Face the inMusic: A Corporate Patent Owner Cannot (Yet?) Recover the Lost Profits of a Subsidiary
The Federal Circuit has long held that “the general rule” of patent infringement damages law is “a patentee may not claim, as its own damages, the lost profits of a related company.” More than 15 years ago, one patent owner argued that an exception to this general rule should be when a subsidiary’s profits “flow inexorably” to the parent patent owner. In that case, the Federal Circuit avoided deciding the legal question, concluding that the patent owner had failed to prove that its wholly owned subsidiary’s profits flowed inexorably to it. The same legal question came before the Federal Circuit again in Roland Corp. v. inMusic Brands, Inc. and the result was, well, the same: no dice.
The circumstances were as follows. Roland sued inMusic for infringement of several patents relating to electronic drums and cymbals. Roland, the sole plaintiff, is a Japanese company that does business directly in the U.S. and through its wholly owned U.S. subsidiary, Roland U.S. (Roland U.S. buys product from Roland and then resells it in the U.S.). Roland’s case against inMusic went to trial and the jury returned a verdict in Roland’s favor, awarding $2.7 million in lost profits to Roland (and an additional $1.9 million in reasonable royalties). The jury rendered a single lost profits verdict, i.e., one that that did not separate out Roland’s lost profits from Roland U.S.’s lost profits. inMusic appealed the judgment entered on the verdict.
On appeal, the Federal Circuit vacated the entire damages award and remanded the case to the district court for a new trial on damages. With respect to lost profits, after reciting the “general rule” of lost profits recovery noted above, the court held that Roland had failed to introduce substantial evidence that Roland U.S.’s profits “inexorably flowed” to Roland. The only evidence introduced was testimony from an executive of both Roland and Roland U.S. that Roland U.S. was a wholly owned subsidiary, and the court held this to be conclusory and insufficient. The court noted the absence of any evidence of (1) who controlled Roland’s U.S.’s distribution of profits, (2) corporate controls to ensure that Rolan U.S.’s profits became those of its corporate parent, Roland, or (3) “historical financial information showing an unwavering flow of profits” from Roland U.S. to its parent. Moreover, because the jury did not render a Roland-only lost profits finding, the Federal Circuit vacated the jury’s lost profits award.
Though designated nonprecedential, Roland is yet another example of the Federal Circuit demanding rigor from patent owners and their damages experts in supporting patent damages claims. See my recent post for other examples. The key takeaways from Roland are as follows. First, the Federal Circuit has yet to embrace the legal principle that patent owners can recover lost profits of a non-party subsidiary. (This is to be contrasted with the court’s acceptance of the notion that a subsidiary with an exclusive license under the corporate parent’s patent is eligible to recover its lost profits.) Second, an “inexorable flow” theory of damages is unlikely to succeed in the future unless a patent owner pursuing this theory of recovery proves that it has structured its financial arrangement with its U.S. subsidiary such that, in fact, the subsidiary’s profits from the sale of the patented product systematically flow to the parent patent owner.
Replacement Cost Insurance Coverage in Turbulent Times
After the wildfires in Los Angeles, extreme weather events throughout the United States, and recently enacted tariffs, it seemed like a good time to revisit the calculation of replacement cost under policies insuring against loss or damage to property. The concept of replacement cost — sometimes referred to as “new for old” — seems simple, but issues often arise over the calculation and various policy terms and conditions. So, let’s dig in.
What Is Replacement Cost Coverage?
Replacement cost coverage is the most common type of insurance found in first-party property insurance policies, including standard business property policies and builder’s risk policies (for property in the course of construction). It usually applies to both “building” coverage and to business personal property (BPP) coverage, with some exceptions. It is referred to as “new for old” because it pays to replace lost or damaged property with new property of the same type.
Insurance companies frequently argue that because they cover only loss or damage to covered property, policyholders must prove that a particular item of covered property was damaged before the insurance company has an obligation to repair or replace it. Insurance policies, however, rarely are specific on this point. In Windridge of Naperville Condo. Ass’n v. Philadelphia Indem. Ins. Co., 932 F.3d 1035, 1040 (7th Cir. 2019), for example, the court held that “the unit of covered property to consider under the policy (each panel of siding vs. each side vs. the buildings as a whole) is ambiguous.” Thus, the court construed the policy in favor of the policyholder under the well-settled rule that ambiguous language in an insurance policy must be construed in favor of coverage and strictly against the insurance company.
