Make Protecting Your UK and EU Product Packaging and Labels Your New Year’s IP Resolution. Part 1: Protect Unique Packaging in the EU
New developments in Europe make a filing strategy for registered designs and trade marks even more essential for the modern consumer business. Read on to find out more.
On 19 December 2024, the EU’s new Packaging Regulation was signed and will come into force 18 months after the date of publication, still to be announced. This repeals the old packaging directive and makes significant changes to the regime. These changes include introducing stringent requirements on sustainability, recyclability and limiting single-use plastics for products sold in the EU. However, the regulation will also provide certainty for brands as the regulation will harmonise the rules across all EU member states, which will stop brands having to contend with varying, sometimes conflicting, packaging rules in different markets.
Packaging Minimisation in the EU
This new regulation will have a large effect on many industries including fast moving consumer goods, cosmetics and fashion, but we want to draw your attention to one new requirement in particular, the requirement for packaging minimisation (Article 10). This requires packaging to be designed so as to minimise its volume and weight, and to enable recyclability.
There will therefore be a ban on “superfluous” packaging such as double walls and false bottoms, but also packaging that is not necessary for “packaging function”. Together these could limit a brand’s ability to use inventive and creative packaging to stand out in the market. For instance, a product packaging in an unusual shape that is not strictly necessary to its function could be banned.
There is a (somewhat limited) exception to this rule for packaging that is protected under EU or national design or trademark laws or applicable international agreements. This exception applies provided that packaging changes would affect “the shape of the packaging in such a way that the trademark can no longer distinguish the trademarked good from goods of another undertaking, and the design can no longer keep its new and individual characteristics”. Importantly, UK designs and trademarks will not count, and companies will need EU-based registrations to qualify for this exception.
However, the exception only applies to trademark and design rights protected before the date of entry into force of the new regulation. This means that the clock will start to tick very shortly with an 18-month window to ensure designs and trademarks are properly filed.
Key Takeaways for Brands
The key takeaways are:
Review trade mark and design portfolios to check protection status today;
File trade marks for any hero products and packaging to protect their shape, look and feel (multiple marks may be necessary depending on the complexity of the packaging); and
File registered designs for new products as soon as possible.
Look out for Part 2 of this series on combating product imitations (known as ‘dupes’) in the UK, coming soon.
Ceramtec GMBH v. Coorstek Biocermanics LLC
This case examines the application of trademark functionality doctrine in the medical device industry, specifically addressing whether the pink color of ceramic hip components can be protected as a trademark. The case provides important guidance on how courts evaluate functionality claims and the intersection between patent and trademark protection for product features.
Background
Ceramtec manufactures artificial hip components using zirconia-toughened alumina (“ZTA”) ceramic material containing chromium oxide (chromia). The chromia gives their products, marketed under the name “Biolox Delta,” a distinctive pink color. Prior to seeking trademark protection, Ceramtec held U.S. Patent 5,830,816 covering their ceramic composition, which expired in January 2013.
In January 2012, Ceramtec applied for two trademarks claiming protection for the color pink used in ceramic hip components. The marks were registered on the Supplemental Register in April 2013, covering both a “hip joint ball” and an “acetabular shell or fossa.”
Coorstek, a competitor in the medical implant market, manufactures two different ZTA ceramic materials: CeraSurf-p, which contains chromia and is pink, and CeraSurf-w, which does not contain chromia and is white. On March 3, 2014, Coorstek filed both a lawsuit in the District of Colorado and a cancellation petition with the Trademark Trial and Appeal Board (TTAB), arguing that the pink color was functional and therefore ineligible for trademark protection.
The TTAB ruled in favor of Coorstek, finding that the pink color was functional and cancelling Ceramtec’s trademark registrations. The Board based its decision on evidence from Ceramtec’s expired patent and their technical publications showing that chromia provided material benefits to the ceramic components. Ceramtec appealed this decision to the Federal Circuit, challenging both the Board’s functionality finding and its handling of the unclean hands defense.
Issue(s)
Whether the pink color of Ceramtec’s ceramic hip components is functional and thus ineligible for trademark protection.
Holding
The Federal Circuit affirmed the TTAB’s decision canceling Ceramtec’s trademarks, finding that the pink color was functional and therefore not eligible for trademark protection.
Reasoning
The Federal Circuit’s analysis centered on the Morton-Norwich factors, a four-part test established in In re Morton-Norwich Products, Inc. that courts use to determine whether a product feature is functional. These factors examine: (1) the existence of a utility patent disclosing the utilitarian advantages of the design; (2) advertising materials in which the originator of the design touts its utilitarian advantages; (3) the availability to competitors of functionally equivalent designs; and (4) facts indicating the design results in a comparatively simple or cheap method of manufacturing.
Applying these factors to Ceramtec’s case:
The court found that Ceramtec’s expired patent disclosing the use of chromia in ZTA ceramics provided strong evidence that the pink color was functional, as it resulted from a feature that provided material benefits.
The court considered Ceramtec’s advertising materials and public communications, which disclosed that chromia provides material benefits to the ZTA ceramics, further supporting functionality.
Regarding the availability to competitors, the court found no evidence that alternative designs would work as well, making this factor neutral in the analysis.
The court determined that evidence about manufacturing costs and methods was inconclusive and treated this factor as neutral.
Particularly significant was the relationship between Ceramtec’s expired patent and their trademark claims. The court emphasized that features previously protected by a patent cannot later be protected through trademark law if they are functional, as this would effectively extend patent protection indefinitely.
The court also rejected Ceramtec’s argument that the Board improperly applied the “unclean hands” doctrine, finding that the Board properly considered the public interest in removing registrations for functional marks from the trademark register.
Through this decision, the Federal Circuit reinforced the principle that functional product features, even if they create a distinctive appearance, cannot be protected as trademarks when they serve a utilitarian purpose essential to the product’s use or manufacture.
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Colorado Attorney General Announces Adoption of Amendments to Colorado Privacy Act Rules + Attorneys General Oppose Clearview AI Biometric Data Privacy Settlement
Colorado Adopts Amendments to CPA Rules
The Colorado Attorney General announced the adoption of amendments to the Colorado Privacy Act (“CPA”) rules. The rules will become effective on January 30, 2025. The rules provide enhanced protections for the processing of biometric data as well as the processing of the online activities of minors. Specifically, companies must develop and implement a written biometric data policy, implement appropriate security measures regarding biometric data, provide notice of the collection and processing of biometric data, obtain employee consent for the processing of biometric data, and provide a right of access to such data. In the context of minors, the amendment requires that entities obtain consent prior to using any system design feature designed to significantly increase the use of an online service of a known minor and to update the Data Protection Assessments to address processing that presents heightened risks to minors. Entities already subject to the CPA should carefully review whether they may have heightened obligations for the processing of employee biometric data, a category of data previously exempt from the scope of the CPA.
