Guess Who’s Back? That’s Right – the CTA
Reporting Companies Are Now Required to Comply with the CTA by March 21, 2025
The U.S. District Court for the Eastern District of Texas lifted the stay on enforcement of the Corporate Transparency Act’s reporting requirements with its February 18, 2025, decision in Smith, et al. v. U.S. Department of the Treasury, et al.
As a result, BOI reporting is again mandatory.
As of the date of this alert, the new deadline for (a) reporting companies formed prior to January 1, 2024, to file an initial report and (b) all other reporting companies to file updated and/or corrected BOI reports is now March 21, 2025. However, if FinCEN previously gave a deadline later than March 21, 2025, to a reporting company (e.g., a disaster relief extension until April 2025), the later deadline continues to apply to that reporting company.
In FinCEN’s February 18, 2025 notice (available here: Beneficial Ownership Information Reporting | FinCEN.gov), it acknowledges that it may provide further guidance on reporting requirements prior to March 21, 2025, and as a result reporting companies may be granted additional time to comply with their BOI reporting obligations once this update (if any) is provided.
If you have been following our guidance to date, you have already gathered your BOI and should be able to file prior to March 21, 2025. If you still need assistance determining if your company is a “reporting company” or if you are required to report BOI, please reach out to your Bradley contact as soon as possible.
Legislative Note: The House of Representatives recently passed the “Protect Small Businesses from Excessive Paperwork Act,” which provides in part for an extension of the CTA reporting deadline until January 1, 2026, for reporting companies formed prior to January 1, 2024. That bill is now in committee in the Senate.
Listen to this article
DEI Executive Orders and Related Litigation
Executive Summary
On January 20, 2025, President Donald Trump signed 26 executive orders (EO), a record number of EOs signed by a President on Inauguration Day.1 In his first two weeks as President, a handful of these orders directly call for the end of diversity, equity and inclusion (DEI) and diversity, equity, inclusion and accessibility (DEIA) programs in both the public and private sectors. DEI is a framework for organizations to promote fair and equal opportunities throughout the organization. These EOs follow DEI bans that have been enacted by various states, terminating DEI programs and practices in their respective colleges and universities during former President Biden’s administration.2
President Trump called for each agency to conduct civil compliance investigations of “publicly traded corporations, large non-profit corporations or associations, foundations with assets of $500 million or more, State and local bar and medical associations and institutions of higher education with endowments over 1 billion dollars”3 to end “illegal discrimination and preferences.”4 President Trump holds that DEI programs are in violation of the Civil Rights Act of 1964, undermine national unity, and threaten the safety of the American people by “diminishing the importance of individuals merit, aptitude, hard work and determination when selecting people for jobs and services.”5 The EOs detail the first course of action – all federal agencies, coordinating with the Attorney General and Office of Management and Budget (OMB), must remove all DEI programming and policies from its records and amend rules and regulations to advance “the policy of individual initiative, excellence and hard work.”6
Download the latest summary of Executive Orders terminating DEI programs. The chart is current as of February 18, 2025, and will be updated as new information becomes available.
Implications: Enforcement of the Orders and Impact on Tax-Exempt Organizations
Federal agencies are working to revise their rules and regulations to redefine which DEI programs and policies are “illegal.” Generally, the Internal Revenue Service (IRS) has a mechanism in place known as the illegality doctrine that revokes an organization’s tax-exempt status if the organization is formed for an illegal purpose or its activities violate public policy, and a substantial part of the organization’s activities were in furtherance of that illegal purpose or violation of public policy. Under Section 501(c)(3) of the Internal Revenue Code, nonprofit organizations qualify for tax-exempt status when 1) the purpose of the organization is charitable; 2) the activities are not illegal, contrary to public policy, or in conflict with express statutory restrictions; and 3) the activities are in furtherance of the organization’s exempt purpose and are reasonably related to the accomplishment of the purpose.7 Depending on the structure of the orders and degree of enforcement, promoting DEI programs and policies in an organization could be subject to IRS investigation under the illegality doctrine. It is unclear from the orders what DEI initiatives would be contrary to public policy.
Federal agencies have issued guidance expanding upon what DEI programs fall under their authority. For example, a memorandum was released by the Department of Justice’s Civil Rights Division (Department) detailing that the Department will enforce all federal civil rights laws by investigating, eliminating and penalizing “illegal DEI and DEIA preferences, mandates, policies, programs and activities in the private sector and in educational institutions that receive federal funds.”8 The Department clarified that activities related to “educational, cultural or historical observance”9 are not prohibited under the law so long as they do not engage in exclusion or discrimination. Guidance has not been issued by the IRS categorizing DEI programs that would jeopardize an organization’s tax-exempt status.
Implications: Civil Litigation for Tax-Exempt Organizations
Tax-exempt organizations may be vulnerable to litigation brought by the federal government or private actors. The government has not brought civil lawsuits against tax-exempt organizations in violation of the EOs, however, private actors have begun filing lawsuits against organizations whose DEI practices are allegedly in violation of federal and state laws. On February 11, 2025, Pacific Legal Foundation, on behalf of a California high school student, filed a complaint against UCSF Benoiff Children’s Hospitals for its Community Health and Adolescent Mentoring Program for Success (CHAMPS) violating the Equal Protection Clause of the Fourteenth Amendment and California’s Proposition 209.10 CHAMPS is an internship that “supports minority high school students interested in health professions.”11 Pacific Legal Foundation argues that CHAMPS should not include a racial component when considering which students qualify for this program that provides internship experience and mentorship in the hospital setting.12
Other lawsuits were filed by private parties against organizations over their DEI practices before the EOs were signed. In one example, on January 12, 2025, the American Alliance for Equal Rights, a nonprofit organization whose mission is to “challeng[e] distinctions and preferences made on the basis of race and ethnicity”13, filed a complaint in U.S. District Court for the Middle District of Tennessee against McDonald’s for funding a college scholarship program for students with “at least one parent of Hispanic/Latino heritage.”14 The scholarship program is funded by McDonald’s and administered by International Scholarship & Tuition Services, a for-profit company. The parties ultimately settled with McDonald’s, agreeing to allow non-Latino individuals to qualify for the scholarship program.
Conversely, other organizations in opposition to the EOs argue that the EOs are unconstitutional and vague. Several lawsuits have been filed, seeking an injunction to block the federal government from enforcing these anti-DEI orders. The National Association of Diversity Officers in Higher Education, along with other plaintiffs, filed a complaint in US District Court for the District of Maryland Baltimore Division on February 3, 2025, against Trump and several federal agencies, that argues the anti-DEI orders violate several clauses under the Constitution including the Spending Clause, the Due Process Clause under the Fifth Amendment, Separation of Powers and Free Speech Clause under the First Amendment.15
Overall, these ongoing lawsuits are divided into substantive and procedural legal arguments on the constitutionality of the EOs and DEI practices. Opponents of DEI base their complaints on substantive laws, arguing that DEI programs and policies violate the Equal Protection Clause and Title VI Civil Rights Act of 1964 because they do not center meritorious qualifications for employment, internships, grants or other opportunities. On the other hand, defenders of DEI highlight the EOs are procedurally unconstitutional. They argue the executive branch cannot unilaterally enforce laws that go against the will of Congress (Spending Clause) and targeted organizations are not provided with sufficient notice about what is prohibited under the EOs by not defining key terms such as DEI or DEIA (Due Process Clause). These different legal approaches may shape the changing DEI legal landscape to adhere to the ruling in Students for Fair Admissions case or leave this issue open to further challenges for tax-exempt organizations to navigate the best practices that are in alignment with their charitable purposes while complying with federal state laws on DEI.
