benefits on promises intended to guarantee Play Store exclusivity for a period of three years. The court described these provisions as “designed to level the playing field for the entry and growth of rivals, without burdening Google excessively.” Id. at *5.

Second, the court will require that Google give rival app store developers access to the catalog of Play Store apps for three years, which the court deemed a sufficient time period to give rival stores a fair opportunity to establish themselves. The court determined that access to the Play Store apps was necessary to remediate the anticompetitive “consequences” of Google’s illegal conduct. “The consequences to be remediated are intertwined with the network effects of Google’s dominant position in the relevant markets.” Id. at 5–6. The court described “network effects” here as the greater the number of developers, the greater the number of users, and the greater the number of users, the greater the number of developers. Google unfairly enhanced the network effects in a way that would not have happened but for its anticompetitive conduct.

Although the court acknowledged that there are potential security and technical risks involved in making third-party apps available, including rival app stores, it prohibited Google blocking rival app stores’ presence to lower the barriers for rival app stores to get onto users’ phones. Id. at 7. The court viewed its mandate allowing other app stores to be distributed through the Play Store for three years as a “modest step” to correct the consequence of Google’s unlawful conduct preventing rival stores from reaching users and developers. Id.

To the extent technical issues about security and the like come up, the injunction established a “Technical Committee.” The committee will be made up of one person selected by each side, plus a third person to be selected by the parties’ two nominees, to resolve the issue in the first instance. Id. at 9.

Google filed an appeal in the U.S. Court of Appeals for the Ninth Circuit.

§ 2.3.11. Sidibe v. Sutter Health, 103 F.4th 675 (9th Cir. 2024).

A divided panel of the U.S. Court of Appeals for the Ninth Circuit reversed a jury verdict in favor of the defendant healthcare system in one of the most followed antitrust cases. The majority’s decision provides support for admission of intent evidence when analyzing a restraint under the rule of reason. See Sidibe v. Sutter Health, 103 F.4th 675 (9th Cir. 2024).

The plaintiffs, a class of individuals and businesses, were insured by health plans that contracted with the defendant, Sutter Health. Id. at 680. Plaintiffs alleged that the defendant charged supracompetitive rates to their health plans, which in turn were passed on to the plaintiffs in the form of higher premiums. Id. Plaintiffs alleged that Sutter Health tied the sale of services across certain inpatient hospitals and imposed contract terms that prevented health plans from steering patients towards lower-priced providers. Id. at 689–90. Plaintiffs, indirect purchasers, brought their claims under the Sherman Act, California’s Cartwright Act, and California’s Unfair Competition Law. Id.

The trial court granted Sutter Health’s motions in limine to exclude evidence of its earlier business practices and related litigation against it. Id. at 681–82. The lower court also adopted Sutter Health’s proposed jury instructions for the Cartwright Act claim, which instructed the jury to consider only the “effect” of the defendant’s conduct on competition, not the “purpose.” Id. at 682. After a four-week trial, the jury returned a verdict in favor of Sutter Health on both the tying and unreasonable course of conduct claims. Id. Plaintiffs appealed to the Ninth Circuit. Id.

On appeal, plaintiffs first argued that the district court erred by omitting “purpose” from the jury instructions for the Cartwright Act claim. They contended that anticompetitive purpose is a relevant factor in evaluating whether Sutter Health had engaged in an unreasonable anticompetitive course of conduct under the Cartwright Act. See id. at 683. Sutter Health argued that an anticompetitive purpose alone is not sufficient to prove a violation. Id. at 687. The Ninth Circuit agreed with the plaintiffs that anticompetitive purpose is a relevant factor under the Cartwright Act and held that the district court erred. Id. at 685–88.

Next, the plaintiffs argued that the district court abused its discretion by excluding evidence that they contended was crucial to proving intent, including evidence from years before the alleged damages period. Id. at 688. That evidence included internal documents reflecting Sutter Health’s intent to force health plans to pay above-market rates, its implementation of systemwide contracting, anticompetitive contract terms between 2001 and 2005, the health plans’ objections to the challenged contract terms, and prior lawsuits to block potential mergers. See id. at 694–98. The Ninth Circuit agreed with the plaintiffs, determining that the evidence was relevant and should have been admitted by the trial court. Id. at 703.

According to the majority opinion, plaintiffs’ antitrust injury theory was pivotal to its decisions regarding the exclusion of evidence predating the damages period and the relevance of Sutter Health’s intent. Specifically, the majority described defendant’s shift around 2000 from negotiating health plan contracts on a hospital-by-hospital basis to a systemwide basis and found that plaintiffs’ main contention was that Sutter Health tried to use its market power in the regions where it was an important provider to get higher anticompetitive rates in more competitive regions. Further, the majority noted that plaintiffs claim it was Sutter Health’s systemwide strategy that gave it the leverage to win the anticompetitive contracting terms they were challenging. The importance of the reasons for and original shift to a systemwide health plan negotiation strategy, thus, was pivotal to the majority.

Accordingly, the majority agreed with plaintiffs’ arguments that the combined effect of the erroneous jury instructions and the exclusion of evidence was prejudicial, warranting a new trial. Id. at 705–06.

Judge Bumatay dissented, finding that the trial court acted within its discretion with the jury instructions and exclusion of evidence. Id. at 707–08. “So broad is the district court’s discretion in this context that, to my knowledge, no federal circuit court has ordered a retrial based on the setting of a reasonable evidence cutoff date,” he said. “We are now the first.” Id. at 707. Judge Bumatay concluded that anticompetitive purpose is not a required element under the Cartwright Act, and that the excluded evidence was cumulative and would confuse the jury. Id. at 720–21. Judge Bumatay believed that any error in the jury instructions or exclusion of evidence was harmless because it would not have had any impact on the jury’s considerations of whether Sutter Health engaged in tying or anticompetitive contracting practices. Id. at 720.

§ 2.4. Clayton Act, Section 7—Mergers

§ 2.4.1. Overview

Section 7 of the Clayton Act prohibits acquisitions where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” 15 U.S.C. § 18. This forward-looking language has been interpreted to mean “that a section 7 violation is proven upon a showing of reasonable probability of anticompetitive effect.” FTC v. Warner Commc’ns Inc., 742 F.2d 1156, 1160 (9th Cir. 1984). The FTC or DOJ may obtain an injunction of a merger they fear violates the Clayton Act if they can persuade a court that they will succeed on the merits and the court then balances the equities and finds an injunction is warranted. Id.

Both the agencies and parties subject to regulation under the Clayton Act pushed the boundaries of the law with novel arguments in 2024, including resurrection of 1960s case law, very narrow market definitions, and adoption of lower thresholds for certain presumptions. With significant overhauls in the 2023 Merger Guidelines that came into effect on December 18, 2023, and the agencies’ updated HSR premerger form in 2025, it is likely this trend will continue into next year as well. See U.S. Department of Justice & Federal Trade Commission, Merger Guidelines (2023); Premerger Notification; Reporting and Waiting Period Requirements, 88 Fed. Reg. 42178 (June 29, 2023) (to be codified at 16 C.F.R. 801 and 16 C.F.R. 803).

§ 2.4.2. Federal Trade Commission v. Kroger Co., No. 3:24-cv-00347-AN, 2024 WL 5053016 (Or. Dec. 10, 2024) and Washington v. Kroger Co., No. 24-2-00977-9 SEA (Wash. Sup. King Cty. Dec. 10, 2024).

Within hours of each other, an Oregon federal district court, Federal Trade Commission v. Kroger Co., No. 3:24-cv-00347-AN, 2024 U.S. Dist. LEXIS 223077 (Or. Dec. 10, 2024) [hereinafter “Oregon case”], followed by a Washington state court, Findings of Fact & Conclusions of Law, State v. Kroger Co., No. 24-2-00977-9 SEA (Wash. Sup. King Cty. Dec. 10, 2024) [hereinafter “Washington case”], enjoined the $24.6 billion merger of the Kroger and Albertsons grocery chains. The Oregon court adopted the controversial 2023 Merger Guidelines’ market concentration presumption and largely accepted the Federal Trade Commission’s (FTC) and its expert’s arguments for a narrow grocery market. Oregon case, at *16. In a loss for the FTC, the Oregon court declined to find that the proposed transaction was likely to substantially harm competition in the labor market alleged. Oregon case, at *38

The Washington court similarly relied on structural presumptions based on market concentration calculations, though it did not expressly adopt or reject the 2023 Merger Guidelines. Washington case, at 108–09. The Washington attorney general (AG) did not assert harm to any labor market, and accordingly, that court did not address the proposed transaction’s impact on labor.

While the decisions are notable for their narrow market definition limited to traditional grocery stores, they are most noteworthy for their embrace of a post-merger market share as low as 30% as “unacceptable” or a “threat,” Oregon case, at *15; Washington case, at 108, the Oregon court’s express acceptance of the 2023 Merger Guidelines’ market concentration presumption, Oregon case, at *16, and the Oregon court’s rejection of the FTC’s labor market harm theory because of the lack of the type of economic evidence used in the evaluation of traditional sell-side markets. Oregon case, at *38. Also potentially problematic were the courts’ skeptical approaches to the merging parties’ proposed divestiture package and buyer.

Market One: Traditional Grocery Stores

Both courts held the enforcement agencies established their prima facie case that the Kroger/Albertsons merger would substantially lessen competition or tend to create a monopoly in the submarket limited to traditional grocery stores. Oregon case, at *111; Washington case, at 108.

The courts defined the traditional grocery submarket as stores with a large footprint, a large number of grocery products, and a large number of services like deli and gas—essentially a one-stop shop. Oregon case, at *11; Washington case, at 3. Excluded from the market were value stores, which have low prices and limited services and SKUs; club stores, which have a membership model, larger size products, and limited service and SKUs; dollar stores, which are generally smaller and lack fresh foods, service, and many SKUs; and natural, gourmet or limited assortment stores, which are generally smaller and focus on differentiated and organic brands. Oregon case, at *11–12; Washington case, at 2. Embracing the 2023 Merger Guidelines’ approach, the courts applied the 1962 Brown Shoe Co. v. United States factors. Oregon case, at *12; Washington case, at 100. According to the two courts, the fact that certain retailers may draw some customers away from and that they may compete in some sense with the merging parties does not suggest that the retailers should be in the same relevant market because those retailers also differ generally in terms of price, customers preferences, and format. Oregon case, at *11–12; Washington case, at 2.

The courts held that the enforcement agencies met their prima facie burden of showing the merger would substantially lessen competition. Oregon case, at *17; Washington case, at 108. The courts sided with the agencies’ experts and methods and found unpersuasive the defendant experts’ critiques. Oregon case, at *19–20; Washington case, at 27–37. The Oregon court expressly accepted the 2023 Merger Guidelines’ market concentration thresholds for triggering a presumption of illegality, while the Washington court remained uncommitted because it found that the presumption applied under either the 2010 or 2023 guidelines. Oregon case, at *16; Washington case, at 108. Both courts relied on the 1963 Philadelphia National Bank case’s 30% market share as a competitive threat. Oregon case, at *15; Washington case, at 108.

The courts viewed Kroger and Albertsons as particularly close competitors to each other based largely on their internal documents and rejected their rebuttal arguments. Oregon case, at *18–20; Washington case, at 41–42. For example, the courts were not persuaded that the merger would (1) allow the retailers to better compete against larger competitors like Wal-Mart, Oregon case, at *19–20; Washington case, at 97, or (2) generate substantial efficiencies that would be passed on to consumers, Oregon case, at *21–24; Washington case, at 116. Both courts rigorously reviewed and found the proposed divestitures inadequate to restore the competition that would be lost, accepting the agencies’ arguments that the selected buyer was not sufficiently experienced or prepared. Oregon case, at *28–30; Washington case, at 112.

Therefore, the courts held that the FTC and Washington AG were likely to succeed on the merits and granted the injunction. Oregon case, at *30; Washington case, at 121.

Market Two: Union Grocery Store Labor

The Oregon court rejected the FTC’s standalone argument that an injunction should be issued based on harm in the union grocery store labor market. Oregon case, at *38.

Unlike the Tapestry/Capri court, which declined to reach the labor market arguments in connection with that transaction, the Oregon court carefully reviewed the agency’s labor market theory. Oregon case, at *36–37. Although the court, in dicta, was willing to accept a labor market limited to only unionized grocery workers, in the end it rejected the FTC’s request for an injunction because the agency was unable to provide sufficient economic evidence of the type used in the sell-side grocery market. Oregon case, at *37.

Although the parties have since abandoned the proposed transaction, with Albertsons suing Kroger in Delaware Chancery Court, the Oregon and Washington courts’ decisions are a significant win for the Biden administration, at a minimum, with respect to its approach to defining the narrowest market possible and the burden of establishing an appropriate divestiture remedy. When considered along with the Tapestry/Capri court’s embrace of the 2023 Merger Guidelines’ market concentration presumptions, there is an increased risk of future courts applying the 2023 standard. And while the court ultimately did not grant an injunction on the basis of a labor theory, the Oregon court’s labor market discussion confirms the concerns raised by commentors regarding the 2023 Merger Guidelines’ emphasis on the theory.

§ 2.4.3. Federal Trade Commission v. Tapestry, Inc., No. 1:24-cv-03109 (JLR), 2024 WL 4647809 (S.D.N.Y. Nov. 1, 2024).

A New York federal court’s recent decision to enjoin the merger of two fashion companies gave the FTC and the 2023 Merger Guidelines a boost. Since the issuance of the draft Merger Guidelines in July 2023, commenters and practitioners have asked whether the courts will accept the more pro-enforcement and interventionist guidance, particularly given the fact that the FTC had no sitting Republican commissioners at the time the draft guidance was issued. Court rulings like the following provide counselors and merging parties with some insight into whether and how the 2023 Merger Guidelines should be taken into account in transaction-related risk assessments.

