HSR Filings During the Government Shutdown: The Lights Are On, but Is Anyone Home?
The Federal Trade Commission (FTC) suspended most operations at midnight on October 1, 2025, due to the government shutdown, but its Premerger Notification Office (PNO) remains open to accept filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR).
However, the PNO will not answer questions, provide filing guidance, or grant early termination of the HSR waiting period, which remains unaffected by the shutdown and runs as usual.
Furthermore, while filings will be accepted, it is unclear whether the FTC will have sufficient non-furloughed staff available to provide a substantive review of any HSR filing made during the government shutdown. According to the FTC’s most recent contingency plan, “only those lawyers, economists, and support staff necessary to continue pre-merger investigations with statutory deadlines and law enforcement litigation in order to protect the government’s interest in the legal positions it had advanced or where there would be a significant, immediate harm to life or property if such action were not continued or taken” will be excepted from furlough.
As the statutory HSR waiting period can always be extended through the issuance of a second request, transacting parties should carefully consider the implications of filing during the government shutdown.
Will Artificial Intelligence Increase the Prices of Construction Materials, Equipment, and Labor?
By now, you’ve likely seen news discussing how artificial intelligence (AI) is set to change the construction industry (and every other industry, for that matter). Typically, this discussion centers on improving business efficiency and cost savings. Many construction companies are predictably using AI to assist with project estimating, processing submittals and Requests for Information (RFIs), and, yes, contract review.
However, as more players in the construction industry adopt AI, it may lead to some potentially unexpected outcomes for contractors, like higher material, equipment, and labor costs. Earlier this year, several construction companies filed class-action antitrust lawsuits against the largest equipment rental providers in the United States, alleging a conspiracy to artificially inflate equipment rental prices. Specifically, the plaintiffs allege these providers illegally conspired to increase prices by sharing real-time, confidential data through the “Rouse Rental Insights” (RRI) program.
The lawsuits have been consolidated into the matter of In re Construction Equipment Antitrust Litigation (Case No. 1:25-cv-03487) and are pending in the United States District Court for the Northern District of Illinois.
Many large construction equipment rental providers use RRI to share pricing data from individual line items on invoices. The RRI program uses AI to aggregate pricing information and generate a recommended “RRI Price” daily for each class and category of equipment. The RRI Price considers seasonal changes and other market fluctuations to predict the optimal rental price for a given day.
The plaintiffs in the class action contend that by sharing their confidential pricing data with the RRI pricing tool and agreeing to use the AI-driven “RRI Price,” the equipment rental providers have conspired to significantly increase rental prices. The plaintiffs argue that such price increases are harmful because (1) there are relatively few large equipment rental providers; (2) buying (rather than renting) equipment is uneconomical for most contractors; and (3) increases in equipment rental rates do not significantly decrease the demand for equipment rentals.
Below is a graphic contained in the plaintiffs’ complaint showing the growth in the U.S. construction equipment rental industry since 1997, which plaintiffs contend is due in part to their alleged conspiracy:
The class action lawsuit is ongoing, and the results may determine how AI is utilized in the construction industry going forward. If the equipment rental companies successfully defend the use of the RRI Price, other industry players could adopt similar AI pricing models, which could lead to increased prices in other segments of the construction industry.
GM’s New Purchase Order “Program Extension Clause” Sparks Debate: Supplier Concerns Over Unilateral Program Extensions
General Motors (GM) has recently injected a “Program Extension Clause” into its purchase orders, a move that has raised eyebrows among industry experts and suppliers. GM did this without any formal notice or announcement to its suppliers and just inserted this new material term buried at the end of its purchase orders. This new clause purports to provide GM the unilateral right to extend the contract term multiple times, prompting discussions about the potential legal and business ramifications that such a change might precipitate.
The Dynamics of the Program Extension Clause
Under the newly added provision, GM reserves the right to extend the term of a contract at six-month intervals, with no requirement for bilateral agreement during these extensions. The language suggests that GM is aligning its contract terms with practices common among other Original Equipment Manufacturers (OEMs), who structure agreements to match the lifespan of the program, including any extensions. Historically, GM’s purchase orders have included fixed durations through the end of production (EOP) for a particular program, thus marking this addition as a significant divergence from prior norms. It should be noted however, GM’s ability to extend contracts under the new language is not expressly tied to an extension of the existing program(s) to which the contract relates. This raises the risk that GM might try to leverage the new provision to force suppliers to carry over old contracts to new programs.
Key components of the clause include:
Unilateral Extension: GM can extend contracts at its discretion following a six-month notice, which may lead to multiple subsequent extensions.
Documentation Requirements: Suppliers will be expected to furnish GM with exhaustive documentation to justify for price adjustments during extensions, but price adjustments will be in GM’s sole discretion.
Adjustment Meetings: Prior to extensions, GM and the supplier are expected to negotiate adjustments in good faith. These adjustments are aimed at price recalibrations due to cost increases or decreases associated with the goods.
Pricing Adjustments: In situations where mutual agreement on pricing is unattainable, GM holds the right to “equitably adjust” pricing based on a fair cost assessment.
Application
While it remains to be seen exactly how GM will seek to apply the newly added provision, on its face, the provision purports to apply to not only to new contracts entered into on or after September 20, 2025, but also to any contracts “amended on or after September 20, 2025 where such amendment includes an increase to the price” (excluding price increases “solely” due to material resale/indexation agreements made prior to September 20, 2025 or engineering changes).
Potential Legal Challenges
Contract of Indefinite Duration
The indefinite extension of contracts could transform agreements into contracts of indefinite duration—a concept fraught with legal challenges. Such contracts may be deemed unenforceable due to concerns about lack of clarity and perpetuity in obligations. The purported right of GM to extend a contract again and again exposes suppliers to unforeseen liabilities and indefinite commitments, particularly given the lack of any language tying such contract extensions to extension of a program.
Lack of Supplier Agreement
By inserting this clause without prior negotiation, GM is potentially exposing itself to disputes regarding its enforceability. For suppliers, the unilateral nature of these extensions may lead to imbalances in bargaining power. GM is seeking to materially alter the existing agreements—changes which, without mutual consent, might be rejected outright.
Good Faith and Fair Dealing
While a claim that a party has breached the obligation of good faith and fair dealing imposed on all contracts under the Uniform Commercial code, such arguments may come into play regarding’s GM’s application of the new provision. The language of the provision permits prices to be “equitably adjusted” by GM in the event the parties cannot agree on new pricing for an extension. However, in doing so, GM will remain bound by its obligations of good faith/fair dealing and arguably cannot just ignore information and data provided by a supplier as part of the process.
Suppliers’ Concerns and Industry Implications
Suppliers lacked transparency into this additional term and there were no negotiations involved surrounding the addition of this clause. The extent to which GM plans to apply this to existing programs remains contentious, with suppliers likely to reject unilateral additions to current contracts.
If suppliers accept this term, down the road, many will face challenges in their operational and financial planning due to unpredictable contract durations and pricing structures.
As GM rolls out this new clause, suppliers must carefully review and consider their contractual landscapes. Leveraging negotiation points will be crucial for suppliers entering new programs to protect themselves from the unilateral nature of these extensions and safeguard their interests.
In the evolving automotive industry, as practices shift toward greater program adaptability, the conversation surrounding GM’s Program Extension Clause serves as a reminder of the delicate balance between achieving efficiency and maintaining equitable relationships in the automotive supply chain.
Energy Supply Considerations for Manufacturers Re-Onshoring to the U.S.
Key Takeaways:
Energy is now a strategic priority: Reshoring manufacturers must treat energy planning as key to cost, resilience, and sustainability.
Policy shifts require flexibility: Evolving federal energy priorities make tailored, jurisdiction-aware strategies essential.
Plan early and strategically: Each energy option — RECs, PPAs, or on-site generation — carries long-term legal and financial implications.
As manufacturers accelerate plans to re-shore operations to the U.S., energy strategy has become one of the most material and multidimensional issues in the facility planning process. For energy-intensive industries, power procurement isn’t just a line item on the budget or a utility concern — it’s a strategic input with legal, financial, and operational implications.