Attorneys General Oppose Clearview AI Biometric Data Privacy Settlement
A proposed settlement in the Clearview AI Illinois Biometric Information Privacy Act (“BIPA”) litigation is facing opposition from 22 states and the District of Columbia. The Attorneys General of each state argue that the settlement, which received preliminary approval in June 2024, lacks meaningful injunctive relief and offers an unusual financial stake in Clearview AI to plaintiffs. The settlement would grant the class of consumers a 23 percent stake in Clearview AI, potentially worth $52 million, based on a September 2023 valuation. Alternatively, the class could opt for 17 percent of the company’s revenue through September 2027. The AGs contend the settlement doesn’t adequately address consumer privacy concerns and the proposed 39 percent attorney fee award is excessive. Clearview AI has filed a motion to dismiss the states’ opposition, arguing it was submitted after the deadline for objections. A judge will consider granting final approval for the settlement at a hearing scheduled on January 30, 2025.
FTC Proposes Changes to Business Opportunity Rule to Deter Deceptive Earnings Claims – Republican Commissioners Dissent
On January 13, 2025, the Federal Trade Commission announced that it is seeking comment on proposed changes to the Business Opportunity Rule and a proposed new Earnings Claim Rule. According to the FTC, the two, taken together, “would strengthen the agency’s tools to curb deceptive earnings claims in industries where they are pervasive: multi-level marketing (MLM) programs and money-making opportunities.”
The proposed changes to the FTC’s Business Opportunity Rule and the new Earnings Claim Rule would permit the FTC to seek stronger relief – including money back for consumers and civil penalties – from covered companies making deceptive claims.
“Phony claims about likely earnings lure people looking for honest income into spending thousands, even tens of thousands, of dollars on multi-level marketing, business coaching and other schemes,” said FTC lawyer Sam Levine, Director of the Bureau of Consumer Protection. “The proposed rules would help the FTC deter illegal conduct with civil penalties and put money back in consumers’ pockets. We look forward to getting public comment.”
The FTC is seeking comment from the public on three proposals: two Notices of Proposed Rulemaking (NPRM) and one Advance Notice of Proposed Rulemaking (ANPRM).
What is the FTC Notice of Proposed Rulemaking on Business Opportunity Rule?
The proposal would expand the Business Opportunity Rule to cover money-making opportunities, such as business coaching and investment opportunities, which are marketed to assist consumers in building a business or otherwise earning income. According to the FTC, “such operations proliferate, using deceptive tactics—and in particular, deceptive earnings claims—to take consumers’ money. They cause significant financial and other harm to consumers.”
The NPRM define “business coaching opportunities” broadly to include any program, plan, or product that is represented to train or teach a person how to establish or operate a business.” The FTC is also considering whether to use the term “coaching opportunity” instead of “business coaching opportunity.”
Pursuant to the proposed amendments, sellers of these types of opportunities would be, among other things, prohibited from making material misrepresentations, including about earnings. Sellers also would be required to have written substantiation to back up any earnings claims and make that substantiation available to consumers if they request it – in the language they used to make the earnings claim.
What is the FTC Notice of Proposed Rulemaking on Rule Covering Deceptive Earnings Claims in the MLM Industry?
The proposal would create a new rule that would address false or misleading earnings claims in the MLM industry. “Deceptive earnings claims are a widespread problem in this industry, and they have caused significant financial and other harm to consumers,” according to the FTC.
Like the Business Opportunity Rule, the new rule, if adopted, would prohibit MLM sellers from making deceptive earnings and related claims. Similarly, the proposal would require MLM sellers to have written substantiation to back up any earnings claims and make that substantiation available to consumers if they request it – in the language they used to make the earnings claim.
Advance Notice of Proposed Rulemaking on Additional Components of the Proposed Earnings Claim Rule
In addition to the NPRMs, the FTC is issuing an ANPRM in connection with the proposed Earnings Claim Rule, seeking comment from the public on the need for additional rule requirements addressing deceptive earnings claims and related conduct.
These include:
whether to require MLMs to provide earnings data to potential recruits and current MLM participants or to post such data on their websites;
whether all MLM earnings claims should be accompanied by clear and conspicuous information about the earnings MLM participants can generally expect;
whether there should be a waiting period before a recruit pays any money to the MLM or otherwise joins the MLM;
whether to prohibit misrepresentations relating to expenses, benefits, or the compensation plan; and
whether to prohibit MLMs from using non-disparagement or other “gag” clauses to prohibit participants from communicating truthful negative information to the Commission, potential recruits, or others.
The public comment period for all three proposals will last 60 days from when they are published in the Federal Register.
Republican FTC Commissioners Dissent
The Commission votes to approve the issuance of the proposals in the Federal Register were 3-2. Commissioner Ferguson issued a dissenting statement joined by Commissioner Holyoak, voting against all three proposals.
The dissent asks whether the proposed rules “are lawful, and whether they are prudent and sound policy choice … decisions that belong to the incoming Trump Administration.” It will be interesting to see whether President Trump instructs the Office of the Federal Register not to publish any pending rules, particularly those that seek to advance novel liability theories.
Takeaway: The FTC maintains an aggressive investigation and enforcement program relating to companies that lure in entrepreneurs, investors or participants with promises of significant earnings, and then fail to deliver. The proposed rulemakings are aimed at strengthening the agency’s tools to curb deceptive earnings claims in industries where reports indicate they are pervasive: money-making opportunities and MLM programs. The announcement involves three proposals that work together, a NPRM proposing amendments to the FTC’s Business Opportunity Rule to cover “money-making opportunities,” an NPRM proposing a new rule addressing deceptive earnings claims in the MLM industry, and an ANPR asking whether the FTC should propose additional rule requirements that would apply to the MLM industry.
OFAC Sanctions Russia’s Energy Sector
In an effort to reduce Russian energy revenues being used to fund the war against Ukraine, on January 10, 2025, the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC), issued a “determination” that subjects the energy sector of the Russian Federation to significant sanctions.
In parallel, OFAC issued a determination that prohibits exportation of petroleum services to Russia from the United States or by U.S. persons wherever located.
Designation of Russia’s Energy Sector. The determination pursuant to Section 1(a)(i) of Executive Order 14024, which took effect on January 10, 2025, designates the energy sector of the Russian Federation economy as a sanctioned sector. As explained by OFAC in FAQ 1214 (issued in conjunction with the determination), not all persons that operate or that have operated in the energy sector are now sanctioned. Rather, the designation enables the Secretary of the Treasury in consultation with the Secretary of State (or vice versa), to impose sanctions on any person, entity, or vessel determined to be operating, or to have been operating, in the Russian energy sector. Any such person, entity, or vessel is now at sanctions risk, and contractual counterparties are on notice that transactions with or involving anyone in the Russian energy sector may be prohibited or blocked without warning.
