Fourth Circuit Rejects the Use of Short-Seller Report as a Basis for Satisfying Loss Causation Element in Securities Fraud Action
The United States Court of Appeals for the Fourth Circuit recently joined a growing consensus among federal appellate courts: short-seller reports, without more, rarely suffice to plead loss causation under the federal securities laws. In Defeo v. IonQ, Inc., 2025 U.S. App. LEXIS 8216, ___ F.4th ___ (4th Cir. Apr. 8, 2025), the Court held that a report by activist short-seller Scorpion Capital — which coincided with a significant stock price drop — did not constitute a corrective disclosure revealing previously concealed fraud to the market. The opinion aligns the Fourth Circuit with decisions from the Ninth Circuit, which have similarly found that loss causation cannot rest on short-seller publications that are speculative, anonymously sourced and heavily disclaimed.
IonQ is a publicly traded company operating in the quantum computing space. In Defeo, shareholder plaintiffs filed a complaint for violation of Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934 accusing IonQ and certain insiders of the Company of making misstatements concerning the prospects for IonQ’s technology and the Company’s financial performance. Plaintiffs’ loss causation theory was premised on a May 3, 2022 report by a pseudonymous short-seller, which allegedly revealed the purported misrepresentations and caused the Company’s share price to fall from $7.86 to $4.34.
Defendants moved to dismiss the complaint arguing, among other things, that plaintiffs failed to adequately plead loss causation because plaintiffs loss causation allegations relied almost entirely on a short-seller report that was speculative, anonymous, and heavily disclaimed. The district court granted defendants’ motion to dismiss with prejudice, concluding that the report did not plausibly reveal new facts to the market sufficient to satisfy the standards necessary for pleading loss causation. After unsuccessfully seeking reconsideration and leave to amend, plaintiffs appealed the district court’s dismissal of their complaint.
On appeal, the Fourth Circuit affirmed the district court’s order dismissing plaintiffs’ complaint. In short, the short-seller report did not plausibly disclose new facts to the market because the report’s authors, held a short position in IonQ stock, expressly disclaimed the accuracy of their information, admitted to paraphrasing anonymous sources and conceded they could not verify the truth of their claims. The Court reiterated that a shareholder plaintiff seeking to plead loss causation must allege new facts — not mere allegations — entered the market and caused the decline in stock price.
The Fourth Circuit found the Ninth Circuit’s decisions in In re BofI Holding, Inc. Securities Litigation, 977 F.3d 781 (9th Cir. 2020), and In re Nektar Therapeutics Securities Litigation, 34 F.4th 828 (9th Cir. 2022), persuasive. In BofI, the Ninth Circuit held that blog posts authored by anonymous short-sellers who expressly disclaimed the accuracy of their content could not plausibly be understood by the market as revealing the truth of a company’s alleged misstatements. In Nektar, the Ninth Circuit extended the reasoning in BofI and held that a short-seller report relying on anonymous sources and speculative inference and without presenting new, independently verifiable facts failed to qualify as a corrective disclosure sufficient to satisfy the standard for pleading loss causation. The Fourth Circuit concluded that Scorpion Capital’s report on IonQ shared the same deficiencies highlighted by the Ninth Circuit in BofI and Nektar.
The Fourth Circuit also held that IonQ’s own response to the Scorpion report — a press release issued the next day — did not salvage plaintiffs’ theory of loss causation. IonQ expressly denied the report’s accuracy, warned investors not to rely on the report and underscored the short-seller’s financial motivation for tarnishing the Company. The Court rejected plaintiffs’ contention that IonQ had a duty to specifically refute each allegation in the short-seller report. The Court further held that the handful of media articles cited by plaintiffs discussing the short-seller report did not affect the conclusion that plaintiffs failed to adequately plead loss causation. The articles merely noted the stock drop and the existence of the report, without confirming or endorsing the short-sellers’ claims.
Defeo confirms that courts will look past market reaction and instead focus on whether a disclosure plausibly revealed verifiable, new information to the market when evaluating whether a securities fraud action adequately pleads loss causation. The Fourth Circuit’s opinion does not impose a categorical bar on the use of short-seller reports to establish loss causation, but it makes clear that plaintiffs relying upon such reports must ensure that those reports meet a high standard of reliability. That standard is not met where the report disclaims its own accuracy, relies upon anonymous sources and offers only general accusations without offering independently verifiable facts. Allegations, even if market-moving, do not become revelations simply by appearing in a headline. For loss causation to be adequately pled, the law still requires facts, not just fallout.
