Hold Your Horses – Cannabis Rescheduling Hearings Stayed, Pending Appeal
In the latest development in a road to rescheduling cannabis from Schedule I to Schedule III under the Controlled Substances Act (“CSA”), on January 13, 2025, in the Matter of Schedules of Controlled Substances: Proposed Rescheduling of Marijuana, DEA Docket No. 1362 Hearing Docket No. 24-44, Chief Administrative Law Judge (“ALJ”) John Mulrooney cancelled the January 21, 2025 hearing on the merits of the Drug Enforcement Agency’s (“DEA”) proposal to reschedule cannabis from Schedule I to Schedule III.
After a request by two private movants (the “Movants”) to remove the DEA from its role as proponent of the proposed reclassification rule was denied, the Movants filed a motion for the ALJ to reconsider its denial of this request. On January 13, 2025, ALJ Mulrooney (i) denied the motion for reconsideration but (ii) granted leave for the Movants to file an interlocutory appeal on the merits of ALJ Mulrooney’s refusal to remove the DEA as proponent of the reclassification. While this Order opens the door on appeal to potentially enable to a private actor to replace the DEA as proponent of the reclassification, the January 13 Order will surely cause further delay in the process of potential rescheduling, evidenced by ALJ Mulrooney’s ordering the Movants and the Government to provide a joint status update 90 days from the issuance of the Order, and every 90 days thereafter.
For those hoping that cannabis would be reclassified before the Trump administration enters office, this is a major disappointment. For those who have been paying attention, this is no surprise, and more of the same.
In a constantly evolving and [still – very] nascent industry like the cannabis industry, one truth has remained: it is a fools errand to try to predict if, when, and how regulatory changes and developments will occur at the federal level. For years, there have been similar questions floated and discussed amongst advisors, operators, and investors in the cannabis industry: “when will cannabis be legalized?”,“when will the SAFE act pass”, “surely Congress will do something, right?”.
Federal action is largely an issue of legislative and regulatory priorities (or, as we have seen, a lack-thereof). Folks can talk and pontificate all they want, but the reality has remained the same: States (at this point, 39 in total, having already passed laws allowing medical marijuana use) are left to fend for themselves, as are the businesses trying to operate with one (if not two) arms tied behind their back.
When President Biden requested in October 2022 for the U.S. Department of Health and Human Services (“HHS”) to “initiate the administrative process to review expeditiously how marijuana is scheduled under federal law”, there was tepid excitement. Hey – the White House is asking HHS to look into this… progress! Then, in August 2023, HHS issued a recommendation to the DEA that cannabis be reclassified from Schedule I to Schedule III under the CSA. At this point, industry participants started to cautiously buy in – maybe – just maybe – this will be the time something actually happens. After all, for business operators, a reclassification to Schedule III under the CSA, would have potentially huge implications – potentially rendering §280E of the tax code inapplicable to cannabis businesses, opening the door for cannabis businesses to deduct various business expenses like any other businesses complying with their state and local laws. And yet, here we are, almost two and a half years later, and the industry is still hoping for change at the federal level.
For operators and investors alike, the reality is simple. Now is not the time to focus on what could happen – or what we hope will happen – at the federal level. Industry participants must continue to focus on what they control: increasing operational efficiency to achieve and maintain profitability.
Environmental Developments to Watch in California in 2025
Contaminants of Concern
Perfluoroalkyl and polyfluoroalkyl substances (PFAS)
In September 2024, California’s legislature enacted two new bills restricting the use of PFAS in consumer products.
AB 347 – This statute gives California’s Department of Toxic Substances Control (DTSC) enforcement authority over existing PFAS restrictions on textile articles (AB 1817), juvenile products (AB 652), and cookware and food packaging (AB 1200) (the “covered products” under the “covered PFAS restrictions”). AB 347 also requires manufacturers of covered products to submit a registration to DTSC by July 1, 2029, pay a registration fee, and submit a statement of compliance to DTSC confirming that each covered product complies with the covered PFAS restriction on the sale or distribution of the product that contains regulated PFAS. DTSC will begin enforcing this legislation after July 1, 2030. Given DTSC is the enforcement authority for the above-mentioned covered products, we expect DTSC to release guidance on interpreting AB 1817, AB 652, and AB 1200 in the future.
AB 2515 – This statute prohibits companies from manufacturing, selling, or distributing menstrual products that contain regulated PFAS. “Regulated PFAS” means PFAS “intentionally added to a product” as of January 1, 2025, and will mean “PFAS in a product at or above a limit determined by the department” beginning January 1, 2027. Like AB 347, AB 2515 requires manufacturers to register with DTSC by July 1, 2029, pay a registration fee, and submit a statement of compliance confirming that menstrual products do not contain regulated PFAS.
We expect DTSC to initiate the rulemaking process for both statutes, which would include regulations regarding accepted testing methods for PFAS levels in menstrual products and third-party laboratory accreditations, and regulations to implement, interpret, and enforce the statutes. Both statutes require DTSC to adopt these regulations before January 1, 2029.
Proposition 65
California’s Safe Drinking Water and Toxic Enforcement Act of 1986, Health & Safety Code Section 25249.5 et seq. (“Proposition 65”) prohibits persons in the course of doing business from knowingly and intentionally exposing individuals to certain listed chemicals above a safe harbor level, where one exists, without first providing a “clear and reasonable” warning to such individuals. (Health & Safety Code § 25249.6). The law applies to consumer product exposures, occupational exposures, and environmental exposures that occur in California. Presently, there are approximately 900 listed chemicals known by the State of California to cause cancer, reproductive harm, or both.
In 2025, we will continue to see developments in the implementation and enforcement of this law, of which manufacturers and retailers selling products in California should be aware.
Vinyl Acetate
On December 19, 2024, the Office of Environmental Health Hazard Assessment’s (OEHHA) Carcinogenic Identification Committee (CIC) voted to list vinyl acetate as a carcinogen under Proposition 65. Vinyl acetate is primarily used in glues, plastics, paints, paper coatings, and textiles. Exposure to the chemical can occur through dermal contact, inhalation, or ingestion.
Vinyl acetate was listed despite industry groups claiming that none of the recognized Proposition 65 authoritative bodies consider the chemical to be a carcinogen. OEHHA published evidence of the carcinogenicity of vinyl acetate, which was used by the CIC to support the listing.
Once listed, businesses have 12 months to provide any required warnings.
Warning Labels
Safe harbor regulations provide examples of long-form and short-form warnings deemed “clear and reasonable,” which, if followed, offer businesses an affirmative defense in the event of enforcement. On December 6, 2024, OEHHA amended Proposition 65 to require companies to add at least one chemical name—or the name of two chemicals, if the warning covers both cancer and reproductive toxicity, unless the same chemical is listed for both endpoints—to the short-form warning on the product label for products manufactured and labeled after January 1, 2028. For example:
“[the warning symbol] WARNING: Cancer risk from exposure to [name of chemical]. See www.P65Warnings.ca.gov.”
OEHHA has authorized the continued used of the earlier short-form warning template (that does not name the chemical) for products manufactured and labeled before January 1, 2028:
“[the warning symbol] WARNING: Cancer – www.P65Warnings.ca.gov.”
Manufacturers and retailers selling products in California containing listed chemicals should review their product labeling protocols, as non-compliance may result in an enforcement action. Some manufacturers have employed generic short-form warnings to forestall enforcement actions without determining whether their products actually exposed consumers to listed chemicals. This practice will not be effective after 2027.
Amended Acrylamide Warning Label
On January 1, 2025, OEHHA’s amendments to acrylamide warning label requirements took effect. The new regulation provides:
Warnings must now contain either:
“WARNING”
“CA WARNING”; or
“CALIFORNIA WARNING.”
The warning must be followed by either:
“Consuming this product can expose you to acrylamide;” or
“Consuming this product can expose you to acrylamide, a chemical formed in some foods during cooking or processing at high temperatures.”
The warning must also be followed by at least one of the following:
“The International Agency for Research on Cancer has found that acrylamide is probably carcinogenic to humans;”
“The United States Environmental Protection Agency has found that acrylamide is likely to be carcinogenic to humans;” or
“The United States National Toxicology Program has found that acrylamide is reasonably anticipated to cause cancer in humans.”
The warning may be followed by one or more of the following:
“Acrylamide has been found to cause cancer in laboratory animals”;
“Many factors affect your cancer risk, including the frequency and amount of chemical consumed”’ or
“For more information including ways to reduce your exposure, see www.P65Warnings.ca.gov/acrylamide.”
The newly amended warning language comes after years of ongoing litigation alleging that the previous warning mandate violated the First Amendment (California Chamber of Commerce v. Rob Bonta (2:19-cv-2019 DJC JDP)). Challengers allege that the warning remains unconstitutional as the state has failed to show that the warnings are purely factual and uncontroversial. As described below, the First Amendment is proving to be an effective defense in some circumstances.
Litigation Update: The Personal Care Products Council vs. Rob Bonta
In recent years, the First Amendment has served as a powerful tool for companies subject to Proposition 65 labeling requirements. A 2025 ruling in The Personal Care Products Council vs. Rob Bonta (2:23-cv-01006) will determine the legality of warning labeling requirements regarding titanium dioxide in consumer products. In 2025, the U.S. District Court for the Eastern District of California is poised to rule on the parties’ motions in the case. If the Court grants the Personal Care Products Council’s (PCPC) summary judgment motion, the ruling will have far-reaching impacts on the enforcement of Proposition 65, bolstering the First Amendment defense to Proposition 65 claims where there is a reasonable scientific debate about the hazards of the listed chemical.
The action was brought in 2023 by PCPC a non-profit association of businesses in the cosmetic and personal care products industry, which sued California Attorney General Rob Bonta in his official capacity.
On June 12, 2024, the District Court issued an Order granting PCPC’s request for a preliminary injunction enjoining Bonta and all private enforcers of Proposition 65 from filing new lawsuits to enforce the law’s warning requirement for exposures to titanium dioxide. The District Court agreed with PCPC that the “Prop 65 warning requirements for Listed Titanium Dioxide are not purely factual because they tend to mislead the average consumer” since the warnings may convey a “false and/or misleading message that Listed Titanium Dioxide causes cancer in humans or will increase a consumer’s risk of cancer.” This, according to the District Court, renders PCPC likely to prevail on the merits of its First Amendment claim under Zauderer v. Off. of Disciplinary Couns. of Supreme Ct. of Ohio, 471 U.S. 626 (1985) (government may compel commercial speech so long as it is reasonably related to substantial governmental interest, purely factual, noncontroversial, and not unjustified or unduly burdensome).
