Hangzhou Internet Court: Generative AI Output Infringes Copyright
On February 10, 2025, the Hangzhou Internet Court announced that an unnamed defendant’s generative artificial intelligence’s (AI) generating of images constituted contributory infringement of information network dissemination rights, and ordered the defendant to immediately stop the infringement and compensate for economic losses and reasonable expenses of 30,000 RMB.
LoRA model training with Ultraman
Infringing image generated with the model.
The defendant operates an AI platform that provides Low-Rank Adaptation (LoRA) models, and supports many functions such as image generation and model online training. On the homepage of the platform and under “Recommendations” and “IP Works”, there are AI-generated pictures and LoRA models related to Ultraman, which can be applied, downloaded, published or shared. The Ultraman LoRA model was generated by users uploading Ultraman pictures, selecting the platform basic model, and adjusting parameters for training. Afterwards, other users could then input prompts, select the base model, and overlay the Ultraman LoRA model to generate images that closely resembled the Ultraman character.
The unnamed plaintiff (presumably Tsuburaya Productions) alleged that the defendant infringed on their information network dissemination rights by placing infringing images and models on the information network after training with input images. The defendant used generative AI technology to train the Ultraman LoRA model and generate infringing images, constituting unfair competition. The plaintiff demanded the defendant cease the infringement and compensate for economic damages of 300,000 RMB.
The defendant countered that their AI platform, by calling third-party open-source model code, integrates and deploys these models according to platform needs, offering a generative AI platform for users. However, the platform does not provide training data and only allows users to upload images to train the model, which falls within the “safe harbor” rule for platforms and does not constitute infringement.
The Court reasoned:
On the one hand, if the generative artificial intelligence platform directly implements actions protected by copyright, it may constitute direct infringement. However, in this case, there is no evidence to prove that the defendant and the user jointly provided infringing works, and the defendant did not directly implement actions protected by information network dissemination rights.
On the other hand, in this case, when the user inputs infringing images and other training materials and decides whether to generate and publish them, the defendant does not necessarily have an obligation to conduct prior review of the training images input by the user and the dissemination of the generated products. Only when it is at fault for the specific infringing behavior can it constitute aiding and abetting infringement.
Specifically, the following aspects are considered comprehensively:
First, the nature and profit model of generative AI services. The open source ecosystem is an important part of the AI industry, and the open source model provides a general basic algorithm. As a service provider directly facing end users at the application layer, the defendant has made targeted modifications and improvements based on the open source model in combination with specific application scenarios, and provided solutions and results that directly meet the use needs. Compared with the provider of the open source model, it directly participates in commercial practices and benefits from the content generated based on the targeted generation. From the perspective of service type, business logic and prevention cost, it should maintain sufficient understanding of the content in the specific application scenario and bear the corresponding duty of care. In addition, the defendant obtains income through users’ membership fees, and sets up incentives to encourage users to publish training models, etc. It can be considered that the defendant directly obtains economic benefits from the creative services provided by the platform.
Secondly, the popularity of the copyrighted work and the obviousness of the alleged infringement. Ultraman works are quite well-known. When browsing the platform homepage and specific categories, there are multiple infringing pictures, and the LoRA model cover or sample picture directly displays the infringing pictures, which is relatively obvious infringement.
Thirdly, the infringement consequences that generative AI may cause. Generally speaking, the results of user behavior using generative AI are not identifiable or intervenable, and the generated images are also random. However, in this case, because the Ultraman LoRA model is used, the characteristics of the character image can be stably output. At this time, the platform has enhanced the identifiability and intervention of the results of user behavior. And because of the convenience of technology, the pictures and LoRA models generated and published by users can be repeatedly used by other users. The trend of causing the spread of infringement consequences is already quite obvious, and the defendant should have foreseen the possibility of infringement.
Finally, whether reasonable measures have been taken to prevent infringement. The defendant stated in the platform user service agreement that it would not review the content uploaded and published by users. After receiving the lawsuit notice, it has taken measures such as blocking relevant content and conducting intellectual property review in the background, proving that it has the ability to take but has failed to take necessary measures to prevent infringement that are consistent with the technical level at the time of the infringement.
In summary, the defendant should have known that network users used its services to infringe upon the right of information network dissemination but did not take necessary prevention measures. It failed to fulfill his duty of reasonable care and was subjectively at fault, constituting aiding and abetting infringement.
Violations of the Anti-Unfair Competition Law did not need to be considered as copyright infringement was determined.
The full text of the announcement is available here (Chinese only).
DEI at Stake: Federal Groups Challenge Trump’s Efforts to Curb Inclusivity
The Trump administration is facing a new legal challenge to President Donald Trump’s executive orders (EOs) to eliminate diversity, equity, and inclusion (DEI) programs and initiatives after a group of diversity officers, professors, and restaurant worker advocates filed a lawsuit in a federal court in Maryland on February 3, 2025, alleging the orders are vague and unconstitutional.
Meanwhile, the U.S. Attorney General and the U.S. Office of Personnel Management (OPM) issued memoranda on February 5, 2025, to implement the orders and guide federal agencies on their scope.
Quick Hits
A coalition of DEI advocates has initiated a legal challenge against President Trump’s executive orders to eliminate diversity, equity, and inclusion programs, claiming they are unconstitutional and infringe on free speech rights.
The lawsuit argues that the vague language of the executive orders creates uncertainty that could lead to discriminatory enforcement against those promoting lawful DEI efforts.
The U.S. Office of Personnel Management has provided guidance to federal agencies on interpreting and implementing the recently signed executive orders regarding DEI and DEIA initiatives.
The developments raise questions for employers wishing to implement or continue implementing DEI programs to foster more inclusive workplaces.