Earlier this year, the Commission voted unanimously (5–0) to challenge Tapestry, Inc.’s proposed $8.5 billion acquisition of Capri Holdings. Federal Trade Commission v. Tapestry, Inc., No. 1:24-cv-03109 (JLR), 2024 WL 4647809, at *2 (S.D.N.Y. Nov. 1, 2024). According to the FTC’s Complaint, the parties “compete on everything from clothing to eyewear to shoes” but compete “most fiercely” and have “eye-popping market shares” in accessible luxury handbags. Complaint at ¶ 2, Federal Trade Commission v. Tapestry, Inc., No. 1:24-cv-03109 (JLR), 2024 WL 4647809 (S.D.N.Y. Nov. 1, 2024). Accessible luxury handbags are well-built and made largely of leather, unlike mass-market handbags, and are affordable, unlike luxury handbags. Id. at ¶¶ 33–34.

In addition to alleging a narrow product market, the FTC’s Complaint was noteworthy for its repeated citation to Guideline 8 of the 2023 Merger Guidelines for the proposition that “a firm that engages in an anticompetitive pattern or strategy of multiple acquisitions in the same or related business lines may violation Section 7” of the Clayton Act. Id. at ¶ 71. The agency alleged that Tapestry, Inc., having previously acquired two other significant handbag brands in 2015 and 2017, is “engaged in an anticompetitive pattern and strategy of acquisitions in the ‘accessible luxury’ market and intends to continue this pattern and strategy.” Id. at ¶ 72.

Serial acquisitions was not the only theory that the FTC claimed was relevant to the proposed transaction. Specifically, the FTC also alleged that Tapestry, Inc.’s acquisition of Capri Holdings would substantially harm competition in the labor market because it would eliminate the incentives for the two companies to compete for employees, thereby limiting wages and benefits. Id. at ¶ 57.

Although in the past the agencies could and did challenge transactions based on niche market definitions, including premium fountain pens and “super premium ice cream,” the 2023 Merger Guidelines articulated a very narrow approach to relevant market definitions and allowed the agencies to ignore the impact of “significant substitutes” that may not fit within the narrowly defined relevant markets. U.S. Dep’t of Justice & Fed. Trade Comm’n, Merger Guidelines (2023). The Tapestry, Inc./Capri Holdings court’s decision turned entirely on acceptance of the FTC’s niche relevant product market for “accessible luxury handbags,” despite the existence of significant substitutes both at lower and higher price points.

The court’s analysis rested on the nature of the competition between the parties, the product market definition, the concentration of the market and the parties’ alleged market shares. The “central dispute” was the FTC’s claim that, within a broader market of over 150 alleged handbag brands, there are three distinct submarkets—“mass market,” “accessible luxury,” and “true luxury”—and that mass-market handbags and luxury handbags are not reasonably interchangeable with accessible-luxury handbags and therefore are not part of the relevant product market. Tapestry, 2024 WL 4647809, at *10.

The court recognized that accessible luxury handbags function similarly to mass market and luxury handbags: “One can carry a wallet, a phone, or a personal item in a Trader Joe’s tote bag just as effectively as in an Hermès Birkin.” Id. The court noted, however, that even when two products are functionally fungible, consumers may not view them as reasonably interchangeable. Id. The court also concluded that brands play a role in consumers’ selection of which handbag to purchase. Id. at *11.

The court also examined the premise that higher-quality, higher-priced products may constitute a separate market than lower-quality, lower-priced products. Id. It found, among other things, the following distinguishing factors:

• The materials and craftsmanship commonly used in accessible luxury handbags compared to mass market handbags. Id. at *12.
• Manufacturing location distinguishes accessible luxury handbags from luxury handbags. Id. at *13.
  • Accessible luxury brands outsource almost all manufacturing to third parties in Southeast Asia. Id.
  • Most luxury brands are made in European countries such as France and Italy, with little (if any) manufacturing presence in Asia. Id. at *14.
• Price and pricing method differences between mass market, accessible luxury, and luxury brands. Id. at *16.
  • Accessible luxury handbags have an entry price point of approximately $100 and rarely approach or exceed $1,000 and heavily rely on discounts and other promotions. Id.
  • Mass market handbags generally are priced below $100. Id. at *17.
  • Luxury brands generally are priced over $1,000 and discount less frequently. Id. at *19.

The Tapestry, Inc./Capri Holdings court noted that, even if alternative submarkets exist or if there are broader markets that might exist, the viability of such additional markets does not render the one identified by the FTC inappropriate. Id. at *39 (quoting United States v. Bertelsmann SE & Co. KGaA, 646 F.Supp.3d 1, 28 (D.D.C. 2022)).

Although the court acknowledged that the distinguishing factors above, alleged by the FTC, do not apply consistently to the products at issue, the court found that the factors still weigh in favor of a separate mid-tier or accessible luxury market. Id. at *13. The court also discounted the importance of consumer preference with respect to some factors. See id. at *15.

Perhaps most importantly, the court found the evidence of head-to-head competition between the parties compelling. Id. at *66. Because the court found the competition between the parties on pricing, discounting, and marketing efforts compelling, the court determined that it need not reach the FTC’s arguments that the parties also compete regarding handbag design, brick-and-mortar presence, and sustainability efforts. Id. at *67 n. 51.

Generally, the court found the FTC’s expert analysis more compelling than that of the merging parties’ expert. For example, the court accepted the FTC’s expert’s inclusion of wholesale prices along with retail prices when defining a market based on price, thereby rejecting the defendants’ approach. Id. at *42 n. 37. The agency’s expert calculated that the post-merger market concentration would be 3,646 points, with a merger-induced change in concentration of 1,449 points. Id. at *39. Under the Merger Guidelines, the post-merger market concentration exceeded the highly concentrated range of 1,800 points and the change in market concentration exceeded the 100 points necessary for the FTC to assert the structural presumption that the proposed transaction would substantially lessen competition. Id. The FTC estimated that the post-merger market share of the parties would be 59%. Id. at *38.

The Tapestry, Inc./Capri Holdings challenge appears to support the agencies’ pro-enforcement policy and is interesting for several reasons. The court accepted the 2023 Merger Guidelines’ lower market concentration for triggering a presumption that the transaction will substantially lessen competition or tend to create a monopoly. The current nature of the competition between the parties should not be underestimated. Even if other competitors are also important, if the parties’ internal documents and external statements arguably focus on each other, the potential for loss of competition and the parties’ risks will likely be amplified. Niche submarkets within broad markets, including those with many competitors, will not get a pass from the agencies.

§ 2.4.4. Federal Trade Commission v. IQVIA Holdings, Inc., 710 F.Supp.3d 329 (S.D.N.Y. 2024).

On January 8, 2024, the U.S. District Court for the Southern District of New York issued an order preliminarily enjoining the proposed merger of two healthcare programmatic advertisers, IQVIA Holdings, Inc., and Propel Media, Inc., pending an in-house administrative proceeding. Federal Trade Commission v. IQVIA Holdings, Inc., 710 F.Supp.3d 329 (S.D.N.Y. 2024). The parties abandoned their merger attempt shortly after the preliminary injunction was issued.

The Federal Trade Commission (“FTC”) filed this action in July 2023 after a 3–0 vote in favor of blocking IQVIA’s proposed acquisition of Propel and its subsidiary, DeepIntent. The vote was technically unanimous, as there were only three sitting commissioners at the time; however, it was not bipartisan, because all three voters were Democratic commissioners. Id. The court issued an opinion on October 31, 2023, granting the FTC’s motion to strike several constitutional and equitable defenses raised in the defendants’ answers. IQVIA, 710 F.Supp.3d at 346. Litigation proceeded quickly throughout the remainder of 2024, with the court hearing closing arguments in early December. Id. at 347.

In its complaint, FTC alleged that the merger between IQVIA and Propel would violate Section 7 Clayton Act and Section 5 of the FTC Act by “substantially lessening competition in the field of programmatic advertising to health care professionals” (“HCPs”). IQVIA, 710 F.Supp.3d at 340. IQVIA and Propel own two programmatic advertisers, called Lasso and DeepIntent, respectively. Lasso and DeepIntent are two of the three preeminent players in the burgeoning HCP programmatic advertising industry. Id. at 340 (These two entities and their rival, PulsePoint, have been referred to as the “Big 3” in IQVIA’s internal business records.) “The vigorous competition among these three firms through the present day has not only resulted in lower prices, according to the FTC, but has also driven technological innovation in the field.” Id.

In determining whether the FTC is entitled to a preliminary injunction, courts follow a two-step inquiry which “asks (1) whether the FTC has shown a likelihood of ultimate success on the merits in the administrative proceeding, and (2) whether the equities weigh in favor of an injunction.” Id. at 347. The parties disagreed as to what exactly is required for the FTC to demonstrate “a likelihood of ultimate success.” Id. While the FTC contended that it need only show “a fair and tenable chance of ultimate success on the merits,” defendants argued that the FTC must go further and present evidence that “raise[s] questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance and ultimately by the Court of Appeals.” Id. Ultimately, the court held at “there is no meaningful difference between the two standards,” applying a relatively low bar to FTC’s preliminary injunction argument. Id. at 348.

The FTC based its claims on both horizontal and vertical theories of harm. It argued that a horizontal merger between IQVIA and Propel would eliminate the beneficial competition between Lasso and DeepIntent and enhance concentration of the HCP programmatic advertising market. Regarding its vertical theory of harm, the FTC claim that IQVIA is “a provider of essential data for HCP programmatic advertising.” Id. This vertical theory asserted that allowing the merger to be finalized would enable IQVIA to prevent other industry participants from accessing IQVIA’s data, a key element of HCP programmatic advertising. Id. at 352.

The defendants challenged both theories on several grounds. Foremost, they argued that the FTC defined the market for HCP programmatic advertising too narrowly, due to the availability of alternative advertising channels such as social media and endemic websites. Id. at 351. Even within that proposed market, the defendant companies argued that “competition [would] remain vibrant post-merger in what they characterize as a dynamic and rapidly evolving industry.” Id. Responding to the vertical theory specifically, they claimed that IQVIA has neither the ability nor the incentive to prevent other companies from accessing its data.

The court disagreed, however, holding that the FTC was likely to succeed on the merits of its horizontal challenge. Id. To do so, the court noted that the Commission was required to (1) define a relevant market and (2) show that the merger’s effect on that market would likely be anticompetitive.

All parties agreed to one component of market definition—that the geographic market is worldwide. However, they “forcefully dispute[d]” the relevant product market’s scope. Id. A relevant product market is defined by “the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.” Id. The FTC argued that the relevant product market is HCP programmatic advertising, which it defines as “an automated process for digital advertising that facilitates an auction process in microseconds across many digital advertising spaces.” Id. This method of advertising is distinct and “not reasonably interchangeable” with any other form of digital marketing, according to the Commission, and thus should not include channels like social media or endemic websites. Id. According to the FTC, other advertising channels do not offer the same functionality as HCP programmatic advertising and, thus, are not significant competitive restraints. Id. at 353. The defendants, on the other hand, claimed that the relevant market should be defined far more broadly. They argued that social media platforms and endemic websites can easily offer programmatic advertising to HCPs and are thus reasonable substitutes that belong in the relevant market definition. Customers, defendants claimed, could simply respond to any post-merger price increase by sending their business to alternative advertising channels. Id. Both sides offered their own economic experts to support their positions on the appropriate relevant market definition. Id. at 354.

Ultimately, the court accepted the FTC’s narrow market definition. Id. It held that alternative advertising channels like social media and endemic websites are not reasonably interchangeable with HCP programmatic advertising because the latter “offers something meaningfully different than what is provided by those alternative channels.” Id. In making this decision, the court utilized the factors set forth by the U.S. Supreme Court in Brown Shoe Co., Inc. v. United States, 370 U.S. 294 (1962), including “industry or public recognition of the submarket as a separate economic entity, the product’s peculiar characteristics and uses, unique productions facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.” IQVIA, 710 F.Supp.3d at 354. The court noted that the first two Brown Shoe factors, distinct characteristics and industry recognition, were the “most illuminating” to the matter at hand. Id. at 355.

The FTC’s “distinct characteristics” argument was extensive. It claimed that HCP programmatic advertising gives customers “unparalleled inventory access, transparency, efficiency, and control.” Id. Compared to social media, the FTC said, programmatic advertising provides customers with a much broader reach for their product, rather than just the users and data within the walls of a social media platform. Id. Likewise, advertising on endemic websites limits customers to the fixed limits and inventory on each specific website, rather than the access across myriad websites that programmatic advertising offers. Id. Several expert witnesses supported the FTC’s position, arguing that advertising dollars stretch much further with programmatic advertising than with social media or endemic websites, citing the “walled garden” confines of those platforms. Id. at 357–58.

The defendants offered witnesses who claimed they regularly shift money around to various advertising platforms, and that they would simply take their business elsewhere if the proposed merger resulted in raised prices in programmatic advertising. Id. at 358. However, the court held that the mere willingness or habit of shifting advertising dollars across different platforms fails to establish that those alternative channels are adequate substitutes for the unique features of programmatic advertising. Id. Rather, it noted that “it is hard to see how moving away from programmatic to social or endemic would not result in at least some sacrifice in services.” Id. at 359. While the parties argued heavily about whether or not Google sufficed as a competitive constraint, the court was ultimately persuaded by the FTC’s witnesses who testified that the tech giant participates only minimally in the HCP advertising space. Id. at 361.

Regarding industry recognition, the FTC argued that industry participants recognize HCP programmatic advertising as distinct. Id. at 362. Several witnesses testified that companies often have entirely separate budgets for programmatic advertising and social media or endemic websites. Id. The court also found documents from the ordinary course of defendants’ business indicative of distinct market for programmatic advertising. Id. at 363. Several documents offered as evidence referred to only three main competitors, including DeepIntent and Lasso, in the programmatic advertising market. Id.

