Employer Benefit Plan Assistance FAQs: California Wildfires
In the wake of the horrific wildfires in Los Angeles (which are ongoing as of today), employees based in the Los Angeles area may have questions about available support from employer-sponsored 401(k) plan accounts and other impacts on benefits. Below are some considerations for employers about making 401(k) plan funds available to employees and related issues during this extremely challenging time.
Can employees withdraw money from 401(k) plan accounts for wildfire-related expenses? This depends on the terms of the underlying plan, but most 401(k) plans provide some type of withdrawal right on account of hardship. By way of quick background, participants usually cannot take distributions from a 401(k) plan account until a distribution event, such as severance of employment, attainment of age 59½, or disability. However, many 401(k) plans provide exceptions to this rule whereby a participant can take an in-service withdrawal before a distribution event under the following circumstances:
Hardship distributions. Plans may allow in-service distributions to participants who experience a covered hardship that creates an immediate and heavy financial need that cannot be met from other assets reasonably available to them. Covered hardships relevant to the wildfires include expenses and losses (including loss of income) related to a major disaster if the participant lived or worked in the disaster area designated by FEMA for individual assistance, expenses for repairs to the participant’s primary residence, and purchase of a new principal residence. As there is already a federal disaster declaration in place for the wildfires, impacted participants should generally be eligible for a hardship distribution to the extent permitted by the plan. Hardship distributions are typically subject to income tax in the year of distribution and an additional 10% early withdrawal penalty if the participant is under age 59½. To qualify, the participant may self-certify to the plan administrator that they experienced a covered hardship, the distribution does not exceed the amount of need, and they do not have other assets reasonably available to meet the need.
Qualified disaster recovery distributions. SECURE 2.0 created a new in-service distribution option for losses sustained because of a federally-declared disaster—qualified disaster recovery distributions. If a participant’s principal residence is in a qualified disaster area and the participant sustains economic loss due to the disaster, the participant may request one or more in-service distributions totaling up to $22,000 (which is measured across all plans and IRAs owned by the employee). These distributions generally must be requested within 180 days after the event. Unlike hardship distributions, qualified disaster recovery distributions are not subject to the 10% early withdrawal penalty, and are included in income for tax purposes ratably over a three-year period (unless the participant elects to include the full amount in the year of distribution). More on qualified disaster recovery distributions may be found here.
Emergency personal expense withdrawals. SECURE 2.0 also created an in-service distribution option to cover unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. These distributions are limited to the lesser of $1,000 or the participant’s vested balance minus $1,000 and may only be taken once per calendar year. These distributions are exempt from the 10% early withdrawal penalty but are generally subject to income tax in the year of distribution. The IRS issued FAQs on emergency personal expenses, which can be found here.
Plan loans. Plans may allow a participant to take a loan from their 401(k) plan account, up to the lesser of 50% of their vested balance or $50,000; this limit is reduced for any outstanding loans. Under SECURE 2.0 disaster relief, participants residing in a qualified disaster area may increase the loan limit up to the lesser of 100% of their vested balance or $100,000 (again, reduced for any outstanding loans).
Can an employee pay back amounts withdrawn for wildfire expenses to her 401(k) plan account? Possibly—that will depend on the nature of the withdrawal. Hardship withdrawals cannot be repaid, subject to a limited exception for withdrawals taken to construct a new primary residence that could not be used because of a qualified disaster. However, if a participant took a qualified disaster recovery distribution, emergency personal expense distribution, or plan loan, those amounts are generally eligible for repayment as summarized below:
Qualified disaster recovery distributions and emergency personal expense distributions may be recontributed to an eligible retirement plan (including the employer’s 401(k) plan) within three years after the distribution date. If the participant takes an emergency personal expense distribution, the participant is not eligible to take another emergency personal expense distribution during the three-year repayment period until they have recontributed the full amount of the prior distribution to the plan.
Plan loans are generally repaid through payroll deduction over a period not to exceed five years (the repayment period may be extended if the loan was for the purchase of a principal residence). If a plan loan is not repaid within the repayment period, the outstanding balance is a deemed distribution and subject to income tax. Under changes made by SECURE 2.0, to the extent permitted by the underlying plan, participants residing in a qualified disaster area with an outstanding loan due during the period from the first day of the incident period (i.e., the period when the disaster occurred) up to 180 days after the incident period may delay repayment on any outstanding loan for up to one year.
Would an employer or plan sponsor need to amend its 401(k) plan to permit the relief described above? Potentially. Many 401(k) plans already permit hardship withdrawals, qualified disaster recovery distributions and plan loans. For those plans, a plan amendment is not necessary. If a 401(k) plan does not currently permit in-service withdrawals under the circumstances noted above and an employer desires to add them in response to the L.A. wildfires, the sponsor should coordinate with its recordkeeper to confirm those options can be implemented for the plan, with the understanding that any required plan amendment would be adopted by the applicable deadline.
Plans adopting the SECURE 2.0 disaster relief noted above must be amended for such purposes by December 31, 2026 (December 31, 2028 for collectively bargained plans). However, if a plan makes a discretionary change unrelated to SECURE 2.0 (e.g., implementing in-service hardship withdrawals for the first time), that amendment would be due by the end of the plan year.
We don’t have regular access to our workplace because of the wildfires. Is there any relief for an employer or plan sponsor that misses required benefit deadlines—for example, sending out COBRA election notices or other required notices? At this admittedly early moment in time, the government agencies have not announced any specific tolling relief that would apply to benefit administration. In the past, as covered in our blog post here, the agencies have offered limited relief for plan sponsors and fiduciaries who fail to timely provide a notice or other document that must be furnished to plan participants during a set relief period, provided that the fiduciary acts in good faith and does so as soon as administratively practicable under the circumstances. That agency guidance also typically extends benefit plan deadlines for individuals affected by natural disasters. While our expectation is that the agencies would issue something similar in response to the L.A. wildfires, that is not guaranteed and it is unclear at this point whether such relief will be issued.
Final thoughts on employee relief? Given the wide range of in-service distributions theoretically available to participants, most 401(k) plans are positioned to make relief available to eligible participants. For 401(k) plans that currently permit hardship distributions, other in-service distributions or plan loans, the next step may be publicizing the relief already available to impacted participants. Plan sponsors who have not adopted these features—or who are looking to expand or modify distributions options in response to the L.A. wildfires—should coordinate with their recordkeepers regarding the implementation steps and timeline.
Bid Protests in New Jersey
Bradley has been publishing an ongoing survey of state-level bid protest processes and procedures (see our posts on “Bid Protests in Georgia,” “Bid Protests in the District of Columbia,” “Bid Protests in New York,” “Bid Protests in Virginia,” “Bid Protests in Massachusetts,” and our “Update on Bid Protests in Alabama”). For the next state in this series, we focus on the bid protest procedures in New Jersey.
What Rules Apply?
The Division of Purchase and Property (DPP) of the New Jersey Department of the Treasury provides centralized procurement and related services to agencies of the executive branch of state government.
Procurements by local boards of education under the Public School Contracts Law, N.J.S.A 18A:18A-1 et seq., procurements by the New Jersey Turnpike Authority (Ch. 9 of Title 19 of the New Jersey Administrative Code), and procurements by public municipalities, counties, and local government/authorities are outside of the authority of the DPP.
N.J. Admin. Code § 17:12-3 governs bid protest procedures for procurements that fall under the authority of the DPP.
Who May Protest?
For pre-award protests, a vendor that intends to submit a proposal in response to an advertised request for proposals and that objects to a term or specification therein may submit a written protest to the Director of Purchasing. N.J.A.C. 17:12-3.2(a).
For post-award protests, a bidder who has submitted a proposal in response to a request for proposals may submit a written protest to the Director of Purchasing concerning (1) the rejection of its proposal, when such objection is based upon the bidder’s failure to comply with N.J.A.C. 12.12-2.2, (2) the notice of award of a contract, or (3) cancellation of an RFP after the opening of proposals. N.J.A.C. 17:12-3.3.
When Must a Protest Be Filed?
Pre-award protests shall be submitted to the Director of Purchasing only after the DPP has formally responded to questions posed during the request for proposals question and answer period. N.J.A.C. 17:12-3.2(b). The Director of purchasing may disregard any pre-award protest filed fewer than seven business days prior to the scheduled deadline for proposal submission. N.J.A.C. 17:12-3.2(b)(3).
Post-award protests must be filed within 10 business days following the bidder’s receipt of written notification that its proposal is non-responsive or of notice of award, as applicable, or prior to the deadline specified in the DPP’s notice of intent to award communication to the bidder, whichever date is earlier. N.J.A.C. 17:12-3.3(b).
What Must the Protest Include?