Pursuant to the authority thus granted, the Secretary of the Treasury immediately listed as Specially Designated Nationals (SDN) Russia’s two leading energy companies (Gazprom Neft and Surgutneftegas), as well as numerous vessels, vessel owners, oil traders, oilfield service providers, insurance companies, and Russian energy officials. Any property or interest in property of anyone listed as an SDN in the possession or control of a U.S. person, must be blocked (i.e., frozen). Any property or interest in property of any entity owned 50% or more by one or more SDN-listed persons or entities must likewise be blocked. The designations prohibit any U.S. person (including any person in the United States) from providing funds, goods, or services to, and from receiving funds, goods, or services from, any blocked person or entity.
The term “energy sector” will be formally defined in forthcoming OFAC regulations. FAQ 1213 sets out the anticipated definition, which will include “activities such as the procurement, exploration, extraction, drilling, mining, harvesting, production, refinement, liquefaction, gasification, regasification, conversion, enrichment, fabrication, manufacturing, testing, financing, distribution, purchase or transport to, from, or involving the Russian Federation, of petroleum, including crude oil, lease condensates, unfinished oils, natural gas, liquefied natural gas, natural gas liquids, or petroleum products, or other products capable of producing energy, such as coal, wood, or agricultural products used to manufacture biofuels; the development, production, testing, generation, transmission, financing, or exchange of power, through any means, including nuclear, electrical, thermal, and renewable, to, from, or involving the Russian Federation; and any related activities, including the provision or receipt of goods, services, or technology to, from, or involving the energy sector of the Russian Federation economy.”
Prohibition on Petroleum Services. The determination pursuant to Section 1(a)(ii) of Executive Order 14071, titled “Prohibition on Petroleum Services,” will take effect at 12:01 am EST on February 27, 2025. It generally prohibits “[t]he exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of petroleum services to any person located in the Russian Federation.”
The term “petroleum services” will be formally defined in forthcoming OFAC regulations. FAQ 1216 sets out the anticipated definition, which will include “services related to the exploration, drilling, well completion, production, refining, processing, storage, maintenance, transportation, purchase, acquisition, testing, inspection, transfer, sale, trade, distribution, or marketing of petroleum, including crude oil and petroleum products, as well as any activities that contribute to Russia’s ability to develop its domestic petroleum resources, or the maintenance or expansion of Russia’s domestic production and refining. This would include services related to natural gas as a byproduct of oil production in Russia.”
General Licenses. OFAC has also issued several general licenses (GL) that mitigate the immediate impact of the determinations. Existing transactions that fall within the prohibitions may be wound down until either February 27 or March 12, 2025, depending on the Russian entity involved (GL 8L, 117, 118, 119). Activities necessary for the health or safety of crews on sanctioned vessels are authorized until February 27, 2025, as are vessel repairs necessary to protect the environment (GL 120). Petroleum services related to three major energy projects (the Caspian Pipeline Consortium, Tengizchevroil, and Sakhalin-2) are authorized until June 28, 2025 (GL 121).
OFAC’s latest salvo against the Russian Federation mandates heightened caution in dealing with the Russian energy sector. Anyone planning or currently involved in such activity would be well-advised to consult with experienced sanctions counsel. Katten stands ready to assist.
(US) Fifth Circuit Puts Serta Simmons Uptier Transaction to Bed
On December 31, 2024, the U.S Court of Appeals for the Fifth Circuit issued a unanimous decision reversing the bankruptcy court’s ruling that allowed an uptier transaction entered into by Serta Simmons Bedding, LLC (“Serta Simmons”) in 2020 (the “2020 Uptier”). The appellate court also held that plan provisions requiring the indemnification of the lenders who participated in the 2020 Uptier (“Prevailing Lenders”) were impermissible under the U.S. Bankruptcy Code and should be excised from the plan.
The use of uptier transactions by distressed borrowers has increased dramatically over recent years, spurred by the marked increase in distressed companies during the COVID-19 pandemic. The 2020 Uptier was one of the first major uptier transactions and was controversial from its inception because it resulted in the subordination of a majority of creditors’ interests. Typically, in an uptier transaction, a borrower will issue new superpriority debt under an existing credit facility, consented to by the majority of lenders, in exchange for giving those lenders’ debt superior status. Such transactions earned their name because new debt is “uptiered,” subordinating the existing debt of lenders who were not party to the uptier transaction. This is what occurred with the 2020 Uptier—the Prevailing Lenders were able to uptier their loan, with the remaining lenders (“Excluded Lenders”) recovering little on their claims in the restructuring.
Background
Serta Simmons is the world’s leading producer of mattresses and other bedding products. It entered into a 2016 credit agreement with certain lenders which provided it with a $1.95 billion first lien term loan credit facility (“2016 Agreement”). Among the various provisions, the 2016 Agreement mandated pro rata sharing among the lenders, a background norm in corporate finance that requires a borrower to proportionately allocate its repayments based on the lenders’ percentage interest in the outstanding debt. The 2016 Agreement included exceptions to the ratable sharing provision that “any lender may, at any time, assign all or a portion of its rights and obligations under this Agreement in respect of its Term Loans to any Affiliated Lender on a non-pro rata basis (A) through Dutch Auctions[1] open to all Lenders holding the relevant Term Loans on a pro rata basis or (B) through open market purchases, in each case with respect to clauses (A) and (B), without the consent of the Administrative Agent.” The term “open market purchase” was not defined in the 2016 Agreement.
Later, facing liquidity issues during the COVID-19 pandemic, Serta Simmons entered into the 2020 Uptier with its Prevailing Lenders holding first-lien and second-lien debt. The 2020 Uptier: (i) provided Serta Simmons with $200 million in new financing in exchange for $200 million first-out superpriority debt; and (ii) traded $1.2 billion of first-lien and second-lien loans for $875 million in second-out superpriority debt. To facilitate the 2020 Uptier and to deal with anticipated future litigation, Serta Simmons amended the 2016 Agreement in order to allow it to issue new priming debt, labeled the 2020 Uptier an “open market purchase” within the meaning of section 9.05(g) of the 2016 Agreement, and agreed to indemnify the Prevailing Lenders for all losses, claims, damages, and liabilities in connection with their participation in the 2020 Uptier (“Prepetition Indemnity”).
Despite the 2020 Uptier, Serta Simmons’ financial condition continued to deteriorate. Subsequently, on January 23, 2024, Serta Simmons and 13 affiliated debtors (together, the “Debtors”) filed for chapter 11 protection in the Bankruptcy Court for the Southern District of Texas (“Bankruptcy Court”). The Bankruptcy Court entered an order confirming the Debtors’ Second Amended Joint Chapter 11 Plan (“Plan”) on June 14, 2023. The Plan was subject to a number of objections, including objections to an indemnity provision that baked the provisions of the Prepetition Indemnity into the plan (“Plan Indemnity”), but was ultimately confirmed and went effective on June 29, 2023.
