The built environment encompasses all human-made spaces and structures where people live, work, and move. On September 19, at the American Bar Association (“ABA”) Business Law Section Fall Meeting, a CLE program presented by the Corporate Sustainability Law Committee explored how evolving legal, financial, and insurance frameworks are shaping physical structures, land use, systems, and services for sustainable real estate development.

The panelists for the CLE program—Elizabeth Beardsley with the U.S. Green Building Council, Jenna Kirkpatrick Howard with Lockton, Amanda Schermer MacVey with Venable LLP, and Elizabeth Yazgi with LSTA, Inc.—addressed sustainability considerations for new and existing buildings, financing mechanisms for energy efficiency and decarbonization retrofits and new builds, risk mitigation strategies amid climate resilience considerations, and practical solutions to implementation barriers. Attendees gained insights essential for competence in advising clients on emerging standards, legal requirements, and best practices for property ownership and the future of our nation’s buildings, parks, transportation systems, bridges, and other human-made spaces and structures that shape how people live, work, and recreate.

Howard began the program by offering data and statistics on the growth in number, severity, and cost of climate-related events. She noted property insurers have closely monitored the financial and economic impacts of changing climate and weather, with the 2020s off to an ominous start. She reported that there was $89 billion in average annual incurred property insurance losses between 2020 and 2023 and twenty-seven events in the United States alone in 2024 that caused at least $1 billion in economic damage with combined disaster costs of $182.7 billion. She warned that climate-related disasters are projected to cause economic losses of $12.5 trillion worldwide by 2050.

MacVey discussed the role of attorneys in guiding clients through evolving laws, codes, and regulations relating to the construction and operation of buildings, which surprisingly account for approximately 33 percent of carbon dioxide emissions. MacVey noted the expanding role of local building and energy codes and explained the ethical standards adopted by industry organizations for design professionals and engineers. She touched upon the impact of the ABA’s House of Delegates approval of Resolution 513 on August 5, 2024, regarding the importance of incorporating sustainability into the practice of law. She also spoke of the Building Code Adoption Tracking (“BCAT”) program of the Federal Emergency Management Agency (“FEMA”), which analyzes adoption of provisions related to natural hazard resistance, and discussed the significance of residential and commercial energy codes, especially in states that enacted significant legislation in 2024 and 2025 to advance sustainability objectives such as California, Hawaii, Maine, New York, Florida, and Vermont. MacVey insisted that business lawyers with clients in real estate development or use in these states in particular must have some level of competence in this rapidly changing landscape.

Beardsley described the range of policies for high-performing green buildings, including green building adoption for public buildings as well as incentives and permit conditions for private buildings, and how state and local governments use certifications to implement their goals for the built environment. She highlighted certain financial products for deep energy retrofits, efficiency upgrades, and new sustainable developments. She touched upon the evolution of LEED standards for sustainable building, and the latest version, LEED v5, which requires that all building projects conduct a climate resilience assessment. She also provided the essential concepts of green financial products such as Property Assessed Clean Energy (“PACE”) financing, energy performance contracts, and green mortgages that deliver both environmental benefits and economic returns. In a world of political backlash to environmental, social, and government (“ESG”) practices, Beardsley explained how the drivers of sustainable investing, climate risk, resource scarcity, and social resilience remain intact. As Triodos Investment Management put it in one of its commentary pieces, the “ESG backlash doesn’t make economic sense”—the backlash is political, not financial.

Yazgi discussed the factors driving financial market participants’ interest in sustainable debt financing and provided a walkthrough of the LSTA’s “framework documentation” governing the critical sustainable lending instruments available in the market—namely, sustainability-linked loans and use-of-proceeds, or thematic, instruments (“green,” “social,” and “transition” loans). She detailed how ESG products fit within the broader financial markets, noting the continued interest by lenders and investors in projects that contribute to specific social or environmental objectives and that direct capital towards sustainable investments. She also highlighted the inaugural Transition Loans Guide from the LSTA, Loan Market Association (“LMA”), and Asia Pacific Loan Market Association (“APLMA”), which reflects the advance of transition instruments. The latter have become increasingly adopted as entities in high-emitting sectors seek financing to transition from high-carbon to low-carbon operations and develop business models that contribute meaningfully to the decarbonization of the real economy. She closed by noting that, despite recent regulatory rollback and government retreat from ESG priorities, sustainable finance remains an important opportunity for companies and investors and illustrates that lending can be a critical source of capital.

The panelists each noted that all those involved in real estate development and use (and the lawyers that advise them) are adjusting to the legal and regulatory changes prompted by the evolving risk of weather-related disaster events. Industry standards are shifting toward strategic foresight, anticipating climate-related challenges and disruptions, and allocating resources for long-term value creation. Strategies for overcoming barriers facing sustainable projects—whether in financing, legal compliance, or risk mitigation—are essential. There is an emerging transformation of industry standards in our built environment that will result in changes to legal standards. Whether we look at soft or hard law, sustainability issues are core to existing and future real estate and relevant to multiple business units including, but not limited to, finance, procurement, and supply chains.

Howard ended the program by discussing the current state of the insurance marketplace for real estate development and use, changes to modeling based on the rapid pace of climate change, and how volatile insurance rates impact projects. She shared examples of how insurers incentivize property owners to sustainable investments. The session wrapped up with risk considerations factors when considering a location for real estate development.

Not touched upon during the panel discussion because of lack of time but also relevant given the program’s content is the pressing need for companies to prepare to protect their employees in the face of a climate-related crisis. Two pending litigations—Elijah Johnson et al. v. Mayfield Consumer Products, filed in the Graves County Circuit Court in Kentucky on December 16, 2021, and Peterson Family v. Impact Plastics, Inc. and Gerald O’Connor, filed in the Tennessee State Court on October 14, 2024—allege the defendant employers denied employees’ pleas to evacuate during severe weather warnings, with tragic results. Best practices now clearly require companies to not only adopt a written emergency plan but also approach climate-related risks as triggering Occupational Safety and Health Administration (“OSHA”) requirements to maintain a safe workplace.

While no one can predict when known regional threats such as hurricanes or wildfires will strike, employers can certainly plan for what to do if such crises unfold. Preparing for climate-related disasters will mitigate against legal risk, assure (as well as possible) employee safety, foster communication, and clarify realistic compensation and leave expectations. The climate-related emergency plan should address at a minimum: (i) clear and direct communication prompts; (ii) mass alert systems via text, email, or phone, if feasible; (iii) where employees should shelter physically in the workplace during a disaster if evacuation is not possible; (iv) what safety protocols are in place for on-site or essential workers; (v) when and how business operations will close or reopen; and (vi) training with emergency drills or simulations. OSHA’s How to Plan for Workplace Emergencies and Evacuations is a great resource.

Note that, under the Fair Labor Standards Act, nonexempt employees must be paid for hours actually worked. If employees are at work but are unable to work, like in the event of a power outage, pay is still required. If employees are sent home, assuming no employment-related tasks are performed at home, pay is not required. Exempt employees must receive their full salary if they work any part of the week. Employees may be required to use paid time off during closures, but such a policy should be in place and clearly communicated to employees in advance if the employer hopes to avoid confusion and complaints. Disasters are unpredictable, but violations of workplace safety and compensation statutes despite known severe weather risks are.

While the term “climate change” may be considered polarizing or politically charged, businesses and the attorneys that represent them must address the reality of changes in climate patterns and the growing number of severe climate-related events. Like all other foreseeable business-related risks, all applicable federal, state, and local laws must be reviewed in the due diligence assessment of such risk.

This article is related to a CLE program titled “Sustainability in Real Estate: State, Local, and Private Requirements and the Future of the Built Environment” that took place during the ABA Business Law Section’s 2025 Fall Meeting. To learn more about this topic, listen to an audio recording of the program, free for members.

This is the eleventh installment in the Year in Governance Series from the In-House Subcommittee of the ABA Business Law Section’s Corporate Governance Committee. Each month, the series will share key tips on a different corporate governance topic. To get involved in the Corporate Governance Committee, please visit the committee’s webpage.

A message from Kathy Jaffari: “As Chair of the Corporate Governance Committee, I would like to extend my sincere appreciation to the authors for this publication. The Corporate Governance Committee has ongoing opportunities for writing and volunteering with various projects, whether it’s an article you want to publish or a CLE that you want to present. Our Committee is dedicated to helping you promote informative resources for corporate governance practitioners. You may contact me at [email protected] to get involved.”

Executive sessions of a board of directors enable directors to speak freely, voice concerns openly, and arrive at informed decisions without external pressure. Ensuring that these sessions are properly conducted, documented, and legally compliant requires careful attention to both procedural and substantive considerations. A well-run session protects the corporation and builds trust and confidence in the decision-making process.