DEI Executive Orders
In the first days of President Trump’s second term, he signed two key executive orders to eliminate all “illegal” DEI and diversity, equity, inclusion, and accessibility (DEIA) programs from the federal government and discourage the use of such programs in the private sector: EO 14151, “Ending Radical and Wasteful Government DEI Programs and Preferencing,” and EO 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” and President Trump’s rescission of many of Biden’s executive actions.
EO 14151 directs federal government agencies to end all illegal DEI and DEIA mandates, policies, programs, preferences, and activities in the federal government, including “equity action plans,” “equity action initiatives,” or other programs, grants, or contracts. The EO further eliminates DEI or DEIA performance requirements for employees, contractors, or grantees. The EO further seeks to eliminate “environmental justice” offices, positions, programs, policies, and services across the federal government.
EO 14173 terminates several prior executive actions to promote DEI in the federal government and orders the development of “appropriate measures to encourage the private sector to end illegal discrimination and preferences, including DEI.” The order argued that employers “have adopted and actively use dangerous, demeaning, and immoral race- and sex-based preferences under the guise of so-called” DEI or DEIA programs that violate civil rights laws.
Specifically, the EO directs the attorney general to develop recommendations for using federal civil rights laws and other measures to deter DEI in the private sphere and directs federal agencies to “identify up to nine potential civil compliance investigations of publicly traded corporations, large non-profit corporations or associations, and institutions of higher education with endowments over 1 billion dollars.”
DEI Legal Challenge
On February 3, 2025, a coalition of DEI advocates—the National Association of Diversity Officers in Higher Education, American Association of University Professors, Restaurant Opportunities Centers United, and the Mayor and City Council of Baltimore—filed a lawsuit in the U.S. District Court for the District of Maryland alleging the Trump EOs on DEI and DEIA are vague and unconstitutional.
The lawsuit alleged President Trump’s EOs are unconstitutional, threaten to put their members in the “crosshairs” of federal investigators, and will unlawfully strip federal funding from private entities that wish to continue with DEI efforts.
According to the lawsuit, President Trump’s policies leave their members “with an untenable choice: continue to promote their lawful diversity, equity, inclusion, and accessibility programs, or suppress their speech by ending the programs or policies that the President may consider ‘illegal DEI.’”
Specifically, the suit challenges EO 14173, alleging that it “is designed to, and does, chill free speech on matters of substantial political import,” which is “amplified by its vagueness.” The lawsuit alleges that “[t]he undefined terms leave potential targets with no anchor as to what speech or actions the order encompasses,” the suit alleges. “They also give executive branch officials like the Attorney General carte blanche authority to implement the order discriminatorily.”
The groups raise several constitutional claims, including those based on the First Amendment, the Due Process clause of the Fifth Amendment, and separation of powers, alleging that the orders are vague and suppress their free speech.
The suit names President Trump and several agency heads and acting heads as defendants and is seeking preliminary and permanent injunctions to block the implementation of EO 14151 and EO 14173.
Agency Guidance
On February 5, 2025, OPM Acting Director Charles Ezell issued a memorandum to the heads and acting heads of federal departments and agencies on eliminating DEI and DEIA programs and initiatives, including DEI or DEIA offices, employee resource groups (ERGs), and “special emphasis programs” within the agencies The memo shows how OPM interprets the DEIA orders, providing valuable insights into what the EOs may be interpreted to prohibit for federal contractors, federal money recipients, and even private employers.
The memo directs federal agencies to “eliminate DEIA offices, policies, programs, and practices (including policies, programs, and practices outside of any DEIA offices) that unlawfully discriminate in any employment action” based on “protected characteristics.”
The memo explained that “[u]nlawful discrimination related to DEI includes taking action motivated, in whole or in part, by protected characteristics” and that “a protected characteristic does not need to be the sole or exclusive reason for an agency’s action.” Specifically, the memo stated that unlawful DEI includes practices such as “diverse slate” policies that mandate the composition of hiring panels or candidate pools.
However, the restrictions are not meant to include offices or personnel required by law “to counsel employees allegedly subjected to discrimination, receive discrimination complaints, collect demographic data, and process accommodation,” but “[s]uch functions should be transferred” to other personnel and offices at the agency, the memo stated.
Similarly, the memo says that agencies should “eliminate Special Emphasis Programs that promote DEIA based on protected characteristics in any employment action,” including hiring, promotions, training, and internships or fellowships.
The memo further stated that the orders revoke the authority for ERGs and that agencies should eliminate them to the extent that they promote unlawful discrimination. However, agency heads “retain discretion” to allow programs such as affinity group lunches, mentorship programs, and gatherings “for social and cultural events” so long as such events are not restricted to members or attendance to those of a protected characteristic.
The memo also highlighted the administration’s position that the Biden administration had “conflated” DEI with “longstanding, legally-required” disability accessibility obligations. The memo told agencies to “rescind policies and practices contrary to the Civil Rights Act of 1964 and the Rehabilitation Act of 1973,” except to retain a minimum number of employees to carry out legally required disability and accessibility laws.
DOJ Memo
Also on February 5, 2025, newly confirmed U.S. Attorney General Pamela Bondi issued two memoranda implementing EO 14173. One memo directs the U.S. Department of Justice (DOJ) to review all “consent decrees, settlement agreements, litigation positions (including those set forth in amicus briefs), grants or similar funding mechanisms, procurements, internal policies and guidance, and contracting arrangements” that include “race- or sex-based preferences, diversity hiring targets, or preferential treatment based on DEI- or DEIA-related criteria.”
The memo further directs the DOJ to update its guidance to affirm “equal treatment under the law means avoiding identity-based considerations in employment, procurement, contracting, or other Department decisions” and to “narrow the use of ‘disparate impact’ theories that effectively require use of race- or sex-based preferences.”