PCPC’s pending summary judgment motion was filed on September 10, 2024. If granted, this will be the third case successfully challenging Proposition 65 warnings on First Amendment grounds, with previous cases involving designated glyphosate and acrylamide. See Nat’l. Assoc. of Wheat Growers v. Bonta, 85 F.4th 1263 (9th Cir. 2023); Cal. Chamber of Comm. v. Bonta, 529 F. Supp. 3d 1099 (E.D. Cal. 2021).
Here, the District Court’s June 12, 2024 ruling dramatically halted the prosecution of countless pending claims against cosmetic companies and retailers of cosmetics. A favorable ruling for PCPC in 2025 may embolden companies subject to Proposition 65 requirements to bring an array of constitutional challenges with respect to other designated chemicals, specifically businesses selling products containing a designated chemical where the underlying scientific basis for its designation is controversial. The District Court’s language strongly casts doubt on the constitutionality of “misleading” Proposition 65 labels that lack an adequate scientific basis.
Extended Producer Responsibility (EPR) and Recycling
California continues to pave the way for EPR laws that affect various products. Rulemaking efforts will continue through 2025.
AB 863 – Carpets
Governor Newsom approved AB 863 on September 27, 2024, governing carpet recycling in California. California enacted its first carpet stewardship law in 2010 and has since amended it multiple times. The latest law maintains several basic facets and updates the governance structure of California’s current carpet stewardship program but nominally converts it to a carpet producer responsibility program following the expiration of the current 2023-2027 five-year carpet stewardship plan. The new law punts many specifics of the new program to the discretion of CalRecycle, including performance standards and metrics, key definitions, deadlines, and grounds for approving or revoking an approved plan. CalRecycle must adopt implementing regulations effective no earlier than December 31, 2026. The law purports to deem CalRecycle’s adopted “performance standards” as immune from judicial review under the California Administrative Procedure Act. The law also calls for certain amendments to the existing carpet stewardship plan to be proposed and adopted sooner.
The new law requires all carpet producers doing business in California to form and register with a single producer responsibility organization (PRO). The law requires the PRO to develop a producer responsibility plan for the collection, transportation, recycling, and safe and proper management of covered products in California, along with related public outreach regarding the plan; review the plan at least every five years after approval; and submit annual reports to CalRecycle. An approved plan must be in place within 24 months of the effective date of CalRecycle’s regulations under the new law, which may result in a deadline as early as December 31, 2028. All reports and records must be provided to CalRecycle under penalty of perjury. The law restricts public access to certain information collected for the purpose of administering this program.
The PRO must establish and provide a covered product assessment to be added to the purchase price of a covered product sold in the state by a producer to a California retailer or wholesaler or otherwise sold for use in the state. Each retailer and wholesaler is then required to add the assessment to the purchase price of all covered product sold in the state. This assessment of carpet sales in California parallels existing law. The new law does not specify any other available funding methods for implementing its requirements. The new law also requires the PRO to pay fees to CalRecycle, not to exceed CalRecycle’s actual and reasonable regulatory costs to implement and enforce the program. It further newly requires all carpet sold in California to contain 5% of post-consumer recycled carpet content by 2028, and grants CalRecycle authority to set new rates for 2029 and beyond.
Additionally, the new law requires carpet producers to provide additional information to CalRecycle regarding California carpet sales and compliance with the requirements of an approved plan. CalRecycle must post on its website a list of producers that are in compliance with the requirements of the program. The existing carpet stewardship plan must be amended to allocate 8% of collected assessments to unions for apprenticeship program grants. Compared to current law, penalties for violations increase from $5,000 per day to $10,000 per day, and from $10,000 per day to $25,000 per day if the violation is intentional, knowing, or negligent. CalRecycle may audit a carpet stewardship organization and individual producers annually The law also clarifies that a carpet stewardship organization cannot delegate decision-making responsibility regarding a carpet stewardship plan to a person who is not a member of the organization’s board.
SB 707 – Textiles
In September 2024, California’s legislature enacted the first, and only current, statewide EPR textile program in the U.S. with the Responsible Textile Recovery Act of 2024. The Act requires qualified producers of apparel or textile articles to form and join a PRO that CalRecycle will approve by March 1, 2026. All eligible producers must join the PRO by July 1, 2026. Once formed, the PRO must submit a statewide plan for the collection, transportation, repair, sorting, recycling, and the safe and proper management of covered clothing and textiles to CalRecycle for review. Once the plan is approved, retailers, importers, distributors, and online marketplaces will not be permitted to sell, distribute, offer for sale, or import a covered product into the state unless the producer of the covered product is listed as in compliance. The PRO will charge each participant-producer annual fees for its operation.
By July 1, 2030, or upon approval of the plan, whichever occurs first, noncompliant producers of covered products will be subject to administrative civil penalties up to $50,000 per day.
The Act directs CalRecycle to adopt regulations to implement its provisions with an effective date of no earlier than July 1, 2028. The rulemaking process will be carried out in accordance with California’s Administrative Procedure Act, which provides opportunities for the public, including industry representatives, to shape the policy going forward. Rulemaking efforts associated with SB 707 are not yet listed on CalRecycle’s website, but given the short deadlines imposed by the Act, we can expect updates in the near future.
AB 187 – Mattresses
California’s legislature established the Used Mattress Recovery and Recycling Act (Mattress EPR Act) in 2013 and most recently updated it in 2019. The Mattress EPR Act, which CalRecycle administers, applies to manufacturers, renovators, distributors, and retailers that sell, offer for sale, or import a mattress into California. At least once every five years, the mattress recycling organization reviews the plan for the recovery and recycling of used mattresses and determines whether amendments are necessary. Each year, CalRecycle, through the Mattress Recycling Council, posts lists of compliant manufacturers, renovators, and distributors on its website. If the manufacturer, brand, renovator, or distributor is not on this list, no retailer or distributor may sell a mattress in the state until the department affirms they are in compliance.
CalRecycle may impose an administrative civil penalty of not more than $500 per day on any manufacturer, mattress recycling organization, distributor, recycler, renovator, or retailer violating the Mattress EPR Act. However, if the violation is intentional, knowing, or reckless, the department may impose an administrative civil penalty of not more than $5,000 per day.
SB 551 – Beverage Containers
SB 551, or the California Beverage Container Recycling and Litter Reduction Act, took effect on September 29, 2024 as an urgency statute, necessary for the immediate preservation of the public peace, health, or safety within the meaning of Article IV of the California Constitution. Plastic beverage containers sold by a beverage manufacturer must contain a specified average percentage of post-consumer recycled plastic per year. Manufacturers of beverages sold in a plastic beverage container subject to the California Redemption Value fee must report to CalRecycle certain information about the amounts of virgin plastic and post-consumer recycled plastic used for those containers for sale in California in the previous calendar year. The law authorizes certain beverage manufacturers to submit a consolidated report to CalRecycle with other beverage manufacturers, in lieu of individual reports, if those beverage manufacturers share rights to the same brands or the products of which are distributed, marketed, or manufactured by a single reporting beverage manufacturer. This consolidated report must be submitted under penalty of perjury and pursuant to standardized forms prescribed by CalRecycle.
SB 54 – Plastics and Packaging
At the start of this year, CalRecycle was required to adopt any necessary regulations to implement and enforce its Plastic Pollution Prevention and Packaging Producer Responsibility Act (SB 54). SB 54 imposes EPR on “producers” of packaging materials for achieving the source reduction, recyclability or composability, and recycling rates for their products. Producers may comply with SB 54’s requirements by either joining the Circular Action Alliance (CAA), the PRO selected by the state to administer SB 54, or through assuming individual responsibility for compliance.
CalRecycle met its regulation deadline under SB 54 by publishing the Source Reduction Baseline Report on December 31, 2024, followed by updates to the list of Covered Material Categories regulated by SB 54 on January 1, 2025. The updates to the Covered Material Categories include an increase in materials considered to be “recyclable” or “compostable” while the Source Reduction Baseline Report establishes a baseline measurement for the Department and CAA to define source reduction targets, develop plans and budgets, and the track progress of SB 54’s implementation.
On January 1, 2025, SB 54’s prohibition on the sale, distribution, or importation of expanded polystyrene (EPS) food service items—unless the producer can demonstrate that all EPS used in the state meets a recycling rate of least 25%—went into effect. EPS food service producers may now be subject to notices of violation from CalRecycle and enforcement of penalties for noncompliance of up to $50,000 per violation, per day. Recycling rate mandates for plastic-covered materials do not go into effect until 2028.
SB 1143 – Paint
In September 2024, California enacted SB 1143, which expands the state’s existing Architectural Paint Recovery Program to include a wider range of paint products. “Paint product” is now defined to include interior and exterior architectural coatings, aerosol coating products, nonindustrial coatings, and coating-related products sold in containers of five gallons or less for commercial or homeowner use.
The law tasks CalRecycle with administering the program and approving a stewardship plan for the newly covered paint products. Retailers, importers, distributors, and online marketplaces will be prohibited from selling, offering for sale, or importing these products in California unless the producers are in compliance with the stewardship plan. Producers may comply with SB 1143 requirements by either joining PaintCare, the only recognized paint stewardship organization representing paint manufacturers in California, or through assuming individual responsibility for compliance.
All eligible products must comply with the new requirements by January 1, 2028, or an earlier date set by an approved stewardship plan. By July 1, 2030, or upon approval of the plan, whichever comes first, noncompliant producers will face administrative civil penalties up to $50,000 per day.
Climate Regulation
SB 261 and SB 253
After a year of uncertainty driven by budget constraints, California seems poised to implement its climate disclosure laws (SB 261 and SB 253) that were first passed in 2023. In September 2024, the Legislature passed SB 219, which granted the California Air Resources Board (CARB) a 6-month extension to issue the requisite rules that must be adopted by no later than July 1, 2025. CARB is responsible for administering SB 261 and SB 253.
On December 16, 2024, CARB posted an Information Solicitation that calls for public comments on the implementation of the laws and related issues. The Information Solicitation also invites input on key aspects of the climate disclosure framework that have been subject to speculation since the laws were enacted, such as the definition of “entity that does business in California” (clarifying the cohort within the scope of the laws); the methods for measuring and reporting scope 1, scope 2, and scope 3 emissions; and third-party verification and assurance requirements. The deadline to submit comments through CARB’s website is February 14, 2025.