This importance is amplified by today’s political and regulatory uncertainty. The Trump administration has already made significant changes to the energy landscape, and has signaled that more is to come. This could mean different priorities for decarbonization, incentives for renewables, or permitting rules for fossil fuel projects and transmission lines.
These shifting priorities directly affect how manufacturers evaluate energy options — especially when long-term investments are at stake. Manufacturers must take a more strategic and tailored approach to energy planning to ensure operational goals and cost structure for decades.
Features of Energy for Manufacturing
Manufacturers’ energy needs are different than many other types of commercial operations:
Load Size: Manufacturing operations, in particular heavy manufacturing, often have relatively large loads. This opens additional supply avenues to manufacturers, and provides market leverage.
Load Profile: Manufacturing operations have relatively consistent and predictable energy needs, particularly facilities that operate multiple shifts.
Long horizons: Manufacturing facilities are long-lived assets. This allows manufacturers to make energy decisions over decades instead of months.
Consistency and uptime: Energy interruptions mean costly facility downtime. For some manufacturers, energy interruptions mean damage to inventory or equipment, and protection against energy interruption is of paramount importance.
Process Steam: Some manufacturing operations also require thermal energy, process steam, or similar non-electric energy inputs. Such requirements will substantially limit the available energy supply options. Here, we will focus on electric-only load requirements.
For manufacturers, energy supply is on par with labor availability and similar operational planning. In some sectors, energy considerations even outweigh traditional factors like real estate cost or proximity to suppliers. Energy should be an intentional operational opportunity to align with long-term cost, sustainability, and resilience goals.
Four Strategic Energy Goals
Manufacturers’ energy strategies balance some combination of four competing energy goals:
Reducing total energy costs, particularly in price-sensitive or energy-intensive sectors.
Price predictability, to support long-term financial planning.
“Greening” the energy supply, for ESG or regulatory reasons. For some products and jurisdictions, a sufficiently green energy supply may also extend “green” benefits to the manufacturer’s products.
Interruption protection, to avoid operational losses and liabilities.
No energy strategy can perfectly achieve all of these goals simultaneously, however. Choices and compromises must be made.
Energy Management Approaches
With competing energy goals in play, manufacturers should evaluate available management approaches which vary in complexity, commitment, and impact.
Renewable Energy Certificates (RECs). While technically not energy, RECs are a straightforward tool for achieving energy greening goals. The manufacturer buys energy from the grid (or any other source), and separately purchase RECs in the desired amounts. This allows the manufacturer to offset the emissions from purchased energy.
Pros: Low cost; limited commitment; easy to execute; no physical facility required.
Cons: Increases overall energy cost; does not contribute towards goals other than greening.
Use case: Companies needing quick ESG reporting solutions or early-stage green targets.
Offsite Power Purchase (Virtual or Physical Delivery). With this approach, the manufacturer signs an agreement with the owner of a power plant not co-located with the manufacturing facility, and the remote power plant supplies energy to the manufacturing facility. This energy will reduce the amount of energy purchased from the local utility. These long-term financial contracts allow manufacturers to lock in their energy cost long-term.
Pros: May provide overall cost reduction, price certainty, and energy greening; no local construction required.
Cons: Potentially long-term commitment; limited availability in fully-regulated energy markets; does not provide interruption protection; remote supply may not provide energy greening in all circumstances.
Use case: Sophisticated buyers with strong legal/financial teams.
On-Site Energy Facility. An energy facility constructed at or adjacent to the manufacturing facility can provide energy generation, energy storage, or both.
Pros: Strong alignment with all four goals; physical interruption protection available.
Cons: Requires land, capital, and time for development and construction; long-term commitment.
Use case: Long-term manufacturing facilities with access to land or favorable permitting regimes; manufacturing facilities that require interruption protection.
Microgrids. Self-contained energy systems that can island from the grid offer resilience and autonomy. Microgrids combine multiple generation and storage solutions to maximize control of energy supply.
Pros: Resilience; price control; custom design.
Cons: High operational complexity; regulatory hurdles; redundancy/oversupply may be required.
Use case: Mission-critical manufacturing; remote or off-grid locations.
Choosing a Path: Legal and Operational Considerations
No matter the technology, key decision parameters should guide manufacturers’ energy planning:
Setup time – Strategies that require energy plant development/construction generally take longer than strategies involving only contractual arrangements. Technologies require differing lead times.
Commitment Duration – Most of the options discussed require long-term commitment, but the duration of that commitment can vary significantly depending on technology and structure selections. Factor those timelines into your choice.
Financial and Contractual Terms – The contracts involved in energy planning can be complex, and the specific terms can vary significantly. Evaluation of financial and contractual details should be considered early in the process.
Regulatory Considerations – Energy generation and transmission is highly regulated everywhere, but there is still significant variation across jurisdictions. The process, structure, terms, and even availability of both on-site and off-site solutions will be subject to and limited by local/regional rules.
Siting and Permitting – Local zoning and environmental rules can change the cost/benefit analysis for various energy strategies, and in some cases may limit available on-site options.
Manufacturers planning new or expanded U.S. operations should take an informed, flexible, and jurisdiction-aware approach to energy. Navigating energy strategies involves considering long-term commitments, regulatory landscapes, and financial and operational considerations. With proper planning, manufacturers can align their energy strategies with broader business objectives, ensuring operational efficiency, cost-effectiveness, and sustainability in an unpredictable energy landscape.
A Pivotal Week for Pharmaceutical Policy: Trump Administration Advances Tariff and Drug Pricing Initiatives
The first week of October 2025 marked a significant shift in U.S. drug pricing policy as the Trump administration unveiled a series of sweeping actions to deliver on his promise to lower drug prices. From President Trump’s announcement of a 100% tariff on imported branded drugs to the Trump administration’s landmark pricing deal with Pfizer and the rollout of the TrumpRx.gov direct-to-consumer (DTC) platform, last week marked an escalation in the White House’s efforts to drive down prescription drug costs and bring pharmaceutical manufacturing back to U.S. soil. Below, we provide an overview of the Trump administration’s new policies and the stakeholder responses already reshaping the broader pharmaceutical landscape.
Trump Administration Tariffs on Pharmaceutical Manufacturers
Trump Targets Pharmaceutical Imports with 100% Tariff Plan Tied to U.S. Plant Construction. In April, President Trump issued an Executive Order initiating an investigation into the pharmaceutical supply chain under Section 232 of the Trade Expansion Act of 1962 (Section 232Executive Order). Pursuant to the Section 232 Executive Order, the Department of Commerce has been investigating the impact of certain pharmaceutical imports as part of a plan to impose tariffs on drugs made outside the U.S. On September 25, 2025, via a post on Truth Social, President Trump announced that beginning October 1, pharmaceutical manufacturers would face a 100% tariff on all “branded or patented” drugs imported to the U.S. However, Trump indicated that manufacturers could avoid these tariffs by building manufacturing facilities in the U.S., defining “building” as either “breaking ground” or “under construction.”
Notably, several key exemptions are likely to limit the impact of the proposed tariffs. In addition to exempting drug companies that are building manufacturing plants in America, the proposed tariffs would not apply to generic drugs. Additionally, a White House official confirmed that the Trump Administration will honor existing trade agreements, including recent EU and Japanese compacts that limit pharmaceutical tariffs to 15%. While the White House has not specified which companies would be affected or what authority would be used to levy the 100% tariff, the threat of tariff exposure appears to be a strategic tool employed by the Trump administration to strike deals with pharmaceutical companies to lower drug prices in the U.S.
Negotiations with Pharmaceutical Manufacturers Continue after Trump Misses Tariff Deadline. On the October 1st tariff deadline, the Trump administration announced the tariffs had not gone into effect and that the administration had now “begun preparing” tariffs on manufacturers that don’t build in the U.S. or enter into a most-favored-nation (MFN) drug pricing agreement with the Trump administration, casting uncertainty over the future of the proposed 100% pharmaceutical tariffs. Following the announcement of Trump’s drug pricing deal with Pfizer (discussed below), Commerce Secretary Howard Lutnick stated the administration intends to let negotiations with other pharmaceutical companies “play out” before imposing any of the proposed pharmaceutical tariffs and is interested in pursuing similar agreements to the Pfizer deal with other pharmaceutical manufacturers. The Pfizer deal suggests the Trump administration has a broader strategy: offering pharmaceutical manufacturers an avenue to avoid the tariffs by voluntarily agreeing to sell drugs at reduced prices.