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This Week in 340B: April 8 – 14, 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: Rebate Model; Contract Pharmacy
In five cases against the Health Resources and Services Administration (HRSA) related to rebate models:
In one case, amici filed an amicus brief in support of the government.
In one case, a plaintiff filed a brief in opposition to defendants’ cross motion for summary judgment and reply in support of summary judgment.
In four cases, intervenor defendants filed a reply brief in support of their cross motion for summary judgment.
In a case challenging a Utah law that would restrict manufacturers’ ability to restrict contract pharmacy arrangements, the plaintiffs filed a motion for a preliminary injunction.
In two appealed cases challenging a Louisiana law governing contract pharmacy arrangements, the defendant and intervenor-defendant filed their briefs.
In a case by a drug manufacturer challenging an Arkansas state law governing contract pharmacy arrangements, the drug manufacturer filed a motion to strike a declaration.
Two drug manufacturer filed four separate complaints to challenge four state laws restricting contract pharmacy arrangements.
Reuben Bank and Deepika Raj also contributed to this article.
SCOTUS Ruling: Freezing $65 Million in Teacher Grants Amid DEI Controversy
On April 4, 2025, the United States Supreme Court granted an emergency application to vacate the First Circuit Court of Appeals’ March 10 temporary restraining order (TRO) in the case of Department of Education v. California. The TRO had previously required the federal government to reinstate approximately $65 million in grants earmarked for recruiting and training teachers, which were previously terminated due to certain diversity, equity and inclusion (DEI) training and initiatives included in the grants. The Supreme Court’s decision allows the Department of Education to withhold and halt funding for these grants, prompting significant implications for organizations that rely on these grants. While the opinion is limited only to several grants for teacher recruitment and training, it opens the door for government agencies to immediately freeze or terminate grant funding and gives grant recipients little or no recourse to access potentially critical funding until lengthy and expensive litigation is complete.
The Court’s 5-4 majority opinion stated that the government would be unable to claw back funds without immediate intervention and funds may be withheld until litigation is completed. The Court’s opinion effectively stays the TRO and allows the Department of Education to proceed with its plan to terminate grants under the Teacher Quality Partnership (TQP) and Supporting Effective Educator Development (SEED) programs while the matter is litigated.
Although temporary restraining orders are typically not appealable, the Court majority believed that appellate review was justified because the TRO more closely resembled a preliminary injunction, which is appealable. The Court also noted that the government was likely to succeed in showing that the District Court did not have the authority to order payments of money under the Administrative Procedure Act, which does not typically cover monetary claims. Additionally, the Court majority believed that the state respondents would not suffer irreparable harm while the TRO was stayed because they had the financial means to continue the programs and could recover any wrongly withheld funds through appropriate legal channels. In dissent, several justices criticized the majority decision because the Department of Education’s grant funding terminations contradicted clear congressional goals in disbursing grant funding to educational institutions and other objectives.
With this opinion, organizations will need to carefully weigh whether to pursue injunctive relief based on the scope and size of the grant versus the time, cost and likelihood of success associated with litigation. For smaller grants and/or smaller organizations, this opinion may limit the ability or desire to challenge an adverse agency action related to a grant.
This opinion also raises important questions about whether a court has the authority to require grant payments in an injunction. It opens the floodgates for other cases to be brought by the new administration, including previous attempts to cut Federal assistance funding and foreign aid. As tensions between federal courts and the executive branch over funding decisions rise, time will tell what role the judicial branch will have in shaping or impacting this Administration’s policies.
Supreme Court Lifts Restraining Order on Grant Terminations
The Supreme Court recently issued a ruling with significant impacts for federal contractors and grantees looking to challenge terminations of their contracts and grants in U.S. district courts. Terminated contractors and grantees may strongly prefer to challenge terminations in the district courts rather than in the Court of Federal Claims, because the Court of Federal Claims does not have authority to grant equitable relief to do things like restore funding or enjoin terminations, and the available grounds for challenging contract and grant terminations in the Court of Federal Claims are significantly limited.