Cal Chamber v. CARB
On January 30, 2024, the U.S. Chamber of Commerce and other business groups filed Chamber of Commerce of the United States of America et al. v. California Air Resources Board (CARB) et al., No. 2:24-cv-00801 (C.D. Cal. 2024) challenging SB 253 and SB 261 for violation of the First Amendment, the Supremacy Clause, and the U.S. Constitution’s limitations on extraterritorial regulation, including the dormant Commerce Clause.
Regarding the First Amendment facial challenge, the Plaintiffs alleged the laws “compel companies to publicly express a speculative, noncommercial, controversial, and politically-charged message that they otherwise would not express.” Concerning the Supremacy Clause, they argued that by requiring companies to make speculative public statements about emissions and climate-related financial risk, the laws enable “activists and policymakers to single out companies,” pressuring them to reduce emissions within and outside California. As for the constitutional claims, the Plaintiffs alleged that California lacks authority to regulate greenhouse gas emissions outside of the state and that the laws are invalid under the U.S. Constitution’s limitations on extraterritorial regulation because they heavily intrude on Congress’s authority to regulate interstate and foreign commerce.
To expedite the District Court’s ruling, the Plaintiffs moved for summary judgment on the First Amendment challenge. Simultaneously, CARB moved to dismiss the Plaintiffs’ Supremacy Clause and extraterritorial regulation claims. On November 5, 2024, the District Court denied the Plaintiffs’ motion. The Court held that the First Amendment applied to SB 253 and 261; however, it concluded that the constitutional challenge involves factual questions that go beyond pure legal analysis and thus, completing a “fact-driven task” was necessary to decide which of the laws’ applications violate the First Amendment. It held that further discovery is required to complete this “fact-driven” task.
The District Court indicated that it would address CARB’s motion to dismiss in a separate order. That motion is pending as of the date of this publication.
SB 1383 – Organic Waste & Food Collection
Since CalRecycle adopted regulations implementing SB 1383, California communities have made progress in diverting and reducing the disposal of organic waste and thereby reducing the amount of methane emissions from landfills. According to California’s Short-Lived Climate Pollutant Reduction Strategy, 93% of jurisdictions with requirements for collection reported having residential organics collection, and 100% of California communities expanded programs to send still-fresh, unsold food to Californians in need, reducing the waste large food businesses send to landfills every year. Through SB 619, 126 jurisdictions have been granted additional time to comply with SB 1383 regulations.
While progress has been made, local jurisdictions continue to struggle to meet the law’s mandates (namely, reduce organic waste disposal by 75% and reduce edible food waste by 20% by 2025). Rather than revising those mandates or pausing the implementation of SB 1383 to ensure jurisdictions weren’t sanctioned for missing implementation deadlines, the legislature enacted a number of laws to address some of the concerns raised by the regulated community. These include SB 2902, AB 2346, and SB 1046.
SB 2902 extends the rural jurisdiction exemption to comply with organics collection and procurement requirements until January 1, 2027. AB 2346 allows jurisdictions to count specified compost products toward their goals and adopt a five-year procurement target instead of annual goals, and SB 1046 directs CalRecycle to create a programmatic environmental impact report for small to medium composting facilities, aiding local governments and composters by streamlining permitting.
Although CalRecycle initiated formal enforcement actions in 2024, there is no indication that the agency has fined or sanctioned any jurisdiction for non-compliance. As the 2025 target date has now passed, expect enforcement efforts to increase in the months and years ahead.
Energy Efficiency Standards
As covered in our December 10, 2024 news alert, manufacturers and sellers of consumer products in California should be aware that the California Energy Commission continues to bring more enforcement actions and assess large civil penalties for violations of its Title 20 Appliance Efficiency Program. At a time when federal appliance efficiency standard enforcement is expected to recede due to the recent presidential election and imminent transition, California enforcement is likely to continue to grow. Regulated businesses, therefore, should pay increasing attention to Title 20 compliance, not only to avoid large fines but also to ensure continued access to their products in the lucrative California market.
Stationary Source Regulation
AB 1465 – Air Quality Management Districts (AQMDs) Granted Authority to Seek Triple Penalties
For years, the penalty ceilings in California’s Health & Safety Code have limited the ability of California’s regional AQMDs to collect civil penalties for rule violations. Starting January 1, 2025, AB 1465 tripled these ceilings. For example, the typical maximum penalty for strict liability violations—previously $12,090 per violation—has escalated to $36,270 per violation. The new law also requires that air districts (or a court) consider items like health impacts and community disruptions when evaluating penalty amounts (in addition to other factors required to be considered by law). These elevated ceilings only apply to stationary sources that have a Federal Clean Air Act Title V permit and emit certain defined compounds. How air districts will wield this new authority has yet to be seen, but we expect to see increasing penalties for many sources as a result.
Indirect Source Rules Will Continue to be a Hot Topic
While regional air districts are generally limited in their legal authority to regulate mobile sources (that authority is reserved for California’s state air regulator, CARB), indirect source rules (regulation of stationary sources that attract emissions from mobile sources) have received renewed attention as a means by which air districts seek to curb air pollution. With the incoming Trump administration signaling its intent to limit California’s ability to regulate mobile sources, air districts will likely be incentivized to find creative ways to indirectly regulate mobile sources within their districts.
In 2024, the South Coast AQMD received U.S. Environmental Protection Agency (EPA) approval to include such an indirect source rule (ISR) for warehouses as part of its state implementation plan. South Coast AQMD also adopted an ISR in 2024 applicable to rail yards and has been working on a rule applicable to ports for years, which it promises to bring before its board for approval in 2025.
Perhaps observing the South Coast AQMD’s recent ISR adoptions, the Bay Area AQMD also included an ISR in its 2025 rulemaking forecast. However, exactly what such a rule for this district might look like or what source it might seek to regulate remains to be seen.
New National Ambient Air Quality Standard for PM 2.5 Will Likely Drive Rulemaking Activity
California’s major regional air quality districts (the Bay Area AQMD, the South Coast AQMD, and the San Joaquin Valley Air Pollution Control District) have jurisdiction over areas considered to be in non-attainment of national standards regarding particulate matter (PM) 2.5. Areas in persistent non-attainment status risk federal sanctions and the loss of federal highway funding. In early 2024, EPA tightened the PM 2.5 standards even further. As a result, some air districts may consider rulemakings designed to reduce PM2.5 pollution within their jurisdictions. Given that mobile sources are a major contributor of this pollutant, ISR options may become even more appealing in 2025 and beyond.
Mobile Source Regulation
The Clean Air Act preempts states from adopting their own emission standards for new motor vehicles and new motor vehicle engines. However, Section 209 of the Clean Air Act allows California to set its own emissions standards if EPA grants a waiver from the federal preemption or EPA authorizes California to enforce its own standards despite the preemption. In the past year, CARB submitted requests for waiver or authorization for several regulations.
Advanced Clean Fleets Regulation – This regulation applies to trucks performing drayage operations at seaports and railyards; fleets owned by State, local, and federal government agencies; and high-priority fleets that are entities that own, operate, or direct at least one vehicle in California and that have either $50 million or more in gross annual revenue, or that own, operate, or have common ownership or control of a total of 50 or more vehicles. The regulation imposes restrictions on purchasing internal combustion engines, requires fleet owners to phase in zero-emission vehicles (ZEVs) or near-ZEVs beginning in 2024, and imposes reporting and recordkeeping requirements on fleet owners and operators. On January 13, 2025, CARB withdrew the request for waiver and authorization. In a response letter, EPA stated that it, therefore, “considers the matter closed.”
In-Use Locomotive Standards – The regulation has four primary, interrelated components: (1) imposes restrictions on the operation of any locomotive that is “23 years or older” from the original engine build date unless the locomotive exclusively operates in zero-emission configuration within California; (2) requires railroads to make annual deposits into a “Spending Account” based on the locomotive’s emissions in California in the prior year and imposes restrictions on the use of funds in the “Spending Account”; (3) imposes idling requirements that would regulate a locomotive’s function and maintenance; and (4) imposes registration, reporting, and recordkeeping requirements, including the requirement to annually report emissions information for non-zero emissions locomotives. On January 13, 2025, CARB withdrew the request for waiver and authorization. By response letter, EPA stated it therefore “considers this matter closed.”
Amendments to the Small Off-Road Engines Regulations – The amendments include improvements to evaporative emissions certification procedures, revise the compliance testing procedure, update the evaporative emissions certification test fuel to represent commercially available gasoline, and align aspects of the regulation requirements with the corresponding federal requirements. EPA granted the authorization request on December 19, 2024.
The “Omnibus” Low NOx Regulation – The regulation establishes the next generation of exhaust emission standards for nitrogen oxides (NOx), PM, and other emission-related requirements for new 2024 and subsequent model year on-road medium- and heavy-duty engines and vehicles. EPA granted the authorization request on December 17, 2024.
Advanced Clean Cars II Program – The regulations amend the Zero-emission Vehicle Regulation to require an increasing number of ZEVs and amends the Low-emission Vehicle Regulations to include increasingly stringent particulate matter, Nox, and hydrocarbon standards for gasoline cars and heavier passenger trucks to continue to reduce smog-forming emissions. EPA granted the authorization request on January 6, 2025.
Amendments to California’s In-Use Off-Road Diesel-Fueled Fleets regulation – The amendments will require fleets to phase out use of the oldest and highest polluting offroad diesel vehicles in California, prohibit the addition of high-emitting vehicles to a fleet, and require the use of R99 or R100 renewable diesel in off-road diesel vehicles. EPA granted the authorization request on January 3, 2025.
If the current EPA administration does not grant the pending waiver requests, then it is unclear how EPA under the Trump administration will decide on the waiver requests. Our November 6, 2024 news alert discusses these waiver issues in more detail.
CARB also enacted the zero-emission forklift regulation on August 2, 2024. The regulation accelerates the transition towards zero-emission forklifts by restricting fleet operators/owners from owning, possessing, and operating Large Spark Ignition (LSI) forklifts starting on January 1, 2026, and requiring fleet operators to phase out Class IV LSI forklifts of any rated capacity, as well as Class V LSI Forklifts with rated capacity less than 12,000 pounds according to the compliance schedule in the Regulation. These forklifts will need to be phased out by January 1, 2038.