Trump Strikes Drug Pricing Deal with Pfizer and Announces TrumpRx.Org. As we previously reported, on May 12, 2025, President Trump issued his “Delivering Most-Favored Nation Prescription Drug Pricing to American Patients” Executive Order (MFN Drug Pricing Executive Order). The MFN Drug Pricing Executive Order sought to reduce the price of drugs by requiring manufacturers to offer the United States MFN pricing, or in other words, the lowest price offered to any “comparably developed” foreign country that pays for the same drugs. After months of negotiations between the Trump administration and manufacturers, Pfizer was the first manufacturer to step up to the plate and strike a deal. On September 30, 2025, President Trump announced a landmark agreement with Pfizer to secure several drug pricing concessions. Pfizer has agreed to offer its portfolio of drugs at MFN prices, equal to the lowest prices it offers other developed countries, to every state Medicaid program. Pfizer also agreed to launch new drugs in the U.S. market at the same prices it offers to other developed countries and offer some of its medications directly to consumers at a discounted cash price. In exchange, Pfizer will be exempt from the 100% tariffs described above for three years. Pfizer also committed to channeling $70 billion into research and development while expanding domestic manufacturing in the U.S.
President Trump also announced the 2026 launch of TrumpRx.gov, a Federal DTC prescription drug purchasing platform that will give American patients direct access to discounted drugs. Primary care treatments and select specialty brands will be offered at an average discount of 50%, with some products marked down by as much as 85%.
Manufacturer Response to Trump Administration Executive Orders
Manufacturers Have Announced Investments in U.S. Manufacturing and Production. In response to Trump’s drug pricing executive orders, several global pharmaceutical manufacturers are investing in U.S. manufacturing and production. According to a White House article, Gilead Sciences, Johnson & Johnson, Roche, Novartis, and Bristol Myers Squibb have announced multibillion-dollar investments to expand their domestic footprint in manufacturing, research, and development. Merck, Novo Nordisk, and Eli Lilly have continued to expand their efforts since starting to build in 2023, creating construction sites in Delaware, North Carolina, and Texas with the aim of anchoring U.S.-based supply chains and supporting production of blockbuster medicines. Additionally, Novartis, AbbVie, Amgen, Regeneron Pharmaceuticals, and Abbott Laboratories have announced plans to expand their US-based manufacturing and facilities.
Manufacturers & PhRMA Offering DTC Platforms. As we previously discussed in our last edition of the IRA Update, manufacturers are harnessing President Trump’s directive to adopt DTC purchasing programs. Since the date of our last publication, AstraZeneca, Boehringer Ingelheim, Amgen, and Novartis have joined the list of manufacturers that have implemented DTC programs with steep discounts on their products. In addition to manufacturers, the Pharmaceutical Research and Manufacturers of America (PhRMA) announced plans to launch a new DTC website in January 2026 to allow patients to buy prescription drugs directly from manufacturers, bypassing pharmacy benefit managers and other middlemen. The website, to be called America’s Medicines, will allow manufacturers to list medicines available for direct purchase and connect patients with manufacturers’ DTC programs that offer lower prices and fewer barriers to access. The website will also include a “Medicine Assistance Tool” where patients can search for manufacturers’ patient assistance programs for certain medications.
Drug Companies Have Started Adjusting Their U.S. and European Pricing. In response to Trump’s MFN Drug Pricing Executive Order, some pharmaceutical manufacturers have raised the price of their drugs abroad. Bristol Myers Squibb and AbbVie have announced plans to charge the same price for medicines in the U.K. and the U.S. The Trump administration is asking that manufacturers set medicines at the lowest price in an Organization for Economic Co-operation and Development (OECD) country with a GDP per capita of at least 60% of the U.S. GDP per capita. Since U.K. drug prices tend to be particularly low, the pressure is on pharmaceutical manufacturers to both raise U.K. prices and reduce them in the U.S.
Impact of This Week’s Developments on PBMs, Payors, and Consumers
Impact of Tariffs. If President Trump does follow through on effectuating his 100% tariffs, the impact of the tariff may not be as significant as it appears. For starters, the vast majority of drugs utilized by US patients are generic drugs, which will not be subject to these tariffs. Additionally, most brand-name drug manufacturers already maintain U.S. operations, facilities, and drug distribution models. These factors suggest that many pharmaceutical products would avoid exposure to the proposed tariffs if implemented. The question of whether U.S. patients will see drug price increases will depend on how many drugmakers receive exemptions — and on whether manufacturers choose to pass those costs on to payors or patients. Notably, such price increases would be antithetical to manufacturers’ existing negotiations with the Trump administration and would likely put them even more firmly in the crosshairs of the administration. Payors and PBMs will need to monitor tariff developments to determine if manufacturers intend to reduce or eliminate rebates or related discounts to offset the impact of the tariffs.
Impact of DTC Platforms. Manufacturers have long claimed that the complex pharmaceutical supply chain contributes to the high cost of drugs in the U.S. and thus point to the DTC platforms as a way to lower drug prices. However, the DTC discounts offered by manufacturers may not be lower than the prices patients pay for the drugs through their health insurance. Further, by purchasing drugs directly from manufacturers, patient drug spending will not contribute to their deductibles or out-of-pocket maximums, thus limiting the effectiveness of the mechanisms used to limit patient drug costs over their plan year. The DTC sales platforms may alleviate costs for uninsured patients and patients looking to access drugs not covered by their health insurance.
Medicare Drug Price Negotiation Program Releases Final Guidance for Year 2028
CMS Issues Final Guidance on 3rd Cycle of IRA Drug Price Negotiation Program. On September 30, 2025, the Centers for Medicare and Medicaid Services (CMS) issued its final guidance (Final Guidance) on the third cycle of negotiations, and first cycle of renegotiations, under the IRA’s Medicare Drug Price Negotiation Program (Negotiation Program). As we discussed in our most recent edition of the IRA Update, this Final Guidance is particularly significant as it sets forth CMS’s initial policies for negotiating drugs payable under Medicare Part B and renegotiating previously selected drugs from prior cycles. The Final Guidance also provides further detail on how otherwise eligible drugs can be excluded from the Negotiation Program (e.g., through the small biotech exemption and biosimilar delay provision)—and notably, expands protection for orphan drugs through the orphan drug exclusion in accordance with the “Working Families Tax Cuts Act,” previously known as the “One Big Beautiful Bill Act.” Additionally, the Final Guidance, among other things, refines maximum fair prices (MFP) effectuation policies to further detail what information CMS will use when determining whether a manufacturer has appropriately made available the MFP to a dispensing entity and provides further detail on the selection and negotiation processes to increase transparency in the Negotiation Program. One notable difference between the draft guidance issued in May 2025 and the Final Guidance is that CMS has delayed by one year its efforts to implement a policy that would plug a loophole in the Negotiation Program that allows drugmakers to delay or avoid eligibility for Medicare price negotiation by combining ingredients.
Novel Lawsuits Allege AI Chatbots Encouraged Minors’ Suicides, Mental Health Trauma: Considerations for Stakeholders
In the wake of a lawsuit filed in federal district court in California in August—alleging that an artificial intelligence (AI) chatbot encouraged a 16-year-old boy to commit suicide—a similar suit filed in September is now claiming that an AI chatbot is responsible for death of a 13-year-old girl.
It’s the latest development illustrating a growing tension between AI’s promise to improve access to mental health support and the alleged perils of unhealthy reliance on AI chatbots by vulnerable individuals. This tension is evident in recent reports that some users, particularly minors, are becoming addicted to AI chatbots, causing them to sever ties with supportive adults, lose touch with reality and, in the worst cases, engage in self-harm or harm to others.
