The Supreme Court’s 2026 decision in FS Credit Opportunities Corp. v. Saba Capital Master Fund arose from a clash between Maryland control-share protections and the Investment Company Act of 1940. Several Maryland closed-end funds adopted resolutions limiting voting rights for shareholders holding disproportionate positions unless other shareholders approved. Activist investor Saba Capital argued that the resolutions violated section 18(i) of the Investment Company Act, which generally requires equal voting rights among a registered management company’s outstanding voting shares, and invoked section 47(b) to seek rescission. The district court and the U.S. Court of Appeals for the Second Circuit agreed that section 47(b) supplied an implied private action, but the Supreme Court reversed in a 6–3 decision and held that the provision governs a court’s remedial authority without independently authorizing private parties to sue.^[1]

The Investment Company Act’s provisions perform different functions. Section 18(i), 15 U.S.C. § 80a-18(i), supplies the equal-voting requirement underlying Saba’s challenge. Section 47(a), § 80a-46(a), declares contractual waivers of compliance void; Section 47(b), § 80a-46(b), addresses enforceability and rescission when a contract was made or performed in violation of the Act. Section 42, § 80a-41, gives the Securities and Exchange Commission investigative and civil-enforcement authority, while Sections 36(b) and 30(h), §§ 80a-35(b) and 80a-29(h), expressly authorize or incorporate specified private actions. Saba concerns only whether Section 47(b) itself impliedly creates another private cause of action; the Court held that it does not.^[2]

The decision’s broader lesson is that a statute may regulate a contract and constrain remedies without giving every affected party a federal claim. A plaintiff seeking rescission must identify an independent cause of action before the court reaches the requested relief, and counsel should separately analyze the source of the duty, the right to sue, the remedy, and federal jurisdiction at the outset of a regulated-contract dispute.^[3]

Why Saba Matters to Business Litigators

Saba arose within the specialized world of registered investment companies, but its method reaches beyond that setting. The majority did not ask whether private enforcement would improve compliance or protect investors; it asked whether Congress supplied rights-creating language and a private enforcement mechanism. That sequence matters whenever a complaint treats a federal regulatory standard as though it automatically creates a civil claim. It also matters in contract disputes where a party seeks rescission because performance allegedly violated a federal statute.^[4]

For companies, the ruling changes litigation architecture more than underlying compliance duties. A contract can remain subject to federal regulation even when a private plaintiff lacks authority to enforce that regulation directly. The same conduct may still support an agency proceeding, an express federal claim, a state-law claim, or an affirmative defense. Counsel must therefore avoid converting the absence of one cause of action into an assumption that the challenged conduct is lawful.^[5]

The Dispute That Reached the Court

The petitioners were closed-end funds whose shares traded on the open market, while Saba pursued an activist strategy involving substantial positions in closed-end funds. The funds were incorporated in Maryland and adopted resolutions opting into the Maryland Control Share Acquisition Act. Those resolutions limited voting rights attached to control shares unless other shareholders approved them.^[6] Saba alleged that the resolutions conflicted with section 18(i) of the Investment Company Act, which generally requires equal voting rights among outstanding shares.^[7]

Saba relied on section 47(b) to seek rescission of the resolutions, and the district court, applying Oxford University Bank v. Lansuppe Feeder, granted summary judgment in its favor. The Second Circuit summarily affirmed.^[8] Other circuits had concluded that section 47(b) did not create a private right of action, leaving a direct conflict over who could sue.^[9] The Supreme Court granted review and reversed the Second Circuit.

Separating the Remedy from the Right

The majority began from the rule that Congress determines who may enforce federal law. Section 47(b) states that certain contracts are unenforceable and limits when a court may deny rescission, but it does not identify a protected class or authorize that class to file suit.^[10] The provision is directed to a court that is already considering relief, not to a person seeking entry into court.^[11] The Court therefore treated the statutory text as a limit on remedial discretion rather than a grant of litigation authority.

That distinction supplied the opinion’s central contract-law point. Rescission is ordinarily a remedy attached to an underlying claim, such as fraud, mistake, duress, breach of contract, or breach of fiduciary duty. Section 47(b) changes the common-law treatment of certain performed contracts by making rescission available in circumstances where it might otherwise be denied.^[12] It does not itself supply the claim that permits a plaintiff to request that remedy.

The Court also rejected reliance on Transamerica Mortgage Advisors, Inc. v. Lewis, which recognized a limited rescission action under the Investment Advisers Act.^[13] Congress amended section 47(b) in 1980, removed the earlier declaration that violating contracts “shall be void,” and directed the new language to courts. The majority viewed those changes as substantive and treated the remaining “shall be void” language in section 47(a) as a deliberate contrast.^[14] The comparison prevented an older implied-right decision under a different statute from controlling the amended Investment Company Act.

Statutory structure reinforced the textual analysis. The Investment Company Act gives the SEC broad enforcement authority and expressly creates private actions in selected provisions. Those express actions include a security-holder suit concerning specified fiduciary duties and an incorporated action to recover certain short-swing profits.^[15] Their detail showed that Congress knew how to create private enforcement when it intended to do so.

A Current Step in the Implied-Rights Doctrine

Saba fits a long movement away from judicial creation of private statutory claims. In J.I. Case Co. v. Borak, the Court looked to effective enforcement of congressional purpose when recognizing a remedy under the securities laws.^[16] Cort v. Ash later framed a multifactor inquiry that included legislative intent, statutory purpose, and the traditional allocation of state and federal law.^[17] By Touche Ross & Co. v. Redington, the inquiry focused on statutory text and congressional intent to create both a right and a remedy.^[18] Alexander v. Sandoval later confirmed that recognition of a private remedy begins with enacted text and structure.^[19]

Recent doctrine also treats comprehensive agency enforcement as evidence against additional private remedies.^[20] Before Saba, that approach had already divided the circuits over section 47(b).^[21] Decisions addressing other Investment Company Act provisions likewise refused to infer private claims from regulatory commands alone.^[22] The new decision resolves the section 47(b) conflict and gives defendants a direct Supreme Court authority for challenging similar attempts to turn remedies or regulatory duties into unstated causes of action.

What Remains Available After Saba

The decision leaves the Investment Company Act’s express private actions intact. Section 36(b) authorizes security holders to sue on behalf of a registered investment company for specified breaches of fiduciary duty involving compensation.^[23] Section 30(h) incorporates the Securities Exchange Act’s action for recovery of certain short-swing profits.^[24] A complaint grounded in those provisions must still satisfy their statutory limits, but Saba does not narrow the rights Congress stated expressly.

Public enforcement also remains central. The SEC may investigate violations of the Investment Company Act and seek injunctive relief or civil monetary penalties under section 42.^[25] Private parties may report suspected violations even when they cannot prosecute those violations in their own names. Corporate compliance teams should therefore preserve the same regulatory analysis and supporting records they maintained before the decision.

State-law litigation remains possible when state law supplies a valid claim or defense. The Court specifically described rescission requests attached to breach, fraud, mistake, duress, and fiduciary-duty theories.^[26] Section 47(a), which retains “shall be void” language for provisions waiving compliance with the Investment Company Act, may also generate future disputes, but the Court did not decide whether it creates a private action.^[27] Parties should treat these routes as distinct legal theories rather than substitutes automatically permitted by section 47(b).

Pleading and Forum Strategy

A plaintiff should build the complaint in four separate layers: duty, cause of action, remedy, and jurisdiction. A federal standard may define unlawful conduct without granting the plaintiff a claim, and a remedial provision may control relief without opening the courthouse door. Contract language that references federal compliance also requires careful treatment because a state-law contract theory cannot simply recreate a federal action Congress withheld.^[28] The analysis must identify an independently enforceable promise rather than restating the statute.

Equitable pleading requires the same discipline. A traditional equitable claim may sometimes support prospective relief, but a detailed statutory enforcement scheme can foreclose an effort to enforce federal law indirectly.^[29] Counsel should plead the recognized source of equitable authority and address any statutory limits on that authority. Requesting rescission in the prayer for relief cannot cure the absence of an underlying claim.

The cause-of-action question must also be kept separate from subject-matter jurisdiction. The absence of a valid federal claim ordinarily calls for a merits dismissal rather than a jurisdictional dismissal when the asserted federal theory is not wholly insubstantial.^[30] A state claim incorporating a federal violation does not automatically arise under federal law, particularly when Congress supplied no private federal action.^[31] The narrow route for embedded federal issues still requires a necessarily raised, actually disputed, substantial federal issue that a federal court can resolve without disturbing the federal-state balance.^[32]

Defense, Contract, and Governance Consequences

Defendants should raise the private-right issue early and precisely. A motion under Rule 12(b)(6) can isolate whether the invoked statute authorizes the plaintiff to sue, while a separate jurisdictional argument can address the forum.^[33] The motion should map each count to its asserted source of law and requested remedy. That structure can narrow discovery before the parties incur the cost of litigating the merits of a regulatory violation.

For boards and fund advisers, Saba does not displace state corporate law or fiduciary duties that operate consistently with federal policy.^[34] Minutes, board materials, adviser presentations, and legal analyses should document the purpose and operation of control-share measures or other governance provisions. The record should address both the governing state statute and the federal requirements applicable to voting rights. A strong record matters because future plaintiffs may shift from section 47(b) to state fiduciary or contract theories.

Transactional counsel should review regulated agreements for compliance representations, termination rights, severability, restitution provisions, and risk-allocation language. State law may refuse enforcement on public-policy grounds.^[35] That question is separate from whether a federal statute supplies a private cause of action. At the same time, private drafting cannot manufacture a statutory right that Congress withheld, and courts may reject contractual theories that function only as enforcement substitutes.^[36] The contract should state which promises are independently enforceable and what remedies follow from breach.

A Practical Agenda for Business Counsel

Counsel should inventory pending and threatened disputes that rely on a federal regulatory provision without an express private action. For each matter, the team should identify the claimant, the protected interest, the statutory enforcer, any express private remedy, the proposed state-law theory, and the requested relief. The same review should test whether federal jurisdiction exists independently of the remedy provision. This exercise can expose weak claims and overlooked enforcement risk at the same time.^[37]

Companies should also align compliance and litigation records without treating them as interchangeable. Regulatory files should demonstrate substantive compliance, while litigation files should preserve the distinct analysis of who may sue and what relief is available. Agency exposure can persist after a private claim is dismissed because the SEC’s enforcement authority does not depend on section 47(b).^[38] The disciplined approach is to defend the procedural boundary recognized in Saba while continuing to evaluate the underlying regulatory duty.