Cal/OSHA Developments
Cal/OSHA Lead Exposure Regulations
The California Division of Occupational Safety and Health’s (Cal/OSHA) updated lead standards, which were approved on February 15, 2024, and went into effect on January 1, 2025. These apply to both general and construction worksites and replace standards that are decades old, based on data from over 40 years ago. The amended standards modify the permissible exposure limit (PEL), action level (AL), workplace hygiene practices, and medical surveillance requirements relating to lead in the workplace.
The reduction of the PEL and AL is significant; the threshold that triggers various regulatory requirements is now considerably lower. Many new industries will likely be covered. The PEL is now 10 µg/m3 (8-hour-time weighted average), an 80% reduction from the earlier PEL (50 µg/m3). The AL is now 2 µg/m3, a 93% drop from the prior AL (30 µg/m3).
Regulations for General Industry now define certain tasks as “Presumed Significant Lead Work” (PSLW). Until employers perform an employee exposure assessment, they are required to provide employees performing PSLW with interim protections.
For the construction industry, the regulations also define various “trigger tasks” levels, which assume a certain level of employee exposure. These “triggers” require protective measures for employees performing these tasks until an employee exposure assessment is completed.
Cal/OSHA Silica Emergency Temporary Standard
Cal/OSHA stated that California is experiencing a “silicosis epidemic” among artificial stone fabrication workers. In December 2023, the Occupational Safety and Health Standards Board (OSHB) approved the Emergency Temporary Standard (ETS) on Respirable Crystalline Silica (RCS) in response to these circumstances. The ETS intends to protect employees working with artificial and natural stone containing more than 10% crystalline silica. Additional protections apply to workers performing “high exposure trigger tasks.”
On December 19, 2024, OSHB voted unanimously to make the Silica ETS permanent. The decision is a step towards making these emergency measures permanent. The current proposal continues the protections the ETS has introduced, with some changes. These include a new medical removal subsection and updates to the medical surveillance subsection.
The proposed medical removal provisions provide protections to employees when a physician or other licensed healthcare professional (PLHCP) recommends that they be removed from a job assignment or that the job be modified to reduce exposure to RCS. The proposed updates to the medical surveillance provisions include specific medical procedures to be conducted for the required initial and periodic examinations. PLCHPs and specialists would also be required to submit certain information to the California Department of Public Health for each silica medical examination conducted.
The Office of Administrative Law has 30 days to approve or deny the proposal. We expect a decision in mid-January 2025.
Cal/OSHA Increases Staffing for Its Bureau of Investigations Unit
In August 2024, Cal/OSHA announced that it had increased staffing for its Bureau of Investigations (BOI) unit. Cal/OSHA says this would “allow BOI to tackle more cases and ensure that the most negligent of employers are held accountable.”
The BOI is responsible for investigating employee fatality and serious injury cases, and preparing and referring cases to local and state prosecutors for criminal prosecution. Cal/OSHA was criticized in early 2024 for the short-staffed status of BOI. Given the recently enhanced staffing, employers should expect that BOI investigations will likely increase in 2025.
Bird Flu
On December 18, 2024, Governor Newsom declared a state of emergency for Avian influenza (H5N1) (“bird flu”) in California. On December 27, 2024, the Division of Workers’ Compensation (DWC) advised employers and healthcare professionals to look for occupational cases of bird flu. There have been no cases of human-to-human transmission in California—nearly all affected persons had exposure to infected cattle. In light of DWC’s recommendations, employers should nevertheless review Cal/OSHA’s guidance on bird flu for employers.
Water Rights, Tribal Issues, Public Lands, Endangered Species
Threatened Species Listing of Monarch Butterfly
On December 12, 2024, the U.S. Fish and Wildlife Service (FWS) proposed listing the monarch butterfly as a threatened species with a special section 4(d) rule under the Endangered Species Act (ESA). The special 4(d) rule would provide very narrow exemptions to the ESA’s broad prohibition on unauthorized take for certain types of activities that may otherwise impact the species. FWS also proposed designating nearly 4,500 acres in California as critical habitat that would extend from the California Bay Area’s Marin County down the state’s western coast to Ventura County north of Los Angeles.
If finalized as proposed, this listing would stand as the largest listing decision in ESA history, affecting the entire lower forty-eight states. FWS is receiving public comment through March 12, 2025.
Central Valley Project and State Water Project
The U.S. Bureau of Reclamation (Reclamation)’s Central Valley Project (CVP), which is operated jointly with the California Department of Water Resources’ State Water Project (SWP), manages the collection, storage, and transport of many millions of acre-feet of water through the Central Valley for delivery to irrigators and municipalities and to meet state and federal ecological and species requirements. In 2018, California finalized revisions to its Water Quality Control Plan for the San Francisco Bay and San Joaquin-Sacramento River Delta (Bay-Delta) to require that more flows from the San Joaquin and Sacramento Rivers would reach the Bay-Delta for water quality and fish and wildlife enhancement, accordingly reducing water supplies for agricultural irrigators. In 2019, the previous Trump administration responded by committing to increasing CVP water supplies for agricultural users through changes to long-term operations of the CVP, pursuant to a 2019 ESA biological opinion or “BiOp.”
These ESA changes were promptly challenged by California and environmental organizations as insufficiently protective of Bay-Delta salmon and smelt populations, habitats, and spawning activities. They were first enjoined by federal court and later remanded to the National Marine Fisheries Service (NMFS) and FWS under the Biden administration. The cases were stayed during NMFS and FWS’s reconsideration of new CVP and SWP operating rules, in favor of an interim operations plan (IOP), which was extended through December 2024 to allow for the issuance of new CVP and SWP BiOps. See March 28, 2024 Order in Pacific Coast Federation of Fishermen’s Associations v. Raimondo, Civ. Nos. 20-00426, -00431 (E.D. Cal.). On December 20, 2024, on the verge of another change in administration, Reclamation issued its Record of Decision for the “Long-Term Operation of the Central Valley Project and State Water Project” based on 2024 BiOps, to mixed reviews from environmentalists and water users alike. It is likely that these new “California water rules” will spark new rounds of both litigation challenges and regulatory reconsideration in 2025.
Yurok Tribe v. Klamath Water Users Association
In this appeal before the Ninth Circuit (Nos. 23-15499 and 23-15521, consolidated), the Klamath Water Users Association (KWA) and Klamath Irrigation District (KID) sought review of a 2023 federal district court decision holding that an Oregon Water Resources Department (OWRD) order prohibiting Reclamation from releasing stored water subject to adjudicated irrigation rights from Upper Klamath Lake to protect and restore endangered fish species was preempted by the ESA. KWA and KID had sought declaratory relief that the ESA does not authorize Reclamation to release water from Upper Klamath Lake, arguing that the case does not involve any issue of preemption, because Reclamation does not have authority under its enabling act to appropriate rights to use water in violation of Oregon law, and the ESA does not expand these Reclamation authorities. OWRD subsequently withdrew its order.
The Ninth Circuit heard oral argument on June 12, 2024, but the court, just prior to the hearing, indicated that it perceived potential jurisdictional issues due to the OWRD withdrawal having mooted the initial challenge to its order. At oral argument, KID urged the court to certify key questions to the Oregon Supreme Court concerning Reclamation’s authority to use and control the use of water under Oregon law, arguing that Oregon’s water rights and laws governing the use and control of water in Upper Klamath Lake were established long before the ESA was enacted, that Section 8 of the Reclamation Act mandates compliance with state water law and water rights, and that controlling precedent makes clear that state law governs whether Reclamation has authority or discretion to meet its ESA obligations using stored irrigation water subject to adjudicated water rights. Therefore, these state law questions should be addressed independently of the federal question of Reclamation’s ESA obligations and their preemptive consequences. Briefing on KID’s motion for certification continued into December 2024, so a Ninth Circuit ruling on the merits, or as to whether the questions will proceed for now in state or federal court, can be expected in 2025.
Water
On November 20, 2024, EPA Region 9 published in the Federal Register its Final Designation of formerly unregulated stormwater discharges from commercial, industrial, and institutional (CII) properties for required National Pollutant Discharge Elimination System (NPDES) stormwater permitting. The designation applies to CII facilities consisting of five or more acres of impermeable surfaces (in the case of unpermitted facilities) or five or more total acres (in the case of unpermitted portions of facilities already holding a NPDES permit and no exposure certificate, and in the case of non-notice of non-applicability (NONA) covered portions of facilities with a NONA) in two watersheds in the Los Angeles County area. This expansion of stormwater regulation is a joint effort between EPA Region 9 and the Los Angeles Regional Water Quality Control Board. The Water Board prepared the corresponding draft CII General Permit and is expected to hold a public hearing on the draft permit now that EPA’s designation is final.
The incoming Trump administration may reevaluate the Final Designation and consider rescinding it, but it may take some time for new EPA staffers to address this action. In the interim, it will be critical for parties adversely affected by the Final Designation to expeditiously seek judicial review—and a stay or preliminary injunction—to protect their interests.
Additional Authors: Gary J. Smith, Patrick J. Redmond, Leticia E. Duarte, Sara M. Eddy, Gabriela Espir, Jeremy D. Faulkner, Nicole L. Garson, Ragini Gupta, Lauren M. Lankenau, Sharon Mathew, Claire S. McLeod Ruiz, Lauren M. Murvihill, and Megan V. Unger
Colorado Attorney General Announces Adoption of Amendments to Colorado Privacy Act Rules + Attorneys General Oppose Clearview AI Biometric Data Privacy Settlement
Colorado Adopts Amendments to CPA Rules
The Colorado Attorney General announced the adoption of amendments to the Colorado Privacy Act (“CPA”) rules. The rules will become effective on January 30, 2025. The rules provide enhanced protections for the processing of biometric data as well as the processing of the online activities of minors. Specifically, companies must develop and implement a written biometric data policy, implement appropriate security measures regarding biometric data, provide notice of the collection and processing of biometric data, obtain employee consent for the processing of biometric data, and provide a right of access to such data. In the context of minors, the amendment requires that entities obtain consent prior to using any system design feature designed to significantly increase the use of an online service of a known minor and to update the Data Protection Assessments to address processing that presents heightened risks to minors. Entities already subject to the CPA should carefully review whether they may have heightened obligations for the processing of employee biometric data, a category of data previously exempt from the scope of the CPA.