Suggested Actions
Review your organization’s internal governing documents, DEI policies and programs and how those policies and programs further your organization’s charitable purpose.
Survey the organization’s ongoing federal, state, and local grants to ensure they comply with current federal regulations to the extent they are funded through federal funds, or to the extent state funds do not have similar restrictions at the state level.
Review your organization’s scholarship programs, applications, joint venture agreements, and other relevant agreements. Pay special attention to the qualifications for applicants in any application forms, internal policies or external marketing materials. Additionally, evaluate any agreements that reference the organization’s charitable purpose, particularly those related to DEI practices. Consider ways to achieve your organization’s goals while minimizing risk exposure.
[1] See The Washington Post, Here are the executive actions and orders Trump Signed on Day 1 (January 13, 2025) https://www.washingtonpost.com/politics/2025/01/20/trump-executive-orders-list/.
[2] See Best Colleges, These States’ Anti-DEI Legislation May Impact Higher Education (January 22, 2025) https://www.bestcolleges.com/news/anti-dei-legislation-tracker/.
[3] See White House, Ending Illegal Discrimination and Restoring Merit-Based Opportunity (January 21, 2025) https://www.whitehouse.gov/presidential-actions/2025/01/ending-illegal-discrimination-and-restoring-merit-based-opportunity/.
[4] Id.
[5] Id.
[6] Id.
[7] Rev. Rul. 80-278, 1980-2 C.B. 175.
[8] Department of Justice Ending Illegal DEI and DEIA Discrimination and Preferences (February 5, 2025) https://www.justice.gov/ag/media/1388501/dl?inline.
[9] Id.
[10] See Pacific Legal Foundation, UCSF healthcare internship selects participants based on race, denying students equal access to educational opportunities https://pacificlegal.org/case/ucsf-minority-healthcare-scholarship-discrimination/.
[11] See UCSF Benoiff Children’s Hospitals, CCCH Programs CHAMPS https://www.ucsfbenioffchildrens.org/about/ccch/programs/champs.
[12] G.H., a minor, by Rebecca Hooley the mother, legal guardian, and next friend of G.H., Plaintiffs v. UNIVERSITY OF CALIFORNIA BOARD O F REGENTS; USCSF BENIOFF CHILDREN’S HOSPITALS; Michelle Ednacot, in her individual and official capacity as the CHAMPS program manager at UCSF BENOIFF CHILDREN’S HOSPITAL OAKLAND; Dr. Nicolas Holmes, in his individual and official capacity as President of UCSF BENOIFF CHILDREN’S HOSPITALS; and Janet Reilly, in her official capacity as President of the UNIVERSITY OF CALIFORNIA BOARD OF REGENTS, Defendants, 4:25-cv-01399, (N.D. Cal. 2/11/2025).
[13] See American Alliance for Equal Rights, https://americanallianceforequalrights.org/.
[14] American Alliance for Equal Rights v. McDonald’s Corporation; McDonald’s USA, LLC; International Scholarship & Tuition Services, Inc., 3:25-cv-00050, (M.D. Tenn. 1/12/2025).
[15] NATIONAL ASSOCIATION OF DIVERSITY OFFICERS IN HIGHER EDUCATION; American Association of University Professors; Restaurant Opportunities Centers United; Mayor and City Council of Baltimore, Maryland, Plaintiffs, v. Donald J. TRUMP, in his official capacity as President of the United States; Department of Health and Human Services; Dorothy Fink, in her official capacity as Acting Secretary of Health and Human Services; Department of Education; Denise Carter, in her official capacity as Acting Secretary of Education; Department of Labor; Vincent Micone, in his official capacity as Acting Secretary of Labor; Department of Interior; Doug Burgum, in his official capacity as Secretary of the Interior; Department of Commerce; Jeremy Pelter, in his official capacity as Acting Secretary of Commerce; Department of Agriculture; Gary Washington, in his official capacity as Acting Secretary of Agriculture; Department of Energy; Ingrid Kolb, in her official capacity as Acting Secretary of Energy; Department of Transportation; Sean Duffy, in his official capacity as Secretary of Transportation; Department of Justice; James McHenry, in his official capacity as Acting Attorney General; National Science Foundation; Sethuraman Panchanathan, in his official capacity as Director of the National Science Foundation; Office of Management and Budget; Matthew Vaeth, in his official capacity as Acting Director of the Office of Management and Budget, Defendants., 2025 WL 391958 (D.Md.)
January 2025 ESG Policy Update— Australia
Australian Update
Mandatory Climate-Related Financial Disclosures Come Into Effect
The first phase of the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth) (Bill) commenced on and from 1 January 2025. The Bill amends the Corporations Act 2001 (Cth) to mandate that sustainability reporting be included in annual reports.
The first phase requires Group 1 entities to disclose climate-related risks and emissions across their entire value chain. Group 2 entities will need to comply from 2026, followed by Group 3 entities from 2027.
First Annual Reporting Period Commences on
Reporting Entities Which Meet Two out of Three of the Following Reporting Criteria
National Greenhouse and Energy Reporting (NGER) Reporters
Asset Owners
Consolidated Revenue for Fiscal Year
Consolidated Gross Assets at End of Fiscal Year
Full-time Equivalent (FTE) Employees at End of Fiscal Year
1 Jan 2025(Group 1)
AU$500 million or more.
AU$1 billion or more
500 or more.
Above the NGERs publication threshold.
N/A
1 July 2026(Group 2)
AU$200 million or more.
AU$500 million or more.
250 or more.
All NGER reporters.
AU$5 billion or more of the assets under management.
1 July 2027(Group 3)
AU$50 million or more.
AU$25 million or more.
100 or more.
N/A
N/A
Mandatory reporting will initially consist only of climate statements and applicable notes before expanding to include other sustainability topics, including nature and biodiversity when the relevant International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards are issued by the International Sustainability Standards Board (ISSB).
Entities are also not required to report Scope 3 emissions, being those generated from an entity’s supply chain, until the second year of reporting. Further, there is a limited immunity period of three years for Scope 3 emissions in which actions in respect of statements made may only be commenced by the Australian Securities and Investments Commission (ASIC) or where such statements are criminal in nature.
Further information on the mandatory climate-related disclosures can be found here.
New Vehicle Efficiency Standard Comes into Effect
On 1 January 2025, the New Vehicle Efficiency Standard (NVES) came into effect.
The NVES aims for cleaner and cheaper cars to be sold in Australia and to cut climate pollution produced by new cars by more than 50%. The NVES aims to prevent 20 million tonnes of climate pollution by 2030.
Under the NVES, car suppliers may continue to sell any vehicle type they choose but will be required to sell more fuel-efficient models to offset any less efficient models they sell. Car suppliers will receive credits if they meet or beat their fuel efficiency targets.
However, if a supplier sells more polluting cars than their target, they will have two years to trade credits with a different supplier or generate credits themselves before a penalty becomes payable.
The NVES aims to bring Australia in line with the majority of the world’s vehicle markets, and global manufacturers will need to comply with Australia’s laws. This means that car suppliers will need to provide Australians with cars that use the same advanced fuel-efficient technology provided to other countries.