Conclusion

Saba supplies a current rule with immediate value for business litigators: a remedy is not a cause of action, and a regulatory command is not necessarily a privately enforceable right.^[39] The ruling narrows one route to federal court but leaves express claims, agency enforcement, state-law theories, and traditional defenses available when their elements are satisfied. Business counsel should now examine regulated-contract disputes by separating duty, enforcement authority, remedy, and jurisdiction. That separation will produce more accurate pleadings, better motion practice, and more defensible corporate records.

1. FS Credit Opportunities Corp. v. Saba Cap. Master Fund, Ltd., No. 24-345, slip op. at 1–3 (U.S. June 11, 2026). ↑

2. See 15 U.S.C. §§ 80a-18(i), 80a-29(h), 80a-35(b), 80a-41(a), (d)–(e), 80a-46(a)–(b) (2024); FS Credit Opportunities, slip op. at 3–8. ↑

3. See FS Credit Opportunities, slip op. at 3–8; Alexander v. Sandoval, 532 U.S. 275, 286–91 (2001); Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 89 (1998); Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 314 (2005). ↑

4. See FS Credit Opportunities, slip op. at 3–8; Sandoval, 532 U.S. at 286–91. ↑

5. See FS Credit Opportunities, slip op. at 5–8. ↑

6. Id. at 1–3. ↑

7. 15 U.S.C. § 80a-18(i) (2024); Md. Code Ann., Corps. & Ass’ns § 3-702(a)(1) (LexisNexis 2026). ↑

8. Saba Cap. Master Fund, Ltd. v. BlackRock Mun. Income Fund, Inc., 710 F. Supp. 3d 213, 220–26 (S.D.N.Y. 2024), aff’d sub nom. Saba Cap. Master Fund, Ltd. v. BlackRock ESG Cap. Allocation Tr., Nos. 23-8104 et al., 2024 WL 3174971, at *4 (2d Cir. June 26, 2024) (summary order), rev’d & remanded sub nom. FS Credit Opportunities, slip op. ↑

9. Compare Oxford Univ. Bank v. Lansuppe Feeder, LLC, 933 F.3d 99, 105–10 (2d Cir. 2019), with Santomenno ex rel. John Hancock Tr. v. John Hancock Life Ins. Co. (U.S.A.), 677 F.3d 178, 186–87 (3d Cir. 2012), and UFCW Loc. 1500 Pension Fund v. Mayer, 895 F.3d 695, 699–701 (9th Cir. 2018). ↑

10. FS Credit Opportunities, slip op. at 3–7. ↑

11. See Thompson v. Thompson, 484 U.S. 174, 183 (1988); Alexander v. Sandoval, 532 U.S. 275, 288–89 (2001). ↑

12. FS Credit Opportunities, slip op. at 5–7. ↑

13. Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11, 18–24 (1979). ↑

14. FS Credit Opportunities, slip op. at 9–11. ↑

15. Id. at 7–8; 15 U.S.C. §§ 80a-29(h), 80a-35(b), 80a-41(a), (d)–(e) (2024). ↑

16. J.I. Case Co. v. Borak, 377 U.S. 426, 433 (1964). ↑

17. Cort v. Ash, 422 U.S. 66, 78 (1975). ↑

18. Touche Ross & Co. v. Redington, 442 U.S. 560, 568, 575–76 (1979). ↑

19. Alexander v. Sandoval, 532 U.S. 275, 286–91 (2001). ↑

20. See Gonzaga Univ. v. Doe, 536 U.S. 273, 283–90 (2002); Armstrong v. Exceptional Child Ctr., Inc., 575 U.S. 320, 327–29 (2015). ↑

21. See Oxford Univ. Bank v. Lansuppe Feeder, LLC, 933 F.3d 99, 105–10 (2d Cir. 2019); Santomenno ex rel. John Hancock Tr. v. John Hancock Life Ins. Co. (U.S.A.), 677 F.3d 178, 186–87 (3d Cir. 2012); UFCW Loc. 1500 Pension Fund v. Mayer, 895 F.3d 695, 699–701 (9th Cir. 2018). ↑

22. See Bellikoff v. Eaton Vance Corp., 481 F.3d 110, 116 (2d Cir. 2007); Olmsted v. Pruco Life Ins. Co. of N.J., 283 F.3d 429, 433–36 (2d Cir. 2002). ↑

23. 15 U.S.C. § 80a-35(b) (2024); Jones v. Harris Assocs. L.P., 559 U.S. 335, 340–41 (2010). ↑

24. 15 U.S.C. §§ 80a-29(h), 78p(b) (2024). ↑

25. Id. § 80a-41(a), (d)–(e). ↑

26. FS Credit Opportunities Corp. v. Saba Cap. Master Fund, Ltd., No. 24-345, slip op. at 5–7 (U.S. June 11, 2026). ↑

27. 15 U.S.C. § 80a-46(a) (2024); FS Credit Opportunities, slip op. at 9–11. ↑

28. Astra USA, Inc. v. Santa Clara Cnty., 563 U.S. 110, 117–18 (2011). ↑

29. Armstrong v. Exceptional Child Ctr., Inc., 575 U.S. 320, 327–29 (2015). ↑

30. Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 89 (1998). ↑

31. Merrell Dow Pharms., Inc. v. Thompson, 478 U.S. 804, 817 (1986). ↑

32. See Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 314 (2005); Gunn v. Minton, 568 U.S. 251, 258 (2013). ↑

33. Fed. R. Civ. P. 12(b)(6); Steel Co., 523 U.S. at 89. ↑

34. Burks v. Lasker, 441 U.S. 471, 478–80 (1979). ↑

35. Restatement (Second) of Contracts § 178 (Am. L. Inst. 1981). ↑

36. See Astra USA, Inc. v. Santa Clara Cnty., 563 U.S. 110, 117–18 (2011). ↑

37. See FS Credit Opportunities Corp. v. Saba Cap. Master Fund, Ltd., No. 24-345, slip op. at 3–8 (U.S. June 11, 2026); Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 89 (1998); Grable, 545 U.S. at 314. ↑

38. FS Credit Opportunities, slip op. at 7–8. ↑

39. Id. at 3–8. ↑

The U.S. Supreme Court has eased the way for people and companies to make claims over the confiscation of Cuban property when Fidel Castro seized power in 1959. Recently, in Havana Docks Corp. v. Royal Caribbean Cruises, Ltd., 608 U.S. ___ (2026), the U.S. Supreme Court revived claims filed by a U.S. company, Havana Docks, that operated docks in the Cuban capital.

The suit targeted four cruise lines that brought tourists to Cuba during a brief reopening of Cuban relations that occurred during the Obama administration, using confiscated property claimed by Havana Docks. The pivotal law is the Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996, commonly referred to as the Helms-Burton Act.

The Helms-Burton Act created a mechanism for victims of Cuba’s expropriation of private property to seek redress against private parties that “traffic” in expropriated Cuban property. It thus provides an avenue for plaintiffs to obtain redress for their damages from nongovernment parties that have made economic use of the confiscated property. Under the Helms-Burton Act, trafficking includes anyone who “purchases, leases, receives, possesses, obtains control of, manages, uses, or otherwise acquires or holds an interest in confiscated property,” or who “causes, directs, participates in, or profits from, trafficking . . . by another person, or otherwise engages in trafficking . . . through another person, or who holds an interest in or profits from confiscated property.” 22 U.S.C. § 6023(13).

The Helms-Burton Act provides a statutory measurement of damages that are to be paid under the act by the trafficker of confiscated property to the plaintiff who holds the claim for the affected properties. There are heightened damages for defendants who traffic in a confiscated Cuban property if the property was subject to a certified claim under the International Claims Settlement Act of 1949. See 22 U.S.C. § 6082(a)(3). It seems that the rationale for the heightened damages is that the prior certification of the claim provides constructive notice to potential users of the property that they are dealing with property that had been taken from a U.S. person and were subject to claims by the former owners.

Despite the significant liability ostensibly created by the Helms-Burton Act, for twenty-three years, Title III of the act, which provided for the cause of action described above, was suspended by United States presidents of both major political parties in view of broader international implications. It was only in 2019 that the Trump administration ceased the suspension of Title III so that claims under the Helms-Burton Act could proceed.

In addition to activating the law, President Trump imposed travel restrictions that stopped the cruise ships that were at issue in the Havana Docks case.

The trial court in the case awarded Havana Docks more than $400 million in damages, but a federal appeals court reversed. The Supreme Court held that the cruise lines’ use of the docks was sufficient to establish that they used “property which was confiscated by the Cuban Government” and that “Havana Docks is not required to establish that the cruise lines used its property interest,” and it sent the case back for further argument.

Numerous law firms have filed lawsuits under the Helms-Burton Act, and some plaintiffs are collecting on them. When individual plaintiffs collect damages for property that was confiscated many years ago, it is often the descendants of property owners who are the recipients. And while it might seem that they are just getting back something that was taken from them, they are paid in cash, not with actual property. To the IRS, that means taxes, as the IRS taxes most lawsuit settlements.

However, some settlements can be positioned as capital gain. A suit about damage to or conversion of property is a prime example. From a tax viewpoint, an involuntary conversion occurs if your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation, and if you receive money or other property in payment. The money may come from insurance, a condemnation award, or a lawsuit settlement.

The tax rules are contained in Section 1033 of the Internal Revenue Code. Federal tax law generally treats these funds as the proceeds of settling your property. Depending on your tax basis in your property, that can trigger gain, as would occur with any other sale. Section 1033 of the tax code allows taxpayers who experience an involuntary conversion to roll over their gain into similar property. It is somewhat analogous to a Section 1031 exchange of real estate, although Section 1033 is full of special rules, timing constraints, and more.

The IRS tends to assume that litigation settlements are ordinary income. However, many successful Helms-Burton Act plaintiffs are likely to have good arguments that settlement proceeds should qualify for long-term capital gain treatment. After all, having property confiscated should mean that a later settlement is effectively paying you for your property. Settlement agreement wording could make that argument even better.

In the case of Helms-Burton Act recoveries, or any other case arising out of a taking or involuntary conversion, one needs to examine the status of the plaintiff/taxpayer. For individuals, ordinary income is taxed at up to 37 percent, while capital gain can be taxed as low as 0 percent and as high as 23.8 percent. Apart from lower tax rates, capital gain can involve recouping basis, too. If you spent $1 million in costs (such as legal fees) that you have not deducted, that is basis that can be repaid without tax before you start reporting gain.

What about legal entities that are Helms-Burton Act plaintiffs? C corporations do not receive a capital gain rate preference, so C corporations pay tax at the 21 percent federal rate, whether a recovery is ordinary or capital. S corporations, partnerships, and LLCs taxed as partnerships qualify for capital gain rates, with the gain being reported by the shareholders, partners, or members according to their K-1s.