The Windridge court also examined the so-called “matching” issue that often arises with partial damage. Specifically, where new materials will not match the existing undamaged materials, does the insurer have an obligation to pay for changes in the undamaged portions of a building so that the new and old will match? The court noted that the case law is “mixed” in answering this question. The court followed the case law holding that the insurer must account for matching, noting that “buildings with mismatched siding are not a post-storm outcome that the insured was required to accept under this replacement-cost policy.” Id. at 1041.
What Is “Like Kind and Quality”?
“New for old” is usually not difficult when property is a total loss, but it becomes a challenge when property is only damaged or partly destroyed. It can often be difficult, if not impossible, to replace only part of a damaged structure. Issues like tying the new into the old, matching the new and the old, material and technology changes, and code requirements for new versus old often arise.
Most policies require replacement of lost or damaged property with property of “like kind and quality,” or similar words. The standard ISO form uses the phrases “comparable material and quality…used for the same purpose.” These words usually are not further defined.
As discussed above, several courts and/or state statutes provide that replacement materials must match the undamaged portions of the property to qualify as like kind or comparable. For other issues, whether replacement materials are “comparable” often involves expert testimony. In Republic Underwriters Ins. Co. v. Mex-Tex, Inc., 150 S.W.3d 423 (Tex. 2004), for example, the court held that “comparable” does not mean “identical” and affirmed the trial court’s ruling finding coverage for a different type of roof based on expert testimony that the replacement roof was comparable, even though it was different from the damaged roof and cost more to replace.
What if Building Codes Have Changed?
The standard ISO replacement cost form states that the “cost of building repairs or replacement does not include the increased cost attributable to enforcement of or compliance with any ordinance or law regulating the construction, use or repair of any property.” However, some coverage is available for “Increased Cost of Construction,” which includes coverage for the increased cost necessary to comply with the minimum costs of complying with building codes or ordinances, subject to certain conditions. This additional coverage also is sometimes referred to as “Ordinance or Law” coverage. It is limited to certain amounts in the standard ISO form ($10,000 or 5% of the applicable limit), but additional coverage can be purchased.
How Is My Value Determined?
At a high level, replacement cost valuation is straightforward — it is cost to repair or replace the lost or damaged property with comparable property. The standard ISO form limits recovery to the maximum of “the amount actually spent that is necessary to repair or replace the lost or damaged property.” But the total replacement cost can be affected by the issues discussed above (e.g., matching or whether the replacement property is “comparable”), as well as a host of other issues.
The number of factors that can affect replacement cost vary based on the type and age of construction, materials, geography, and macroeconomic events like weather, tariffs and the labor market. These factors affect things like:
The availability of replacement materials
The cost of replacement materials
Alternatives to the damaged property
Lead times for materials
Labor rates and intensity of different repair options
Market or aesthetic changes
The schedule for repairs or replacement
Most insurance companies and their experts use software programs to calculate replacement costs. These programs contain regularly updated labor and materials costs by geographical regions. In calculating replacement cost estimates, they also consider additional costs, such as overhead, profit, permitting, and other costs that may be included in a general contractor’s “general conditions.”
While these programs are the insurance industry’s standard for calculating replacement cost, they are the map and not the territory. Nothing in the policy requires the use of estimates to calculate replacement cost, and recovery ultimately is based on the actual costs of repairs or replacement, subject to the policy’s terms and conditions, such as those discussed above.
Contractors and builders generally do not use the same programs that insurance companies use — they base their cost estimates on sub-contractor bids and their general knowledge about the costs and time involved in a potential job. In tight labor markets or times of rapidly rising or fluctuating prices, the replacement cost estimates in an insurance company’s software program may not reflect the events on the ground.