The other memo states the DOJ’s Civil Rights Division “will investigate, eliminate, and penalize illegal DEI and DEIA preferences, mandates, policies, programs, and activities in the private sector and in educational institutions that receive federal funds.” The memo further carries out the EO by directing the Civil Rights Division and the Office of Legal Policy to submit a report with recommendations to enforce federal civil rights laws to “encourage the private sector to end illegal discrimination and preferences, including policies relating to DEI and DEIA.”
However, both memos indicated in footnotes that they only apply to programs that “discriminate, exclude, or divide individuals based on race or sex” and “does not prohibit educational, cultural, or historical observances—such as Black History Month, International Holocaust Remembrance Day, or similar events—that celebrate diversity, recognize historical contributions, and promote awareness without engaging in exclusion or discrimination.”
Next Steps
The Trump administration has taken a hardline stance against DEI and DEIA generally, characterizing specific DEI/DEIA practices like race and gender preferences, including such DEI initiatives as diverse slates, as “illegal” or “unlawful discrimination.” These efforts come as the administration is further seeking to define sex as binary and immutable and limit the Supreme Court of the United States’ holding in Bostock v. Clayton County, Georgia, that firing an employee because of the employee’s sexual orientation or transgender status constitutes unlawful sex discrimination under Title VII of the Civil Rights Act of 1964. Further, federal lawmakers have reintroduced the “Dismantle DEI Act,” which seeks to codify President Trump’s DEI orders and prevent future administrations from reinstating similar policies.
The OPM memo confirms that federal agencies must eliminate DEI and DEIA programs and offices, which the administration is already dismantling. Further, those prohibitions extend beyond hiring and promotion practices that take DEIA into account to include softer implementation of DEI, such as through ERGs and Special Emphasis Programs. However, the memo acknowledges that agencies still need personnel to maintain compliance with antidiscrimination and harassment laws, as well as to fulfill accommodation obligations for employees with disabilities covered by applicable law.
At the same time, the DEI executive orders are facing a legal challenge and are likely to face more challenges that raise constitutional and other legal questions about the president’s authority to effectuate such changes, particularly the power to discourage and chill DEI with private employers without explicit statutory authorization and in contravention to existing federal law, such as Title VII. A ruling in favor of the plaintiffs could reinforce the importance of the lawfulness of DEI programs and protect them from future executive actions. Conversely, a ruling favoring the executive order could set a precedent for further restrictions on DEI efforts.
Employers may want to monitor these quickly evolving developments and consider reviewing their own DEI and DEIA practices regarding risk tolerances.
Weekly Bankruptcy Alert February 10, 2025 (For the Week Ending February 9, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
7 Wales Street, LLC(Dorchester, MA)
Not Disclosed
Boston(MA)
$500,001to$1 Million
$100,001to$500,000
2/3/25
SBF Ventures, LLC(Boston, MA)
Not Disclosed
Boston(MA)
$1,000,001to$10 Million
$1,000,001to$10 Million
2/3/25
Zmetra Land Holdings, LLC(Webster, MA)
Lessors of Real Estate
Worcester(MA)
$1,000,001to$10 Million
$1,000,001to$10 Million
2/4/25
MMK Subs, LLC(Westbrook, ME)
Not Disclosed
Portland(ME)
$50,001to$100,000
$500,001to$1 Million
2/4/25
MMK Family Investments, Inc.(Biddeford, ME)
Not Disclosed
Portland(ME)
$50,001to$100,000
$500,001to$1 Million
2/4/25
York Beach Surf Club LLC(York, ME)
Traveler Accommodation
Portland(ME)
$10,000,001to$50 Million
$10,000,001to$50 Million
2/6/25
Omega Therapeutics, Inc.(Cambridge, MA)
Pharmaceutical and Medicine Manufacturing
Wilmington(DE)
$100,000,001to$500 Million
$100,000,001to$500 Million
2/10/25
Orispel V LLC(New York, NY)
Not Disclosed
Manhattan(NY)
$10,000,001to$50 Million
$10,000,001to$50 Million
2/7/25
Xinergy Corp.2(Knoxville, TN)
Mining, Quarrying and Oil and Gas Extraction
Wilmington(DE)
$10,000,001to$50 Million
$50,000,001to$100 Million
2/7/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
JPKS Management LLC(Manchester, NH)
Restaurants and Other Eating Places
Concord(NH)
$0to$50,000
$1,000,001to$10 Million
2/5/25
Bruneau Antiques Inc.,d/b/a Bruneau & Co Auctioneers(North Scituate, RI)
Retail Trade
Providence(RI)
$0to$50,000
$500,0001to$1 Million
2/6/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
2Additional affiliate filings include: Brier Creek Coal Company, LLC, Bull Creek Processing Company, LLC, Raven Crest Contracting, LLC, Raven Crest Leasing, LLC, Raven Crest Minerals, LLC, Raven Crest Mining, LLC, Shenandoah Energy, LLC, South Fork Coal Company, LLC, White Forest Resources, Inc. and Xinergy of West Virginia Inc.
Michelle Pottle also contributed to this article.
Caution: Beware of Escape Hatch Allowing Successive Insurers to Dodge Claims that “Involve” Circumstances Reported to Former Insurers
The recent California federal court decision Scottsdale Ins. Co. v. Beachcomber Mgmt. Crystal Cove, LLC, et al. illustrates the perils that corporate policyholders may face in obtaining the full benefit of the bargain when they procure new D&O insurance after making a claim under a prior policy. 2025 WL 257599, at *13 (C.D. Cal. Jan. 21, 2025). In Scottsdale, the court agreed that an insurer who sold a D&O policy could deny coverage for a lawsuit filed against two corporate executives during its policy period because that lawsuit involved some of the same allegations of wrongdoing as did a claim the policyholder previously submitted to a former D&O insurer. The new policy contained a very broadly worded “prior notice exclusion” that barred coverage for all claims “in any way involving” any wrongful conduct, facts, circumstances, or situations as to which notice had been given to a prior D&O insurer. As discussed below, the company had notified its prior insurer when it received a draft version of the lawsuit a year earlier, and that insurer accepted coverage. When the claimants formally filed their litigation, however, they alleged new wrongdoing and sought new relief, so the company prudently made a claim under its new policy as well. The court acknowledged that the new claims made the formal complaint different than the draft complaint, but invoked the prior notice exclusion to bar coverage because some aspects were the same, and that was all that the plain language of the prior notice exclusion in that case required. This ruling is a cautionary tale for policyholders that underscores the importance of paying close attention to the detailed terms and conditions of existing and prospective insurance policies, particularly with respect to whether and how reporting a claim under one policy may limit or preclude coverage under a replacement or later-in-time policy.