1. Differentiate between three types of executive sessions. The board should recognize three distinct types of executive sessions: (a) directors-only sessions for candid, non-legal discussions about board culture or dynamics; (b) privileged sessions with counsel present to provide legal advice; and (c) committee-level sessions, such as audit committee meetings with external auditors. Each type has different attendance rules, documentation requirements, and privilege implications. Codifying these distinctions in governance guidelines prevents confusion about who should attend and when privilege applies.
2. Schedule sessions strategically—and mix it up. Consider placing executive sessions on every regular board meeting agenda to normalize the practice and avoid signaling crisis. For listed companies, regular executive sessions are not optional—listing requirements mandate them. A regular cadence satisfies regulatory expectations while providing consistent opportunities for independent discussion, even when no pressing matters exist. Rather than leaving the sessions until the end (often the default approach), some boards include executive sessions at the midpoint of meetings or immediately following key discussions.
3. Use a “CEO in/out” protocol. During executive sessions, first invite the CEO for a portion to exchange candid feedback on strategic matters, then excuse the CEO for truly independent discussion. This approach maintains open communication while preserving independence. Designate the lead independent director or chair as the single voice for post-session feedback to the CEO, which can help to prevent sending mixed messages. Document who attends each portion of the session and when transitions occur, and apply the same discipline for other executives or advisors.
4. Go on the record to confirm privileged discussions. When counsel joins to provide legal advice, begin with a clear oral statement such as: “I would like to confirm for the record that the purpose of this portion of the session is to provide the board with privileged legal advice regarding [topic].” This creates a contemporaneous record of intent, which may be helpful in the event of litigation. Make sure that counsel announce when the privileged segment begins and ends, and excuse all nonessential parties before privileged discussions begin, so as to preserve the privilege.
5. Match documentation to the session. For general discussions, keep minimal records; the board minutes should simply note something like, “The independent directors met in executive session. No formal actions were taken.” For formal actions, document the resolution (e.g., CEO compensation decision), but not the discussion. For legal advice, have counsel personally prepare privileged legal minutes, mark them privileged, and maintain them in legal department files, not the corporate minutes book. Do not record individual director comments or create detailed transcripts that could become problematic in any future litigation.
6. Address CEO succession. Reserve executive session time at least annually for both emergency and long-term succession planning. This is a critical oversight duty. In the minutes, record that succession planning was reviewed and readiness was confirmed, as well as next steps, if any—without summarizing the discussion. If counsel is advising on employment, disclosure, or litigation risk, move that portion into a privileged segment of the session and keep privileged minutes (maintained by counsel) for that discussion.
7. Orchestrate the post-session “feedback loop.” Predictably, executive sessions can create significant anxiety for management. Designate the lead independent director (or chair) as the single voice to deliver the debrief after synthesizing the board’s feedback and framing it constructively. The lead director should deliver feedback consistently, covering general themes and any decisions or action items, but should not reveal individual director positions or comments.
8. Tailor executive sessions to committee needs. Audit committees must meet regulatory obligations for private sessions with external auditors. Compensation committees may need time with independent consultants to discuss sensitive pay matters. Nominating and governance committees address board composition, independence assessments, and director performance privately. And know when to recuse yourself: if the session addresses investigation of the entire executive team including counsel, the board needs independent outside counsel.
9. Implement technology and communication controls. As always, be particularly cautious with email—directors using employer systems may lack the privacy expectation necessary to maintain privilege. Use secure board portals for all session materials and restrict access appropriately. Establish clear protocols about destroying drafts and maintaining only official records. Remind directors that informal texts or personal emails about session topics can expand discovery and jeopardize confidentiality if there is litigation.
10. Codify the executive session process in a formal policy. Consider adopting a short executive session guideline that addresses when sessions are held, who attends which sessions, who sets the agendas, what documentation standards apply, and how feedback flows to management. This policy can serve as a training tool and help manage expectations. Keep in mind that executive session materials, while confidential, are discoverable in litigation, and so proper procedures provide essential legal protection.

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

Nowadays, arbitration agreements are ubiquitous in the consumer finance context; some studies indicate that more than 90 percent of certain consumer contracts contain mandatory arbitration agreements. Over the years, many states and various government agencies have attempted to curtail or outright ban the use of arbitration agreements with little success. That has not stopped the California state legislature, however, which in recent years has attempted to limit arbitration in various ways.

California is back at it again with the passage of S.B. 82, which seeks to limit the scope of arbitrable claims in “consumer use agreements.” The law, which becomes effective January 1, 2026, is almost sure to be challenged in court on preemption and other grounds.

What Does S.B. 82 Do?

S.B. 82 limits arbitrable claims in consumer use agreements (broadly defined as an agreement to “use, receive, or otherwise enjoy a good, service, money, or credit”) to claims arising out of and relating to the contract containing the agreement to arbitrate. Broadly speaking, this means that a claim or dispute separate and apart from the contract (like a later injury or a tort claim that is unrelated to the original contract) is no longer arbitrable even if such a claim would fall within the arbitration agreement’s definition of a “claim” or “dispute.”

California then went further and made clear that any arbitration agreement that violates this limitation is “void and unenforceable”: any waiver of this new law contained in an arbitration agreement is deemed contrary to public policy and unenforceable. 

Supporters Say an End to “Infinite” Arbitration Clauses Is Necessary

Proponents of the bill say it is necessary to end “infinite” arbitration clauses. As Senator Thomas Umberg, the chair of the California Senate Judiciary Committee, stated, “No one should be denied their day in court because they clicked ‘I agree’ to a streaming trial or grocery app years ago. SB 82 makes sure arbitration applies only to the contracts people actually sign, not to every future dispute corporations can dream up.”

Senator Umberg also criticized so-called “infinite” arbitration clauses as producing “absurd and unfair” results, pointing to a widely publicized case in which Disney initially attempted to compel arbitration of a wrongful death lawsuit on the basis that the decedent had agreed to an arbitration clause when he signed up for a Disney+ trial account. 

An End-Around the FAA?

S.B. 82 will most likely be challenged in court on a number of grounds, including whether it is preempted by the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1 et. seq. The FAA was enacted by Congress nearly a century ago and was designed to overcome longstanding judicial hostility to arbitration. To that end, the FAA mandates that courts liberally construe arbitration agreements in favor of arbitration. Also, while the FAA does not include an express preemption clause, courts, including the Supreme Court, have routinely found state laws that unfairly target arbitration or treat arbitration agreements differently from other contracts are preempted by the FAA.

In fact, California is no stranger to having its laws preempted by the FAA; it has happened numerous times over the years, ranging from laws attempting to preclude arbitration agreements in the employment context to laws attempting to avoid arbitration agreements that did not permit class-wide arbitration. And while proponents of S.B. 82 claim that it only regulates the scope of arbitration and not the formation of an agreement to arbitrate, that is arguably a distinction without a difference. Indeed, the Supreme Court has previously held that the FAA “preempts any state rule discriminating on its face against arbitration—for example, a ‘law prohibit[ing] outright the arbitration of a particular type of claim.’”

Challenges to the text of the bill itself will almost assuredly follow as well.

What’s Next?

While S.B. 82’s future will most likely be decided in court, financial services companies that contract with and do business with California consumers would be well served to re-review their arbitration agreements now to address the enactment of the bill. If the bill survives judicial scrutiny, businesses will need to revise their broad arbitration agreements to account for it.

In addition, businesses would be well served to include a delegation clause in their arbitration agreements. Delegation clauses indicate who decides threshold questions of arbitrability: a court or an arbitrator? Absent such a clause, threshold questions as to arbitration, including the scope of an agreement, are for a court to decide. S.B. 82 arguably raises such threshold questions, and delegating those questions to an arbitrator may be appropriate.

Ultimately, California’s S.B. 82 represents a significant legislative shift in consumer arbitration law, targeting the overreach of so-called “infinite” arbitration clauses. If it survives potential legal challenges, it will likely reshape how businesses structure arbitration clauses and how consumers can contest them in California and elsewhere.

An Exploration of the Curious Near-Total Disappearance of “Fiduciary Out” Provisions in Private Company Sale Transactions.

Few practitioners will be surprised to learn that virtually all public company merger agreements include customary “fiduciary out” provisions.^[1] However, many might be surprised to learn that virtually no recent private company acquisition agreements include “fiduciary out” provisions,^[2] especially since the core fiduciary duties owed by the directors of public and private target companies are essentially the same.

What accounts for this stark difference? After a brief summary of the rationales for “fiduciary out” provisions, this article will:

• review why most private company acquisitions can be safely completed without fiduciary out provisions;
• discuss the limited set of circumstances when private company targets should strongly consider requesting fiduciary out provisions; and
• offer hypotheses on:
  • why so few attorneys representing private company targets have succeeded in including fiduciary out provisions in their clients’ acquisition agreements; and
  • whether the increasing use of artificial intelligence tools will revive the use of fiduciary outs in private company transactions.

I. Rationales for Fiduciary Out Provisions

The fiduciary duties of corporate directors emanate principally from centuries-old principles of agency and trust law, both of which recognize the need to safeguard the interests of persons who confer legal powers over their affairs to other persons. To protect against abuses of power, the fiduciary is charged with the duty to act in the best interest of the beneficiary.^[3]

In most cases, fiduciaries can operate free of liability if they act in good faith and with a reasonable level of care.^[4] In the corporate setting, this general deference to fiduciary decision-making has been embodied in the business judgment rule, first articulated in the United States by the Louisiana Supreme Court in the 1829 case of Percy v. Millaudon.^[5] But in Revlon v. MacAndrews and other decisions, Delaware courts have long held that sales of corporate control require a more exacting standard of judicial review.^[6] This higher level of judicial scrutiny is premised on several factors, including the “omnipresent specter that a board may be acting primarily in its own interests” and the recognition that the sale of control is a critical one-time corporate event necessitating heightened judicial vigilance.^[7]

The Delaware courts have further held that target company directors cannot contractually disclaim in an acquisition agreement their fiduciary duties regarding the target’s subsequent receipt of an improved offer. As stated in QVC, any contractual provision that purports to limit the directors’ exercise of their fiduciary duties is “invalid and unenforceable.”^[8] These cases sharply conflict with the understandable desire of the acquiror to document its right to complete its acquisition on the terms contractually agreed to by the parties, which creates a tension between the target board’s desire for deal optionality to meet the Revlon standard and the parties’ mutual contractual commitments to expeditiously close their transaction. In response to this tension, practitioners have crafted “fiduciary out” provisions that expressly permit the target to pursue alternative transactions in a narrowly defined set of circumstances. In the words of a former Delaware chancellor, these provisions provide an “escape hatch” to a target corporation that excuses nonperformance of a merger agreement in the event of a superior proposal or intervening event.^[9]

Fiduciary out provisions vary in terms of their breadth and scope, but they generally fulfill the central purposes of (i) enabling target directors to pursue the best deal available in accordance with Revlon without breaching their contractual commitments to the acquiror and (ii) allowing target stockholders to reap the benefit of any superior intervening offer. In a 2000 article, former Chancellor William T. Allen suggested an intriguing additional rationale for fiduciary out provisions. Chancellor Allen noted that judges are fallible human beings charged with broad equitable powers to scrutinize complex transactions under a standard of review that requires them to substantively review ex-post the reasonableness of the directors’ prior decisions to sell their companies. Chancellor Allen further noted that the judicial contours of directors’ duties and the “reasonableness” of their actions are not clearly marked. This creates risk that judges might “mistakenly” impose liability on directors who acted in good faith after due deliberations. Although Chancellor Allen conceded that some sales transactions can safely proceed with no fiduciary out, he warned that “there invariably is some degree of risk associated with this strategy (because courts are imperfect at distinguishing true from feigned good faith).”^[10] According to Chancellor Allen, directors seek protection from these risks, and they are key beneficiaries of fiduciary out provisions.^[11]

Other commentators have argued that stockholders are the primary beneficiaries of fiduciary outs, while yet others have noted that even acquirors can benefit from them by ensuring that acquirors will receive a contractually negotiated termination payment rather than being confronted with an unenforceable contract.^[12] Regardless, however, most commentators agree that the primary purposes of fiduciary outs are to foster value maximization in favor of target stockholders and liability minimization in favor of target directors.^[13]

II. Factors Limiting the Need for Fiduciary Outs in Private Sales

Stockholders and directors of target companies, whether publicly or privately held, generally seek to maximize transaction value and minimize legal risk. Consequently, it is reasonable to assume that practitioners representing private company targets would attempt to attain either or both of these goals through fiduciary outs. However, as noted above, in recent years practitioners have rarely been successful in obtaining such language in their agreements.