In February 2025, the Department of Education (“DOE”) terminated $600 million in grants for teacher training on the grounds that the training included diversity, equity, and inclusion (“DEI”) concepts and thus no longer effectuated DOE priorities. The grantees challenged these terminations in a lawsuit filed in the U.S. District Court for the District of Massachusetts. The District Court issued a Temporary Restraining Order (“TRO”) directing DOE to restore the terminated grant funding. DOE asked the First Circuit to stay the TRO pending appeal, which the First Circuit denied. DOE then filed an emergency appeal to the U.S. Supreme Court, where a majority of the justices sided with DOE.
In a 5-4 per curiam ruling, the Supreme Court stated that the district court likely does not have jurisdiction under the Administrative Procedures Act because the controlling law for jurisdictional purposes is likely instead the Tucker Act. The majority seems to suggest that the Tucker Act applies to disputes arising under government contracts and grants and requires plaintiffs to file lawsuits in the Court of Federal Claims—rather than the district courts. The immediate effect of the Supreme Court’s ruling is that DOE can proceed with terminating these grants while the plaintiffs’ litigation proceeds.
The dissenting opinions authored by Justices Kagan, Sotomayor, and Jackson took issue with the majority’s decision to focus on jurisdictional arguments that they feel do not require the Supreme Court’s emergency intervention. The dissenters also criticized the majority’s reasoning that by enjoining the termination of the grants, the district court was enforcing “a contractual obligation to pay money,” a type of claim that must be brought in the Court of Federal Claims. The dissenters suggested that the plaintiffs were actually seeking injunctive relief based on allegations that DOE violated a federal statute.
Although the Supreme Court’s decision is not a final, binding ruling on whether district courts have jurisdiction over challenges to contract and grant terminations, the ruling puts the jurisdictional issue front and center for all district court judges who are adjudicating termination challenges. Already we are noticing that the Department of Justice is filing Notices of Supplemental Authority in numerous other litigation challenges, arguing that the Supreme Court believes that government contractors and grantees with disputes against the United States do not belong in U.S. district court.
We will continue to monitor further legal developments as the district court in Massachusetts considers its response to the jurisdictional points that the Supreme Court majority has raised.
Rescission of Regulations Without Notice and Comment? What’s Next for Regulated Industries in the Deregulation Climate
We previously wrote about President Trump’s February Executive Order identifying deregulation as a top administration priority (here and here). That Executive Order, 14219 (the “Deregulation EO”), directed all executive departments and agencies to identify regulations falling within certain enumerated categories of regulations. More recently, on April 9, 2025, the President issued a memorandum providing further direction to executive departments and agencies regarding implementation of the Deregulation EO (available here). This memorandum addresses how the President envisions that Executive Branch agencies will go about rescinding regulations. And—spoiler alert—the vision for rescinding regulations is a departure from the typical notice-and-comment process.
The Specifics
Emphasizing adherence to recent Supreme Court decisions and the use of the “good cause” exception in the Administrative Procedure Act for expedited rulemaking (that is, rulemaking/rescission without the constraints of notice and comment), the memorandum instructs agencies, first, as part of the review-and-repeal efforts required by the Deregulation EO, to assess each existing regulation’s lawfulness under the following United States Supreme Court decisions:
Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024);
West Virginia v. EPA, 597 U.S. 697 (2022);
SEC v. Jarkesy, 603 U.S. 109 (2024);
Michigan v. EPA, 576 U.S. 743 (2015);
Sackett v. EPA, 598 U.S. 651 (2023);
Ohio v. EPA, 603 U.S. 279 (2024);
Cedar Point Nursery v. Hassid, 594 U.S. 139 (2021);
Students for Fair Admissions v. Harvard, 600 U.S. 181 (2023);
Carson v. Makin, 596 U.S. 767 (2022); and
Roman Cath. Diocese of Brooklyn v. Cuomo, 592 U.S. 14 (2020).
Second, most significantly, the memorandum instructs agencies to then begin the rescission of any regulations they identify as unlawful under step one, without undertaking public notice and comment. The memorandum instead directs agencies to rely on the Administrative Procedure Act’s “good cause” exception. That exception allows agencies to bypass the notice-and-comment process when notice and comment is “impracticable, unnecessary, or contrary to the public interest.” The memorandum asserts that leveraging the “good cause” exception is appropriate because retaining and enforcing facially unlawful regulations is contrary to the public interest such that notice-and-comment proceedings are unnecessary in those instances where repeal of a regulation is necessary to ensure consistency with Supreme Court rulings.