For Australians who cannot afford an electric vehicle, it is hoped the NVES will encourage car companies to introduce more inexpensive options. There are approximately 150 electric and plug-in hybrids available in the US, but less than 100 on the market in Australia. There are also currently only a handful of battery electric vehicles in Australia that regularly retail for under AU$40,000.
Inaugural Australian Anti-Slavery Commissioner Appointed
On 2 December 2024, Mr Chris Evans commenced a five-year term as the inaugural Australian Anti-Slavery Commissioner (Commissioner), having been appointed in November 2024.
Mr Chris Evans previously served as CEO of Walk Free’s Global Freedom Network “Walk Free”. He and Walk Free played a significant role in campaigning for the introduction of the Modern Slavery Act 2018 (Cth) (Modern Slavery Act).
Prior to his time at Walk Free, Mr Evans was a Senator representing Western Australia, serving for two decades.
The Australian Government has committed AU$8 million over the forward estimates to support the establishment and operations of the Commissioner.
Among other functions, the Commissioner is to promote business compliance with the Modern Slavery Act, address modern slavery concerns in the Australian business community and support victims of modern slavery. We expect the Commissioner will take a pro-active role in implementing the McMillan Report’s recommendations for reform of the Modern Slavery Act supported by the Australian Government including penalties on reporting companies who fail to submit modern slavery statements on time and in full and the Commissioner’s disclosure of locations, sectors and products considered to be high-risk for modern slavery.
For more information on the role of the Commissioner, you can read our June 2024 ESG Policy Update – Australia.
View From Abroad
Trump Administration Provides Early Insight Into Their Position on ESG-Related Regulations
On 20 January 2025, shortly after new US President Donald Trump was inaugurated, the White House published the America First Priorities (Priorities). Several of these priorities are relevant to ESG-related policies and have been incorporated into Executive Orders and Memoranda issued by President Trump.
These Priorities, Executive Orders and Memoranda provide an insight into the new administration’s position on ESG-related regulations and include the following:
Reviewing for rescission numerous regulations that impose burdens on energy production and use, including mining and processing of non-fuel minerals;
Empowering consumer choice in vehicles, showerheads, toilets, washing machines, lightbulbs and dishwashers;
Declaring an “energy emergency” and using all necessary resources to build critical infrastructure;
Prioritising economic efficiency, American prosperity, consumer choice and fiscal restraint in all foreign engagements that concern energy policy;
Withdrawing from the Paris Climate Accord;
Withdrawing from any agreement or commitment under the UN Framework Convention on Climate Change and revoking any financial commitment made under the Convention;
Revoking and rescinding the US International Climate Finance Plan and policies implemented to advance the US International Climate Finance Plan;
Freezing bureaucrat hiring except in essential areas; and
Ordering those officials tasked with overseeing diversity, equity and inclusion (DEI) efforts across federal agencies be placed on administrative leave and halting DEI initiatives taking place within the government.
It is expected that the Trump administration will continue to prioritise economic growth over the perceived costs of ESG-related initiatives. Corporate ESG obligations may decrease, potentially creating short-term reporting relief and less shareholder pressure on companies to adopt ESG-focused policies.
Any relaxation of ESG-related regulations in the US may have extra-territorial effects on other jurisdictions as they determine whether to pause, roll-back or expand their reform programs in response. Multinational enterprises may find it difficult to navigate these potentially increasingly divergent national regimes.
UK Accounting Watchdog Recommends Sustainability Reporting Standards
On 18 December 2024, the Financial Reporting Council, as secretariat to the UK Sustainability Disclosure Technical Advisory Committee (TAC), recommended the UK Government adopt International Sustainability Standards Board reporting standards, IFRS S1 (Sustainability-related financial information) and IFRS S2 (Climate-related disclosures) (the Standards).
The purpose of these Standards is to provide useful information for primary users of general financial reports. Broadly:
IFRS S1 provides a global framework for sustainability-related financial disclosures and addresses emissions, waste management and environmental risks; and
IFRS S2 focuses on climate risks and opportunities.
Adopting these Standards in tandem ensures that companies account for their full environmental impact. TAC has also recommended minor amendments to the Standards for better suitability to the UK’s regulatory landscape. For example, extending the ‘climate-first’ reporting relief in IFRS S1 will allow entities to delay reporting sustainability-related information, by up to two years. This will allow companies to prioritise climate-related reporting.
This endorsement comes after the TAC was commissioned by the previous government to provide advice on whether the UK Government should endorse the international reporting Standards. Sally Duckworth, chair of TAC, stated that the adoption of these reporting standards is “a crucial step in aligning UK businesses with global reporting practices, promoting transparency and supporting the transition to a sustainable economy”.
With more than 30 jurisdictions representing 57% of global GDP having already adopted the Standards, the introduction of these Standards in the UK will align UK companies with international reporting standards and provide greater transparency and accountability, which is important for achieving sustainability goals and setting strategies going forward.
Sustainable Investing Spotlight for 2025
Whilst Europe has dominated the sustainable investing charge with regulators prioritising disclosure and reporting initiatives, 2025 is set to be a challenging year with the Trump administration expected to reorder priorities in the US that are likely to impact the sustainability landscape going forward. Investment data analytics from Morningstar predicts that there will be six themes that will shape the coming year:
Regulations
The US Securities and Exchange Commission (SEC) may reverse rules requiring public companies in the US to disclose greenhouse gas emissions and climate-related risks and roll back a number of other sustainability related initiatives. This is at odds with the European Union and a number of other jurisdictions globally who are focusing on rolling out climate and sustainability disclosures.
Funds Landscape
Fund-naming guidelines that have been introduced by the European Securities and Markets Authority will see a large number of sustainable investment funds across the EU rebrand, which is likely to reshape the landscape. Off the back of the de-regulation occurring in the U.S., there is an expectation that the number of sustainable investment funds will shrink. It will be interesting to see how the market responds and what investor appetite for these products across the rest of the world, will be.
Transition Investing
Investors will look to invest in opportunities arising out of the energy transition. Institutional investment is vital to meet targets, with focus predicted to be on renewable energy and battery production.
Sustainable Bonds
It is predicted that sustainability related bonds will outstrip US$1 trillion once again. Institutional investors have been targeting sustainability related bonds to aid their net zero efforts. Global players like the EU are poised to play a critical role in the global energy transition and boost the sustainability bond markets by implementing regulatory frameworks to encourage investment.
Biodiversity Finance
Nature will increasingly be recognised as an asset class, thanks to global initiatives aimed at correcting the flawed pricing signals that have contributed to biodiversity loss. These efforts seek to acknowledge the true value of nature and address the ongoing degradation of biodiversity. There is an appetite for nature-based investment, but regulatory uncertainty and uncharted pathways remain a deterrent.
Artificial Intelligence
This prominent investment theme in 2024 is likely to continue well into this year. However, there are risks associated with this asset class. The rapid adoption and volatile regulations are proving costly, along with the immense amount of energy generation required to run artificial intelligence fuelled data centres.
Canada Releases First Sustainability Disclosure Standards in Alignment with ISSB Global Framework
The Canadian Sustainability Standards Board (CSSB) has released its first Canadian Sustainability Disclosure Standards (CSDS), which align closely with IFRS Sustainability Disclosure Standards whilst also addressing considerations specific to Canada.