While not yet reflected in diagnostic manuals, experts are recognizing the phenomenon of “AI psychosis”—distorted thoughts or delusional beliefs triggered by interactions with AI chatbots. According to Psychology Today, the term describes cases in which AI models have amplified, validated, or even co-created psychotic symptoms with individuals. Evidence indicates that AI psychosis can develop in people with or without a preexisting mental health issue, although the former is more common.
A recent article in Modern Healthcare reported that the increased scrutiny of AI chatbots is not preventing digital health companies from investing in AI development to meet the rising demand for mental health tools. Yet the issue of AI and mental health encompasses not only minors, developers, and investors but also health care providers, therapists, and employers in all industries, including health care. On October 1, 2025, a coalition of leaders from academia, health care, tech, and employee benefits announced the formation of an AI in Mental Health Safety & Ethics Council, a cross-disciplinary team advancing the development of universal standards for the safe, ethical, and effective use of AI in mental health care. Existing lawsuits from parents are demonstrating various avenues for liability in a broad range of contexts, and the seriousness of those lawsuits may prompt Congress to act. In this post, we explore some of the many unfolding developments.
The Lawsuits: Three Examples
Cynthia Montoya and William Peralta’s lawsuit, filed in the U.S. District Court for the District of Colorado on September 15, alleges that defendants including Character Technologies, Inc. marketed a product that ultimately caused their daughter to commit suicide by hanging within months of opening a C.AI account. They allege claims including strict product liability (defective design); strict liability (failure to warn); negligence per se (child sexual abuse, sexual solicitation, and obscenity); negligence (defective design); negligence (failure to warn); wrongful death and survivorship; unjust enrichment; and violations of the Colorado Consumer Protection Act.
Matthew and Maria Raine’s lawsuit, filed in California Superior Court, County of San Francisco, on August 26, alleges that defendants including OpenAI, Inc. created a product, ChatGPT, that helped their 16-year-old son commit suicide by hanging. The Raines allege claims including strict liability (design defect and failure to warn); negligence (design defect and failure to warn); violation of California’s Business and Professional Code, Unfair Competition Law, and California Penal Code (criminalizing aiding, advising, or encouraging another to commit suicide); and wrongful death and survivorship.
Megan Garcia filed suit in U.S. District Court for the Middle District of Florida (Orlando) in October 2024 against Character Technologies Inc. and others, claiming that her son’s interactions with an AI chatbot caused his mental health to decline to the point where the teen committed suicide to “come home” to the bot. An amended complaint filed in July 2025 alleges strict product liability (defective design); strict liability (failure to warn); aiding and abetting; negligence per se (sexual abuse and sexual solicitation); negligence (defective design); negligence (failure to warn); wrongful death and survivorship; unjust enrichment; and violations of Florida’s Deceptive and Unfair Trade Practices Act.
Congressional Scrutiny
The Montoya/Peralta lawsuit appeared the same week as a September 16, 2025, hearing of the U.S. Senate Judiciary Committee on “Examining the Harm of AI Chatbots.” The panel included Matthew Raine and Megan Garcia as well as “Jane Doe,” a mother from Texas who filed suit in December 2024 alleging that her son used a chatbot suggesting that “killing us, his parents, would be an understandable response to our efforts [to limit] his screen time.”
Senator Josh Hawley (R-MO), who chairs the U.S. Senate Subcommittee on Crime and Counterterrorism and who conducted the hearing, took the issue seriously:
The testimony that you are going to hear today is not pleasant. But it is the truth and it’s time that the country heard the truth. About what these companies are doing, about what these chatbots are engaged in, about the harms that are being inflicted upon our children, and for one reason only. I can state it in one word, profit.
Representatives from certain companies that develop AI chatbots reportedly declined the invitation to appear at the congressional hearing or to send a response.
Potential FDA and FTC Oversight
On September 11, 2025, the Food and Drug Administration (FDA) announced that a November 6 meeting of its Digital Health Advisory Committee would focus on “Generative AI-enabled Digital Mental Health Medical Devices.” FDA is establishing a docket for public comment on this meeting; comments received on or before October 17, 2025, will be provided to the committee.
Although FDA has reviewed and authorized certain digital therapeutics, generative AI products currently on the market have generally not been subject to FDA premarket review and are not subject to quality system regulations governing product design and production, or postmarket surveillance requirements. Were FDA to change the playing field for these products, it could have a major impact on access to these products in the U.S. market, producing substantial headwinds (e.g., barriers to market entry) or tailwinds (e.g., enhancing consumer trust, and competitive benefits for FDA-cleared products), depending on your point of view.
All stakeholders (practitioners, software developers and innovators, investors, and the public at large) should be paying close attention to FDA developments and considering how to effectively advocate for their points of view. Innovators also should be thinking about how to future-proof themselves against major disruptions due to (very likely) regulatory changes by, for example, building datasets substantiating product value to individuals, implementing procedures and processes to mitigate risks being introduced through product design, and adopting strategies to identify and address emergent safety concerns. If products’ regulatory status is called into doubt or clearly changes in the future, these steps can help innovators be prepared to address their products with FDA if they are contacted.
The FTC announced its own inquiry on September 11, issuing orders to seven companies providing consumer-facing AI chatbots to provide information on how those companies measure, test, and monitor potentially negative impacts of this technology on children and teens. The inquiry “seeks to understand what steps, if any, companies have taken to evaluate the safety of their chatbots when acting as companions, to limit the products’ use by and potential negative effects on children and teens, and to apprise users and parents of the risks associated with the products.”
The timing here is not coincidental. FDA and FTC routinely coordinate on enforcement of laws concerning consumer (nonprescription) products and will likely be considering how to most efficiently implement changes to regulation.
Federal Legislative Efforts
Federal legislators recently introduced bills to prevent harm to minors’ mental health due to AI chatbots; these proposals highlight enforcement by the Federal Trade Commission (FTC) and the state attorneys general. Key federal bills include:
2714: The CHAT Act would require AI chatbots to implement age verification measures and also to establish certain protections for minor users. The legislation includes, among other things, a requirement of verifiable parental consent before allowing a minor to access and use the companion AI chatbot; immediate notice to the parent of any interaction involving suicidal ideation; and blocked access to any companion AI chatbot that engages in sexually explicit communication. Notice would be required every 60 minutes that the user is not engaging with a human. A covered entity—defined as “any person that owns, operates, or otherwise makes available a companion AI chatbot to individuals in the United States” — would be required to monitor companion AI chatbot interactions for suicidal ideation. Violations of S. 2714 would be enforced by the FTC or through civil actions by the attorneys general of the states.
R. 5360: This legislation would direct the FTC to develop and make available to the public educational resources for parents, educators, and minors with respect to the safe and responsible use of AI chatbots by minors.
State Legislative Efforts
States including Utah, California, Illinois, and New York have already undertaken legislative efforts relating to AI and mental health, seeking to impose obligations on developers and clarifying permissible applications of AI in mental health therapy (see a summary by EBG colleagues here). New York’s S. 3008, “Artificial Intelligence Companion Models,” takes effect November 5. It defines “AI companion” as an AI “designed to simulate a sustained human or human-like relationship with a user” that facilitates “ongoing engagement” and asks “unprompted or unsolicited emotion-based questions” about “matters personal to the user.” The bill also defines “human relationships” as those that are “intimate, romantic or platonic interactions or companionship.” The AI companion must have a protocol for detecting “user expressions of suicidal ideation or self harm,” and it must notify the user of a suicide prevention and behavioral health crisis hotline. The AI must also provide notifications at the beginning of any interaction, and throughout the interaction—at least every three hours—that state that the user is not communicating with a human.
On September 22, 2025, the California legislature presented to the governor for signature SB 243, Companion Chatbots, which would amend the Business and Professions Code. If signed, this law will take effect July 1, 2027. The law closely tracks New York’s law: it requires the AI to provide notifications every three hours that the user that it is not human, and it also requires protocols to detect suicidal ideation. Interestingly, this law provides a private right of action for injunctive relief, damages of up to $1,000 per violation, and attorney’s fees and costs.