In Beachcomber, the central issue was whether an insurer that sold a D&O policy to replace another D&O policy would cover a litigation that included some of the same claims and allegations as did prior claims, but that also included new and different claims and allegations. During the prior policy period, corporate creditors prepared a draft complaint as part of bankruptcy proceedings accusing two business executives of breaching their fiduciary duties by allegedly causing the company to make distributions that were not in the company’s best interest. The company’s then D&O insurer agreed to cover that claim. Afterward, and as part of the company’s reorganization efforts, the company procured a new D&O insurance policy from a different insurer. After that new policy was in effect, the bankruptcy trustee filed its broader complaint echoing the breach-of-fiduciary-duty allegations from the draft complaint, and also alleging other misconduct, including usurping business opportunities and devoting and transferring corporate financial resources for the benefit of other businesses.
The new D&O insurer ultimately sought a declaratory judgment that it did not owe coverage for the litigation, culminating in Beachcomber. Notably, the new insurer initially had agreed to provide coverage for the claims alleged in the trustee’s formal complaint, but changed its mind and invoked the prior notice exclusion to bar coverage when it learned that the prior insurer had already accepted coverage based on the draft complaint. Thereafter, the new insurer filed summary judgment focused on the point that the company’s notice of the earlier draft complaint to its former insurer satisfied and barred coverage under the prior notice exclusion. As already mentioned, the particular version of the prior notice exclusion at issue included the expansive phrase “in any way involving,” and the court found those words meant that any overlap between the wrongful acts, facts, circumstances, or situations in the draft and as-filed complaints could satisfy the exclusion. In the court’s view, it did not matter that the filed complaint had allegations not present in the earlier draft complaint; so long as both complaints “in any way involve[d]” the same facts and law, they came within the scope of the exclusion.
Notably, in reaching its decision that the prior notice exclusion barred coverage, the court expressly declined to consider cases addressing whether successive claims are “related” for coverage purposes under policy terms and conditions other than the prior notice exclusion. The court’s narrow focus was significant to the result in Beachcomber, because the Ninth Circuit Court of Appeals has shown much greater willingness to differentiate among successive claims with overlapping facts and allegations in other coverage contexts, such as the application of the Interrelated Wrongful Acts provision at issue in Fin. Mgmt. Advisors, LLC v. Am. Int’l Specialty Lines Ins. Co., 506 F.3d 922, 926 (9th Cir. 2007). In FMA, the Ninth Circuit declined to find “related,” for coverage purposes, two lawsuits filed by different investors who had received financial advice from an investment advisory firm, even though the two lawsuits included some common allegations of wrongdoing. In the appellate court’s view, it was more important that some of the wrongful acts alleged in the two lawsuits were different than it was that both claims included some common allegations. The court in Beachcomber ultimately reached the opposite conclusion, and held that the overlap between the draft complaint and the filed complaint was more important than the fact that the filed complaint included expanded facts and claims.
Beachcomber is a reminder of the importance for policyholders to carefully examine and understand the intricacies of their insurance policies, including how policies effective during different time periods can interact. Beachcomber also highlights the potential benefit to policyholders of evaluating their rights at the outset of insurance claims, including those related to reporting claims under their policies. Indeed, having a detailed understanding of the insurance policies implicated by the claim at issue is essential to ensuring that policyholders are adequately protecting their interests. Policyholders may avoid costly errors, or inadvertent oversight, and be prepared to navigate the nuanced nature of insurance claims by contacting insurance counsel who can help them better understand their coverage.
Vax On: Fourth Circuit Reinstates Plaintiff’s Religious Bias Suit in COVID Vaccine Mandate Case
On January 7, the United States Court of Appeals for the Fourth Circuit reversed and remanded a district court’s dismissal of a plaintiff’s Title VII religious bias suit—holding the case was sufficient to survive a motion to dismiss at the pleading stage. The matter, Barnett v. Inova Health Care Services, provides key insights and reminders for employers attempting to balance workplace policies with employees’ religious beliefs.
The matter concerned Inova’s COVID-19 vaccine policy. Inova’s policy mandated all employees receive the COVID-19 vaccine unless they had a religious or medical exemption. Barnett, the plaintiff, was a registered nurse and devout Christian. Inova first rolled out its COVID vaccine policy in 2021. At that time, Barnett requested a medical exemption based on lactation concerns but also objected on religious grounds. Inova granted Barnett’s exemption request. According to Barnett, later that year Inova revised its policy and required all employees with an existing vaccine exemption reapply under the new criteria. Barnett claims Inova then required all employees requesting a religious exception complete a questionnaire about their particular religious beliefs applicable to the COVID vaccine. The questionnaire—which Barnett attached to her lawsuit—requested the following information:
1. Describe the nature of your objection to the vaccine.
2. How would complying with the mandate burden your religious exercise?
3. How long have you held the religious belief forming the basis of your objection?
4. As an adult have you received any other vaccines?
5. If you do not religiously object to other vaccines, why do you object to the COVID vaccine?
6. Identify other medications/products you avoid because of your religious beliefs.
When completing the questionnaire, Barnett sought only a religious exemption. Therein, Barnett explained she was a devout Christian and made “life decisions after thoughtful prayer and Biblical guidance.” Barnett further claimed it “would be sinful for her” to take the vaccination having been “instructed by God” to abstain from it. Additionally, Barnett alleged that receiving the vaccine would be “sinning against her body.” Barnett’s stance on the vaccine did not arise directly from scripture but, instead, was “based on her study and understanding of the Bible and personally directed by God.” Inova ultimately denied Barnett’s exemption request—and discharged Barnett after briefly placing her on administrative leave.