Broadly, and similar to IFRS Sustainability Disclosure Standards:
CSDS 1 establishes general requirements for the disclosure of material sustainability-related financial information; and
CSDS 2 focuses on disclosures of material information on critical climate-related risks and opportunities.
The CSSB has also introduced the Criteria for Modification Framework which outlines the criteria under which the IFRS Sustainability Disclosure Standards developed by the ISSB may be modified for Canadian entities.
CSSB Interim Chair, Bruce Marchand has stated that the introduction of these standards “signifies our commitment to advancing sustainability reporting that aligns with international baseline standards – while reflecting the Canadian context. These standards set the stage for high-quality and consistent sustainability disclosures, essential for informed decision-making and public trust”.
Other features of the CSDS include:
Transition relief through extended timelines for adoption;
Its voluntary adoption by entities, unless mandated by governments or regulators in the future; and
Its role in being the first part of a multi-year strategic plan by the CSSB which includes building partnerships with First Nations, Métis and Inuit Peoples to ensure Indigenous perspectives are integrated into sustainability-related standards.
The authors would like to thank lawyer Harrison Langsford and graduates Daniel Nastasi and Katie Richards for their contributions to this alert.
Nathan Bodlovich, Cathy Ma, Daniel Shlager, and Bernard Sia also contributed to this post.
The ReAIlity of What an AI System Is – Unpacking the Commission’s New Guidelines
The European Commission has recently released its Guidelines on the Definition of an Artificial Intelligence System under the AI Act (Regulation (EU) 2024/1689). The guidelines are adopted in parallel to commission guidelines on prohibited AI practices (that also entered into application on February 2), with the goal of providing businesses, developers and regulators with further clarification on the AI Act’s provisions.
Key Takeaways for Businesses and AI Developers
Not all AI systems are subject to strict regulatory scrutiny. Companies developing or using AI-driven solutions should assess their systems against the AI Act’s definition. With these guidelines (and the ones of prohibited practices), the European Commission is delivering on the need to add clarification to the core element of the act: what is an AI system?
The AI Act defines an AI system as a machine-based system designed to operate with varying levels of autonomy and that may exhibit adaptiveness after deployment. The system, for explicit or implicit objectives, infers from input data how to generate outputs – such as predictions, content, recommendations or decisions – that can influence physical or virtual environments.
One of the most significant clarifications in the guidelines is the distinction between AI systems and “traditional software.”
AI systems go beyond rule-based automation and require inferencing capabilities.
Traditional statistical models and basic data processing software, such as spreadsheets, database systems and manually programmed scripts, do not qualify as AI systems.
Simple prediction models that use basic statistical techniques (e.g., forecasting based on historical averages) are also excluded from the definition.
This distinction ensures that compliance obligations under the AI Act apply only to AI-driven technologies, leaving other software solutions outside of its scope.
Below is a breakdown of what the guidelines bring for each of the seven components:
Machine-based systems – AI systems rely on computational processes involving hardware and software components. The term “machine-based” emphasizes that AI systems are developed with and operate on machines, encompassing physical elements such as processing units, memory, storage devices and networking units. These hardware components provide the necessary infrastructure for computation, while software components include computer code, operating systems and applications that direct how the hardware processes data and performs tasks. This combination enables functionalities like model training, data processing, predictive modeling, and large-scale automated decision-making. Even advanced quantum computing systems and biological or organic systems qualify as machine-based if they provide computational capacity.
Varying levels of autonomy – AI systems can function with some degree of independence from human intervention. This autonomy is linked to the system’s capacity to generate outputs such as predictions, content, recommendations or decisions that can influence physical or virtual environments. The AI Act clarifies that autonomy involves some independence of action, excluding systems that require full manual human involvement. Autonomy also spans a spectrum – from systems needing occasional human input to those operating fully autonomously. This flexibility allows AI systems to interact dynamically with their environment without human intervention at every step. The degree of autonomy is a key consideration for determining if a system qualifies as an AI system, impacting requirements for human oversight and risk-mitigation measures.
Potential adaptiveness – Some AI systems change their behavior after deployment through self-learning mechanisms, though this is not a mandatory criterion. This self-learning capability enables systems to automatically learn, discover new patterns or identify relationships in the data beyond what they were initially trained on.
Explicit or implicit objectives – The system operates with specific goals, whether predefined or emerging from its interactions. Explicit objectives are those directly encoded by developers, such as optimizing a cost function or maximizing cumulative rewards. Implicit objectives, however, emerge from the system’s behavior or underlying assumptions. The AI Act distinguishes between the internal objectives of the AI system (what the system aims to achieve technically) and the intended purpose (the external context and use-case scenario defined by the provider). This differentiation is crucial for regulatory compliance, as the intended purpose influences how the system should be deployed and managed.
Inferencing capability – AI systems must infer how to generate outputs rather than simply executing manually defined rules. Unlike traditional software systems that follow predefined rules, AI systems reason from inputs to produce outputs such as predictions, recommendations or decisions. This inferencing involves deriving models or algorithms from data, either during the building phase or in real-time usage. Techniques that enable inference include machine learning approaches (supervised, unsupervised, self-supervised and reinforcement learning) as well as logic- and knowledge-based approaches.
Types of outputs – AI systems generate predictions, content, recommendations or decisions that shape both their physical and virtual environments. Predictions estimate unknown values based on input data; content generation creates new materials like text or images; recommendations suggest actions or products; and decisions automate processes traditionally managed by human judgement. These outputs differ in the level of human involvement required, ranging from fully autonomous decisions to human-evaluated recommendations. By handling complex relationships and patterns in data, AI systems produce more nuanced and sophisticated outputs compared to traditional software, enhancing their impact across diverse domains.
Environmental influence – Outputs must have a tangible impact on the system’s physical or virtual surroundings, exposing the active role of AI systems in influencing the environment they operate within. This includes interactions with digital ecosystems, data flows and physical objects, such as autonomous robots or virtual assistants.
Why These Guidelines Matter
The AI Act introduces a harmonized regulatory framework for AI developed or used across the EU. Core to its scope of application is the definition of “AI system” (which then spills over onto the scope of regulatory obligations, including restrictions on prohibited AI practices and requirements for high-risk AI systems).
The new guidelines serve as an interpretation tool, helping providers and stakeholders identify whether their systems qualify as AI under the act. Among the key takeaways is the fact that the definition is not to be applied mechanically, but should consider the specific characteristics of each system.
AI systems are a reA(I)lity; if you have not started assessing the nature of the one you develop or the one you procure, now is the time to do so. While the EU AI Act might be considered by many as having missed its objective (a human-centric approach to AI that fosters innovation and sets a level playing field), it is here to stay (and its phased application is on track).
February 14 Dear Colleague Letter Signals Enforcement focus on Race-based preferences, DEI
On February 14, 2025, the U.S. Department of Education’s Office for Civil Rights (OCR) issued a Dear Colleague Letter (DCL) which, for the first time, previewed how the Education Department under the second Trump administration will scrutinize race-based preferences and DEI initiatives in K-12 and higher education.
As many college administrators have been expecting, the DCL reflects the administration’s view that any preferential treatment based on race is discriminatory. This includes some facially neutral efforts to increase on-campus racial diversity and some DEI-specific training and programming.
