SCOTUS Upholds TikTok Ban: Implications for Digital Marketing and Emerging Platforms
The United States Supreme Court unanimously upheld the Protecting Americans from Foreign Adversary Controlled Applications Act (the “Act”) – more commonly referred to as the TikTok Ban – and rejected TikTok’s arguments that the Act violated the First Amendment. While the ultimate fate of TikTok’s U.S. operations remains uncertain, the Supreme Court’s ruling has clear implications for digital content and marketing professionals and their selection of platform strategies going forward.
In a per curiam opinion published today, the Supreme Court recognized its long-standing tradition of exercising caution when deciding cases that involve “new technologies with transformative capabilities[,]” and resolved the narrow question of the tension between the First Amendment and the potential risks associated with foreign adversary control over data collection from U.S. citizens. The Act makes it unlawful for any entity to provide certain services to “distribute, maintain, or update” a “foreign adversary controlled application” in the United States, which explicitly meant TikTok and its parent company, ByteDance Ltd. The Supreme Court also acknowledged that the Act applies to any application that is both “(1) operated by a ‘covered company’ that is ’controlled by a foreign adversary,’ ” which is any country subject to the reporting requirements of 10 U.S.C. § 4872 – which currently includes China, Russia, Iran, and North Korea – and “ ’(2) determined by the President to present a significant threat to the national security of the United States,’ following a public notice and reporting process.”
Noting the “striking bipartisan support” for the Act, the Supreme Court’s narrow decision reflects a growing concern among policymakers and courts regarding the national security implications of foreign-owned technology companies operating in the United States. Beyond the immediate impact on TikTok and its users, this ruling has broader implications for the tech industry and the relationship between the U.S. government and foreign-owned companies. It signals a willingness by the Court to uphold government restrictions on technology companies, particularly those with ties to countries considered foreign adversaries when national security concerns can be credibly invoked. Since the Act identified TikTok by name, it is just the first company to be subject to the ban; however, the Act provides a broader framework that could apply to other platforms operating in the United States. Indeed, the popular trend of U.S. TikTok users migrating to another Chinese app, RedNote, could very well implicate the Act.
Marketing and advertising stakeholders should particularly take note of today’s Supreme Court decision because of a challenge built into the Act: While content creators and marketers benefit from being early adopters of emerging platforms, including international platforms, the Act comes into play when an application reaches a critical mass of more than 1,000,000 monthly active users. In other words, the Act adds another layer of complexity for content creators as they consider building their presence and following on new applications. Once an application becomes sufficiently popular, it could be shut down if it is deemed controlled by a foreign adversary. Likewise, marketing and advertising agencies should more carefully scrutinize the risk that a platform could be shut down under the Act, frustrating ongoing agreements or campaigns.
Grassley Defends Constitutionality of False Claims Act’s Qui Tam Provisions in Amicus Brief
In an amicus brief filed on January 15, Senator Chuck Grassley (R-IA) urges the Eleventh Circuit to reverse a district court ruling which held that the False Claims Act’s qui tam provisions are unconstitutional.
Grassley, who authored the 1986 amendments which modernized the FCA, states that “the False Claims Act is our nation’s single greatest tool to fight waste, fraud and abuse” and calls the Middle District of Florida’s decision in Zafirov v. Florida Medical Associations a “flawed decision.”
In September, the Middle District of Florida dismissed whistleblower Claire Zafirov’s qui tam lawsuit on the grounds that the FCA’s qui tam provisions are unconstitutional as they violate the Appointments Clause of Article II of the Constitution.
In his brief, Grassley lays out the long-history of qui tam laws and details a number of qui tam provisions enacted by the First Congress. He criticizes the district court for discarding this history despite the Supreme Court’s heavy reliance on it in its decision in Vermont Agency of Nat. Res. v. United States ex rel. Stevens, which held that the FCA’s qui tam provisions do not violate Article III of the Constitution.
“The First Congress that enacted numerous statutes that featured qui tam provisions made clear that, at the time of the founding, the legislature believed that the limited rights granted relators fell within the Constitutional separation of powers many of them had personally fashioned,” Grassley’s brief states.
In the brief, Grassley also notes that “every court to have addressed the issue has concluded that the qui tam provision is in accordance with the Constitutional separation of powers.”
He further emphasizes the immense success of the FCA’s qui tam provisions in incentivizing whistleblowers to come forward and expose otherwise hard-to-detect frauds, deter would-be fraudsters, and protect the public from harm.
As Grassley notes in his brief, “the FCA is a resounding success, as Congress and the Executive Branch have both acknowledged.” According to newly released statistics from the Department of Justice (DOJ), since the FCA was modernized in 1986, qui tam lawsuits have resulted in over $55 billion in recoveries of taxpayer dollars.
Grassley’s brief joins a brief filed by the U.S. government in urging the Eleventh Circuit to reverse the district court ruling. In its brief, the government claims that the Stevens decision “makes clear that relators do not exercise Executive power when they sue under the Act… Rather, they are pursuing a private interest in the money they will obtain if their suit prevails.”
It further states that “the historical record.. suggests that all three branches of the early American government accepted qui tam statutes as an established feature of the legal system.”
During her Senate confirmation hearing on January 15, Senator Grassley asked Pam Bondi, nominee to be the Attorney General, if she would commit to defending the constitutionality of the FCA.
“I would defend the constitutionality of course of the False Claims Act,” Bondi stated. “The False Claims Act is so important, especially by what you said with whistleblowers.”
401(k) Plan Fiduciaries Breached ERISA’s Duty of Loyalty By Allowing ESG Interests To Influence Management Of The Plan
Last week, Judge Reed O’Connor of the U.S. District Court for the Northern District of Texas, issued the first-of-its-kind ruling on the merits pertaining to environmental, social, and corporate governance (“ESG”) investing in ERISA-covered retirement plans. In his 70-page Opinion, Judge O’Connor concluded that the plan fiduciaries of American Airlines’ (the “Plan Sponsor’s”) 401(k) plans breached their duty of loyalty, but not their duty of prudence, by allowing their corporate ESG interests, as well as the plan investment manager’s ESG interests, to influence management of the plans. The case is Spence v. American Airlines, Inc., No. 4:23-cv-552 (N.D. Tex. Jan. 10, 2025).
There have been numerous media reports on the Opinion which, as one may expect, have reached a wide array of views about its implications. On the one hand, some have viewed the Opinion as being limited to the specific facts of the case. On the other hand, some have viewed the Opinion as having far reaching consequences because (i) its undertone suggests it is yet another attack on the controversial practice of ESG investing, and (ii) it seeks to upend the common practice of plan fiduciaries delegating authority for proxy voting to investment managers.
Plan sponsors and fiduciaries will want to monitor developments in this action, including how Judge O’Connor addresses the issue of damages and what is likely to become a hotly contested appeal to the Fifth Circuit. In addition, a watchful eye should be kept on another case in this District recently remanded by the Fifth Circuit, where another judge is being asked to consider a legal challenge to ERISA’s ESG investing-related regulations.