The 2020 Uptier Was Not a Valid Open Market Purchase
The 2020 Uptier was met with resistance from Excluded Lenders and other creditors. In response, the Debtors and Prevailing Lenders filed an action for declaratory relief on January 24, 2023, seeking the Bankruptcy Court’s approval of the 2020 Uptier through a declaration that it did not violate the pro-rata sharing provisions in the 2016 Agreement and did not violate the implied covenant of good faith and fair dealing.[2] On February 24, 2023, the Debtors and Prevailing Lenders each filed a motion for summary judgment, arguing inter alia that: (i) the term “open market purchase” under the 2016 Agreement included debt exchanges in which not all lenders are invited to participate; (ii) the inclusion of “non-pro rata” in section 5.09(g) of the 2016 Agreement reflects an intention that open market purchases need not be open to all; (iii) the Debtors undertook a robust marketing process to obtain the best price possible; and (iv) therefore, the 2020 Uptier was a valid open market purchase under the 2016 Agreement.[3]
Former Bankruptcy Judge David Jones granted partial summary judgment in favor of the Debtors and the Prevailing Lenders, finding that the 2020 Uptier was an open market purchase and permitted under the 2016 Agreement. In so finding, Judge Jones found that there was no ambiguity in the meaning of “open market purchase” in section 9.05(g) of the 2016 Agreement, and that the 2020 Uptier fit within the definition because there was no evidence of any coercion or manipulation in the transaction.
On appeal, the Fifth Circuit reversed the Bankruptcy Court’s decision, finding that the 2020 Uptier was not a permitted open market purchase under the 2016 Agreement. The appellate court rejected the expansive definition of “open market purchase” proffered by the Debtors, because its application would mean that short of coercing one of the lenders, the Debtors could call any arms-length transaction an open market purchase.[4] Additionally, according to the Fifth Circuit, an open market is “a specific market that is generally open to participation by various buyers and sellers.”[5] This means that an open market purchase takes place on the market relevant to the purchased product, in this case being the secondary market for syndicated loans.[6] Instead of purchasing the loans on the secondary market, Serta Simmons privately engaged individual lenders outside of the secondary market, taking the 2020 Uptier outside the protection of section 9.05(g).[7]
The Bankruptcy Code Does Not Permit the Indemnification of Prevailing Lenders
The Excluded Lenders and a creditor, Citadel Equity Fund Ltd. (“Citadel”), objected to the Plan Indemnity, arguing that it allowed the Prepetition Indemnity to pass through the Plan in violation of sections 502(e)(1)(B) and 509(c) of the Bankruptcy Code.[8] Together, they argued, these provisions were enacted to ensure that a non-debtor co-obligor’s reimbursement claim could not be recovered prior to the full payment of the primary claim.[9] The Debtors’ Plan ran afoul of this legislative intention by allowing the contingent claims of co-obligors to pass through bankruptcy at the expense of the Excluded Lenders’ claims that would be discharged for almost no value.[10]
However, Judge Jones found that the Plan Indemnity was given to the Prevailing Lenders as part of a “basket of consideration” in exchange for the equitization of almost $1 billion in secured claims and the provision of DIP Financing.[11] According to Judge Jones, because the Plan Indemnity dealt with potential liability connected to participation in the 2020 Uptier, it was unsurprising that the Plan Indemnity’s language was virtually identical to that of the Prepetition Indemnity.[12] Therefore, the Plan Indemnity was valid as part of a plan settlement pursuant to section 1123(b)(3) of the Bankruptcy Code.
The Fifth Circuit reversed Judge Jones’ ruling, holding that the plan provisions that required the Debtors to indemnify the Prevailing Lenders were impermissible under the Bankruptcy Code. Initially, the court found that the issue was not equitably moot since the Plan Indemnity could simply be excised from the Plan without threatening the success of the Debtors’ reorganization.[13] Additionally, it was unclear which third parties would be harmed by excision, and while the Excluded Lenders and Citadel had been denied a stay of the confirmation order, such failure did not mandate finding an appeal equitably moot.[14]
Turning next to the merits, the Fifth Circuit found that the Plan Indemnity was “an impermissible end-run” around the Bankruptcy Code.[15] The court began its analysis with section 502(e)(1)(B) of the Bankruptcy Code, which requires bankruptcy courts to disallow contingent prepetition indemnification claims.[16] The Debtors attempted to avoid the section 502(e)(1)(B) ban by characterizing the Plan Indemnity as a valid settlement indemnity under section 1123(b)(3)(A). The Fifth Circuit rejected this argument because section 1123(b)(3)(A) only allows for a plan to settle or adjust certain claims or interests and does not expressly allow for “the back-end resurrection of claims already disallowed on the front end.”[17] The Plan Indemnity mirrored the terms of the Prepetition Indemnity and sought to protect the same group of lenders. On this basis, the Bankruptcy Court’s acceptance of the validity of the resurrected Prepetition Indemnity in the form of the Plan Indemnity was a “mistake.”[18]
Takeaways
The Fifth Circuit’s decision may potentially chill the market for uptier transactions as it takes a swing at a once-reliable option for struggling companies which relied on the general acceptance of open market purchase provisions. As for the rejected plan indemnities, interested lenders may be discouraged by the increased risks associated with uptier transactions. Litigation risk will now shift from debtors to lenders because equitable mootness under these circumstances will no longer provide an effective back-stop to litigation, and at least in the Fifth Circuit, the use of settlement indemnities containing terms identical or substantially similar to prepetition indemnities provided in uptier transactions will not be approved.
On the other hand, however, the market for uptier transactions may not be so strongly impacted because the decision is only binding in the Fifth Circuit, and it is unknown whether other jurisdictions will follow suit. Distressed companies and interested lenders may also get creative with the language in credit agreements moving forward to allow for such transactions. For example, in the Ocean Trails CLO VII v. MLN Topco Ltd. decision that was also handed down on December 31, 2024, the New York Appellate Court blessed an uptier transaction because it found that the terms of the credit agreement allowed for the purchase of loans on a non-pro-rata basis.[19] While the Fifth Circuit put the 2020 Uptier to bed, it remains to be seen whether other courts will follow suit.
[1] A Dutch auction is an auction in which property is initially offered at an excessive price that is gradually lowered until the property is sold. See Dutch Auction, Black’s Law Dictionary (12th ed. 2024).
[2] See Adversary Complaint(ECF No. 1), Serta Simmons Bedding, LLC, et al. v. AG Centre Street Partnership L.P. (In re Serta Simmons Bedding, LLC), Case No. 23-09001, (Bankr. S.D. Tex. Jan. 24, 2023).
[3] See Serta Simmons Bedding, LLC’s Motion for Summary Judgment(ECF No. 69), p. 18, Serta Simmons Bedding, LLC, et al. v. AG Centre Street Partnership L.P. (In re Serta Simmons Bedding, LLC), Case No. 23-09001, (Bankr. S.D. Tex. Feb. 24, 2023); Lender Plaintiffs’ Motion for Summary Judgment (ECF No. 73), pp. 3-4, Serta Simmons Bedding, LLC, et al. v. AG Centre Street Partnership L.P. (In re Serta Simmons Bedding, LLC), Case No. 23-09001, (Bankr. S.D. Tex. Feb. 24, 2023).
[4] Opinion (ECF No. 233), p. 33, Excluded Lenders v. Serta Simmons Bedding, LLC, (In re Serta Simmons Bedding, LLC), Case No. 23-20181, (5th Cir. Dec. 31, 2024)(“Opinion”).