Many Helms-Burton Act plaintiffs may not have a significant tax basis, given the lapse of time since a 1959 confiscation. But there is one other significant tax impact of reporting as capital gain. Nearly all Helms-Burton Act plaintiffs use contingent fee lawyers. When their ship comes in, the IRS will treat them as receiving not only their net recovery, but the share of the funds that goes to their contingent fee lawyers as well. That means most plaintiffs must look for a way to claim a legal fee tax deduction.

That can be tricky in some cases. However, if you recover capital gain, the tax case law is clear that you can capitalize your legal fees and offset them to reduce your gain. That is an added benefit of lawsuit settlements that are taxed as capital gain. Still, not every plaintiff who reports capital gain for a legal settlement has an easy time convincing the IRS. And while Helms-Burton confiscation cases seem fundamentally about confiscation, what if the bulk of the damage analysis is about loss of income?

It is not uncommon for the IRS in various contexts to say that loss of income claims means that a resulting settlement or judgment is taxable as ordinary income. In some cases, though, an alleged income stream is used as a kind of proxy for the value of the items taken.

Settlement Agreement Wording

In NCA Argyle LP v. Commissioner, T.C. Memo. 2020-56, the IRS and the taxpayer Newport Capital Advisors, LLC (“NCA”) faced off over the treatment of a $23 million legal settlement. The taxpayer claimed that the money was capital gain for its interests in the failed joint ventures at issue in the settled case. The IRS said the money was for the most part really future fees the joint ventures would reap, plus punitive damages, both of which are clearly taxed as ordinary income.

The settlement agreement stated that NCA received all $23 million in exchange for its interests in the joint ventures. Although settlement agreement wording does not bind the IRS, the Tax Court relied heavily on the express allocation in the settlement agreement. The court agreed with the taxpayer that these were sale proceeds and capital gain.

Tax Deferral

Finally, although it may rarely be invoked in this context, Section 1033 is another potential tax benefit for Cuban confiscation damages. Section 1033 allows you to put your gain into repairing or replacing damaged or destroyed property. There are time limits and requirements, but it is used frequently in property damage and construction defect cases. It could be used in Helms-Burton Act cases as well.

Of course, in the case of individuals, descendants of Cuban property owners paid nearly seventy years after the confiscation may be unlikely to want to reinvest their lawsuit proceeds into other property, even if it saves them taxes. However, even C corporations can claim the benefits of Section 1033, so it is conceivable that a recipient company could evaluate this tax deferral opportunity.

No one wants to go through a protracted legal dispute. After enduring that process, no one wants to go through another dispute about taxes on the money they recovered, or the money they had to pay.

On July 24, 2026, in Fairholme Funds, Inc. v. Federal Housing Finance Agency,^[1] a unanimous panel of the U.S. Court of Appeals for the District of Columbia Circuit affirmed a district court decision that permitted holders of common and junior preferred shares of two government-sponsored enterprises (“GSEs”)—the Federal National Mortgage Association (“Fannie Mae”)^[2] and the Federal Home Loan Mortgage Corporation (“Freddie Mac”)^[3]—to proceed to trial with claims based on breach by the federal government of an implied covenant of good faith and fair dealing. After trial of those claims, a jury ultimately awarded $812 million in damages (including prejudgment interest).^[4]

Brief Background

For years, both Fannie and Freddie used the capital provided by their private shareholders to provide liquidity to the residential mortgage market. Though privately owned, both benefited from a public misperception (shared by the ratings agencies) that the federal government had implicitly guaranteed the securities they issued;^[5] this allowed Fannie and Freddie to purchase more mortgages and mortgage-backed securities in the market and at cheaper rates^[6] and to achieve market dominance in mortgage securitization.^[7]

In 2007, the housing market collapsed, and the U.S. economy fell into a severe recession. The financial crisis was occasioned, in part, by a plethora of mortgage loans to borrowers with poor credit. As a direct result of policies of the federal government, among other factors, lenders were strong-armed into easing their standards for loans designated as subprime mortgages:^[8] Little or no down-payment was required, nor was much in the way of documenting the borrower’s income, and loans were frequently originated with contractually discounted interest rates that were then reset after two years.^[9] Those same policies pushed the GSEs not just to relax their standards^[10] but to invest $2 trillion in subprime mortgages.^[11] These low-quality loans were then packaged into pools and securitized, and the resulting mortgage-backed securities were given deceptively high credit ratings.^[12]

In the wake of the subprime lending and housing crisis that began circa 2007, the two GSEs, which at the time controlled combined mortgage portfolios valued at approximately $5 trillion—nearly half of the United States mortgage market—suffered multibillion-dollar losses. They lost more in 2008 ($108 billion) than they had earned in the previous thirty-seven years combined ($95 billion).^[13] Congress reacted with the Housing and Economic Recovery Act of 2008 (“HERA”),^[14] which abolished two prior federal regulators, the Federal Housing Finance Board and the Office of Federal Housing Enterprise Oversight, and replaced them with the Federal Housing Finance Agency (“FHFA”), which became the principal oversight authority for the Federal Home Loan Banks as well as the two GSEs. Among other things, Congress authorized FHFA to place Fannie and Freddie into conservatorship,^[15] which FHFA promptly did.^[16]

As conservator or receiver of a regulated entity, FHFA enjoys sweeping authority. It may “exercise all powers and authorities specifically granted to conservators or receivers, respectively, under [12 U.S.C. § 4617], and such incidental powers as shall be necessary to carry out such powers”;^[17] in so doing, it may “take any action authorized by this section, which the Agency determines is in the best interests of the regulated entity or the Agency.”^[18] FHFA is authorized to “take such action as may be . . . (i) necessary to put the regulated entity in a sound and solvent condition; and (ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.”^[19]

Specifically, FHFA may “take over the assets of and operate the regulated entity with all the powers of the shareholders, the directors, and the officers of the regulated entity and conduct all business of the regulated entity.”^[20] FHFA may also “collect all obligations and money due,”^[21] “perform all functions of the regulated entity in the name of the regulated entity which are consistent with the appointment as conservator or receiver,”^[22] “preserve and conserve the assets and property of the regulated entity,”^[23] and “provide by contract for assistance in fulfilling any function, activity, action, or duty of the Agency as conservator or receiver.”^[24] As with conservators and receivers in general, the FHFA, when acting in either capacity, “immediately succeed[s] to all rights, titles, powers, and privileges of such regulated entity . . . with respect to the regulated entity and the assets of the regulated entity”^[25] and may “transfer or sell any asset or liability of the regulated entity in default . . . without any approval, assignment, or consent.”^[26]

As part of that process, FHFA and the Treasury Department entered into senior preferred stock purchase agreements (“Preferred Stock Agreements”), whereby the latter would provide capital to Fannie and Freddie, initially in exchange for fixed-rate dividends. Pursuant to these Preferred Stock Agreements, Treasury made $100 billion in emergency capital support^[27] available to Fannie and Freddie in exchange for $1 billion in newly created preferred stock in each GSE, plus warrants for the purchase of common stock of each representing 79.9 percent of the common stock of each GSE on a fully diluted basis at a nominal price, and each agreed to pay Treasury a quarterly dividend in the amount of 10 percent.^[28] Further, the Preferred Stock Agreements prohibited Fannie and Freddie from declaring or paying any dividend (preferred or otherwise) or making any other distribution (by reduction of capital or otherwise) without Treasury’s consent.

Through the end of Q1 FY2012, Fannie Mae drew on $116.2 billion and Freddie Mac drew on $71.3 billion for a total draw of $187.5 billion.^[29] Meanwhile, the Preferred Stock Agreements were amended twice in 2009—once in May to raise the cap on Treasury support to $200 billion,^[30] and again in December to remove the cap altogether through 2012. In addition to dividends, Fannie and Freddie had to pay quarterly commitment fees to Treasury for making the capital support available.

The Obama administration, meanwhile, drastically changed the ground rules. In a 2011 white paper, buried among a lot of high-sounding rhetoric, was the following proclamation: “The Administration will work with [FHFA] to develop a plan to responsibly reduce the role of [Fannie and Freddie] in the mortgage market and, ultimately, wind down both institutions.”^[31] Thus, what had begun as a conservatorship to assist with a liquidity problem at two government-sponsored, but privately owned, enterprises that were concededly solvent at the time the conservatorships were imposed^[32] ended up being a somewhat clandestine nationalization of the two mortgage giants.^[33] The descriptor “somewhat clandestine” refers to the deliberate acquisition of warrants for 79.9 percent of the stock of Fannie and Freddie:

If the United States took an option on 80% of the shares or more, it would have to report the Fannie and Freddie debt on its balance sheet, which it was loath to do. This situation allowed it to acquire the benefits of economic control in the event of an upswing without having to bear any of the short-term consequences of it.^[34]

According to the Perry Capital LLC v. Mnuchin court:

Fannie’s and Freddie’s frequent inability to make those dividend payments, however, meant that they often borrowed more cash from Treasury just to pay the dividends, which in turn increased the dividends that Fannie and Freddie were obligated to pay in future quarters. In 2012, FHFA and Treasury adopted the Third Amendment to their stock purchase agreement, which replaced the fixed 10% dividend with a formula by which Fannie and Freddie just paid to Treasury an amount (roughly) equal to their quarterly net worth, however much or little that may be.^[35]

In 2012, the Preferred Stock Agreements were amended so that Fannie and Freddie were required to pay the Treasury dividends equal to their net worth above a specified reserve, a change known as the “Net Worth Sweep.” This was the Third Amendment to the Preferred Stock Agreements (“Third Amendment”), which eliminated the prior 10 percent dividend and substituted instead an arrangement whereby all profits over a certain threshold were “swept” into the Treasury. Pursuant to the Third Amendment, from and after January 1, 2013, every positive net worth dollar the GSEs generated above the capital reserve account would be the new “Dividend Amount,” payable to Treasury as a dividend on its existing senior preferred stock. As a result, neither Fannie nor Freddie was permitted to amass any capital except for a small reserve.^[36]

Announcement of this amendment caused the value of Fannie and Freddie shares to plummet, and shareholders, including those holding both common and junior preferred shares, filed multiple lawsuits^[37] challenging the legality of the actions by FHFA in its conservatorship role on a variety of federal statutory and constitutional claims, as well as state law contract claims. These lawsuits variously called into question Treasury’s actions during 2008 to stabilize the home mortgage market, challenged the constitutionality of forcing Fannie and Freddie into conservatorship, and questioned the government’s operation of the two GSEs.

One of those cases went to the U.S. Supreme Court. In Collins v. Yellen,^[38] the Court held, on the one hand, that HERA’s restriction on removal by the president of the FHFA director was unconstitutional based on a similar ruling involving the director of the Consumer Financial Protection Bureau (“CFPB”),^[39] but, on the other hand, that HERA had authorized FHFA to replace a fixed-rate dividend formula with a variable one, that FHFA had not exceeded its authority in choosing that option, and that 12 U.S.C. § 4617(f)^[40] prohibited courts from restraining the exercise of FHFA’s conservatorship powers or functions.