Pre-award protests must contain the following: (1) identification of the solicitation number; (2) the terms/specifications at issue and the specific grounds for challenging the cited terms/specifications, including all argument materials, or other documentation that may support the protester’s position; and (3) a statement as to whether the protester requests an opportunity for an in-person presentation and the reason(s) for the request. N.J.A.C. 17:12-3.2(b)1.
Post-award protests must contain the following: (1) identification of the solicitation number; (2) the specific grounds for challenging the proposal rejection, the notice of intent to award, or the cancelation, including all arguments, materials, and/or other documentation that may support the protester’s position; and (3) a statement as to whether the protester requests an opportunity for an in-person presentation and the reason(s) for the request. N.J.A.C. 17:12-3.3(b)1.
What Are the Discovery Procedures?
The Director is entitled to request, receive, and review copies of all records and documents relevant to the issues and arguments set forth in the protest.
Upon receipt of the Director’s request, the bidder shall promptly provide the requested records and documents free of charge in the time, place, and manner specified by the Director.
If the protesting bidder fails to comply with the request, such failure may constitute a reasonable basis for the Director to resolve the protest against the protester.
The Director may also consider relevant information requested and received from other parties. N.J.A.C. 17:12-3.4.
Will a Hearing Be Held?
For both pre- and post-award protests, the Director, or the Director’s designee from within or outside the Division may perform a review of the written record or conduct an in-person presentation. In the case of a review or an in-person presentation being handled by a hearing officer designee from outside the DPP, the determination of such designee shall be in the form of a report to the Director, which shall be advisory in nature and not binding on the Director.
All parties shall receive a copy of the hearing officer’s report and shall have 10 business days to provide written comments or exceptions to the Director. After the 10-business-day period for comments/exceptions, the Director shall make a final written decision on the matter.
In the case of a review or in-person presentation being handled by a designee from within the Division, the determination shall be issued by the Director, or the Director’s designee, and such determination shall be a final agency decision. See N.J.A.C. 17:12-3.2(f); N.J.A.C. 17:12-3.3(f).
What Are the Appeal Procedures?
Final agency decisions on both pre- and post-award protests are appealable to the Superior Court Appellate Division. N.J.A.C. 17:12-3.1(b).
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Workplace Safety Review: Navigating Change: OSHA’s 2024 Wrap-Up and a Look Ahead to 2025 [Podcast]
In the latest episode of Greenberg Traurig’s Workplace Safety Review podcast, co-hosts Adam Roseman and Joshua Bernstein provide a comprehensive wrap-up of the significant OSHA developments from 2024 and explore what’s on the horizon for 2025. They delve into the impacts of administrative changes, including the Supreme Court’s Loper Bright decision, which overturned Chevron deference, and how it may affect OSHA litigation. Their discussion highlights key regulatory updates, like the proposed heat stress and lockout/tagout standards, and examines the potential implications of the Kenrick Steel case challenging the constitutionality of the Occupational Safety and Health Review Commission. As the Trump administration prepares to take office, the hosts consider the prospective leadership and policy direction under Secretary of Labor nominee Lori Chavez-DeRemer and the next OSHA head. Workplace Safety Review is a podcast where the hosts interview influential environmental, health, and safety professionals across the country regarding timely and important topics in the environmental, health, and safety world.
SEC Priorities for 2025: What Investment Advisers Should Know
The US Securities and Exchange Commission (SEC) recently released its priorities for 2025. As in recent years, the SEC is focusing on fiduciary duties and the development of compliance programs as well as emerging risk areas such as cybersecurity and artificial intelligence (AI). This alert details the key areas of focus for investment advisers.
1. Fiduciary Duties Standards of Conduct
The Investment Advisers Act of 1940 (Advisers Act) established that all investment advisers owe their clients the duties of care and loyalty. In 2025, the SEC will focus on whether investment advice to clients satisfies an investment adviser’s fiduciary obligations, particularly in relation to (1) high-cost products, (2) unconventional investments, (3) illiquid assets, (4) assets that are difficult to value, (5) assets that are sensitive to heightened interest rates and market conditions, and (6) conflicts of interests.
For investment advisers who are dual registrants or affiliated with broker-dealers, the SEC will focus on reviewing (1) whether investment advice is suitable for a client’s advisory accounts, (2) disclosures regarding recommendations, (3) account selection practices, and (4) disclosures regarding conflicts of interests.
2. Effectiveness of Advisers Compliance Programs
The Compliance Rule, Rule 206(4)-7, under the Advisers Act requires investment advisers to (1) implement written policies reasonably designed to prevent violations of the Advisers Act, (2) designate a Chief Compliance Officer, and (3) annually review such policies for adequacy and effectiveness.
In 2025, the SEC will focus on a variety of topics related to the Compliance Rule, including marketing, valuation, trading, investment management, disclosure, filings, and custody, as well as the effectiveness of annual reviews.
Among its top priorities is evaluating whether compliance policies and procedures are reasonably designed to prevent conflicts of interest. Such examination may include a focus on (1) fiduciary obligations related to outsourcing investment selection and management, (2) alternative sources of revenue or benefits received by advisers, and (3) fee calculations and disclosure.
Review under the Compliance Rule is fact-specific, meaning it will vary depending on each adviser’s practices and products. For example, advisers who utilize AI for management, trading, marketing, and compliance will be evaluated to determine the effectiveness of compliance programs related to the use of AI. The SEC may also focus more on advisers with clients that invest in difficult-to-value assets.
3. Examinations of Private Fund Advisers
The SEC will continue to focus on advisers to private funds, which constitute a significant portion of SEC-registered advisers. Specifically, the SEC will prioritize reviewing:
Disclosures to determine whether they are consistent with actual practices.
Fiduciary duties during volatile markets.
Exposure to interest rate fluctuations.
Calculations and allocations of fees and expenses.
Disclosures related to conflicts of interests and investment risks.
Compliance with recently adopted or amended SEC rules, such as Form PF (previously discussed here).
4. Never Examined Advisers, Recently Registered Advisers, and Advisers Not Recently Examined
Finally, the SEC will continue to prioritize recently registered advisers, advisers not examined recently, and advisers who have never been examined.
Key Takeaways
Investment advisers can expect SEC examinations in 2025 to focus heavily on fiduciary duties, compliance programs, and conflicts of interest. As such, advisers should review their policies and procedures related to fiduciary duties and conflicts of interest as well as evaluating the effectiveness of their compliance programs.
Game On: How the CFPB’s EFTA and Regulation E Changes Could Shape Video Game and Online Marketplace Transactions
The Electronic Fund Transfer Act (EFTA) and Regulation E apply to an electronic fund transfer (EFT) that authorizes a “financial institution” to debit or credit a consumer’s account. While a “financial institution” traditionally refers to a bank, credit union, or savings association, it is well established that “financial institutions” can also include non-bank entities that directly or indirectly hold an account belonging to a consumer, or that issue an access device and agree with a consumer to provide EFT services. Prepaid accounts and “other consumer asset accounts” into which funds can be deposited by or on behalf of the consumer and which have features of deposit or savings accounts, also meet Regulation E’s definition of “account.” Some video game accounts used to purchase virtual items from multiple game developers or players may fall under the definition of “other consumer asset accounts.”
In April 2024, the Consumer Financial Protection Bureau (CFPB) issued a report on the banking and payment services becoming more prevalent in gaming and virtual worlds where consumers spend billions of dollars annually to purchase gaming assets—often by converting U.S. dollars to virtual currencies. The report raised concerns about consumer protections and the uncertain allocation of responsibility for errors or fraud when a customer’s digital currency or assets are lost through hacking, account theft, scams, or unauthorized transactions.
Recent Developments
Following that report, on January 10, 2025, the CFPB issued a proposed interpretive rule that aims to expand the scope of Regulation E’s coverage to video game platforms that hold consumers’ money for personal, family, or household use and treat those game platforms as if they are account holders just like a bank or credit union for Regulation E purposes.
The interpretive rule expands on what constitutes an EFT, particularly for new payment methods such as peer-to-peer payment platforms and digital wallets. This expansion includes transfers initiated through apps and payment systems tied to consumer accounts. The key is whether the funds act like or are used like money, such that they are accepted as a medium of exchange, a measure of value, or a means of payment.
The interpretive rule would also clarify that video game companies operating online marketplaces or otherwise facilitating EFTs would be subject to the consumer protection provisions under Regulation E, namely investigation and error resolution obligations. Additionally, the interpretive rule would require a video game company to disclose the terms and conditions of EFT services.
Next Steps
The CFPB is soliciting comments from the gaming community for this proposed interpretive rule, which must be sent via email to [email protected] on or before March 31, 2025.
Employers’ Wage and Hour FAQs: California Wildfires Edition
Wildfires continue to rage across Southern California, leveling entire neighborhoods, forcing evacuations for tens of thousands of people, and posing incredible hardship on businesses and their employees. Below are a few common scenarios employers should know about paying their California employees and maintaining compliance with wage and hour laws:
“Our office was closed for a few days because of the fires. Do we have to pay our employees for those days?”