According to Barnett, Inova effectively picked “winners and losers” from among those employees requesting an exemption. More particularly, Barnett claimed that Inova chose to exempt employees from more “prominent” or “conventional” religions, while denying Barnett’s request. Barnett claimed to practice a non-denominational form of Christianity.
In her lawsuit, Barnett brought one count of failure to accommodate and two counts of disparate treatment pursuant to Title VII of the Civil Rights Act. Barnett also brought overlapping state-law claims under the Virginia Human Rights Act.
Inova moved to dismiss Barnett’s complaint pursuant to Federal Rule 12 on the basis it failed to state a viable claim for relief. Primarily, Inova argued that Barnett’s concerns about the COVID vaccine were not sincerely religious in nature and, rather, amounted to personal preferences or fears. Inova claimed that Barnett’s reliance on “prayerful consideration” to make her vaccination decision—instead of scriptural authority—meant her choice was “untethered to a particular religious belief.” The district court sided with Inova and dismissed Barnett’s complaint on the pleadings. Barnett appealed that decision to the Fourth Circuit.
On appeal, the Fourth Circuit reversed and remanded the district court’s decision; wholly reinstating Barnett’s lawsuit. In its opinion, the Court of Appeals noted that to qualify for Title VII protection, a religious discrimination plaintiff must show her professed belief is (1) sincerely held and (2) religious in nature. The Fourth Circuit found Barnett met the first prong by alleging to be “a sincere follower of the Christian faith” who made “all life decisions” after “prayer and Biblical guidance.” Sincerity, the Court of Appeals noted, is “almost exclusively a credibility assessment” that can “rarely be determined on summary judgment, let alone a motion to dismiss.”
The Fourth Circuit also found Barnett’s complaint adequately demonstrated her beliefs were religious. In her lawsuit, Barnett alleged that getting the COVID vaccine would be “sinful…against her body”, defy instructions “by God”, and otherwise go against her “study and understanding of the Bible.” According to the Fourth Circuit, these allegations were “sufficient to show that Barnett’s belief is an essential part of a religious faith” and “plausibly connected” to her refusal to receive the COVID vaccine.
The Barnett opinion offers some important lessons. First, Rule 12 motions to dismiss are difficult to win, give plaintiffs a low bar to clear, and should be filed only when strategically appropriate; not as a matter of course. To survive a Rule 12 motion, a complaint need only plead facts that—taken as true—plausibly support a claim. In the context of discrimination suits, the Fourth Circuit noted that allegations offering a “reasonable inference” of discriminatory intent are sufficient. A plaintiff also does not need to establish a prima facie case to survive a Rule 12 motion. As the Fourth Circuit remarked, that is an “evidentiary standard, not a pleading requirement”.
Second, Barnett serves as a reminder that a religious belief need not be rooted in scriptural authority or dogma to form a viable discrimination claim. Similarly, a plaintiff’s theological interpretations need not be shared by their church’s leadership—or deemed valid by their employer—to qualify as religious in nature.
Third, at the pleading stage especially, courts give a wide berth to a plaintiff’s claim that their religious belief is “sincerely held.” As the Barnett court noted, whether a plaintiff’s religious belief is “sincere” is a credibility assessment that can rarely—if ever—be determined on the pleadings.
Fourth and finally, Barnett serves as a reminder that employers should consult experienced counsel before implementing any policies, procedures, or written questionnaires designed to evaluate whether employees may qualify for an exemption from vaccines or other workplace mandates. The plaintiff in Barnett attached Inova’s questionnaire as an exhibit to the publicly-filed complaint. Any business implementing these or other policies should seek advice from well-qualified outside counsel.
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Disappearing CFPB? What’s Happened And What’s Next
These are interesting times we live in.
During the transition period between Trump’s election and inauguration, Elon Musk stated that the there were “too many duplicative regulatory agencies” and he would “delete” the Consumer Financial Protection Bureau (CFPB).
Well, it looks like that process has been begun. And if not deleted, then erased significantly.
On Friday afternoon, Elon Musk tweeted out “CFPB RIP”. Subsequently, people noticed the CFPB’s website and X page went dark.
On Saturday night, Russell Vought, the director of the Office of Management and Budget tweeted that the CFPB will NOT be taking its “next draw of unappropriated funding because it is not ‘reasonably necessary’ to carry out its duties.” And the CFPB’s current balance of over $700 million is “excessive in the current fiscal environment”.
Then on Sunday, Mr. Vought, sent an email to all CFPB employees essentially telling them all to go pencils down and they must get approval from the Chief Legal Officer IN WRITING before performing any work task. The letter was signed by Mr. Vought as “Acting Director”.
So, a lot going on. But, what does this mean?
It is helpful to remember the CFPB is funded through the Federal Reserve without Congressional approval. This was the basis of the challenge which the Supreme Court ruled on last year. The Supreme Court found that the CFPB’s funding scheme fell squarely within the definition of a Congressional “appropriation” in a vote of 7-2.
Therefore, since the CFPB is funded by Treasury, Mr. Vought declining to ask for more money from Treasury is the first step to defund the CFPB. However, it would not be that simple to eliminate the CFPB, the Bureau’s power could be significantly limited.