The DCL provides the following key insights:
The administration will seek to expand the prohibition on race-based preferences in admissions by broadly interpreting the Supreme Court’s decision in Students for Fair Admissions v. Harvard to apply to other areas of college and university operations including financial aid, hiring, training, and programming.
The administration views race-based segregation, including in dormitories, graduation ceremonies, and facilities as drawing unlawful race-based designations, even if it is voluntary.
The administration specifically listed programming that includes explicit race-consciousness, including “under the banner of DEI,” as an example of race-based discrimination, which it referred to as “toxic[]” and “indoctrinat[ion.]”
The DCL states that “DEI programs” that “teach students that certain racial groups bear unique moral burdens that others do not” are discriminatory and “stigmatize students who belong to particular racial groups.” It is unclear how the administration plan to regulate curriculum that it views as discriminatory in this way, and, if so, whether that regulation will apply to higher education.
The DCL closes by directing educational institutions to: (1) ensure that their policies and actions comply with existing civil rights law; (2) cease all efforts to circumvent prohibitions on the use of race by relying on proxies or other indirect means to accomplish such ends; and (3) cease all reliance on third-party contractors, clearinghouses, or aggregators that are being used by institutions in an effort to circumvent prohibited uses of race.
The DCL also promises that more guidance is forthcoming in a matter of weeks. Please stay tuned and call your Hunton lawyer with any concerns related to compliance with federal law or interpretation of Department of Education guidance.
Financing and Debt Issuance for Data Center Developers: Insights from Womble Attorneys
Data center developers face a myriad of challenges when it comes to financing and debt issuance. In this blog post, Womble Of Counsel Barlow Keener delves into the intricacies of these topics with Womble Of Counsel David Beckstead and Womble Of Counsel Art Howson. The conversation covers essential aspects such as project finance models, revenue streams, and risk management. This comprehensive discussion aims to provide valuable insights for data center developers looking to enhance their financial strategies.
Barlow Keener: David, what are the primary considerations for data center developers when it comes to debt financing?
David Beckstead: When considering debt financing for data centers, it is crucial to understand that lenders are primarily interested in the project’s revenue streams and risk profile. They look for an acceptable return given the risk involved, and this includes examining co-location agreements, tenancy agreements, and the overall financial model. Lenders scrutinize the project’s utility supply, including power and water, and the potential impact of delays or downtime on revenue. Additionally, lenders are interested in the project’s location, proximity to power and water infrastructure, and the availability of fiber cables.
Barlow Keener: How do lenders assess the risk associated with data center projects?
David Beckstead: Lenders assess risk by evaluating various factors such as the project’s revenue streams, the creditworthiness of tenants, and the terms of service level agreements. Lenders are particularly interested in the service level agreements (“SLAs”), which outline minimum downtime and construction delay provisions.
Barlow Keener: Can you explain the concept of limited recourse financing in the context of data centers?
David Beckstead: Limited recourse financing means that the data center project’s assets are used to secure the lending, and the revenue streams are what lenders rely on for repayment. This model is common in project finance and is particularly relevant for data centers due to their unique infrastructure requirements.
Barlow Keener: What role do green loan principles play in data center financing?
David Beckstead: Green loan principles, such as those issued by Loan Market Association (“LMA”), the Asia Pacific Loan Market Association (“APLMA”), and the Loan Syndications and Trading Association (“LSTA”), are increasingly important in data center financing. These principles require data center operators to maintain certain energy and environmental design standards, which can make the project more attractive to lenders. Data center operators are expected to adhere to standards such as LEED certification, which focuses on energy efficiency and environmental sustainability.
Barlow Keener: Moving on beyond green loan principles, Art, how do lenders approach the construction phase of data center projects?
Art Howson: During the construction phase, lenders often require completion guarantees and financial support from sponsors, including minimum equity contribution requirements for the project. From a due diligence perspective, they typically review the project construction schedule closely in comparison with terms of the project’s revenue contracts, and structure the loan documents to mitigate the risk of potential delays or cost overruns.. Lenders may also require reserve to maintain funds on deposit to cover loan payments or other project costs.
Barlow Keener: Art, what are the key elements of a co-location agreement that lenders focus on?
Art Howson: Lenders focus on the terms of the data center’s revenue contracts, including the length of the lease, early termination risks, and the creditworthiness of tenants. They typically seek the ability to cure defaults under key project contracts, to protect their interests in case of default and ensure that the project’s revenue stream remains intact. And they will want to confirm that the tenancy agreements can be assigned to a new project owner if necessary, given the importance of those contracts as collateral for the loan.
Barlow Keener: How do lenders evaluate the supply of utilities for data center projects?
David Beckstead: Lenders evaluate the supply of utilities by examining the project’s power and water infrastructure. Lenders to data centers today are more than ever particularly interested in how power is secured, whether through dedicated power purchase agreements (“PPAs”) or other arrangements, as this is a critical factor for data center operations. Lenders will also assess the project’s proximity to power plants and water sources to ensure reliable utility supply.
Barlow Keener: Art, what are the common risk allocation strategies in data center financing?
Art Howson: Common risk allocation strategies include limitations on the amount of debt that can be advanced, in relation to equity contributions or to the projected value of the project. Lenders may also require the project to have payment and performance bonds in place with the key construction contractors and equipment suppliers, to mitigate risks outside of the borrower’s direct control.
Barlow Keener: In conclusion, financing and debt issuance for data center developers require a thorough understanding of various financial models, risk assessment strategies, and contractual terms. By focusing on revenue streams, utility supply, and green loan principles, data center developers can enhance their financial strategies and secure the necessary funding for their projects. The insights provided by Womble Of Counsel David Beckstead and Womble Of Counsel Art Howson offer valuable guidance for navigating the complexities of data center financing. As the data center industry continues to evolve, staying informed about these critical aspects will be essential for success.
New Data Privacy Working Group Created by US House Committee
On February 12, 2025, Congressman Brett Guthrie (R-KY), Chairman of the House Committee on Energy and Commerce, and Congressman John Joyce, M.D. (R-PA), Vice Chairman of the House Committee on Energy and Commerce, announced the establishment of a comprehensive data privacy working group (the Working Group). The Working Group also includes Representatives Morgan Griffiths (R-VA), Troy Balderson (R-OH), Jay Obernolte (R-CA), Russell Fry (R-SC), Nick Langworthy (R-NY), Tom Kean (R-NJ), Craig Goldman (R-TX), and Julie Fedorchak (R-ND).
The House Republicans created the Working Group to develop new federal data privacy standards. The Working Group welcomes input from a broad range of stakeholders. Stakeholders interested in engaging with the Working Group can reach out to [email protected] for more information.
This initiative presents an opportunity for companies to actively engage in shaping emerging federal data privacy standards. Feel free to contact us for guidance. We will monitor the Working Group’s progress and keep clients apprised of key developments as new federal privacy standards take shape.
“We strongly believe that a national data privacy standard is necessary to protect Americans’ rights online and maintain our country’s global leadership in digital technologies, including artificial intelligence. That’s why we are creating this working group, to bring members and stakeholders together to explore a framework for legislation that can get across the finish line,” said Chairman Guthrie and Vice Chairman Joyce. “The need for comprehensive data privacy is greater than ever, and we are hopeful that we can start building a strong coalition to address this important issue.”
energycommerce.house.gov/..