Non-exempt (i.e., overtime-eligible) employees generally have to be paid only for hours they actually work. So, if a non-exempt employee cannot work because your office is closed—or because the employee cannot make it into the office because of natural disaster-related conditions—the wage and hour laws do not require you to pay the employee for non-working time. On the other hand, a non-exempt employee who performs work remotely (say, from home, from a temporary site, or from a coffee shop) is entitled to pay for the time worked.
An exception exists for salaried non-exempt employees, who may—depending on the terms of their agreement with the employer—expect to receive their full weekly salary regardless of how many hours they actually work that week.
Exempt employees (i.e., employees not entitled to overtime pay) generally receive their full salary for any week in which the office is closed for less than a full workweek. If your office is closed for an entire workweek, you can inform all employees of the closure and you need not pay them for that week (unless they are working remotely).
Be sure to check any agreements with exempt employees—as well as offer letters, policies, or other statements regarding the nature of their pay—which may also limit your ability to prorate salary during office closures and/or give rise to pay claims.
“Because of dangerous conditions, we had to close our office after a number of employees had already reported for work. Do we have to pay them for the day?”
Exempt employees who report to work but are turned away or sent home by their employer generally must receive their salary for that week.
Non-exempt employees are often entitled to reporting time pay when they show up for their shift and are sent home before they’ve worked at least half their shift. But there is an exception for certain conditions that are beyond the employer’s control, including natural disasters like wildfires.
If the business closes at an employer’s discretion, and not due to a threat to property, recommendation by civil authority, failure of public utilities, or work interruption by an “act of God,” reporting time pay may be owed. When a nonexempt employee shows up for work as scheduled and is not put to work or is given less than half of their scheduled hours, the employee is eligible for reporting time pay equal to one-half of the scheduled shift, but no less than two hours and no more than four hours.
“Our office was open, but some of our staff could not make it in because of the fires. Do we need to pay them?
As we note above, non-exempt employees generally must be paid only for hours they actually work, but salaried non-exempt employees may have a right to receive their full salary for any week in which they perform work.
Exempt employees who are absent from work for one or more full days because of transportation difficulties are considered to be absent for personal reasons if the office is otherwise open. Absent a contractual right to be paid, they do not have to be paid for the days they are unable to report to work, and the employer does not jeopardize their exempt status if it decides not to pay them for those days. Deductions for partial-day absences under these circumstances, however, are not permitted.
“Can employees refuse to work if our worksite is an evacuation zone?”
Yes. California law prohibits employers from retaliating against workers who refuse to work in unsafe conditions, including when their worksite is an evacuation zone. Employers should check local evacuation orders before reopening worksites and communicate clearly with employees about when it is safe to return.
“Our payroll records were destroyed in the fires or are inaccessible. How do we pay our employees?”
If the only records of hours worked are lost or unusable, then there is no perfect solution. Recreate the most-accurate accounting you can under the circumstances. Use a reasonable method to determine the number of hours worked, such as:
Asking employees to submit a certified time sheet indicating the number of hours they worked;
Re-creating hours worked through electronic records (e.g., card/ID swipes or logins/logouts);
Making assumptions based on an employee’s fixed or regular schedule of hours;
Asking managers to verify hours worked; or
Some combination of the above.
“How do we record employees’ worktime without our electronic time clocks?”
Employees may record all hours worked on physical or handwritten timesheets. Employees should be instructed to enter their own time and to record the actual times when their work starts and stops each workday, including meal breaks.
“Can we require our employees to use available sick time or vacation days during a fire or natural disaster-related office closure or absence?”
Employees may use accrued sick leave under California law for absences related to the wildfire disaster if the need falls under a permissible use (such as health issues or to care for a family member). Additionally, the employee may choose to take paid leave under vacation or paid time off policy if the policy provides for such leave or the employer opts to allow, but this generally cannot be required unless reasonable notice is provided and stated in a policy or employment agreement.
“Can we give our staff additional paid or unpaid time off to assist in recovery or relief efforts?”
Yes. Employers may grant their employees additional paid and unpaid time off for any reason, including assisting with disaster-related recovery and relief efforts.
All employers must also provide leaves of absence for employees who serve as volunteers for local fire departments or other emergency response entities but are not required to compensate the employees during this time off. Employees who are assisting in relief efforts as part of the National Guard or Armed Forces Reserves may have additional rights under state and federal law.
“Because of the fires, it took our employees twice as long to commute to work as opposed to most other days. Do we need to pay them for the additional commute time?”
Generally, time spent in an employee’s normal commute from home to work at the beginning of the workday, and from work to home at the end of the workday, is not considered time worked and need not be paid. However, commute time is considered compensable work hours where the employer requires its employees to meet at a designated place, use the employer’s transportation to and from the work site, and prohibits employees from using their own transportation.
“Some of my employees are members of a union. Do these rules apply to them as well?”
Collective bargaining agreements generally cannot waive or reduce the protections available to employees under federal, state, or local wage and hour laws. However, collective bargaining agreements can—and often do—impose additional pay, time off, and other obligations on employers. Employers with unionized employees should consider all applicable agreements when analyzing their rights and responsibilities in the context of a natural disaster-related emergency or other “force majeure” event.
“We want to do more for our employees, to go above and beyond what the law requires. What are some things we can do?”
Employers that want to do more for their employees may consider the following:
Granting additional paid or unpaid time off;
Allowing affected employees to work remotely for some period of time;
Making loans or emergency advances of wages;
Setting up disaster-relief programs or payments;
Setting up food and clothing drives.
Final Thoughts
Employers making decisions about scheduling, pay, and time off during natural disaster-related emergencies and disruptions should bear in mind the potential implications on employee morale. Flexibility and support in times of need—or the absence of them—are likely to be remembered long after the fires are extinguished.
Weekly IRS Roundup December 30, 2024 – January 3, 2025
Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of December 30, 2024 – January 3, 2025.
December 30, 2024: The IRS released Internal Revenue Bulletin 2025-1, which includes the following:
Revenue Procedure 2025-1, which contains the revised procedures for letter rulings and information letters issued by the different associate chief counsel offices. This revenue procedure also contains the revised procedures for determination letters issued by the Large Business and International Division, the Small Business/Self-Employed Division, the Wage and Investment Division, and the Tax Exempt and Government Entities (TE/GE) Division.
Revenue Procedure 2025-2, which explains when and how associate chief counsel offices should provide advice in technical advice memoranda (TAM) as well as taxpayers’ rights when a field office requests a TAM.
Revenue Procedure 2025-3, which provides a revised list of Internal Revenue Code (Code) areas under the jurisdiction of the following associate chief counsel offices: Corporate; Financial Institutions and Products; Income Tax and Accounting; Passthroughs and Special Industries; Procedure and Administration; and Employee Benefits, Exempt Organizations, and Employment Taxes. These relate to matters in which the IRS will not issue letter rulings or determination letters.
Revenue Procedure 2025-4, which provides guidance on the types of advice the IRS offers to taxpayers on issues under the jurisdiction of the IRS Commissioner, TE/GE Division, and Employee Plans Rulings and Agreements. It also details the procedures that apply to requests for determination letters and private letter rulings.
Revenue Procedure 2025-5, which provides the procedures for issuing determination letters on issues under the jurisdiction of the Exempt Organizations Rulings and Agreements. It also explains the procedures for issuing determination letters on tax-exempt statuses for organizations applying under Code Section 501 or 521, private foundation status, and other determinations related to tax-exempt organizations. Additionally, the revenue procedure applies to revocation or modification of determination letters and provides guidance on the exhaustion of administrative remedies for purposes of declaratory judgment under Code Section 7428.
Revenue Procedure 2025-7, which provides the areas under the jurisdiction of the associate chief counsel (international) in which letter rulings and determination letters will not be issued.
December 30, 2024: The IRS published Treasury Decision 10018, which contains final regulations regarding the filing of consolidated returns by affiliated corporations. They modify the consolidated return regulations to reflect statutory changes, update language to remove antiquated or regressive terminology, and enhance clarity. The IRS separately issued proposed regulations under which a transferee’s assumption of certain liabilities from a member of the same consolidated group will not reduce the transferor’s basis in the transferee’s stock received in the transfer.
December 30, 2024: The IRS published final regulations clarifying when tax-exempt bonds are considered retired for federal income tax purposes under Code Section 103. The regulations affect state and local governments issuing tax-exempt bonds and address significant modifications to bond terms or the acquisition and resale of bonds.
December 30, 2024: The IRS published final regulations on information reporting by brokers who regularly provide services for digital asset sales and exchanges. The regulations require brokers to file information returns and furnish payee statements reporting gross proceeds from digital asset transactions. The regulations also provide transitional penalty relief for brokers adapting to these new requirements. The regulations take effect February 28, 2025.