Attorneys General Oppose Clearview AI Biometric Data Privacy Settlement
A proposed settlement in the Clearview AI Illinois Biometric Information Privacy Act (“BIPA”) litigation is facing opposition from 22 states and the District of Columbia. The Attorneys General of each state argue that the settlement, which received preliminary approval in June 2024, lacks meaningful injunctive relief and offers an unusual financial stake in Clearview AI to plaintiffs. The settlement would grant the class of consumers a 23 percent stake in Clearview AI, potentially worth $52 million, based on a September 2023 valuation. Alternatively, the class could opt for 17 percent of the company’s revenue through September 2027. The AGs contend the settlement doesn’t adequately address consumer privacy concerns and the proposed 39 percent attorney fee award is excessive. Clearview AI has filed a motion to dismiss the states’ opposition, arguing it was submitted after the deadline for objections. A judge will consider granting final approval for the settlement at a hearing scheduled on January 30, 2025.
DEA Tightens Buprenorphine Telemedicine Prescribing Rules
The Drug Enforcement Administration (DEA) and the U.S. Department of Health & Human Services (HHS) just finalized their March 2023 proposed rule regarding telemedicine prescribing of buprenorphine. The final rule, effective February 17, 2025, allows DEA‑registered practitioners to prescribe Schedule III-V controlled substances, i.e., buprenorphine, to treat opioid use disorder (OUD) through audio-video visits and through audio-only visits in specific circumstances after certain requirements are met. Although these practices are currently allowed under the COVID-era telemedicine prescribing flexibilities through the end of the 2025, the final rule introduces additional requirements for these prescriptions.
Requirements of the Final Rule
PDMP Check
Before prescribing a Schedule III-V controlled substance approved by the U.S. Food & Drug Administration (FDA) to treat OUD via telemedicine (currently limited to buprenorphine), DEA-registered practitioners must review the prescription drug monitoring program (PDMP) database of the state in which the patient is located at the time of the encounter.
Scope of Review: Practitioners must check PDMP data for any controlled substances issued to the patient within the past year. If less than a year of data is available, practitioners must review the entire available period.
Initial Prescription:
After reviewing the PDMP data and documenting the review, practitioners may issue an initial six-month supply of buprenorphine, which may be divided across several prescriptions, totaling six calendar months.
If the PDMP data is not available but the attempt to access it is documented, practitioners may prescribe only a seven-day supply of buprenorphine. Practitioners must continue to check the PDMP database to issue subsequent prescriptions. If, after checking, the PDMP remains unavailable and access attempts are documented, practitioners may prescribe subsequent seven-day supplies, up to the six-month limit.
Follow-Up Prescriptions
After the initial six-month supply, practitioners may issue additional prescriptions if they either:
Conduct an in-person medical exam; or
Meet one of the seven narrow exceptions under the Ryan Haight Act (discussed below) for telemedicine practitioners.
Once an in-person medical exam has been conducted, the practitioner and patient are no longer considered to be engaged in the practice of telemedicine, and the obligations outlined in the final rule will no longer apply.
Pharmacist Verification
Before dispensing these prescriptions, pharmacists must verify the identity of the patient using one of the following:
A state government-issued ID;
A federal government-issued ID; or
Other acceptable documentation, such as a paycheck, bank or credit card statement, utility bill, tax bill, or voter registration card.
A Brief History
The rules stem from the Ryan Haight Act, which amended the Controlled Substances Act to restrict practitioners from prescribing controlled substances unless the practitioner conducts an in-person examination of the patient. The Ryan Haight Act (at 21 U.S.C. § 802(54)) outlines seven exceptions under which practitioners may prescribe controlled substances via telemedicine without an in-person exam. The fifth exception involves practitioners who have obtained the long-awaited special registration. (Stay tuned for our discussion on the DEA’s proposed rule establishing a special registration.) The seventh exception involves other circumstances specified by regulation.
During the COVID-19 Public Health Emergency (PHE), the DEA issued letters on March 25, 2020, and March 31, 2020, granting temporary exceptions to the Ryan Haight Act and its implementing rules that enabled DEA-registered practitioners to prescribe controlled substances without an in-person exam and with a DEA registration in only one state. These telemedicine flexibilities enabled practitioners to prescribe Schedule II-V controlled substances through audio-video visits and audio-only visits. Audio-only visits are permitted if the practitioner has the capability to use audio-video, but the patient is either unable to use video or does not consent to it.
In March 2023, in anticipation of the PHE ending, the DEA issued a proposed rule regarding the expansion of telemedicine prescribing of buprenorphine, which received significant criticism from stakeholders. In response, the DEA quickly rescinded the proposed rule and extended the COVID-era flexibilities in May 2023. The flexibilities were subsequently extended in October 2023 and November 2024 and are now set to expire on December 31, 2025. (For more details, see our previous discussions on the DEA’s proposed rules for telemedicine prescribing of controlled substances and the first, second, and third temporary rules extending COVID-era flexibilities.) Now, in an effort to not lose ground on the expansion of telemedicine prescribing of buprenorphine, especially if the telemedicine flexibilities expire with the incoming Trump administration, the DEA and HHS have revised and finalized their proposed buprenorphine rule.
Comparing the Proposed and Final Rules
The final rule introduces several changes to the proposed rule, some of which are described below:
Supply Limitation: The initial 30-day prescription supply limitation via audio-only was increased to a six-month supply.
In-Person Medical Evaluation: The requirement to have an in-person medical evaluation, with three options for conducting it, to prescribe more than the initial supply of buprenorphine was removed.
Recordkeeping: The detailed recordkeeping requirements for each prescription a practitioner issues through a telemedicine encounter, such as whether the encounter was conducted via audio-video or audio-only, were removed.
PDMP Review: Although reviewing the PDMP database of the state in which the patient is located at the time of the encounter is still required, the specifications and recordkeeping requirements for the review were changed.
The DEA and HHS state that these changes are likely to address and alleviate many of the concerns raised by commentors, acknowledging that some of the previously proposed requirements would have placed undue burdens on both patients and practitioners.
Conclusion
We anticipate that many stakeholders will be dissatisfied with the final rule, particularly with the six-month duration for an initial supply, which may still be too short, and the nationwide PDMP check requirement, which is overly burdensome given the absence of a nationwide PDMP database — a burden the DEA continues to underestimate.
If the COVID-era telemedicine prescribing flexibilities expire without further extension, the final rule offers protection for prescribing buprenorphine to treat OUD. However, that protection is contingent on establishing a legitimate special registration process, which the DEA has yet to propose or implement. Given the uncertainty surrounding the incoming Trump administration’s priorities and its views on telemedicine prescribing of controlled substances, it is unclear whether the final rule will be withdrawn or left as-is. There is also uncertainty about whether the telemedicine prescribing flexibilities will expire after 2025.
Tickled Pink No More
Federal Circuit Affirms Cancellation of CeramTec’s Trademarks for Pink Ceramic Hip Implants
January 16, 2025
Color trademarks have traditionally been difficult to obtain. Of the over 4 million trademark registrations, there were less than 1000 color trademarks as of 2019.[1] To be eligible for trademark registration, a color must have acquired distinctiveness and must not be functional. Recently, the Federal Circuit examined the functional component of the analysis and explained why it presents such a hurdle to registration—particularly when a party also obtains patent protection.
On January 3, 2025, the U.S. Court of Appeals for the Federal Circuit upheld the Trademark Trial and Appeal Board (TTAB) decision canceling trademarks claiming protection for the pink color of ceramic hip components.
CeramTec, a manufacturer of ceramic components for artificial hip implants, developed zirconia toughened alumina (ZTA) containing chromia, which imparts pink color and increased hardness. This material was protected under CeramTec’s U.S. Patent No. 5,830,816, which expired in January 2013. In 2012, CeramTec sought trademark protection for the pink color of its ceramic components. CoorsTek, a competitor, successfully petitioned the TTAB to cancel the trademarks, arguing that the pink color was functional.
On appeal, the Federal Circuit affirmed the TTAB decision, emphasizing that trademarks are not registrable or enforceable if the design is functional. The court analyzed the TTAB’s application of the Morton–Norwich factors to determine functionality:
the existence of a utility patent disclosing the utilitarian advantages of the design;
advertising materials in which the originator of the design touts the design’s utilitarian advantages;
the availability to competitors of functionally equivalent designs; and
facts indicating that the design results in a comparatively simple or cheap method of manufacturing the product.
CeramTec GmbH v. Coorstek Bioceramics LLC, No. 2023-1502, 2025 WL 29252 (Fed. Cir. Jan. 3, 2025).
The court also considered TrafFix Devices, Inc. v. Mktg. Displays, Inc., 532 U.S. 23 (2001), which establishes that utility patents are strong evidence of functionality. The Federal Circuit noted that the functionality doctrine ensures the public is free to use innovations after a patent expires.
Based on these findings, the court affirmed that CeramTec’s pink trademarks are functional and therefore ineligible for protection.
If you have any questions about the impact of these changes, please contact your Miller Canfield attorney or the authors of this alert.
[1] Wang, Xiaoren, Should We Worry about Color Depletion? An Empirical Study of USPTO Single-color Trademark Registrations (January 18, 2022). Available at SSRN: https://ssrn.com/abstract=4011677 or http://dx.doi.org/10.2139/ssrn.4011677
EnforceMintz — Novel Criminal Charges and Emerging Civil Trends from Opioid Enforcement in 2024
In past years we have discussed how opioid-related enforcement efforts have remained a top federal and state priority (here, here, and here). In 2024, opioid-related enforcement efforts continued across the entire opioid supply chain, and two themes dominated the most significant opioid cases and resolutions of 2024. First, two major settlements from the past year highlight examples of allegations that crossed a line, prompting the government to pursue criminal charges. Second, a number of recent cases against pharmacies involve a common theory of liability based on the Controlled Substances Act (CSA), which served as the basis for civil liability under the False Claims Act (FCA).
Opioid-Related Criminal Resolutions
In February 2024, Endo, a pharmaceutical manufacturer that previously filed for bankruptcy, reached a global resolution of various criminal and civil investigations into the company’s sales and marketing of opioid drugs. The company agreed to pay the government $464.9 million over 10 years (though the actual total payment amount will likely be much lower due to bankruptcy).
To resolve the criminal investigation, Endo agreed to plead guilty to a one-count misdemeanor charge for violations of the federal Food, Drug, and Cosmetic Act (FDCA). That charge related to the company’s marketing of the drug’s purported abuse deterrence, tamper-resistant, or crush-resistant properties to prescribers, despite a lack of supporting clinical data. In the plea agreement, the company admitted responsibility for misbranding its opioid drug by marketing the drug with a label that failed to include adequate directions for its claimed abuse deterrence use, in violation of the FDCA.