The defendants criticized the FTC’s reliance on ordinary course documents, arguing that many of them were outdated and often include “anecdotal speculation.” Id. They further argued that any indication of market dominance in those documents should be viewed as laymen’s comments, rather than evidence to define an antitrust market. Id. at 364. While the court agreed that mere references to a “market” in a business’s internal documents “are not themselves dispositive in delineating the boundaries of the relevant antitrust market,” courts have repeatedly held that such documents “can and should play a role in analyzing competitive dynamics and evaluating whether certain products qualify as reasonable substitutes that must be included in the market.” Id. Defendants also pointed to evidence that many companies compete for bites of healthcare and pharmaceutical industry advertising budgets.

Ultimately, the court agreed with the FTC on this point. It held that “the fact that many companies are competing in a broad market for advertising dollars does not prove that the FTC’s proposed market here is unduly narrow.” Id. at 365. Rather, courts assessing antitrust challenges must focus on “the narrowest market within which the defendant companies compete that qualifies as a relevant product market,” which does not include social media channels or endemic websites in this case. Id. at 366. “In this case, there is undeniably a broader market for digital healthcare advertising in which programmatic, social media, and endemic websites all participate. But ‘the viability of such additional markets does not render the one identified by the government unusable.’” Id. at 368 (quoting United States v. Bertelsmann SE & Co., 646 F. Supp. 3d 1, 28 (D.D.C. 2022)).

With the relevant market issue settled, the court then turned to the second step of the FTC’s injunction hurdle: whether the proposed merger’s effect on the market would likely be anticompetitive. The FTC relied on two arguments to assert that IQVIA’s acquisition of Propel and its advertiser, DeepIntent. Id. at 377. First, the Commission “argue[d] that the merged firm’s market share would exceed the 30% threshold, first set out by the U.S. Supreme Court in United States v. Philadelphia National Bank 374 U.S. 321 (1963) in 1963, that triggers a presumption of anticompetitive effects.” IQVIA, 710 F.Supp.3d at 377. It claimed the HHI also supported a presumption of anticompetitive effects. Second, the FTC argued that merger would substantially eliminate competition between DeepIntent and Lasso (IQVIA’s programmatic advertiser). Id. Despite vigorous opposition from the defendants, the court agreed with the FTC. “The FTC’s market share and HHI calculations . . . establish a presumption that the proposed acquisition will harm competition in the market for HCP programmatic advertising. And that presumption is reinforced by ample evidence that the transaction would eliminate substantial head-to-head competition between DeepIntent and Lasso.” Id.

IQVIA and Propel argued that the 30% threshold from Philadelphia National Bank has been repudiated, and that the FTC’s calculations were based on significant errors. Id. at 378. They claimed that the FTC’s Merger Guidelines make no mention of the 30% threshold and that it is an arbitrary number. Id. The court, though, noted several decisions from the Second Circuit and other courts since Philadelphia National Bank was issued that continue to support that opinion’s 30% threshold holding to this day, promptly setting aside the defendants’ argument that it is invalid. Id. at 379 The FTC’s expert testified that the merger would result in IQVIA controlling 46% of the HCP programmatic advertising market, while the defendants’ expert claimed it would be 30.6%. Id. Because of the court’s support of the 30% threshold, the post-merger market share would trigger a presumption of anticompetitive effects regardless of which side’s expert is correct.

While the court noted that this high market concentration would be sufficient for the FTC to state its prima facie case, it also discussed the Commission’s extensive evidence of how the proposed merger would eliminate head-to-head competition between DeepIntent and Lasso. Id. at 382 It noted that courts often agree that elimination of direct competition between merging parties can bolster a conclusion that the merger will have anticompetitive effects. Ordinary course documents and witness testimony are frequently relied upon to illustrate whether two parties view one another as strong competition, and that was no different in this case. Id. at 383. “Time and again, defendants’ own records revealed evidence of fierce competition between DeepIntent and Lasso. For instance, DeepIntent documents repeatedly refer to Lasso as a significant competitor.” Id. (citing internal documents in which DeepIntent executives made comments such as “glove are off with Lasso,” and “we need a few strong bullets as to what makes our integrated planning, activation & real-time optimization, stronger than Lasso,” and “we are in a dogfight . . . between us and Lasso”). Lasso internal documents likewise identify DeepIntent as major competition. Id. at 383–84 (citing internal documents in which Lasso executives made comments such as “We have been very clear that Deep[I]ntent is our largest competitor on the programmatic side of things.”). These internal documents indicate that the two companies often compete on price, product quality, and innovation, because customers frequently weigh one’s offerings against the other’s, and witness testimony and quantitative evidence revealed similar conclusions. Id. at 384–87.

Once the FTC established a presumption of anticompetitive effects, the defendants raised rebuttal arguments based on four grounds: “(1) the inability of current market shares to predict future competition; (2) ease of entry into the market; (3) the sophisticated customers in the market; and (4) efficiencies that will result from the transaction.” Id. at 389. They attempted to argue that current markets shares are not reliably indicative of future competition because the programmatic advertising industry is dynamic; that Lasso’s rapid ascent to illustrate how the ease with which competitors may enter the market; that there are “power buyers” in the industry who would be able to combat the merged parties’ ability to raise prices; and that the merger would reduce costs for customers and expand the firms’ capabilities and quality. Id. at 389–397. Ultimately, the court rejected all four of these arguments, holding that the defendants failed to “overcome the FTC’s strong prima facie case of anticompetitive effects,” granting the Commission’s preliminary injunction request.

§ 2.4.5. Federal Trade Commission v. U.S. Anesthesia Partners, Inc., No. 4:23-cv-03560, 2024 WL 2137649 (S.D. Tex. May 13, 2024).

A Texas federal court dismissed the Federal Trade Commission’s (FTC) lawsuit against private equity (PE) owner, Welsh, Carson, Anderson & Stowe (Welsh Carson), while allowing to proceed the agency’s challenge against U.S. Anesthesia Partners’ (USAP) series of acquisitions. See Federal Trade Commission v. U.S. Anesthesia Partners, Inc., No. 4:23-cv-03560, 2024 WL 2137649 (S.D. Tex. May 13, 2024).

Background

Rather than directly employ anesthesiologists, many hospitals contract with outside anesthesiologists or anesthesia groups to ensure around-the-clock access to anesthesia services. In 2012, Welsh Carson created USAP, which began to buy other anesthesia practices in Texas, eventually owning at least 15 practices. According to the FTC’s complaint, USAP would add each acquired practice to its existing insurance contracts and thereby raise the rates of the newly acquired practices’ services to match its own higher reimbursement rates. Id. at *1. Today, USAP “handles nearly half of all hospital-only anesthesia cases in Texas and earns almost 60% of all hospital anesthesia revenue paid by Texas insurers, employers, and patients.” Id. at *2.

When Welsh Carson formed USAP it owned 50.2% and chose company leadership. In 2017, the firm sold half of its stake in USAP. Id. at *3. Since then, one of the firm’s funds owns 23% of USAP and has the right to appoint only two of USAP’s 14 board members. Id.

In September 2023, the FTC sued Welsh Carson and USAP, claiming that they engaged in anticompetitive practices to monopolize Texas’ anesthesiology. See Complaint, FTC v. U.S. Anesthesia Partners, Inc., No. 4:23-cv-03560 (S.D. Tex. Sept. 21, 2023). Allegedly, “Welsh Carson masterminded the plan for USAP to roll up markets across Texas and inflate prices,” pointing to internal communications at Welsh Carson where the firm allegedly bragged about being USAP’s primary architect. Id. at ¶336. From the FTC’s perspective, Welsh Carson’s minority ownership in USAP was no shield from liability because there is nothing to “prevent Welsh Carson from re-upping its investment in USAP, retaking formal control of the company, and directing yet more anticompetitive acquisitions.” Id. at ¶337. The FTC also pointed to Welsh Carson’s duplication of its anesthesiology consolidation strategy in the radiology market as evidence the firm would continue its anticompetitive practices.

The FTC claims that it was entitled to an injunction under Section 13(b) of the FTC Act. Section 13(b) provides that when the FTC has reason to believe “that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the [FTC],” it may sue in federal district court to enjoin those practices. 15 U.S.C. § 53(b). Welsh Carson and the USAP each moved to dismiss the claims against it.

The Court’s Decision

First, in granting the motion to dismiss for Welsh Carson, the court ruled that the FTC did not adequately allege that Welsh Carson is currently violating antitrust laws. The court acknowledged that an acquisition of assets in a company may subject one to liability for monopolization or an unlawful transaction that may substantially lessen competition. U.S. Anesthesia Partners, No. 2024 WL 2137649, at *4. Welsh Carson, however, owns only 23% of USAP, and the FTC did not “cite[] a case in which a minority, noncontrolling investor—[regardless of how] hands-on—is liable under Section 13(b) because the company it partially owned made anticompetitive acquisitions.” Id. at *5. In contrast, in denying the motion to dismiss for USAP, the court stated that USAP’s alleged continued acquisitions and dominance in the state’s anesthesiology market “constitute ongoing activity and plausibly contribute to the monopoly power and unfair competition that the FTC’s complaint alleges.” Id. at *8.

Second, the court ruled that the FTC did not adequately allege that Welsh Carson is about to violate antitrust laws. As stated, the FTC argued that nothing prevents Welsh Carson from again becoming a controlling investor in USAP and directing anticompetitive acquisitions. The court disposes of this by pointing out that “the mere capacity to do something does not meet the requirement that the thing is likely to recur.” Id. at *6. And the fact that USAP is continuing its alleged anticompetitive practices “goes to USAP’s violations, not Welsh Carson’s.” Id. at *5. The court also acknowledged that Welsh Carson seeks to replicate its strategy in other health care markets, but “comments from . . . executives indicating a desire to consolidate other health care markets do not show that Welsh Carson is about to violate antitrust laws.” Id. at *6.

Welsh Carson was a minority, noncontrolling investor. It controlled only two of USAP’s 14 board seats. This gave the firm the meaningful separation from USAP it needed. Firms should be mindful that courts will examine the extent of board control no matter how “hands-on” or “hand-off” the investor is regarding operations. The December 2023 Merger Guidelines provide that the agency will “examin[e] both the firm’s history and current or future strategic incentives” by evaluating “documents and testimony reflecting [the firm’s] plans and strategic incentives both for the individual acquisitions and for its position in the industry broadly.” Merger Guidelines §2.8 (2023) In the FTC’s press release after filing the lawsuit, FTC Chair Lina M. Khan remarked that the “FTC will continue to scrutinize and challenge serial acquisitions, roll-ups, and other stealth consolidation schemes.” Press Release, Fed. Trade Comm’n, FTC Challenges Private Equity Firm’s Scheme to Suppress Competition in Anesthesiology Practices Across Texas (Sept. 21, 2023).

§ 2.5. Miscellaneous

§ 2.5.1. Non-Compete Rulemaking—Ryan, LLC v. Federal Trade Commission, Civil Action No. 3:24-CV-00986-E, 2024 WL 3297524 (N.D. Tex. July 3, 2024).

The Northern District of Texas issued its much-anticipated order preliminarily enjoining the effective date of the Federal Trade Commission’s (“FTC”) controversial noncompete ban rule. See Ryan, LLC v. Federal Trade Commission, No. 3:24-CV-00986-E, 2024 WL 3297524 (N.D. Tex. July 3, 2024). The court’s decision, however, is limited to the named plaintiffs—a tax accounting firm and several business groups—in the case. Id. at *16. Nevertheless, the stay signals that a permanent and nationwide injunction is likely.

The FTC’s noncompete rule, if it becomes effective, will apply to any written or oral employment term or policy that penalizes or prevents a worker from (a) seeking or accepting work in the U.S. with a different employer, or (b) operating a business in the U.S. after the conclusion of the employment that includes the term or condition. Id. at *3 (citing 16 C.F.R. § 910.1). The rule prohibits workers from entering into new noncompete agreements on or after the effective date. Id. (citing 16 C.F.R. § 910.2(a)). The rule also prohibits workers from enforcing or attempting to enforce a noncompete clause that existed before the effective date, except for those workers who qualify as senior executives. Id. The ban does not apply to customer or employee nonsolicitation agreements. For a more thorough review of the rule, see FTC Bans Employee Noncompete Clauses, Troutman Pepper (Apr. 24, 2024).

The central issue before the Texas court was whether the FTC Act gave the FTC the authority to promulgate substantive rules in general, and the broad, sweeping noncompete ban in particular. See Ryan, LLC, 2024 WL 3297524 at *8. The court rejected the FTC’s interpretation of the FTC Act and ruled that a “plain reading” of Section 6(g) of the FTC Act “does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition.” Id. Further, the court cited a 1979 Supreme Court case which referred to Section 6(g) as a “housekeeping statute,” authorizing rules related to “procedure or practice,” not “substantive rules.” Id. (citing Chrysler Corp. v. Brown, 441 U.S. 281, 310 (1979)). Ultimately, the court found that “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g).” Id. The court also determined that the FTC rule is likely “arbitrary and capricious.” Id. at *12.

Notably, the Texas court limited its preliminary ruling to the parties and declined to enter an order enjoining enforcement of the FTC rule nationwide. Id. at *16. As a result, the court’s preliminary injunction order does not invalidate the FTC rule for any nonparty.

However, the court’s ruling on the preliminary injunction was not a final judgment in the case. Its approach to the preliminary injunction and finding that the plaintiffs demonstrated a “substantial likelihood of success on the merits” strongly suggested that it would strike down the rule on the merits. Id. at *10. Notably, the court also cited the Supreme Court decision overturning the recent Chevron doctrine, Loper Bright Enterprises v. Raimondo. See id. at *7. Indeed, on August 20, 2024, after the parties cross-moved for summary judgment, the court held that the FTC lacked substantive rulemaking authority, and that the rule was arbitrary and capricious. See Ryan, LLC v. Federal Trade Commission, No. 3:24-CV-00986-E, 2024 WL 3879954, at *12–14 (N.D. Tex. Aug. 20, 2024). The court therefore granted the plaintiffs’ motion for summary judgment and set aside the FTC’s noncompete rule. Id. at *14.

§ 2.5.2. Non-Compete Rulemaking—ATS Tree Service v. Federal Trade Commission, Civil Action No. 24-1743, 2024 WL 3511630 (E.D. Pa. July 23, 2024).