The legal maneuvers required to completely eliminate the CFPB could require a supermajority vote in the Senate, which seems unlikely, but how could a massive cutback in force affect lead generators?
First, does it stop all new enforcement and rulemaking? This is an organization that has filed over 140 enforcement actions in the last 5 years and has over 20 proposed rules in various stages.
Second, what actions does the new administration take regarding prior actions. Does it rollback all guidance including the guidance around lead generation and pay to play? Does it pause all litigation? This could radically change the playing field for comparison shopping websites and the lenders that rely on them.
These are big questions with many downstream effects in the ecosystem.
My initial suggestion:
Don’t let this change your current business practices.
Like the 1:1 rule being vacated, the cutback of the CFPB doesn’t eliminate existing laws or regulations. And also like the 1:1 rule, don’t be surprised if other parties step into the vacuum created by the CFPB’s sudden diminishing stature.
Delaware Supreme Court Applies the Business Judgment Rule to Fiduciary Duty Claims Related to Reincorporation Out of Delaware
The Delaware Supreme Court, in Maffei v. Palkon, No. 125, 2024 (Del. Feb. 4, 2025), has reversed the Court of Chancery and decided that business judgment deference applied to breach of fiduciary duty claims related to a controlled corporation’s decision to reincorporate from Delaware to Nevada. The Delaware Supreme Court held that claims regarding additional litigation or liability protections that TripAdvisor’s controlling stockholder and/or board of directors could receive following the conversion from a Delaware to Nevada corporation were highly speculative. The speculative nature of such claims failed to demonstrate that there was a material non-ratable benefit involved in the conversion which created a conflicted controller transaction subject to entire fairness review.
On a motion to dismiss these claims, the Delaware Court of Chancery previously held that the controlling stockholder and board of directors of TripAdvisor and its affiliate Liberty TripAdvisor would receive a material unique benefit in the reincorporation, in the form of greater protection from personal liability afforded by Nevada law. As a result, the Court of Chancery determined that the entire fairness standard of review would apply in the absence of Delaware law procedures for cleansing breach of fiduciary duty claims.
Given the important legal issues involved, the Delaware Supreme Court accepted an interlocutory appeal. The Delaware Supreme Court noted that temporality of any litigation against the defendants (and corresponding benefits of protection in such litigation) is a key factor in determining the materiality of any unique benefits that the defendants might derive from the reincorporation. In the absence of allegations that the reincorporation was used to avoid threatened or pending litigation or in contemplation of a particular transaction, the Court viewed any benefit as too speculative to be material and therefore determined that the reincorporation was not subject to entire fairness review. The Court also noted that, although it was not an independent ground for its decision, its holding furthered the goals of comity by declining to engage in a comparison of the Delaware and Nevada corporate governance regimes.
This decision provides useful guidance regarding the standard of review applicable to breach of fiduciary duty claims related to reincorporation transactions (including mergers, conversions, and domestications), as well as board considerations in connection with such a transaction. We will continue to monitor this issue from Delaware, Nevada, and other related perspectives.
CIPA SUNDAY: Class Certified! Instant Replay Catches Prudential Offside—It’s 4th & Long, What’s Their Next Move?
Greetings CIPAWorld!
We are bringing back CIPA Sundays! And what better day to do it than Super Bowl Sunday—where the only replay we should be analyzing is on the field. But off the field, a different kind of replay is making headlines—one that allegedly tracks every move you make online, even the ones you think are erased. While millions tune in for the big game, another play-by-play happens behind the scenes. Imagine filling out an online life insurance quote form. You type in your age, financial details, and perhaps even information about your medical history. Then you delete something, perhaps reconsidering how much you want to share. But what if that erased data was never truly gone? What if every keystroke, every backspace, every moment of hesitation was silently recorded? That’s exactly what Prudential Financial allegedly did, and a federal court gave thousands of California residents the green light to challenge the practice together.
In a significant ruling for digital privacy, Judge Charles Breyer of the Northern District of California refused to let Prudential and its partners sidestep liability, certifying a class action that could reshape the boundaries of online data collection. See Torres v. Prudential Fin., Inc., No. 22-CV-7465-CRB, 2024 WL 4894289 (N.D. Cal. Nov. 26, 2024). Does this case sound familiar? It should. The one and only Baroness blogged about it here: The ActiveProspect Saga: Privacy Challenges Continue Post-Javier. This case illustrates how courts deal with modern surveillance technologies, the boundaries of implied consent, and whether companies can justify real-time user tracking under the pretext of “data collection.”
So, let’s get a little technical for a moment for those unfamiliar with this tech. The technology at issue here is TrustedForm, a session replay tool that does more than just log user submissions. In turn, it generates a second-by-second reconstruction of a user’s entire interaction with Prudential’s quote form, capturing information even if it is deleted before submission. Here’s how it works: the moment a visitor lands on the form, TrustedForm assigns them a unique tracking ID and begins recording. Think of it like a surveillance camera for your browser—monitoring every keystroke, every backspace, every time you hover over a field but hesitate to fill it out. By the time users hit “Get an instant quote,” Prudential and its partners already have a fully mapped-out replay of their entire thought process. But here’s the twist—users never agreed to this level of tracking. At no point were they explicitly told that their interactions were being recorded in real time.
With this in mind, let’s now switch gears and break down the Court’s reasoning so we can work through the Court’s analysis to fully understand it. Before deciding whether a class could be certified, the Court tackled standing—a threshold issue in privacy litigation. In Campbell v. Facebook, Inc., 951 F.3d 1106, 1117 (9th Cir. 2020), Judge Breyer reaffirmed that CIPA violations inherently confer standing because they protect substantive privacy rights, not just procedural ones. Unlike some privacy claims that require proof of harm beyond statutory violations, Plaintiff didn’t need to show her data was misused—the unconsented recording itself was enough to constitute concrete injury under TransUnion L.L.C. v. Ramirez, 594 U.S. 413, 423 (2021).