There are various reasons for the absence of fiduciary outs in private sales transactions. Several of these are obvious, many are well-reasoned, and most are interrelated. But some are less tenable than generally believed.

First, in tightly held corporations, the directors might beneficially own all of the stock. If so, there are no unaffiliated stockholders who need protection from potentially abusive or careless directors, or who could potentially benefit from alleging a breach of a fiduciary duty (absent highly unusual facts). Moreover, these individuals negotiating the transaction will invariably possess adequate information to assess the relative benefits of a fiduciary out and to make an informed and enforceable decision to forego the protections afforded thereby. A similar dynamic applies if the directors own only a portion of the stock, but have close relations with the small number of other stockholders. Here too, this group of individuals will embody all of the key beneficiaries of a fiduciary out and should possess sufficient information to knowingly agree amongst themselves to forego the related protections.

Second, stockholders in closely held corporations may be uninterested in the deal optionality promoted by fiduciary outs. Family-controlled companies may prioritize transaction speed upon the death or impending retirement of their CEO if there is no available successor or if a controlling block of stockholders demands a prompt sale to provide near-term liquidity. Undercapitalized or thinly staffed targets might also prefer a quick sale to limit transaction expenses or managerial distraction. In addition, companies backed by private equity might favor transaction speed if faced with pressures to return capital to limited partner investors. In each of these cases, the target’s stockholders would likely prioritize deal certainty over the potential benefits of a fiduciary out.^[14]

Third, private company directors may be less successful policing private company sales processes, where personal industry relationships play a significantly greater role than in public sales. Unlike public company directors, directors of many closely-held corporations may be family members or long-standing friends or associates of the company’s founder or CEO. These directors may be less inclined to resist the plan of such founder or CEO to sell the company to a predetermined acquiror quickly without the benefit of a fiduciary out. These directors may also lack sufficient transaction acumen to hire experienced advisors or resist the advice of financial advisors to accept the first acceptable offer.^[15] This dynamic should, of course, raise concerns for any attorney representing a private target, because any suggestion that the sales process was unduly cloistered will substantially increase the risk of a court subsequently questioning the reasonableness of the directors’ decision-making.

Fourth, the risk of a private company or its directors being sued based on an alleged breach of fiduciary duties in connection with a sales transaction will almost always be lower than the comparable risk faced by a public company and its directors. There are many reasons for this. Most significantly, private companies will, in nearly all cases, have far fewer stockholders than public companies, and therefore fewer potential litigants. Plus, in closely-knit private companies, passive stockholders may be less inclined to sue the company’s board. In addition, private companies frequently have lower valuations, which reduces the size of potential recoveries for litigants seeking damages. Finally, unlike public companies, private companies are generally not legally obligated to announce their entry into a sales agreement. This lack of public disclosure significantly maximizes the likelihood that the transaction can be closed without a competing bid, which in turn reduces the likelihood of an ensuing judicial inquiry into the reasonableness of the directors’ actions. This diminished risk profile is likely a key factor in target corporations foregoing fiduciary outs when confronted with an acquiror’s vehement objection to including this feature in the acquisition agreement.

But diminished risk is not the same as no risk. In certain circumstances, the risk may not be sufficiently reduced to warrant foregoing a fiduciary out. If, for instance, management of a highly valuable target with a disparate group of stockholders agrees to sell without an adequate sales process, foregoing a fiduciary out could entail significant risk, especially if intra-family animosities increase the risk of judicial challenges.

Fifth, many private companies rely on Optima^[16] and its progeny to promptly secure stockholder approval of private company sales, often within twenty-four hours, by written consent. In Optima, the Delaware Chancery Court refused to enjoin a merger agreement approved by the target’s stockholders within twenty-four hours of the board’s approval thereof, notwithstanding the subsequent emergence of a higher offer. The court found that the target company’s board had satisfied Revlon by conducting a thorough process, and it further noted that “[n]othing in the [Delaware General Corporation Law] requires a particular period of time between a board’s authorization of a merger agreement and the necessary stockholder vote.”^[17] Accordingly, under the right set of circumstances, a target can quickly secure stockholder consent to a sale and rely on Optima and subsequent cases to conclude that a fiduciary out is unnecessary.^[18]

There are important constraints, however, on use of a rapid stockholder consent process. It may be impractical, or invite a hostile stockholder reaction, to expect stockholders to consent to a sales transaction this quickly, especially if the terms are complex or management has conflicting interests. A rushed approval process could cause directors to furnish a faulty stockholder information package that violates their duty of candor,^[19] or could result in an ill-informed stockholder approval that is subsequently voided by a court on the basis of inequitable process or inadequate disclosure.^[20] Moreover, prior to closing, stockholders who fail to consent (and potentially stockholders who do consent) will still be free to allege that the directors’ process failed to meet the Revlon standard. Because many private transactions require a substantial amount of time to obtain governmental or third-party consents, it is quite possible that leaked news of a pending sale will enable third parties to offer competing bids before the sale can be closed, thereby inviting legal challenges. In short, Optima should not be viewed as an all-encompassing panacea that absolves a target company from considering the merits of requesting a fiduciary out.^[21]

III. When Should Private Company Targets Request a Fiduciary Out?

Chancellor Allen’s warning cited in Section I above about judicial fallibility, coupled with the discussion above in Section II, suggest various scenarios where privately held target companies should be wary of proceeding without a fiduciary out. These include:

• sales by private companies with large stockholder bases, especially if (i) a block of stockholders is hostile to the management team, (ii) confidentiality concerns preclude management from canvassing the company’s stockholders to gauge their support prior to signing the acquisition agreement, or (iii) the transaction is large enough to entice interest from the plaintiffs’ bar;
• transactions approved solely or predominantly by non-independent directors, which are apt to draw more judicial scrutiny than transactions approved by independent directors;
• a sales process not reasonably designed to identify the most likely prospective bidders;
• transactions that suggest that management was unduly motivated by the desire to sell quickly or to a pre-determined acquiror at the expense of a careful review of all options; and
• transactions involving conflicts of interest, complex terms, or other features precluding rapid stockholder approval, which thereby create a window for competing bids and stockholder suits to emerge.

IV. Why Have Fiduciary Outs Virtually Disappeared from Private Sale Transactions, and Will Artificial Intelligence Tools Impact This Trend?

Without an exhaustive search of the specific circumstances governing each of the private company sales reflected in recent survey data, it is difficult to speculate with certainty why nearly all private target companies are currently foregoing fiduciary out protections. It is possible that most of the private companies reflected in the data are closely-held, tightly knit companies that believe they can forego fiduciary out protection at minimal risk. But this seems questionable because the number of complex, widely-held target private companies (often with hundreds of stockholders) is growing, not contracting. It is also possible that practitioners have concluded that the Delaware courts have lost their zeal for policing the reasonableness of sales processes under Revlon. But this would conflict with the near universal use of fiduciary outs in public company transactions.

A more likely explanation is that acquirors are using survey data to argue that fiduciary outs are “off-market” in private company sales, and that it is therefore patently unreasonable for any target company to request including one in a sales agreement. If, over time, this argument continuously prevails, the number of private company sales with fiduciary outs would be expected to continuously ratchet down.^[22]

Over the past couple of decades, survey data has, on balance, had a profoundly positive impact on dealmaking by allowing practitioners to more quickly resolve differences of views on negotiated terms, thereby freeing them to focus on more mission-critical tasks. But survey data can also become a crutch that forestalls substantive debate on when an “off-market” provision is justified in a sales agreement.

The manner in which artificial intelligence (“AI”) platforms are trained could have a significant impact on whether fiduciary outs in private company acquisitions remain rare or experience a resurgence. If AI platforms are trained to focus narrowly on the most prevalent terms used in recent deals, their use would likely reinforce the current trend towards the near-disappearance of fiduciary outs in private company acquisition agreements. Conversely, AI platforms trained to focus broadly on the full range of deal terms used in an expansive set of acquisition agreements could have the opposite effect by prompting sellers’ counsel to assess the potential benefits of including fiduciary outs in their private company sale transactions. If so, it would be quite ironic if AI helped to reinvigorate the open-minded debate over fiduciary outs that survey data has apparently squelched in recent years.

V. Conclusion

The discussion above clearly indicates that most private company sale transactions can be safely pursued with no fiduciary out provisions. But this discussion also suggests that, in certain limited instances, a private company target should vigorously seek the protections afforded by fiduciary outs. In these circumstances, counsel for the target should aggressively pursue the best interests of their client, and resist any attempt by the purchaser’s counsel to use survey data as a blunt weapon to preclude an objective debate over the reasonableness of the target’s position.