In direct conflict with a recent Texas District Court ruling, an Eastern District of Pennsylvania Court denied ATS Tree Services’ motion for a preliminary injunction, staying the effective date of the Federal Trade Commission’s (“FTC”) noncompete ban. ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743, 2024 WL 3511630, at *19 (E.D. Pa. July 23, 2024). The ATS court limited application of its decision to the plaintiff, but its holding—“the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition,” id. at *13—conflicts with the Texas Court’s conclusion that “the FTC lacks the authority to create substantive rules.” Ryan, LLC, 2024 WL 3297524 at *8.

The ATS court undertook a full statutory analysis of the FTC Act in light of the U.S. Supreme Court’s recent Loper Bright Enterprises v. Raimondo decision, which overturned Chevron deference to agencies in cases of statutory interpretation. See ATS Tree Services, LLC, 2024 WL 3511630 at *13. Despite this lack of deference, the court relied heavily on the FTC’s non-binding 2022 Policy Statement. The non-binding Policy Statement lays out the FTC’s current position regarding the scope and history of Section 5 of the FTC Act. See Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act Commission (Nov. 10, 2022), available at https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyStatement.pdf. Less than a month after Chair Khan’s Senate confirmation, the FTC, in a 3–2 vote along party lines, withdrew its 2015 policy statement, replacing it with the more controversial, less stringent, and more flexible 2022 Policy Statement. See id.

Additionally, the court found that the plaintiff’s noncompete agreements were “not justified by legitimate business purposes” and, using the 2022 Policy Statement’s language, found that they were “exploitative and coercive” when entered into with employees who are not senior executives. ATS Tree Services, LLC, 2024 WL 3511630 at *17.

The court’s opinion ignored the dissenting statements of the two Republican commissioners and gave short shrift to the arguments of ATS and the amici supporting the stay. For example, the fact that the agency did not issue substantive rules until 1962, and even doubted that it had the authority to issue substantive rules, was left to a footnote. See id. at *15 n. 19. Importantly, the court offered little guidance as to what principles exist to limit the FTC’s issuance of other substantive rules under Section 6(g) of the FTC Act, other than the fact that such rules must concern “unfair methods of competition.” See id. at *13. The court noted that Congress intended that the phrase, “unfair methods of competition” be “vague” to not limit the FTC’s ability to define what should be prohibited conduct. Id. at *3.

The court also found that ATS failed to meet its burden of proving irreparable harm, and the court characterized the arguments that (1) ATS would have to scale back its training program and (2) its employees would quit absent a noncompete provision as “speculative.” Id. at *10.

The Pennsylvania court’s ruling on the preliminary injunction motion was not a final judgment in the case, but its approach to the preliminary injunction and its finding that the plaintiff did not demonstrate either a substantial likelihood of success on the merits or irreparable harm strongly suggested that it would ultimately deny the Plaintiff’s request for a permanent injunction. Plaintiff filed a motion to stay the case on September 6, 2024, which was denied. See ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743, 2024 U.S. Dist. LEXIS 192128 (E.D. Pa. Oct. 3, 2024). Plaintiff then voluntarily dismissed its claim against the FTC on October 4, 2024, ending the case before a decision on the merits could be reached. See Notice of Voluntary Dismissal by All Plaintiffs, ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743, 2024 WL 3511630 (E.D. Pa. Oct. 4, 2024).

§ 2.5.3. Non-Compete Rulemaking—Property of the Villages, Inc. v. Federal Trade Commission, No. 5:24-cv-316-TJC-PRL, 2024 WL 3870380 (M.D. Fla. Aug. 14, 2024).

The third of the three federal district court cases to consider the Federal Trade Commission’s (“FTC”) rule banning employee noncompete arrangements was the Middle District of Florida. See Property of the Villages, Inc. v. Federal Trade Commission, No. 5:24-cv-316-TJC-PRL, 2024 WL 3870380 (M.D. Fla. Aug. 14, 2024). In a decision issued from the bench, in Property of the Villages, Inc. v. Federal Trade Commission, the court granted the plaintiff’s motion for a preliminary injunction and stayed the FTC’s rule. Id. at *11.

Plaintiff, Properties of the Villages, Inc., a real estate broker, entered into noncompete agreements with its agents. Id. at *2. The four-count complaint challenged the FTC’s rule under the Administrative Procedure Act, 5, U.S.C., Section 706(2), including two counts alleging violations of the federal Constitution. See id. Plaintiff alleged that the FTC does not have substantive rulemaking authority over unfair methods of competition. Id. Plaintiff argued that, even if the FTC has substantive rulemaking authority, the noncompete rule exceeds that authority and is impermissibly retroactive, and the noncompete rule violates the commerce clause. Id.

With respect to the agency’s rulemaking authority, the court began by noting that Congress “empowered and directed” the FTC “to prevent” for-profit businesses “from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” Id. at *4. Section 5 of the FTC Act also includes mechanisms for enforcement actions to stop violations. Id. Section 6 of the FTC Act, entitled “Additional Powers of the Commission,” provides authority for the agency to undertake investigations, require reports of various entities, publish periodic information and reports, and assist with international investigations. Id. Section 6(g) grants the FTC the authority to “from time to time classify corporations and except as provided in Section 57a(a)(2) of this title,” which addresses rulemaking with respect to unfair or deceptive acts or practices, “to make rules and regulations for the purpose of carrying out this subchapter.” Id.

The FTC argued that, given its Section 5 mission to prevent businesses from using unfair methods of competition combined with its authority in Section 6(g) to make rules and regulations, it has the authority to promulgate substantive unfair competition rules, specifically the noncompete rule. Id. at *4. The court rejected the plaintiff’s argument that Section 6 granted the FTC only certain process-related authority for ministerial acts such as recordkeeping and publications. Id. at *4–5. Instead, the Florida court concluded that Section 6(g) granted the FTC the authority to make substantive rules as opposed to procedural rules. Id. at *5.

The court also determined that the plaintiff had not demonstrated a likelihood of success with respect to its constitutional arguments, claiming there is no interstate commerce connection, a separation of powers concern, and the non-delegation doctrine. Id.

Although the court concluded that Section 6(g) of the FTC Act grants some type of substantive rulemaking authority, it next examined whether it granted the FTC the authority to issue the noncompete rule at issue and whether the rule implicated a major question. See id. at *5–6. The major questions doctrine provides that when an agency claims to have the power to issue rules of “extraordinary . . . economic and political significance,” it must “point to ‘clear congressional authorization’ for the power it claims.” Id. at *6. The agency’s support for its authority must be more than plausible, given the significant consequences of the “major” rule. Id. The doctrine’s purpose is to protect the separation of powers by requiring Congress to state its intention to confer that power clearly and unambiguously. Id. The court further described the doctrine as the “context” against which a statutory delegation is enacted, and therefore “a tool for discerning, not departing from, the text’s most natural interpretation.” Id. Given the sweep and the breadth of the final rule, however, the court held it substantially likely that the plaintiffs had shown that it presents a major question. Id. at *8. Further, the court concluded that the Section 6 language relied on by the FTC, by its text, placement, context, and history, falls short with respect to a rule as sweeping and consequential as the noncompete ban. Id. at *9.

The court granted the plaintiff’s motion for a preliminary injunction. Id. at *11. On September 24, 2024, the FTC appealed the decision to the U.S. Court of Appeals for the Eleventh Circuit.

§ 2.5.4. Non-Compete Rulemaking—Ryan, LLC v. Federal Trade Commission, Civil Action No. 3:24-CV-00986-E, 2024 WL 3879954 (N.D. Tx. Aug. 20, 2024).

In a victory for plaintiffs, a Texas court permanently enjoined the Federal Trade Commission’s (“FTC”) rule banning nearly all employee noncompetes. See Ryan, LLC, 2024 WL 3879954. The Texas opinion gave much-needed clarity regarding the rule and eliminated the need for employers to address the rule by September 4, 2024, which is when the rule was scheduled to become effective. See id. at *1.

The FTC’s noncompete rule, if it had become effective, would have applied to any written or oral employment term or policy that penalized or prevented a worker from (a) seeking or accepting work in the U.S. with a different employer, or (b) operating a business in the U.S. after the conclusion of the employment that includes the term or condition. Id. at *3 (citing 16 C.F.R. § 910.1). The rule, with narrow exceptions, prohibited new noncompete agreements on or after the effective date with any worker. Id. The rule also prohibited enforcing or attempting to enforce a noncompete clause that existed before the effective date for any worker except for those who qualified as senior executives. Id. at *4 (citing 16 C.F.R. § 910.2(a)).

The Texas and Pennsylvania courts reached conflicting preliminary injunction decisions, with the Pennsylvania court upholding the ban, see ATS Tree Services, LLC, 2024 WL 3511630, at *19, and the Texas court finding that the FTC did not have the authority to issue the noncompete rule. See Ryan, LLC, 2024 WL 38779954, at *14. Although the Florida court agreed that its plaintiff was entitled to preliminary relief from the rule, it applied a different analysis to reach that decision. See Properties of the Villages, Inc., 2024 WL 3870380 at *4–11. All three of the preliminary rulings applied only to the plaintiffs in each of those cases, leaving other employers with a difficult choice: (1) comply with a rule that negated their bargained-for employee arrangements, (2) attempt to preserve their right to enforce noncompete obligations, or (3) not comply in hopes that the ban would, in the future, be struck down.

The central issue before the Texas court was whether the FTC Act gives the FTC the authority to promulgate substantive rules in general, and the broad, sweeping noncompete ban in particular. Ryan, LLC, 2024 WL 3879954 at *9. Unlike the Texas court’s preliminary injunction ruling, which was limited to only the parties before it, in the instant decision the court held that the FTC’s noncompete rule “shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.” Id. at *14. The court agreed that the FTC Act granted the agency the power to prevent unfair methods of competition, but concluded that Congress did not affirmatively grant the FTC the authority to promulgate “substantive rules regarding unfair methods of competition.” Id. at *12. The court determined that the pertinent Section of the FTC Act—Section 6(g)—is “a housekeeping statute,” authorizing rules regarding the agency’s practices and procedures. Id. at *9 (citing Chrysler Corp. v. Brown, 441 U.S. 281, 310 (1979)).

The court also concluded that the FTC’s noncompete ban was arbitrary and capricious, and accordingly violated the Administrative Procedures Act because of its “one-size-fits-all approach with no end date.” Id. at *13. “The [FTC]’s lack of evidence as to why [it] chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all noncompetes—instead of targeting specific, harmful noncompetes, renders the Rule arbitrary and capricious.” Id.

After concluding that the FTC did not have the statutory authority to establish the noncompete ban and that the ban was arbitrary and capricious, the Texas court found that it was obligated to “hold unlawful” and “set aside” the FTC’s rule in its entirety and as required under Section 706(2) of the APA. Id. at *14.

The Texas and Florida courts’ analyses differed. The Texas court held that the FTC did not have the authority to promulgate “substantive rules regarding unfair methods of competition.” Id. at *9. Instead, the court determined that the pertinent Section of the FTC Act—Section 6(g)—is “a housekeeping statute,” authorizing rules regarding the agency’s practices and procedures. Id. (citing Chrysler Corp., 441 U.S. at 310). The Florida court, on the other hand, held that Congress granted the FTC the authority to make rules to prevent unfair methods of competition, but that given the economic significance of noncompetes, the noncompete rule likely violates the major questions doctrine. See Properties of the Villages, Inc., 2024 WL 3870380 at *5–8.

The Pennsylvania court took yet a third approach, denying the plaintiff’s request for preliminary injunctive relief and finding that the FTC likely has the authority to issue substantive unfair competition rules, including a rule prohibiting noncompetes as a class, and that the rule likely does not violate the non-delegation doctrine. ATS Tree Services, LLC, 2024 WL 3511630 at *19. Following the court’s decision that the plaintiff’s challenge was unlikely to succeed on the merits, the plaintiff sought a stay. See ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743, 2024 WL 4525514 (E.D. Pa. Oct. 3, 2024). In opposition to the stay, the FTC argued that it would be unfair to allow the Pennsylvania plaintiff “to avail itself of [the Texas court’s] judgment . . . while preserving plaintiff’s challenge to the Rule indefinitely, for the sole purpose of reviving it in the event the Commission were to prevail in an appeal in another circuit.” See Opposition to Motion to Stay, ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743, 2024 WL 4525514 (E.D. Pa. Sept. 11, 2024). After the Pennsylvania court refused to stay the proceedings, the plaintiff voluntarily dismissed its challenge. See Notice of Voluntary Dismissal by All Plaintiffs, ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743, 2024 WL 3511630 (E.D. Pa. Oct. 4, 2024).

On October 18, 2024, the FTC filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit. Accordingly, both the Fifth and Eleventh Circuits will have the opportunity to speak to the authority of the FTC to promulgate rules regarding unfair methods of competition if the new administration does not change course.

§ 2.5.5. State Antitrust Enforcement Venue Act Developments

Since it was signed into law on December 29, 2022, the State Antitrust Enforcement Venue Act 28 U.S.C. § 1407 (2022) (“Act”) has enabled state attorneys general to fight to keep antitrust cases on their own turf, forcing companies to defend against antitrust lawsuits based on very similar facts in multiple jurisdictions. States have been successful under the Act thus far.

The Act amended 28 U.S.C. § 1407, which governs the ability of the Judicial Panel on Multidistrict Litigation (“JPML”) to transfer and consolidate litigation spanning multiple jurisdictions. H.R. Rep. No. 117-494, at 2 (2022). Prior to the Act’s passage, the statute enabled the JPML to consolidate multijurisdictional antitrust cases, but provided an exception for antitrust cases brought by the federal government. Id. Because of that exclusion, “the United States [was] entitled to litigate most antitrust actions in the federal district court where it file[d] its claims . . . As a result, federal government enforcement actions [could] often proceed more quickly than those brought by states or private plaintiffs.” Id. The 2022 amendment, which was enacted as part of the Consolidated Appropriations Act, 2023, added the words “or a State” to this exemption. See Pub. L. No. 117-328, Div. gg, Title III, § 301, 136 Stat. 4459, 5970 (Dec. 29, 2022). Consequently, the Act extended the exclusion to state AGs and now prohibits companies from transferring state-filed antitrust lawsuits.