EDPB Adopts Statement on Age Assurance and Creates a Task Force on AI Enforcement
On February 12, 2025, during its February 2025 plenary meeting, the European Data Protection Board (EDPB) adopted a statement on assurance, which outlines ten principles concerning the processing of personal data when determining an individual’s age or age range. The EDPB is also cooperating with the European Commission on age verification in the context of the Digital Services Act (DSA) working group.
In addition, the EDPB extended the scope of the ChatGPT task force to artificial intelligence (AI) enforcement. The EDPB members underlined the need to coordinate the actions of the Data Protection Authorities (DPAs) regarding urgent sensitive matters and will set up a quick response team for that purpose.
In the statement, the EDPB outlines ten key principles to follow to implement a governance framework that complies with the General Data Protection Regulation (GDPR) to protect children and how their personal data is processed. The EDPB Chair, Anu Talus, stressed the importance of balancing the responsible use of AI within the GDPR framework. Businesses should ensure compliance with these evolving data protection standards, and our team is available to provide guidance on navigating the GDPR requirements and implementing effective compliance strategies.
“The GDPR is a legal framework that promotes responsible innovation. The GDPR has been designed to maintain high data protection standards while fully leveraging the potential of innovation, such as AI, to benefit our economy. The EDPB’s task force on AI enforcement and the future quick response team will play a crucial role in ensuring this balance, coordinating the DPAs’ actions and supporting them in navigating the complexities of AI while upholding strong data protection principles.” – EDPB Chair Anu Talus
www.edpb.europa.eu/…
Micro-captive Insurance Reportable Transactions and the Reporting Requirements
Certain micro-captive transactions are back to being reportable. On January 14, 2025, the Treasury Department and the Internal Revenue Service (“IRS”) published final regulations (the “Regulations”) that named some micro-captive insurance transactions as listed transactions and others as transactions of interest. See Internal Revenue Service, Treasury. “Micro-Captive Listed Transactions and Micro-Captive Transactions of Interest. 90 Fed. Reg. 3534 (Jan. 14, 2025). These formal rules replace the reporting regime that developed first under IRS Notice 2016-66, which was voided for failure to comply with the Administrative Procedure Act.
A “Captive” elects 831(b) treatment and is at least 20% owned by an Insured-related party
The Regulations apply only to certain companies defined as “Captives.” A “Captive” is an entity that elects to be taxed under Section 831(b) of the Internal Revenue Code, issues or reinsures a contract that any party treats as insurance when filing federal taxes, and is at least 20 percent owned by an “Insured”, an “Owner” of an Insured, or a person related to an Insured or an Owner. The Regulations further define an “Insured” as any person who enters a contract with a Captive and treats amounts paid under the contract as insurance premiums for federal income tax purposes. An “Owner” is someone with a direct or indirect ownership interest in an Insured or its assets.
Reportability depends on loss ratio and related-party financing
The Regulations define the micro-captive listed transaction and the micro-captive transaction of interest based on two core ideas: loss ratio and related-party financing. The regulations calculate the loss ratio as:
The loss ratio is measured over a period of years, not just a single taxable year. For a transaction of interest, the loss ratio is measured over ten years or the life of the Captive, whichever is shorter. If the loss ratio is less than 60 percent over those years, then the Captive is a transaction of interest. For a listed transaction, the time period is the most recent ten years. So, a Captive must be at least ten years old to become a listed transaction. If the loss ratio over the most recent ten years is less than 30 percent, then the Captive may be a listed transaction.
The Regulations’ other focus is related-party financing. Related-party financing occurs when the Captive makes funds available to an Insured, an Owner, or some other related party through a non-taxable arrangement (e.g., a loan) and the amount made available is greater than the Captive’s cumulative after-tax earnings on investments. A Captive that has engaged in a related party financing in the last five years with an outstanding balance in effect at any point during an open tax year is a transaction of interest. If that Captive also has a loss ratio less than 30 percent over the most recent ten years, then the Captive is a listed transaction.
This interaction can be summarized in a convenient tabular format:
A transaction of interest is one where the IRS requires additional information to consider whether tax avoidance is present. A listed transaction is one where the IRS believes tax avoidance is present. Listed transactions are treated more consequentially than transactions of interest. Therefore, a Captive that meets both categories must file as a listed transaction.
“Seller’s Captives” and some employee-benefits captives are excluded
The Regulations offer two exceptions, both of which are excluded from the definition of a transaction of interest or listed transaction. First, Captives for which the U.S. Department of Labor has issued a Prohibited Transaction exception and that provide insurance for employee compensation or benefits are excluded.
Second, “Seller’s Captives” are also excluded. A “Seller” is an entity that sells products or services to customers and also sells those customers insurance contracts connected to the goods or services. A “Seller’s Captive” is a Captive related to a Seller, a Seller’s owner, or parties related to a Seller or owners of Sellers. To qualify for the exception, the Seller’s Captive’s only business must be to issue or reinsure insurance contracts in connection with the sales made by the Seller or its related persons, and at least 95 percent of the Seller’s Captive’s business in a year must be in connection to contracts purchased by customers unrelated to the Seller. If those conditions are met, then the Seller’s Captive has not engaged in a listed transaction or a transaction of interest.
Reporting requirements for participants in the transaction
The Regulations place reporting requirements on parties involved in any transaction covered by the Regulations (a “reportable transaction”). These reporting requirements apply to participants in the transaction and to “material advisors” to the transaction, both for the current year and for all years where the statute of limitations for assessing tax has not yet expired. The Regulations do not by themselves require the filing of amended tax returns. [NTD: This question of amended returns came up at WCF and with RMA.]
Captives, Owners, Insureds, and any other parties to a reportable transaction must file Form 8886, Reportable Transaction Disclosure Statement, with the IRS Office of Tax Shelter Analysis (“OTSA”). The filing must describe the transaction in sufficient detail, including the party’s involvement in the transaction and how the party learned about the transaction.
Captives and Insureds have additional reporting burdens. For every year that a Captive participated in a reportable transaction, it must also disclose the types of policies it provided, how much it received in premiums, how much it paid in claims, the contact information of those who helped determine premiums, and the names and ownership interest of anyone who meets a 20% ownership threshold in the Captive. An Insured must describe how much it paid in premiums for coverage by a Captive.
Participants have 90 days from the date the regulations were published, January 14, 2025, to file their initial reports. The initial filing should include all applicable open tax years and must be sent to OTSA. A copy of the initial filing, and all subsequent filings, should be included with the applicable tax return.
There are two ways that a taxpayer can avoid filing under the Regulations. If a taxpayer has finalized a settlement with the IRS regarding a reportable transaction that was in examination or litigation, that taxpayer is treated as having made a disclosure for the years covered by the settlement. A taxpayer engaged in a transaction of interest who has been diligent in filing under the now-defunct Notice 2016-66 regime has a reduced filing burden. The taxpayer’s previous transaction of interest filings count under the Regulations, so the taxpayer does not have to refile for those past years.
There are also two “safe harbor” provisions which allow a taxpayer to not file a Form 8886. The first relates specifically to Owners who only participate in reportable transactions due to their ownership interests. In that case, the Owner does not have to file if the Insured complies with its own filing obligation, acknowledges the obligation in writing to the Owner, and identifies the Owner on its own Form 8886 as the recipient of the acknowledgement. The other safe harbor arises when a Captive revokes its Section 831(b) election. If a Captive revokes its election, then the transaction ceases to be a reportable transaction for any years that the revocation is effective and none of the participating taxpayers will have been party to a reportable transaction. To facilitate revocations, the IRS also released Revenue Procedure 2025-13 (Rev. Proc. 2025-13), which provides a streamlined procedure to revoke a taxpayer’s Section 831(b) election.