The Fairholme Funds Appeal

The appeal in Fairholme Funds followed a lower-court ruling that let stand a jury verdict awarding shareholders $612.4 million in damages after finding FHFA had breached the implied covenant of good faith and fair dealing. The district court, in upholding that verdict in March 2025, rejected FHFA’s argument that the Supreme Court’s 2021 decision in Collins v. Yellen foreclosed the shareholders’ claims.

FHFA’s position on appeal was that Collins undercut that verdict and reinforced how much latitude Congress gave the agency under HERA when it placed Fannie and Freddie into conservatorship.^[41] The panel, consisting of Senior Circuit Judge Douglas Ginsburg and Judges Justin Walker and J. Michelle Childs, distinguished Collins as having addressed a statutory claim concerning the scope of the FHFA’s authority as conservator, not a contract claim for damages. While FHFA enjoyed broad authority to act in the public interest, this power did not give it license “arbitrarily or unreasonably” to violate the reasonable expectations of parties with whom it had a contract.

The court of appeals also rejected FHFA’s contention that the implied covenant could not apply because the shareholder agreements gave the agency wide discretion. Citing Delaware and Virginia law, the court held that such broad grants of discretion are precisely when the implied covenant of good faith is most needed to prevent arbitrary conduct. The covenant is a gap-filler with respect to how such broad discretion may be exercised.

Finally, the court rejected the idea that the shareholders’ position constituted merely an “unripe claim for anticipatory breach” about future dividends. Instead, the court found that the adoption of the Net Worth Sweep was itself a breach of the ongoing duty of good faith, for which the shareholders could seek damages based on the immediate drop in value of their shares.

Affirming the district court’s judgment, the D.C. Circuit held that the implied covenant claim was foreclosed neither by Supreme Court precedent nor by HERA, that the claim was available against FHFA as conservator, and that the Net Worth Sweep violated the reasonable expectations of shareholders. The court of appeals read the Supreme Court’s statutory holding in Collins as applying only to FHFA’s statutory authority as conservator but not foreclosing a contract law claim for damages.^[42]

The court held, as it had in Perry Capital LLC v. Lew,^[43] that when a contract authorizes a party to act in its “sole discretion,” that party may still violate the implied covenant of good faith and fair dealing if it exercises that discretion “arbitrarily or unreasonably.” In doing so, the court rejected FHFA’s invitation to reassess evidence and discredit testimony heard by the jury.^[44] Finally, the D.C. Circuit determined that post–Net Worth Sweep purchasers of shares could pursue the claim and that the denial of restitution and reliance damages was proper.^[45] Accordingly, the award of expectation damages was affirmed.

1. No. 25-5113, 2026 U.S. App. LEXIS 22075 (D.C. Cir. July 24, 2026), aff’g 2022 U.S. Dist. LEXIS 180141 (D.D.C. Oct. 3, 2022). The D.C. Circuit opinion was authored by Senior Circuit Judge Douglas H. Ginsburg, who has served on the court for forty years. ↑

2. Popularly known as “Fannie Mae” or sometimes just “Fannie,” this entity was created during the Great Depression to “provide stability in the secondary market for residential mortgages,” to “increas[e] the liquidity of mortgage investments,” and to “promote access to mortgage credit throughout the Nation.” See National Housing Act Amendments of 1938, ch. 13, 52 Stat. 8 (codified at 12 U.S.C. § 1716). Originally a government agency, Fannie was designed to facilitate the creation of, and to participate in, a secondary market for mortgage loans. In 1954, Fannie Mae was transformed from a government agency into a mixed ownership (i.e., public-private) corporation, and in 1968, to remove Fannie from the federal budget, the enterprise was converted into a publicly traded, entirely privately owned corporation that funded its operations via market operations in stocks and bonds. ↑

3. Popularly known as “Freddie Mac” or sometimes just “Freddie,” this entity was created in 1970 (as a younger sibling to Fannie) to “increase the availability of mortgage credit for the financing of urgently needed housing.” See Emergency Home Finance Act of 1970, Pub. L. No. 91-351, 84 Stat. 450 (1970). As with Fannie, Freddie was ultimately transformed (in the 1989 savings and loan bailout legislation popularly known as FIRREA) into a publicly traded, privately owned, for-profit corporation. ↑

4. Fairholme Funds, 2026 U.S. App. LEXIS at *3. ↑

5. See Fed. Deposit Ins. Corp., Assessing the Banking Industry’s Exposure to an Implicit Government Guarantee of GSEs (2004). ↑

6. See Perry Cap. LLC v. Lew, 70 F. Supp. 3d 208, 215 (D.D.C. 2014). ↑

7. See generally Viral V. Acharya, Governments as Shadow Banks: The Looming Threat to Financial Stability, 90 Tex. L. Rev. 1745 (2012). ↑

8. Edward J. Pinto, Government Housing Policies in the Lead-up to the Financial Crisis: A Forensic Study (2011). ↑

9. Joint Center for Housing Studies of Harvard University, The State of the Nation’s Housing: 2008, at 2 (2008). ↑

10. See, e.g., Charles Duhigg, Pressured to Take More Risk, Fannie Reached Tipping Point, N.Y. Times (Oct. 4, 2008). ↑

11. See, e.g., Pinto, supra note 8. ↑

12. See Crash Course: The Origins of the Financial Crisis, The Economist (Sept. 7, 2013). ↑

13. See Off. of Inspector Gen., FHFA, White Paper No. WPR-2013-002, Analysis of the 2012 Amendments to the Senior Preferred Stock Purchase Agreements 5 (2013). ↑

14. See Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289, §§ 1101–1163, 1311–1314 (codified at 12 U.S.C. ch. 46). ↑

15. See 12 U.S.C. § 4617 (a). ↑

16. See Press Release, Fed. Hous. Fin. Agency, Statement of FHFA Director James B. Lockhart at News Conference Announcing Conservatorship of Fannie Mae and Freddie Mac (Sept. 7, 2008). ↑

17. 12 U.S.C. § 4617(b)(2)(J)(i) ↑

18. Id. § 4617 (b)(2)(J)(ii) (emphasis added) ↑

19. Id. § 4617(b)(2)(D). ↑

20. Id. § 4617(b)(2)(B)(i). ↑

21. Id. § 4617(b)(2)(B)(ii). ↑

22. Id. § 4617(b)(2)(B)(iii). ↑

23. Id. § 4617(b)(2)(B)(iv). ↑

24. Id. § 4617(b)(2)(B)(v). ↑

25. Id. § 4617(b)(2)(A)(i). ↑

26. Id. § 4617(b)(2)(G)–(H). ↑

27. This was later doubled to $200 billion. See Perry Cap., 70 F. Supp.3d at 216 (“On May 6, 2009, Treasury and the GSEs, through FHFA . . . doubled its funding cap to $200 billion for each GSE.”). ↑

28. The rate would increase to 12 percent if, in any quarter, the dividends were not paid in cash, until such time as all dividends had been paid in cash. Id. ↑

29. Fed. Hous. Fin. Agency, 2013 Performance and Accountability Report 110 (2013). ↑

30. See U.S. Dep’t of Treasury, Fed. Nat’l Mortg. Ass’n, First Amendment to Amended and Restated Senior Stock Purchase Agreement § 4 (May 6, 2009); U.S. Dep’t of Treasury, Fed. Home Loan Mortg. Corp., First Amendment to Amended and Restated Senior Stock Purchase Agreement § 4 (May 6, 2009). ↑

31. Dep’t of the Treasury & Dep’t of Hous. & Urb. Dev., Reforming America’s Housing Finance Market: A Report to Congress 4 (Feb. 2011). ↑

32. See Off. of Inspector Gen., FHFA, Analysis of the 2012 Amendments to the Senior Preferred Stock Purchase Agreements 5 (Mar. 20, 2013). ↑

33. See Building a Sustainable Housing Finance System—Examining Regulatory Impediments to Private Investment Capital: Hearing Before the H. Comm. on Fin. Servs., 112th Cong. (2013) (statement of James E. Millstein, Chief Executive Officer, Millstein & Co.) (asserting that major government interventions “effectively nationalized the residential mortgage market” and that this form of “continued government dominance of the mortgage market is unacceptable”). ↑

34. Richard A. Epstein, The Government Takeover of Fannie Mae and Freddie Mac: Upending Capital Markets with Lax Business and Constitutional Standards, 10 N.Y.U. J.L. & Bus. 379, 425 (2014). ↑

35. Perry Cap. LLC v. Mnuchin, 864 F.3d 591, 598 (D.C. Cir. 2017). ↑

36. Whether or not the Treasury’s concerns—which were the basis for the Third Amendment—about Fannie and Freddie entering a vicious cycle of endless Treasury borrowings just to pay required dividends under the Preferred Stock Agreements had any basis in reality, it is clear that they turned out to be unfounded. Under the Net Worth Sweep arrangement, as of year-end 2014 Freddie Mac had repaid the Treasury approximately $91 billion compared with total Treasury advances of $71 billion. See generally Freddie Mac, Update: Investor Presentation 12–13 (Dec. 2014) (showing profitable quarters since a final draw on the Treasury in the first quarter of 2012, and Fannie Mae had repaid Treasury approximately $134.5 billion compared with total Treasury advances of $116.1 billion); Press Release, Fannie Mae, Fannie Mae Reports Net Income of $3.9 Billion and Comprehensive Income $4.0 Billion for Third Quarter 2014, at 1 (Nov. 6, 2014). ↑

37. See, e.g., Saxton v. Fed. Hous. Fin. Agency, 901 F.3d 954, 2018 U.S. App. LEXIS 23769 (8th Cir. 2018); Collins v. Mnuchin, 896 F.3d 640 (5th Cir.), vacated, 908 F.3d 151 (5th Cir. 2018) (en banc); Roberts v. Fed. Hous. Fin. Agency, 889 F.3d 397, 399 (7th Cir. 2018); Robinson v. Fed. Hous. Fin. Agency, 876 F.3d 220 (6th Cir. 2017); Perry Cap. LLC v. Lew, 70 F. Supp. 3d 208 (D.D.C. 2014), aff’d in part, rev’d in part sub nom. Perry Cap. LLC v. Mnuchin, 848 F.3d 1072 (D.C. Cir. 2017), amended, 864 F.3d 591, cert. denied, 583 U.S. 1115 (2018), cert. denied sub nom. Cacciapalle v. Fed. Hous. Fin. Agency, 583 U.S. 1115 (2018), and cert. denied sub nom. Fairholme Funds, Inc. v. Fed. Hous. Fin. Agency, 583 U.S. 1115 (2018). ↑