In a September 2022 report, the House Committee on the Judiciary noted that the Act was intended “to promote competition by preventing the transfer of actions arising under the antitrust laws in which a State in a complainant.” Id. It further said that the Act would ensure “that states were afforded deference when selecting an appropriate venue to enforce the antitrust laws and protect the public from antitrust injury . . . [and] eliminate[ ] delays, inefficiencies, and associated higher costs that states face enforcing the antitrust laws under the current JPML process.” Id.

The Act received significant bipartisan support at its passage, which was often described as a necessary reaction to Big Tech’s purported litigation strategies. Advocates for the Act frequently cited the state antitrust lawsuits filed against Google. Specifically, Google had moved to transfer several lawsuits to California shortly before the Act was initiated, in the attempt to land a more favorable forum. Id. While defendants view consolidation or venue transfers as cost-saving mechanisms and a way to minimize the risk of conflicting decisions affecting their businesses, plaintiffs’ attorneys and states often view them as mere disruptive strategies that slow the pace of litigation. Id.

Now, states have the power to choose their own antitrust venues, offering more control to state plaintiffs, but increasing the cost of antitrust litigation for defendants, third parties, and the judiciary over multiple jurisdictions. Since the Act was passed, several state AGs have attempted to take advantage of their new power, and they have been largely successful.

The State of Texas invoked the Act for the first time in 2023, when it successfully got a case against Google remanded to the Eastern District of Texas where it had been originally filed. Remand Order, In Re: Google Digital Advertising Antitrust Litigation, MDL No. 3010, at 4 (JPML June 5, 2023). Before the Act was passed, the case had been transferred and consolidated with similar actions in New York. Id. at 1. In June 2023, a seven-member JPML panel held “that the recent amendment to Section 1407(g) applies to pending state antitrust enforcement actions and, absent a state’s waiver of its venue rights, the [p]anel must grant the motion for remand.” Id. at 2. Google appealed to the U.S. Court of Appeals for the Second Circuit, which held that Google had failed to show the “exceptional circumstances” required to overturn the JPML transfer decision and affirmed the remand of the Texas case. Order, Google LLC v. Texas, No. 23-910 (2d. Cir. Oct. 4, 2023).

In November 2023, a group of AGs attempted to argue that, in light of the Second Circuit’s remand decision in the Google case, the Act should be applied retroactively to remand their antitrust actions regarding generic drug pricing from Pennsylvania back to Connecticut federal court where they were originally filed. Memorandum of Law in Support of Motion to Remand, In Re: Generic Pharmaceuticals Pricing Antitrust Litigation, MDL No. 2724, at 3-6 (JPML Nov. 1, 2023). The generic drug pricing cases had been pending since long before the Act was passed; the first related state case was filed in 2016 and consolidated as multidistrict litigation in 2017. The Pennsylvania court’s status report to the JPML panel noted that “the Transferee Court and the Special Masters appointed to assist with the informal resolution of disputes have developed significant knowledge with regard to the cases and the generic pharmaceutical industry.” Status Order, In Re: Generic Pharmaceuticals Pricing Antitrust Litigation, MDL No. 2724, at 3 (E.D. Pa. Dec. 7, 2023). The panel acknowledged that remand of the state AG cases to Connecticut would mean that significant resources of the parties and the transferee court would be wasted, but stated that the impact of remand on the multidistrict litigation is “largely irrelevant.” Remand Order, In Re: Generic Pharmaceuticals Pricing Antitrust Litigation, MDL No. 2724, at 7 (JPML Jan. 31, 2024).

In 2024, state AGs successfully kept parallel antitrust actions in their chosen home forums on multiple occasions. In January, an Arkansas federal judge granted a state AG’s request to keep an antitrust action against pesticide companies in Arkansas, despite the defendants’ efforts to transfer the lawsuit to North Carolina, where they are already facing similar claims. See also Ark. ex rel. Griffin v. Syngenta Crop Prot. AG, No. 4:22-CV-01287-BSM, 2024 WL 183111, at *1 (E.D. Ark. Jan. 17, 2024). The court found that the defendants’ reasons for transfer did not outweigh the state’s right to choose the forum under the Act. Id. The supermarket chains Kroger and Albertsons have also been forced to litigate challenges to their proposed merger in several different venues. The merger was blocked in December 2024 in two separate suits; one brought by the Federal Trade Commission in Oregon federal court, and one brought by Washington state in its state court. See FTC v. Kroger Co. & Albertsons Co., Inc., No. 3:24-cv-00347-AN, 2024 U.S. Dist. LEXIS 223077, at *1 (Or. Dec. 10, 2024); Findings of Fact & Conclusions of Law, State v. Kroger Co., No. 24-2-00977-9 SEA (Wash. Sup. Dec. 10, 2024). The grocery retailers also faced a merger challenge in Colorado state court, where a decision was still pending at the close of 2024. Colorado v. Kroger, No. 24-CV-30459 (Colo. Dist. Ct. 2024); see also Lindsey Toomer, Colorado awaits decision in Kroger-Albertsons case after rulings block merger in other states, Colo. Newsline (Dec. 22, 2024).

Editor

Assistant Editor

Contributors

Keo McKenzie, Mercedes Subhani, Avi Toltzis, and Alex Crowley

§ 1.1. Introduction

Another year has passed, and the legal issues arising out of Artificial Intelligence’s increasingly broad adoption across every facet of our lives continued to expand. As business lawyers, there is optimism that AI (especially Generative and Agentic AI) will create new opportunities for us to assist our clients in this rapidly developing legal landscape of lawsuits, proposed and newly enacted regulations, and novel IP, employment and privacy concerns. At the same time, lawyers must recognize how AI is changing the practice of law and clients’ expectations of how their outside counsel will work efficiently and smartly to further their interests.

Simply stated, lawyers have an ethical obligation to learn, understand and keep apace with how AI can be used in the daily practice of law. And as I write this, the media reports Bill Gates is predicting that in 10 years, most jobs across industries will become obsolete thanks to AI; something that has concerned me since at least 2014 (for those interested in my perspective, which remains largely unchanged 11 years later, please see my 2014 Tech Crunch article on the subject). Whether or not Mr. Gates is correct (and I would wager that he is), there is no denying AI’s impact on the legal profession and the seismic shift upon us in the way we utilize Generative AI to perform tasks which hitherto were the sole provenance of paralegals, legal assistants and junior lawyers. Tasks like legal research, document automation, risk and compliance management, and many other legal functions are rapidly becoming the provenance of AI tools and AI-powered legal assistants.

The pace of change with regard to AI’s use in the legal profession will only increase in the coming years, changing nearly everything about how our data-driven profession operates (“find a case that holds Y”; “pull up the last contract and compare it with the draft opposing counsel just sent,” “what is the law in X jurisdiction on Y issue”; “for an opening statement, pull the stats on how many drunk driving collisions end in fatalities,” “analyze this draft crypto loan agreement and suggest ways to strengthen it,” “find how many times Person Y is mentioned in all of the various FTX related filings around the country,” “for the 2 TB data set, find all of the documents that reference ‘Z,’ explain the new EU regulations on [subject] and our compliance obligations,” etc.). Like our clients, it is our duty to utilize AI in responsible and transparent ways.

For 2024, we have continued our practice of focusing on cases decided in 2024 and legislation enacted in 2024. Not surprisingly, emerging themes for both the courts and state and local legislators center around copyright infringement, privacy, fairness/perceived bias, civil rights, transparency and consent. The headline is that for the foreseeable future, practicing law will increasingly mean staying abreast of AI technology in many different use cases and domains. Our clients are looking for ways to produce and utilize AI to make themselves more efficient while cutting costs and errors associated with human capital. In the near future, it is likely that clients and judges will expect lawyers to utilize AI to better serve them and the courts. And like it or not, AI will remain the focus for regulators and litigants across the United States.

We hope that this Chapter continues to be a useful tool for lawyers looking for a straightforward summary of the major AI cases and legislation for 2024. And my colleagues Adam Aft, Keo McKenzie, Mercedes Subhani, Avi Toltzis, and Alex Crowley have my gratitude for their assistance in preparing this year’s Chapter.

We look forward to tracking the trends in these cases and presenting the cases arising over the next several years.

Bradford Newman

Editor and Co-Chair of the AI and Blockchain Subcommittee of the Business and Corporate Litigation Committee

Palo Alto

§ 1.2. Artificial Intelligence Cases of Note

§ 1.2.0. United States Supreme Court

Moody v. NetChoice, LLC, 603 U.S. 707, 144 S. Ct. 2383 (2024). Defendant NetChoice, an internet trade association, alleged that Florida and Texas laws restricting social media platforms’ ability to moderate content on their websites via algorithms (including artificial intelligence) violated the First Amendment to the U.S. Constitution. The Court found that the lower courts had not properly considered the issues and vacated and remanded the prior judgments regarding each law.

§ 1.2.1. First Circuit

Harris v. Adams, No. 24-cv-12437-PGL, 2024 U.S. Dist. LEXIS 210951 (D. Mass. Nov. 20, 2024). Two high school students were punished for cheating on an AP U.S. History project by failing to attribute the source for text (which included hallucinations) that they copied from Grammarly’s artificial intelligence software. Plaintiff Harris claimed that the high school violated Plaintiff’s due process rights and that the punishments were too harsh. The Court denied Plaintiff’s motion for preliminary injunction because Plaintiff had failed to show any misconduct by authorities of Plaintiff’s schools.

Overjet, Inc. v. VideaHealth, Inc., Civil Action No. 24-cv-10446-ADB, 2024 U.S. Dist. LEXIS 128030 (D. Mass. July 19, 2024). Overjet and VideaHealth compete in providing artificial intelligence-enabled dental software. In this case, Overjet alleged that Videa infringed Overjet’s copyrights related to its software and falsely advertised, including regarding Videa’s software’s artificial intelligence capabilities, in violation of the Lanham Act. The Court denied Overjet’s motion for a preliminary injunction because Overjet had not sufficiently shown a likelihood that its claims would succeed on the merits nor a likelihood of irreparable harm.

WEX Inc. v. HP Inc., No. 2:24-cv-00121-JAW, 2024 U.S. Dist. LEXIS 119715 (D. Me. July 9, 2024). WEX alleged that HP’s “HP WEX” software name infringed WEX’s trademark “WEX.” HP argued that a news article presented as evidence of confusion of the WEX mark and HP WEX “‘was created using generative artificial intelligence,’ and therefore ‘no person . . . was confused.’” WEX countered that the article was nonetheless reviewed by a confused human editor. The Court found that the AI-generated article indicated that HP and WEX could be confused as being affiliated given the “HP WEX” brand. The Court granted WEX’s motion for a preliminary injunction against HP regarding use of “WEX.”

Baker v. CVS Health Corp., 717 F. Supp. 3d 188 (D. Mass. Feb. 16, 2024). A job candidate alleged that CVS violated the Massachusetts Lie Detector Statute (Mass. Gen. Laws. Ch. 149, §19B) by subjecting the candidate to an artificial intelligence-based test (to help evaluate an individual’s integrity and cultural fit) during a job interview without notifying the candidate of his statutory rights. The Court denied CVS’ motions to dismiss for failure to state a claim and for lack of standing.

§ 1.2.2. Second Circuit

N.Y. Times Co. v. Microsoft Corp., No. 23-cv-11195 (SHS) (OTW), 2024 U.S. Dist. LEXIS 212998 (S.D.N.Y. Nov. 22, 2024). The Court denied Open AI’s motion to compel production of disputed discovery because Open AI failed to demonstrate the relevance of asking for the New York Times’ documents related to the Times’ use of non-parties’ generative AI tools due to it neither being relevant nor proportional to Open AI’s fair use defense.

Dukuray v. Experian Info. Sols., 2024 U.S. Dist. LEXIS 132667 (S.D.N.Y. July 26, 2024). The Court did not believe any sanctions would be appropriate against a pro se Plaintiff because they would not be aware of the risk that ChatGPT and similar AI programs can generate fake case citations and other misstatements of law in their Fair Credit Reporting Act case.

Z.H. v. N.Y.C. Dep’t of Educ., No. 23-cv-3081 (ER), 2024 U.S. Dist. LEXIS 124478 (S.D.N.Y. July 12, 2024). The Judge declined to credit evidence the Firm submitted using ChatGPT that showed the Firm’s requested rates are reasonable market rates because ChatGPT has been shown to be an unreliable source.

Gross v. Madison Square Garden Ent. Corp., No. 23-cv-3380 (LAK) (JLC), 2024 U.S. Dist. LEXIS 83102 (S.D.N.Y. May 7, 2024). The Court granted the defendant’s motion to dismiss the complaint for failure to state a claim because it held that sharing biometric data with a third party to implement a policy banning certain individuals from venues does not constitute “profiting” from the biometric data within the meaning of NYC Ad. Code § 22-1202(b).

Network-1 Techs., Inc. v. Google LLC & YouTube, LLC, 2024 U.S. Dist. LEXIS 76545 (S.D.N.Y. Apr. 24, 2024). The Court held that in this patent infringement case against Google, the term “non-exhaustive search” is indefinite because persons skilled in the art could reasonably construe it in different ways based on the intrinsic and extrinsic evidence. Therefore, even though Google’s Siberia version of Content ID conducted an algorithmic patent search which increased computing resources, it did not perform a sublinear search as required by the ’237 Patent because undisputed evidence showed the search to be linear and the Plaintiff failed to show the multi-step search as a whole is sublinear.

Rensselaer Polytechnic Inst. v. Amazon.Com, Inc., 723 F. Supp. 3d 132 (N.D.N.Y. Mar. 18, 2024). The Court denied Plaintiffs’ motion for summary judgement and granted Defendant’s motion for summary judgement due to its ’798 patent of an approach for interpreting and responding to a natural language input by storing and searching certain types of information not being subject matter eligible for patent protection under 35 U.S.C. § 101.