Illinois HB 1806, the Therapy Resources Oversight Act, took effect on August 1, 2025. It is designed to ensure that therapy or psychotherapy services are delivered by qualified, licensed or certified professionals and to protect consumers from unlicensed or unqualified providers, including unregulated AI systems. AI use by a licensed professional is permitted when assisting in providing “supplementary support in therapy or psychotherapy services where the licensed professional maintains full responsibility for all interactions, outputs and data systems.” The new law prohibits an individual, corporation, or entity from providing or advertising, offering therapy or psychotherapy services, including through Internet-based AI, unless the services are conducted by a licensed professional. A proposed law in New York, S. 8484, would also prohibit licensed mental health professionals from using AI tools in client care, except in administrative or supplemental support activities where the client has given informed consent.
Other comprehensive state laws relating to AI and consumer protection, such as the impending law in Colorado, may also be implicated in the context of AI chatbots and mental health.
Takeaways for the Health Care Industry (Including Health Care Employers)
The issues surrounding AI mental health chatbots, potential liability, and increasing probability of regulatory actions continue to develop quickly—against a federal backdrop of fostering AI innovation. Developers and investors should already be following the cases and laws in this area. Health care providers and social workers should familiarize themselves with the specific laws that could affect them as practitioners, and with chatbot apps they recommend or use, as well as data protection issues. We add here that more employers are offering mental health chatbots to employees, which could raise liability concerns:
Risk of misdiagnosis or inappropriate treatment. If the bot’s algorithms are flawed or its responses inadequate, and an employee suffers harm, the employer could face claims of negligence for selecting or deploying an inadequate therapeutic tool. Courts may find that employers assumed a duty of care by offering what employees reasonably perceived as mental health treatment.
Privacy and data security. Employees may disclose sensitive information about mental health conditions, trauma, substance use, or other protected health information. If this data is breached or used inappropriately, employers could face lawsuits under the Health Insurance Portability and Accountability Act, state privacy statutes, or disability discrimination laws like the Americans with Disabilities Act.
Practice of medicine. Employers must consider whether they are practicing medicine without proper licensing or credentials, which could trigger regulatory action or professional liability claims—especially if the bots cross the line from general wellness into clinical mental health treatment.
Voluntary consent. Employees may feel coerced into using these bots, particularly if participation is tied to health insurance benefits or workplace wellness incentives.
The issues concerning the safety and security of wellness bots and various therapeutic AI modalities continue to evolve.
FTC Continues Clayton Section 8 Enforcement Efforts on Interlocking Directorates
What Happened: The Federal Trade Commission (FTC) recently announced that three individuals resigned from the Board of Directors of Sevita Health following the FTC’s ongoing enforcement efforts targeting interlocking directorates under Section 8 of the Clayton Act. These resignations came after the FTC raised concerns that the directors simultaneously served on the boards of Sevita Health and Beacon Specialized Living Services. Both companies offer services to individuals with intellectual and developmental disabilities and have common private equity ownership.
The Bottom Line: The FTC’s press release says it is committed to enforcing Section 8 and encourages all firms to review their board memberships to avoid any overlaps with competitors. Companies should be aware of the FTC’s enforcement activity to avoid potential disruption and expense resulting from an investigation.
The Full Story: Section 8 of the Clayton Act prohibits directors and officers from serving simultaneously on the boards of competing corporations, unless certain de minimis exceptions apply based on the competitive sales volumes between the companies. For decades, Section 8 enforcement was rare, but beginning under the Biden administration, both the FTC and the Antitrust Division of the Department of Justice (DOJ) stated an intention to revive their focus on the law.
The DOJ has been active in securing resignations of directors, which were announced in October 2022, March 2023, and August 2023, among others. Eliminating the interlock through a voluntary resignation typically has been sufficient to remedy the concern. In some cases, the agencies may seek further concessions, such as requiring a company to relinquish board appointment rights that would allow it to place a director on the board of a company in which it has an ownership interest.
The FTC and DOJ have also broadened their scrutiny to include not just formal board appointments, but also observer rights and similar arrangements that could result in “common representation” among competitors. This extension is meant to address the issue raised by potential sharing of competitively sensitive information between firms that compete in the same geographic markets. The agencies have stated that companies can violate Section 8 when different individuals acting as “agents” of the company serve as directors of two competitors. Also, the FTC and DOJ have taken the position that a Section 8 violation is not necessarily mooted if there is risk of recurrence or if sharing of competitively sensitive information has occurred.
The agencies view Section 8 as applying to other non-corporate entities such as private equity (PE) firms despite the plain language of “corporations” in the statute. The DOJ’s announcement in March 2023 makes this position clear. One matter involved a PE firm whose representatives sat on three different software companies’ boards that were alleged to compete with each other. A second matter involved the rights of a subsidiary of a PE firm to appoint a director of an insurance company that allegedly competed with a wholly-owned insurance company of the PE firm. And a third matter involved affiliates of a PE firm potentially sitting on the boards of two companies in the airline industry.
The FTC’s action in Sevita Health follows the same approach as taken by the DOJ and shows some continuity under the Trump administration. In Sevita Health, the press release states that the director resignations made in response to the FTC’s enforcement efforts completely resolved the competition concerns raised by the three individuals serving as directors for both Sevita Health and Beacon Specialized Living Services simultaneously. The FTC’s Director of the Bureau of Competition noted, “[w]e encourage all firms to review their board memberships to avoid any overlaps with competitors—including when new board members are added as a result of investments by private equity firms or other new shareholders.” Both Sevita Health and Beacon Specialized Living Services are owned by PE firms. The FTC also praised the companies for working with the FTC to resolve the issue quickly.
Practical Guidance: In light of ongoing Section 8 enforcement, companies should take the following steps:
Conduct annual reviews of directors’ and officers’ other board memberships to detect potential interlocks. D&O questionnaires should be drafted to elicit this information on an annual basis, but directors’ and officers’ other board memberships should be continually evaluated in the context of shifting business plans and M&A activity.
Consider potential interlocks when structuring investments that have board appointment rights or board observers, particularly in the context of the FTC and DOJ’s expansive view of Section 8, including PE funds’ ownership of portfolio companies and/or minority ownership of companies in the same industry.
Engage antitrust counsel for guidance on the application of Section 8 and possible exemptions.
Section 8 is aimed at eliminating the opportunity for competitors to coordinate their conduct—explicitly or implicitly—through common directors. The potential antitrust concerns raised by an interlock are therefore broader than the scope of Section 8, and companies should be aware of these risks when reviewing their compliance with Section 8 and other antitrust law.
BIS Adopts “Fifty Percent Rule” for Entity List, Significantly Expanding Exporter Due Diligence Obligations
On September 29, 2025, the US Department of Commerce’s Bureau of Industry and Security (BIS) issued an interim final rule (IFR) that substantially expands the scope of US export controls, imposing significant new compliance obligations on exporters. Effective September 29, 2025, the rule extends license requirements applicable to entities on the Entity List and the Military End-User (MEU) List to any company that is 50 percent or more owned, directly or indirectly, by one or more of those listed parties.
This change closes what BIS described as a “significant loophole” and aligns the Export Administration Regulations (EAR) more closely with the long-standing “Fifty Percent Rule” maintained by the Department of the Treasury’s Office of Foreign Assets Control (OFAC). For exporters, this means that simply screening transaction parties against US government restricted party lists is no longer sufficient. Companies now have an affirmative obligation to conduct due diligence on the ownership structure of their customers, suppliers, and other counterparties.
Background: Closing a Perceived Loophole
Previously, export controls under the EAR generally applied only to the specific legal entity named on the Entity List. A listed party could circumvent restrictions by creating or using a legally distinct affiliate—such as a subsidiary or shell company—to procure US-origin items. The new rule directly targets this practice by making ownership, not just legal identity, a determining factor for export restrictions.
The New BIS Fifty Percent Rule Explained
The rule, which BIS is referring to as the “Affiliate Rule,” amends the EAR to state that any entity owned 50 percent or more, in the aggregate, by one or more parties on the Entity List or MEU List is subject to the same license requirements as the listed entity. The IFR amends part 744 of the EAR and its supplements, which cover the Entity List, MEU List, and Foreign Direct Product rules, to incorporate the Affiliate Rule changes.