Background
Bryan Spence, a participant in one of the Plan Sponsor’s two 401(k) plans, sued the plans’ fiduciaries under ERISA, alleging that they breached their fiduciary duties of prudence and loyalty by mismanaging certain funds in the plans’ investment menus that were managed by firms that pursued non-financial and non-pecuniary ESG policy goals through proxy voting and shareholder activism. Spence contended that such mismanagement harmed the financial interests of the plans’ participants and beneficiaries by pursuing ESG policy goals rather than exclusively financial returns.
The Court’s Opinion
After considering the evidence presented at trial, the court concluded that the plans’ fiduciaries did not breach their fiduciary duty of prudence, but that they did breach their duty of loyalty.
The court concluded that Spence did not prove that the plans’ fiduciaries acted imprudently because their process was consistent with, and in some ways better than, prevailing industry standards. While the court criticized the plans’ fiduciaries for failing to probe the investment manager’s ESG strategy, it concluded that the plans’ fiduciaries maintained a “robust process” for monitoring, selecting, and retaining investment managers, which included the following:
The plans’ fiduciaries held quarterly meetings, which included reporting from internal and external experts responsible for evaluating the plans’ investment managers;
The plans’ fiduciaries hired a well-qualified, independent investment advisor through a competitive bidding process;
The plans’ fiduciaries relied on in-house investment professionals to supplement the third-party advisor’s analysis, “another layer of review that few large-plan fiduciaries replicate”; and
The plans’ fiduciaries met industry standards regarding delegation and oversight of the plans’ investment manager’s proxy voting guidelines and practices.
Notably, the court lamented that “the ‘incestuous’ nature of the retirement industry” means that fiduciaries could escape liability for imprudence by following the prevailing practices of fiduciaries who set the industry standard, even where, in its view, those practices have shortcomings. The court concluded, however, that an act of Congress would be required “to avoid future unconscionable results like those here.”
The court next concluded that the plans’ fiduciaries violated their duty of loyalty “by doing nothing” to ensure that the plans’ investment manager acted in the best financial interests of the plans. In the court’s view, the following facts, taken together, proved that the plans’ fiduciaries failed to act with an “eye single” toward the plans and their participants and beneficiaries:
The investment manager was one of the Plan Sponsor’s largest shareholders and held more than $400 million of the Plan Sponsor’s debt;
A member of the plans’ fiduciary committee was responsible for the Plan Sponsor’s relationship with the investment manager, and the record included emails among fiduciaries referencing the importance to the Plan Sponsor of its relationship with the investment manager;
As a large consumer of fossil fuels, the Plan Sponsor had a corporate reason to be concerned about the investment manager’s ESG focus, which impermissibly clouded the fiduciaries’ judgment; and
The plans’ fiduciaries allowed the Plan Sponsor’s corporate commitment to ESG goals to influence their oversight and management of the plans; in other words, they failed to maintain the necessary divide between their corporate interests and the investment manager’s use of plan assets in the pursuit of ESG policy goals with little fiduciary oversight.
The court found that the evidentiary combination of the (i) Plan Sponsor’s corporate commitment to ESG, (ii) endorsement of ESG policy goals by the plans’ fiduciaries, (iii) influence of, and conflicts of interests related to, the plans’ investment manager that had emphasized ESG, plus the (iv) lack of separation between the defendants’ corporate and fiduciary roles, together established a convincing picture that the defendants had breached their duty of loyalty under ERISA. Whether that disloyalty was in service of the investment manager’s objectives or the Plan Sponsor’s own corporate goals, or both, did not matter. According to the court, the defendants did not act solely in the interests of the plans’ participants and beneficiaries and thus breached their fiduciary duty of loyalty to the plans.
The court ordered the parties to submit cross-supplemental briefing within three weeks on the question of whether the plans suffered any losses and other outstanding issues.
Proskauer’s Perspective
Only time will tell whether the Opinion is limited to its facts or, as some believe, will have broad consequences for the retirement plan industry. Regardless, the court’s decision is notable for several reasons.
To begin with, the premise of the court’s analysis was that the investment manager’s ESG focus was non-pecuniary. Consistent with the Department of Labor’s most recent ESG-related guidance (described here), the court acknowledged that ESG factors could be relevant to a pecuniary risk-and-return analysis where there is a “sole focus on [the] ESG factor’s economic relevance.” For example,the court explained that an investment manager would not be permitted to decide to divest from a company because the company lacks diversity in its leadership, but could consider the lack of leadership diversity if the investment manager believes, based on sound analysis, that it materially risks financial harm to shareholders.
The court drew consequential conclusions based on what it characterized as significant holdings by the investment manager of the Plan Sponsor’s equity and debt. The case illustrates the importance of maintaining clear separation between company considerations and plan fiduciaries’ deliberations. Because many large investment managers have significant holdings in major companies, the court’s analysis opens the door for increased scrutiny of whether an investment manager’s holdings might cloud fiduciaries’ judgment. In fact, it could be argued that the very same conduct the court found was consistent with industry norms and established that the plan fiduciaries acted prudently also established that the plan fiduciaries acted disloyally.
GAO Rejects Notion of a Pre-FPR “Continuous Registration Requirement” for SAM
The last week saw GAO sustain two protests that should put the nail in the SAM “continuous registration” coffin.
The Federal Acquisition Regulatory (“FAR”) Council recently revised the standard System for Award Management (“SAM”) registration clause (FAR 52.204-7) to make clear there is no “continuous registration requirement”—contractors need to be registered in SAM only at the time they submit their final, legally-binding proposal.
In two recent decisions, GAO has confirmed that the same was (and is) true under the prior version of FAR 52.204-7 as well. That is, if an agency allows an offeror to submit a revised proposal, and the offeror is properly registered in SAM when that final proposal is submitted, it does not matter if there was some SAM registration failure at an earlier stage of the procurement. The offeror is eligible, and it would be unreasonable for an agency to eliminate an offeror or terminate an award based on a pre-FPR SAM flaw.
In UNICA-BPA JV, LLC, B-422580.3, the protester (“UNICA”) had an active SAM registration when it submitted its final revised proposal, but the Agency later eliminated UNICA from the competition based on the fact that UNICA was not registered in SAM at the time of its initial proposal. That was unreasonable, GAO found, because UNICA had in fact met the stated requirement to be registered in SAM “when submitting an offer,” as the FAR defines “offer” as a proposal that can form a binding contract, and that definition applied only to UNICA’s final, legally-binding proposal, which was compliant. GAO thus found the Agency acted unreasonably by eliminating UNICA from the competition and sustained UNICA’s protest.
In Metris LLC, B-422996.2, the Agency proposed to take corrective action to terminate the award to Metris for having a break in its SAM registration between the time of the initial proposal submission and its final proposal submission. GAO found that Metris’s initial proposal was extinguished when Metris submitted – and the Agency accepted – Metris’s final proposal revision. Because Metris was registered in SAM at the time of the final proposal revision, Metris had an active SAM registration when it submitted its offer, in accordance with FAR 52.204-7. GAO thus recommended that the agency abandon its plans to terminate Metris’s contract award, and instead “maintain its existing award to Metris.”
These cases follow the legal reasoning of Hanford Tank Disposition Alliance, LLC v. United States, 173 Fed. Cl. 269, 312-319 (2024), and should deter agencies from eliminating any more offerors over pre-FPR SAM issues.