January 2, 2025: The IRS issued proposed regulations pertaining to the Code Section 5000D excise tax on the sales of certain drugs. The proposed regulations outline the imposition and calculation of the excise tax and would affect manufacturers, producers, and importers of designated drugs. The IRS also issued Revenue Procedure 2025-9, which provides a safe harbor and safe harbor percentage that a manufacturer, producer, or importer may use to identify applicable sales of a designated drug described in Section 5000D(b).
January 3, 2025: The IRS announced that on January 10, 2025, it will release final regulations for the Clean Hydrogen Production Tax Credit under Code Section 45V. The regulations will provide rules for:
Determining lifecycle greenhouse gas emissions rates resulting from hydrogen production processes
Petitioning for provisional emissions rates
Verifying the production and sale or use of clean hydrogen
Modifying or retrofitting existing qualified clean hydrogen production facilities
Using electricity from certain renewable or zero-emissions sources to produce qualified clean hydrogen
Electing to treat part of a specified clean hydrogen production facility as property eligible for the energy credit.
These regulations will affect all taxpayers who produce qualified clean hydrogen and claim the Clean Hydrogen Production Tax Credit, elect to treat part of a specified clean hydrogen production facility as property eligible for the energy credit, or produce electricity from certain renewable or zero emissions sources used by taxpayers or related persons to produce qualified clean hydrogen.
January 3, 2025: The IRS reminded disaster-area taxpayers who received extensions to file their 2023 returns that, depending upon their location, their returns are either due by February 3 or May 1, 2025:
Taxpayers in Louisiana, Vermont, Puerto Rico, and the Virgin Islands and parts of Arizona, Connecticut, Illinois, Kentucky, Minnesota, Missouri, Montana, New York, Pennsylvania, South Dakota, Texas, and Washington have until February 3, 2025, to file their 2023 returns.
Taxpayers in Alabama, Florida, Georgia, North Carolina, and South Carolina and parts of Alaska, New Mexico, Tennessee, Virginia, and West Virginia have until May 1, 2025, to file their 2023 returns. For these taxpayers, May 1 will also be the deadline for filing their 2024 returns and paying any tax due.
Eligible taxpayers include individuals and businesses affected by various disasters that occurred during the late spring through the end of 2024. The filing deadline extension for 2023 returns does not apply to payments.
Taxpayers who live or have a business in Israel, Gaza, or the West Bank and certain other taxpayers affected by the attacks in Israel have until September 30, 2025, to file and pay. This includes all 2023 and 2024 returns.
Mass Arbitration 101
In today’s legal landscape, understanding both the power and the limitations of mass arbitration is crucial. Mass arbitration has been employed as a strategy for giving major corporations a taste of their own medicine. Recent precedents suggest that it can succeed in recovering compensation and holding a company to task even when a consumer’s or employee’s ability to sue is restricted by prior agreements or internal policies. However, when done incorrectly, mass arbitration can lead to excessive fees and higher costs, without benefit to the claimant.
What Is Mass Arbitration?
If you work for a corporation, you may well have signed an arbitration agreement as part of your employee onboarding. As a consumer, you are often bound by agreements with arbitration clauses when you accept terms of use for online accounts or apps such as Uber, Tinder, StubHub, and more. By clicking through and acknowledging those terms, you might be forced to give up your right to file a lawsuit in court against the company or to participate in a class action lawsuit. Instead, you would have to resolve disputes through arbitration – a legally binding process that takes place outside the courtroom and can be very expensive. It centers around the use of a private arbitrator (a neutral third party) who is paid by the parties to act similarly to a judge by hearing each party’s arguments and making a decision.
The right to agree that conflicts must be settled through arbitration stems from the 1925 Federal Arbitration Act, originally designated for intra-business use. Arbitration between two parties with equal power and resources can be a useful tool, allowing for the private resolution of conflicts with less time or resources than those needed for court proceedings and a trial. Corporations soon realized that they could impose arbitration clauses upon less powerful entities, forcing employees and consumers to accept their terms, often not realizing they are doing so. This can make it extremely difficult if not impossible to pursue their claims because of the cost of arbitration and because they cannot proceed as part of a group. In 2011, the Supreme Court case AT&T Mobility LLC v. Concepcion, 563 U.S. 333, largely upheld this tactic by enforcing an agreement in consumers’ cell phone contracts saying they could not participate in a class action. But savvy lawyers have fought back through mass arbitration. This is a strategy that involves filing multiple similar claims in arbitration together at once to leverage the strength of a group of legal claims, like a class action does. By filing many claims together, this creates a burden on the company that insisted upon the arbitration process, shifting the power dynamic back toward the consumers or employees.
Mass Arbitration vs. Individual Arbitration
Individual arbitration often pits individuals against powerful corporations. Unlike traditional court proceedings, arbitration limits the rights of employees and consumers by removing opportunities for discovery and appeal. Although arbitrators play a similar role to judges, they are not bound by the same rules. Arbitration is also kept private, allowing companies to settle claims of fraud, harassment, or bad behavior without negative press. In addition, arbitration fees often make filing a claim more costly than any potential recovery.
As an example, imagine you are an employee who is owed overtime pay in the amount of $475. If you are bound by an arbitration clause, it will likely cost you more than that amount to present your claim, once you account for arbitration filing fees and possible attorney’s fees. The company you work for will also pay fees but can afford to do so more than the employee with fewer resources at their disposal. Individual arbitration banks on this imbalance in the power dynamic to dissuade employees and consumers from following through on their claims.
Mass arbitration turns the tables on companies to uphold consumer and employee rights. In a mass arbitration effort, each employee who is owed overtime pay can file their claim together at the same time. In doing so, they put the company on the hook for thousands or even millions of dollars in arbitration fees at once, similar to what they might face from an in-court lawsuit. Meanwhile, the claimants themselves are represented by a firm that is able to shoulder the upfront fees while seeking to recover a higher amount in the long run from a settlement. Bringing people with similar claims together creates an economy of scale, decreasing the administrative cost and easing the burden of the individual claimants.
Mass Arbitration vs. Class Action
A class action lawsuit is a legal process in which a group of people who have been harmed in a similar way by someone’s actions come together to file one shared claim for compensation in a court of law. Class action lawsuits provide rights to plaintiffs that arbitration does not, such as allowing for the discovery process as well as the option to appeal.
In a typical class action lawsuit, proceeds are divided amongst plaintiffs, with exceptions made for those who have seen a disproportionately higher degree of harm. An example of a class action settlement is when a bank pays a settlement to all of its customers who paid unlawful overdraft fees. Everyone who is a class member may be awarded part of the settlement, but those who paid more in fees will likely receive a higher share than others.
Mass arbitration can provide a similar recourse for harmed people who are unable to join a class action lawsuit due to an arbitration clause, but who have similar claims. Unlike a class action lawsuit, in order to benefit from mass arbitration, the harmed people must generally affirmatively sign up to participate.
Do I Have a Case?
In order to see whether you can file an arbitration claim, you will need to look into your specific contract with the company to verify if you are bound by an arbitration clause. If you work in the private sector and are a non-union employee with a corporation, you may well be bound by a mandatory arbitration clause in the event of a dispute. Many consumers are also bound by arbitration clauses in the event that they suffer harm due to a company’s practices, from false advertising to unlawful charges.
If arbitration is your only option, contact a law firm with experience in mass arbitration to see if there are others who may be able to join you in your claim. Mass arbitration has a much higher success rate than individual claims but comes with a high administrative cost and generally requires a minimum number of claimants. This number may differ depending on the specific arbitration firm that contracts with the company. Mass arbitration does not have a limit on the maximum of claims that can be filed at once, which means there may be hundreds or even thousands of other individuals who allege similar harm and can join the process.
Mass Arbitration Procedures
Mass arbitration is largely done through private companies like the American Arbitration Association (AAA) and the Judicial Arbitration and Mediation Services, Inc. (JAMS). The rules of each service differ, and working with a skilled attorney is crucial to ensure that the required procedures are followed appropriately to give your claim the best chance of success.
Companies often specify in their arbitration clauses which third party arbitrator service will be used, prior to any dispute being filed. When an arbitration claim is filed, both parties pay the arbitrator a filing fee in order to begin the proceedings. The amount of the fee differs based on the type of case, the arbitrator used, and the number of claims filed. The final decision of the arbitrator (or panel of arbitrators) is legally binding.
Consumer or workplace disputes filed under the AAA must involve at least 25 demands for arbitration filed at once to be considered “mass arbitration.” Under the rules of FEDARB, a minimum of 20 claimants must file together to be considered under its ADR-MDL framework for mass arbitration.
Are There Benefits to Mass Arbitration?