The memorandum directs agencies to begin the repeal process immediately following the 60-day review period specified in the February 19 Deregulation EO (i.e., April 20, 2025). It further directs agencies, within 30 days of the review period’s expiration (i.e., May 20, 2025), to submit to the Office of Information and Regulatory Affairs a one-page summary of each regulation that the agency initially identified as falling within one of the categories specified in the Deregulation EO but which is not being targeted for repeal, explaining the basis for the decision not to repeal that regulation.
The Import
In light of this memorandum, industries should brace for potentially significant regulatory changes as agencies undertake the mandated review-and-repeal process.
Chief among the concerns we anticipate from this memorandum is uncertainty. In the first place, the plan for such large-scale use of the good-cause exception will likely draw legal challenges. Regulations promulgated with notice-and-comment procedures typically require notice and comment for their rescission. Legal challenges bring uncertainty as cases wind their way through the courts.
Affected businesses could also face uncertainty with respect to their regulatory compliance costs. For example, if a business spent significant sums to comply with a regulation that is now targeted for rescission, the business will experience a period of budgetary uncertainty until it is known whether that particular regulation will, in fact, be rescinded.
Conversely, industries that benefit from certain regulations or have invested significantly in compliance may want to proactively engage with relevant agencies to ensure these regulatory schemes are preserved. In our earlier writings, we suggested that affected businesses look for ways to proactively engage with agencies in identifying regulations for either rescission or retention, even though the Deregulation EO did not provide a direct pathway for such engagement. In the weeks since its issuance, both the Office of Management and Budget and the Federal Communications Commission have opened specific dockets requesting the public’s comment on regulations that might be targeted. (See here and here.) Potentially affected industries should take advantage of these opportunities to engage with the administration about the regulations that affect it.
Staying proactive and informed about the regulatory landscape is crucial for businesses to navigate the potential opportunities and risks presented by this new directive. Blank Rome’s team of lawyers is available to guide you through these regulatory changes and help you address the implications for your industry.
Plaintiffs’ Bar Tries to Get Around Nevada Supreme Court with Amendment to AB 3
As discussed in a prior article, Nevada’s Assembly Bill 3 would increase the jurisdictional cap for the state’s court-annexed arbitration program from $50,000 to $100,000. The cap was last adjusted in 2005, and inflation has reduced the number of cases that are submitted to the program. Now, the plaintiff-oriented Nevada Justice Association (NJA) has proposed an amendment to the bill.
AB 3’s original text simply amended NRS 38.250, changing the $50,000 limit to $100,000. The NJA’s amendment goes far beyond that that scope:
It attempts to overrule Nevada Arbitration Rule 16(e). The rule currently caps the attorneys’ fees recoverable in an arbitration at $3,000. NJA’s amendment would increase that to $15,000.
It attempts to expand NAR 5(a)’s list of automatically exempted cases.
It proposes deleting NRS 38.359’s requirement that the arbitrator’s non-binding award be presented to a jury in a subsequent trial.
It proposes limiting short-trial cases to those where the arbitration award is $50,000 or less. If the arbitration award is $50,000 or more and trial de novo is requested, then the case would be removed to the standard district court process.
These changes may be an attempt to circumvent the Supreme Court’s rulemaking process, as NJA attempted with NRS 52.380 and NRS 629.620. On March 24, 2022, the Supreme Court of Nevada created a committee to Study the Rules Governing Alternative Dispute Resolution and Nevada Short Trial Rules under ADKT 0595. A 10-member committee was formed to review the rules.
The order appointing the Committee included three personal injury lawyers, two of whom are NJA board members. The Committee studied the rules and filed a report that made various recommendations. The suggested changes did not include the cap on attorneys’ fees and did not create a two-tier short trial program, but did expand the list of automatically exempt cases. The Supreme Court adopted the proposed amendments in an order filed October 26, 2022.
The Supreme Court studied the arbitration program and revised the rules to facilitate a better program for all participants. Notably, it could have:
Raised the fee cap in NAR 16(e), but chose not to.
Expanded the list of automatically exempt cases, but chose not to.
Created a two-tier trial de novo process, but chose not to.