1. See generally deal points survey data published by the Mergers & Acquisitions Committee of the American Bar Association Business Law Section. ↑

2. According to survey data on private-target M&A transactions published in 2024 and 2025 by SRS Acquiom Inc., 0 percent and 2 percent of private company sales included fiduciary outs in 2023 and 2024, respectively. Prior SRS Acquiom survey data reflects a slightly higher incidence of these provisions in prior years, whereas a deal points study published in 2023 by the Mergers & Acquisitions Committee of the American Bar Association Business Law Section notes that 17 percent of private company sales in 2008 included fiduciary outs, with the number falling steadily thereafter. ↑

3. Julian Velasco, Fiduciary Duties and Fiduciary Outs, 21 Geo. Mason L. Rev. 157, 159–160 (2013). ↑

4. Deborah A. DeMott, The Oxford Handbook of Fiduciary Law (2017), citing Restatement (Third) of Agency (A.L.I. 2006). ↑

5. Percy v. Millaudon, 8 Mart. (N.S.) 68, 78 (La. 1829); see also Gerald V. Mantese & Emily S. Fields, The Business Judgment Rule, 99 Mich. Bar J. 30 (Jan. 2020). ↑

6. This article focuses on Delaware law, which has strongly influenced the jurisprudence of other states. ↑

7. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 180 (Del. 1986) (quoting Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985)). See also J. Travis Laster, Revlon Is a Standard of Review: Why It’s True and What It Means, 19 Fordham J. Corp. & Fin. L. 1, 5 (2013) (citing multiple cases cataloguing the financial and nonfinancial conflicts of interest raised by sales of corporate control). ↑

8. Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34, 51 (Del. 1993) (“QVC”). ↑

9. William T. Allen, Understanding Fiduciary Outs: The What and the Why of an Anomalous Concept, 55 Bus. Law 653, 653 (February 2000). A target company can also seek a different exemption from its contractual commitments to the acquiror in the form of a “go-shop” provision, whereby the acquiror expressly permits the target to seek competing offers. This article, however, focuses solely on fiduciary outs. ↑

10. Id. at 656–658. Similarly, in Ace Ltd. v. Capital Re Corp., 747 A.2d 95, 107 (Del. Ch. 1999), Vice Chancellor Leo E. Strine Jr. suggested there were some “limited circumstances” where a board may proceed without a fiduciary out, but he further noted that the absence of a fiduciary out would be “less justifiable” in most change of control transactions requiring a stockholder vote. ↑

11. Allen, supra note 9, at 657. ↑

12. Velasco, supra note 3, at 171–175; see also Lou R. Kling & Eileen T. Nugent, Negotiated Acquisitions of Companies, Subsidiaries and Divisions § 4.04 (2025 ed.). ↑

13. See generally Allen, supra note 9, and Velasco, supra note 3. See also Robert B. Little, Travis S. Souza, & Rachel F. Harrison, “No-Shops & Fiduciary Outs: A Survey of 2012 Public Merger Agreements,” Gibson, Dunn & Crutcher (2013). ↑

14. Granted, similar pressures could potentially arise in public corporations, but this dynamic is far more common in private corporations. ↑

15. Typically, financial advisors are structurally incentivized to close a large number of briskly paced transactions at acceptable prices rather than a materially smaller number of slower-paced transactions at the maximum available price. ↑

16. Transcript of Oral Argument on Plaintiff’s Motion for Preliminary Injunction and Ruling of the Court, Optima International of Miami, Inc. v. WCI Steel, Inc., No. 3833 (Del. Ch. June 27, 2008) (ruling from the bench). ↑

17. Id. at 127. ↑

18. Practitioners typically assume that Revlon’s enhanced standard of review is inapplicable to a post-closing damages action challenging a transaction not subject to the entire fairness standard if the transaction has been approved by a fully informed, uncoerced vote of the stockholders, citing Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015) and multiple subsequent cases citing Corwin. ↑

19. Delaware courts have required directors to fully and fairly disclose material information to stockholders when soliciting their approval, including a duty to provide “accurate, full, and fair” disclosure once the board elects to speak. Arnold v. Society for Savings Bancorp, Inc. 650 A.2d 1270, 1280 (Del. 1994). See also William M. Lafferty, Lisa A. Schmidt, & Donald J. Wolfe Jr., A Brief Introduction to the Fiduciary Duties of Directors Under Delaware Law, 116 Penn St. L. Rev. 837, 848–849 (2012). ↑

20. In recent years, the Delaware courts have been fairly aggressive in disregarding flawed stockholder approvals. See Morrison v. Berry, 191 A.3d 268, 282–284 (Del. 2018); Jenness E. Parker & Amanda L. Day, “Mind Your Disclosures: Delaware Courts Are Asking Just When a Stockholder Vote Is ‘Fully Informed,’” Skadden (Spring 2024). ↑

21. For a critique of the Optima decision, see Guy Firer & Adi Libson, Out with Fiduciary Out?, 49 Iowa J. of Corp. L. 138, 33–35 (2023). See also Alexander B. Johnson & Roberto Zapata, Optima Is Optional: Sidestepping Omnicare in Private Company M&A Transactions, Deal Points (Committee on Mergers and Acquisitions, ABA Business Law Section) (Summer 2009). ↑

22. See the historical data presented above in note 2, which suggests that the incidence of fiduciary outs in private sales agreements over the past twenty years has in fact gradually decreased from being infrequent to nearly nonexistent. ↑

I regularly advise clients on employee separations, and often, clients inquire whether it would be better to style a performance-based separation as a “reorganization.” The answer is almost always no. Quite simply, semantics do not insulate employers from wrongful termination claims. This article addresses best practices for employers with respect to position eliminations and reductions in force (“RIFs”), with a focus on nonprofits.

Most nonprofit employees are at-will employees, meaning that they can be terminated for any reason or no reason, except an unlawful reason. The employer must be able to prove that a legitimate business reason prompted the termination. A position elimination or a RIF prompted by a strategic reorganization is a legitimate business reason for an employee termination.

Simple, right? Well, not exactly. Assume that you eliminate a position due to a strategic reorganization. An aggrieved employee may argue that the position elimination was a pretext for an unlawful motive. The nonprofit organization must be able to prove otherwise. But how? The following practical advice sets forth best practices for structuring lawful position eliminations and reorganizations.

1. Identify the Triggering Event.

A position elimination or reorganization is a strategic undertaking that should be orchestrated with great thought and memorialized in written business records. A range of events may trigger a reorganization. Perhaps the organization is facing some sort of financial exigency. Perhaps a consultant identified redundancies or gaps in organizational structure. Perhaps a recently appointed executive director desires to pursue a new vision and, in so doing, de-emphasizes old priorities. Whatever the underlying motive for the position elimination or reorganization, it should be documented at the outset of restructuring efforts in an internal memorandum or emails among senior leadership.

2. Identify Relevant Policies and Contracts.

While it is most common for nonprofit organizations to execute written contracts only with the CEO or executive director, sometimes, nonprofits execute written employment agreements with other senior-level executives as well. Employment contracts may influence how an employer carries out a position elimination or reorganization. You must read contractual terms carefully, in consultation with counsel, if a potential reorganization implicates an employee with an employment contract. Similarly, an employee handbook may guarantee employees certain procedural protections in connection with position eliminations or reorganizations. As is the case with all policies, you must follow your policies to a tee.

3. Consider Alternatives.

Especially when a reorganization is driven by financial strain, leadership may want to evaluate alternative options. Might a furlough allow the employer to recover enough costs to continue standard operations during a financial downturn? Might salary reductions (if federal and state law allow them) save enough money to carry the organization through the end of the fiscal year without eliminating any positions? Might voluntary sabbaticals, voluntary leaves of absence, or voluntary separations allow for cost savings? Would a hiring freeze allow unrestricted funds to be reallocated? Is it possible to freeze staff overtime to recapture enough funds to continue operations without interruption? It may be that the only sound business decision is to eliminate a position, but alternatives should be considered if they exist.

4. Establish and Document Objective Selection Criteria.

Once you have determined that a reorganization is necessary (whether it ultimately impacts one position or more), establish and document lawful and objective selection criteria, consistent with the business needs of the organization. Objectivity is key: The most defensible criteria are objective criteria. A nonexhaustive list of objective selection criteria includes but is not limited to:

• Elimination of grant that previously funded the equivalent of one or more full-time employees
• Organizational redundancies that could be consolidated more efficiently
• Outsourcing certain responsibilities to contractors for financial cost savings
• Program discontinuation
• Length of service to the organization
• Job classification

This is just a sampling. While it is not unlawful to consider job performance as a component of a lawful RIF, it does open the door to arguments about pretext, so proceed with caution.

Once you have identified objective selection criteria, memorialize the criteria in writing in a business record. This could be through a memorandum or an email. Most optimally, have a separate decision-maker approve the recommendations. For example, the chief operating officer or human resources director could present the objective criteria as recommendations to the executive director in an internal, confidential memorandum, with the executive director approving the objective plan. Though not required as a matter of law, this kind of arrangement best shields the organization from individual employee claims that the position elimination or restructuring was a pretext for intentional discrimination targeting a single individual.

5. Conduct a Case-by-Case Analysis.

No employee termination is without risk. In consultation with counsel, conduct a case-by-case risk analysis looking at each impacted employee. Did any of the impacted employees recently blow the whistle on alleged fraudulent activity? Take protected leave to care for themselves or a family member? Report discrimination or harassment? Participate in an internal investigation? Disclose a disability or request a disability accommodation? These are protected activities, and while none of these facts preclude you from proceeding with a position elimination or a reorganization, they do impact the risk of doing so, especially when the protected activity occurs in close proximity to the adverse action (position elimination). The risk calculus may inform whether to offer severance pay (in exchange for a release of all claims) and how the organization structures severance packages.

6. Conduct a Disparate Impact Analysis.

You should also analyze the impact of the reorganization on employee diversity, again in consultation with counsel. Imagine that you employ ten full-time employees. You must eliminate five positions. As it turns out, all five of the separated employees are over age sixty, and all five of the retained employees are under age thirty-five. The optics of this outcome are not ideal and again impact the risk calculus. In this circumstance, you will want to make sure that biases did not infect the process in any way, such that a separated employee could reasonably suspect that age discrimination played a role in the decision. As with the case-by-case analysis, the disparate impact analysis may also inform whether to offer and how to structure severance packages.