Mass arbitration can be both efficient and cost-effective compared to an individual claim, leveraging the power of collective action. Mass arbitration has recovered over $300 million for employees and consumers, much of which would never have been on the table due to the restrictive structure of individual arbitration agreements. Under mass arbitration, companies can also be incentivized to pay higher settlements to claimants in order to avoid the fee structure of arbitration.
The mass arbitration process has resulted in significant wins for consumer rights over the years. For instance, in 2021 Amazon received over 75,000 arbitration claims alleging that their Echo devices had recorded consumers without their consent. In the wake of these claims, Amazon removed its mandatory arbitration clause from its terms of use. This way, consumers can once more file class action lawsuits, resetting the playbook and resulting in a significant check on corporate power.
Challenges and Criticisms of Mass Arbitration
While mass arbitration is a useful process for holding companies accountable for harm, it is not a silver bullet. At the end of the day, arbitration is still structured to take place on the defendant’s terms. Some of the main pitfalls of mass arbitration include:
Companies Avoiding Fees
Companies that attempt to shirk paying filing costs change the rules of the game that they established. For instance, Uber and Family Dollar both sued their own arbitrators, alleging excessive fees compared to the settlement amounts that were being debated in arbitration. A recent Samsung mass arbitration claim resulted in the company refusing to pay arbitrator fees after being hit with over $2.5 million in filing fees for two separate sets of claims, Wallrich and Hoeg—even after the consumers had paid their filing fees. This led the AAA to close the proceedings, depriving claimants of the opportunity to present their claims in arbitration. It may be only a matter of time before fee structures are further amended in order to benefit corporate interests once more.
High Fees and Costs
Mass arbitration involves prohibitively high upfront fees for many lower-dollar claims, limiting what kinds of claims are best suited to this type of recovery process. It often involves limited or no discovery, which can mean the consumer or employee may not have access to critical evidence to support their claims, particularly ones that are factually complex like employment discrimination or sexual harassment cases. On the other hand, more straightforward cases like unpaid overtime claims hinge mostly on mathematical calculations for proof, and can thus be more easily pursued through mass arbitration.
Delays
Mass arbitration can take a long time when thousands or hundreds of thousands of claims are involved, which can delay results for claimants. For instance, JAMS guidelines point out that the few hundred arbitrators it employs cannot reasonably work through 50,000 claims in a fair span of time, limiting the scope of mass arbitration as a tool for consumers.
Illegitimate Claims
Finally, critics argue that mass arbitration can become a tool of extortion, leading companies to settle simply because of the threat of high fees and not because of the legitimacy of the claims. Mass arbitration comes with the risk of frivolous claims being lumped into consideration in order to increase the overall cost to the corporation, thus de-legitimizing the process.
Choosing a respected law firm to represent you is necessary to increase the likelihood of all claims being thoroughly vetted so you can avoid penalties or possible legal action down the line. A mass arbitration law firm must have the resources to credibly discover, contact, investigate, and communicate with what can amount to hundreds or thousands of clients, as well as file each of their individual claims in the appropriate manner.
What Does the Mass Arbitration Process Look Like?
The mass arbitration process is typically structured based on guidelines from the arbitration company and may include the following steps:
Initiating a mass arbitration: By working with a qualified law firm, your claim will be filed under the appropriate guidelines and timelines set by AAA, JAMS, or another arbitration company, including filing the proper documents and paying the appropriate fees.
Selecting arbitrators: Each arbitration provider has specific rules and processes for selecting the specific arbitrator(s) who will hear the claim or claims.
Evidence gathering: There is usually a limited discovery process to investigate the legitimacy of the claims and defenses.
Hearing: Claims under certain amounts (for example, $100,000 under FEDARB guidelines) will be held virtually. Compelling circumstances or higher penalty amounts may result in an in-person hearing.
Award: If the parties do not choose to settle in advance, you will receive a ruling determining the claim or claims. There is no guaranteed right of appeal with an award from arbitration.
How Long Does the Arbitration Process Take?
Mass arbitration typically takes less time than a case filed in court. When statutory damages are involved, most mass arbitration cases are decided in around a year, according to FEDARB.
Notable Mass Arbitration Cases
Recent years have seen a wave of high-profile mass arbitration cases as consumers turn to law firms to protect their rights. Some claims include apps and services that have threatened consumer privacy by allegedly collecting sensitive, financial, or identifying information from their users. For instance, a mass arbitration case involving Bumble accused the dating app of violating the Biometric Information Protection Act (BIPA) by scanning user selfies. Meanwhile, tech giants Google and Meta have been accused of aggregating tax information from H&R Block in order to advertise financial services to their users. Other claims involve hidden fees and higher costs passed onto consumers, like those filed against Spotify, Valve, Uber, Amex, and Peloton.
What Should I Do If I Have a Mass Arbitration Case?
As companies attempt to block or circumvent high arbitration fees, change their policies, and generally escape liability for harm done, mass arbitration continues to be a complex and rapidly changing area of law. If you have been injured or have suffered adverse effects due to a company’s actions, contact an arbitration lawyer to find out if you are eligible to join a class action lawsuit or if you are bound by an arbitration clause. If so, mass arbitration may be a viable path toward your recovery.
How Will the Cannabis World Look When Marijuana Is Rescheduled?
A few weeks ago, someone at a holiday party asked “Whitt, why doesn’t Budding Trends take on the weighty legal issues of the day and instead resort to cheap pop culture references and puns?” I thought about responding with a quote from “Run Like an Antelope” but then it hit me: Maybe we should give some thought to a more high-minded discussion about the practical implications of marijuana rescheduling. (Editor’s note: This exchange did not actually happen.) So, I guess set the gear shift for the high gear of your soul, and let’s dive in.
It has been said that our greatest hopes and our worst fears are seldom realized. I think the recent efforts by DEA to reschedule marijuana from Schedule I to Schedule III is a good example of both. Those looking for news that marijuana is soon to be freely available nationwide will be disappointed, as, we suspect, will those who fear that rescheduling will immediately destroy the existing marijuana industry. It’s like Tom Petty reminded us, “most things I worry about, never happen anyway.”
None of This Matters if Marijuana Is Not Rescheduled, and That’s Far from a Settled Question
All of this is, of course, moot if marijuana is not rescheduled. While rescheduling is considered by many to be a fait accompli (oh yeah, Budding Trends dropping French on you) – and I agree it is more likely than not that marijuana will be rescheduled, although not in 2025 – there are a number of potential roadblocks standing in the way. We previously wrote about the process here.
But even if marijuana is not rescheduled in the near future, hopefully the discussion below will be helpful in thinking through the practical implications if marijuana is rescheduled in the future.
280E in the Rearview
It is widely assumed by many that one of the certain impacts of rescheduling is that marijuana operators would no longer be subject to the draconian tax consequences of 280E.
We previously wrote on the subject:
One of the most significant impediments to the growth of marijuana operators, and dispensaries in particular, is 26 U.S.C 280E. That one-sentence provision may be the biggest hurdle to the development of the marijuana industry in the United States. It dictates that:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
280E has crippled the marijuana industry, often exacting an effective tax rate north of 60% for operators. “Within the meaning of schedule I and II of the Controlled Substances Act” is the ballgame. If marijuana is rescheduled to Schedule III, 280E would no longer apply and marijuana operations would be taxed as normal businesses – provided that Congress did not specially enact a marijuana tax.
Obviously, state tax laws may still penalize marijuana businesses akin to 280E, but some states proactively exempted licensed cannabis businesses from those impacts.
One question that has stuck in my mind is whether rescheduling marijuana to Schedule III would remove state-legal operators from the ambit of 280E, or would that benefit only be afforded to businesses who manufactured, distributed, and sold FDA-approved Schedule III products (i.e., not most state-licensed operators at present)?
This is a question of statutory interpretation, and I think it comes down to how the government characterizes marijuana that is not compliant with Schedule III requirements. Is non-compliant marijuana still a Schedule III substance? If so, does it somehow become Schedule I or II? If not, then it would appear that that 280E does not capture non-compliant marijuana because that provision appears to be limited on its face to Schedule I and II substances. I think the better reading is that, while non-compliant marijuana operators may face consequences as discussed immediately below, 280E will no longer include marijuana.
Another related question of great interest to marijuana operators currently sitting on huge overdue tax bills is whether rescheduling marijuana would have a retroactive effect eliminating the existing tax liabilities for marijuana operators. Generally speaking, changes to tax laws are not retroactive unless Congress expressly says so. It strikes me as very unlikely that lawmakers will be interested in allowing marijuana operators who have not paid their full tax bills for years (and in some instances publicly admitted as much) to simply walk away from those obligations.
State Medical Programs
So, if marijuana is rescheduled, what happens to existing marijuana businesses operating under the auspices of state laws? This, as well as the fate of adult-use operators discussed immediately below, may be the most consequential yet unclear aspects of rescheduling.