Conclusion
As amended, parts of AB 3 may be unconstitutional for the same reasons discussed in Lyft v. Dist. Ct. Further, by creating a two-tier trial de novo process, the amended AB 3 is inconsistent. Thus far there is no explanation for why the nonbinding arbitration program is appropriate for cases up to $100,000 but the short-trial program is good only for cases up to $50,000. If the program’s goal is to conserve judicial resources by directing cases away from the district court, then a two-tier trial de novo program does not contribute to that goal.
DHS Revokes Legal Status, Sends Parole Termination Notices to CBP One App Users in United States
On April 11, 2025, DHS sent a Notice of Parole Termination to individuals who utilized the Biden-era online appointment CBP One App to enter and stay in the United States on Humanitarian Parole while applying for asylum.
Previously, after attending an appointment at the U.S.-Mexico border, individuals were paroled into the United States for an initial period of two years. Once in the United States, individuals were eligible to apply for work authorization. Approximately 900,000 individuals entered the United States using the CBP One App. DHS has not revealed how many individuals have received the April 11, 2025, termination notice.
The termination notice directs individuals who have not obtained an immigration status other than parole to depart the United States within seven days or risk removal.
The notice states that recipients can utilize the new CBP Home App to arrange for their departure from the United States.
The announcement is the most recent of several DHS decisions terminating other programs including Temporary Protected Status (TPS) for Venezuelan and Haitian nationals, and the CHNV Humanitarian Parole program. Termination of TPS and CHNV parole have been temporarily enjoined as part of ongoing federal litigation. Judge Edward Chen, a district court judge in the Northern District of California, has issued a ruling halting the termination of Venezuela TPS. In response to the ruling, DHS has announced that Venezuela TPS has been automatically extended until Oct. 2, 2026, for individuals who registered under the 2023 designation, and until Sept. 10, 2025, for individuals who registered under the 2021 designation. Judge Indira Talwani, a district court judge in the District of Massachusetts, has issued a ruling halting the termination of Humanitarian Parole for citizens of Cuba, Haiti, Nicaragua, and Venezuela, also known as the CHNV program. Accordingly, an individual’s parole can only be terminated prior to their expiration date based on a case-by-case review.
Individuals paroled into the United States under the CBP One App who are not otherwise covered by the ongoing Venezuela or Haitian TPS or CHNV litigation should consult with an immigration attorney before making plans to depart the United States.
The More You Know Can Hurt You: Court Rules Financial Institutions Need ‘Actual Knowledge’ of Mismatches for ACH Scam Liability
On March 26, the US Court of Appeals for the Fourth Circuit issued a decision that has important ramifications for banks and credit unions that process millions of Automated Clearing House (ACH) and Electronic Funds Transfer (EFT) transactions daily, some of which are fraudulent or “phishing scams.” In Studco Buildings Systems US, LLC v. 1st Advantage Federal Credit Union, No. 23-1148, 2025 WL 907858 (4th Cir. amended Apr. 2, 2025), the Fourth Circuit held that financial institutions typically have no duty to investigate name and account number mismatches — commonly referred to as “misdescription of beneficiary.” Instead, they can rely strictly on the account number identified before disbursing the funds received. The financial institution will only face potential liability for the fraudulent transfer if it has “actual knowledge” that the name and the account number do not match the account into which funds are to be deposited.
A Phishing Scam Results in Misdirected Electronic Transfers
A metal fabricator (Studco) was the victim of a phishing scam in which hackers penetrated its email systems. Once inside, the scammers impersonated Studco’s metal supplier (Olympic Steel, Inc.) and sent an email with new ACH/EFT payment instructions purporting to be those of Olympic Steel. The instructions designated Olympic’s “new account” at 1st Advantage Credit Union for all future invoice payments. The new account number, however, had no association with Olympic and was controlled by scammers in Africa.
Studco failed to recognize certain red flags in the payment instructions and sent four payments totaling over $550,000. Studco sued 1st Advantage for reimbursement, alleging the credit union negligently “fail[ed] to discover that the scammers had misdescribed the account into which the ACH funds were to be deposited.” Studco claimed that 1st Advantage was liable under Virginia’s version of UCC § 4A-207 because it completed the transfer of funds to “an account for which the name did not match the account number.” Following a bench trial, the district court entered judgment in Studco’s favor for $558,868.71, plus attorneys’ fees and costs. It found that 1st Advantage “failed to act ‘in a commercially reasonable manner or exercise ordinary care'” in posting the transfers to the account in question.