Mass. Appeals Court: 9-Month Repair Delay Exposes Landlord to Chapter 93A Penalties
A residential landlord is generally subject to Chapter 93A, as they engage in the “conduct of trade or commerce” by leasing residential property unless, as explained by the Massachusetts Supreme Judicial Court in Billings v. Wilson, the leased property is owner-occupied. Therefore, a non-owner-occupied landlord must contend with (i) specific Massachusetts landlord-tenant laws1 and (ii) Chapter 93A.
The Massachusetts Appeals Court recently subjected a residential landlord to Chapter 93A in Ndoro v. Torres. The litigation arose from the landlord’s action to recover possession of an apartment. In response to the lawsuit, the tenant counterclaimed and asserted that the landlord had breached the implied warranty of habitability by failing to repair “rotted bathroom underflooring” within a reasonable time. The trial judge found for the tenant on the breach of implied warranty claim and awarded her continued possession of the premises and damages. The judge, however, dismissed the tenant’s Chapter 93A claim. According to the judge, the landlord had repaired the premises within a reasonable time.
The Appeals Court disagreed. Based on the record, the landlord waited approximately nine months to repair the premises. As the defects in the bathroom underflooring presented a safety hazard, that delay breached the implied warranty of habitability. That alone was sufficient to violate Chapter 93A and, independently, 940 Code Mass. §3.17(1)(b)(1)-(2) and 3.17(1)(i). The Appeals Court noted that the landlord had not challenged the trial court’s finding that the landlord was engaged in “trade or commerce.” It is unclear from the opinion whether the landlord also lived at the premises, which may have precluded the tenant’s Chapter 93A claim.
Ultimately, the Appeals Court concluded that the tenant had prevailed on her Chapter 93A counterclaim without the need for further evidence. The Appeals Court remanded the matter to the Housing Court Department to enter judgment under Chapter 93A for the tenant, determine the tenant’s damages (and whether those damages should be doubled or trebled under Section 9), and award attorneys’ fees and costs. This case underscores the importance of understanding the laws governing landlord-tenant rights and when a landlord is engaging in “the conduct of trade or commerce” that falls into the scope of Chapter 93A.
1 See The Attorney General’s Guide to Landlord and Tenant Rights and 940 C.M.R. s. 3.17 (Landlord-Tenant Regulations)
TikTok, the Clock Won’t Stop, and Cases Involving Court Jurisdiction Narrowly Focused – SCOTUS Today
As the snow has fallen on Washington, DC’s First Street over the past few days, the Supreme Court has begun to issue opinions in the current term.
One of those cases has been in the news constantly, as it relates to a matter at issue in the recent presidential campaign that will likely get attention after the inauguration. The other two relate to federal court jurisdiction, but they are also consequential because their fact patterns are likely to be duplicated in future litigation.
While, with the advent of the new administration, things very well might change, the news today that the Court has upheld a law that could ban the social media platform TikTok this Sunday is significant not only to expressive younger Americans (perhaps your children and mine) but also as a matter of national security.
In a per curiam opinion in TikTok, Inc. v. Garland, the Court noted the following:
There is no doubt that, for more than 170 million Americans, TikTok offers a distinctive and expansive outlet for expression, means of engagement, and source of community. . . . But Congress has determined that divestiture is necessary to address its well-supported national security concerns regarding TikTok’s data collection practices and relationship with a foreign adversary.
And the Court has sided with Congress. Accordingly, TikTok either must divest or shut down the app this Sunday, January 19, as of which date, “the Protecting Americans from Foreign Adversary Controlled Applications Act [the “Act”] will make it unlawful for companies in the United States to provide services to distribute, maintain, or update the social media platform TikTok, unless U.S. operation of the platform is severed from Chinese control.”
The petitioners are two TikTok operating entities and a group of U.S. TikTok users who claimed that the Act, as applied to them, violates the First Amendment. The Court acknowledged that the case could be considered more of a regulation as to a foreign government adversary’s corporate ownership than as a matter of speech. Thus, the Court holds that “a law targeting a foreign adversary’s control over a communications platform is in many ways different in kind from the regulations of non-expressive activity that we have subjected to First Amendment scrutiny.” Those differences include “the Act’s focus on a foreign government [and] the congressionally determined adversary relationship between that foreign government and the United States. . . .” However, “[t]his Court has not articulated a clear framework for determining whether a regulation of non-expressive activity that disproportionately burdens those engaged in expressive activity triggers heightened review. We need not do so here. We assume without deciding that the challenged provisions fall within this category and are subject to First Amendment scrutiny.”
The Court goes on to set forth a primer on the conditions predicate for considering governmental action that arguably suppresses speech. “Content-based laws—those that target speech based on its communicative content—are presumptively unconstitutional and may be justified only if the government proves that they are narrowly tailored to serve compelling state interests.” Reed v. Town of Gilbert, 576 U.S. 155, 163 (2015). Content-neutral laws, in contrast, “are subject to an intermediate level of scrutiny because in most cases they pose a less substantial risk of excising certain ideas or viewpoints from the public dialogue.” Turner Broadcasting System, Inc. v. FCC, 512 U. S. 622, 642 (1994) 512 U.S., at 642 (citation omitted). “Under that standard, we will sustain a content-neutral law ‘if it advances important governmental interests unrelated to the suppression of free speech and does not burden substantially more speech than necessary to further those interests.” Turner Broadcasting System, Inc. v. FCC, 520 U. S. 180, 189 (1997).’”
”As applied to petitioners, the challenged provisions are facially content neutral and are justified by a content-neutral rationale.” Noting that the Act in question is “designed to prevent China—a designated foreign adversary—from leveraging its control over ByteDance Ltd. to capture the personal data of U. S. TikTok users,” which “qualifies as an important Government interest under intermediate scrutiny,” the Court held that this standard, including its narrow focus, justified the divestiture order at issue.
Justice Sotomayor and Justice Gorsuch concurred in the result. Justice Gorsuch’s caveat, expressing satisfaction that the Court did not consider evidence available to it but not to the petitioners, is noteworthy. That is a potential issue in many national security-related cases.
Labor law practitioners who read this blog will be particularly interested in the Court’s unanimous opinion in E.M.D. Sales, Inc. v. Carrera. The case concerns the application of the Fair Labor Standards Act (FLSA), guaranteeing a federal minimum wage for covered workers, 29 U. S. C. §206(a)(1), and requiring overtime pay for those working more than 40 hours per week, §207(a)(1). There are, however, many employees who are exempt from the FLSA’s overtime-pay requirement, e.g., salesmen who primarily work away from their employer’s place of business. §213(a)(1). The application of that exemption places the burden on the employer to show that it applies. Here, EMD, a Washington, DC-area food distributor, faced overtime claims by certain sales representatives who manage inventory and take orders at grocery stores. Several sales representatives sued EMD, alleging that the company violated the FLSA by failing to pay them overtime.
At trial, the U.S. District Court for the District of Maryland held that EMD failed to prove by “clear and convincing evidence” that its sales reps were “outside salesmen.” The U.S. Court of Appeals for the Fourth Circuit affirmed. EMD argued that the sales representatives were outside salesmen and, therefore, exempt from the FLSA’s overtime-pay requirement and that the District Court should have used the less stringent “preponderance of the evidence” standard.