Key features include:
Aggregate Ownership: The 50 percent threshold can be met through combined ownership by multiple restricted parties. For example, if two Entity List parties each own 25 percent of a company, that company is now subject to the same restrictions.
Direct and Indirect Ownership: The rule applies to complex ownership chains, requiring exporters to look beyond immediate parents.
Alignment with OFAC: BIS modeled this rule on OFAC’s well-established Fifty Percent Rule. While companies with robust sanctions compliance programs may leverage existing processes, the EAR context introduces new challenges and a broader universe of controlled items and technologies.
Key Implications and Challenges for Exporters
Because OFAC’s Fifty Percent Rule has long required beneficial ownership screening, many US companies already have processes in place that BIS expects will carry over to the new Affiliates Rule. Leveraging these existing procedures can help streamline compliance and minimize disruption. That said, exporters should be mindful that EAR obligations cover a broader range of transactions and technologies, potentially requiring adjustments to current programs, and the Affiliate Rule creates an additional “red flag” for exporters to incorporate into their “Know Your Customer” (KYC) programs (namely, BIS’s new Red Flag 29 specifies that such exporters “have an affirmative duty to determine the percentage of ownership of those listed entities”).
Key factors to consider include:
Heightened Due Diligence Burden: Exporters must now make reasonable inquiries into ownership structures, creating an affirmative duty to investigate corporate hierarchies.
Opaque Jurisdictions: Determining ultimate beneficial ownership can be difficult, particularly in jurisdictions with limited transparency. Companies may need to engage third-party due diligence providers or local counsel.
Navigating Uncertainty: If ownership cannot be definitively determined despite good-faith efforts, companies should apply for a BIS license and document their diligence efforts.
Risk-Based Approach: BIS expects companies to adopt risk-based compliance programs, focusing enhanced diligence on high-risk transactions involving sensitive technologies or high-risk jurisdictions.
Immediate Actions and Recommendations
Update Your Export Compliance Program (ECP): Incorporate ownership due diligence into screening procedures.
Conduct or Update Compliance Risk Assessment: Review existing counterparties, especially in high-risk jurisdictions.
Evaluate Screening Tools: Confirm whether your screening systems can identify ownership by listed entities and will include the Entity List, MEU List, and other non-OFAC screening lists.
Train Key Personnel: Ensure sales, logistics, and compliance teams understand the new rule, as well as the new “red flag” added to BIS’s KYC guidance.
Review the Temporary General License (TGL): BIS has issued a narrow 60-day TGL for certain pre-existing transactions. This TGL expires on December 1, 2025.
Hunton Andrews Kurth Insight
This rule represents one of the most significant expansions of export control obligations in recent years. While BIS has modeled the rule on OFAC’s approach, its application in the EAR context introduces unique challenges, particularly for companies dealing with complex supply chains and high-risk jurisdictions. Companies should act promptly to update compliance programs, enhance due diligence processes, and train personnel. Our team is closely monitoring BIS guidance and enforcement trends and is available to assist with risk assessments, compliance program updates, and license applications.
Resources
https://www.bis.gov/press-release/department-commerce-expands-entity-list-cover-affiliates-listed-entities
https://www.federalregister.gov/documents/2025/09/30/2025-19001/expansion-of-end-user-controls-to-cover-affiliates-of-certain-listed-entities
https://ofac.treasury.gov/faqs/401
Navigating HSR Filings During a Government Shutdown: What Clients Need to Know
As the federal government enters a shutdown, many clients involved in ongoing transactions are asking: What does this mean for Hart-Scott-Rodino (HSR) filings and antitrust reviews?
The good news is that HSR notifications can still be filed as normal, and the statutory 30-day waiting period will continue to run. The HSR waiting period is mandated by statute and therefore cannot be suspended administratively. The Federal Trade Commission (FTC) and Department of Justice (DOJ) are continuing to receive and process HSR filings to allow mergers to follow on the usual timelines.
Even with the significant furloughs anticipated from the shutdown and possible layoffs, we would not expect much timing disruption with respect to the large majority of HSR filings that raise little or no competitive concern and are routinely cleared at the expiration of the waiting period. However, for such nonproblematic transactions, the FTC has announced that it will suspend the granting of “early termination” during the shutdown, which as a practical matter may represent the most significant impact from the shutdown.
For transactions that may raise antitrust issues, the shutdown introduces new risks and uncertainties:
Staffing Uncertainty at Antitrust Agencies: With furloughs in effect, it remains unclear how many staff will be available at the FTC and DOJ. Staffers who identify potential competitive concerns may suffer from fewer resources to timely evaluate such potential concerns.
Historical Context: Past shutdowns have not typically resulted in the widespread use of Second Requests to extend waiting periods, likely due to the large percentage of transactions that raise little or no competitive concern and the short duration of most shutdowns. Still, each shutdown presents unique challenges, and clients should be prepared for delays in more complex reviews.
FTC’s Commitment to Merger Reviews: Encouragingly, the FTC has indicated it will allocate resources to merger reviews that are subject to a ticking statutory deadline, suggesting that the FTC may seek to tirage filing reviews based on level of concern and timing.
What Clients Should Do
Clients with pending or upcoming transactions should:
Continue filing HSR notifications as planned.
Be aware of the increased risk of delays for deals involving antitrust scrutiny.
Monitor agency communications for updates on staffing and review priorities.
Consult with counsel to assess whether a transaction may raise antitrust issues and prepare accordingly.
BIS Rule Significantly Expands Reach of Entity List Export Controls; Includes Temporary General License
The US Commerce Department’s Bureau of Industry and Security (BIS) has introduced a major revision of the Export Administration Regulations (EAR), 15 C.F.R. Part 730 et seq., through an Interim Final Rule (IFR) extending EAR-based licensing controls on entities designated on the Entity List or Military End Users (MEU) List or subject to EAR § 744.8 to affiliates in which they have a 50% or greater ownership interest directly or indirectly, whether held individually or in the aggregate with other listed entities.1 Effective 29 September 2025, this rule, dubbed the “Affiliates Rule,” aims to counter evasions of the EAR through complex ownership structures and subsidiary networks. BIS emphasized that the Affiliates Rule closes a critical loophole in export controls and strengthens the effectiveness of US export controls.
The Affiliates Rule introduces challenging new compliance obligations for US and non-US companies alike when dealing with exports, reexports, and in-country transfers of EAR items, particularly in regions and sectors where ownership structures are opaque or complex. Under the new rule, companies must quickly evaluate the sufficiency of their existing due diligence procedures and make updates to conform to the new requirements. In some cases, companies may be able to leverage existing compliance processes around the long-standing 50 percent rule applied under sanctions programs administered by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC). However, because the scope of the Entity List and MEU List are different, a wholesale re-screen of customers, suppliers, end users, and other parties to transactions will be required.
BIS has also issued revised Entity List FAQs to incorporate guidance on the Affiliates Rule.
Key Features of the Affiliates Rule
50% Ownership Threshold
Any affiliate owned in the aggregate 50% or more directly or indirectly by one or more Entity List or MEU List designees is automatically subject to the same export license requirements as its listed parent.2
Aggregation of Multiple Shareholders
The Affiliates Rule applies based on the aggregated direct and indirect shareholding of all designated entities with direct or indirect ownership interests. This is true even if the multiple direct or indirect owners are not affiliated with each other or are identified on different lists. For example, a company owned 25% by an Entity List designee and 25% by a company on the MEU List would be covered by the Affiliates Rule. In such cases, the most restrictive licensing requirement would apply. In the above example, if the relevant Entity List licensing requirement is for all EAR items (whereas the MEU List restrictions are narrower), the Entity List restrictions will apply even though the Entity List designee has only a 25% ownership interest in the affiliate.
Extraterritorial Application
As with the EAR generally, the Affiliates Rule applies to any export, reexport, or transfer (including in-country transfers) involving an item subject to EAR jurisdiction3 where an affiliate captured by the rule is a transaction party (i.e., purchaser, consignee, or end user). This includes transactions involving items subject to EAR jurisdiction that take place entirely outside the United States without any nexus to US territory or US persons.