More recently, in December 2024, McKinsey & Company, a worldwide management consulting firm, agreed to pay $650 million to resolve criminal and civil investigations related to the firm’s consulting work for Purdue Pharma, the maker of OxyContin. As noted in the government’s press release, the McKinsey resolution was the first time a management consulting firm has been held criminally responsible for its advice resulting in a client’s criminal conduct.
The two-count criminal charging document accused McKinsey of conspiring to misbrand a controlled substance and obstruction of justice. The conspiracy charge related to McKinsey’s work to “turbocharge” OxyContin sales by targeting high-volume opioid prescribers. The obstruction charge arose from the alleged deletion by a senior partner of certain documents related to the company’s work for Purdue. To resolve those charges, McKinsey entered into a five-year deferred prosecution agreement (DPA). Under the DPA, McKinsey agreed not to do any consulting work related to the marketing, sale, or distribution of controlled substances and agreed to implement significant changes to its compliance program. Separately, the former McKinsey senior partner who allegedly destroyed records relating to the company’s work for Purdue was charged with obstruction of justice and agreed to plead guilty to that charge.
These two resolutions are relevant to all entities in the opioid supply chain, from manufacturers to consultants and all stakeholders in between. Sales and marketing practices, or abuse deterrence claims or practices targeting prescribers based on volume, can lead to both civil liability and potential criminal exposure.
Pharmacies Face Potential FCA Liability Based on CSA Violations
On the civil side, three opioid enforcement actions were particularly noteworthy. Three years ago, we highlighted some of the first pharmacy-related resolutions, which showed that pharmacies were “next in line” for opioid related enforcement. In 2024, two substantial settlements involved alleged CSA violations giving rise to FCA liability. A third FCA lawsuit filed in December 2024 against the nation’s largest pharmacy shows that this trend will likely continue in 2025 and beyond.
In July 2024, Rite Aid and its affiliates agreed to settle allegations brought by the government related to its opioid dispensing practices. Rite Aid had previously filed for bankruptcy, so the settlement agreement involved a payment of $7.5 million, plus a general unsecured claim of $401.8 million in the bankruptcy case.
The government alleged that Rite Aid pharmacists dispensed unlawful prescriptions and failed to investigate “red flags” before dispensing opioid prescriptions, then improperly submitted claims to the government for reimbursement of those prescriptions. The government alleged that the company dispensed unlawful prescriptions by (1) filling so-called “trinity” prescriptions, which are a combination of opioid, benzodiazepine, and muscle relaxants; (2) filling excessive quantities of opioid prescriptions; and (3) filling prescriptions written by prescribers previously identified as suspicious by pharmacists.
Similarly, in December 2024, Food City, a regional grocery store and pharmacy based in Virginia agreed to pay $8.48 million to resolve allegations that it dispensed opioids and other controlled substances in violation of the CSA and the FCA. Like the Rite Aid case, the government alleged that these prescriptions were medically unnecessary, lacked a legitimate medical purpose, or were not dispensed pursuant to valid prescriptions. The government alleged that Food City ignored “red flags” including, among other things, (1) prescribers who wrote unusually large opioid prescriptions; (2) early refills of opioids; (3) prescriptions for unusual quantities or combinations of opioids; and (4) patients who were filling prescriptions for someone else, driving long distances to fill prescriptions, or paying cash for prescriptions.
Also in December 2024, the Department of Justice announced that it had intervened in a nationwide lawsuit alleging that CVS Pharmacy filled unlawful prescriptions in violation of the CSA and sought reimbursement for those prescriptions in violation of the FCA. The lawsuit is currently pending. The theory of liability asserted against CVS is similar to the Rite Aid and Food City cases: CVS allegedly filled unlawful prescriptions, ignored “red flags” of abuse and diversion, and sought reimbursement from federal health care programs for unlawful prescriptions in violation of the FCA.
Under the CSA and applicable regulations, pharmacists dispensing controlled substances, like opioids, have a “corresponding responsibility” to ensure that the prescription was issued for a legitimate medical purpose. 21 C.F.R. § 1306.04(a). Exercising that corresponding responsibility requires identifying and resolving “red flags” before filling a prescription. There is no defined list of what the government deems to constitute “red flags” and determining the existence of red flags is often context dependent. Because FCA lawsuits based on alleged CSA violations appear to be a growing trend, these three cases provide helpful guidance for companies seeking to mitigate risk by implementing corporate compliance programs designed to identify and resolve “red flags” related to opioid prescriptions.
DOL: Employers Cannot Mandate PTO Use with State/Local Paid Leave Benefits During FMLA
The U.S. Department of Labor Wage and Hour Division (“WHD”) has issiued an opinion letter stating that employers cannot require employees to substtute accrued paid time off during a Family and Medical Leave Act (“FMLA”) leave where the employee is also receiving benefits under a state or local paid family or medical leave program.
The opinion letter – which does not have the force of law but sets forth the agency’s enforcement position – answers a longstanding open question around the interplay between the FMLA, state/local paid leave programs, and accrued paid time off.
A Quick Refresher: FMLA and State Family/Medical Leave Programs
The federal FMLA entitles eligible employees of covered employers to up to 12 weeks (or in limited cases, 26 weeks) of unpaid, job-protected leave per 12-month period for specified family and medical reasons. Covered reasons for FMLA leave include an employee’s own serious health condition, caring for a parent, spouse or child with a serious health condition, and caring for a new child following birth, adoption or foster placement.
Since the FMLA’s enactment in 1993, numerous states (including New York, California, Massachusetts, Connecticut, and others) have instituted family and/or medical leave programs that provide partially paid leave (usually based on a percentage of the employee’s wages, up to a set cap) for personal medical, family care and/or parental leave reasons. Likewise, certain local governments have implemented paid family and medical leave programs specifically for their municipal employees. Many of these programs permit leave for reasons that are also qualifying reasons for leave under the FMLA. However, state/local paid leave programs often include benefits that differ from or exceed what the FMLA provides, such as longer leave periods or additional covered reasons for leave.
What Do the FMLA Regulations Say About Substitution of PTO?
While FMLA leave is unpaid, the governing regulations allow an employee to elect, or an employer to require the employee, to “substitute” accrued employer-provided paid time off (e.g., paid vacation, paid sick leave, etc.) for any part of an unpaid FMLA period – that is, the accrued paid time off may be used concurrently with FMLA leave to enable the employee to receive full pay during an otherwise unpaid leave period. However, the regulations further state that, during any part of an FMLA leave where an employee is receiving disability or workers’ compensation benefits, neither the employer nor the employee can require substitution of paid time off because such leave is not unpaid. Rather, when disability or workers’ compensation benefits are being received, the employer and the employee may only mutually agree (where state law permits) that accrued paid time off will be used to supplement such benefits.
EXAMPLE: John tells his employer he requires 12 weeks of leave to recover from a serious back surgery. John’s employer designates the 12 weeks as FMLA leave. John also applies and is approved for 12 weeks of disability benefits under his employer’s short-term disability program, pursuant to which he will receive a benefit equal to two-thirds of his regular wages. John’s employer cannot require John to substitute his accrued vacation time because he is receiving disability benefits and therefore his FMLA is not unpaid. However, John and his employer agree to use one-third of his available vacation time each week to supplement his disability pay so John receives 100% pay during the leave.
How Does the Opinion Letter Impact Substitution of PTO During FMLA?
Because they have only more recently come into existence, state and local paid family or medical leave programs are not directly addressed in the FMLA regulations. However, the opinion letter now makes clear that “the same principles apply to such programs as apply to disability plans and workers compensation programs.”
First, the opinion letter emphasizes that “where an employee takes leave under a state or local paid family or medical leave program, if the leave is covered by the FMLA, it must be designated as FMLA leave[.]” The opinion letter then goes on to state:
[W]here an employee, during leave covered by the FMLA, receives compensation from a state or local family or medical leave program, the FMLA substitution provision does not apply to the portion of leave that is compensated. Because the substitution provision does not apply, neither the employee nor the employer may use the FMLA substitution provision to unilaterally require the concurrent use of employer-provided paid leave during the portion of the leave that is compensated by the state or local program. [However], if the employee is receiving compensation through state or local paid family or medical leave that does not fully compensate the employee for their FMLA covered leave, and the employee also has available employer-provided paid leave, the employer and the employee may agree, where state law permits, to use the employee’s employer-provided accrued paid leave to supplement the payments under a state or local leave program.
The opinion letter also notes that if an employee’s leave under a state or local paid family or medical leave program ends before the employee has exhausted their full FMLA leave entitlement and the leave therefore becomes unpaid, the FMLA substitution provision would then apply and the employee would be able to elect, or the employer would be able to require the employee, to substitute accrued paid time off.
EXAMPLE: Jane tells her employer she requires 12 weeks of leave to care for her husband while he recovers from a serious back surgery. Jane’s employer designates the 12 weeks as FMLA leave. Jane also applies and is approved for 8 weeks of paid family care benefits under her state’s paid family and medical leave program, pursuant to which she will receive a benefit equal to two-thirds of her regular wages. Jane’s employer cannot require Jane to substitute her accrued vacation time during the 8 weeks of her FMLA leave where she is concurrently receiving state family care benefits because her FMLA during that time is not unpaid. However, Jane and her employer agree to use one-third of her available vacation time each week during the first 8 weeks to supplement her state family care benefit so Jane receives 100% pay during that time. Beginning on week 9, Jane is no longer eligible for state family care benefits and her FMLA leave is now unpaid, so pursuant to its FMLA policy Jane’s employer requires her to substitute her remaining accrued vacation time during the FMLA leave until it is exhausted.
Implications and Action Steps for Employers
The opinion letter clarifies what has been a gray area around the interplay between the FMLA, state/local paid leave programs, and accrued paid time off. For example, the regulations governing the New York Paid Family Leave Law (“NYPFL”) state that “[a]n employer covered by the FMLA . . . that designates a concurrent period of family leave under [the NYPFL] may charge an employee’s accrued paid time off in accordance with the provisions of the FMLA.” However, it had previously been unclear whether this language in fact permitted employers to require substitution of accrued paid time off during a concurrent FMLA and NYPFL leave. It is now clear that such a requirement is impermissible, though employers and employees may agree to use paid time off to supplement NYPFL benefits.