[5] Id. at 29.
[6] Id.
[7] Id. at 32.
[8] In re Serta Simmons Bedding, LLC, Case No. 23-90020, 2023 WL 3855820, at *10 (Bankr. S.D. Tex. Jun. 6, 2023).
[9] Objection of the Ad Hoc Group of First Lien Lenders to the First Amended Joint Chapter 11 Plan of Serta Simmons Bedding, LLC and Its Affiliated Debtors(ECF No. 824), pp. 2, 13-16, In re Serta Simmons Bedding, LLC, Case No. 23-90020, (Bankr. S.D. Tex. May 11, 2023).
[10] Id.
[11] Id.
[12] Id.
[13] Opinion, at 40, 42-43.
[14] Id. at 41-42.
[15] Id. at 46.
[16] Id.
[17] Id. at 48.
[18] Id. at 47.
[19] Case No. 2024-00169 (N.Y. App. Div., 1st Dept., Dec. 31, 2024).
Considerations for Avoiding Waiving Contractual Rights to Collect Liquidated Damages
Liquidated damages clauses are inserted into contracts to establish a pre-determined amount of compensation to the non-breaching party where the damages may be difficult to calculate. A variety of circumstances may trigger liquidated damages, including when (1) a party fails to deliver goods on time (thereby causing a delay in production and/or lost sales); (2) a party abandons a lease before its expiration (thereby causing the owner to suffer lost rents and other costs until it obtains a replacement tenant); and (3) a contractor fails to complete a project on time (thereby delaying a new business location’s opening and causing the owner to incur lost profits).
Like all contract provisions, the non-breaching party’s words and/or conduct can waive liquidated damages provisions. To determine if a party has waived their ability to seek liquidated damages, courts consider (1) the contract’s terms and whether the moving party provided notice of the event that triggered the liquidated damages (if the contract requires notice), (2) the parties’ conduct, (3) contractual compliance for extensions, and (4) evidence of extension agreements.
The case U.S. Pipeline, Inc. v. N. Nat. Gas Co., 930 N.W.2d 460 (Neb. 2019) discusses the circumstances that can result in a waiver of rights to collect liquidated damages. In that case, the owner sought liquidated damages from the contractor after the contractor failed to complete the natural gas pipeline construction by the date of substantial completion specified in the contract. Rather than notify the contractor of its intent to enforce the liquidated damages clause, the owner worked with the contractor to develop a new schedule and directed the contractor to perform additional work after the deadline to achieve substantial completion. Importantly, however, the owner failed to provide the revised plans for the extra work for several weeks, thereby delaying the start of the extra work and causing further delays. The contractor performed the extra work and ultimately completed the project several months after the original deadline.
The owner sued the contractor for its delay in completing the project and sought to recover liquidated damages based on the total number of days the project was delayed (which an expert calculated to be a total of 141 days after the substantial completion date). The trial court denied the owner’s claim for liquidated damages, explaining that the owner waived its right to liquidated damages. The Supreme Court of Nebraska affirmed the trial court’s ruling, explaining that the owner’s decision to request the contractor to perform extra work after the date of substantial completion, combined with the owner’s failure to inform the contractor of its intent to seek liquidated damages, demonstrated that the owner intended to waive its right to these damages.
The court’s ruling serves as a powerful reminder that parties can waive their right to recover liquidated damages. Parties seeking to enforce their rights to collect liquidated damages should consider immediately sending written notice of their intent to collect liquidated damages to the other party after it has breached the contract. However, subsequent communications between the parties concerning requests from the owner to the contractor to perform extra work, or about steps the breaching party plans to take to cure the default and/or to mitigate the non-breaching party’s damages should be carefully drafted to avoid a claim that liquidated damages have been waived.
Sixth Circuit Rules Jury Must Decide if FLSA Violations Were Willful
On December 23, 2024, the U.S. Court of Appeals for the Sixth Circuit ruled in Su v. KDE Equine, LLC that whether an employer willfully violated the Fair Labor Standards Act (FLSA) is a fact question best left to the jury.
The unanimous Sixth Circuit panel vacated the U.S. District Court for the Western District of Kentucky’s award of summary judgment on this issue, holding that a reasonable factfinder could conclude the defendant’s FLSA violations were not willful. The decision is notable because it clarifies that defendants must act with the required mental state for their actions to be considered “willful” under the FLSA.
Quick Hits
The Sixth Circuit reversed and remanded a finding of willfulness under the FLSA because the district court’s bench trial focused only on whether the defendant had violated the FLSA—not whether it did so willfully.
Defendants must act with the required mental state for their alleged FLSA violations to be considered “willful.”
The Sixth Circuit also vacated the district court’s award of liquidated damages, since the issue of whether the defendant committed its FLSA violations “in good faith” and with “reasonable grounds” turned on the same factual disputes as the willfulness issue.
Summary
Violations of the FLSA’s minimum wage and overtime provisions are subject to a two-year statute of limitations, which may extend to three years if the violations are “willful.” (See 29 U.S.C. §255(a).) Under the FLSA, a finding of “willfulness” requires that the employer either knew or showed reckless disregard with respect to the prohibited conduct. The Supreme Court of the United States has held that negligence alone does not equate to willfulness, and even if an employer’s efforts to comply with the FLSA were unreasonable (but not reckless or knowingly deficient), a finding of willfulness is unwarranted.
Last month, the Sixth Circuit clarified this standard in Su v. KDE Equine LLC. The U.S. Department of Labor (DOL) had sued KDE Equine, LLC (KDE) in June 2015, alleging KDE had failed to pay its horse groomers the correct overtime wages. In 2018, the U.S. District Court for the Western District of Kentucky granted summary judgment to KDE on the issue of willfulness, holding that, even when viewing the record in the light most favorable to the DOL, any violations by KDE were at most the result of negligence—not willfulness. The district court then assigned the case to a new judge, who conducted a bench trial in May 2019, which resulted in an award to KDE’s horse groomers for alleged unpaid overtime wages. (The bench trial did not address the willfulness issue, as the court had already ruled on this issue in granting summary judgment to KDE.)
In the first appeal, the Sixth Circuit vacated the grant of summary judgment to KDE on the willfulness issue, holding that “factual disputes” in the case raised “enough of a genuine issue of material fact to preclude summary judgment.” After remand to the district court, the parties again filed cross-motions for summary judgment.
This time, the district court granted summary judgment in favor of the DOL and awarded liquidated damages. The district court, therefore, came to different conclusions on the same issue and based on the same facts. One judge held that no reasonable factfinder could conclude that KDE’s violations were willful, and the other held that no reasonable factfinder could conclude that KDE’s violations were anything other than willful. KDE appealed the second ruling.