7. Consider Severance Packages.

Reorganizations usually are not based on performance. Almost always, they take place at no fault of the separated employee or employees. When equipped with the financial resources to do so, nonprofit organizations typically offer severance packages to separated employees in exchange for a full release of all claims. Nonprofit leaders sometimes want to offer transition services (usually at a de minimis cost to the employer) as part of severance packages to help separated employees obtain new employment. Where an employee separation results from a position elimination as opposed to performance concerns, severance packages often guarantee a positive or mutually agreed-upon job reference. The terms of any severance package are negotiable, although again, it will be important to cross-check internal policies, as some employee handbooks specify a minimum amount of severance for position eliminations.

Conclusion

Getting back to the original question—would it be better to call it a reorg? At the end of the day, semantics are meaningless unless you can show your work. Only then can you overcome a claim that the legitimate business reasons underlying the decision to eliminate a position are not a pretext for an unlawful motive.

For more information, please contact the author at [email protected].

A German attorney, a New York attorney, and a Canadian attorney walk into a bar and stay until last call. Despite the mental lubrication of the bar’s finest offerings, they only agree that they all disagree on what the word “knowledge” means and what a “legal opinion” is. Such is the murky world of cross-border legal opinion practice.

In an effort to bring clarity, an esteemed “who’s who” of experts in the world of legal opinions convened in Toronto in September 2025 for a sober yet animated panel discussion on the underlying work required to support a firm’s legal opinion, and—with the help of Canadian counsel—a comparative United States / Canada cross-border analysis on the same subject. The discussion examined the best practices, including what qualifies as “customary diligence,” the universe of authoritative literature, and how firms teach their teams the skills and knowledge to properly form and issue opinions.

The panel was moderated by Christina M. Houston, partner at DLA Piper (Wilmington, Delaware), and featured Arthur A. Cohen, partner at Haynes and Boone, LLP (Houston, D.C., and NYC); Aaron S. Emes, partner at Torys LLP (Toronto); Timothy G. Hoxie, of counsel at Jones Day (San Francisco); Ettore A. Santucci, partner at Goodwin Procter LLP (Boston); and Steven O. Weise, partner at Proskauer Rose LLP (Los Angeles). Karina S. Oshunkentan, counsel at Haynes and Boone, LLP (Washington, D.C.), was the materials coordinator. The program was sponsored by the firm of Young Conaway Stargatt & Taylor, LLP (Wilmington, Delaware) (where this author is an attorney).

Customary Practice in Opinion Giving

The concept of “customary practice” provides both a safeguard and a responsibility for attorneys. Weise informed the audience that “the various restatements of torts and of the law governing lawyers have said that in testing whether you were negligent or not, an important component is customary practice and customary diligence.” Therefore, the stakes are high. Weise continued, “Understanding what customary practice requires and what it means, and what you should do, is going to be critical if you ever have to defend a lawsuit on an opinion letter.”

In discussion, Weise and Cohen explained that a lawsuit could be based on the tort of misrepresentation, but that a legal opinion recipient can only sue on the grounds of something it would have been reasonable to rely upon. Weise stated that “the recipient expects, reasonably, that you are going to follow customary practice,” and the recipient cannot “reasonably expect more than what customary practice might call for.” Cohen humorously summarized, “They can’t. [Because i]t’s not reasonable.” According to Hoxie, an “opinion recipient is entitled to expect the giver has acted within customary diligence, [and . . . an] opinion giver is entitled to expect the recipient is to be aware of customary practice.”

Because each transaction is unique, Cohen explained that what an opinion author needs to do “is a function of your professional practice as modified by customary practice.” If you diverge from customary practice, it should be disclosed through a carve-out or assumption. So how does an attorney know if they have met the bar of customary practice?

Opinions Determine the Diligence

Hoxie advised opinion givers to ask themselves, “What opinion am I giving, and what is required to support that opinion?” The set of opinions being given informs the customary diligence required to back those opinions; and customary diligence is comprised of factual diligence and legal diligence. Diligence requires understanding what facts are needed to reach a conclusion, and how to determine those facts. Through those specific and established facts, opinion givers apply the law.

Factual diligence is an important focus because while the facts vary, the law usually does not. Hoxie observed therefore that “usually, if there is a problem, it is a factual issue and not a problem of understanding the law.” But opinion givers should be aware that endless diligence is not a workable solution to uncertainty. According to Weiss, “Customary diligence is a floor, but it is also a ceiling.” He further explained, “Customary diligence also has a cost-benefit analysis: What does it make sense to do in a deal? Is it cost effective for the transaction?” When push comes to shove on feasible diligence, Hoxie and Cohen agreed that divergence from customary diligence is okay if it is clearly disclosed and the parties relying upon the opinions understand what has been done.

Reports prepared by the TriBar Opinion Committee (“TriBar”) provide significant guidance for opinion givers, including what various opinions mean and what is needed to produce them. But each circumstance, transaction, and governance scheme creates a case-by-case determination for what is necessary and customary. The TriBar Reports and a trove of other opinion resources are available online at the Legal Opinions Resource Center, which Hoxie called “the best one-stop compendium of all of this literature.” These publications and reports study and document what becomes considered customary practice and customary diligence. State and local bar associations also often have publications, which might be most relevant to opinions in particular fields.

Cross-Border Comparisons

“Local customs and practice matter a great deal,” according to Santucci. Santucci stated that it is a “bedrock principle” that “U.S. lawyers giving third-party legal opinions in cross-border transactions rely on the same customary practice on which they rely when they give domestic opinions.” However, those practices cannot be applied to contracts governed by non-U.S. laws.

The discussion revealed that customary practice is far less consistent across national borders than state borders. Santucci provided a few examples of varying global practice. In London, “legal opinions are part of client advice, and not a legal opinion at all.” In Germany, “an opinion is a lawyer’s reasoned analysis of applicable law, often coming to no conclusion at all.”

Perhaps given their proximity, U.S. and Canadian legal opinions are more alike. It is understood that the laws covered in a U.S. or Canadian legal opinion—and therefore the analysis provided—are only the laws of the jurisdiction covered (if stated), and only the laws an experienced lawyer in the relevant jurisdiction would think are applicable and appropriate. In the United States and in Canada, tax, securities, and antitrust laws are customarily understood to be excluded unless expressly covered.

Emes detailed further similarities between Canada and U.S. legal opinions:

• Choice of law opinions are given in Canada, subject to public policy exception, the same as in the United States.
• Enforcement of foreign judgements opinions are based on common law, but Canada does not require reciprocity for enforceability.
• Enforcement of foreign arbitral award opinions are almost identical to those given in the United States.

Emes also noted some differences between Canadian and U.S. practice, including the following:

• Unlike in U.S. practice, Canadian practice will provide underwriting agreement enforceability opinions, but they include indemnity carve-outs because of the possibility of a court taking a public policy position on indemnity.
• Intellectual property opinions are not common in Canadian practice, so U.S. practice is influential in those opinions.
• Negative assurance letters are not given in domestic opinions, but they can be given in cross-border opinions with a disclaimer regarding the meaning of “material facts” (which relates to “knowledge”).
• Good standing opinions are not given; the relevant Canadian authorities provide certificates of corporate status, which only state that an entity is not dissolved.

Given the complexity of cross-border opinions, Santucci recommended a foolproof methodology for cross-border practitioners: “Start every cross-border opinion not with a form of opinion, but with a chart: Who is doing what to whom, where, and—ideally—why and how. And then annotate that chart with choice of law and forum selection.” The 2023 publication “Good Practice in Cross-Border Legal Opinion Practice” is also recommended as an excellent resource.

Conclusion

When preparing a legal opinion letter, an author should identify the facts required to come to a sound legal conclusion. The legal standards relevant to that law define the relevant facts, and customary practice and the contours of the transaction itself define the customary diligence.

Learning the facts and the law are often easier than learning customary practice. But learning customary practice is essential for competency in the practice of opinion giving. Therefore, maintaining knowledge of customary practice is a communal project of conferring with colleagues directly and through legal publications.

Just as languages—and accents within the same language—vary as the globe rotates, customs vary as well, including the customs underpinning legal opinions. To avoid any misunderstandings, cross-border opinion givers should use extra care when entering murky international waters.

Thankfully, we are not in the “age of discovery” with opinion practice, and there are many experts and resources to rely upon both for domestic and cross-border opinion giving.

This article reports on a CLE program titled “What Work Do You Need to Do to Support a Legal Opinion? A Cross-Border Perspective,” which was presented during the ABA Business Law Section’s 2025 Fall Meeting. To learn more about this topic, view the program as on-demand CLE, free for Business Law Section members.

The exclusions clause of an insurance policy sets forth a series of exceptions to coverage under the policy, either as to types of event or subject matter or as to types of loss.^[1] Unlike other clauses of an insurance policy, for which the burden of proof is typically on the insured, in the case of the exclusions clause of an insurance policy, the burden of proof is typically on the insurer.^[2] Insurance policy exclusions are like wolves in the fold: they prey on events, subject matters, or losses that would otherwise be covered by the policy.

However, in a modern representation and warranty insurance (“RWI”) policy, the fines or penalties exclusion has evolved to become a sheep in wolf’s clothing. The typical fines or penalties exclusion in a modern RWI policy effectively acts to confirm coverage for fines or penalties^[3] unless a very rigorous series of conditions can be met by the insurer that would exclude coverage. This article sets forth a typical example of the fines or penalties exclusion in a modern RWI policy^[4] and explains how the exclusion should be applied and interpreted in furtherance of its inclusionary effect. This inclusionary effect can be particularly significant for RWI policies written in industries such as healthcare, where fines and penalties can represent one of the most significant potential risks of a regulatory representation and warranty breach.

Example of the Exclusion

An example of the fines or penalties exclusion in full is as follows:

The Insurer shall not be liable to pay, nor shall the Retention be eroded by, that portion of any Loss to the extent that such portion constitutes:

. . .