38. 594 U.S. 220 (2021). The case came out of the U.S. Court of Appeals for the Fifth Circuit as Collins v. Mnuchin, 896 F.3d 640 (5th Cir. 2018), aff’d in part, rev’d in part, 938 F.3d 553 (5th Cir. 2019) (en banc), but the name changed when Janet Yellen succeeded Stephen Mnuchin as secretary of the Treasury. ↑

39. See Seila Law LLC v. Consumer Fin. Prot. Bureau, 591 U.S. 197 (2020) (holding that restrictions in the Dodd-Frank legislation on the removability of the CFPB director violated the separation of powers). ↑

40. That statute provides, “Except as provided in this section or at the request of the Director, no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver.” ↑

41. FHFA’s argument was based on 12 U.S.C. § 4617(f), which provides in pertinent part: “Except as provided in this section . . . no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver.” FHFA relied on the Supreme Court’s holding that § 4617(f) protects the FHFA’s business decisions from judicial review. Collins, 594 U.S. at 254. From this, FHFA contended, the jury could not second-guess the Net Worth Sweep because it was a “core exercise” of the FHFA’s “broad” powers under HERA. Furthermore, the agency argued, because Collins held the FHFA “could have reasonably concluded” that the Net Worth Sweep was in the public’s interest, id. at 239, the Supreme Court’s decision necessarily rejected the central element of the shareholders’ implied covenant claim — that FHFA acted “arbitrarily or unreasonably” in agreeing to the Net Worth Sweep. The shareholders’ rejoinder was that FHFA was overreading Collins, which simply involved a claim under the Administrative Procedure Act about the scope of the agency’s and did not decide how § 4617(f) would apply to a claim for contract damages or whether the Net Worth Sweep was consistent with the reasonable expectations of the parties. ↑

42. Fairholme Funds v. Fed. Hous. Fin. Agency, No. 25-5113, 2026 U.S. App. LEXIS 22075, at *14–20 (D.C. Cir. July 24, 2026). The D.C. Circuit had reached a similar conclusion in its pre-Collins decision in Perry Capital LLC, 864 F.3d at 604–16, and reaffirmed it in Fairholme Funds. ↑

43. 70 F. Supp. 3d 208. ↑

44. Fairholme Funds, 2026 U.S. App. LEXIS 22075, at *29–32. ↑

45. Id. at *32–38. The court was persuaded that, under Delaware law, “the implied covenant claim traveled with the shares.” Id. at *34. ↑

In a decision with potential far-reaching consequences, the Seventh Circuit Court of Appeals recently affirmed dismissal of a putative class action related to unwanted text messages under the Telephone Consumer Protection Act (“TCPA”), finding that text messages do not equal calls and are therefore not covered by section 227(c)(5) of the TCPA (Steidinger v. Blackstone Medical Services, No. 25-2398 (7th Cir. July 14, 2026)).

The Seventh Circuit’s decision ultimately conflicts with decisions from other circuit courts and could result in the U.S. Supreme Court deciding the issue once and for all.

What Happened?

• Plaintiffs received numerous marketing text messages from the defendant, even after they asked it to stop (or added themselves to the Do-Not-Call Registry). In response, they filed a putative class action under the TCPA.
• The defendant then moved to dismiss and argued that 47 U.S.C. § 227(c)(5), the provision on which the plaintiffs’ claims for relief were based, only creates a private right of action for phone calls, not text messages.
• The district court agreed, dismissed the TCPA claims, and declined to exercise supplemental jurisdiction over the plaintiffs’ state law claims. The plaintiffs then appealed.

Based on Plain Meaning, a Text Message Does Not Equal a Telephone Call

On appeal, the Seventh Circuit Court of Appeals affirmed the district court’s decision and found that a text message is not a telephone call for purposes of § 227(c)(5) of the TCPA. That section provides for a private right of action for any person “who has received more than one telephone call within any 12-month period by or on behalf of the same entity in violation of the regulations prescribed under this subsection.”

As the court noted, it is undisputed that a “telephone call” could not have included text messages when the TCPA was enacted in 1991; the first text message was not sent until the next year. So the court looked into what “telephone call” meant back in 1991.

Because the TCPA does not define the term, the court looked to contemporaneous dictionary definitions. As the court noted, in 1991, “a telephone was ‘[a]n instrument for reproducing sounds at a distance.” Because text messages do not reproduce sounds, they did not meet the definition of a telephone call back in 1991.

The Plaintiffs’ Arguments

The court also concluded that the provisions surrounding § 227(c)(5) provided further support for this plain reading of the term telephone call. For example, §§ 227(c)(3) and (4) relate to creating a national database for individuals to object to receiving “telephone solicitations,” a term specifically defined to include more than telephone calls. The court found it telling that Congress used two different terms within the same statutory scheme and rejected the plaintiffs’ argument that those different terms should not be given different meanings.

The plaintiffs, however, rejected that conclusion and raised a number of policy-related arguments that the court rejected outright.

• The plaintiffs contended that the term telephone call should be read broadly to encompass text messages; otherwise, “the TCPA’s protections will become increasingly ineffectual as new technologies emerge.” But the court found that the “march of technology” alone was insufficient to ignore the plain meaning of the statute.
• Next, the plaintiffs argued that decisions by the Supreme Court and other circuits undermine the defendants’ argument. This, too, was rejected. The Seventh Circuit found that the Supreme Court cases relied upon by the plaintiffs never actually decided what the term “call” meant, noting that the parties never argued that issue, and it rejected the other circuit courts’ decisions on that same basis.
• The Court also rejected the plaintiffs’ plea to consider the Federal Communications Commission’s interpretation of the term “call,” noting that under recent Supreme Court precedent, it is no longer bound to defer to the agency’s determination.
• Finally, the Court rejected the plaintiffs’ public policy arguments, noting that “the plaintiffs’ policy arguments and broad invocation of the TCPA’s remedial nature ‘cannot overcome the clear commands of [§ 227(c)(5)’s] text and the statutory context.’”

What Does It Mean?

The Seventh Circuit’s ruling is binding on Illinois, Indiana, and Wisconsin, and it means that TCPA class actions under § 227(c)(5) for unwanted marketing text messages in those states are effectively dead. But this decision is only binding in the Seventh Circuit, meaning that other courts could rule differently on the issue. Furthermore, the FCC retains the ability to regulate unwanted text messages under the TCPA.

Attorneys are problem solvers, often tasked with ensuring safe adoption of emerging technologies in real time. With our added duty of competence, we must always advocate for thoughtful implementation, even when there’s a temptation to save time or costs through automation. The magic problem-solving skills of legal work come through a competent human in the mix, not artificial intelligence or any other tool.

As a Gen X attorney, I’ve seen technology evolve from typewriters to tablets and can consider new AI automations with the benefit of lived experience. AI is not the “set it and forget it” solution to automating “simple” legal work. No matter how much pressure in-house counsel is under to reduce costs, automate, and prioritize speed in contracts, using AI without involving human judgment does the opposite. It increases costs due to mistakes, missed clauses, and renegotiations after someone signs onto an impossible promise tangled in “boilerplate” wording.

AI automations are the next tool attorneys will learn to use, implement, and perfect, just as we’ve done for generations moving from quill and ink, through the beloved early word processor WordPerfect, to the variety of digital tools used in practice today. AI tools are not magic, but with innovative attorneys at the helm, incorporating knowledge and experience into the process while thoughtfully crafting improvements, they are remarkably effective at scaling the creation of clear, cost-effective, and commercially aware agreements. As with any legal technology, our tools are most valuable to clients when attorneys are responsible for the substance of our creations.

Why Context Requires a Human

I remember the joyful power of using the “reveal codes” function in WordPerfect, and how it enhanced our new computer skills. Revealing the underlying format is an ideal example of what technology can do to empower and improve the quality of attorney work. Today we can use AI to perform a “reveal” function across all types of contracts, uncovering their structures and paving the way to make adjustments at scale with speed. Automated review of repeat contracts does not, of course, eliminate the need for a human attorney’s experience and knowledge.

The gains of automation don’t fall out of thin air. Smart gains require human attorneys who are familiar with the deal, the client, the counterparties, and any third-party beneficiaries, as well as the tricky ways contracts operate when they are treated as routine or unimportant. When a backdoor standstill is slipped into a simple deal nondisclosure agreement (NDA), an automation might not pick up the ambiguity-turned-land-mine. An experienced, detail-oriented human review will find the dangerous one-word addition of “negotiated” to a standard use restriction (you will only use X for a transaction regarding Y) and discuss the risk of “negotiated” slipped in before “transaction” with a business in a way that a computer can’t. It’s the attorney who turns insight into quality and action for clients, not the tool.

Checking Our Work, Avoiding the Foot Fault

As a later-in-life law student, I took my 1L writing classes in my thirties with professors who regaled us with tales of the halcyon days of learning to Shepardize by hand, sharing horror stories of classmates stealing a key reference from the library when they needed it most. By that time, though, we were learning not only how to find those tomes among the stacks but also how to use LexisNexis, Bloomberg, and WestLaw: ubiquitous tools in today’s practice of law.

Along with learning the foundations of the legal profession, we were taught to use current innovations to become more agile, not to avoid our duty to check those citations each time. Current advancements require the same duty to check our work. This May, the Florida Supreme Court issued an instruction reiterating what we know: innovations don’t replace attorney responsibility. In Florida (and I expect many states to follow), an attorney’s representation to the court is the accuracy of our work, including existing and accurately cited sources, not a disclosure or certification of what tool was used.

Because our duty of competence is not removed by our use of technology, AI automations included, attorneys must always check our work. Instead of slowing things down, AI can help boost the volume of our work, leaving time for careful citation checks in the same timeline it previously took to create the product to begin with. Another use of AI is searching past agreements and finding how often and in what form the counterparty agreed to wording your client needs. With AI, we don’t have to invent the wheel or delay the process to search vast troves of past agreements; we can utilize its enhanced search and summary capabilities to inform and improve our output.

When, Not If, Automation Falls Short

A May 2026 article in The New Yorker surveyed college professors about the push-and-pull of AI use on college campuses. One professor, Daniel Silver at the University of Toronto, discussed showing students that the C-grade “replacement-level work” that AI produces is the floor. Students must still learn how to think and create something better than the identifiably bland output of a large language model.

The same issue affects the use of AI tools in our profession. The first draft spit out by a large language model is not the quality of legal work we are expected to produce, nor the work a competent attorney would be comfortable presenting as their own, even the ever-maligned “first-year.”

In the rush to utilize AI automations, those of us in the transactional contract space have already seen such C-level replacement work come into our inboxes, sometimes in an email “signed” by an automation itself. Automations don’t capture the nuances of a commercial relationship in drafts or emails, despite the relationship often being equally important as the outcome of an early-stage NDA or engagement letter. A human in the mix who knows how to balance relationships and risk improves timing and success by reaching out with a quick phone call, confirming the counterparty’s intent, and sending back a finalized contract reflecting positions acceptable to everyone.