Reporting requirements for material advisors to the transaction
Material advisors to reportable transactions must also file with the IRS. A “material advisor” is a person who makes a tax statement to a party that needs or will need to disclose the transaction and the advisor derives gross income from it that surpasses a threshold. The advisor’s gross income can be based on almost anything the advisor does related to the transaction. The threshold for income on a listed transaction is $10,000 when most of the transaction’s benefits go to natural persons and $25,000 in other cases. For a transaction of interest, the threshold is higher, at $50,000 when the transaction mostly benefits natural persons and $250,000 otherwise.
Material advisors must file Form 8918, Material Advisor Disclosure Statement, with OTSA. Form 8918 must be filed with OTSA by the last day of the month following the end of the calendar quarter when one becomes a material advisor. In this case, that means by April 30, 2025.
Under these Regulations, material advisors are required to report for tax statements up to six years before the date of publication, or January 14, 2019. Additionally, there is no exception in the Regulations for material advisors who filed previously.
Differences between the proposed and final regulations
While the IRS continues to look unfavorably upon micro-captives, there are some positive signs in the Regulations. In particular, the IRS received comments from the regulated community, considered those comments, and adjusted its final position based on those comments.
The result is that the final regulations are less burdensome than the proposed regulations. The proposed regulations would have treated any related-party financing as a listed transaction. They also would have treated any Captive with a loss ratio of less than 65 percent over 10 years as a listed transaction. Finally, they would have treated a Captive with a loss ratio of less than 65 percent over the preceding nine years or the Captive’s lifetime, whichever was shorter, as engaging in a transaction of interest. The final regulations dramatically reduced the loss ratio needed to escape being considered a listed transaction, required a listed transaction to meet both the funding and loss ratio criteria, and slightly lowered the threshold to escape transaction of interest status.
Seek guidance for comprehensive compliance
The Regulations were issued with a lengthy background discussion and include many definitions and references to other laws. This article highlights the key provisions of the Regulations. Taxpayers that may be subject to the Regulations should consult (consider consulting?) professional advisors for detailed review and guidance on potential reporting requirements.
Member of Congress Introduces Bill to Abolish Occupational Safety and Health Administration
U.S. Representative Andy Biggs (R-AZ) first introduced the “Nullify the Occupational Safety and Health Administration Act” or “NOSHA Act” in November 2021, legislation aimed at abolishing the Occupational Safety and Health Administration (OSHA). His justification for filing the bill was that OSHA was “usurping states’ authorities and forcing [President] Biden’s vaccine mandate on the private sector.” Though Arizona has a “state plan” and federal OSHA does not regulate workplaces there, he had nine cosponsors of the NOSHA Act.
Quick Hits
Representative Andy Biggs (R-AZ) reintroduced legislation (H.R. 86) that would abolish OSHA.
Although the bill has little chance of being enacted—the bill has no cosponsors and there is no companion legislation in the U.S. Senate—what seems more likely to happen is a challenge to how OSHA standards are created.
Supreme Court Justice Clarence Thomas has expressed support for curtailing the OSH Act’s delegation of authority to OSHA and stated that “[a]t least five justices have already expressed an interest in reconsidering [the] Court’s approach to Congress’s delegations of legislative power.”
The NOSHA Act was reintroduced in the 118th Congress with a single cosponsor, Representative Scott Perry (R-PA). (He became a cosponsor in August 2023, eight months after introduction in January 2023.) As was true of its predecessor bill, this version did not make it out of the House Committee on Education and Labor (renamed the “House Committee on Education and the Workforce” when Republicans took the reins of the U.S. House of Representatives in January 2023), which is the first step in becoming law.
Representative Biggs recently introduced it again in the 119th Congress, without cosponsors, as H.R. 86. It has been referred to the House Committee on Education and the Workforce.
H.R. 86 is a simple piece of legislation that includes two simple sentences that have caused an uproar: “The Occupational Safety and Health Act of 1970 is repealed. The Occupational Safety and Health Administration is abolished.” These two sentences have generated more controversy in the workplace health and safety sphere than any two other sentences have, potentially since the Occupational Safety and Health Act of 1970 (OSH Act) was signed into law.
The OSH Act was signed into law by President Richard M. Nixon on December 29, 1970, after years of movement toward a national law to regulate health and safety in the workplace. While the OSH Act and OSHA are often viewed as partisan creations, they were a bipartisan effort to improve workplace health and safety conditions for American workers.
Though some potential exists for the U.S. Congress to take action to overturn the OSH Act and eliminate OSHA, given the lack of current and historical support for the NOSHA Act bill and the fact that no companion bill has been introduced in the U.S. Senate, the likelihood of either succumbing to the NOSHA Act appears rather limited. Moreover, the impact of the bill seems suspect, given that at present twenty-two states have their own state plans that provide oversight of both private and government workplaces, while seven more have plans that provide oversight of government workplaces (while federal OSHA provides oversight of the private workplaces).
What seems more likely to happen is a challenge to the way OSHA standards are created. Supreme Court Justice Clarence Thomas, in a dissent to the denial of certiorari in Allstates Refractory Contractors, LLC, v. Su, stated that “[t]he Occupational Safety and Health Act may be the broadest delegation of power to an administrative agency found in the United States Code.” He continued, writing, “If this far-reaching grant of authority does not impermissibly confer legislative power on an agency, it is hard to imagine what would.” He also indicated that a majority of the justices had expressed an interest in reviewing this sort of broad delegation of authority.
If the Supreme Court of the United States were to determine that the OSH Act constituted an unconstitutional delegation of legislative power to an agency, Congress would need to reframe OSHA’s rulemaking authority or take on some of the rulemaking responsibilities itself. This would likely result in a dramatic decrease in OSHA’s already limited rulemaking activity.
The EU’s Foremost Economic Retaliation Device – The Anti-Coercion Instrument
Under the leadership of President Trump, the US has adopted a new trade policy that may lead to the adoption of trade measures on imports from the EU. Given the importance of the US/EU trade relationship and the EU’s stated commitment to a free trade environment, the EU has said that it will adopt measures in response to such a US policy. During the election campaign, President Trump spoke of tariffs to re-balance the US economy and replace some tax revenue (i.e. new tariffs as a permanent feature of the trading landscape). The EU’s response may be calibrated according to the purpose of tariffs applied by the US Administration.
In this blog post, we provide an insight into the functioning of perhaps the most assertive (yet so far unused) trade instrument at the EU’s disposal to retaliate, the EU Anti-Coercion Instrument (ACI, available here).
EU Retaliation
Should the EU consider that its interests are impaired by the US measures, it may decide to take retaliatory action against it.
Such retaliatory action is already being announced. On February 11, 2025, following the US announcement of a 25% import tariff on steel and aluminum, EC President Ursula von der Leyen affirmed that the EU would respond to “unjustified tariffs” with “firm and proportionate countermeasures”, and that the EU will act to safeguard its economic interests” (see here).
The EU has different instruments at its disposal for this purpose, including setting retaliatory tariffs on US products, using conventional trade defense instruments or acting under the EU International Procurement Instrument.