(ii) fines or penalties, but only if such fines or penalties are prohibited at law from being insured as to the Named Insured under the applicable law of the Most Favorable Jurisdiction;

An example of a Most Favorable Jurisdiction definition in full is as follows:

Most Favorable Jurisdiction means, with respect to the interpretation of coverage for fines and/or penalties under this Policy, the law of the jurisdiction most favorable to the insurability of fines and penalties, provided that such jurisdiction either: (1) has a substantial relationship to any Insured, the matter in which the fines or penalties were imposed, the claim for which the fines or penalties were imposed, or the conduct or occurrence for which the fines or penalties were imposed; (2) is the state in which the Insurer is incorporated or maintains its principal place of business, or where this Policy was made, or the laws of which govern this Policy pursuant to the governing law provision of this Policy; or (3) is any other jurisdiction the laws of which could be chosen by the parties to apply to this Policy, such matter, and such interpretation and which would allow such insurance of the Named Insured with respect thereto.

Anatomy and Meaning of the Exclusion

“but only if such fines or penalties are prohibited at law from being insured”

Meaning of This Portion of the Exclusion

In early versions of RWI policies, the exclusion for fines or penalties often began and ended with “fines or penalties.” However, the exclusion evolved to add everything that follows “fines or penalties,” starting with the phrase “but only if.” The effect of that phrase is to nullify the exclusion for fines or penalties unless each of the conditions following that phrase is met. Effectively, the added language turns the exclusion on its head.

That turning on its head starts with the phrase “are prohibited at law from being insured.” If and only if applicable law prohibits fines or penalties from being insured does the exclusion even potentially come into play to preclude coverage.^[5]

Applicable Law as to the Exclusion

No RWI Law Prohibiting the Insurability of Fines or Penalties

The first problem for an RWI carrier trying to meet its burden of proving that the fines or penalties exclusion applies to prohibit insurability is the dearth of applicable law prohibiting fines or penalties from being insurable under an RWI policy.^[6] Because of the unique nature of an RWI policy, as discussed below in the “as to the Named Insured” section, an insured can (and should) take the position that recourse to applicable law regarding other types of insurance policies or other types of loss is inapposite.

Very Limited Law as to Other Types of Insurance Policies

Even as to non-RWI types of insurance policies, there is very little in the way of applicable law.^[7] Moreover, what limited reported law that does exist rarely provides a bright-line rule prohibiting insurability in all cases, focusing instead on the type of violation (in particular, whether it was criminal or civil); the measure of culpability (such as intent, recklessness, negligence, moral reprehensibility, or moral turpitude);^[8] or the purpose of the fine or penalty in question (such as punishment, deterrence, or compensation).

In any event, even if law applicable to other types of insurance is determined to be relevant, a threshold question is whether the exclusion requires a determination as to the specific type of fine or penalty, the measure of culpability, or the purpose of the law, or whether instead the exclusion only applies if the jurisdiction in question has a bright-line rule prohibiting the insurability of fines or penalties in all instances.^[9]

Analogous Law Regarding the Insurability of Punitive Damages

The most analogous issue of law regarding insurability of fines or penalties is insurability of punitive damages. However, there is no RWI law prohibiting the insurability of punitive damages. Thus, an insurer trying to meet its burden of proving that the fines or penalties exclusion in an RWI policy is applicable would have to establish not only that applicable law prohibits the insurability of punitive damages but also that this prohibition is so analogous as to compel the conclusion that fines and penalties are not insurable under an RWI policy. Such a conclusion is a bridge too far.

“as to the Named Insured”

Meaning of This Portion of the Exclusion

This portion of the exclusion means that the determination of insurability of fines or penalties is to be made as to the buyer, which is almost always the named insured in a buyer-side RWI policy.^[10] However, the insured that is the subject of the wrongdoing that gives rise to the fines or penalties assessment in question will in all instances have been a member of the target group prior to the acquisition of the target by the buyer, when the target group was still owned by the seller.

Why the Focus on the Named Insured Makes a Difference as to the Exclusion

Requiring the insurability determination to be made as to the named insured may well be the most inclusionary aspect of the fines or penalties exclusion. In many jurisdictions, the reason for prohibiting insurability of fines or penalties is public policy based on moral hazard: that an insured will “exercise less care to avoid incurring an insured loss than would be exercised if the loss were not insured.”^[11] In other jurisdictions, the public policy rationale for prohibiting insurability is to require the wrongdoer to bear the responsibility and consequences of the wrongdoing—and, in particular, fines or penalties imposed by a governmental agency for the wrongdoing. By shifting the focus of the insurability determination to the buyer instead of the member of the target group whose wrongdoing caused the fines or penalties to be imposed, the fines or penalties exclusion puts the insurability determination in the best possible light to favor coverage.

The unique nature of RWI comes into play as to both public policy rationales. The normal insurance context for a public policy prohibition is liability insurance, including directors’ and officers’ (“D&O”) and errors and omissions (“E&O”) insurance. For liability insurance, the insured risk is prospective. The insured (or its parent organization) arranges insurance for the purpose of protecting itself from loss for wrongdoing of the insured that has not yet occurred and therefore is unknown.

In the RWI context, the insured risk is retrospective, even though the consequences may be prospective. The buyer arranges insurance for the purpose of protecting itself from loss for wrongdoing by a member of the target group that occurred prior to the acquisition and is unknown to the buyer.^[12] The seller, rather than the buyer, will have been the owner of the target group at the time of the wrongdoing, and the loss incurred by the buyer will be to the value of the target business it acquired. It is this unique nature of RWI that should make the shift in focus to the buyer as named insured conclusive as to the determination of insurability of fines or penalties in favor of coverage.^[13]

“under the applicable law of the Most Favorable Jurisdiction”

Meaning of This Portion of the Exclusion

This portion of the exclusion has the effect, through the definition of Most Favorable Jurisdiction, of requiring the determination of insurability to be made as to a number of potential jurisdictions. If, and only if, all such jurisdictions prohibit the insurability of fines and penalties does the exclusion apply.^[14]

Why the Focus on the Most Favorable Jurisdiction Makes a Difference as to the Exclusion

The focus on the Most Favorable Jurisdiction likely seals the deal in favor of coverage of fines or penalties as it relates to the RWI policy exclusion, even if there is still a question after applying all the other factors in favor of insurability.^[15] Choosing among a number of potentially applicable jurisdictions under the “Most Favorable Jurisdiction” definition and still ending up with a prohibition of insurability is hard to imagine.

Conclusion

A fines or penalties exclusion in an RWI policy that looks anything like the example provided in this article should not be feared, but instead embraced, by attorneys for insureds. Even though it is among exclusions and appears to be one, it contains inclusionary considerations that effectively make it an “anti-exclusion.”

Practice Tips for Attorneys for Insureds

Consider the following:

• In the policy arrangement and negotiation phase, try to get a fines or penalties exclusion that looks like the example provided.
• If the exclusion says anything more than “[criminal/civil] fines and penalties,” it may be more of an inclusion than an exclusion.
• Be prepared to push back on any attempt by the insurer to deny coverage based on such an exclusion, including emphasizing the burden of proof being on the insurer.
• Search for applicable law specific as to RWI, and if there continues to be none, be prepared to make your stand on that basis as to any analogy assertions, based on the unique nature of RWI.
• Consider how any public policy consideration might apply differently to a buyer who did not own the target group at the time of the wrongdoing in question.
• Be prepared to assert the M&A indemnification replacement argument in favor of coverage, particularly if there continues to be no unfavorable law in that context.
• Review the “Most Favorable Jurisdiction” definition carefully, and be prepared to try to stretch its boundaries.
• Watch out for rules/regulations applicable to the fines or penalties in question that contain their own prohibition on insurability.
• Consider the purpose of the fines or penalties in question, specifically whether they are criminal in nature and have a punitive or deterrent purpose, but even then be prepared to push back on a denial of coverage that is based on such an exclusion.

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

1. This article focuses on U.S. RWI policies and U.S. law. For an excellent compendium of the laws of other countries regarding the insurability of fines or penalties under directors’ and officers’ (“D&O”) insurance policies, see Dominik Skrobala, et al., A Global Guide to the Insurability of Fines and Penalties, Marsh / Clyde & Co (Oct. 19, 2022) (available in the “Insights” section of each of those firms’ websites). This article also focuses on buyer-side RWI policies. Whether a public policy argument regarding insured wrongdoing may have more purchase in the case of a seller-side RWI policy is beyond the scope of this article. ↑

2. Although, under applicable law, the burden of proof typically shifts back to the insured with respect to the applicability of an exception to an exclusion, see, e.g., E.I. du Pont de Nemours & Co. v. Admiral Ins. Co., 711 A.2d 45, 53–54 (Del. Super. Ct. 1995), the inverted wording of a typical fines or penalties exclusion (i.e., fines or penalties are excluded but only if coverage is prohibited under specified applicable law based on very limited conditions) should mean that the burden of proof is on the insurer fully to prove the applicability of the exclusion. ↑

3. This effect of the fines or penalties exclusion is sometimes referred to in this article as the “inclusionary effect.” ↑

4. No distinction is made in this article between exclusions for criminal fines or penalties and for civil fines or penalties, even though some RWI policies have separate exclusions for each type. As discussed in this article, whether a fine or penalty is criminal or civil in nature, regardless of whether it is technically so classified, may be relevant to a determination of insurability. ↑

5. However, see the discussion later in this article about whether the inclusionary effect of this exclusion can ever overcome an actual prohibition of insurability under applicable law. ↑

6. This dearth of law may simply be a function of the dearth of case law regarding RWI policies generally, resulting from the prevalence of settlement or arbitration as the method of resolving RWI policy coverage disputes. However, even in the case of indemnification for a private company acquisition, where the formal method of resolving a dispute is more likely to be a judicial proceeding, there appears to be a dearth of case law to the effect that the acquiror cannot be indemnified by the seller for a fine or penalty incurred by a target company with respect to a third-party claim. ↑

7. The term law in this context may refer to case law, statute, or regulation/rule. For a discussion of the insurability of civil fines or penalties under law generally, see Kenneth S. Abraham, The Insurability of Civil Fines and Penalties, Torts, Trial & Ins. Prac. L.J. (Fall 2023). ↑

8. Many liability insurance policies, including D&O and errors and omissions (“E&O”) policies, contain “conduct” provisions that may serve to exclude coverage for losses such as criminal fines or penalties, even in the absence of a provision in the policy’s exclusions clause to that effect. And some liability insurance policies provide coverage only for “damages,” which some courts have construed to exclude fines or penalties. RWI policies do not include comparable conduct and loss limitation provisions. ↑