The Supreme Court agreed, holding that the preponderance-of-the-evidence standard applies when an employer seeks to demonstrate that an employee is exempt from the minimum wage and overtime pay provisions of the FLSA. Noting that at the time of enactment of the FLSA in 1938, and continuing to the present, the preponderance standard is the default mode in American civil litigation, the Court held in favor of EMD.
There are three main circumstances in which a more stringent standard might apply: (1) where a statute requires it, (2) where the Constitution requires it, and (3) where coercive governmental action is present. None of those is present here. Moreover, in a related area to the case at bar, employment discrimination, the preponderance standard has consistently been applied. Additionally, the Court rejected the notion that the non-waivability of FLSA rights is material to what standard of proof applies.
Ultimately, the remedy applied by the Court is a limited one. In reversing the decision, the Court simply remands the case to the Court of Appeals to determine whether employees would fail to qualify as outside salesmen even under a preponderance standard.
In a case decided two days ago, Royal Canin U.S.A. Inc. v. Wullschleger, the Court dealt with a consumer claim that the manufacture of a brand of dog food (full disclosure: my dog loves the Golden Retriever variety) had engaged in deceptive marketing practices. The consumer’s original claim, filed in state court, asserted both federal and state law violations. Royal Canin removed the case to federal court pursuant to 28 U. S. C. §1441(a). The plaintiff, Anastasia Wullschleger, wanted the case to be resolved in state court, so she amended her complaint to remove any mention of federal law and petitioned the district court for a remand to state court, which the court denied. However, the Eighth Circuit reversed, and a unanimous Supreme Court, per Justice Kavanaugh, affirmed, holding that “[w]hen a plaintiff amends her complaint to delete the federal-law claims that enabled removal to federal court, leaving only state-law claims behind, the federal court loses supplemental jurisdiction over the state claims, and the case must be remanded to state court.”
Thus, the Court has begun to issue new opinions, at least one of which is going to resound loudly on the domestic political scene.
Nasdaq Board Diversity Rules Struck Down in Court
On December 11, 2024, the U.S. Court of Appeals for the Fifth Circuit, sitting en banc in Alliance for Fair Board Recruitment v. SEC, held that the approval by the U.S. Securities and Exchange Commission (SEC) of the Nasdaq Board Diversity Rules was arbitrary, capricious, and in contravention of the Securities Exchange Act of 1934, and vacated the approval of those Rules.
It is unclear if the SEC will seek to appeal the decision to the U.S. Supreme Court or if that court will grant the petition for certiorari. However, in a December 12, 2024, statement, Jeff Thomas, Nasdaq’s Global Head of Listings, confirmed that Nasdaq will not seek to appeal the ruling, and companies seeking Nasdaq listing or listed on the Nasdaq stock markets will not need to comply with the Diversity Rules.
The Diversity Rules, proposed as a securities exchange listing requirement in December 2020 and approved by the SEC under Section 19(b)(1) of the Exchange Act, went into effect in August 2021. Subject to certain transition periods and exceptions, it required each Nasdaq-listed company to publicly disclose information on the voluntary self-identified gender, racial characteristics, and LGBTQ+ status of the members of the company’s board of directors. The Exchange also required each Nasdaq-listed company, subject to certain exceptions, to have, or explain why it does not have, at least two members of its board of directors who are considered “diverse,” including at least one director who self-identifies as female and at least one director who self-identifies as an underrepresented minority or LGBTQ+. In connection with the Diversity Rules, Nasdaq provided recruiting assistance for interested public companies to recruit diverse board members.
The Loper Loophole: Will Loper Bright Chip Away at Federal Circuit Rule 36 Summary Affirmances?
Criticism of the U.S. Court of Appeals for the Federal Circuit’s practice of issuing summary affirmances without written opinions in federal appeals and, in particular, Patent Trial and Appeal Board (PTAB) decisions, under Federal Circuit Rule 36 has reached a fever pitch. Recent briefs to the U.S. Supreme Court and rehearing petitions to the Federal Circuit advocate for change. Does the U.S. Supreme Court’s momentous 2024 decision casting aside the Chevron doctrine in Loper Bright Enterprises v. Raimondo now offer a path for PTAB appellants to circumvent Rule 36 altogether?
Rule 36 of the Federal Circuit’s Rules of Appellate Procedure permits the court to affirm on appeal without an opinion when the court determines that one of five criteria are met. The Federal Circuit has explained that a summary affirmance neither rejects nor endorses the underlying reasoning from the tribunal below, and therefore does not carry precedential weight. Nevertheless, a Rule 36 affirmance constitutes a final judgment for the litigants before the court and may be relied on for purposes of claim preclusion, issue preclusion, judicial estoppel, and law of the case.
The scrutiny of Rule 36 affirmances has been especially acute in connection with recent PTAB decisions. For example, amicus briefs were filed over the past few months in support of a petition submitted by patent holder ParkerVision, Inc., which contrasted the comments of former Federal Circuit judges conveying that the court should provide an opinion in every case, with the reality that the Federal Circuit issued Rule 36 summary affirmances in 43 percent of PTAB appeals between 2011 and 2024. This practice, ParkerVision urged, runs afoul of the requirement of 35 U.S.C. § 144 that a court provide the reason for its decision.
But the Loper Bright decision, which overturned the Chevron doctrine requiring courts to defer to agency interpretation of statutes, may sometimes require the Federal Circuit to exercise “independent judgment in determining the meaning of a statutory provision.”
In Loper Bright, the Supreme Court held that when confronted with a statutory ambiguity, a court must not defer to an agency’s interpretation but instead should do its “ordinary job of interpreting statutes, with due respect for the views of the Executive Branch.” While prior PTAB appeals to the Federal Circuit would have been affirmed when the court agreed that the agency’s interpretation of an ambiguous statute was reasonable, such deference is no longer permitted. Framing a PTAB appeal through the lens of a “statutory ambiguity” may increase the likelihood that the Federal Circuit will be unable to rubber-stamp the statutory interpretation and associated findings of the PTAB using Rule 36.
In October 2024, appellant-patent owner Converter Manufacturing made this very argument when it petitioned the Federal Circuit to rehear its appeal en banc after receiving a Rule 36 affirmance of an adverse PTAB decision in Converter Manufacturing, LLC v. Tekni-Plex, Inc. Converter Manufacturing claimed the Supreme Court’s decision in Loper Bright barred the Federal Circuit from deferring to the U.S. Patent and Trademark Office’s (USPTO) interpretation of patent law under 35 U.S.C. §§ 102 and 103, and argued that the Federal Circuit panel had substituted the USPTO’s interpretation for its own by issuing the summary affirmance.
Although the petition was ultimately denied, it raises new questions about the limits of Federal Circuit affirmances under Rule 36 in light of Loper Bright. Perhaps the Supreme Court’s shift away from deference offers a new opportunity for appellants to position their appeal to avoid the dreaded two-word decision: “summarily affirmed.”