The EU ACI is one of the more resolute tools at the EU’s disposal. It is aimed at addressing economic coercion by third countries against the EU or one/several of its member states. So far, the ACI, which was adopted in 2023, has never been used by the EU. Nevertheless, the EU could choose to resort to it, should EU-US relations severely deteriorate.
When Could the EU Resort to the ACI
The ACI can only be resorted to in case of “economic coercion.” This is understood as a situation where a third country applies or threatens to apply a measure affecting trade or investment to make the EU or a member state thereof act (or stop acting) in a particular manner.
Certain circumstances may guide the EU towards an economic coercion finding. This includes the magnitude of trade or investment disruption, the pressure arising from it, the extent of the sovereignty encroachment or whether particular acts are expected from the EU or one/several of its Member States.
EU Examination of Third Country Actions and Omissions
The EC may examine any third country action or omission to evaluate if it constitutes economic coercion. It may do so at its own initiative or if requested to do so (subject to conditions).
Where the EC considers that the third country action or omission constitutes economic coercion, it must submit a proposal to the Council of the European Union (“the Council”, i.e. the EU member states) for an act formally determining that the third country action, or omission constitutes economic coercion. Should it declare economic coercion (by a qualified majority of its members), the Council may also request reparations for the injury to the EU.
Consultants
Next, the EC would request the country in question to immediately cease such economic coercion (as well as to repair any injury, if requested to do so by the Council).
The EC would also seek consultations with the country in question. Options that could be explored in such consultations would include direct negotiations, or the submission of the matter to international adjudication, mediation or conciliation.
Simultaneously, the EC would seek to obtain the cessation of the economic coercion by raising it in international fora, where applicable. It could also collaborate with any country affected by the same or similar economic coercion, for example to coordinate their respective responses.
EU Response Measures
Foreign economic coercion could result in the EC adopting response measures, which may amount to measures of general application (potentially affecting an entire third country, or only specific sectors, regions or companies thereof), or measures targeting specific natural or legal persons.
Substantially, response measures may include:
Customs duties
Other import charges
Import or export restrictions
Measures on transiting goods
EU internal measures applying to goods
The non-performance of international obligations concerning the right to partake in tender procedures
Measures affecting trade in services (including through EU subsidiaries)
Measures affecting access to foreign direct investment to the EU (including through EU subsidiaries)
Restrictions on the protection of intellectual property rights or their commercial exploitation
Restrictions in access to EU capital markets and other financial service activities
Restrictions on the possibility of marketing goods subject to EU rules on chemicals
Restrictions on the possibility of marketing goods subject to the EU sanitary and phytosanitary rules
Response measures should, in any event, be proportionate and not exceed the level of injury to the EU.
The adoption of response measures would, in any event, be subject to three conditions:
That any request to the third country in question to cease or repair the economic coercion, as well as any consultations and possible further action (such as international adjudication or mediation) has not resulted in the cessation of the economic coercion is a reasonable period of time;
That the adoption of EU response measures is necessary to protect the interests and rights of the EU, and its member states in the particular case;
That the adoption of the EU response measures is in the EU interest (including with respect to the ability of the EU and its member states to make legitimate sovereign choices free of economic coercion).
EU response measures are also possible where the economic coercion in question has ceased, but the third country has not repaired in full the injury to the EU, despite having been requested to do so.
After the Imposition of Measures
Upon adoption of response measures, the EC would offer to negotiate a solution with the third country. The entry into force of the measures could be delayed by up to three months following their adoption, extendable where the third country in question would take steps to cease the economic coercion and, where appropriate, repair the injury to the EU.
Once response measures would be applied, the EC would monitor the evolution of the economic coercion – and potentially amend them. Where economic coercion would be suspended, the EC would also suspend the application of the response measures.
The EC would be required to terminate EU response measures when any of the following five situations would arise:
Where the economic coercion would end, and any requested injury reparation would be carried out;
Where economic coercion would end without injury reparation (event where requested) – subject to conditions;
Where a mutually agreed solution would be reached with the third country in question;
Where a binding decision in relevant international third-party adjudication would require the termination of the restrictive measures;
Where termination would be appropriate in light of the EU interest.
Response measure termination would be carried out through EC implementing acts. To adopt such implementing acts, the EC would have to follow an examination procedure. As part of that examination procedure, a committee representing EU member states would have to deliver an opinion (adopted through a qualified majority) asking for the measures to be terminated. The EC would be required to follow the committee’s opinion and terminate the measures. Under some circumstances and provided the committee would not deliver an opinion, the commission could also terminate the EU response measures at its own initiative.
How We Can Help
The ACI is at the apex of the EU’s policy arsenal in international economic matters – it is for that reason that is has been referred to as a “bazooka”. While it has never been used so far, a very aggressive trade policy measure against the EU could prompt the EC to at least brandish the ACI as one of the more assertive instruments at its disposal against third countries, including the US or China. Should it ever be triggered, ACI response measures could severely affect trade or financial relations. US goods and services may be directly targeted. At the most extreme end of the spectrum, US trade restriction measures and the EU’s response could combine to alter current patterns of trade across the Atlantic for some time into the future.
The Intellectual Property Enterprise Court
In the UK, intellectual property (IP) infringement claims and other disputes in which IP is a major concern can be brought in either the High Court or in many cases the specialist Intellectual Property Enterprise Court (IPEC). Based at the Rolls Building in central London, the IPEC has a more streamlined procedure than the High Court and employs a full-time specialist IP judge (currently Judge Hacon) and a number of specialist deputy judges, which aids the development of a consistent approach to cases that can often cost less than in the High Court.
Is IPEC Suitable for a Claim?
The IPEC can hear all types of IP disputes, including IP infringement claims along with other disputes in which IP is a major concern. Importantly, the court has the power to award all of the same remedies available in the High Court (interim injunctions, damages, delivery up etc.). Examples of the types of cases which have previously been heard in the IPEC include: IP infringement claims, amendments of patents, compensation for employees in respect of patented inventions created by them and claims relating to a breach of confidentiality including misuse of trade secrets.
However, limitations are placed on the value of claims which can be heard by the IPEC as it offers either a small claims track for low value disputes (where the amount in dispute is £10,000 or less) or a multitrack option for claims valued between £10,000 to £500,000, meaning that any claim above £500,000 must be brought in the High Court.
A number of procedural restrictions also apply for IPEC claims. As such, in practice the IPEC is generally best-placed to hear less complex IP disputes that do not involve very complex legal or fact heavy disputes as these restrictions include:
IPEC trials should last for two days or less (and in practice many cases are heard in a single day).
The default position is that there is no disclosure of documents as part of an IPEC trial unless IPEC orders that; however, IPEC may order the disclosure of “adverse” documents known by the parties to an IP dispute.
IPEC has strict controls regarding the cross-examination of witnesses, which is only permitted on topics which the judge deems necessary.
Orders for recovery of legal costs are capped at £60,000 meaning that the losing party will only ever have to pay the other party’s costs up to £60,000 (excluding court fees and wasted costs orders).
Whilst an important benefit of the streamlined IPEC procedure is improved access to justice for small and medium sized companies involved in IP disputes, it is important to remember that access to the IPEC is not limited only to small and medium-sized companies and is available to all claimants regardless of size. As such, at the outset of any IP dispute claimants should always consider whether the IPEC as opposed to the High Court may be the most suitable forum. For more details of IPEC click here.