The numbers in the estimating software used by insurance companies also necessarily reflect figures among a range of possible costs a policyholder might receive from a contractor in an estimate for actual repair or replacement work. The costs of the most available or desirable contractor may be higher than the cost reflected in an insurance company’s insurance program. In addition, the accuracy of an estimate will only be as good as the information entered into the program. If the details of the loss are entered incorrectly, or if the scope changes as additional work becomes necessary or additional damage is uncovered during demolition, the estimate will need to be corrected or updated.
Policyholders should not accept software driven estimates as final costs, but as useful tools for receiving early partial payments on a claim and for setting a general framework for replacement costs. Policyholders should not settle claims until after they fully understand the scope of their loss and the actual costs they will incur in repairing or replacing damaged or destroyed property.
Do I Get Replacement Cost if I Don’t Rebuild or Rebuild Something Different?
Many policy forms state that the insurer will pay only the “actual cash value” or “ACV” of property damage until after repairs are made. Some courts have held that this condition may be waived by an insurer’s handling of a claim. In Rockford Mut. Ins. Co. v. Pirtle, 911 N.E.2d 60 (Ind. Ct. App. 2009), for example, the court held that this condition was waived where the insurer waited six months and until after foreclosure proceedings were initiated to offer an ACV payment.
Most insurers define ACV as replacement cost less depreciation, and some policies define the term in this way. But many policies do not define ACV. In the absence of a policy definition of ACV, or where the policy language allows, many states use the “broad evidence rule” for calculating ACV. This rule is a “flexible rule” that permits consideration of “any relevant factor” in determining ACV. Travelers Indem. Co. v. Armstrong, 442 N.E.2d 349, 356 (Ind. 1982).
Some policies allow recovery of replacement cost where the policyholder rebuilds at another location, or even if the policyholder rebuilds something different from the damaged or destroyed property. Other policies go so far as to allow a replacement cost recovery where the policyholder does not rebuild, if the proceeds are used elsewhere in the policyholder’s business. These provisions often also require that the proceeds are used on unplanned expenses. In these situations, disputes center on the “hypothetical” replacement cost of repairing or rebuilding with like kind or comparable property, given that no actual costs are incurred for that work.
Who Decides What I Get?
There are three ways disputes over replacement cost may be decided. If the dispute involves a question of what the insurance policy language means, then the issue is usually decided by a court. But courts only decide what the law mandates or what the insurance policy language means. Juries typically decide factual disputes or issues that turn on experts’ credibility.
In the case of disputes over the amount of replacement cost, property insurance policies usually contain a third remedy, called appraisal. The appraisal process involves each side choosing an appraiser and those appraisers choosing an umpire. The appraisers and the umpire then evaluate the differences in replacement cost calculations and the umpire’s agreement with one of the party’s appraisers is binding. Appraisals too can be fraught with issues, which is discussed in a prior article linked here.
Conclusion
Disputes over replacement cost raise legal and factual issues in normal times, but they present enhanced challenges when costs, climate, and market forces are changing and uncertain. Policyholders should navigate those challenges thoughtfully to ensure they obtain the benefits they paid for under their property insurance policies.
Texas Supreme Court To Review Whether A Corporate Trust’s Shareholder Has Standing To Sue On Behalf Of The Trust
The Supreme Court granted oral argument in In re UMTH Gen. Servs., L.P., 2023 WL 8291829 (Tex. App.—Dallas 2023), wherein a real estate investment trust entered into an advisory agreement with an entity and gave it authority to manage corporate assets. One of the trust’s shareholders sued the advisor and its affiliates, asserting claims under the advisory agreement for the alleged improper use of corporate funds for legal expenses. The advisor filed motions objecting to the shareholders’ claims due to a lack of capacity and standing. After the trial court denied the motions, the advisor filed a petition for writ of mandamus in the court of appeals, which was denied, and then in the Texas Supreme Court. The advisor argues that the trial court abused its discretion in allowing the shareholder to bring its claims directly rather than derivatively, as it lacked a personal cause of action and a personal injury, and that the shareholder lacked derivative standing because it did not maintain continuous or contemporaneous ownership of trust shares. The Supreme Court has set the case for oral argument.