The benefits of AI to a law firm are not outputs to replace thought, innovation, or competence. Instead, AI is a particularly promising tool, allowing thoughtful attorneys to organize and monitor complex problems across discovery, depositions, governance, and reporting.

The Gordian Knot AI Can’t Untangle

As attorneys, our clients hire us to solve their problems, no matter the size or the complexity, and regardless of whether it’s ever been seen before. Trust like this—clients bringing us their Gordian knots to unweave—is why our profession requires competence, honesty, and a clear path of responsibility for our actions. These guiding principles have allowed attorneys to be leaders in AI adoption, within our firms and in partnership with our in-house clients. We are trusted to use our experience and thoughtfulness to implement the next big thing without dropping the proverbial balls of competence, honesty, and responsibility.

Those core values for attorneys are why humans will not be replaced by large language models: Our craft requires a human in the loop. Tools help attorneys synthesize and organize data, so we support our clients efficiently and build both the details and big picture needed to make the most important decisions. AI tools can find and summarize, but not decide, so attorneys are well placed to use those summaries and searches to expand the information available to compliance teams and provide the advice our clients count on.

With AI, our clients will benefit from information learned from the last fifty or five hundred contracts that have been through the same queue, but only if they can also depend on humans applying context and detail for today’s deal. An experienced attorney knows why a particular commercial term matters to sales, why checking citations for hallucinations and other mistakes (before filing) matters to courts, or why the deposition answers of the CFO and CIO should be checked against one another. Clients will not and should not rely on a C-minus draft or on automated review, but they can benefit from the knowledge gained from prior experience when that knowledge is funneled through attorney sign-off.

The Road Ahead

Pretending the next generation of attorneys will only learn by doing it our way is a recipe for stagnation. At the same time, our clients deserve our expert skills enhanced by AI tools, not replaced by them. Luckily for us, our profession is already constantly adapting to the ever-shifting landscape of legislation, markets moving at warp speed, and clients who rely on us to understand established law and find innovative theories to move their ideas in the world. Buoyed by our foundational duties of competence, honesty, and responsibility—attorney innovators will lead on AI, too. Even as the competence and honesty of AI tools’ outputs improve incrementally, our responsibility is the core reason why the most successful adoptions of AI include human involvement. Attorney skills and foresight identify mistakes, right the ship, and approve the final work product before our work is touched by a client or a court.

Attorneys have always used tools, from pen and paper through word processors and digital research repositories. As long as we maintain human oversight, AI is simply the next tool in our belt, not the Sword of Damocles.

This article previews a Showcase CLE program at the American Bar Association Business Law Section’s upcoming Fall Meeting in Chicago, Illinois. Register now to attend the program, “Data Centers: Issues of National Infrastructure, State Investment, and Local Sustainability,” on Thursday, September 3, 2026, 12:00–1:30 p.m. CT.

Data centers have gained popular attention in the United States of late, amid an expansion of data center development fueled by the artificial intelligence boom. Many residents and local officials in communities abutting data centers—whether proposed, under construction, or in operation—have risen up in opposition, voicing their concerns about strains on the local electricity grid and depletion of clean water sources, frustration with nuisances such as heat and noise, and skepticism about whether data center projects’ promises of jobs and economic prospects to the community are justified and real.

We depend on data centers every day. When we text, email, and use generative AI tools, the data we transmit and consume fly through various data centers. Data centers use electricity to power the transmission and manipulation of data and typically use water (some use air-based systems) to cool the components and equipment that heat up as they process data. With increasing adoption of AI, data centers’ electricity usage is expected to accelerate. Hence, it would appear that though all of us benefit from data centers from anywhere, the communities hosting the data centers may be asked to shoulder a disproportionate share of the burden and externalities.

That apparent benefit-burden mismatch led me to propose the upcoming Showcase Program on data centers at the ABA Business Law Section Fall Meeting 2026 in Chicago, titled Data Centers: Issue of National Infrastructure, State Investment, and Local Sustainability. Through conversations with the panelists and members of the Section’s Community Economic Development Committee, as well as my own research, the working thesis I have developed is that durable data center development should preserve meaningful self-determination for host communities. A conscientious business lawyer engaged in or wanting to engage in data center development—whether as deal counsel, policy strategist, or community advocate—can help manifest that principle in contracts, processes, and community engagement.

Such an approach is a particularly helpful lodestar today when conversations around data centers have shifted significantly and continue to be in flux. For example, as the world’s largest data center market, northern Virginia remains the mature-market benchmark for the industry, and the state’s retail sales-and-use tax exemption was an important player in that growth. However, in March, a Virginia appellate court affirmed that the rezoning approvals for a major proposal, Prince William Digital Gateway, were void because of defective public notice, resulting in the cancellation of what reportedly would have been the world’s largest data center project. Texas—another incentive-driven market—appeared to respond to the popular opposition when Governor Greg Abbott directed the Public Utility Commission of Texas and the Electric Reliability Council of Texas to audit certain projects and to make available to the public important information about the projects, such as receipt of public financial assistance, power and water demand, and measures to reduce neighborhood impact.

Other questions persist. How will the Trump administration’s energy policy coexist with data center’s increasing demand for power? What will happen to the sprawling data center facilities should we no longer need such large footprints, whether due to technology advances or changes to our data consumption patterns? What will happen if the operator or the tenant leaves, and the facilities stop operation altogether?

The Showcase Program will help attendees to make sense of these developments, participate in the conversation, and leave with practical questions for our professional lives. The panel brings together a leading professor, a data center developer executive immersed in responsible data center development, and lawyers with deep knowledge from transactional, financing, and tax perspectives. We will ask how multifaceted influences and concerns can be aligned to support host-community agency.

During the session, the panelists will explain what data centers are and what they do; examine the legal and political considerations that shape data center development, including tax incentives and financing; and discuss how business lawyers can help catalyze host communities’ meaningful exercise of self-determination. We hope to offer concrete takeaways for lawyers in different roles and generate lively conversations. I hope you will join us.

This article previews a Showcase CLE program at the American Bar Association Business Law Section’s upcoming Fall Meeting in Chicago, Illinois. Register now to attend the program, “When the Alarm Sounds: Boardroom Crisis Management in Real Time,” on Wednesday, September 2, 2026, 12:00–1:30 p.m. CT.

Corporate crises rarely arrive at a convenient time, in a neat package, or with a complete set of facts. Lawyers cannot control when the alarm sounds. A ransomware attack locks key systems before dawn. A whistleblower complaint alleges executive misconduct on the eve of an earnings call. A regulator sends an urgent inquiry that suggests the government already knows more than the company does. A financial restatement threatens market confidence, investor relations, and board credibility all at once.

In those moments, lawyers (both outside counsel and in-house counsel) are asked to do far more than answer legal questions. They must help a company think clearly under extreme pressure—and do so in a way that holds up to real-time and post-hoc scrutiny from regulators and judges. They must also help directors and officers identify problems, preserve privilege, and satisfy fiduciary duties, all without creating new legal or ethical problems of their own along the way. The first hours matter, but so do the decisions made in the days, weeks, and months that follow.

When the Boardroom Becomes a Crisis Command Center

When a serious crisis emerges, one of the very first questions is who should take charge. The answer can be surprisingly hard to pin down. Management often has operational control and access to information, but the board may have independent oversight obligations, particularly when the allegations involve senior leadership, internal controls, financial reporting, regulatory compliance, or enterprise risk management.

The board’s role often has to be worked out in real time, and counsel needs to be ready for it. Should the full board handle this directly, or does it call for a special committee and independent counsel? Whatever the answer, directors need enough information—properly documented—to know when to defer to management and when to take a harder stance. These decisions can shape the company’s legal position, affect privilege, and determine whether later scrutiny views the company’s actions as thoughtful governance or reactive damage control.

Preserving Privilege While Finding the Facts

Internal investigations are often central to corporate crisis response. But an investigation that is poorly structured at the outset can create avoidable risk. Counsel must consider (1) who the client is; (2) who is directing the investigation; (3) who should conduct interviews; (4) how documents should be collected; (5) how findings should be reported; and (6) whether any report should be written, oral, privileged, or shared with third parties.

To complicate matters, there is a practical tension between learning the facts quickly and preserving legal protections. In a crisis, business leaders want answers immediately. Regulators may expect cooperation. Auditors, insurers, lenders, investors, and counterparties may demand information. Employees may be anxious or confused. The media may ask questions before the company has completed its own review. Lawyers must help the company gather reliable information without sacrificing privilege, waiving protections unnecessarily, or creating a record that is inaccurate, incomplete, or damaging.

Communications, Candor, and Control

Every corporate crisis is also a communications crisis. Silence can create suspicion, but premature statements may create liability. Public companies may face disclosure obligations. Regulated entities may have reporting duties. Private companies have their own audiences to manage, from employees and customers to lenders and business partners. And in nearly every significant crisis, someone will be watching: regulators, plaintiffs’ lawyers, the media, competitors, stockholders, consumers, and/or the court of public opinion.

Shaping communications that are accurate, disciplined, and consistent with the company’s legal obligations is its own kind of advocacy. That does not mean turning lawyers into public relations professionals. It means understanding how communications strategy, litigation risk, regulatory exposure, and corporate governance intersect. Counsel must also be sensitive to the danger of inconsistent messaging. What the company tells employees should not undermine what it tells regulators. What it says publicly should not conflict with what the board has been told privately. What appears in a press release may later appear in a complaint, deposition, enforcement action, or judicial opinion. Good crisis management requires coordination, judgment, and restraint.

Ethics in the Pressure Cooker

Crisis conditions can magnify ethical risk. Lawyers may face difficult questions about organizational representation, conflicts, confidentiality, reporting obligations, document preservation, witness communications, and interactions with government agencies. In-house counsel may be asked to serve simultaneously as legal adviser, business strategist, investigator, and institutional memory. Outside counsel may be asked to move quickly while still maintaining independence and professional judgment. But many fundamental and difficult questions arise quickly:

• Whom does counsel represent?
• What happens when the interests of the company and individual executives diverge?
• How should counsel communicate with employees during internal interviews?
• What must be done to preserve documents and electronically stored information?
• When does zealous advocacy become obstruction, overstatement, or concealment?

These issues matter not only to corporate lawyers but also to judges and government lawyers who later evaluate whether a company acted responsibly. A crisis response that is ethical, organized, and well-documented can affect regulatory credibility, settlement posture, judicial perception, and litigation outcomes.

A Practical Framework for the Full Life Cycle of a Crisis

Crises tend to unfold in phases, but the planning for them has to happen long before any crisis exists. What counsel needs is a practical framework for advising boards and companies through the full life cycle of a corporate crisis. This framework must be built well in advance, not improvised under pressure.