In the second appeal, the Sixth Circuit concluded that the disagreement between the two judges suggested a trial was necessary on the issues of willfulness and liquidated damages. Specifically, the Sixth Circuit determined that the legal dispute ultimately turned on contested issues of fact, including whether KDE acted with the requisite mental state. Especially important to the Sixth Circuit was the fact that the record contained no “smoking gun” evidence of any willfulness by KDE. For example, the parties did not identify any emails or text messages from KDE personnel showing that they knew they were committing FLSA violations. Thus, only by drawing factual inferences could the district court determine willfulness, and reasonable people could disagree about the validity of those inferences.
Key Takeaways
In the Sixth Circuit, the issue of whether a defendant willfully violated the FLSA is typically a factual issue best left for a jury, absent “smoking gun” evidence of the same. Further, defendants must act with the requisite mental state for their actions to be considered willful violations of the FLSA. The Sixth Circuit’s clarification of this issue stands to impact whether FLSA violations within the court’s jurisdiction will be subject to a two-year statute of limitations or the extended three-year period applicable to “willful” violations.
The BR International Trade Report: January 2025
Recent Developments
President Biden blocks Nippon Steel’s acquisition of US Steel. On January 3, President Biden announced that he would block the $15 billion sale of U.S. Steel to Japan’s Nippon Steel, citing national security concerns. President Biden’s decision came after the Committee on Foreign Investment in the United States (“CFIUS”) reportedly deadlocked in its review of the transaction and referred the matter to the President. U.S. Steel and Nippon Steel condemned the President’s action in a joint statement, arguing it marked “a clear violation of due process and the law governing CFIUS,” and on January 6 filed suit challenging the measure.
Canadian Prime Minister Justin Trudeau announces his resignation as party leader and prime minister. On January 6, Prime Minister Trudeau, who has served as the Liberal Party leader since 2013 and prime minister since 2015, declared his intention to “resign as party leader, as prime minister, after the party selects its next leader through a robust, nationwide, competitive process.” Governor General Mary Simon suspended, or prorogued, the Canadian Parliament until March 24 to allow the Liberal Party time to select its new leader—who will replace Trudeau as prime minister leading up to the general elections, which must be held by October 20. Separately, details have begun to leak of the potential Canadian retaliation against President-elect Trump’s threatened tariffs on Canadian goods. This retaliation could include tariffs on certain steel, ceramics, plastics, and orange juice.
U.S. Department of Commerce announces new export controls for AI chips. On January 13, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) issued a new interim final rule in an effort to keep advanced artificial intelligence (“AI”) chips from foreign adversaries. The interim final rule seeks to implement a three-tiered system of export restrictions. Under the new rule, (i) certain allied countries would face no new restrictions, (ii) non-allied countries would face certain restrictions, and (iii) U.S. adversaries would face almost absolute restrictions. BIS followed up with another rule on January 15 imposing heightened export controls for foundries and packaging companies exporting advanced chips, with exceptions for exports to an approved list of chip designers and for chips packaged by certain approved outsourced semiconductor assembly and test services (“OSAT”) companies.
Biden Administration imposes sanctions against Russia’s energy sector in parting blow. On January 10, the U.S. Department of the Treasury (“Treasury”) issued determinations authorizing the imposition of sanctions against any person operating in Russia’s energy sector and prohibiting U.S. persons from supplying petroleum services to Russia, and designated two oil majors—Gazprom Neft and Surgutneftegas—among others.
BIS issues final ICTS rule on connected vehicle imports and begins review of drone supply chain. On January 14, BIS issued a final rule under the Information and Communications Technology and Services (“ICTS”) supply chain regulations prohibiting the import of certain connected vehicles and connected vehicle hardware, capping a rulemaking process that started in March 2024. The rules, which will have a significant impact on the auto industry supply chain, will apply in certain cases to model year 2027 and in certain other cases to model year 2029. (See our alert on BIS’s proposed rule from September 2024.) Meanwhile, BIS launched an ICTS review on January 2 into the potential risk associated with Chinese and Russian involvement in the supply chains of unmanned aircraft systems, issuing an Advance Notice of Proposed Rulemaking.
China implicated in cyberattack on the U.S. Treasury. In December, a China state-sponsored Advanced Persistent Threat (“APT”) actor hacked Treasury, using a stolen key. Reports suggest that attack targeted Treasury’s Office of Foreign Assets Control (“OFAC”), which administers U.S. sanctions programs, among other elements of Treasury. Initial reporting indicated that only unclassified documents were accessed by hackers, although the extent of the attack is still largely unknown. The Chinese government has denied involvement.
United Kingdom joins the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. On December 15, the United Kingdom officially joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”)—a trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam—nearly four years after submitting its 2021 application. The United Kingdon is the first non-founding country to join the CPTPP.
Fallout of failed presidential martial law declaration continues in South Korea. South Korea continues to face unrest after last month’s short-lived declaration of martial law by President Yoon Suk Yeol, which led to his December 14 impeachment and January 15 arrest by anti-corruption investigators. On December 27, the National Assembly also impeached Prime Minister Han Duk-soo, who had been serving as acting president for the two weeks following Yoon’s impeachment. Finance Minister Choi Sang-mok now serves as acting president, and faces calls from South Korean investigators to order the presidential security service to comply with a warrant for President Yoon’s arrest.
Office of the U.S. Trade Representative initiates investigation into legacy chips from China. In late December, U.S. Trade Representative (“USTR”) Katherine Tai announced a new Section 301 investigation “regarding China’s acts, policies, and practices related to the targeting of the semiconductor industry for dominance.” The USTR will focus its initial investigation on “legacy chips,” which are integral to the U.S. manufacturing economy. The USTR began accepting written comments and requests to appear at the hearing on January 6. The public hearing is scheduled for March 11-12.
President-elect Donald Trump eyes the Panama Canal and Greenland. At the December 2024 annual conference for Turning Point USA, President-elect Donald Trumpcriticized Panama’s management of the Panama Canal, indicating that the United States should reclaim control due to “exorbitant prices” to American shipping and naval vessels and Chinese influence in the Canal Zone. Panamanian President José Raúl Mulino rejected Trump’s claims, stating “[t]he canal is Panamanian and belongs to Panamanians. There’s no possibility of opening any kind of conversation around this reality.” President-elect Trump also has sought to revive his 2019 proposal to purchase Greenland from Denmark, emphasizing its strategic position in the Arctic and untapped natural resources. In response, Greenland’s Prime Minister Mute Egede stated that Greenland is not for sale, but would “work with the U.S.—yesterday, today, and tomorrow.”
Nicolás Maduro sworn in for third presidential term, despite disputed election results. On January 10, Nicolás Maduro Moros was inaugurated for another six-year term as president of Venezuela, despite evidence he lost the election to opposition candidate Edmundo González Urrutia. Gonzalez, recognized by the Biden Administration as the president-elect of Venezuela, met with President Biden in the White House on January 6. In response to Maduro’s inauguration, the United States announced new sanctions programs against Maduro associates and extended the 2023 designation of Venezuela for Temporary Protected Status by 18 months.