McDermott+ Check-Up: April 11, 2025
THIS WEEK’S DOSE
House Passes Concurrent Budget Resolution for Reconciliation Process. Passage of the resolution didn’t resolve the policy differences between the House and the Senate. Those still need to be addressed as the reconciliation package is developed.
House Ways and Means Health Subcommittee Discusses Lowering Costs of Biosimilars. Witnesses included physicians and biosimilar manufacturers, and members discussed their views on the biosimilar market.
House Oversight Committee Examines FDA Reform. Democrats criticized the Trump administration’s restructuring of the US Food and Drug Administration (FDA), while Republicans pushed for further FDA reform.
CMS Releases Two MA Final Rules. The regulations increase plan payments for 2026 but omit several significant proposals.
Trump Administration Takes Further Deregulation Actions. The administration directed federal agencies to repeal, without notice and comment, regulations that do not comply with Loper Bright, and sought public comment on which regulations to repeal.
CMS Notifies States of Intent to Deny Future Funding of DSHPs and DSIPs. The Centers for Medicare & Medicaid Services (CMS) believes providing federal funding for designated state health programs (DSHP) and designated state investment programs (DSIP) is not in line with the mission of Medicaid.
Federal Judge Strikes Down Biden-Era Nursing Home Staffing Rule. The ruling could impact ongoing reconciliation discussions as Republicans look for policies that would save money.
Supreme Court, Fourth Circuit Rule on Firing of Probationary Workers. Both rulings held that the plaintiffs lacked legal standing to bring the cases.
CONGRESS
House Passes Concurrent Budget Resolution for Reconciliation Process. Over the weekend, the Senate passed the concurrent budget resolution by a 51 – 48 vote, with Sens. Paul (R-KY) and Collins (R-ME) joining Democrats in voting no. The resolution includes differing instructions for House and Senate committees, requiring the committees to continue debating spending and savings levels. Democrats introduced 800 amendments, including a bipartisan amendment from Sens. Wyden (D-OR) and Hawley (R-MO) to strike instructions for the House Energy and Commerce Committee to find at least $880 billion in savings, likely to come from Medicaid. The amendment failed, but Sens. Collins, Hawley, and Murkowski (R-AK) voted with Democrats in support.
House Republican leadership’s plan to pass the resolution before leaving for the two-week Easter recess was complicated by opposition from multiple members of the party, including House Budget Committee Chairman Arrington (R-TX). Those members were opposed to separate spending cut instructions for the House and Senate, as they wanted to stick with the House’s version of a budget resolution, which called for at least $1.5 trillion in federal spending cuts. Leadership repeatedly postponed a Rules Committee meeting to discuss the resolution, and President Trump met with House Republicans to urge them to support the concurrent resolution. Ultimately, a vote on the concurrent resolution was brought to the House floor Wednesday night but was cancelled amid strong opposition.
Senate Majority Leader Thune (R-SD) stated on Thursday that the Senate is “aligned with the House . . . in terms of savings,” noting that some senators believe the $1.5 trillion threshold is a minimum and that the Senate will “do everything we can to be as aggressive as possible to see that we are serious about the matter.” While this still leaves wiggle room as reconciliation continues, the House passed the resolution by a 216 – 214 vote. Reps. Spartz (R-IN) and Massie (R-KY) were the only Republicans to oppose it. As the vote was happening, Senate Democrats issued a letter to the public criticizing the budget resolution, arguing that it would provide a tax cut for the wealthy while cutting Medicaid. In related news, the Congressional Budget Office (CBO), in response to a request from Sen. Merkley (D-OR), released a report showing that if the Trump-era tax cuts were made permanent, the federal deficit would increase by $6 trillion over the next 10 years.
House Ways and Means Health Subcommittee Discusses Lowering Costs of Biosimilars. During the hearing, Democrats continued to express their concerns about National Institutes of Health grant reductions and the US Department of Health and Human Services (HHS) reorganization and reductions in force. Democrats were concerned about the implications of these actions for biosimilar market research and approvals. Republicans discussed disincentives and barriers to the development of new life-saving drugs, as well as issues with the current reimbursement system in Medicare and the role of pharmacy benefit managers (PBMs) in the biosimilar market. Witnesses included physicians and biosimilar manufacturers who discussed the importance of biosimilars and threats to a healthy biosimilar market, including actions from insurance companies and PBMs, cuts to federal research grants, and federal regulations.