UCC § 4A-207 and Financial Institution Duties and Liability
1st Advantage appealed, and the Fourth Circuit reversed. The Court began by noting that Studco itself failed to spot warning signs in the imposter’s emails: the domain did not match Olympic’s email domain; the new account was at a credit union in Virginia, not Ohio (where Olympic was based); and there were multiple grammatical and “non-sensical” errors contained in the imposter’s instructions.
The Court then turned to 1st Advantage and whether it had a duty to act on any mismatch between the name on the payment instructions (Olympic) and the account number (a credit union customer with no obvious association to Olympic). It first noted the absence of actual knowledge by the credit union. 1st Advantage used a system known as DataSafe that monitored ACH transfers. The Court observed that the “DataSafe system generated hundreds to thousands of warnings related to mismatched names on a daily basis, but the system did not notify anyone when a warning was generated, nor did 1st Advantage review the reports as a matter of course.” The Court further noted that the DataSafe system generated a “warning of the mismatch: ‘Tape name does not contain file last name TAYLOR'” which was the name of the credit union’s account holder, not Olympic.
The Court then assessed Virginia’s version of § 4A-207(b)(1), Va. Code Ann. § 8.4A-207(b)(1), which says in relevant part: “‘If a payment order received by the beneficiary’s bank identifies the beneficiary both by name and by an identifying or bank account number and the name and number identify different persons’ and if ‘the beneficiary’s bank does not know that the name and number refer to different persons,’ the beneficiary’s bank ‘may rely on the number as the proper identification of the beneficiary of the order.'” The Court further noted that the provision states that “[t]he beneficiary’s bank need not determine whether the name and number refer to the same person.” Based upon this, the Court concluded that it “protects the beneficiary’s bank from any liability when it deposits funds into the account for which a number was provided in the payment order, even if the name does not match, so long as it “does not know that the name and number refer to different persons.” [Emphasis added.] Studco argued that constructive knowledge was sufficient or could be imputed to 1st Advantage. The Court disagreed, concluding that “knowledge means actual knowledge, not imputed knowledge or constructive knowledge” and that a “beneficiary’s bank has ‘no duty to determine whether there is a conflict’ between the account number and the name of the beneficiary, and the bank ‘may rely on the number as the proper identification of the beneficiary.'”
In the concurring opinion, however, one judge disagreed that there was no evidence of actual knowledge because 1st Advantage may have received actual knowledge of the misdescription when an investigation of a Federal Office of Foreign Asset Control (OFAC) alert led to a review of the transfers at issue. Because the first two (of four) overseas transfers from the infiltrated 1st Advantage account triggered an OFAC alert, 1st Advantage opened an ongoing investigation into the wires, including a review of the member’s account history. Thus, the concurrence noted that a “factfinder could infer that [the officer’s] investigation led to a [credit union] employee obtaining actual knowledge of a misdescription between account name and number prior to Studco’s two November deposits.”
Lessons Learned Post-Studco
In the age of ubiquitous cyber and other sophisticated scams running throughout the US financial system, the financial services industry surely welcomes this Fourth Circuit decision. The trial court in Studco ruled that 1st Advantage was liable for scam-related ACH transfers in excess of a half-million dollars because 1st Advantage’s core system had triggered a warning regarding the name and account discrepancy, which 1st Advantage did not review or investigate. The fact that 1st Advantage did not undertake to review warnings from its core system appears to have saved 1st Advantage as the Court concluded that “actual knowledge” of the discrepancy was a prerequisite to liability. There was no proof of actual knowledge in this case.
On April 9, 2025, Studco petitioned the Fourth Circuit for rehearing, and alternatively, rehearing en banc with the full court. Studco argues that the panel erred in holding that there was no actual knowledge, pointing out that “1st Advantage opened the scammer’s account and reviewed the account at least 33 times over an approximate 40-day period – each time related to the scammers conducting a suspicious transaction.” Studco argues that a full en banc hearing should be permitted because the application of “UCC Article 4A-207 presents a question of exceptional importance.”
In the end, Studco stands as a warning to banks and credit unions alike that the more they know about the name mismatch issue for any particular transaction, the more liability they may take on. Banks and credit unions should consult their bank counsel to discuss their ACH and EFT review processes and ensure that their processes do not tip into “actual knowledge” and potential liability for transfers rooted in fraud.