U.S. Department of Defense designates more entities on Chinese Military Companies list. In its annual update of the Chinese Military Companies list (“CMC list”), the Department of Defense (“DoD”) added dozens of Chinese companies to the list, including well-known technology, AI, and battery companies, bringing the total number of CMC List entities to 134. Beginning in June 2026, DoD is prohibited from dealing with the newly designated companies.
European Union and China consider summit to mend ties. On January 14, European Council President António Costa and Chinese President Xi Jinping spoke via phone call, reportedly agreeing to host a summit on May 6, 2025—the 50th anniversary of EU-China diplomatic relations. The conversation comes just days before the inauguration of President-elect Donald Trump, who has threatened additional tariffs on Chinese goods and pushed the European Union to further decouple from China. Despite Beijing’s and Brussels’s willingness to meet, China-EU trade tensions remain high, highlighted by the European Commission’s October decision to impose duties of up to 35% on Chinese-made electric vehicles.
President Biden Issues Second Cybersecurity Executive Order
In light of recent cyberattacks targeting the federal government and United States supply chains, President Biden’s administration has released an Executive Order (the “Order”) in an attempt to modernize and enhance the federal government’s cybersecurity posture, as well as introduce and expand upon new or existing requirements imposed on third-party suppliers to federal agencies.
To the extent that the mandates set forth in this Order remain in place after President-elect Donald Trump takes office, third-party vendors and suppliers that contract with the federal government will need to ensure compliance with new or updated cybersecurity standards in order to remain eligible to contract with federal agencies. With that said, even if this Executive Order does not pass through to the next administration, it still provides general guidance on best practices for cybersecurity. While some of these practices may not be novel to the cybersecurity industry, it would serve as yet another guidance document for companies on what constitutes “reasonable security.”
Below is a high-level, non-exhaustive summary of some of the key highlights in the Executive Order. Please note that the mandates would take effect on different dates in accordance with the time frames discussed in the Order.
Federal Government’s Latest Attempt to Modernize its Cybersecurity Posture
The Executive Order underscores the importance of modernizing the federal government’s cybersecurity infrastructure to defend against cyber campaigns by foreign adversaries targeting the government.
One of the ways in which the new Order attempts to do this is by directing federal agencies to implement “strong identity authentication and encryption” across communications transmitted via the internet, including email, voice and video conferencing, and instant messaging.
In addition, as federal agencies have improved their cyber defenses, adversaries have targeted the weak links in agency supply chains and the products and services upon which the government relies. In light of this pervasive threat, the Executive Order places a strong emphasis on the need for federal agencies to integrate cybersecurity supply chain risk management programs into enterprise-wide risk management by requiring those agencies, via the Office of Management and Budget (OMB), to (i) comply with the guidance in the National Institute of Standards and Technology (NIST) Special Publication (SP) 800-161 (Cybersecurity Supply Chain Risk Management Practices for Systems and Organizations), and (ii) provide annual updates to OMB on their compliance efforts with respect to the same. The OMB’s requirements will address the integration of cybersecurity into the acquisition lifecycle through acquisition planning, source selection, responsibility determination, security compliance evaluation, contract administration, and performance evaluation.
The Executive Order also addresses the potential to use artificial intelligence (AI) to defend against cyberattacks by increasing the government’s ability to quickly identify new vulnerabilities and automate cyber defenses. Specifically, the Order directs certain agencies to prioritize research on topics related to AI and cyber defense, which include: (i) human-AI interaction methods to assist with defensive cyber analysis; (ii) security of AI coding assistance and the security of AI-generated code; (iii) methods for designing secure AI systems; and (iv) methods for prevention, response, remediation, and recovery from cyber incidents involving AI systems.
Beyond using modern technology to defend against increasing cyber threats, the Executive Order aims to centralize the government’s cybersecurity governance by expanding the Cybersecurity and Infrastructure Security Agency’s (CISA) role as the lead agency overseeing federal civilian agencies’ cybersecurity programs.
Enhancing and Expanding Upon Requirements Imposed on Third-Party Vendors of Federal Agencies
In addition to requiring federal agencies to adjust their cybersecurity posture, the Executive Order also aims to ensure that third-party vendors of federal agencies undertake various measures that are intended to help ensure the safety and security of our federal government and critical infrastructure systems, and strengthen the United States supply chains, from malicious cyber-attacks.
Third-Party Software Providers and Secure Software Development Practices
Part of the latest Executive Order focuses on transparency and deployment of secure software that meets standards set forth in the Biden administrations first cybersecurity Executive Order 14028, which was issued in May 2021. Under that Order, suppliers are required to attest that they adhere to secure software development practices, in language spurred by Russian hackers who infected an update of the widely used SolarWinds Orion software to penetrate the networks of federal agencies. Given that insecure software remains a challenge for both providers and users, it has continued to make the federal government and critical infrastructure systems vulnerable to additional malicious cyber incidents. This was recently illustrated by several attacks, including the 2024 exploitation of a vulnerability in a popular file transfer application used by multiple federal agencies.
Against this backdrop, the newly released Executive Order sets forth more robust attestation requirements for software providers that support critical government services and pushes for enhanced transparency by publicizing when these providers have submitted their attestations so that others can know what software meets the secure standards. In a similar vein, the new Order also aims to provide federal agencies with a coordinated set of practical and effective security practices to require when they procure software by calling for (i) updates to certain frameworks established by NIST that are adhered to by federal agencies – such as NIST SP 800-218 (Secure Software Development Framework) (SSDF) – for the secure development and delivery of software, (ii) the issuance of new requirements by OMB that derive from NIST’s updated SSDF to apply to federal agencies’ use of third-party software, and (iii) potential revisions to CISA’s Secure Software Development Attestation to conform to OMB’s requirements.
Vendors of Consumer Internet-of-Thing (IoT) Products and U.S. Cyber Trust Mark Label
To further protect the supply chain, the Executive Order recognizes the risks federal agencies face when purchasing IoT products. To address these risks, the Order requires the development of additional requirements for contracts with consumer IoT providers. Consumer IoT providers contracting with federal agencies will have to (i) comply with the minimum cybersecurity practices outlined by NIST, and (ii) carry United States Cyber Trust Mark labeling on their products. The initiative related to Cyber Trust Mark labeling was announced by the White House on January 7, 2025, and will require consumer IoT products to pass a U.S. cybersecurity audit and legally display the mark on advertising and packaging.
Cloud Service Providers
The Executive Order also requires the development of new guidelines for cloud service providers, which is unsurprising in light of the recent cyber attack on the U.S. Treasury Department where a sophisticated Chinese hacking group known as Silk Typhoon stole a digital key from BeyondTrust Inc.—a third-party service provider for the Treasury Department—and used it to access unclassified information maintained on Treasury Department user workstations. The breach utilized a technique known as token theft. Authentication tokens are designed to enhance security by allowing users to stay logged in without repeated password entry. However, if compromised, these tokens enable attackers to impersonate legitimate users, granting unauthorized access to sensitive systems.