9. In this regard, whether the antecedent such in “such fines or penalties” in the exclusion is intended to be all fines or penalties or the specific fines or penalties in question is indeterminate. ↑

10. While it is conceivable that a different insured in the buyer group could be the named insured in a buyer-side RWI policy, there is no good reason for a different insured to be the named insured and many good reasons for the buyer to be the named insured. ↑

11. Abraham, supra note 7, at 7 (footnote omitted). ↑

12. The buyer will, among other things, sign a no-claims declaration (“NCD”) to help ensure that any insured risk is unknown to the buyer. ↑

13. In the context of M&A indemnification, the buyer is normally seeking indemnification from the seller, which owned the target group at the time of the wrongdoing. This may help explain the dearth of M&A cases in which the seller tries to assert a public policy rationale to prohibit its indemnification of the buyer for fines or penalties. That RWI functions as a replacement for most or all seller indemnification in the private company acquisition context should be a factor favoring coverage of fines or penalties. ↑

14. How a jurisdiction could prohibit insurability and still be the Most Favorable Jurisdiction as to insurability is a mystery. ↑

15. One important caveat here: the inclusionary effect provisions of the exclusion only apply to the question of whether the RWI policy exclusion applies. If there is a jurisdiction out there with laws that apply to the question of whether the RWI policy covers fines or penalties, and those laws prohibit insurability, then the insurer could still try to deny coverage based on that prohibition. However, the named insured then should assert the inclusionary effect of the RWI policy exclusion as evidence that it was the intent of the insurer and the named insured to provide coverage of fines or penalties. ↑

Generally, a debtor-in-possession may assume or reject any executory contract. Franchise agreements are integral assets in a franchisee debtor’s bankruptcy case. The agreements often represent the core of the business operations—controlling brand identity, trademarks and licenses, system operations, and other essential resources. The issue of whether, and to what extent, a debtor franchisee may assume a franchise agreement over the franchisors’ objection has created a deepening divide among courts interpreting section 365 of the Bankruptcy Code. There are also considerable concerns about conflicts with federal law governing intellectual property, including the Lanham Act.^[1] Circuit court decisions on the issue reflect differing interpretations of section 365(c)(1) of the Bankruptcy Code. This article considers the varying legal approaches to resolving the issue; recent developments in the law; and practical implications for franchisors, franchisees, and counsel.

I. The Legal Frameworks: Hypothetical v. Actual Tests

Active franchise agreements are, by their nature, executory.^[2] Such contracts depend on continuing performance and cooperation of both the franchisor and franchisee. Often, the franchisor holds a trademark and other intellectual property that it licenses to the franchisee for use subject to certain payment and compliance conditions.^[3] Section 365(c)(1) of the Bankruptcy Code prohibits a trustee (or debtor-in-possession) from assuming or assigning an executory contract where applicable nonbankruptcy law excuses the nondebtor party from accepting performance or rendering performance to a party other than the debtor.^[4] The apparent purpose of the statute is to preserve the rights of nondebtor parties to a franchise agreement. In the franchising context, the rights at issue include prohibitions against third-party assignment under the Lanham Act.

In determining whether the prohibition is applicable in a particular case, courts have taken varying approaches to interpreting section 365(c)(1) of the Bankruptcy Code. Those courts employing the “Hypothetical Test” examine nonbankruptcy law and preclude assumption where such law would prohibit a debtor from assigning the agreement, regardless of whether a third-party assignment is proposed or intended to be made. Theses courts, including the Third, Fourth, Ninth, and Eleventh Circuit Courts of Appeal, center their analysis on a plain reading of the statute irrespective of the subjective intent of the debtor-in-possession.^[5] Some objectors also maintain that an assumption by a debtor estate necessarily results in an assignment to an entity other than the one that contracted for the prebankruptcy use rights. Courts applying the “Actual Test,” including the First and Fifth Circuit Courts of Appeal, consider the intent of the debtor and whether there is actual risk to the nondebtor party (franchisor) of being compelled to accept performance from a third party.

II. Recent Decisions and Deepening Divide

A. The Hypothetical Test

1. In re MeSearch Media Tech., Ltd.^[6]

Applying the Hypothetical Test, a Western District of Pennsylvania bankruptcy court determined a purported exclusive license granted to a debtor as licensee of two software patents could be assumed by the trustee under a bankruptcy plan. The court acknowledged that patent license agreements are generally nonassignable, but it focused on language in the agreement authorizing assignment to “successors in interest.” The court determined the language was sufficient to meet the Third Circuit’s Hypothetical Test, overriding the general prohibition against assignment and allowing assumption by the trustee.

2. In re Pinnacle Foods of California, LLC^[7]

In its application of the Hypothetical Test, an Eastern District of California bankruptcy court recognized the often-devastating effects this test has on a Chapter 11 debtor’s ability to reorganize. Indeed, the court referred to the franchisor creditor’s ability to withhold consent as an effective veto power. But compelled by Ninth Circuit precedent and applicable nonbankruptcy law prohibiting assignment without consent—the Lanham Act and California’s Franchise Relation Act^[8]—the court denied the debtor’s motion to assume the franchise agreement.

B. The Actual Test

1. In re Welcome Group 2, LLC^[9]

Applying the Actual Test, a Southern District of Ohio bankruptcy court determined that a debtor-in-possession would not be prohibited from assuming a franchise agreement, where it had no intention of assigning the franchise agreement to a third party. Considering the facts, the court reasoned that assumption by the debtor presented no risk to the franchisor of having to accept performance from or provide performance to a third party. Under the circumstances, prohibiting assignment was unwarranted.

III. Statutory and Policy Considerations

Proponents of the Actual Test maintain that a strict focus on a plain reading of section 365(c)(1) of the Bankruptcy Code contradicts bankruptcy policy objectives of facilitating successful reorganizations and maximizing the value of estate assets. The argument is that no creditor should be allowed to effectively veto a debtor’s ability to reorganize in bankruptcy.

Advocates of the Hypothetical Test, meanwhile, point to the intellectual property rights bestowed on patent and license holders to limit the transfer of their intellectual property and exert exacting standards for consent.

IV. Practical Implications for Business Lawyers

For the franchisee debtor, there is no question that the ability to retain the franchise agreement is critical.

Key considerations for business lawyers advising on franchise agreement assumption in bankruptcy include:

• Status of the agreement as of the petition date (i.e., default history, termination, etc.)
• Applicable law governing assignment
• Intent of the debtor (i.e. assumption, assignment, or both)
• What intellectual property is involved
• Whether rights and restrictions (such as IP licenses and limitations) are bundled in a single agreement or separate
• Jurisdictional authority on assumption and assignment
• Venue selection

Monique D. Hayes and Miles Taylor are co-chairs of the ABA Business Bankruptcy Committee’s Executory Contracts Subcommittee.

1. Lanham Act, Pub. L. No. 79-489, Ch. 540, 60 Stat. 427 (1946) (codified as amended in scattered sections of 15 U.S.C.). ↑

2. An executory contract is “a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973). ↑

3. Evans v. S.S. Kresge Co., 394 F. Supp. 817, 844 (W.D. Pa. 1975). ↑

4. 11 U.S.C. 365(c)(1). ↑

5. In re Trump Ent. Resorts, Inc., 526 B.R. 116, 125 (Bankr. D. Del. 2015); RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 269 (4th Cir. 2004); Perlman v. Catapult Ent., Inc. (In re Catapult Ent., Inc.), 165 F.3d 747, 754 (9th Cir. 1999); United States v. TechDyn Sys. Corp. (In re TechDyn Sys. Corp.), 235 B.R. 857, 861–62 (Bankr. E.D. Va. 1999). ↑

6. In re Crivella Holdings Ltd. v. MeSearch Media Tech. Ltd. (In re MeSearch Media Tech. Ltd.), 668 B.R. 828 (Bankr. W.D. Pa. 2025). ↑

7. In re Pinnacle Foods of California LLC, No. 24-11015-B-11, 2024 WL 4481070 (Bankr. E.D. Cal. Oct. 10, 2024). ↑

8. Cal. Bus. & Prof. Code § 20028. ↑

9. In re Welcome Group 2, LLC, 660 B.R. 874 (Bankr. S.D. Ohio 2024). ↑

Publicly traded life sciences companies operate under dual regulatory oversight with respect to communications about drugs and devices. The U.S. Food and Drug Administration (“FDA”) oversees the entire product lifecycle, from development and clinical trials to manufacturing, labeling, marketing, and promotional communications, while the U.S. Securities and Exchange Commission (“SEC”) governs public disclosures, requiring timely and complete disclosure of material information.

The intersection between FDA regulatory processes and SEC disclosure requirements creates complexity. While the FDA traditionally treats investigational drug and device applications as confidential proprietary information, giving sponsors discretion over disclosure, the SEC expects timely communication of material developments to investors. Since 2004, a coordination mechanism between the agencies has allowed the FDA to refer potential securities law violations to the SEC and share nonpublic information upon request.^[1] With both regulators increasingly engaged, companies must tread carefully: every disclosure decision is subject to scrutiny, and missteps can trigger SEC enforcement. This dynamic compels companies to continuously assess how and when to communicate regulatory milestones and clinical progress to the market, while simultaneously protecting their confidential and proprietary information.

In July 2025, the FDA flipped the script by announcing its commitment to “radical transparency,” signaling a new era of visibility into regulatory decision-making.^[2] For public life sciences companies, this shift, paired with the SEC’s enforcement stance, raises the stakes in navigating disclosure obligations with precision and care.

SEC Materiality Standard

The SEC enforces disclosure requirements to protect investors, prevent fraud, and ensure market integrity. SEC regulations require that material information be disclosed in annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and that such disclosure is not materially misleading. Information is deemed material if there is substantial likelihood that the disclosure would be viewed by a reasonable investor as having significantly altered the total mix of information made available.^[3]

The uncertainty inherent in the materiality standard can be problematic for life sciences companies. The historic secrecy of the FDA approval process has afforded companies with broad discretion over when and how to disclose regulatory developments. For example, executives may genuinely believe that a setback, such as a clinical hold or a negative FDA communication, is temporary or based on a misunderstanding that can be resolved through further dialogue with the agency. In that moment, they may conclude the issue is immaterial and choose not to disclose it, hoping to avoid unnecessary investor panic. But this decision could carry significant risk.