Park v. Kim, 91 F.4th 610 (2d Cir. Jan. 30, 2024). The Court referred an attorney to the Second Circuit’s Grievance Panel for investigation for submitting a brief that relief on “non-existent” caselaw generated by ChatGPT.

§ 1.2.3. Third Circuit

Thomson Reuters Enter. Ctr. GmbH v. Ross Intel. Inc., No. 1:20-cv-613-SB, 2025 U.S. Dist. LEXIS 24296 (D. Del. Feb. 11, 2025) and Thomson Reuters Enter. Ctr. GmbH v. Ross Intel. Inc., No. 1:20-cv-613-SB, 2024 U.S. Dist. LEXIS 175507 (D. Del. Sep. 27, 2024). Ross Intelligence aimed to improve legal research via development of an artificial intelligence-based research tool. Thomson Reuters alleged that Ross infringed Thomson Reuters’ copyrighted Westlaw headnotes and Key Number System by using them in the development of Ross’s tool. In its February 2025 opinion, the Court “grant[ed] most of Thomson Reuters’s motion for partial summary judgment on direct copyright infringement and related defenses, D.I. 674; (2) grant[ed] Thomson Reuters’s motion for partial summary judgment on fair use, D.I. 672; (3) den[ied] Ross’s motion for summary judgment on fair use, D.I. 676; and (4) den[ied] Ross’s motion for summary judgment on Thomson Reuters’s copyright claims, D.I. 683.”

In parallel to Thomson Reuters’s copyright infringement claim, Ross alleged that Thomson Reuters’s Westlaw caselaw database and search tools were tied together in violation of antitrust laws. The Court rejected Ross’s allegation and granted summary judgment to Thomson Reuters with respect to Ross’s antitrust claims.

Huckabee v. Meta Platforms, Inc., Civil Action No. 24-773-GBW, 2024 U.S. Dist. LEXIS 209624 (D. Del. Nov. 18, 2024). Former Governor of Arkansas Mike Huckabee alleged that Meta should be liable under various laws and for violation of various legal rights for allowing, via its machine learning algorithms, presentation of third-party advertisements that made false claims and falsely attributed statements to Governor Huckabee. The Court held that Meta was liable under Section 230 of the Communications Decency Act as an “information content provider” because its algorithms determined advertisement presentation, but the Court denied Governor Huckabee’s claims as they did not state claims upon which relief can be granted.

VB Assets, LLC v. Amazon.com Servs. LLC, No. 19-1410 (MN), 2024 U.S. Dist. LEXIS 176993 (D. Del. Sep. 30, 2024). Plaintiff VB Assets alleged that Amazon’s Alexa voice assistant and associated devices violated VB Assets’ smart speaker technology patents. The Court granted Amazon’s motion for judgment as a matter of law for only one of VB Assets’ infringement claims.

Lee v. ElectrifAI, LLC, Civil Action No. 23-2239 (JXN) (JRA), 2024 U.S. Dist. LEXIS 165093 (D.N.J. Sep. 13, 2024). As part of this case, the Court rejected plaintiff’s claim that her prior employer, ElectrifAI, LLC was misrepresenting the functionality of artificial intelligence in its products. The Court found that the plaintiff did not provide sufficient facts to establish a plausible claim.

Elkin Valley Baptist Church v. PNC Bank, N.A., Civil Action No. 23-1798, 2024 U.S. Dist. LEXIS 162888 (W.D. Pa. Sep. 10, 2024). In this case regarding statutory interpretation of Section 4A-207 (pertains to financial fraud) of the Uniform Commercial Code, the Court notes that financial institutions’ use of artificial intelligence and other automation necessitates developing a well-reasoned interpretation of the Section.

State Farm Mut. Auto. Ins. Co. v. Amazon.Com, Inc., Civil Action No. 22-1447-CJB, 2024 U.S. Dist. LEXIS 160437 (D. Del. Sep. 6, 2024). State Farm alleged that Amazon infringed several of State Farm’s patents relating to use of machine learning and neural networks to evaluate whether an individual can safely live independently. In this case, the Court denied Amazon’s motion to dismiss under which Amazon argued that the asserted patents pertained to patent ineligible subject matter and were thus invalid.

IPA Techs. Inc. v. Microsoft Corp., Civil Action No. 18-1-RGA, 2024 U.S. Dist. LEXIS 76038 (D. Del. Apr. 25, 2024). IPA Technologies alleged that Microsoft products containing Microsoft’s virtual assistant Cortana infringed on various of IPA Technologies’ patents regarding software architecture that “supports cooperative task completion by flexible and autonomous electronic agents.” The Court granted in part, denied in part, and dismissed as moot in part Plaintiff’s and Defendant’s summary judgment and Daubert motions.

§ 1.2.4. Fourth Circuit

Saas v. Major, Lindsey & Africa, LLC, No. 1:23-cv-02102-JRR, 2024 U.S. Dist. LEXIS 84968 (D. Md. May 10, 2024). Plaintiff Saas alleged that the defendants used algorithmic and machine learning tools in their recruitment processes, which led to unlawful discrimination based on sex and age in violation of Title VII of the Civil Rights Act and the Age Discrimination in Employment Act of 1967. Saas claimed that these tools discriminated against women with employment gaps due to motherhood, which caused them to be passed over for interviews and other opportunities. However, the plaintiff’s claims that the defendant used discriminatory AI tools was based solely on the supposition that all large businesses use AI tools, which was contradicted by the defendant’s statement that it does not use AI tools. The Court therefore concluded that the plaintiff had not adequately pleaded discrimination through the use of AI tools. The decision highlights the importance for plaintiffs to plead specific facts relating to a defendant’s use of AI tools in respect of discrimination claims.

§ 1.2.5. Fifth Circuit

Mullen Indus. LLC v. Meta Platforms, Inc., No. 1:24-CV-00354-DAE, 2024 U.S. Dist. LEXIS 207934 (W.D. Tex. Nov. 14, 2024). Mullen Industries alleged that Meta’s augmented and virtual reality systems infringed on twelve of its patents, including a claim on the use of AI technologies. The Magistrate Judge for this case recommended that the District Court grant Meta’s motion to dismiss in respect of the AI claims, because it found that Mullen had not plausibly pled that AI was present in the allegedly infringing systems.

Hicks v. Collier, No. 2:24-CV-00126, 2024 U.S. Dist. LEXIS 241129 (S.D. Tex. Oct. 31, 2024). Plaintiff, a Texas prisoner, alleged that his constitutional rights were violated due to excessively hot living conditions and inadequate medical care. A significant aspect of the case involved the Texas Department of Criminal Justice’s (“TDCJ”) use of an algorithm to classify inmates for housing assignments based on their “heat scores.” Hicks claimed that this algorithm misclassified him, leading to his placement in non-air-conditioned housing, which exacerbated his health issues. The Court’s decision to preserve the claims against the TDCJ and its officials highlights the need for transparency, accuracy, and accountability in AI implementation to protect individual rights. However, the Court dismissed the plaintiff’s claims under § 1983 against the unidentified developer of the algorithm because the Court found that it was not acting under the color of state law.

§ 1.2.6. Sixth Circuit

Concord Music Grp., Inc. v. Anthropic PBC, 738 F. Supp. 3d 973 (M.D. Tenn. 2024). Several music publishers sued Anthropic, an AI research company, alleging that Anthropic used their copyrighted song lyrics to train its AI model, Claude, without proper authorization. The Court found that it lacked personal jurisdiction over Anthropic, a Delaware company with its principal place of business in California (and which used data located in Virginia to train the Claude model, which itself was hosted on servers in Iowa), and transferred the action to California. The Court rejected plaintiffs’ arguments that Anthropic had availed itself of sufficient contacts with the forum state by making the model available to Tennessee through an interactive website. This decision will be significant insofar as it rejects the notion that personal jurisdiction can be established over the developer of an AI model simply by the developer’s making that model available in the jurisdiction.

§ 1.2.7. Seventh Circuit

G.T. v. Samsung Elecs. Am., Inc., No. 21 CV 4976, 2024 U.S. Dist. LEXIS 233003 (N.D. Ill. Dec. 23, 2024) and G.T. v. Samsung Elecs. Am. Inc., No. 21 CV 4976, 2024 U.S. Dist. LEXIS 130771 (N.D. Ill. July 24, 2024). In a first amended complaint, plaintiffs in this class action lawsuit alleged that Samsung violated Illinois’s Biometric Information Privacy Act (“BIPA”) in possessing and collecting their biometric data via Samsung’s Gallery photo applications. The Court found claims to be insufficiently pled and granted Samsung’s motion to dismiss.

In their second amended complaint, the plaintiffs alleged that Samsung violated BIPA by offering software that generates and stores biometric data (face templates) on a device using facial recognition technology. The Court granted Samsung’s second motion to dismiss on the basis that BIPA requires control over the actual biometric data, and Samsung did not have such control.

Arnold v. Target Corp., No. 24 CV 4452, 2024 U.S. Dist. LEXIS 212009 (N.D. Ill. Nov. 21, 2024). Plaintiffs alleged that Target Corp. violated BIPA in possessing, collecting, and disclosing their biometric data (face geometry captured by facial recognition technology in Target stores). The Court denied Target’s motion to dismiss on the basis that plaintiffs’ claims were plausible.

Hartman v. Meta Platforms, Inc., No. 3:23-CV-02995-NJR, 2024 U.S. Dist. LEXIS 167696 (S.D. Ill. Sep. 17, 2024). Plaintiffs in this putative class action lawsuit alleged that Meta violated BIPA in possessing and collecting their biometric data via augmented reality features of the Facebook Messenger and Messenger Kids applications. The Court denied Meta’s motion to dismiss on the basis that plaintiffs’ claims were plausible, and the case proceeded to discovery.

Lewerentz v. 1411 State Parkway Condo. Ass’n, No. 23-cv-1635, 2024 U.S. Dist. LEXIS 159664 (N.D. Ill. Sep. 5, 2024). A building engineer continued to receive calls from elevator call buttons after stopping work at those buildings. The calls included an artificial intelligence voice. The engineer alleged that the calls were harassment under the Telephone Consumer Protection Act and a tort of intrusion upon seclusion under Illinois state law. The Court found that these claims were insufficiently pled and granted the Defendant’s motion to dismiss the complaint.

Plumbers v. Morris Plumbing, LLC, No. 23-CV-616-JPS-JPS, 2024 U.S. Dist. LEXIS 70751 (E.D. Wis. Apr. 18, 2024). In this case, the Court noted that a case in Plaintiff’s reply brief appeared to be hallucinated by artificial intelligence, as the case could not be found via online searching. The Court warned Plaintiff’s counsel that they would be sanctioned for any future presentations of non-existent cases.

Taylor v. 48forty Sols., LLC, No. 23 C 14400, 2024 U.S. Dist. LEXIS 64573 (N.D. Ill. Apr. 9, 2024). In this putative class action, a truck driver alleged that his former employer collected scans of his face geometry (biometric data) in violation of BIPA Sections 15(a), (b), and (d). The Court denied the former employer’s motion to dismiss all those claims, though plaintiff was required to be ready to inform the Court whether he would like to proceed with the Section 15(a) claim in federal or state court.

Hernandez v. Omnitracs, LLC, No. 1:22-CV-00109, 2024 U.S. Dist. LEXIS 58865 (N.D. Ill. Mar. 31, 2024). In this putative class action, a truck driver alleged that his former employer collected scans of his face geometry (biometric data) in violation of BIPA Sections 15(a)-(d). The Court denied the former employer’s motion to dismiss all those claims.

§ 1.2.8. Eighth Circuit

No cases identified for the Eighth Circuit.

§ 1.2.9. Ninth Circuit

Tate v. VITAS Healthcare Corp., No. 2:24-cv-01327-DJC-CSK, 2025 U.S. Dist. LEXIS 3828 (E.D. Cal. Jan. 8, 2025). VITAS uses third party conversation intelligence software, records calls, creates transcripts, and uses AI to classify data into a searchable database. Plaintiff, who interacted with the software to discuss hospice care for her mother, alleged violations of California Invasion of Privacy Act (CIPA). The Court found that the AI software could be considered a third party and a recording device under CIPA and denied VITAS’s motion to dismiss.

Netchoice v. Bonta, No. 5:24-cv-07885-EJD, 2024 U.S. Dist. LEXIS 234919 (N.D. Cal. Dec. 31, 2024). The Court considered the constitutionality of SB 976, the Protecting Our Kids from Social Media Addiction Act, to regulate social media platforms’ interactions with minors. Among other requirements, SB 976 restricts personalized feeds and notifications for minors. The Court found that algorithms designed to maximize a person’s time spent on social media do not reflect any message from its creator and therefore do not constitute expressive speech. The Court found that the plaintiff had not met its burden of establishing that the personalized feed provisions of the law impermissibly restrict free speech and dismissed those elements of the claim.

Ryan v. X Corp., No. 24-cv-03553-WHO, 2024 U.S. Dist. LEXIS 222459 (N.D. Cal. Dec. 9, 2024). Plaintiff Ryan alleges X Corp. used AI to target and suspend his accounts without proper notice. The Court granted X Corp.’s motion to dismiss after finding that all claims were barred by X Corp.’s Terms of Service, which limit liability for account suspensions. Additionally, the unjust enrichment claim was also barred by Section 230 of the Communications Decency Act and X Corp.’s use of AI to moderate content does not negate Section 230 immunity. Ryan was given leave to amend his complaint.

Vance v. Google LLC, No. 20-cv-04696-BLF, 2024 U.S. Dist. LEXIS 220639 (N.D. Cal. Dec. 5, 2024). In this case, the Court denied the motion to dismiss the plaintiffs’ claims under section 15(b) of Illinois’s BIPA but granted dismissal of their Section 15(c) claim. Plaintiffs posted photos containing their faces to Flickr, a photo hosting website. IBM created the Diversity in Faces (DiF) Dataset using Flickr photos without user permission and Google obtained the DiF Dataset from IBM to improve facial recognition technology for its facial unlock feature. The Court found that improving a product was not sufficient to demonstrate a commercial transaction to support a Section 15(c) claim.