The Pendulum Swings Back (Again) on Prohibition of Incidental Take under the Migratory Bird Treaty Act
The scope of the prohibition of “take” under the Migratory Bird Treaty Act (MBTA or the Act) – and specifically whether the prohibition includes the incidental (unintentional) take of migratory birds – is an issue that has been hotly debated for years. As we reported previously, the federal circuit courts do not agree on the issue, and the federal government’s position has changed several times in recent years, depending on the political party in control of the Executive Branch.
The Trump administration amended the government’s position again on April 11, 2025, when the Acting Solicitor for the US Department of the Interior issued a one-page legal opinion (or “M-Opinion”) repealing opinion M-37065, which was issued during the Biden administration and specified that the MBTA prohibits both intentional and incidental take of migratory birds, and restoring opinion M-37050, which was issued during the first Trump administration and specifies that only intentional take of migratory birds is prohibited. This latest legal opinion cites President Trump’s January 20, 2025 Executive Order on “Unleashing American Energy,” which directed the heads of each federal agency to implement plans “to suspend, revise, or rescind all agency actions identified as unduly burdensome,” and Interior Secretary Doug Burgum’s identification of opinion M-37065 as falling within this directive as reasons for the change of direction.
Enacted over 100 years ago, in 1918, the MBTA is one of the oldest wildlife protection laws in the US. and protects approximately 90 percent of all birds occurring in North America. The Act makes it a crime for any person to “take” a migratory bird. “Take” is defined broadly under the MBTA to include “pursue, hunt, shoot, wound, kill, trap, capture, or collect” migratory birds, or to attempt such activities. 50 C.F.R. § 10.12.
The original purpose of the MBTA was to regulate over-hunting of migratory birds, primarily by commercial enterprises, but the US Fish and Wildlife Service (USFWS or the Service) – the agency with primary responsibility for MBTA enforcement – broadened its interpretation during the 1970s and began prosecuting incidental take of protected birds. Since that time, persons engaging in an activity likely to result in a take of migratory birds, however unintentional and otherwise lawful, have faced the risk of enforcement. Permits for incidental take under the MBTA remain unavailable, as efforts to establish a permitting program under the Biden administration stalled, and the Service withdrew a rule that it was developing in late 2023. This lack of available permitting adds to the long-term uncertainty created by the federal government’s shifting interpretations of the scope of the MBTA take prohibition for those engaged in industries or activities that may result in unintentional and even unavoidable incidental impacts to birds.
Adding to this uncertainty, the federal courts of appeals have split on the scope of the MBTA’s take prohibition. The Fifth and Eighth Circuits have held that the MBTA does not prohibit incidental take, while the Second and Tenth Circuits have held that it does. As a result, the geographic location where an action that could result in take of migratory birds occurs may determine the risk of enforcement under the Act.
While the US Supreme Court has not had occasion to consider the question, the US District Court for the Southern District of New York reviewed the first Trump administration’s opinion M-37050, found it unlawful, and vacated it in 2020. See Natural Res. Def. Council v. US Dep’t of the Interior, 478 F.Supp.3d 469 (S.D.N.Y. 2020). For this reason, the April 11 opinion specifies that the newly restored M-Opinion will be “administrative and binding on the Department, except with respect to actions relying on such opinion that are taken within the jurisdiction of the United States District Court for the Southern District of New York.” In addition, a similar legal challenge to this new opinion, perhaps in a different jurisdiction, is a distinct possibility. Regardless of the outcome of any such legal challenge, the new M-Opinion signals that the Department of the Interior can be expected to exercise its discretion to forego enforcement action for incidental take of migratory birds while the current administration remains in control.
Avocado Oil Company Moves to Dismiss False Labeling Suit
Sovena USA Inc. has filed a motion to dismiss a proposed class action alleging that the company falsely labeled its avocado oil as “100% pure” despite diluting it with “cheaper” seed oils. According to Sovena, “the suit lacks evidence and is part of a ‘baseless’ litigation campaign meant to undermine the industry.”
The class action stems from a study by UC Davis researchers that showed fatty acid profiles beyond the types of fatty acids that would be expected to be in pure avocado oil, suggesting that there are other oils mixed into Sovena’s Olivari avocado oil. However, Sovena says that rather than testing for inferior oils, the researchers used a “theoretical ‘purity standard’” that they applied to a single bottle of Olivari oil. Thus, the study did not demonstrate that other oils are present in the Olivari oil or any of the other samples tested, but instead that the samples contained an “indicator” of other oils, “could have” other oils, or that the samples otherwise failed the researchers “ad hoc purity standards.”