State-licensed marijuana operators have existed in a sort of legal limbo since their inception. How, if at all, will the rules change for state-licensed operators if marijuana is rescheduled?
The way I see it, there are three paths forward for state-licensed marijuana operators if marijuana is rescheduled:
The federal government, in a break from more than a decade of quasi-official federal policy, could actually follow the Controlled Substances Act and require marijuana operators to meet the requirements for Schedule III substances.
There is no practical change and the federal policy of non-enforcement of most marijuana operations remains in place, along with a similar posture from the states with marijuana regimes.
There is no immediate change in federal enforcement policy, but states tighten marijuana rules over time to allow for a gradual change such that access to marijuana is not immediately shut off as the federal government and marijuana operators take the steps necessary to treat marijuana like other Schedule III substances.
In a nutshell, the path chosen will answer what I believe is the most interesting and critical question in this whole discussion: Does the government intend for marijuana scheduling to be a dead letter or does the government intend to regulate marijuana as a controlled substance?
That answer will govern whether and, if so, how the federal government will regulate state-licensed cannabis operators – including potential enforcement actions.
Of the three paths above, the first strikes me as the least likely and the last strikes me as the most likely. Why? I am skeptical that the federal government would shut down existing access to marijuana (i.e., state-licensed operators) under the guise of making marijuana more available. That certainly does not comport with the statements of the political supporters of rescheduling or the spirit of rescheduling. And make no mistake, it will take years of clinical trials and FDA approval for the first marijuana medication (in a specific formulation with a specific indication) to be approved for use by patients.
I do think, however, that there will be political pressure from certain companies that do develop FDA-approved marijuana medications to curtail the state markets. Why would a company spend the substantial time and money to develop a Schedule III medication for FDA approval for a specific indication when someone can just buy marijuana to be used for any purpose from a dispensary down the street?
State Adult-Use Programs
Like state-licensed medical marijuana operators, state-licensed adult use operators have also been operating in legal purgatory, albeit with probably less legal certainty than medical operators.
To be very clear: Rescheduling marijuana under the Controlled Substances Act will do absolutely nothing to the legality of adult-use marijuana. Schedule III regulates medications prescribed by physicians and does not contemplate the recreational use of any Schedule III product.
But what does this actually mean for adult-use programs and individual operators as a practical matter? Well, as with several of the points above, we’ll see.
It is certainly possible that the federal government will continue its hands-off approach to adult-use marijuana programs. It is also possible that the federal government – and potentially some state governments – will use the ability to access federally legal marijuana by prescription to scrap existing adult-use programs. But if I was a betting man (and I am), I would bet that at least in the short term there would not be much impact, if any, to adult-use regimes.
Interstate Commerce
When it comes to transporting marijuana across state lines with Schedule III approval and appropriate federal and state licenses, interstate commerce should not be a problem.
When it comes to transporting unlicensed marijuana, theoretically it would remain illegal, and it will come down to the federal government’s appetite to enforce interstate transportation of marijuana.
Banking
Here is another instance where it depends on whether the federal government insists that marijuana products comply with the rules of Schedule III.
If the federal government insists on strict compliance with Schedule III, then any non-conforming products would likely fall within the ambit of anti-money laundering statutes. If, on the other hand, the government treats all marijuana as Schedule III, then banks may be able (albeit perhaps uninterested initially) to bank all marijuana businesses.
Private Investment
I expect there will be an immediate influx of private capital to marijuana businesses if marijuana is rescheduled. Momentum will (at least appear to) be on the side of marijuana businesses. A number of funds that have formal or informal policies governing investment in marijuana businesses will immediately investigate the opportunities. And investors will be even more motivated because it appears that 280E would no longer provide a substantial tax headwind for growth of those businesses.
This could all be thwarted if the federal government immediately makes clear that it will vigorously enforce the requirements of Schedule III, meaning that it will be extremely cash-intensive to develop profit-generating products. As noted above, I think that is unlikely, but it would certainly be an impediment to obtaining private capital.
Big Pharma/Pharmacies
The multibillion-dollar question: What role, if any, will big pharmaceutical companies and pharmacies play in the event marijuana is rescheduled?
I suspect big pharma won’t rush into the marijuana space, in part because of all the uncertainties discussed above and in part for reputational reasons. But I will be on the lookout for quiet investments by Big Pharma in companies researching and developing marijuana formulations that meet the requirements of Schedule III.
If things break a certain way, you may be able to get the best weed ever made courtesy of a brand-name pharmaceutical company. But I do believe we are years away from that happening.
Intellectual Property
This area of the law could be particularly interesting because the USPTO will have a layer of input on top of the Department of Justice and state regulators. If a product complies with Schedule III, it will have the ability to be protected by United States intellectual property laws, including trademarks and patents. If it does not comply with Schedule III, the USPTO could independently conclude that such products may not avail themselves of those protections.
Conclusions
[Deep exhale] For years, cannabis activists and legal scholars have debated the possibility and the wisdom of rescheduling marijuana. Now that we may – and I stress may – be on the horizon, it seems there are just as many questions as answers about what the implications of that change would be. So much of those implications depend on things that we do not yet know. For example, will a Trump HHS/DOJ/DEA take a different position than the Biden HHS/DOJ/DEA? Will states change their rules in response to rescheduling? And how will financial institutions and private investors react to those developments.
Third-Party Litigation Funding in England and Wales Post-PACCAR: Where are We Now?
In our earlier alert on third-party funding (TPF) and the UK Supreme Court’s decision in PACCAR, we discussed the initial industry reaction, subsequent litigation, and legislative reform proposals (at the time, through the remit of the Digital Markets, Competition and Consumers Bill (DMCC Bill) – introduced by the former, Conservative UK government under then Prime Minister, Rishi Sunak).
This alert provides an update on where we are now, following the publication of the Civil Justice Council (CJC) interim report and consultation on litigation funding, which confirmed that the current UK government will not be re-introducing the Litigation Funding Agreements (Enforceability) Bill (LFA Bill) any time soon—instead, looking at legislative reform in the round after the CJC’s final report is published in summer.
We therefore discuss the early indications around the CJC’s direction of travel and recent industry reaction as we await these all-important clarifications.
Recap
In July 2023 in PACCAR, the UK Supreme Court held that litigation funding agreements (LFAs) that entitle funders to payments based on the amount of damages recovered would be classified as damages-based agreements (DBAs). In turn, they would have to comply with the Damages-Based Agreements Regulations 2013 (DBA regime) or risk being deemed unenforceable. The decision brought the enforceability of many pre-existing LFAs into question and created large scale uncertainty within the TPF market. This was a particular problem for opt-out collective proceedings in the Competition and Appeals Tribunal (CAT), where DBAs are strictly prohibited (s.47C(8), Competition Act 1998).
Originally, there were proposals to restore the pre-PACCAR position through a last minute amendment to the DMCC Bill. By March 2024, this was a bill of its own—the LFA Bill. The LFA Bill was to be an integral part of the last government’s commitment to restoring the pre-PACCAR status quo, passing second reading in the House of Lords on 15 April 2024. However, it did not survive the pre-election wash up ahead of the dissolution of parliament on 30 May 2024, remaining indefinitely postponed under the new administration.
CJC Review of the TPF Market in England and Wales
In spring 2024, prompted by the PACCAR decision, the then Lord Chancellor called upon the CJC to conduct a wider review of the TPF market. At this time, the PACCAR decision was to be reversed via the LFA Bill, which, as above, later fell through on change of governments.
On 31 October 2024, the CJC published its much-anticipated interim report and consultation on litigation funding, as the first phase of the CJC review process. Being interim in nature, it seeks to identify the concerns within the current system of TPF in England and Wales and set up the key issues that the CJC is consulting on. Whilst only interim in nature, it does give an indication of the CJC’s (and, subsequently, the government’s) direction of travel.
Broadly, the interim report covers the development of TPF in England and Wales and the current self-regulatory model, approaches to the regulation of TPF across different jurisdictions, the relationship between costs and funding, and existing funding options.
There are 39 consultation questions that the CJC seeks input on, located at Appendix A.
In sum, these questions cover:
The benefits of TPF (namely, access to justice and equality of arms between parties to litigation).
The extent to which the current model of self-regulation works and whether there should be one homogenous regulatory framework applied to (i) all types of litigation and (ii) English-seated arbitration.
Whether and, if so, to what extent, a funder’s return on any third-party funding agreement should be subject to a cap.
How TPF should best be deployed relative to other sources of funding (including legal expenses insurance and crowd funding).
The role of the court in controlling the conduct of litigation support by TPF or similar funding arrangements.
What provision (including provision for professional legal services regulation), if any, needs to be made for the protection of claimants whose litigation is funded by TPF.
The extent to which the availability of TPF encourages specific forms of litigation.
Responses to the consultation are sought by 11:59 pm on Friday 31 January. The CJC will then issue a final report in summer with outcomes and recommendations.