Prudential’s primary defense hinged on implied consent—arguing that website visitors were sufficiently “on notice” of session replay tracking through privacy policies, industry norms, and even news articles discussing online monitoring. However, the Court wasn’t convinced. Relying on Calhoun v. Google, L.L.C., 113 F.4th 1141, 1147 (9th Cir. 2024), the Court emphasized that for consent to be valid, it must be to “the particular conduct, or substantially the same conduct” at issue. Generic disclosures about data collection won’t cut it.
Prudential then pointed to its privacy policy, but the Court found this argument lacking, distinguishing Torres from its own prior decision in Javier v. Assur. IQ L.L.C., 649 F. Supp. 3d 891, 896-97 (N.D. Cal. 2023). While Javier held that a privacy policy might put users on “inquiry notice” for statute of limitations purposes, it didn’t establish actual consent. Here, no reasonable user clicking through Prudential’s quote form would expect that their keystrokes and deleted inputs were being recorded in real time.
Another hurdle Prudential tried to establish was the identification of class members—arguing that individual inquiries would dominate. The Court disagreed. Under Briseno v. ConAgra Foods, Inc., 844 F.3d 1121, 1125 (9th Cir. 2017), the Ninth Circuit doesn’t require plaintiffs to demonstrate administrative feasibility at the certification stage. It found that Prudential’s own database, combined with user affidavits, would be sufficient to identify affected consumers.
Next, one of Prudential’s more technical arguments was that some class members may have used VPNs, making it difficult to verify whether they were in California. However, the Court found this issue insufficient to defeat predominance. The Court suggested that ZIP code cross-referencing and affidavits could establish California residency. See Zaklit v. Nationstar Mortg. L.L.C., No. 5:15-cv-2190-CAS(KKx), 2017 WL 3174901, at *9 (C.D. Cal. July 24, 2017). It also pointed out that CIPA’s protections extend to communications “in transit” through California, meaning that even non-residents could potentially qualify if their data was intercepted while in the state.
With class certification granted, the battle over Prudential’s use of TrustedForm is far from over. The defendants—Prudential, ActiveProspect, and Assurance IQ—aren’t waiting for the trial to try to shut this case down. They’ve filed an early motion for summary judgment, arguing that their use of TrustedForm doesn’t violate California’s wiretapping law, CIPA § 631(a). The motion is set for a hearing on March 28, 2025, with briefing continuing through February and March.
The core of this motion revolves around whether ActiveProspect qualifies as a “third-party eavesdropper” under CIPA or if it was merely a service provider acting on Prudential’s behalf. The defense insists that TrustedForm is just a compliance tool, incapable of independent use, while Plaintiffs argue that recording user interactions without explicit consent is exactly the kind of digital surveillance CIPA was meant to prevent. Defendants might also move to exclude the expert testimony of Plaintiffs’ software expert, adding another layer of complexity. If they do, that motion will be fully briefed by March 13, 2025.
Meanwhile, the Court has scheduled a case management conference for March 28, 2025, immediately following the summary judgment hearing. Depending on how Judge Breyer rules, this case could either be heading toward trial—or be over before it ever gets there.
Bottom line? This fight is far from over, and Torres could still set a significant precedent for online tracking and consumer privacy rights. The next few months will be one to watch, and we’ll be sure to keep you updated.
As always,
Keep it legal, keep it smart, and stay ahead of the game.
Talk soon!
First Circuit Broadly Interprets Exclusion in Commercial General Liability Policy Under Current Massachusetts Law
In Admiral Insurance Co. v. Tocci Building Corp., 120 F.4th 933 (1st Cir. 2024), the federal Court of Appeals ruled that, under current Massachusetts law, a general contractor’s Commercial General Liability (CGL) policy does not cover damage to non-defective work resulting from defective work by subcontractors.
The defendant contractor was retained as a construction manager for an entire residential construction project. After several work quality issues and delays on the project, the contractor was terminated before the project’s completion. The owner of the project filed suit against the contractor for breach of contract and related claims but did not allege negligence by the contractor. The complaint included allegations of defective work by the contractor’s subcontractors leading to various instances of damage to non-defective work on the project including: (1) damage to sheetrock resulting from faulty roof work; (2) mold formation resulting from inadequate sheathing and water getting into the building; and (3) damage to a concrete slab, wood framing, and underground pipes resulting from soil settlement due to improper backfill and soil compaction. The contractor’s request for defense and indemnification coverage under its CGL policy was denied by its insurer. The insurer filed suit seeking a declaratory judgment confirming it had no obligation to defend or indemnify the contractor. The district court granted summary judgment in favor of the insurer and the contractor appealed.
The Court examined the “Damage to Property” exclusion outlined in subsection (I)(2)(j) of the CGL policy, which provides that there is no coverage for “property damage” to “(6) [t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” The CGL policy defines “your work,” in relevant part, as “work or operations performed by you or on your behalf.” Since the complaint alleged damage resulting from the contractor’s “incorrectly performed” work on the entire project, the Court interpreted the (j)(6) exclusion as applying to the entirety of the project where the contractor was the construction manager charged with supervising and managing the whole project, the Court enforced the exclusion against coverage for the contractor.
The Court also examined the exception to the exclusion in (j)(6), which provides that the exclusion does not apply to “‘property damage’ included in the ‘products-completed operations hazard.’” The “products-completed operations hazard,” in turn, “includes all ‘bodily injury’ and ‘property damage’ occurring away from premises you own or rent and arising out of ‘your product’ or ‘your work’ except … (2) work that has not yet been completed or abandoned.” Since the contractor was terminated and did not complete or abandon the project prior to damage, the court of appeals concluded that the coverage exclusion in (j)(6) still applied.