The first phase is preparation, which includes refining governance structures, setting escalation protocols, drafting crisis playbooks, addressing privilege issues, training incident response teams, and educating the board, long before any of it is actually needed. That groundwork pays off in the first critical hours, when counsel must help identify the problem, convene the right decision-makers, preserve evidence, retain necessary advisers, and control communications.

From there, the response widens: internal investigations, regulatory engagement, public disclosures, employee communications, insurance coordination, remediation, litigation strategy, and board oversight, often running at the same time.

And once the immediate crisis passes, the work is not finished. Counsel must turn to identifying lessons learned, effectuating governance reforms, implementing compliance improvements, and, where needed, the slower work of rebuilding trust.

Conclusion

Corporate crises test institutions. They also test the lawyers and public relations professionals who serve those institutions, often before key audiences—boards, regulators, judges, juries—who will judge the process as closely as the outcome.

When the alarm sounds, the lawyer’s role is not simply to say what the law requires. It is to help the organization make careful decisions under intense pressure, protect the integrity of the process, and guide the client from the first frantic phone call to whatever resolution eventually follows. The lawyers who do this well are usually the ones who did the unglamorous work months or years earlier—the playbook, the trained team, the privilege protocols already worked out—long before anyone could have guessed which crisis would actually occur.

Program attendees will leave with guidance on the following:

• How to organize the first forty-five minutes to an hour after a crisis is identified.
• How to determine who should lead and who should be informed.
• How to preserve privilege while gathering facts.
• How to navigate legal ethical dilemmas.
• How to coordinate legal and communications strategies without increasing liability.
• How to advise boards through difficult governance decisions under time pressure.
• How to recognize common mistakes that often worsen a crisis.

The ABA Business Law Section is hosting its Fall Meeting in Chicago on September 2–4, 2026, at the Hyatt Regency Chicago. This event brings together legal professionals from around the world and offers 50+ CLE programs, networking receptions, practice group committee meetings, and ticketed dinners. With so many events happening at once, choosing which CLEs, receptions, and dinners to attend can be challenging, especially for in-house counsel. To assist, the Business Law Section’s In-House Counsel Committee has created the guide below, curated for in-house counsel attending the ABA Business Law Section’s Fall Meeting in Chicago this September.

ABA Business Law Section Fall Meeting: The In-House Counsel Track

This track presents one path through the conference for in-house counsel, but please note that there are other programs of interest, including others co-sponsored by the In-House Counsel Committee. Refer to the Fall Meeting agenda for details.

Bolded programs are presented by the In-House Counsel Committee.

Wednesday, September 2, 2026

Thursday, September 3, 2026

Friday, September 4, 2026

The ABA Business Law Section’s Fall Meeting is a great place to network, learn, and explore a new city. It is especially valuable for in-house counsel to learn new practice areas, meet potential outside counsel, and network with fellow in-house counsel. We look forward to seeing you there!

Business lawyers, both internal and external counsel, occupy an important leadership role in the ongoing evolution of organization governance built on “checks and balances.” Further, business lawyers can contribute to carrying the concept of “checks and balances” and “transparency” down through the organization, thereby benefitting the entire organization. As is set out here, business lawyers can contribute to the leadership of their organizations—legal and otherwise—by encouraging the discussion of and aiding in the implementation of the appropriate checks and balances within a transparent environment. Business lawyers can lead by exploration and examination, and thoughtful inquiry without dictating. That exploration and examination can reach to all levels in an organization.

Leadership Through Governance

A good starting position for the business lawyer is to keep in mind what has been set out by recognized authorities. There are three to whom we have often turned and continue to turn:

1. Retired Delaware Supreme Court Chief Justice E. Norman Veasey, in his Pennsylvania Law Review article of May 2005, stated that stockholders should have the right to expect that “the board of directors will actually direct and monitor the management of the company, including strategic business plans and fundamental structural changes.”^[1]
2. Further to the point that directors have management as well as oversight responsibilities, then–Delaware Chancery Court Chancellor William B. Chandler stated in his 2005 opinion in the Disney shareowner derivative suit, “Delaware law is clear that the business and affairs of a corporation are managed by or under the direction of its board of directors. The business judgment rule serves to protect and promote the role of the board as the ultimate manager of the corporation.”^[2]
3. In a discussion of internal controls and director responsibilities on the Federal Reserve website, the Fed describes a board’s responsibility to create and enforce prudent policies and practices with the following statement: “Directors are placed in a position of trust by the bank’s shareholders, and both statutes and common law place responsibility for the affairs of a bank firmly and squarely on the board of directors. The board of directors of a bank should delegate the day-to-day routine of conducting the bank’s business to its officers and employees, but the board cannot delegate its responsibility for the consequences of unsound or imprudent policies and practices.”^[3]

These well-recognized authorities provide a basis for the business lawyer to interact with, not dictate to, other members of senior management and the board who are accountable for addressing these responsibilities. The task is not simple; business lawyers and their clients, be they organizations, boards, or senior management, are seeking to address expectations for enhanced oversight and governance and face many challenges.

Not to address the intertwined set of governance, oversight, and management responsibilities can be catastrophic, as occurred in the Wells Fargo fake accounts scandal of the late 2010s and the Boeing crashes of 2018 and 2019. There was criticism of all of the Wells Fargo directors by the Board of Governors of the Federal Reserve based on their lack of performance, followed by a procession of director departures including the chair/CEO and the lead director.^[4] And in the 2021 In re The Boeing Company Derivative Litigation decision,^[5] Delaware Chancery Court Vice Chancellor Zurn set out a balanced, but scathing, review of the Boeing board’s actions and lack thereof with respect to the loss of 346 passenger lives in two Boeing 737 Max crashes and other safety lapses.^[6] Regarding Boeing, U.S. District Judge Reed O’Connor said that “Boeing’s crime may properly be considered the deadliest corporate crime in U.S. history.”^[7]

Economists have long recognized that the division of labor of a firm is unique to each firm at each point in time. Similarly, there is no single standard and no single metric for what constitutes effective governance—no sole best practice, no “one size fits all” approach to follow. But there are the fundamental issues of governance, oversight, and management to be addressed.^[8]

Governance, oversight, and management are necessarily both organization-specific and time-specific. Models and practices are useful sources of information to consider in designing governance-oversight-management structures, but what is required in an organization will inevitably change over time, sometimes unexpectedly and rapidly in response to a crisis or other change in circumstances.^[9]

These factors position the business lawyer to employ an approach of exploration and examination to promote thoughtful inquiry. It is the authors’ view that the business lawyer brings to this examination and exploration the critical role of checks and balances and the importance of transparency.

Checks and Balances

The concept of checks and balances in corporate governance is not new. In the March 2002 issue of The CPA Journal, five senior executives (three large public companies, one large private company, and a large public-private organization), including one of these authors, authored an op-ed titled “From ‘Tone at the Top’ to ‘Checks and Balances.’”^[10]

Shortly afterward, a senior executive from the Securities & Exchange Commission relayed its concurrence with the position taken in the op-ed regarding checks and balances.

Not long afterwards, writing in the Wall Street Journal in 2004, Paul Volcker, former chair of the Federal Reserve, and Arthur Levitt Jr., former chair of the SEC, were direct on the need for checks and balances: “Two years ago this summer, Congress passed the Sarbanes-Oxley Act, the most far-reaching corporate reform legislation in 60 years, with the support of all but three members of Congress who voted. It was a moment of rare bipartisan action in response to the breakdown in corporate checks and balances that cost investors hundreds of billions of dollars in losses.”^[11]

Note that no mention was made of “tone at the top.”

Economics and political history have long pointed to the value of checks and balances. Volcker and Levitt locked their value in place.

Going Forward

The ABA Business Law Section understands well the benefits to an organization from effective business lawyer involvement and guidance, and recently joined with the three authors here and a colleague in publishing the book Corporate Governance: Understanding the Board-Management Relationship (2024).^[12]

The business lawyer cannot only raise the issues of “checks and balances” and “transparency” but, within the context of those issues, needs to focus on questions of stress testing the organization, the adequacy and effectiveness of internal reporting, the monitoring of cash flows, the usefulness of an executive committee of the board, and other questions, doing so from the position of an involved insider opening and maintaining a dialogue on these and other matters.

An important avenue exists for the business lawyer to offer valuable legal leadership via maintaining an organization’s focus in general, and in addressing governance, oversight, and management issues throughout the organization.

1. E. Norman Veasey with Christine T. Di Guglielmo, What Happened in Delaware Corporate Law and Governance from 1992–2004? A Retrospective on Some Key Developments, 153 U. Pa. L. Rev. 1399, 17 (2005). ↑

2. In re The Walt Disney Co. Deriv. Litig., 907 A.2d 693, 746 (Del. Ch. 2005) (footnotes omitted). ↑

3. Management and Internal Controls Evaluation, Bd. Governors Fed. Rsrv. Sys. (last updated Apr. 20, 2026). ↑

4. H. Stephen Grace Jr., S. Lawrence Prendergast & Susan Koski-Grafer, Board Oversight and Governance: From Tone at the Top to Substantive Checks and Balances, Bus. L. Today (Feb. 14, 2019). ↑

5. No. 2019-0907-MTZ, 2021 WL 4059934 (Del. Ch. Sept. 7, 2021). ↑

6. Suzanne H. Gilbert, H. Stephen Grace Jr. & S. Lawrence Prendergast, Boeing and the Ongoing Evolution of Director Responsibilities, Bus. L. Today (Dec. 14, 2021). ↑

7. David Shepardson, Boeing 737 MAX Plea Deal Withstands Challenge from Crash Victims’ Families, Reuters (Feb. 10, 2023). ↑

8. H. Stephen Grace Jr., Suzanne H. Gilbert, Joseph P. Monteleone & S. Lawrence Prendergast, Corporate Governance: Understanding the Board-Management Relationship 6 (2024). ↑

9. Business Roundtable, in its updated Principles of Corporate Governance 2016, sets out: “No one approach to corporate governance may be right for all companies, and Business Roundtable does not prescribe or endorse any particular option, leaving that to the considered judgment of boards, management and shareholders. Accordingly, each company should look to these principles as a guide in developing the structures, practices and processes that are appropriate in light of its needs and circumstances.” ↑

10. James N. Clark, R. Hartwell Gardner, H. Stephen Grace Jr., John E. Haupert, & Robert S. Roath, From ‘Tone at the Top’ to ‘Checks and Balances,’ CPA J. (Mar. 2002). ↑

11. Paul Volcker & Arthur Levitt Jr., In Defense of Sarbanes-Oxley, Wall St. J. (June 14, 2004) (emphasis added). ↑

12. Our colleague and fourth author, Joe Monteleone, recently passed away. ↑

Every day, personal data is bought, sold, and traded online by companies most people have never heard of, often for purposes they never explicitly agreed to. Consumers typically don’t know it’s happening. And the businesses operating websites are also often in the dark as to how some data-collection technologies work in practice. Up until now, there have been few legal avenues for better understanding and addressing these potential harms.