Samuels v. Dao, No. 23-cv-06492-VC, 2024 U.S. Dist. LEXIS 209474 (N.D. Cal. Nov. 18, 2024). This case was brought by an investor who bought cryptocurrency tokens issued by Lido DAO and lost money on his investment. The Court rejected defendant’s argument that it is merely autonomous software that runs without human management and therefore not a legal entity that can be subject to legal proceedings. Rather, the alleged actions are of an entity run by people, and this entity can be sued as a general partnership.

Kohls v. Bonta, No. 2:24-cv-02527 JAM-CKD, 2024 U.S. Dist. LEXIS 179933 (E.D. Cal. Oct. 2, 2024). The Court granted a preliminary injunction against California’s AB 2839, which aims to address the spread of AI-generated “deepfakes” and other manipulated media that could mislead voters or undermine confidence in the electoral process. The Court found the law unconstitutional for being overly broad and not narrowly tailored, thus violating the First Amendment. The decision highlighted the role of AI in creating “deepfakes” and emphasized the importance of protecting free speech involving digitally manipulated content.

Lamontagne v. Tesla, Inc., No. 23-cv-00869-AMO, 2024 U.S. Dist. LEXIS 178030 (N.D. Cal. Sep. 30, 2024). The plaintiffs alleged that Tesla, Inc., and Elon Musk made twenty-nine false or misleading statements about the development and safety of Tesla’s autonomous driving technology. The Court granted Tesla’s motion to dismiss, finding that the statements were either protected by the PSLRA safe harbor, nonactionable corporate puffery, or not sufficiently alleged to be false or misleading. The Court also dismissed the plaintiffs’ claims under Sections 10(b) and 20(a) of the Securities Exchange Act, as well as claims under Items 105 and 303 of Regulation S-K, due to insufficient allegations of scienter and materiality. The plaintiffs were given leave to amend their complaint.

Andersen v. Stability AI Ltd., No. 23-cv-00201-WHO, 2024 U.S. Dist. LEXIS 143204 (N.D. Cal. Aug. 12, 2024). The Court partially granted and partially denied the defendants’ motions to dismiss. The plaintiffs, a group of artists, alleged that Stability AI and other defendants used their copyrighted works to train AI models without permission. The Court allowed the copyright infringement claims to proceed, finding the plaintiffs’ allegations plausible. However, it dismissed the Digital Millennium Copyright Act (“DMCA”) claims and unjust enrichment claims. The Court found that the plaintiffs’ infringement allegations regarding the use of their works in training AI models were sufficiently pled. The court granted the plaintiffs leave to amend their unjust enrichment claims complaint but dismissed the DMCA claims with prejudice.

Mobley v. Workday, Inc., No. 23-cv-00770-RFL, 2024 U.S. Dist. LEXIS 126336 (N.D. Cal. July 12, 2024). The Court granted in part and denied in part the defendant’s motion to dismiss an employment discrimination case. The plaintiff, Derek Mobley, alleged that Workday’s algorithm-based applicant screening tools discriminated against him and others based on race, age, and disability. The Court denied the claims under Title VII, ADEA, and ADA based on Workday’s liability as an agent of employers. However, it granted the claims based on Workday being an employment agency and intentional discrimination claims under Title VII, ADEA, and Section 1981. Additionally, the Court granted with leave to amend the claims under California’s Fair Employment and Housing Act (FEHA). Mobley was permitted twenty-one days to amend his complaint regarding the FEHA claim.

Jones v. Peloton Interactive, Inc., No. 23-cv-1082-L-BGS, 2024 U.S. Dist. LEXIS 118511 (S.D. Cal. July 5, 2024). The Court denied Peloton’s motion to dismiss the First Amended Complaint. The plaintiffs claimed that Peloton violated the California Invasion of Privacy Act (CIPA) by using AI-powered third-party software, Drift, to intercept and record chat communications on its website without users’ consent. The Court found that Drift’s AI technology, which analyzed and used the intercepted data for its own purposes, acted as a third-party eavesdropper. Accordingly the plaintiffs’ CIPA claims were sufficiently pled.

Ambriz v. Google, LLC, No. 23-cv-05437-RFL, 2024 U.S. Dist. LEXIS 119619 (N.D. Cal. June 20, 2024). The Court dismissed Misael Ambriz’s complaint against Google, which alleged that Google’s Cloud Contact Center AI wiretapped, eavesdropped on, and recorded his call to Verizon’s customer service. The Court found that Google’s AI acted as a virtual agent for Verizon, a telephone company, and thus fell under the exemption provided by the California Invasion of Privacy Act (CIPA).

Forrest v. Meta Platforms, Inc., No. 22-cv-03699-PCP, 2024 U.S. Dist. LEXIS 107340 (N.D. Cal. June 17, 2024). The Court partially granted and partially denied Meta’s motion to dismiss. The case centered on Facebook advertisements using Dr. Andrew Forrest’s likeness to promote fraudulent investments. The advertisements were alleged to have been created and optimized by Meta’s AI and machine learning tools, raising factual disputes about Meta’s liability under Section 230 that were unsuitable for preliminary resolution. Specifically the pleadings left a factual dispute as to whether Meta materially contributes to the ads to render it beyond Section 230’s protection. The claims for misappropriation and negligence were allowed to proceed.

Dental Monitoring SAS v. Align Tech., Inc., No. C 22-07335 WHA, 2024 U.S. Dist. LEXIS 88739 (N.D. Cal. May 16, 2024). The Court granted the defendant’s summary judgment motion, invalidating Dental Monitoring’s patents, which involved methods for remote dental aligner assessment using deep learning devices. Applying the Alice two-step test, the Court determined that the invention was both directed to an abstract concept and that it merely applied generic machine learning technology to the known field of dental aligners.

Alich v. Opendoor Techs. Inc., No. CV-22-01717-PHX-MTL, 2024 U.S. Dist. LEXIS 86544 (D. Ariz. May 14, 2024). The Court granted the plaintiffs’ motion for reconsideration of the Court’s earlier dismissal, thereby allowing claims under Sections 11 and 15 of the Securities Act of 1933 to proceed. The plaintiffs alleged that Opendoor made misleading statements about its algorithm’s ability to adjust to market conditions, which they claimed led to investors’ financial losses. The defendant’s algorithm was designed to adjust dynamically to market indicators and economic conditions. The Court found that misrepresentations regarding Opendoor’s algorithm touches upon the alleged reasons for plaintiffs’ losses, finding that the plaintiffs have adequately pleaded a Section 11 claim.

Gibson v. Cendyn Grp., LLC, No. 2:23-cv-00140-MMD-DJA, 2024 U.S. Dist. LEXIS 83547 (D. Nev. May 8, 2024). The Court dismissed the plaintiffs’ claims with prejudice. The plaintiffs had alleged that the defendants, including a software company and several hotel operators, violated the Sherman Antitrust Act by artificially inflating hotel room prices through the use of pricing algorithms. The Court found that the plaintiffs failed to plausibly allege a tacit agreement among the defendants to fix prices and that the vertical agreements between the software company and the hotel operators did not restrain trade. The Court found that the mere use of algorithmic pricing, without allegations of any explicit or implicit agreement between competitors to accept the prices that the algorithm recommends, does not enable a plausible allegation of illegal collusion.

Tremblay v. OpenAI, Inc., 716 F. Supp. 3d 772 (N.D. Cal. Feb. 12, 2024). The Court granted in part and denied in part OpenAI’s motions to dismiss. The plaintiffs, authors of copyrighted books, alleged that OpenAI used their works to train its language models without permission. The Court dismissed claims for vicarious copyright infringement, DMCA violations, negligence, and unjust enrichment, but allowed the unfair competition claim to proceed. The plaintiffs were permitted to amend their complaint with respect to the dismissed claims.

Meta Platforms, Inc. v. Bright Data Ltd., No. 23-cv-00077-EMC, 2024 U.S. Dist. LEXIS 11913 (N.D. Cal. Jan. 23, 2024). The Court granted the defendant, Bright Data’s motion to dismiss finding that its scraping of publicly available data while not logged into a user account did not breach Meta’s Terms of Service. The Court also determined that the Terms did not apply to Bright Data’s activities after it terminated its accounts, and the survival clause did not impose a perpetual ban on scraping public data. This led to the dismissal of Meta’s breach of contract claims.

§ 1.2.10. Tenth Circuit

United States v. Cole, No. 1:24-cr-00054-SKC, 2024 U.S. Dist. LEXIS 184877 (D. Colo. Oct. 8, 2024). Criminal defendant Cole argued that the “unique selection” of his image using facial recognition software contributed to making his image stand out in a photo array. The Court did not find that such selection caused the array to be impermissibly suggestive.

MarketDial, Inc. v. Applied Predictive Techs., Inc., No. 1:23-cv-00477-JNP-CMR, 2024 U.S. Dist. LEXIS 109809 (D. Utah June 20, 2024). MarketDial, Inc. alleged that Applied Predictive Technologies, Inc.’s (APT) patent directed toward “determining optimal parameter settings for a predictive machine-learning model in business initiative testing software” was invalid or unenforceable. The Court determined that the patent failed the Alice test for patent eligibility, granted MarketDial’s motion to dismiss APT’s counterclaim of patent infringement, and denied APT’s motion to dismiss the complaint.

Total Quality Sys. v. Universal Synaptics Corp., No. 1:22-cv-00167-RJS-DAO, 2024 U.S. Dist. LEXIS 93224 (D. Utah May 23, 2024). In this case, Universal Synaptics Corporation alleged that Total Quality Systems infringed two of Universal’s patents, one of which covers an apparatus containing a neural network. Applying the Alice test, the Court held that the claimed inventions were ineligible for patent protection under 35 U.S.C. § 101.

§ 1.2.11. Eleventh Circuit

United States v. Deleon, 116 F.4th 1260 (11th Cir. 2024) and Snell v. United Specialty Ins. Co., 102 F.4th 1208 (11th Cir. 2024). In two cases, Judge Kevin C. Newsom of the United States Court of Appeals, Eleventh Circuit, wrote concurring opinions in which he evaluates how AI-based large language models could aid in conducting interpretive analysis in line with an “ordinary meaning” approach to evaluating legal texts.

Mazile v. Larkin Univ. Corp., No. 1:23-cv-23306-LEIBOWITZ, 2024 U.S. Dist. LEXIS 128457 (S.D. Fla. July 22, 2024). Larkin University expelled student/plaintiff Mazile after an AI system owned by remote testing company ExamSoft flagged that Mazile had cheated on a test monitored by the AI system. Mazile brought claims against ExamSoft and Larkin. The Court granted ExamSoft’s motion to compel arbitration under the End User License Agreement to which Mazile had agreed. The Court dismissed Mazile’s claim for discrimination based on her disability because Mazile failed to provide evidence that Larkin knew that ExamSoft’s AI system was discriminatory, and that Larkin discriminated against Mazile because of her disability.

Medallia Inc. v. Echospan, Inc., No. 1:23-cv-3730-TCB, 2024 U.S. Dist. LEXIS 160154 (N.D. Ga. June 14, 2024). Medallia Inc. asserted that Echospan, Inc. infringed Medallia’s patent regarding sentiment analysis of text. The Court denied Echospan’s motion asserting that Medallia’s patent was directed to patent-ineligible subject matter because the parties had not yet agreed on the meaning of critical terms “first model” and “relevantly similar analysis model” in the patent claims.

Doe v. Emory Univ., 734 F. Supp. 3d 1369 (N.D. Ga. 2024). Two students at Emory University created an “artificial intelligence-based learning tool” that Emory’s Honor Council determined may be used for cheating. Emory initiated disciplinary proceedings against the students. In this case, the Court rejects one student’s motion to proceed in litigation anonymously because the student did not satisfy precedential requirements for permitting anonymity in court, despite the student’s assertions that they could be subject to negative attention if their identity was made public.

§ 1.2.12. DC Circuit

TikTok Inc. & ByteDance Ltd. v. Garland, 122 F.4th 930 (D.C. Cir. 2024). The federal Protecting Americans from Foreign Adversary Controlled Applications Act, enacted in April 2024, results in the ban of Tik-Tok’s AI-enabled social media app in the US. Among other claims, TikTok asserted that the Act violated freedom of speech under the First Amendment. The Court rejected the TikTok’s First Amendment claim on the basis that the Act’s provisions addressed compelling national security interests “to counter (1) the PRC’s efforts to collect data of and about persons in the United States, and (2) the risk of the PRC covertly manipulating content on TikTok.” The U.S. Supreme Court affirmed this judgment in January 2025. See TikTok Inc. v. Garland, 145 S. Ct. 57 (2025).

Rubio v. District of Columbia, Civil Action No. 23-719 (RDM), 2024 U.S. Dist. LEXIS 218004 (D.D.C. Dec. 3, 2024). In this case, the Court denied all the plaintiff’s federal and D.C. law claims, including based on the plaintiff’s provision of cases likely fabricated by AI.

Biddle v. DOD, Civil Action No. 23-1380 (TJK), 2024 U.S. Dist. LEXIS 164961 (D.D.C. Sep. 13, 2024). Plaintiff Biddle requested certain “records pertaining to the Algorithmic Warfare Cross-Functional Team’s use of Google technology, software or hardware” from the Department of Defense via a Freedom of Information Act (FOIA) request. The Department asserted that disclosure of its approach to AI development and implementation in response to the FOIA request would “reveal vulnerabilities in Department of Defense critical infrastructure.” The Court was unconvinced, including because an approach to AI is not clearly “infrastructure.” The Court denied both parties’ motions for summary judgment.