The DEI Stalemate: Paying the Price for the Wrong Move
Three Ward and Smith attorneys described what can happen when a DEI initiative goes wrong, placing an organization in a legal stalemate with its employees.
In a unique, interactive session that was part of the firm’s annual In-House Counsel seminar, participants evaluated potential DEI outcomes by analyzing three fictional scenarios. With elements pulled from real-life cases, the discussion illustrated how the stakes can become increasingly high with DEI practices.
Each participant assumed a different role, from in-house counsel and employee to accuser and accused, creating a lively examination of the benefits of DEI and the challenges associated with implementation, as well as how to develop solutions for evolving issues in the DEI landscape.
The discussion was led by Ken Gray, leader of the Labor and Employment Law Group, X. Lightfoot, an employment and personal injury attorney, and Avery J. Locklear, a labor and employment attorney.
The Technology Company Scenario
The first scenario involved a well-intentioned technology company that recently hired a new SVP in charge of Diversity, Equity, and Inclusion (DEI), Jordan Ellis. The business in question is a tech leader with over 10,000 employees across the U.S.
Ellis was asked to perform an assessment of the company’s workforce and leadership diversity. He found a number of areas in need of improvement, including female representation in leadership, Black/African American representation in leadership, and Asian/Hispanic representation in leadership.
Tasked with improving these metrics by the CEO, Ellis re-evaluated the Director of Communications role held by John Roe, a White man with a strong track record. Ellis then made the decision to inform Roe of a strategic shift within the company and relieved him of his duties.
The role was split into two new positions that were filled by two qualified deputies: one a White woman, the other a Black woman. Ellis believed the move aligned with the company’s DEI goals, representing a strategic step in making the leadership more inclusive and diverse.
Potential Response to Litigation?
The audience was asked to determine if any possible defense asserted by the company in response to a claim made by Roe represented a house of cards. “This was a fairly clear example of discrimination in relation to Title VII,” noted Gray, “which prohibits discrimination based on race, color, religion, sex, and national origin.”
The scenario was based on a real case, Duvall v. Novant Health, Inc. “In this case, a white management level employee who received above average evaluations got the axe,” said Gray. “It was a one-week jury trial, and the jury awarded $10 million.”
The decision made clear that it is permissible for employers to use DEI programs; however, these programs may not form the basis for adverse employment decisions.
“Some call this reverse discrimination, but I just call it discrimination. It’s important to note that the Act doesn’t say in regard to sex, the female sex, or in regard to race, the Black race or the Brown race. It just says race, it just says sex,” Gray explained.
The case established a significant precedent and illustrated a pitfall associated with poorly implemented DEI programs.
A Venture Capital Fund’s Contested Contest
The next scenario involved a venture capital fund interested in supporting businesses led by women of color. To close the funding gap, the fund created a grant contest with a prize of $50,000, growth tools, and mentorship opportunities.
Eligibility was open to Black women who were U.S. residents, with businesses that were at least 51 percent Black woman-owned. The audience discussed potential legal issues an in-house attorney could face as a result of the contest, which included an entry form with official competition rules.
The rules were explicit, stating in all caps that, “BY ENTERING THIS CONTEST, YOU AGREE TO THESE OFFICIAL RULES, WHICH ARE A CONTRACT…”
Two companies with owners who were not Black women were rejected after submitting applications for the contest. The Chief Legal Officers for both companies, Vegan Now and Well Soul, were members of the Collective of Corporate Counsel (CCC), a national bar association promoting the common business interests of in-house counsel through education, networking, and advocacy.
Would it be permissible for CCC to sue on behalf of Vegan Now and Well Soul? Did the rules on the entry form constitute a contract? The audience considered these and other questions.
The contention of CCC was that the form constituted a contract since the potential contest winners entered into a bargain-for-exchange when they applied. CCC’s argument was based on 42 USC § 1981, a federal law prohibiting discrimination on the basis of race, color, and ethnicity when making and enforcing contracts.
CCC also contended that the contest violated section 1981 due to its terms, as it categorically excluded non-black applicants from eligibility because of race. “If this sounds familiar, the reason is that it mirrors the factual pattern of a case that went before the 11th Circuit Court of Appeals,” commented Lightfoot.
The case involved the American Alliance for Equal Rights and a venture capital fund out of Atlanta, the Fearless Fund. “Ultimately, the court ruled that the membership organization did have standing to sue on behalf of its members, and the contest likely violated Section 1981 of the Civil Rights Act of 1866,” added Lightfoot.
The Fearless Fund settled the lawsuit and discontinued the contest as a response.
Breaking Boundaries Baristas
In the final scenario, the team explored how a well-intentioned coffee shop owner brewed trouble in her organization with a DEI policy gone wrong. Hiring people of diverse backgrounds and creating a welcoming environment for her team was a central focus for the owner, Linda Harper, who operates three local branches with 20 employees.
One of Linda’s employees, Sam Rowe, was assigned female at birth. “Sam has been living as a man and recently shared that his new pronouns are he/him,” said Locklear. “Though Sam’s announcement was mostly accepted, some of the team didn’t felt comfortable with his transition.”
A heterosexual female colleague, Olivia Spencer, struggled to adapt to Sam’s pronouns and had to be corrected multiple times. A heterosexual male colleague, Ben Paulson, admits the transition makes him somewhat uncomfortable. However, he has respected Sam’s pronouns.
Locklear asked whether Olivia’s and Ben’s behavior has risen to the level of creating a hostile work environment. The answer, of course, is that it depends and, as it is with so many other topics within the legal profession, there is no such thing as a one-size-fits-all, bright-line rule that can be applied to every situation.
Slurs and the misuse of pronouns by co-workers can encourage similar behavior from customers. To illustrate this idea, Gray described a case in which he assisted a client in 2016. “People would approach the coworkers and ask whether their colleague was a man or a woman,” he said. “This would occasionally result in slurs, and the customers would pick up on that, perpetuating the hostile work environment.”
The facts have to be evaluated in the context of every situation. “It boils down to whether the behavior was so severe and pervasive it created a hostile work environment. There’s no magic number of how many harassing events need to occur,” advised Locklear. “It’s based on all the circumstances.”
The EEOC issued new guidance on transgender employees in the workplace in April of 2024. A key aspect of this guidance was the misgendering of employees in front of coworkers and customers to the extent it made them uncomfortable.
“If it’s a long-term employee, there are going to be mistakes, and everyone has to give each other a little bit of grace, but whenever in doubt, you can always just use that person’s name,” added Locklear.
Mandatory Work Events
In an effort to foster unity and celebrate Pride Month, Linda organizes a mandatory drag queen night for the entire workforce. Her hope is that an evening with celebrity impersonator, Holly Wood, could bring the team together through a shared experience emphasizing inclusion.
While some employees are pumped about the event, some, including Ben and Olivia, are not comfortable attending. Sam also feels uneasy, sensing the event is directed at him in a way that feels awkward instead of supportive.
Ben asks to be excused from the event; Linda reiterates that attendance is mandatory and disciplinary action will follow if employees fail to attend.
The day after, Olivia tells Linda she feels the company is “too woke,” and she no longer enjoys working there. Sam describes new tension with his colleagues and feels some are treating him differently as a result of the event.