Strict Liability Standard
BIS guidance on the Affiliates Rule states that BIS will enforce the Entity List, MEU List, Section 744.8, and Affiliates Rule on a strict liability basis, meaning that affirmative “knowledge” of restricted entity involvement is not required to trigger the end-user requirements under the EAR. However, BIS further advises that the agency will consider the person’s level of “knowledge” when determining penalty calculations for EAR-related violations to the Affiliates Rule. While not specifically requiring diligence in all cases, the strict liability standard places an onus on an exporter, reexporter, or transferor to develop sufficient screening and recordkeeping processes to verify transaction parties’ bona fides.
Affirmative Diligence Duty to Resolve Red Flags
The Affiliates Rule also establishes a presumption (Red Flag 29)4 that requires any exporter, reexporter, or transferor to seek a license if they have knowledge or reason to know that a foreign entity that is a party to the transaction has one or more owners that are listed on the Entity List or the MEU List but are unable to determine the percentage of ownership by those listed entities. Such a presumption and duty to resolve the red flag could arise, for example, where an exporter knows that a counterparty has an Entity List entity as a shareholder but is unable to determine reliably the exact percentage of such shareholding.
Temporary General License (TGL)
BIS also has established a very limited 60-day (unless extended) TGL authorizing transactions involving entities captured by the Affiliates Rule in two scenarios. The first is an export or reexport to, or transfer within, any destination in countries identified in Country Groups A:5 or A:6 in Supplement No. 1 to EAR Part 740 (consisting of US multilateral security partners and other trusted trading partners). The second is to any destination other than embargoed countries (e.g., other than sanctioned countries such as Cuba, Iran, North Korea, and Russia) when a transaction party captured by the rule is a joint venture with a non-listed entity (not otherwise captured by the Affiliates Rule) that is headquartered in the United States or a country in Country Groups A:5 or A:6.
US Affiliates Exempted
The Affiliates Rule explicitly exempts from coverage any US affiliates of foreign designated entities that otherwise could be captured by the rule.
Expansion of Designation Effect Globally
BIS took advantage of the Affiliates Rule to close another loophole in coverage of the Entity List, MEU List, and § 744.8. Previously, designation of an entity located in a specific country did not extend to branches or sales offices in another country that are not legally distinct from the listed entity. Now, the designation will automatically encompass all such branches and sales offices wherever located.
Opportunity to Comment
Although as an IFR the Affiliates Rule has immediate effect, BIS has invited comments from interested parties. Such comments must be received by BIS no later than 29 October 2025.
BIS’s Rationale for the Affiliates Rule
BIS explained that its previous approach—limiting Entity List, MEU List, and § 744.8 restrictions to only the specifically identified entities—has allowed diversionary tactics to proliferate. This has led to listed entities establishing subsidiaries and shell entities under different names to continue accessing US goods, software, and technology. The Affiliates Rule is intended to close that gap by extending restrictions to affiliates owned 50% or more that may have been serving as a supply channel to evade applicable controls.
While acknowledging that the Affiliates Rule will increase compliance burdens on parties dealing with EAR items, BIS suggested that harmonizing diligence procedures with OFAC’s 50% rule will ease compliance because many companies already apply that standard in their sanctions compliance programs.
Implications for Exporters, Reexporters, and Transferors
Expanded Due Diligence Obligations
Screening solely for named entities against the BIS’s Entity List and MEU List will no longer suffice as parties must now also determine whether a transaction party is owned directly or indirectly by one or more listed entities and, if so, determine the ownership percentages. This may require reviewing corporate registries, beneficial ownership records, shareholder agreements, and—where information is unavailable—seeking certifications or representations from counterparties or applying for licenses (see discussion of Red Flag 29, above). Diligence should extend to all parties involved in a transaction such as purchasers, consignees, or end users and (as discussed below) companies should consider incorporating additional compliance terms and conditions related to the Affiliates Rule in their contracts and end user certification processes.
BIS has not yet clarified or provided examples of what specific diligence will be sufficient to address red flags when it is known that a designated entity is within a transaction party’s shareholder mix. For example, while the Affiliates Rule states there is an “affirmative duty to determine the percentage of ownership of those listed entities,” it may be enough to conduct diligence sufficient to infer shareholding below 50%, such as by confirming that non-listed entities own in the aggregate greater than 50%.
Increased License Applications
In cases of uncertainty, exporters must submit BIS license applications before proceeding with a transaction. Although BIS will try to process applications expeditiously, in reality this will slow down transactions that might involve a direct or indirect ownership interest of a listed entity by at least several weeks. Companies with ongoing international sales and services obligations or with long lead times should review transaction parties promptly and assess whether there are listed party ownership issues that may require BIS licensing.
Compliance Considerations
Exporters, reexporters, and transferors should promptly assess the sufficiency of their compliance procedures and undertake needed enhancements, which may include the following.
Ownership Mapping and Screening Tools
Companies should ensure that existing screening solutions capture beneficial ownership and aggregation of ownership percentages of transaction parties. Manual review and escalation to compliance and legal personnel may be required in jurisdictions with complex and opaque ownership structures and where shareholding cannot be sufficiently ascertained. Companies should seriously consider denied party screening software that performs continuous screening to ensure adequate checking of transaction parties, and affiliates, occurs at all stages of a transaction.
Internal Policies and Training
Compliance personnel should update internal manuals and procedures to reflect the Affiliates Rule and ensure that relevant personnel, including sales, procurement, and logistics, are knowledgeable and sensitive to potential red flags. Adequate screening records should be maintained to satisfy record-keeping requirements for the applicable statute of limitations period.
Contractual Provisions and Certifications
It may be prudent to require transaction parties to provide representations of their direct and indirect shareholders and to confirm no ownership by listed entities. This may prove challenging where there is no privity with certain transaction parties, such as consignees and end users with which there is no direct contract relationship.
Coordination with Other Compliance Processes
Many companies already undertake diligence on transaction parties’ shareholding structure to assess application of the OFAC 50% rule and may also conduct shareholding diligence for other purposes, such as anti-corruption compliance. Those diligence processes can be leveraged for compliance with the Affiliates Rule. Of course, because the Affiliates Rule applies to non-US companies dealing with EAR items, there will likely be many companies having to assess transaction parties’ ownership structures for the first time.
Footnotes
1 In addition to Entity List and MEU List entities, the Affiliates Rule also applies to entities designated on OFAC’s Specially Designated Nationals and Blocked Persons List that are subject to EAR-based licensing requirements under EAR § 744.8.
2 BIS has confirmed in the FAQs that the Affiliates Rule applies based on a strict percentage ownership test and not whether the affiliate is controlled by the designated entity. Of course, such control relationship presents a risk that the affiliate could get separately designated, and it also is a red flag that there may be some share ownership by a designated person triggering an affirmative obligation to conduct further diligence to confirm ownership, as discussed further herein.
3 Items subject to EAR jurisdiction include commodities, software, and technology produced in or exported from the United States, items produced outside the United States that incorporate above de minimis U.S. controlled content, and certain foreign-produced items that are the “direct product” of identified U.S. software and technology. See EAR § 734.4(a).
4 This presumption is set forth as Red Flag 29 in BIS’s “Know Your Customer” guidance. See Supplement No. 3 to EAR Part 732.
Additional Authors; Karla M. Cure, Carie A. Cartwright, Arim J. Kim, Myeong S. Park, Abraham P. Hendryx, Marissa N. Cloutier
Going Against the Grain: New 10–50% Tariffs on Imported Timber and Lumber
On Sept. 29, 2025, the White House issued a presidential proclamation imposing tariffs of 10 to 50 percent ad valorem on timber, lumber, and derivative wood products imported into the United States. These tariffs were imposed under Section 232. Citing national security concerns, the proclamation follows a U.S. Department of Commerce investigation which concluded that rising imports threaten the U.S. wood industry’s ability to support critical infrastructure and defense needs. You can also reference the related White House Fact Sheet.