United States v. Google LLC, 747 F. Supp. 3d 1 (D.D.C. 2024). As part of a broader case alleging that Google was engaged in monopolistic practices in violation of antitrust law, Google asserted that the rapid development of AI eroded barriers to entry to providing general search services. The Court rejected that assertion on the basis that AI had not yet developed sufficiently to “change the market dynamic in the ‘foreseeable future’.”

§ 1.2.13. Court of Appeals for the Federal Circuit

Promptu Sys. Corp. v. Comcast Corp., 92 F.4th 1372 (Fed. Cir. 2024). Plaintiff Promptu Systems alleged that Comcast infringed its patents related to speech or voice recognition technology. The Federal Circuit Court of Appeals vacated the district court’s judgment with respect to certain claims and remanded the case for further proceedings.

§ 1.3. Legislation

As in 2023, legislation governing the development, deployment, and use of artificial intelligence continued to be a hot topic in 2024. Below, we summarize key substantive artificial intelligence legislation enacted in 2024.

§ 1.3.0. Multiple States

Deepfakes and sexual offenses. Many states enacted laws in 2024 related to deepfakes and sexual offenses. We list those states and their laws below.

• Alabama:
  • H.B. 168, Alabama Child Protection Act of 2024
• Delaware:
  • H.B. 353, An Act to Amend Titles 10 and 11 of the Delaware Code Relating to Deep Fakes
• Florida:
  • S.B. 1680, Advanced Technology
• Idaho:
  • H.B. 465, An Act Relating to Crimes Against Children
  • H.B. 575, An Act Relating to Disclosing Explicit Synthetic Media
• Indiana:
  • H.B. 1047, Sexual Offenses
• Louisiana:
  • S.B. 6, An Act to enact R.S. 14:73.14, relative to computer related crime; to create the crime of unlawful dissemination or sale of images of another created by artificial intelligence; to provide definitions; to provide penalties; and to provide for related matters
• Pennsylvania:
  • S.B. 1213, An Act amending Titles 18 (Crimes and Offenses) and 61 (Prisons and Parole) of the Pennsylvania Consolidated Statutes, in sexual offenses, further providing for the offense of unlawful dissemination of intimate image; in minors, further providing for the offense of sexual abuse of children and for the offense of transmission of sexually explicit images by minor; and making editorial changes to replace references to the term “child pornography” with references to the term “child sexual abuse material”
• Tennessee:
  • H.B. 2163, An Act to amend Tennessee Code Annotated, Title 39 and Title 40, relative to the sexual exploitation of children
• Washington:
  • H.B. 1999, Concerning fabricated intimate or sexually explicit images and depictions

Deepfakes and election protection. Many states enacted laws in 2024 related to deepfakes and election protection. We list those states and their laws below.

• Alabama:
  • H.B. 172, Relating to elections; to provide that distrib. of materially deceptive media is a crime
• Arizona:
  • S.B. 1359, Election communications; deepfakes; prohibition
  • H.B. 2394, Digital impersonation; injunctive relief; requirements
• California:
  • A.B. 2355, Political Reform Act of 1974: political advertisements: artificial intelligence
  • A.B. 2655, Defending Democracy from Deepfake Deception Act of 2024
  • A.B. 2839, Elections: deceptive media in advertisements
    • Note that enforcement of A.B. 2839 was partially enjoined under Kohls v. Bonta, No. 2:24-cv-02527 JAM-CKD, 2024 U.S. Dist. LEXIS 179933, as described above.
• Colorado:
  • H.B. 24-1147, Candidate Election Deepfake Disclosures
• Delaware:
  • H.B. 316, An Act to Amend Title 15 of the Delaware Code Relating to Deep Fakes in Elections
• Florida:
  • H.B. 919, Artificial Intelligence Use in Political Advertising
• Hawaii:
  • S.B. 2687, Elections; Materially Deceptive Media; Artificial Intelligence; Deepfake Technology; Prohibition; Penalty; Remedies
• Minnesota:
  • H.F. 4772, Elections policy and finance bill
• Mississippi:
  • S.B. 2577, An Act to Create a New Section in Title 97, Chapter 13, Mississippi Code of 1972, to Create Criminal Penalties for the Wrongful Dissemination of Digitizations; and for related purposes
• New Hampshire:
  • H.B. 1596, An Act requiring a disclosure of deceptive artificial intelligence usage in political advertising
  • H.B. 1432, An Act relative to prohibiting certain uses of deepfakes and creating a private claim of action
• New Mexico:
  • H.B. 182, An Act relating to Elections; amending and enacting sections of the Campaign Reporting Act by adding disclaimer requirements for advertisements containing materially deceptive media; creating the crime of distributing or entering into an agreement with another person to distribute materially deceptive media; adding definitions; providing penalties
• Oregon:
  • S.B. 1571, Relating to the use of artificial intelligence in campaign communications; declaring an emergency
• Utah:
  • S.B. 131 (includes clauses touching on elections and criminal justice)
• Wisconsin:
  • A.B. 664, An Act to amend 11.1303 (title); and to create 11.1303 (2m) of the statutes; relating to: disclosures regarding content generated by artificial intelligence in political advertisements, granting rule-making authority, and providing a penalty

§ 1.3.1. California

A.B. 1008, California Consumer Privacy Act of 2018: personal information. Enacted in September 2024, this act revises the scope of personal information under California’s Consumer Privacy Act to allow for multiple formats in which personal information may exist, including abstract digital formats such as “artificial intelligence systems that are capable of outputting personal information.”

A.B. 1836, Use of likeness: digital replica. Enacted in September 2024, this act creates a cause of action for damages when a digital replica of a deceased person is used without prior consent from the person’s estate.

A.B. 2013, Generative artificial intelligence: training data transparency. Enacted in September 2024, this act requires developers of generative AI systems released to California residents on or after January 1, 2022, to disclose details about the data used to train the systems, including a summary of the relevant datasets.

A.B. 2602, Contracts against public policy: personal or professional services: digital replicas. Enacted in September 2024, this act makes unenforceable certain contract provisions regarding performance of services by a digital replica of an individual in lieu of that individual’s own work on or after January 1, 2025.

A.B. 2905, Telecommunications: automatic dialing-announcing devices: artificial voices. Enacted in September 2024, this act amends California’s requirements regarding automated phone calls to further require notification to the call recipient if a prerecorded message uses an artificial voice (generated or significantly altered via artificial intelligence).

A.B. 2885, Artificial Intelligence. Enacted in September 2024, this act amends various sections of California state law to define artificial intelligence as “an engineered or machine-based system that varies in its level of autonomy and that can, for explicit or implicit objectives, infer from the input it receives how to generate outputs that can influence physical or virtual environments.”

S.B. 942, California AI Transparency Act. Enacted in September 2024, this act applies to producers of generative artificial intelligence systems that have over one million monthly users and are publicly accessible within California. The producers must comply with various transparency requirements, such as providing free AI detection tools, and enabling disclosure of and disclosing when content is generated by AI.

A.B. 3030, Health care services: artificial intelligence. Enacted in September 2024, this act requires health care providers to notify patients when communication is performed using generative AI.

S.B. 1120, Health care coverage: utilization review. Enacted in September 2024, this act imposes various requirements on use of AI by health care service plan or disability insurers in performing utilization review or utilization management functions.

§ 1.3.2. Colorado

S.B. 24-205, Consumer Protections in Interactions with Artificial Intelligence Systems. Enacted in May 2024, this act requires developers and deployers of high-risk artificial intelligence systems to use reasonable care to protect Colorado consumers from any known or reasonably foreseeable risks of algorithmic discrimination.

§ 1.3.3. Illinois

H.B. 3773, Limit Predictive Analytics Use. Enacted in August 2024, this act amends Illinois’s list of civil rights violations to include (1) use of artificial intelligence for employment decision purposes that subjects employees to discrimination based on a protected class or zip code as proxy for a protected class, and (2) failure to notify employees of use of artificial intelligence for employment decision purposes.

H.B. 4875, Publicity Act—Use of AI. Enacted in August 2024, this act provides artists with rights to control use of digital replicas of them.

H.B. 4762, Digital Voice and Likeness Protection Act. Enacted in August 2024, this act imposes various requirements on contractual negotiations intended to permit creation and use of digital replicas of an individual.

§ 1.3.4. New Hampshire

H.B. 1688, An Act relative to use of artificial intelligence by state agencies. Enacted in May 2024, this act restricts state agencies from discriminating against people using AI, using AI for biometric surveillance, and using deepfakes for deceptive or malicious purposes.

§ 1.3.5. New York

S. 9832, New York State Fashion Workers Act. Enacted in December 2024, this act requires model management companies to obtain clear written consent to create or use, or alter or modify using artificial intelligence, a model’s digital replica.

S. 7676B, Establishes contract requirements for contracts involving the creation and use of digital replicas. Enacted in December 2024, this act imposes various requirements on contractual negotiations intended to permit creation and use of digital replicas of an individual.

S. 7543A, Enacts the legislative oversight of automated decision-making in government act (LOADinG Act). Enacted in December 2024, this act imposes various requirements, including disclosure requirements, on state agency use of automated decision-making systems.

§ 1.3.6. Tennessee

S.B. 1711, An Act to amend Tennessee Code Annotated, Title 49, relative to artificial intelligence. Enacted in March 2024, this act requires Tennessee state universities and public schools “to adopt a policy regarding the use of artificial intelligence by students, faculty, and staff for instructional and assignment purposes.”

H.B. 2091, Ensuring Likeness, Voice, and Image Security Act of 2024 (ELVIS Act). Enacted in March 2024, this act expanded existing law granting a property right in a person’s name, photograph, or likeness to include a property right in the person’s voice (including a simulation of the voice).

§ 1.3.7. Utah

S.B. 149, Artificial Intelligence Policy Act. Enacted in March 2024, this act requires disclosure of the provision of generative artificial intelligence-enabled services to a user, including for services of a regulated occupation. The act also establishes various initiatives related to artificial intelligence in Utah.

H.B. 366. Enacted in 2024, this act limits how an algorithm or risk assessment tool score may be used in various criminal justice procedures.

Shortly before the scheduled start of trial, the U.S. Department of Justice (“DOJ”), Antitrust Division (“Division”) reached a settlement with Hewlett Packard Enterprise (“HPE”) and Juniper Networks (“Juniper”) that allows their $14 billion merger to proceed. The settlement, described by the agency as “novel,” requires divestiture of an HPE business line to a preapproved buyer and at least one license of certain Juniper technology to one or more licensees that must be approved by the Division.

For the third time in a month, the new administration has approved a structural remedy in order to address the potential anticompetitive effects of a merger.

The Transaction

HPE offers products in a number of technology markets, including general-purpose servers, cloud storage, and finance. The company also sells networking products, including wireless access points and campus switches, under the HPE Aruba Networking brand and its legacy on-premises network management solution, Airwave. Juniper provides a range of networking products, including wireless access points, wired switches, and network management software under the Mist brand.

After the merger, HPE and Juniper’s aggregate market share would be only approximately 22–26 percent, below the 2023 Merger Guidelines’ 30 percent market share threshold for presumption of a merger’s illegality. However, the Division also alleged that the parties’ largest competitor has an approximate 48 percent market share and that at least seven other competitors each have market shares of only between 1 percent and 10 percent for commercial or enterprise-grade wireless networking solutions. The transaction would result in two firms controlling over 70 percent of the relevant market, with a significant gap between post-closing HPE and the next largest competitor in the market, allegedly making it easier for the two largest companies to reach and sustain a consensus on price, features, and reliability.

Though the transaction was cleared by fourteen foreign antitrust authorities, the Division sued to block the merger in January 2025 over concerns about competition for local wireless networking technology. According to the agency’s complaint, there were three primary theories of harm: (1) loss of head-to-head competition between the merging parties’ Aruba and Mist brands, causing prices to increase; (2) elimination of a disruptive force in the industry that has introduced tools to significantly lower the cost of wireless networks; and (3) increased risk of coordination among the remaining vendors.

The European Commission’s public findings regarding the transaction’s impact in the European Economic Area are in stark contrast with the Division’s allegations. Recent statements by HPE’s CEO might, however, explain the divergence; he has said that the transaction would facilitate the firm’s ability to better compete outside the United States, where more competitors with higher market shares participate in the market.

The Remedies

The divestiture and technology license(s) required by the settlement are intended to eliminate the alleged anticompetitive effects of the acquisition by strengthening one or more existing competitors or facilitating entry of a new competitor for enterprise-grade wireless local area network (“WLAN”) solutions.

• HPE must divest its global “Instant On” campus and branch WLAN business, including all assets, intellectual property, R&D personnel, and customer relationships within 180 days.
• The parties must also hold an auction for a perpetual, worldwide, nonexclusive license to Juniper’s AI Ops for Mist source code. The license will include optional transitional support “on reasonable commercial terms” and personnel transfers.

The settlement also assures that any winning licensee will have the right to any improvements to and derivatives of the licensed technology and the right to grant rights of use to the technology to its end users and service providers as reasonably needed. If the auction results in multiple bids exceeding $8 million, Juniper will be required to license to at least one additional bidder. This novel approach by the Justice Department reflects a commitment to solving unique challenges in mergers.

While not routine, license remedies have been used previously. For example, in 2017, the Federal Trade Commission (“FTC”) accepted a license remedy for it challenge to a pharmaceutical company’s acquisition of the US rights to the drug Synacthen. The FTC alleged there that the acquisition would prevent the development of a US competitor to the buyer’s monopoly. In another instance, a licensing remedy was approved in a post-consummation merger challenge.

A licensing remedy alone, however, would likely have been insufficient here. The divestiture of a business is an important component to the settlement with HPE and Juniper. Parties considering transactions should not assume that a license alone will resolve agency concerns. According to public reporting, the settlement was not supported by Division staff but was instead approved by leadership of the DOJ. Even assuming an antitrust enforcement divide within the administration, it is at least clear that there is a willingness to resolve merger challenges in advance of trial as was the case here and in advance of complaint in two other recent transactions. This shift in approach should be taken into consideration when assessing the enforcement risk of potential transactions, when designing agency clearance strategies, and when negotiating antitrust risk-shifting provisions in purchase agreements.