After some reflection, Linda realizes her approach may have inadvertently caused discomfort among the employees she wanted to support with her commitment to inclusivity. To move forward, she begins considering new ways to promote understanding and respect within her team.
The audience considered what went wrong and there was vast consensus that the event should not have been mandatory.
“This could have been fun, but making it mandatory was a bad idea, especially since it was a social event and an employee had already expressed discomfort,” Locklear explained.
Though the scenario was farfetched, it holds a number of important lessons for employers, Locklear added. “One is to educate your workforce,” she said. “Another could be to update your policies so a person who is transitioning knows who they can talk to about it.”
Any information provided in confidence should remain confidential. Being open about new ideas and willing to have frank discussions with employees is advisable. Assessing whether dress codes are gender-neutral could be another proactive way to foster a positive work environment.
Conclusion
The employment attorneys highlighted well-intentioned actors taking steps that caused issues for members of their fictional workforces. The team cautions in-house counsel against unintended consequences and offers training insights in Part 2 of the session.
Department of the Treasury and the Internal Revenue Service Issue Final Regulations on Section 45V Clean Hydrogen Production Tax Credit
On 3 January 2025, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released final regulations (Final Rules) implementing the Section 45V Clean Hydrogen Production Tax Credit (Section 45V tax credit) pursuant to the Inflation Reduction Act of 2022 (IRA). These much-anticipated Final Rules arrive over a year since the holiday-adjacent publication of the proposed regulations on 26 December 2023 (Proposed Rules). Treasury and IRS received approximately 30,000 written comments on the Proposed Rules and conducted a three-day public hearing that included testimony from over 100 participants. Adding to this long saga, the Biden Administration in its waning days has attempted to build upon the Final Rules and promote clean hydrogen production well into the future, announcing a US$1.66 billion loan guarantee by the Department of Energy (DOE) for Plug Power to produce and liquify clean hydrogen fuel. However, these actions come within days of the new Trump Administration and a Republican-controlled Congress, casting some uncertainty over the future of the Final Rules, DOE spending, and, more generally, the Section 45V tax credit.
In the Final Rules, Treasury and IRS made numerous modifications to the Proposed Rules—including notable changes to the controversial “three pillars” (incrementality, deliverability, and temporal matching) of the Energy Attribute Certificate (EAC) framework—largely in an effort to provide flexibility in response to industry concerns without sacrificing the integrity of the credit, while at the same time addressing concerns that substantial indirect emissions would not be taken into account. The Final Rules enable tax credit pathways for hydrogen produced using both electricity and certain methane sources, intending to provide investment certainty while ensuring that clean hydrogen production meets the IRA’s lifecycle emissions standards.
The Final Rules, and primary differences between the Proposed and Final Rules, are discussed below.
EAC Requirements for Electrolytic Hydrogen Production – The Three Pillars
Under both the Proposed and Final Rules, EACs are the established means for documenting and verifying the generation and purchase of electricity to account for the lifecycle greenhouse gas emissions associated with hydrogen production. Under this framework, a taxpayer must acquire and retire qualifying EACs to establish, for purposes of the Section 45V tax credit, that it acquired electricity from a specific electric generation facility (and therefore did not rely on electricity sourced via, e.g., the regional electric grid). Like in the Proposed Rules, the Final Rules require that taxpayers seeking to use EACs attribute electricity use to a specific generator that meets certain criteria for temporal matching, deliverability, and incrementality.
Incrementality
As in the Proposed Rule, the Final Rules define electric generation as “incremental” if the generator begins commercial operations within 36 months of the hydrogen facility being placed in service, or is uprated within that period. Treasury and IRS declined to extend the 36-month time frame for eligibility, but, within that 36-month time frame, Treasury and IRS provided more pathways for eligibility. The expanded pathways are as follows:
Uprates
The Final Rules modify the uprate rules to provide additional flexibility to taxpayers in determining “uprated” production capacity from generation facilities. The Final Rules provide that the term “uprate” means the increase in either an electric generating facility’s nameplate capacity (in nameplate megawatts) or its reported actual productive capacity.
Restarted Electric Generation Facilities
Under the Final Rules, EACs can meet the incrementality requirement with electricity from an electric generation facility that is decommissioned or is in decommissioning and restarts. The Final Rules clarify that these facilities can be considered to have additional capacity from a base of zero if that facility was shut down for at least one year.
Qualifying Nuclear Reactors
The Final Rules allow EACs to meet the incrementality requirement with electricity produced from a qualifying nuclear reactor up to 200 MWh per operating hour per reactor. A qualifying nuclear reactor is a “merchant nuclear reactor” or a single-unit plant that competes in a competitive market and does not receive cost recovery through rate regulation or public ownership.
Qualifying States
The Final Rules allow EACs to meet the incrementality requirement if the electricity represented by the EAC is produced by an electric generating facility physically located in a “qualifying state,” i.e., a state that has stringent clean energy standards (for now, California and Washington), and the hydrogen production facility is also located in the qualifying state.
Carbon Capture and Sequestration (CCS)
As authorized by the Final Rules, the “CCS retrofit rule” allows an EAC to meet the incrementality requirement if the electricity represented by the EAC is produced by an electric generating facility that uses CCS technology and the CCS equipment was placed in service no more than 36 months before the hydrogen production facility.
Temporal Matching
The Final Rules maintain the proposed hourly-matching requirement, which requires that the electricity represented by the EAC be generated in the same hour as the hydrogen facility’s use of electricity to produce hydrogen. The Proposed Rules required hourly matching to go into effect in 2028, but the Final Rules have delayed this requirement until 2030. Annual matching is required through 2029. The Final Rules note that this two-year postponement does not prohibit a hydrogen producer from voluntarily implementing hourly matching prior to 2030. Changes in the Final Rules also provide additional flexibility by allowing hydrogen producers to deviate from the annual aggregation of emissions to an hourly basis so long as the four kg CO2e per kg of hydrogen is met on an aggregate annual basis for the facility. This affords a hydrogen producer the ability to optimize the tax credit amount when it is unable to secure EACs during all hours of operation, without suffering severe penalties in the form of lower credit amounts across the entire year. Additionally, each electrolyzer is considered to be an individual qualified facility, which allows a producer to allocate EACs across electrolyzers and time periods to optimize tax credit values for a site.
Reliance Rule
In the Final Rules, Treasury and IRS declined to include a “reliance rule” (i.e., grandfathering) that would allow facilities that meet certain milestones (such as beginning of construction, being placed in service, or commencing commercial operations) by a certain date to continue to use annual matching instead of hourly matching.
Energy Storage
The Final Rules allow hydrogen producers and their electric suppliers to use energy storage, such as batteries, to shift the temporal profile of EACs based on the period of time in which the corresponding electricity is discharged from the storage device. The storage system must be located in the same region as both the hydrogen production facility and the facility generating the electricity to be stored. Storage systems need not themselves meet the incrementality requirement, but the EACs that represent electricity stored in such storage systems must meet the incrementality requirement based on the attributes of the generator of such electricity. EAC registries must be able to track the attributes of the electricity being stored.