House Oversight Committee Examines FDA Reform. Republicans in the hearing expressed the need for FDA reform, while Democrats criticized the Trump administration’s current efforts to restructure the agency. Members from both parties emphasized that relying on foreign countries for drug manufacturing poses dangers to the domestic supply chain. Witnesses provided suggestions for how to improve FDA product review and regulation of products such as hemp, e-cigarettes, and anti-obesity medications.
ADMINISTRATION
CMS Releases Two MA Final Rules. CMS released the Medicare Advantage (MA) and Part D contract year 2026 policy and technical changes final rule late on April 4, 2024. The Biden administration had issued the proposed rule in November 2024. CMS did not finalize proposals from the Biden administration to expand coverage of anti-obesity medications in Medicare and Medicaid, modify health equity policies, or increase guardrails on artificial intelligence. CMS noted that it may consider future rulemaking on these issues. Read the fact sheet here.
On April 7, 2024, CMS released the 2026 MA capitation rates and Part C and D payment policies, known as the final rate announcement. Released on an annual basis, the rate announcement is used to calculate MA plan payments and includes other payment policies that impact Part D. CMS projects that the payment policies and updates in the final rate announcement will result in a net 5.06% increase in payments to MA plans in 2026. This percentage is an increase from the advance notice, which proposed a 2.23% increase. After accounting for expected trends in coding, CMS projects a net payment increase of 7.16%. This projection is an average across the industry and will vary for each plan. Read the press release here and the fact sheet here.
Trump Administration Takes Further Deregulation Actions. The Office of Management and Budget (OMB) issued a Deregulation Request for Information (RFI) asking for suggestions for rules and regulations that can be rescinded that are unnecessary, unlawful, or unduly burdensome, along with reasons to support the rescission. OMB particularly seeks information on regulations that are inconsistent with statute, unconstitutional, or have costs that exceed benefits. Comments are due May 11, 2025. This follows the January 2025 executive order (EO) “Unleashing Prosperity Through Deregulation,” which states that the Trump administration will repeal 10 regulations for every new regulation issued.
President Trump also sent a memo to federal agencies in follow-up to the February 2025 EO “Ensuring Lawful Governance and Implementing the President’s Deregulatory Initiative,” which directed agencies to identify unlawful and potentially unlawful regulations and begin efforts to repeal them by mid-April. The memo directs federal agencies to prioritize repeal of regulations that do not comply with various US Supreme Court decisions, including Loper Bright. The memo directs agencies to take such actions without notice and comment where doing so is in line with the “good cause” exception of the Administrative Procedure Act. That means that rules could begin being rescinded without any public input as soon as April 19, 2025.
On April 9, 2025, President Trump issued a new EO, “Reducing Anti-Competitive Regulatory Barriers,” which directs agencies to identify regulations that create monopolies, impose unnecessary barriers to market entry, or limit competition, and to recommend recission or modification. The EO also directs the Federal Trade Commission to issue an RFI within 10 days seeking public input on anticompetitive regulations, and to create within 90 days a list of anticompetitive regulations to be rescinded or modified.
CMS Notifies States of Intent to Deny Future Funding of DSHPs and DSIPs. In a State Medicaid Director Letter, CMS notes it will not approve new requests or extend existing requests for federal matching funds for Section 1115 waivers that authorize DSHPs and DSIPs. The letter notes that CMS takes issue with federal matching funds being provided to support DSHP and DSIP which have not necessarily been tied directly to services provided to Medicaid beneficiaries, unlike traditional Medicaid matching funds. Specific examples cited include funding housekeeping for individuals not eligible for Medicaid and internet for rural providers. CMS notes it will conduct direct outreach to states with existing DSHP and DSIP authority to emphasize that it will not be extended beyond the currently approved period. Read the press release here.