Direction of Travel
Whilst the CJC report is only interim in nature, it does give us an indication of the CJC’s early thinking and the potential direction of travel. Some of these key themes are discussed below.
Self-Regulation
A large section of the CJC interim report focuses on the self-regulation of TPF in England and Wales through voluntary subscription to the ‘Code of Conduct for Litigation Funders’ published by the Association of Litigation Funders (ALF Code) and how this compares with other jurisdictions. The report notes that the current model of self-regulation was introduced in 2011, at a time when the TPF market was still beginning to develop, and notes that the TPF market has since expanded very significantly, especially in respect of funding collective proceedings and group litigation. On take up of the ALF Code, the report suggests that whilst an estimated 44 funders operate in England and Wales, only 16 are members of the ALF and thereby party to the ALF Code. Of these 16 members, eight are also members of the International Litigation Funders Association. Many commentators suggest that the interim report’s discussion of the current model of self-regulation may be indicative of the introduction of new legislation to regulate the TPF industry in the future.
PACCAR
The interim report doesn’t address the resolution of PACCAR specifically, which has sparked some criticism. Some commentators have referred to the fact that when the CJC’s original Terms of Reference were set in spring 2024, PACCAR was to be resolved via legislation which has since fallen away. The interim report offers no indication of whether PACCAR would be addressed in light of this.
The co-chair of the CJC review, Dr John Sorabji, has since suggested that whilst consideration of a litigation funding bill falls outside of the Terms of Reference, the CJC’s wider review of TPF industry includes consideration of the DBA regime, for which PACCAR will inevitably be considered.
Several challenges to LFAs are currently stayed in the Court of Appeal as the TPF market awaits a legislative solution to PACCAR. Many funders have since adopted some combination of the ‘multiples’ approach linked to sums invested, internal rates of return and compound interest rates, and creatively drafted clauses that seek to pre-empt a legislative resolution to PACCAR. For now, the TPF market will have to eagerly await the final report and any legislative solution that follows.
Funder Involvement in the Settlement of Disputes
The interim report notes that the nature of TPF means, on the one hand, that the ‘risk exists that funders will control the litigation’ and that ‘TPF discourages and undermines just settlement’. On the other hand, the report explains how the ALF Code makes provision for a dispute resolution procedure in these instances. Here, under the ALF Code the funder and funded are required to instruct a Kings Counsel (either jointly instructed, or as nominated by the Chairman of the Bar Council) to provide a binding opinion on the settlement proposal.
The debate around funder involvement in settlement has also been accelerated by recent headlines around the long running collective action in Merricks v Mastercard, in which the class representative, Walter Merricks, is said to have accepted a £200m settlement offer, much below the original claim value. The funder, Innsworth, has since publicly criticised the decision and written to the CAT ahead of the tribunal reviewing the terms of the settlement early this year.
There is currently no clarity as to whether—and if so to what extent—a funder’s interests will be considered a relevant factor in deciding whether a settlement is just and reasonable. Indeed, this may be the first case to decide the point.
Conclusion
The interim report has therefore provided much food for thought around the future direction of travel. Whilst only indicative at this stage, it looks as though we may be moving away from the model of self-regulation that has existed since 2011, that PACCAR is likely to be addressed in the context of a wider discussion of the existing DBA regime, and that Courts will soon be tasked with considering funder submissions around settlement terms.
Responses to the CJC consultation are open until 31 January. Consultees do not need to answer all questions if only some are of interest or relevance. The full list of consultation questions is available here.
China’s National Intellectual Property Administration Issues Guidelines for Patent Applications for AI-Related Inventions
On December 31, 2024, China’s National Intellectual Property Administration (CNIPA) issued the Guidelines for Patent Applications for AI-Related Inventions (Trial Implementation) (人工智能相关发明专利申请指引(试行)). The Guidelines follow up on CNIPA’s draft for comments issued December 6, 2024 in which only a week for comments were provided. The short comment period implied CNIPA did not actually want comments and is in contravention of the not-yet-effective Regulations on the Procedures for Formulating Regulations of the CNIPA (国家知识产权局规章制定程序规定(局令第83号)) requiring a 30-day minimum comment period. Highlights follow including several examples regarding subject matter eligibility.
There are four types of AI-related patent applications:
Patent applications related to AI algorithms or models themselves
Artificial intelligence algorithms or models, that is, advanced statistical and mathematical model forms, include machine learning, deep learning, neural networks, fuzzy logic, genetic algorithms, etc. These algorithms or models constitute the core content of artificial intelligence. They can simulate intelligent decision-making and learning capabilities, enabling computing devices to handle complex problems and perform tasks that usually require human intelligence.
Accordingly, this type of patent application usually involves the artificial intelligence algorithm or model itself and its improvement or optimization, for example, model structure, model compression, model training, etc.
Patent applications related to functions or field applications based on artificial intelligence algorithms or models
Patent applications related to the functional or field application of artificial intelligence algorithms or models refer to the integration of artificial intelligence algorithms or models into inventions as an intrinsic part of the proposed solution for products, methods or their improvements. For example: a new type of electron microscope based on artificial intelligence image sharpening technology. This type of patent application usually involves the use of artificial intelligence algorithms or models to achieve specific functions or apply them to specific fields.
Functions based on artificial intelligence algorithms or models refer to functions implemented using one or more artificial intelligence algorithms or models. They usually include: natural language processing, which enables computers to understand and generate human language; computer vision, which enables computers to “see” and understand images or videos; speech processing, including speech recognition, speech synthesis, etc.; knowledge representation and reasoning, which represents information and enables computers to solve problems, including knowledge graphs, graph computing, etc.; data mining, which calculates and analyzes massive amounts of data to identify information or laws such as potential patterns, trends or relationships. Artificial intelligence algorithms or models can be applied to specific fields based on their functions.
Field applications based on artificial intelligence algorithms or models refer to the application of artificial intelligence to various scenarios, such as transportation, telecommunications, life and medical sciences, security, commerce, education, entertainment, finance, etc., to promote technological innovation and improve the level of intelligence in all walks of life.
Patent applications involving inventions made with the assistance of artificial intelligence
Inventions assisted by artificial intelligence are inventions that are made using artificial intelligence technology as an auxiliary tool in the invention process. In this case, artificial intelligence plays a role similar to that of an information processor or a drawing tool. For example, artificial intelligence is used to identify specific protein binding sites, and finally obtains a new drug compound.
Patent applications involving AI-generated inventions
AI-generated inventions refer to inventions and creations generated autonomously by AI without substantial human contribution, for example, a food container autonomously designed by AI technology.
AI cannot be an inventor:
1. The inventor must be a natural person
Section 4.1.2 of Chapter 1 of Part 1 of the Guidelines clearly states that “the inventor must be an individual, and the application form shall not contain an entity or collective, nor the name of artificial intelligence.”
The inventor named in the patent document must be a natural person. Artificial intelligence systems and other non-natural persons cannot be inventors. When there are multiple inventors, each inventor must be a natural person. The property rights to obtain income and the personal rights to sign enjoyed by the inventor are civil rights. Only civil subjects that meet the provisions of the civil law can be the rights holders of the inventor’s related civil rights. Artificial intelligence systems cannot currently enjoy civil rights as civil subjects, and therefore cannot be inventors.
2. The inventor should make a creative contribution to the essential features of the invention
For patent applications involving artificial intelligence algorithms or models, functions or field applications based on artificial intelligence algorithms or models, the inventor refers to the person who has made creative contributions to the essential features of the invention.
For inventions assisted by AI, a natural person who has made a creative contribution to the substantive features of the invention can be named as the inventor of the patent application. For inventions generated by AI, it is not possible to grant AI inventor status under the current legal context in my country.
Examples of subject matter eligibility:
The solution of the claim should reflect the use of technical means that follow the laws of nature to solve technical problems and achieve technical effects
The “technical solution” stipulated in Article 2, Paragraph 2 of the Patent Law refers to a collection of technical means that utilize natural laws to solve the technical problems to be solved. When a claim records that a technical means that utilizes natural laws is used to solve the technical problems to be solved, and a technical effect that conforms to natural laws is obtained thereby, the solution defined in the claim belongs to the technical solution. On the contrary, a solution that does not use technical means that utilize natural laws to solve technical problems to obtain technical effects that conform to natural laws does not belong to the technical solution.
As an example and not a limitation, the following content describes several common situations where related solutions belong to technical solutions.
Scenario 1: AI algorithms or models process data with specific technical meaning in the technical field
If the drafting of a claim can reflect that the object processed by the artificial intelligence algorithm or model is data with a definite technical meaning in the technical field, so that based on the understanding of those skilled in the art, they can know that the execution of the algorithm or model directly reflects the process of solving a certain technical problem by using natural laws, and obtains a technical effect, then the solution defined in the claim belongs to the technical solution. For example, a method for identifying and classifying images using a neural network model. Image data belongs to data with a definite technical meaning in the technical field. If those skilled in the art can know that the various steps of processing image features in the solution are closely related to the technical problem of identifying and classifying objects to be solved, and obtain corresponding technical effects, then the solution belongs to the technical solution.