Deliverability
As in the Proposed Rules, the Final Rules provide that an EAC meets the deliverability requirement if the electricity represented by the EAC is generated by a facility that is in the same region as the hydrogen production facility. Also, as in the Proposed Rules, the Final Rules establish that, for the duration of the Section 45V tax credit, “region” for purposes of deliverability will be based on the regions delineated in the DOE’s National Transmission Needs Study. Those regions are based on the balancing authority to which the electric generating source and the hydrogen facility are both electrically connected. The table published in the Final Rules is the authoritative source regarding the geographic regions used to determine satisfaction of the deliverability requirement.
Dynamic Deliverability Regions
Treasury and IRS intend to update the regions in future safe harbor administrative guidance published in the Internal Revenue Bulletin.
Interregional Connections
The Final Rules allow some flexibility on interregional delivery, acknowledging that interregional electric transfers commonly occur. Accordingly, the Final Rules allow an eligible EAC to meet the deliverability requirement in certain instances of actual cross-region delivery where the deliverability of such generation can be tracked and verified. The Final Rules provide specific rules to meet this standard.
Eligibility for Methane-Based Hydrogen Production
The Final Rules also provide pathways for receiving Section 45V tax credits for hydrogen production using biogas, renewable natural gas (RNG), and fugitive sources of methane (collectively, natural gas alternatives). Most notably, the Final Rules dispense with the “first productive use” requirement proposed in the draft regulations, which would have required that the RNG or biogas used to produce hydrogen was not previously used, likening this requirement to the incrementality requirement of the Three Pillars for electrolytic hydrogen. Instead, the Final Rules rely on “alternative fates,” which refer to the assumptions used to estimate emissions from the use or disposal of natural gas alternatives were it not for the natural gas alternative’s new use of producing hydrogen. Under the Final Rules, alternative fates are determined on a categorical basis, rather than adopting a single alternative fate for all natural gas alternatives or adopting alternative fates on an entity-by-entity basis. The alternative fate associated with natural gas alternatives feeds into the “background data” that is entered into the 45VH2-GREET Model. The 45VH2-GREET Model uses that background data to calculate the estimated lifecycle greenhouse gas emissions associated with the specific hydrogen production process.
Alternative Fates, as Applied to Sectors
For landfills, coal mine methane, and wastewater sources, flaring is considered the primary alternative fate. For animal waste, the alternative fate is based on a national average of all animal waste management practices for the sector as a whole. For fugitive methane from fossil fuel activities other than coal mining, the alternative fate is the emissions that would otherwise be generated from productive use.
Venting
The Final Rules reject venting as an alternative fate across all sources of natural gas alternatives because it does not account for the prevalence of flaring and productive use, nor does it address the risk of induced emissions due to the incentives provided by the Section 45V tax credit. In taking this position, Treasury and IRS recognize that venting will likely be increasingly prohibited at local, state, and federal levels.
It is worth noting that Treasury’s failure to issue actual draft regulations for a methane-pathway 45V tax credit could increase the likelihood of a successful legal challenge to the 45V Final Rules. It is unclear at this time whether Treasury’s solicitation of comments in response to the questions the agency posed related to RNG as a viable pathway to secure the 45V credit is sufficient to satisfy proper notice-and-comment requirements under the Administrative Procedure Act. The Biden Administration’s inclusion of Final Rules related to RNG could be part of a strategic effort aimed at minimizing attacks against the Final Rules by bringing RNG developers to the table.
Other Considerations
Determining Lifecycle Greenhouse Gas Emissions Rates
The Final Rules clarify that the annual determination of the tax credit amount is made separately for each hydrogen production process conducted at a hydrogen production facility during the taxable year. The Final Rules clarify that “process” means the operations conducted by a facility to produce hydrogen (for example, electrolysis or steam methane reforming) during a taxable year using one primary feedstock. CCS equipment that is necessary to meet the 45V emissions thresholds is considered part of the facility for purposes of the credit.
Construction Safe Harbor
The Final Rules allow taxpayers to make an irrevocable election to treat the 45VH2-GREET Model available on the date of construction commencement of the hydrogen production facility as the applicable 45VH2-GREET Model.
Third-Party Disclosure Requirement
As in the Proposed Rules, the Final Rules require that an unrelated third party certify the annual verification report submitted as part of the election to treat qualified property as energy property for purposes of the Section 45V tax credit.
Effective Date
The Final Rules become effective immediately upon their publication in the Federal Register.
Outlook
There is still a great deal of political uncertainty surrounding the Section 45V tax credit due to the incoming Trump Administration and Republican-controlled Congress, which could nullify these regulations through the Congressional Review Act or reduce or eliminate the credits by modifying or rolling back the IRA as part of the budget reconciliation process. There is additionally the potential for litigation challenges to the Final Rules under the new Loper Bright standard for judicial review of agencies’ interpretations of statute.1
Regardless, the Final Rules attempt to lay a foundation for hydrogen development for years to come. Barring political disruption, the Final Rules settle many uncertainties that may have acted as an obstacle to investment in the clean hydrogen sector and the progress of planned projects, including the DOE-funded hydrogen hubs. The Final Rules also generate new questions. As noted above, these Final Rules are effective immediately upon publication in the Federal Register. The immediate effectiveness and rollout of the Final Rules could contribute to the momentum needed to keep these rules and relevant IRA provisions in place even as administrations change. Strong industry reliance upon these rules may make it less politically palatable or practical to uproot and discard them entirely.
Footnotes
1 For more information on the U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo and how it impacted administrative law, see the following:
The Post-Chevron Toolkit | HUB | K&L Gates
The End of Chevron Deference: What the Supreme Court’s Ruling in Loper Bright Means for the Regulated Community | HUB | K&L Gates
I Want You to Want Me. But I Don’t Need You to Need Me: Manti Holdings v. The Carlyle Group and the Meaning of Non-Ratable Benefit in Controller Transactions in Delaware
Delaware’s rigorous fairness standards for transactions involving controlling shareholders have recently come to the forefront of the Chancery Court’s docket.1
Delaware rigorously scrutinizes controller transactions, and its law provides that entire fairness review is required where a transaction involves a controlling shareholder and that controller receives a “non-ratable benefit;” i.e. the controller achieves something through the transaction that has no benefit to the entities’ other shareholders, even if both sets of shareholders nominally receive the same consideration.
Entire fairness is a demanding standard, and any controller transaction where it is likely to be applied is red meat to the plaintiffs’ bar. Indeed, once Chancery Court has determined, at the motion to dismiss stage,2 that entire fairness will apply to a transaction, the prospect of massive damages calculations exponentially increases pressure on defendants to settle, whatever the merits of their defenses.
But what if defendants are confident that, at trial, they can show there was no such non-ratable benefit? Or, to go a step further, what if they can show that the non-ratable benefit simply did not matter very much? Vice Chancellor Glasscock’s recent post-trial opinion in Manti Holdings v. The Carlyle Group provides defendants with a ray of hope.
The Transaction
Authentix Acquisition Company, Inc. (“Authentix”) is a company that prevents fraud with its authentication technology products. In 2016, Authentix’s Board of Directors began a wide-ranging sales process, which ultimately led to the sale of Authentix in 2017 to a private equity firm, Blue Water Energy LLP. Around the time of the sale, Authentix was facing several challenges, allegedly suppressing the price achieved.