COURTS
Federal Judge Strikes Down Biden-Era Nursing Home Staffing Rule. A US District Court for the Northern District of Texas judge ruled that the Biden administration’s CMS exceeded its authority when issuing the regulation, citing the Supreme Court’s Loper Bright decision. The final rule in question required nursing homes to have a registered nurse onsite 24 hours a day, seven days a week, and to implement a nurse staffing standard so that each resident received 3.48 hours of nursing care per day. Plaintiffs argued that the staffing mandate would close nursing homes because they face workforce shortages. Repealing the regulation through congressional action would save an estimated $22 billion, and House Republicans have considered it as a cost-saver in the budget reconciliation process. It is unclear if the Trump administration will appeal the court’s decision and how it might impact Congress’ ability to capture those savings for reconciliation.
Supreme Court, Fourth Circuit Rule on Firing of Probationary Workers. The Supreme Court’s ruled, in a case brought by multiple nonprofits, that the nonprofits lacked legal standing to sue over the firing of probationary employees at the US Departments of Defense, Treasury, Energy, Interior, Agriculture, and Veterans Affairs. In a separate case, the US Court of Appeals for the Fourth Circuit ruled that the plaintiff states lacked legal standing to sue against firings at 18 federal agencies, including HHS. The Fourth Circuit’s decision overrules a lower court’s decision this month that the agencies must reinstate fired probationary employees in plaintiff states.
QUICK HITS
HHS Secretary Kennedy Visits Southwestern States in MAHA Tour. The Make America Healthy Again (MAHA) tour made stops in Utah, Arizona, and New Mexico, where Secretary Kennedy met with state, tribal, and local leaders about their initiatives to improve nutrition and food supply, reform the Supplemental Nutrition Assistance Program, and ban fluoride in drinking water.
Trump Pauses Tariffs, Signals Potential Pharmaceutical Tariffs. President Trump announced a 90-day pause on his administration’s reciprocal tariffs for all countries, except China, which will now be subject to a 145% tariff. Although pharmaceuticals were exempt from the original tariff policy, President Trump indicated that they may soon be subject to a separate tariff. Twenty-six Democratic representatives sent a letter to the administration expressing concern about the impact of tariffs on the medical supply chain.
HHS Secretary Kennedy Publishes Op-Ed Defending HHS Reforms. In the New York Post opinion article, he discusses the Trump administration’s goal of addressing chronic diseases and outlines the HHS restructuring announced in March.
CMS Administrator Oz Publishes Vision for the Agency. The vision notes CMS will implement President Trump’s EO on healthcare transparency, reduce unnecessary paperwork for providers, eliminate fraud, waste, and abuse, and focus on chronic disease prevention and management.
MedPAC Holds Final Meeting of 2024 – 2025 Cycle. The Medicare Payment Advisory Commission (MedPAC) meeting included a vote on a draft recommendation to reform and improve the physician fee schedule. Additional sessions focused on Part D plans, MA supplemental benefits, rural hospitals, software technologies, hospice services, and nursing home quality.
MACPAC Holds Final Meeting of 2024 – 2025 Cycle. The Medicaid and CHIP Payment and Access Commission (MACPAC) meeting included a vote on recommendations for the June 2025 report to Congress, along with sessions focused on home- and community-based services, substance use disorder and mental health, artificial intelligence in prior authorization, Medicare-Medicaid plans, and children’s healthcare.
GAO Releases Report on Drug Shortages. The US Government Accountability Office (GAO) report describes trends in drug shortages since the COVID-19 pandemic and includes two recommendations for HHS to improve its coordination of drug shortage activities across agencies.
Senate Homeland Security and Governmental Affairs Committee Advances OPM Director Nomination. Scott Kupor’s nomination for director of the Office of Personnel Management (OPM) advanced to the full Senate floor by a party-line vote of 7 – 4.
House Energy and Commerce Democrats Send Letter on HHS Hire. Ranking Member Pallone (D-NJ), Health Subcommittee Ranking Member DeGette (D-CO), and Oversight and Investigations Subcommittee Ranking Member Clarke (D-NY) posed seven questions to HHS and expressed concern about the hiring of David Geier to lead a study on the link between vaccines and autism.