While this incident is likely not the impetus behind the updated guidelines for cloud service providers, it underscores the importance of auditing third-party vendor security practices and taking measures to reduce the lifespan of tokens so as to limit their usefulness if stolen. These new guidelines under the Executive Order would mandate multifactor authentication, complex passwords, and storing cryptographic keys using hardware security keys for cloud service providers of federal agencies.
Key Takeaways
Although the fate of the Executive Order is uncertain with an incoming administration, organizations that contract with the federal government should closely monitor any developments as they will have to adhere to the new or enhanced cybersecurity requirements set out in the Order.
In addition, even if this Executive Order gets revoked by the incoming administration, organizations should not miss the opportunity to evaluate whether their cybersecurity programs comply with industry standard guidelines, such as NIST, as well as general best practices.
Record Number of Qui Tam Suits Filed by Whistleblowers in 2024
During the 2024 fiscal year a record 979 qui tam lawsuits were filed by whistleblowers under the False Claims Act and the U.S. government recovered over $2.4 billion in qui tam cases, according to statistics released yesterday by the U.S. Department of Justice (DOJ).
Whistleblowers and the government were party to 558 False Claims Act settlements and judgments in FY 2024, the second highest ever, and total recoveries exceeded $2.9 billion. This means that qui tam whistleblower cases accounted for more than 82% of False Claims Act recoveries during FY 2024.
“Year after year, the DOJ’s False Claims Act statistics reaffirm an undeniable truth: whistleblowing works,” says leading whistleblower attorney Stephen M. Kohn of Kohn, Kohn & Colapinto. “Thanks to their bravery and inside knowledge, whistleblowers recover billions of dollars for taxpayers every year.”
“It is imperative that the DOJ fully supports and empowers whistleblowers,” adds Kohn, who is also Chairman of the Board of National Whistleblower Center (NWC).
Under the False Claims Act, whistleblowers with knowledge of government contracting fraud may file qui tam lawsuits on behalf of the U.S. government. In successful qui tam cases, whistleblowers are eligible to receive between 15 and 30% of the recoveries.
Since the qui tam provisions were modernized in 1986, whistleblowers have allowed the government to recover over $55 billion in taxpayer dollars from fraudsters.
In September, a district court ruled that the False Claims Act’s qui tam provisions are unconstitutional. The U.S. government has urged the U.S. Court of Appeals for the Eleventh Circuit to reverse the district court ruling, noting that “other than the district court here, every court to have addressed the constitutionality of the False Claims Act’s qui tam provisions has upheld them.”
5 Trends to Watch: 2025 Energy Regulation and Development
As a new administration takes office in 2025, several new energy policy trends are expected to emerge, reflecting the inherent tension that often exists between political desires and economic realities. For example, while the incoming Trump administration has expressed a desire to claw back subsidies made available under the Inflation Reduction Act (IRA), Republican states have also been significant beneficiaries under the IRA. In other areas such as import tariffs, bipartisan support could emerge, with each party supporting the same result for entirely different reasons. Five trends that could result are discussed below.
Carbon-Related Tariffs Could Reshape Global Trade and Business Strategy. The convergence of increased bipartisan support for import tariffs, albeit for different reasons, could result in a significant shift in international trade dynamics and potential costs for energy companies. President-elect Donald Trump has frequently expressed support for import tariffs as a tool to boost domestic manufacturing, increase revenues, or to create leverage for international negotiations. Democrats have supported adoption of carbon tariffs and mechanisms like the Carbon Border Price Adjustment Mechanism (CBAM) that is being implemented in the European Union to level the playing field for businesses investing in emissions reduction. Adoption of the European Union’s CBAM has created new operational challenges for companies throughout the world, and similar measures in the United States would add to that already complex legal and business landscape. Companies invested in renewable energy projects or reliant on imported components like solar panels and batteries should ensure transparency and awareness of their supply chains, monitor ongoing developments, and prepare for potential cost increases and supply chain disruptions.
IRA Tax Credit Future Critical for Energy Investment Decisions. While Trump has expressed opposition to the IRA, the established tax credits present a complex economic and political challenge. Republican-controlled states have been significant beneficiaries of investments generated by IRA tax credits, and many traditional energy companies have already made substantial investments based on these incentives, particularly in energy production and carbon sequestration projects. This creates significant economic pressure to maintain existing credits. However, uncertainty looms over funds yet to be distributed by the government, as well as details of future Internal Revenue Service guidance on IRA tax credits. This creates the potential to impact short- and mid-term investment decisions and may create a temporary chilling effect on new investments as stakeholders await additional clarity on implementation guidelines. Companies should closely monitor these developments, particularly those with pending applications or planning future projects dependent on IRA incentives.
Support for Clean Hydrogen Production Tax Credit Requires a Balancing of Interests. The clean hydrogen market has experienced record investment growth, catalyzed by the IRA’s tax credits. Many of these investments are being made by traditional energy companies. However, uncertainty remains over whether and to what extent the IRS will adopt stringent requirements advocated by many environmental organizations. These would require the renewable electricity to be produced from newly constructed generation (additionality), in the same hour as hydrogen is produced (temporal matching), and in the same region as hydrogen is produced (geographic matching). How the IRS resolves these issues could have a material impact on future green hydrogen investments. Here, the Trump administration will again be confronted by tension between its more general desire to claw back IRA incentives and the economic reality of significant investment to date along with support by traditional energy companies for continued future investments and increased financial certainty. This balancing of interests may result in adoption of technology neutral policies that are intended to reduce barriers to entry and increase economic certainty for investors.
Carbon Sequestration Gains Momentum Across Political Spectrum. Carbon sequestration offers traditional energy companies and carbon emitters a rare point of bipartisan consensus in energy policy, offering traditional energy companies a pathway to sustainability while maintaining core operations. With former North Dakota Gov. Doug Burgum, a prominent carbon capture and storage (CCS) advocate, announced as Trump’s nominee to lead the Interior Department, the technology could see expanded support. Carbon sequestration appeals to many environmental advocates seeking emissions reductions and to fossil fuel companies seeking to leverage their existing expertise in pipeline construction and drilling to create new opportunities in a transitioning energy market. This dual benefit of maintaining energy security while reducing carbon footprint positions CCS as a critical component in the energy transition landscape and will continue to attract support from both environmental advocates and traditional energy producers in 2025.
Renewed Support for Conventional Energy Production. A significant transformation in federal energy policy is anticipated in 2025, with renewed support for conventional energy development, including through expanded availability of federal oil leases, reduced regulation, and reconsideration of regulations that have been adopted to increase the cost of fossil fuel energy production. The Bureau of Land Management’s current restrictions on coal mining are expected to be reversed, while federal leasing for oil, uranium, and other mineral resources is likely to accelerate. This shift extends beyond mere leasing policies, however, as the Department of Justice will likely adopt a more industry-friendly stance overall. For example, enforcement of environmental regulations, particularly regarding methane emissions and associated royalty payments, is likely to become less stringent. These changes could substantially reduce operational costs for natural gas producers and other conventional energy operators, potentially stimulating increased domestic energy production.