The Plaintiffs, minority stockholders of Authentix, alleged that the Carlyle Group Inc. and its affiliates (“Carlyle”), as a controlling stockholder, convinced the Authentix’s Board of Directors to approve the “fire sale” of Authentix in order for Carlyle to meet its own liquidity needs, and to ensure the transaction occurred before the expiration of the private equity funds Carlyle had used to acquire its interests in Authentix. If the fund expired, Carlyle would no longer be able to obtain additional capital from investors to invest in Authentix. Holding the investment beyond the fund’s lifespan, therefore, was unappetizing to Carlyle.
The Benefit
In denying defendants’ motion to dismiss, VC Glasscock credited Plaintiffs theory that Carlyle was under intense pressure to sell in 2017 to meet investors’ expectations. Plaintiffs’ theory was that Carlyle faced a liquidity-based conflict driven by the need to make a “needle-moving deal” before the end of the fund’s life, which created enormous pressure from investors and effectively mandated that Carlyle sell Authentix in 2017. Moreover, Plaintiff’s alleged, the fund’s Limited Partnership Agreement included a “clawback” provision that would have required Carlyle to return excess distributions so long as it deployed capital on the Authentix investment.
Plaintiffs alleged that defendants sacrificed an astonishing $100,000,000 of value on the table (over half of which would have flowed to Carlyle) in order to push the transaction through on time. Carlyle, in Plaintiffs’ telling, had to sell, “consequences (and price) be damned.”
Have to vs. Want to
At trial, rather than focusing solely on the transaction’s fairness, Carlyle returned to the question of whether Plaintiffs had established a non-ratable benefit. Interestingly, Carlyle does not appear to have contested that it wanted to exit Authentix in 2017, or that it had reason to do so. Rather, Carlyle argued, Carlyle did not “need to” exit Authentix, at least to a degree that impacted the sales process.
The Court found that the sale of Authentix was not a “fire sale” driven by Carlyle acting under time pressure or liquidity pressure from the end of Carlyle’s fund life, in conflict to the minority stockholders’ interests. In support of this finding, the Court reasoned that Carlyle, as the largest stockholder, had an inherent economic incentive to negotiate a favorable transaction for the shareholders. Additionally, although Carlyle wanted to sell off its assets prior to the term expiration, the Court reasoned that the limited partnership agreement did not require Carlyle to do so. Moreover, the Court reasoned that Authentix was not the only remaining asset in Carlyle, indicating that regardless of whether the Authentix sale occurred prior to the end of Carlyle’ term, the fund may have needed an extension for other investments. Therefore, the Court held that Carlyle was “not under compelling pressure to sell Authentix prior to the end of Carlyle’s term, such that its self-interest, shared with the minority, to maximize value was overborne.”
In the Court’s reasoning, the absence of an imperative was sufficient, even though Carlyle conceded that it wanted the sale to go forward in 2017. Carlyle’s interest in moving forward, the court reasoned, was not tantamount to a disabling conflict of interest. For the non-ratable benefit to trigger entire fairness review, it must be sufficient to drive the controller to act against the interests of the minority. Only where there is a “crisis” sufficient to drive the controller to sell before exploring better offers does strict scrutiny apply.3
Don’t Surrender
This decision opens doors, if only a crack, for future defendants. First, it is a reminder that a finding of a well-plead non-ratable benefit is not a death sentence and can be successfully litigated at trial. Second, defendants may contest not just the existence of a non-ratable benefit, but its import. An appropriate, arms-length sales process is strong evidence that a transaction was not improperly tainted, and normal industry pressures, absent specific evidence of a fire-sale, will not be enough to implicate entire fairness.
Plaintiffs who plead a non-ratable benefit that was not sufficiently strong, in the court’s eyes, to motivate malfeasance may find their victories at the motion to dismiss stage merely a cheap trick.
1 See e.g., Thomas v. American Midstream GP, LLC, 2024 WL 5135828 (Del. Ch. Dec. 17, 2024); Tornetta v. Musk, 310 A.3d 430 (Del. Ch. 2024); Palkon v. Maffer C.A. No. 2023-0449-JTL (Feb. 20, 2024) (“Palkon I”); In re Match Group, Inc. Derivative Litigation No. 368,2022 (Del. Apr. 4, 2024); In re Viacom Inc. Stockholders Litigation, 2020 WL 7711128 (Del. Ch. Dec. 29, 2020).
2 In Delaware Chancery, summary judgment is not available by right, and the court will often dispense with that step where it feels the summary judgment process and trial would be redundant.
3 See, In re Morton’s Rest. Gr. Inc. Shareholders Litig., 74 A.3d 656, 662 (Del. Ch. 2013) (citing In re Synthes, 50 A.3d 1022, 1036 (Del. Ch. 2012)).
2024 False Claims Act Statistics Show More Cases Filed Than Ever Before
The Justice Department released its annual False Claims Act statistics on Wednesday, January 15, detailing the number of cases filed, recoveries made, and relators’ shares awarded in fiscal year 2024. The government recovered $2.9 billion dollars in 2024, with 57% of that total coming from healthcare cases, 3% from defense spending cases, and the remainder from other actions. Seventy-five percent of recoveries came from qui tam actions in which the government intervened and 17% came from cases initiated by the Justice Department, while qui tam actions where the government declined to intervene resulted in only 7% of the year’s recoveries.
2024 also saw more new FCA cases initiated than ever before. There were 1,402 new matters: 423 initiated by the government and a record-shattering 979 initiated by relators.
While the overall total recoveries increased by $133 million from the year prior, the types of cases driving the number have shifted slightly. Healthcare recoveries are down $184 million from last year and are the lowest they have been since 2009. Defense spending recoveries are down $464 million and are the lowest they have been in the last several years, though DOJ noted in its press release that a $428 million defense settlement—the second largest in history—came in just after the close of the fiscal year. While those traditional stalwarts of FCA recoveries lagged in 2024, DOJ more than made up for them in recoveries in non-healthcare or defense cases. Recoveries in other cases increased $781 million over the prior year and were the highest they have been in almost a decade.
It is not immediately clear what drove the uptick in non-healthcare and defense cases, though pandemic-related fraud claims accounted for at least $250 million of the recoveries. A menagerie of claims related to other government agencies, programs, and grants also appear to have contributed, including claims related to General Services Administration contracts, Housing and Urban Development grant funds, underpayment of royalties owed for oil and natural gas on federal lands, and Federal Emergency Management Agency (FEMA) projects.
Though the government increased its recoveries, it shared less of that money with whistleblowers. Relators received $50 million less than they did in fiscal year 2023. For qui tam actions in which DOJ intervened, it provided an average of 15.7% of the recoveries to the relator, which is the second-lowest relator share percentage since 2012.
In its press release touting the year-end statistics, the Justice Department highlighted healthcare recoveries in areas it has focused on in recent years, including opioid-related cases, matters alleging unnecessary services and substandard care, Medicare Advantage cases, kickbacks, and Stark Law violations. Though it did not appear to drive significant numbers in 2024, the government also highlighted its emerging cybersecurity initiative to promote cybersecurity requirements for government contractors.
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