Scenario 2: There is a specific technical connection between the AI algorithm or model and the internal structure of the computer system
If the drafting of a claim can reflect the specific technical connection between the artificial intelligence algorithm or model and the internal structure of the computer system, thereby solving the technical problem of how to improve the hardware computing efficiency or execution effect, including reducing the amount of data storage, reducing the amount of data transmission, increasing the hardware processing speed, etc., and can obtain the technical effect of improving the internal performance of the computer system in accordance with the laws of nature, then the solution defined in the claim belongs to the technical solution.
This specific technical association reflects the mutual adaptation and coordination between algorithmic features and features related to the internal structure of a computer system at the technical implementation level, such as adjusting the architecture or related parameters of a computer system to support the operation of a specific algorithm or model, making adaptive improvements to the algorithm or model based on a specific internal structure or parameters of a computer system, or a combination of the two.
For example, a neural network model compression method for a memristor accelerator includes: step 1, adjusting the pruning granularity according to the actual array size of the memristor during network pruning through an array-aware regularized incremental pruning algorithm to obtain a regularized sparse model adapted to the memristor array; step 2, reducing the ADC accuracy requirements and the number of low-resistance devices in the memristor array through a power-of-two quantization algorithm to reduce overall system power consumption.
In this example, in order to solve the problem of excessive hardware resource consumption and high power consumption of ADC units and computing arrays when the original model is mapped to the memristor accelerator, the solution uses pruning algorithms and quantization algorithms to adjust the pruning granularity according to the actual array size of the memristor, reducing the number of low-resistance devices in the memristor array. The above means are algorithm improvements made to improve the performance of the memristor accelerator. They are constrained by hardware condition parameters, reflecting the specific technical relationship between the algorithm characteristics and the internal structure of the computer system. They use technical means that conform to the laws of nature to solve the technical problems of excessive hardware consumption and high power consumption of the memristor accelerator, and obtain the technical effect of improving the internal performance of the computer system that conforms to the laws of nature. Therefore, this solution belongs to the technical solution.
Specific technical associations do not mean that changes must be made to the hardware structure of the computer system. For solutions to improve artificial intelligence algorithms, even if the hardware structure of the computer system itself has not changed, the solution can achieve the technical effect of improving the internal performance of the computer system as a whole by optimizing the system resource configuration. In such cases, it can be considered that there is a specific technical association between the characteristics of the artificial intelligence algorithm and the internal structure of the computer system, which can improve the execution effect of the hardware.
For example, a training method for a deep neural network model includes: when the size of training data changes, for the changed training data, respectively calculating the training time of the changed training data in preset candidate training schemes; selecting a training scheme with the shortest training time from the preset candidate training schemes as the optimal training scheme for the changed training data, the candidate training schemes including a single-processor training scheme and a multi-processor training scheme based on data parallelism; and performing model training on the changed training data in the optimal training scheme.
In order to solve the problem of slow training speed of deep neural network models, this solution selects a single-processor training solution or a multi-processor training solution with different processing efficiency for training data of different sizes. This model training method has a specific technical connection with the internal structure of the computer system, which improves the execution effect of the hardware during the training process, thereby obtaining the technical effect of improving the internal performance of the computer system in accordance with the laws of nature, thus constituting a technical solution.
However, if a claim merely utilizes a computer system as a carrier for implementing the operation of an artificial intelligence algorithm or model, and does not reflect the specific technical relationship between the algorithm features and the internal structure of the computer system, it does not fall within the scope of Scenario 2.
For example, a computer system for training a neural network includes a memory and a processor, wherein the memory stores instructions and the processor reads the instructions to train the neural network by optimizing a loss function.
In this solution, the memory and processor in the computer system are merely conventional carriers for algorithm storage and execution. There is no specific technical association between the algorithm features involved in training the neural network using the optimized loss function and the memory and processor contained in the computer system. This solution solves the problem of optimizing neural network training, which is not a technical problem. The effect obtained is only to improve the efficiency of model training, which is not a technical effect of improving the internal performance of the computer system. Therefore, it does not constitute a technical solution.
Scenario 3: Using artificial intelligence algorithms to mine the inherent correlations in big data in specific application fields that conform to the laws of nature
When artificial intelligence algorithms or models are applied in various fields, data analysis, evaluation, prediction or recommendation can be performed. For such applications, if the claims reflect that the big data in a specific application field is processed, and artificial intelligence algorithms such as neural networks are used to mine the inherent correlation between data that conforms to the laws of nature, and the technical problem of how to improve the reliability or accuracy of big data analysis in a specific application field is solved, and the corresponding technical effects are obtained, then the solution of the claim constitutes a technical solution.
The means of using artificial intelligence algorithms or models to conduct data mining and train artificial intelligence models that can obtain output results based on input data cannot directly constitute technical means. Only when the inherent correlation between the data mined based on artificial intelligence algorithms or models conforms to the laws of nature, the relevant means as a whole can constitute technical means that utilize the laws of nature. Therefore, it is necessary to clarify in the scheme recorded in the claims which indicators, parameters, etc. are used to reflect the characteristics of the analyzed object in order to obtain the analysis results, and whether the inherent correlation between these indicators, parameters, etc. (model input) mined by artificial intelligence algorithms or models and the result data (model output) conforms to the laws of nature.
For example, a food safety risk prediction method obtains and analyzes historical food safety risk events to obtain header entity data and tail entity data representing food raw materials, edible items, and food sampling poisonous substances, and their corresponding timestamp data; based on each header entity data and its corresponding tail entity data, and its corresponding entity relationship carrying timestamp data representing the content level, risk or intervention of each type of hazard, corresponding four-tuple data is constructed to obtain a corresponding knowledge graph; the knowledge graph is used to train a preset neural network to obtain a food safety knowledge graph model; and the food safety risk at the prediction time is predicted based on the food safety knowledge graph model.
The background technology of the program description records that the existing technology uses static knowledge graphs to predict food safety risks, which cannot reflect the fact that food data in actual situations changes over time and ignores the influence between data. Those skilled in the art know that food raw materials, edible items or food sampling poisons will gradually change over time. For example, the longer the food is stored, the more microorganisms there are in the food, and the content of food sampling poisons will increase accordingly. When the food contains a variety of raw materials that can react chemically, the chemical reaction may also cause food safety risks at some point in the future over time. This program predicts food safety risks based on the inherent characteristics of food changing over time, so that timestamps are added when constructing the knowledge graph, and a preset neural network is trained based on entity data related to food safety risks at each moment to predict food safety risks at the time to be predicted. It uses technical means that follow the laws of nature to solve the technical problem of inaccurate prediction of food safety risks at future time points, and can obtain corresponding technical effects, thus constituting a technical solution.
If the intrinsic correlation between the indicator parameters mined by artificial intelligence algorithms or models and the prediction results is only subject to economic laws or social laws, it is a case of not following the laws of nature. For example, a method of estimating the regional economic prosperity index using a neural network uses a neural network to mine the intrinsic correlation between economic data and electricity consumption data and the economic prosperity index, and predicts the regional economic prosperity index based on the intrinsic correlation. Since the intrinsic correlation between economic data and electricity consumption data and the economic prosperity index is subject to economic laws and not natural laws, this solution does not use technical means and does not constitute a technical solution.
The full text is available here (Chinese only).
Several More Companies Propose Move From Delaware To Nevada
As 2024 closed and 2025 began, four additional publicly traded companies proposed reincorporating from Delaware into the “sweet promised land”* of Nevada. These companies include:
Revelation Biosciences, Inc.
Eightco Holdings Inc.
Gaxos.ai Inc.
Remark Holdings, Inc.
In general, these companies cite tax savings, the enhanced ability to attract and retain management, greater liability protection, and flexibility as the reasons for proposing the move to Nevada. It remains to be seen whether the stockholders favor a move. Moreover, the proxy season is only just beginning and it will be interesting to see whether 2025 will be go down in history books as the “Year of the Great Move”.
__________________________*”Sweet Promised Land” is the title of a wonderful book by Robert Laxalt that tells the story of a Basque immigrant and his son’s return visit from Nevada to the father’s ancestral homeland. I’ve never been sure whether the title refers to Nevada, the Basque homeland, or both. The phrase also makes it appearance in the chorus of a song recorded in Walter Van Tilburg Clark’s semi-autobiographical novel about growing up in Reno, Nevada, The City of Trembling Leaves:
“Oh, this is the land that old Moses shall see;Oh, this is the land of the vine and the tree;Oh, this is the land for My children and Me,The sweet promised land of Nevada.”