In closing, the court of appeals left the door open for potential coverage for damage to non-defective, work arising from a subcontractor’s defective work even with the (j)(6) exclusion. Since the Massachusetts Supreme Judicial Court has yet to rule on the issue, it could interpret “property damage” caused by an “occurrence” to encompass this type of damage, which could allow a general contractor to potentially receive coverage if the work is completed or abandoned, as the exception to the exclusion would then apply.
Eleventh Circuit Strikes Down One-to-One Consent Rule
On February 6, 2025, the Eleventh Circuit Court of Appeals struck down the FCC’s one-to-one consent rule (previously discussed here). Applying the Supreme Court’s decision in Loper Bright Enters. v. Raimondo, 9 the Eleventh Circuit ruled that the FCC exceeded its legal authority by enforcing additional consent restrictions not explicitly outlined in the Telephone Consumer Protection Act (TCPA).
The FCC had implemented the one-to-one consent rule as a safeguard against excessive telemarketing calls. By requiring consumers to grant consent to each specific seller, the rule sought to minimize unwanted marketing communications.
By invalidating the rule, the court effectively maintains the status quo, which allows businesses to rely on a single instance of consumer consent for multiple lead generators.
Putting It Into Practice: This ruling likely ends the FCC’s push on the one-to-one consent rule. In the short term, it will need to decide whether it appeals the ruling to a possible hostile Supreme Court. A Trump-centric FCC may have a different view altogether. We will keep monitoring the space for future developments.
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CFPB Signals Shift in Position on Section 1071 Compliance Pause
This week, the CFPB filed an emergency notice in the Fifth Circuit Court of Appeals, indicating that it no longer opposes a pause in compliance with its Section 1071 small business data-collection rule (previously discussed here, here, and here). This marks a significant departure from its previous stance as it navigates ongoing legal challenges from lenders.
The notification was submitted just before a scheduled hearing in the case challenging the rule’s validity, and states “Counsel for the CFPB has been instructed not to make any appearances in litigation except to seek a pause in proceedings.” This shift raises questions about the rule’s near-term enforceability, particularly for financial institutions that have been preparing for its implementation.
The Section 1071 rule, established under the Dodd-Frank Act, is designed to enhance transparency in small business lending. It mandates that financial institutions:
Collect and retain data on small business credit applications. Businesses must track and document applications for credit from small businesses to ensure fair lending practices and monitor access to credit for minority- and women-owned businesses.
Gather applicants’ demographic details. Lenders are required to ask applicants for self-reported demographic information including race, ethnicity, and gender. This will be used to assess lending trends and potential disparities.
Report lending decisions to regulatory bodies for oversight. Collected data must be submitted to the CFPB and other relevant regulatory agencies to facilitate enforcement actions and policy assessments related to fair lending laws.
Establish compliance protocols to ensure adherence with reporting requirements. Institutions must implement internal systems to collect, store, and submit required data while ensuring privacy protections for applicants.
Putting It Into Practice: The CFPB finalized the rule as a result of a lawsuit brought by the California Reinvestment Coalition and other plaintiffs who sought to compel the agency to implement Section 1071 of the Dodd-Frank Act, which had been enacted in 2010 but not enforced for years. The lawsuit led to a settlement agreement in 2020, under which the CFPB committed to a timeline for proposing and finalizing the rule. So while it may not be possible to rescind the law, a pause may lead to the Bureau carving back some of the data collection requirements. We will continue monitor the Section 1071 compliance landscape for further developments.
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California AB 3108 Creates Potential Mortgage Fraud Issue for Lenders on Owner-Occupied Mortgage Loans Made for a Business Purpose
California Assembly Bill 3108 became effective on January 1, 2025 and could conceivably make certain business purpose loans secured by owner-occupied property subject to mortgage fraud claims by the borrowers. The primary goal of the new law—passed unanimously by the State Assembly and nearly unanimously by the State Senate (with one apparent absentee)—is to protect borrowers from certain predatory practices by mortgage lenders and brokers. However, unintended consequences may arise.
Assembly Bill 3108 makes it felony mortgage fraud for a “mortgage broker or person who originates a loan” to intentionally:
Instruct or otherwise deliberately cause a borrower to sign documents reflecting the terms of a business, commercial, or agricultural loan, with knowledge that the borrower intends to use the loan proceeds primarily for personal, family, or household use.
Instruct or otherwise deliberately causes a borrower to sign documents reflecting the terms of a bridge loan, with knowledge that the loan proceeds will be not used to acquire or construct a new dwelling. For purposes of this subdivision, a bridge loan is any temporary loan, having a maturity of one year or less, for the purpose of acquisition or construction of a dwelling intended to become the consumer’s principal dwelling.
This law is clearly intended to go after bad actors with respect to both mortgage loans and bridge loans. However, it also opens up the possibility that a delinquent or defaulting borrower with a business purpose loan could claim that the mortgage lender or broker committed a felony by persuading the borrower to claim that the loan was made for business purposes when the lender knew that the loan was actually for personal purposes.
Putting It Into Practice: All mortgage lenders and mortgage brokers should have policies in place for determining and documenting when loans are made for business purposes. This is the time to review those policies and make sure they are as protective as possible. At a minimum, those policies should include the following:
Obtain a handwritten letter signed in the lender’s presence by the borrower detailing the business purpose of the loan.
Gather corroborating evidence of the business purpose, such as financial statements and invoices.
Have the applicant sign a business purpose certificate.
If possible, fund the loan proceeds to a business bank account.
Consider recording a telephone conversation with the applicant discussing the business purpose, but be sure to inform the applicant that the call is being recorded, as required by California law.
Consider obtaining a legal opinion from the borrower’s counsel.
Having these policies in place could significantly reduce the risk that a borrower will later claim that the mortgage lender or broker has committed felony mortgage fraud in violation of AB 3108.
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