According to Sovena, because the study does not definitively identify adulteration in the avocado oil, it cannot provide a plausible basis for the plaintiffs’ claims. Therefore, Sovena says the case should be dismissed with prejudice as “just one of multiple no-injury, no-deception class action suits aimed at avocado industry members.” The motion references other suits against Kroger and Walmart, which were both dismissed at the pleading stage.
Keller and Heckman will continue to monitor this and other food labeling litigation.
Supreme Court Decisions Cited for Regulatory Repeal Effort in Latest White House Memo
On April 9, 2025, the White House issued a memorandum titled “Directing the Repeal of Unlawful Regulations,” directing agency heads to repeal rules without notice and comment, where doing so is consistent with the “good cause” exception in the Administrative Procedure Act (5 U.S.C. 553(b)(3)(B)). The “good cause” exception allows agencies to dispense with notice-and-comment rulemaking when that process would be “impracticable, unnecessary, or contrary to the public interest.”
This review-and-repeal effort directs agencies to evaluate existing regulation’s lawfulness under several recent Supreme Court decisions such as Loper Bright Enterprises v. Raimondo and West Virginia v. EPA—decisions which limited the power of federal agencies to promulgate regulations absent explicit congressional authorization.
The memorandum is intended to reinforce Executive Order 14219, published on February 19, 2025, which directed the heads of all executive departments and agencies to identify categories of unlawful and potentially unlawful regulations within 60 days and begin plans to repeal them.
Following the 60-day review period ordered in Executive Order 14219, agencies are instructed to immediately take steps to effectuate the repeal of any regulation, or the portion of any regulation, that “clearly exceeds the agency’s statutory authority or is otherwise unlawful.”
Keller and Heckman will continue to monitor developments related to the repeal of regulations and provide updates on how these changes impact regulated industries.
Getting Clear on Compiling Random Drug Testing Pools in Iowa
The Iowa Supreme Court recently clarified that a compliant random drug testing program under Iowa law requires excluding those who are not scheduled to work the day of the testing from the pool of employees who could be selected. Hampe v. Charles Gabus Motors Inc. d/b/a Toyota of Des Moines et ano., No. 22-1599 (Iowa Sup. Ct. Apr. 11, 2025).
Iowa has one of the most technical drug testing laws in the country. It allows unannounced random testing of:
(1) The entire employee population at a particular work site of the employer except for employees not subject to testing pursuant to a collective bargaining agreement, or employees who are not scheduled to be at work at the time the testing is conducted because of the status of the employees or who have been excused from work pursuant to the employer’s work policy prior to the time the testing is announced to employees.
(2) The entire full-time active employee population at a particular work site except for employees not subject to testing pursuant to a collective bargaining agreement, or employees who are not scheduled to be at work at the time the testing is to be conducted because of the status of the employee or who have been excused from work pursuant to the employer’s working policy.
(3) All employees at a particular work site who are in a pool of employees in a safety-sensitive position and who are scheduled to be at work at the time testing is conducted, other than employees not subject to testing pursuant to a collective bargaining agreement, or employees who are not scheduled to be at work at the time the testing is to be conducted or who have been excused from work pursuant to the employer’s work policy prior to the time the testing is announced to employees.
Iowa Code 730.5(8)(a).
In the case before the Supreme Court, the employer used a random testing pool that consisted of all employees. The employer did not exclude employees who were not scheduled to be at work at the time the testing was conducted or who were excused from work pursuant to the employer’s policy. Instead, the employer had a list of alternate employees who could be tested if selected employees were not at work on the day the testing was conducted.
The Iowa Supreme Court held that this practice did not “substantially comply” with the law. Strict compliance with the law is not required, it explained, but substantial compliance is required. The Court held that the employer did not substantially comply with the law when it made no attempt to exclude employees who were not scheduled to be at work or because they had been excused pursuant to an employer policy.
Focusing on the plain language of the statute, the Court stated that it is the way the random pool is constructed that matters, even if, as a practical matter, it is difficult to comply with the statute’s requirements given the “fluid circumstances” of today’s workplace.