Delaying disclosure can result in public statements that misrepresent the company’s regulatory status, either by omission or by painting an overly optimistic picture. Investors may also be misled into believing that development timelines are intact or that approval is imminent, when in fact a product is facing regulatory headwinds.

SEC Enforcement: Case Review^[4]

In December 2024, the SEC announced settled charges against Kiromic BioPharma, Inc. (“Kiromic”) and its former chief executive officer (“CEO”) and chief financial officer (“CFO”) for failing to disclose material information about the status of two of its pending investigational new drug (“IND”) applications.

In June 2021, the FDA called Kiromic and informed the company that the agency was placing two of its drug development programs on clinical hold. Two weeks after the call, Kiromic raised $40 million through a common stock offering, and it did not disclose the clinical holds during investor roadshows, on due diligence calls, or in SEC filings. Kiromic’s subsequent Form 10-Q also omitted information about the FDA clinical hold, and its press release following receipt of an official letter from the FDA downplayed the news, stating simply that the “FDA returned with comments.”

Two internal whistleblowers reported their concerns about Kiromic’s SEC disclosures and public statements. A special committee of the board was formed to review the complaints. Kiromic self-reported to the SEC and took remedial actions, including terminating the CEO and appointing an interim CEO trained in disclosure controls and procedures, establishing a disclosure committee, appointing two new independent directors, voluntarily self-reporting to the SEC, and cooperating with the SEC’s investigation. The CEO and CFO agreed to civil penalties, and the CEO agreed to a three-year director and officer bar.

FDA’s Move Towards Transparency

The dynamics related to disclosure of FDA interactions are shifting. In July 2025, the FDA announced a significant change in its transparency practices, stating that “[b]ecause the FDA has historically refrained from publishing [complete response letters (“CRLs”)] for pending applications, sponsors often misrepresent the rationale behind FDA’s decisions to their stakeholders and the public.”^[5]

In a departure from longstanding policy, the FDA has now released more than 200 CRLs and signaled its intent to begin publishing them in real time. CRLs are decision letters issued when the FDA determines it cannot approve a drug or device application in its current form. These letters outline deficiencies, ranging from safety and efficacy concerns to manufacturing and bioequivalence issues, and often include recommendations for remediation.^[6]

The FDA believes that public disclosure of CRLs will help prevent other companies from repeating similar mistakes and accelerate the development and delivery of effective treatments. While this new approach may face judicial scrutiny, its immediate impact is clear: information that was once confidential until approval may now be available to the public in real time, creating a new layer of visibility that companies must reconcile with their own disclosure practices.

Best Practices

To navigate these regulatory dynamics, companies should consider implementing the following best practices:

1. Strengthen FDA Meeting Preparation: Given the increasing emphasis on transparency, invest in thorough preparation for FDA interactions to align messaging and anticipate regulatory concerns. Ensure that all FDA meeting minutes are accurate and complete and reflect the company’s positions clearly.
2. Audit Historical Disclosures: Review prior public disclosures to identify any inconsistencies with potential interpretations of CRLs. Where necessary, consider issuing clarifications to maintain credibility.
3. Monitor the Release of CRLs: Review any released CRLs for confidential information, and assess any implications for investor relations and litigation exposure.
4. Establish a Disclosure Governance Framework: Implement a formal disclosure review process—such as a disclosure committee—comprising legal, regulatory, and investor relations professionals, to evaluate the timing, accuracy, and completeness of public statements, especially those related to FDA communications and clinical developments.
5. Ensure Compliance with Regulation FD: Align investor communications with Regulation FD requirements to avoid enforcement action. In 2019, the SEC charged TherapeuticsMD Inc. with violating Regulation FD after the company privately described an FDA meeting as “very positive and productive” to sell-side analysts without issuing a public statement. The company agreed to pay a $200,000 penalty.^[7]
6. Ensure Clarity and Objectivity in Communications: Craft public statements about FDA processes with precision and balance. Avoid promotional language or attempts to downplay unfavorable developments. All claims should be evidence-based and presented in a way that supports informed investor decision-making.
7. Monitor External Communications for Consistency: Regularly review external communications, including websites and social media posts, to ensure consistency across platforms.

Conclusion

As FDA policy and the SEC’s enforcement priorities evolve, life sciences companies must remain informed and proactive in their disclosure practices. Optimism won’t satisfy regulators. Silence can mislead. Transparency is no longer optional. And precision matters more than ever.

1. U.S. Sec. & Exch. Comm’n, SEC and FDA Take Steps to Enhance Inter-Agency Cooperation (Feb. 5, 2004). ↑

2. U.S. Food & Drug Admin., FDA Embraces Radical Transparency by Publishing Complete Response Letters (July 10, 2025) (“Radical Transparency Announcement”). ↑

3. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (“[A]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”). ↑

4. U.S. Sec. & Exch. Comm’n, SEC Charges Kiromic BioPharma and Two Former C-Suite Executives with Misleading Investors about Status of FDA Reviews (Dec. 3, 2024). ↑

5. U.S. Food & Drug Admin., Radical Transparency Announcement, supra note 2. ↑

6. Id. ↑

7. U.S. Sec. & Exch. Comm’n, SEC Charges TherapeuticsMD With Regulation FD Violations (Aug. 20, 2019). ↑

This is the third installment in a series on damages available for intellectual property (“IP”) claims, focusing on copyright damages. Understanding damages is essential for two reasons: it highlights the potential rewards of building a robust IP portfolio, and it offers a benchmark for assessing risk when facing an IP claim. Our previous articles discussed trademark and patent damages.

Copyright Infringement

Copyright law protects original works of authorship, including literary, dramatic, musical, and certain other intellectual works that are fixed in a tangible form, whether published or unpublished.

Copyright infringement under the Copyright Act of 1976 involves the nonpermissive replication, distribution, performance, display, or creation of derivative works of copyrighted material.^[1] Section 504 of this act details the remedies for such infringement, indicating potential awards for actual and statutory damages. The Digital Millennium Copyright Act (“DMCA”), in its provisions for safe harbor and takedown procedures, addresses modern challenges posed by the digital environment, ensuring compliance and protecting copyright in the digital age.^[2]

Copyright Damages

To determine copyright damages, courts primarily rely on statutory guidelines under § 504 of the Copyright Act. Section 504(b) authorizes a court to award actual damages and infringer’s profits. Section 504(c) allows recovery for statutory damages; in cases of willful infringement, statutory damages may be enhanced. In some cases, the prevailing party may recover attorney fees under § 505.

Actual Damages and Infringer’s Profits

Section 504(b) states that a copyright owner is entitled to recover the actual damages suffered as a result of infringement and any profits that the infringer made that are attributable to the infringement and are not taken into account in computing actual damages.

This second part of the sentence is meant to prevent double recovery. If a loss to the copyright owner overlaps with profits made by the infringer (e.g., the owner lost a sale that the infringer made), the copyright owner can’t recover both the lost sale and the infringer’s profits from the same event. However, the owner can recover profits that are made in addition to the actual damages from lost sales or are otherwise separate from the harm that the copyright owner suffered.

Actual damages are typically determined by the loss in the fair market value of the copyright, measured by the profits lost due to the infringement or the value of the use of the copyrighted work to the infringer. Infringer’s profits are calculated based on the infringer’s gross revenue attributable to the infringement.

A copyright owner is only required to present proof of the infringer’s gross revenue to satisfy the burden of proof. Once accomplished, it is on the infringer to establish any deductible expenses or profit attributable to factors other than the copyrighted work.

Statutory and Enhanced Damages

Alternatively, § 504(c) of the Copyright Act allows for a recovery method separate from actual damages and infringer’s profits. As long as a plaintiff properly registered the copyright in a timely manner before the infringement took place, a plaintiff, at any time before final judgment is rendered, may elect to collect statutory damages.

Statutory damages are generally unavailable for copyright infringement that occurs before the effective date of registration unless the copyright owner registers the work within three months of its first publication.

Once infringement is proven, the plaintiff does not need to prove actual damages to recover statutory damages. Instead, the court determines an appropriate amount within the statutory range. The statute sets the lower limit at $750 and the upper limit at $30,000—these limits apply per work infringed, not per act of infringement, and courts may assess damages for each separately registered work infringed.

If the court has found that the infringement was committed willfully, the court may increase the award of statutory damages to $150,000. However, if the infringer proves that it was not aware and had no reason to believe that its acts constituted an infringement, then the court may reduce the statutory damages award to $200.

Courts exercise broad discretion in determining the appropriate amount of statutory damages within the statutory range. Factors considered include the expenses saved and profits made from the infringer, the revenues lost by the copyright owner, the infringer’s state of mind, the deterrent effect on the infringer and others, the infringer’s cooperation in providing evidence, and the conduct and attitude of the parties.

Attorney Fees

Section 505 of the Copyright Act makes attorney fees available in some cases. Attorney fees are available to either party at the court’s discretion, hinging on the nature of the case. Even when a plaintiff prevails, attorney fees are entirely subject to the court’s discretion.

In Fogerty v. Fantasy, Inc., the U.S. Supreme Court held that courts should apply equitable discretion when deciding whether to award fees and may do so based on factors like frivolousness, motivation, objective unreasonableness, and deterrent effect.^[3]

Attorney fees are generally unavailable for copyright infringement that occurs before the effective date of registration unless the copyright owner registers the work within three months of its first publication.

Summation

Copyright law uses damages not only to make the copyright holder whole but also to incentivize and reward creative expression. Given the equitable nature of these remedies, courts retain broad discretion to tailor damage awards based on the circumstances of each case, balancing compensation, deterrence, and fairness.

* * *

Please tune in next month for part four of our series, in which we will discuss damages for misappropriation of trade secrets.

1. 17 U.S.C. §§ 101–1332. ↑

2. Pub. L. No. 105-304, 112 Stat. 2860 (1998). ↑

3. 510 U.S. 517 (1994). ↑