Key Duty Rates and Scope
Under Annex I to the proclamation, the following imports will be subject to new ad valorem duties under Section 232:
Softwood timber and lumber will be subject to a 10% ad valorem duty rate.
Upholstered wooden products will be subject to a 25% ad valorem duty rate, effective Oct. 14, 2025. This rate will increase to 30% on Jan. 1, 2026.
Kitchen cabinets and vanities will be subject to a 25% ad valorem duty rate, rising to 50% on Jan. 1, 2026. This duty applies to completed cabinets and vanities, as well as parts imported for use in such articles.
These tariffs apply to goods entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. EDT on Oct. 14, 2025, and are in addition to all other applicable duties, taxes, fees, and trade remedy measures, unless explicitly exempted.
Other Key Provisions
Applicable tariff stacking rules:
Goods subject to the new Section 232 Timber and Lumber tariffs will not be subject to: (1) Reciprocal tariffs imposed under Executive Order (E.O.) 14257 of April 2, 2025 (as amended), (2) Brazil-Reciprocal tariffs imposed under E.O. 14323 of July 30, 2025, and (3) Russian-Oil tariffs on India imposed under E.O. 14329 of Aug. 6, 2025.
Goods subject to the Auto and Automobile Part tariffs imposed under Proclamation 10908 of March 26, 2025, will not be subject to the new Section 232 Timber and Lumber tariffs.
Goods subject to new Sec 232 Timber and Lumber tariffs will not be subject to International Emergency Economic Powers Act (IEEPA-Fentanyl tariffs imposed on Canada or Mexico.
Drawback availability: Duty drawback will be available for Sec 232 Timber and Lumber tariffs.
Preferential treatment for allies:
Imports from the United Kingdom will not exceed 10%.
Imports from the European Union and Japan will not exceed a 15% combined duty rate, inclusive of Column 1 duties.
Foreign Trade Zones (FTZs): Affected products admitted to U.S. FTZs must enter under privileged foreign status and will be subject to the applicable Section 232 duties upon withdrawal for consumption.
Monitoring and expansion: The Secretary of Commerce is directed to monitor imports and may recommend adding products or imposing specific tariffs to address undervaluation or circumvention risks.
Further Annex updates: Effective Oct. 14, 2025, all tariff provisions under Chapter 44 (wood) that were previously exempted from IEEPA-Reciprocal duties on Annex II as updated will be removed from Annex II, except those tariff provisions that (1) are included on Potential Tariff Adjustments for Aligned Partners Annex of Executive Order 14346 of Sept. 5, 2025 (Modifying the Scope of Reciprocal Tariffs and Establishing Procedures for Implementing Trade and Security Agreements), and (ii) do not include products of a type that are subject to an antidumping or countervailing duty order.
Preview of HTS Subheadings in Annex I
Products covered include a range of subheadings under Chapter 44, such as:
4407.10.01: Coniferous wood sawn or chipped lengthwise
9401.61.40: Upholstered wood-frame chairs
9403.40.90: Wooden kitchen cabinets and vanities
9403.90.70: Parts of wooden furniture
(A full list of HTS codes is set forth in Annex I to the Proclamation.)
The “Revolutionary FAR Overhaul”: What Government Contractors Need to Know
The Federal Acquisition Regulation (FAR) is often described as the “bible” of federal procurement. For decades, it has governed how agencies acquire goods and services, and how contractors compete for, win, and perform government contracts. While incremental updates are common, the federal procurement community is now bracing for the implementation of an effort describing itself as a “revolutionary FAR overhaul” — a top-to-bottom “modernization effort” that could reshape the contracting landscape.
Why an Overhaul Now?
For some time, certain policymakers, acquisition officials, and industry stakeholders have criticized the FAR for being:
Overly complex – Thousands of pages of regulations can overwhelm even experienced contractors.
Outdated – Some provisions reflect procurement practices from the 1980s, ill-suited to today’s fast-moving tech environment.
Inflexible – Agencies often struggle to adopt innovative solutions due to rigid rules.
The current change has its roots in an April 2025 Executive Order (E.O. 14275), entitled “Restoring Common Sense to Federal Procurement,” which has as its stated goal the revision of the FAR “to ensure that it contains only provisions that are required by statute or that are otherwise necessary to support simplicity and usability, strengthen the efficacy of the procurement system, or protect economic or national security interests.” Pursuant to that policy, the overhaul is intended to simplify processes, reduce barriers to entry for small and emerging businesses, and ensure that the federal government can access cutting-edge technology and services efficiently.
Key Changes
To date, those handling the overhaul have revised nearly all of the FAR’s 53 parts. The only ones not showing revisions yet are Part 2, Definitions, and Part 52, Solicitation Provisions and Contract Clauses. Nearly all the other parts proposed for revision already have at least some agency-specific deviations that will be going into effect in the coming weeks and months, pending the implementation of the overhaul officially through rulemaking. While the details are still emerging, several areas appear to be central to the FAR reform effort:
Simplification and Plain LanguageThe overhaul is attempting to streamline the FAR’s dense and technical language into more accessible guidance, reducing ambiguity and contractor confusion. Whether the effort succeeds without losing the essential meaning of the regulations and without inadvertently changing settled law is an open question.
Digital Acquisition and Emerging TechnologyFAR Part 40, Information Security and Supply Chain Security, which currently has only one subpart that is concerned with drones, is being substantially revised to include information security topics currently housed in FAR Part 4, Administrative and Information Matters, including the TikTok, Huawei, and Kaspersky bans. While the new rules do not yet address artificial intelligence integration issues, when they are addressed, it will likely be in this section. Potentially, these changes could encourage agile procurement and data-driven IT acquisitions.
Sustainability and Environmental, Social and Governments (ESG) RequirementsFAR Part 23, currently entitled “Environment, Sustainable Acquisition, and Material Safety,” which has a subpart devoted to requiring contractors to disclose greenhouse gas emissions, is being revised to a part entitled “Sustainable Acquisition, Material Safety, and Pollution Prevention,” which does not mention greenhouse gases at all. Sustainability is now linked to whether a product is cost-effective over the life of the product.
Small Business and Socioeconomic PrioritiesDespite the fact that some of the earliest executive orders of the current administration took the position that federal diversity, equity, and inclusion (DEI) programs were illegal, i.e., Ending Radical and Wasteful Government DEI Programs and Preferencing (E.O. 14151) and Ending Illegal Discrimination and Restoring Merit-Based Opportunity (E.O. 14173), the proposed overhaul of FAR Part 19, now called “Small Business,” leaves the Historically Underutilized Business Zone (HUBZone), the Women-Owned Small Business (WOSB), and the 8(a) programs in place. Indeed, the revised section reiterates the current policy of providing “maximum practicable opportunities in its acquisitions to small business and other small business socioeconomic categories.” As stated in the General Services Administration class-deviation, the goal of the reform involves streamlining the requirements and “reorganizing them to align with the actual workflow of a contracting professional.” The effect of these changes may be to broaden access for small businesses, including expanding mentor-protégé arrangements, easing compliance burdens, and strengthening set-aside programs.
What Contractors Should Do Now
Although the overhaul will not happen overnight, numerous agency-specific class-deviations are in the process of going into effect, so government contractors should begin preparing now. For example, contractors should:
Monitor Proposed Rulemaking – Participate in public comment opportunities when draft rules are released. Industry input can shape final requirements.
Assess Compliance Systems – Ensure your internal compliance infrastructure is adaptable — particularly in cybersecurity, reporting, and artificial intelligence areas.
Invest in Training – Procurement and compliance teams should be prepared for a steep learning curve as familiar processes are rewritten.
Engage with Agencies – Proactively communicating with contracting officers about how reforms may impact performance and pricing can provide valuable insights.
Consult with Counsel – Contractors should consult with experienced government contracts counsel about how to interpret, adapt to, and comply with the new rules.
Looking Ahead
The revolutionary FAR overhaul promises to be the among the most significant procurement reform in decades. For federal contractors, this is not simply a regulatory update — it is a paradigm shift. Those who adapt early, stay engaged, and build flexible compliance systems will be well-positioned to thrive under the new regime.
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