That’s changing. Today, artificial intelligence is helping legal teams pull back the curtain on how companies that buy and sell consumer information online—often called data brokers—access and use that data. That same technology is also helping organizations that operate online understand whether their data privacy policies and practices are actually effective. And it’s helping consumers’ attorneys spot and address entities on all sides of consumer data exchanges that fail to protect data privacy.

Staying up to date on all the ways consumer data can be misused (whether intentionally or not, and whether by the organization itself or an external partner) is time-consuming and challenging. Yet businesses operating online likely can’t avoid interacting with external partners, such as data brokers, that seek to access their consumer data. Therefore, they must be aware of the potential privacy risks those organizations introduce so they can better manage them. Here’s what you need to know.

The shifting landscape of consumer data privacy litigation

Data privacy litigation has historically focused on website owners that collect personal digital data, such as health information, financial details, browsing activity, location, and communications, without consent. This can happen when operators add third-party tracking technologies, such as cookies and pixels, to their websites.

• Pixels collect and transmit user data so websites can better understand who a user is and what actions they might take.
• Cookies store data on a user’s computer, allowing websites to identify the user and provide a targeted experience based on past online behavior.

These trackers shape how individuals experience the internet. The information can be intercepted by third-party technology providers who use it to customize advertising and other online experiences to each individual based on the interests they have demonstrated.

Courts increasingly view the practice of intercepting and disclosing this type of consumer behavior data without proper consent as a potential wiretap violation.

Wiretap claims against medical websites, in particular, have historically dominated this area of plaintiff litigation. But as the category evolves, a new kind of case is emerging for firms seeking to protect consumer data through the courts. Instead of focusing on consumer-facing companies, plaintiffs are bringing claims against organizations whose trackers collect consumer information in the background of those websites and profit from it (often without explicit consent and in violation of data privacy statutes) using the Electronic Communications Privacy Act (“ECPA”).

These more recent cases go beyond the tech giants that have historically faced class action lawsuits (e.g., Google and Facebook) and look at other players in the adtech pipeline. These entities are typically registered data brokers that operate within the real-time bidding (“RTB”) infrastructure, which precisely targets ads to individual users based on the information collected about them. These cases turn largely on the collection of users’ browsing history, persistent digital identifiers, and communications to build identity profiles for advertising.

At the same time, states have begun implementing laws to put parameters around how these companies can collect and use consumer information, but these laws are generally not enforceable through private litigation.

Key developments driving potential claims against data brokers include the following:

• The emergence of positive case law on the privacy harm of profiling users in this way (discussed below)
• Governments being allowed to purchase citizen data without warrants
• The recent implementation of California’s DROP centralized deletion mechanism on August 1, 2026

The potential impact on consumer data privacy is significant. A congressional committee found that, over the last decade, just four data breaches involving major data brokers cost U.S. consumers more than $20 billion in losses related to identity theft. That’s a mere snapshot of the likely harm caused by poor data privacy protections. The growing use of AI across business sectors is raising even more concerns about the security of personal data online. In a recent IBM survey, 97 percent of organizations reported an AI-related security incident and lacked proper data access controls.

Darrow data shows an emergence in this category of data privacy cases. Darrow analyzed a subset of consumer data privacy class actions filed directly in federal courts in the first quarter of 2026 involving allegations of website-based tracking. Of the 128 cases identified, over 10 percent targeted advertising technology and data vendors directly rather than the website operators hosting the tracking technology. Prior to 2026, cases advancing wiretap and pen register claims directly against these kinds of advertising-technology vendors were far less common. In 2025, Darrow observed only a handful of similar cases being filed in federal court compared to a surge of website-operator wiretap cases.

Technology vendors make up a growing share of ECPA class actions.

Federal data-privacy class actions involving allegations of website-based tracking. Source: Darrow

Cases shaping consumer data broker privacy litigation today

Several recent cases and settlements are beginning to establish precedent, indicating paths forward for future privacy cases focused on actions by data brokers and ad tech vendors.

Other notable cases indicate potential outcomes as more claims work through the courts.

Oracle agreed to pay $115 million in 2024 to settle a lawsuit alleging that the company sold consumer profiles containing a wide range of personal information to marketers directly and through an Oracle product that helps companies personalize their online marketing. Oracle also had to agree to limits on how it collects user information online going forward.

The Federal Trade Commission will closely watch data broker Kochava after they reached a settlement earlier this year requiring Kochava to revise how it collects, uses, discloses, and disposes of user location data, following the resolution of a class action lawsuit over its disclosure of location data from sensitive venues, including health care facilities, jails, and schools. Kochava agreed to a class settlement in 2025 providing injunctive relief and approximately $1.5 million in attorneys’ fees and expenses, saying it lacked sufficient funds and insurance coverage to pay significant class-wide damages.

And earlier this year, Google agreed to sweeping injunctive relief in a class action settlement to amend its RTB privacy practices.

These types of orders and settlements are just the beginning as these cases continue to mature. However, several issues remain in bringing these claims that businesses and consumers should consider.

Challenges to advancing data broker privacy claims

While data broker and adtech vendor privacy claims are growing in number, there are several hurdles to bringing forward these claims, from clearly defining the class to proving harm on technology platforms that are constantly changing.

Understanding which companies introduce the risk. Identifying the specific intermediaries that buy and sell consumer data collected on a given website can be challenging. Consider that in California alone, more than five hundred companies have registered with the state as data brokers—a figure that likely does not capture all the companies processing consumer data across the United States.

Identifying class members. Because these companies operate in the background, data privacy advocates have historically lacked visibility into the volume and type of consumer data they have accessed. Even when that information is known, classes can be difficult to define if class members used numerous websites with these hidden tracking technologies at different points in time. However, technical analysis used in discovery can help ascertain class members and provide the basis for defining common classes with similar privacy harms. Businesses implicated by these claims will have to consider what individual data they have retained and how any data elements were derived.

Proving harm or consent. Different legal theories exist about what counts as a privacy harm and what level of consent is required when being tracked online. Another recent decision from the Northern District of California, In re Meta Android Privacy Litigation, highlights two competing theories of consent.

• Broad consent: This theory posits that if an app or website’s privacy policy discloses the collection and sharing of users’ data, even in general terms, then acceptance of that policy counts as consent to having their information tracked and shared. Under this theory, reasonable users would understand that their online data is generally being collected, and thus consent, even where the precise contours of that collection are not stated.
• Narrow consent: This theory holds that users must be informed of the specific ways in which their information is tracked and shared, meaning they can agree to some usage but not others—particularly if those others rely, as they did in the In re Meta Android Privacy Litigation case, on knowledge of the platform’s technical architecture that a user would not reasonably be expected to understand. Whether a reasonable user would understand and consent to the collection would be determined based on the specific context.

In this decision, which examined how Meta accessed Android users’ data, the court found that users might agree to basic tracking but not to a more nuanced, hidden process that runs counter to their expectations of online data privacy. The court emphasized that consent goes beyond the four corners of the privacy policy and is dependent on the circumstances.

Four signals shaping consumer data broker privacy risk

With the arrival of AI, legal teams now have the ability to identify and address potential harm more quickly. This allows them to map their digital exposures and make changes to swiftly mitigate their organization’s risk or take steps to secure remedies for consumers—all before privacy violations escalate.

Here are four factors poised to shape the risk landscape around consumer data privacy, and how AI can help organizations better understand what’s at risk and address it accordingly.

1. Millions of potential class members

Growing awareness of data brokers’ reach stemming from government use of consumer data—for example, ICE using Medicaid data, allegedly via a Palantir-created tool, for immigration enforcement—is prompting consumers to reassess their comfort level with how their data is used and may make them more open to participating in class actions.

How AI can help: Legal teams can use AI to review public disclosures, such as government contracting data, to identify arrangements with data brokers that suggest improper data collection and use. Companies should pay attention to these signals and look for similar agreements that might be putting them at risk.

2. More receptive courts

Courts are warming to the idea that consumers shouldn’t be profiled and tracked without their consent in commercial settings. That means more cases across a wide range of sectors are entering discovery. There, legal teams can watch and learn which practices are most likely to trigger liability. Consider the landmark litigation against Facebook over how it tracked user activity on non-Facebook websites, in which the U.S. Court of Appeals for the Ninth Circuit held in 2020 that users had standing for their privacy harms and that the company violated wiretap laws. Although this case was settled, the ruling helped to shape dozens of subsequent cases.

How AI can help: As litigation in this sector continues to grow, AI can be used to scan cases and identify potential patterns that could help legal teams more efficiently identify, and therefore mitigate, other areas of potential harm.

3. An impactful target

Data brokers built their business model around the ability to access and sell consumer data. What’s more, unlike the massive platforms on which that data is accessed, these entities are usually undisclosed to consumers while profiting from data aggregation at scale—leaving them with fewer defenses and giving advocates a privacy harm narrative that courts understand.

How AI can help: Public marketing materials from data brokers and other adtech vendors are rife with claims about the types of data they collect and how comprehensive their data collection is. Legal teams can use AI to analyze tracking behavior across websites and flag inconsistencies between actual practices and privacy policies, as well as discrepancies between the data broker’s privacy policy and the website’s privacy policy where it collects data.

4. State privacy laws and litigation trends

Organizations that collect consumer data must navigate a growing patchwork of compliance rules, as many states have passed comprehensive data privacy laws in recent years. As regulations increase, consumer data privacy benefits from greater transparency, disclosure, and the setting of thresholds for violations, even though most of these laws do not provide a private right of action. States such as California with stricter privacy laws are also frequent venues for federal class action litigation.

How AI can help: AI enables legal teams to track data brokers’ behavior at scale and better understand what data is being collected, where, and when.

Top states for federal online-tracking class actions filed in Q1 2026

Federal data-privacy class actions involving allegations of website-based tracking. Source: Darrow

The future of consumer data broker privacy risk

With the emergence of AI, identification of data privacy violations is shifting from reactive methods (in response to a data breach or government enforcement action) to proactive ones (by identifying where trackers are used and determining whether they comply with consent laws).

Litigation will likely continue to rise, but companies and consumers can take steps to better understand how data brokers access data and how that access is (or isn’t) reflected in the privacy policies they ask customers to accept. At the same time, privacy advocates will likely continue to unearth privacy violations caused by data brokers at scale.

With this new depth of insight, legal teams have the clarity and foresight needed to flag and address signals of data privacy risk to not only protect consumer data today but also shape how consumer data is tracked and shared online for decades to come.