Employers should now review their leave policies and practices to ensure that any provisions around the use of accrued paid time off during FMLA leave comport with the WHD’s interpretation of the requirements of the law. To the extent that any such policies require employees to substitute accrued paid time off during an FMLA leave where an employee is concurrently receiving disability, workers’ compensation or state/local paid family or medical leave benefits, the policies should be revised to provide that paid time off may only be used to supplement such other payments and only if both the employer and the employee agree.
However, employers are reminded that, as noted above, there may be situations where employees are eligible for benefits under state/local paid leave laws that are not also covered by the FMLA. As such, employers should also take note of what an applicable state/local paid family or medical leave law may permit (or not permit) around the substitution of paid time off and apply those rules during any leave period that does not run concurrently with the FMLA.
New Extended Producer Responsibility Requirements for Companies Selling Tobacco and Nicotine Products in Single-Use Packaging
A wave of new “Extended Producer Responsibility” or “EPR” programs is beginning to impact companies placing packaged products, including tobacco products, on the market in U.S. states, including California, Colorado, Maine, Minnesota, and Oregon.
The five EPR programs for packaging enacted thus far have different facets. However, at their core, each of the EPR programs requires companies that sell packaged products (with some limited exceptions) to join a newly formed, state-recognized organization (typically called a “Producer Responsibility Organization” or “PRO”) and pay annual dues based on the amount and type of packaging placed on the market in that state. California’s PRO, for one, must collect $500,000,000 annually from producers of covered products, like single-use packaging. Producers also will need to eventually meet certain sustainability goals for single-use packaging, such as ensuring compostability or recyclability of packaging or meeting minimum post-consumer recycled content targets. What is more, the EPR programs encompass not just primary packaging that directly contacts a good, but often shipping and display packaging as well.
As noted above, the EPR program obligations typically fall on the “producer” of the covered product. In the case of single-use packaging, the states have generally defined producer to mean the brand owner that places a packaged good on the market. For example, an e-cigarette or nicotine pouch company that sells or distributes its branded (tobacco-flavored) e-cigarette or pouch in California would be considered the “producer” of any single-use packaging associated with the finished product, even if the e-cigarette or pouch company did not manufacture the packaging itself. Accordingly, it is the companies marketing the finished products, not packaging companies, that will need to register as producers of tobacco product packaging in the states with packaging EPR programs.
Certain state EPR programs – including Colorado’s and Minnesota’s – also include “paper products” as a covered product. While tobacco companies making roll-your-own (RYO) papers and other such paper-based products may be able to avail themselves of certain exemptions, they must assess this on a case-by-case basis.
In this regard, the state EPR programs include various exemptions for producers and covered products, such as exemptions for small-volume producers and exemptions for certain types of packaging, like infant formula packaging. However, the existing EPR laws do not include any explicit exemptions for tobacco product packaging or paper used in tobacco products. Accordingly, absent another applicable exemption, tobacco product manufacturers are likely to meet the producer definition under the state EPR laws, and thus will need to register with applicable state PROs, pay dues based on the product packaging sold in the state, and eventually meet certain goals for the packaging.
In complying with the state EPR schemes, the tobacco and nicotine product industries can expect to face not only supply chain challenges (e.g., the availability of post-consumer recycled content), but also possibly significant regulatory hurdles under the Family Smoking Prevention and Tobacco Control Act. Under the EPR programs, producers may need to make changes to product packaging to meet sustainability targets. Changes to the container-closure system for a legally marketed tobacco product may well require a new premarket authorization from the U.S. Food and Drug Administration (FDA), which can be a costly and timely endeavor.
In terms of implementation timelines, the states will be rolling out their EPR requirements on differing schedules. The deadline for producers to register with Colorado’s PRO occurred on October 1, 2024, while in California, a deadline to register with the PRO has not been established, but the state has proposed a rule that would require producers to register with CalRecycle later this year. Eventually, producers of covered products will be prohibited from selling in states with EPR programs unless they are registered and participating in the programs.
EPR programs for packaging are likely to spread. Numerous other states have considered or are now considering EPR bills, including New York and New Jersey.
GT Legal Food Talk Episode 26: Crossing Borders – Regulation of Food in the United States and Canada with Stikeman’s Sara Zborovski [Podcast]
In this episode of Legal Food Talk, host Justin Prochnow welcomes Sara Zborovski, one of his attorney counterparts from Canada with Stikeman Elliott to discuss the outlook on food regulation in 2025 for the United States and Canada.
Like a baseball or hockey game played between teams from Canada and the United States, they stand at attention while both national anthems play, discussing some of the potential political implications on food regulation in 2025, including a new administration in the United States and Justin Trudeau’s recent actions to prorogue Parliament in Canada.
They then discuss the wave of FDA guidance issues by the FDA at the end of 2024 and the start of 2025, including FDA’s revised definition of “healthy,” the removal of coconut as a food allergen, new action levels for lead in food intended for infants and children, and the proper naming of plant-based food alternatives.
This episode is a shining example of international cooperation and the best collaboration between the United States and Canada since Canadian bacon and pineapple!
This Week in 340B: January 7 – 13, 2025
Find this week’s updates on 340B litigation to help you stay in the know on how 340B cases are developing across the country. Each week we comb through the dockets of more than 50 340B cases to provide you with a quick summary of relevant updates from the prior week in this industry-shaping body of litigation.
Issues at Stake: Contract Pharmacy; Other
In two appealed cases challenging a proposed Louisiana law governing contract pharmacy arrangements, the appellants filed their opening brief.
In a breach of contract case related to the Medicare 340B cuts, the court terminated the action without prejudice.
Matt David, associate in McDermott’s Los Angeles office, also contributed to this blog post.
December 2024 Bounty Hunter Plaintiff Claims
California’s Proposition 65 (“Prop. 65”), the Safe Drinking Water and Toxic Enforcement Act of 1986, requires, among other things, sellers of products to provide a “clear and reasonable warning” if use of the product results in a knowing and intentional exposure to one of more than 900 different chemicals “known to the State of California” to cause cancer or reproductive toxicity, which are included on The Proposition 65 List. For additional background information, see the Special Focus article, California’s Proposition 65: A Regulatory Conundrum.
Because Prop. 65 permits enforcement of the law by private individuals (the so-called bounty hunter provision), this section of the statute has long been a source of significant claims and litigation in California. It has also gone a long way in helping to create a plaintiff’s bar that specializes in such lawsuits. This is because the statute allows recovery of attorney’s fees, in addition to the imposition of civil penalties as high as $2,500 per day per violation. Thus, the costs of litigation and settlement can be substantial.
The purpose of Keller and Heckman’s latest publication, Prop 65 Pulse, is to provide our readers with an idea of the ongoing trends in bounty hunter activity.
In December of 2024, product manufacturers, distributors, and retailers were the targets of 394 new Notices of Violation (“Notices”) and amended Notices, alleging a violation of Prop. 65 for failure to provide a warning for their products. This was based on the alleged presence of the following chemicals in these products. Noteworthy trends and categories from Notices sent in December 2024 are excerpted and discussed below. A complete list of Notices sent in December 2024 can be found on the California Attorney General’s website, located here: 60-Day Notice Search.
Food and Drug
Product Category
Notice(s)
Alleged Chemicals
Fruits, Vegetables, and Mushrooms: Notices include farro porcini mushrooms, chopped spinach, capers, chili mango, flavored sunflower seeds, shiitake mushrooms, kale chips, flax seeds, artichoke quarters in brine, moringa, dried apricot, madras lentils, cactus chips, bamboo shoots, and stuffed manzanilla olives
38 Notices
Lead and Lead Compounds, and Cadmium and Cadmium Compounds
Prepared Foods: Notices include soup bowls, noodle bowls, salt & vinegar potato chips, bundt cake mix, flatbread mix, granola bars, crackers, nut butter, vegetable biryani, vegan chips, mushroom ravioli, gluten-free tortilla wraps, and plant-based ground meat
36 Notices
Lead and Lead Compounds, Cadmium, and Mercury
Seafood: Notices include Alaska pink salmon, tuna salad, mackerel in olive oil, sardines, seasoned squid, dried seaweed, fried anchovy, dried mackerel, ground shrimp, dried sea mustard seaweed, raw seaweed, and shrimp paste
32 Notices
Lead and Lead Compounds, Cadmium and Cadmium Compounds, and Mercury
Dietary Supplements: Notices include plant-based protein shakes, green powder superfood, greens, protein powder, electrolyte formula beverages, pre-workout beverages, ginkgo biloba powder and tea, and spirulina powder
26 Notices
Cadmium, Lead and Lead Compounds, Mercury and Mercury Compounds, and Perfluorooctanoic Acid (PFOA)
THC-containing Products: Notices include gummies, chocolates, soft gels, flavored beverages, and candies
13 Notices
Delta-9-tetrahydrocannabinol
Sauces: Notices include red mole, aged balsamic vinegar, sundried tomato paste, and basil pesto sauce
4 Notices
Lead and Lead Compounds
Packaged Liquids: Notices include vegetable stock and fruit-flavored beverages, and canned coconut water
4 Notices
Perfluorononanoic Acid (PFNA) and its salts, Perfluorooctanoic Acid (PFOA), and Bisphenol A (BPA)
Cosmetics and Personal Care
Product Category
Notice(s)
Alleged Chemicals
Personal Care Items: Notices include hair color, aloe vera lotions, skin toners, spot treatments, face masks, vitamin C serum, enzyme scrub, body cleaners, eye serums and creams, hair color treatments, hair gels, body wash and foaming cleansers, pain relief cream, body glow, and squirt blood
66 Notices
Diethanolamine
Cosmetics: Notices include mascara, cream makeup, matte lipstick, eyeliner pens, concealers, face primer, and cake makeup
36 Notices
Diethanolamine
Personal Care Products: Notices include shave gel, shave foam, and volumizing foam
3 Notices
Nitrous Oxide
Consumer Products
Product Category
Notice(s)
Alleged Chemicals
Plastic Pouches, Bags, and Accessories: Notices include children’s bags, beauty bags, bento bags, fanny packs, backpacks, wallets, picking bags, weight stabilizing bags, travel bags, rescuer guide packs, shoe covers, and cases for wheel sets
26 Notices
Di(2-ethylhexyl)phthalate (DEHP), Diisononyl phthalate (DINP), and Di-n-butyl phthalate (DBP)
Miscellaneous Consumer Products: Notices include orthodontic kits, keychains, back scratchers, safety flags, vinyl banners, engraved wax sealers, steering wheel covers, lamps, stethoscopes, salt and pepper shakers with PVC components, luggage tag, and vinyl roll holders
26 Notices
Di(2-ethylhexyl)phthalate (DEHP), Diisononyl phthalate (DINP), Di-n-butyl phthalate (DBP), and Lead
Hardware and Home Improvement Products: Notices include long handle hooks, garden hose splitters, coatings and paints, soldering wire, tools with PVC grips, pressure gauge, thermocouples, wing nuts, pop-up drains, propane tank adapter, and thread tape
23 Notices
Lead and Lead Compounds, Di(2-ethylhexyl)phthalate (DEHP), Diisononyl phthalate (DINP), and Perfluorooctanoic Acid (PFOA)
Clothing and Shoes: Notices include gloves made with leather, bucket hats, sandals with PVC components, golf gloves, weatherproof jackets, slides, fuzzy socks, and ski pants
22 Notices
Di(2-ethylhexyl)phthalate (DEHP), Chromium (hexavalent compounds), Perfluorooctanoic Acid (PFOA),
and Bisphenol A (BPA)
Glassware, Metals, and Ceramics: Notices include mugs, glass sets, blue multi-colored glass, metal and glass organizers, spoon rests, shakers, and soap dispenser/sponge holders
19 Notices
Lead and Lead Compounds
Miscellaneous Consumer Products: Notices include shower curtains, tablecloths, pillows, pet beds, athletic bandages, and outdoor cushions
10 Notices
Perfluorooctanoic Acid (PFOA)
Hobby Items: Notices include artist paste paints, art panels, lens mounts, pickleball paddles, jump rope, molding cream, and golf storage boot
8 Notices
Di(2-ethylhexyl)phthalate (DEHP), Di-n-butyl phthalate (DBP), Lead, Diethanolamine, and Perfluorooctanoic Acid (PFOA)
Coal Tar Epoxy
1 Notice
Bisphenol A (BPA), Epichlorohydrin, Ethylbenzene, soots, tar and mineral oils (coal tar)
There are numerous defenses to Prop. 65 claims, and proactive measures that industry can take prior to receiving a Prop. 65 Notice in the first place. Keller and Heckman attorneys have extensive experience in defense of Prop. 65 claims and in all aspects of Prop. 65 compliance and risk management. We provide tailored Proposition 65 services to a wide range of industries, including food and beverage, personal care, consumer products, chemical products, e-vapor and tobacco products, household products, plastics and rubber, and retail distribution.
AI Drug Development: FDA Releases Draft Guidance
On January 6, 2025, the U.S. Food and Drug Administration (FDA) released draft guidance titled Considerations for the Use of Artificial Intelligence To Support Regulatory Decision-Making for Drug and Biological Products (“guidance”) explaining the types of information that the agency may seek during drug evaluation. In particular, the guidance outlines a risk framework based on a “context of use” of Artificial Intelligence (AI) technology and details the information that might be requested (or required) relating to AI technologies, the data used to train the technologies, and governance around the technologies, in order to approve their use. At a high level, the guidance underscores the FDA’s goals for establishing AI model credibility within the context of use.
This article provides an overview of the guidance, including example contexts of use and detailing the risk framework, while explaining how these relate to establishing AI model credibility through the suggested data and model-related disclosures. It further details legal strategy considerations, along with opportunities for innovation, that arise from the guidance. These considerations will be valuable to sponsors (i.e., of clinical investigations, such as Investigational New Drug Exemption applications), along with AI model developers and other firms in the drug development landscape.
Defining the Question of Interest
The first step in the guidance’s framework is defining the “question of interest:” the specific question, decision, or concern being addressed by the AI model. For example, questions of interest could involve the use of AI technology in human clinical trials, such as inclusion and exclusion criteria for the selection of participants, risk classification of participants, or determining procedures relating to clinical outcome measures of interest. Questions of interest could also relate to the use of AI technology in drug manufacturing processes, such as for quality control.
Contexts of Use
The guidance next establishes contexts of use – the specific scope and role of an AI model for addressing the question of interest – as a starting point for understanding any risks associated with the AI model, and in turn how credibility might be established.
The guidance emphasizes that it is limited to AI models (including for drug discovery) that impact patient safety, drug quality, or reliability of results from nonclinical or clinical studies. As such, firms that use AI models for discovering drugs but rely on more traditional processes to address factors that the FDA considers for approving a drug such as safety, quality, and stability, should be aware of the underlying principles of the guidance but might not need to modify their current AI governance. An important factor in defining the contexts of use is how much of a role the AI model plays relative to other automated or human-supervised processes; for example, processes in which a person is provided AI outputs for verification will be different from those that are designed to be fully automated.
Several types of contexts of use are introduced in the guidance, including:
Clinical trial design and management
Evaluating patients
Adjudicating endpoints
Analyzing clinical trial data
Digital health technologies for drug development
Pharmacovigilance
Pharmaceutical manufacturingGenerating real-world evidence (RWE)
Life cycle maintenance
Risk Framework for Determining Information Disclosure Degree
The guidance proposes that the risk level posed by the AI model dictates the extent and depth of information that must be disclosed about the AI model. The risk is determined based on two factors: 1) how much the AI model will influence decision-making (model influence risk), and 2) the consequences of the decision, such as patient safety risks (decision consequence risk).
For high-risk AI models—where outputs could impact patient safety or drug quality—comprehensive details regarding the AI model’s architecture, data sources, training methodologies, validation processes, and performance metrics may have to be submitted for FDA evaluation. Conversely, the required disclosure may be less detailed for AI models posing low risk. This tiered approach promotes credibility and avoids unnecessary disclosure burdens for lower-risk scenarios.
However, most AI models within the scope of this guidance will likely be considered high risk because they are being used for clinical trial management or drug manufacturing, so stakeholders should be prepared to disclose extensive information about an AI model used to support decision-making. Sponsors that use traditional (non-AI) methods to develop their drug products are required to submit complete nonclinical, clinical, and chemistry manufacturing and controls to support FDA review and ultimate approval of a New Drug Application. Those sponsors using AI models are required to submit the identical information, but in addition, are required to provide information on the AI model as outlined below.
High-Level Overview of Guidelines for Compliance Depending on Context of Use
The guidance further provides a detailed outline of steps to pursue in order to establish credibility of an AI model, given its context of use. The steps include describing: (1) the model, (2) the data used to develop the model, (3) model training, (4) and model evaluation, including test data, performance metrics, and reliability concerns such as bias, quality assurance, and code error management. Sponsors may be expected to be more detailed in disclosures as the risks associated with these steps increase, particularly where the impact on trial participants and/or patients increase.
In addition, the FDA specifically emphasizes special consideration for life cycle maintenance of the credibility of AI model outputs. For example, as the inputs to or deployment of a given AI model changes, there may be a need to reevaluate the model’s performance (and thus provide corresponding disclosures to support continued credibility).
Intellectual Property Considerations
Patent vs. Trade Secret
Stakeholders should carefully consider patenting the innovations underlying AI models used for decision-making. The FDA’s extensive requirements for transparency and submitting information about AI model architectures, training data, evaluation processes, and life cycle maintenance plans would pose a significant challenge for maintaining these innovations as trade secrets.
That said, trade secret protection of at least some aspects of AI models is an option when the AI model does not have to be disclosed. If the AI model is used for drug discovery or operations that do not impact patient safety or drug quality, it may be possible to keep the AI model or its training data secret. However, AI models used for decision-making will be subject to the FDA’s need for transparency and information disclosure that will likely jeopardize trade secret protection. By securing patent protection on the AI models, stakeholders can safeguard their intellectual property while satisfying FDA’s transparency requirements.
Opportunities for Innovation
The guidance requires rigorous risk assessments, data fitness standards, and model validation processes, which will set the stage for the creation of tools and systems to meet these demands. As noted above, innovative approaches for managing and validating AI models used for decision-making are not good candidates for trade secret protection, and stakeholders should ensure early identification and patenting of these inventions.
We have identified specific opportunities for AI innovation that are likely to be driven by FDA demands reflected in the guidance:
Requirements for transparency
Designing AI models with explainable AI capabilities that demonstrate how decisions or predictions are made
Bias and fitness of data
Systems for detecting bias in training data
Systems for correcting bias in training data
Systems for monitoring life cycle maintenance
Systems to detect data drift or changes in the AI model during life cycle of the drug
Systems to retrain or revalidate the AI model as needed because of data drift
Automated systems for tracking model performance
Testing methods
Developing models that can be tested against independent data sets and conditions to demonstrate generalizability
Integration of AI models in a practical workflow
Good Manufacturing Practices
Clinical decision support systems
Documentation systems
Automatic systems to generate reports of model development, evaluation, updates, and credibility assessments that can be submitted to FDA to meet regulatory requirements
The guidance provides numerous opportunities for innovations to enhance AI credibility, transparency, and regulatory compliance across the drug product life cycle. As demonstrated above, the challenges that the FDA seeks to address in order to validate AI use in drug development clearly map to potential innovations. Such innovations are likely valuable since they are needed to comply with FDA guidelines and offer significant opportunities for developing a competitive patent portfolio.
Conclusion
With this guidance, the FDA has proposed guidelines for establishing credibility in AI models that have risks for and impacts on clinical trial participants and patients. This guidance, while in draft, non-binding form, follows a step-by-step framework from defining the question of interest and establishing the context of use of the AI model to evaluating risks and in turn establishing the scope of disclosure that may be relevant. The guidance sets out the FDA’s most current thinking about the use of AI in drug development. Given such a framework and the corresponding level of disclosure that can be expected, sponsors may consider a shift in strategy towards using more patent protection for their innovations. Similarly, there may be more opportunities for identifying and protecting innovations associated with building governance around these models.
In addition to using IP protection as a backstop to greater disclosure, firms can also consider introducing more operational controls to mitigate the risks associated with AI model use and thus reduce their disclosure burden. For example, firms may consider supporting AI model credibility with other evidence sources, as well as integrating greater human engagement and oversight into their processes.
In meantime, sponsors that are uncertain about how their AI model usage might interact with future FDA requirements should consider the engagement options that the FDA has outlined for their specific context of use.
Comments on the draft guidance can be submitted online or mailed before April 7, 2025, and our team is available to assist interested stakeholders with drafting.