NEXT WEEK’S DIAGNOSIS
The first series of proposed Medicare payment regulations are expected soon, including the Inpatient Prospective Payment System proposed rule. Both chambers have left town for the annual Easter and Passover recess and are scheduled to return on April 28, 2025. The M+ Check-Up will be on hiatus next week and will return April 25, 2025, to recap the two-week recess.
Deportation Ruling Highlights a Potential Separation-of-Powers Clash – SCOTUS Today
Late in the day on April 10, the U.S. Supreme Court issued a unanimous opinion relating to an order in the case of Noem v. Abrego Garcia.
This order is noteworthy for several reasons. First, this is yet another of what has become a series of emergency-motion cases resolved without full briefing or oral argument on the so-called “shadow docket.” Second, contrary to what some have argued about that docket in the past, there is nothing that isn’t fully transparent about this opinion rendered on behalf of all the Justices. Third, and most importantly, yesterday’s opinion, while brief, might be a significant chapter in what very well may prove a classic separation-of-powers clash between the increasingly unorthodox executive branch and the Supreme Court.
The much-in-the-news Kilmar Armando Abrego Garcia was removed by the United States to El Salvador, where he is currently detained. The government now acknowledges that he had been subject to a withholding order forbidding his removal to El Salvador and that his removal was thus illegal. The government alleges the removal was caused by an “administrative error” but nevertheless argues that he was a member of a gang that had been designated as a foreign terrorist organization. Abrego Garcia denies this, and there is no record of his having engaged in any illegal activities.
The U.S. District Court for the District of Maryland had entered an order directing the government to “facilitate and effectuate the return of [Abrego Garcia] to the United States by no later than 11:59 PM on Monday, April 7.” That order had been stayed by the Chief Justice, and now the issue of the deadline had become irrelevant. However, in its latest opinion, the Supreme Court says that
[t]he rest of the District Court’s order remains in effect but requires clarification on remand. The order properly requires the Government to “facilitate” Abrego Garcia’s release from custody in El Salvador and to ensure that his case is handled as it would have been had he not been improperly sent to El Salvador. The intended scope of the term “effectuate” in the District Court’s order is, however, unclear, and may exceed the District Court’s authority. The District Court should clarify its directive, with due regard for the deference owed to the Executive Branch in the conduct of foreign affairs.
The question, therefore, has become, what must the government do to satisfy the Supreme Court’s mandate concerning the requirement to “facilitate” and “effectuate” Abrego Garcia’s release and, more pointedly, what can the Supreme Court do if the government is less than energetic in satisfying these obligations? Indeed, the point of a concurrence by Justice Sotomayor, joined by Justices Kagan and Jackson, is that the government already has been less than diligent and forthright in the matter so far.
As the Court (likely per the Chief Justice) notes, while the term “facilitate” might be more easily described, “effectuate” is more elusive, and efforts in that regard might conflict with the executive branch’s foreign affairs power. That is what defines the next stage in what might become a separation-of-powers battle. That stage will begin with the district court doing what the Supreme Court has required. But will the government otherwise comply with the facilitation requirement and any further obligation imposed upon it, or will it claim that it is ultimately unable to convince another sovereign to act and that any order of the Court requiring it to deliver exceeds the constitutional authority of the judiciary? That is still to be determined. We’ll keep you posted.
A Policy Guide for Transitioning Founder-Owned Law Firms
The purpose of this document is to provide a detailed listing and description of supporting policies needed when transitioning a founder-owned law firm. This guide aims to facilitate a smooth and orderly transition by outlining clear policies, actionable steps, and real-life examples. The scope of this document includes associate progression, origination sharing, equity transfer, lease and debt guarantees, post-retirement compensation, and contingency planning.
Associate and Income Partner Progression
When developing progression criteria for associate lawyers, it is crucial to consider what is at stake. Partnership admission criteria are critical long-term factors for talented young professionals deciding whether to invest in the firm’s success or seek opportunities elsewhere.
Action Steps:
Establish clear and detailed criteria for associate progression based on performance, client acquisition, and contribution to firm initiatives.
Create a partnership admission process that includes periodic evaluations, mentorship programs, and feedback mechanisms.
Communicate advancement opportunities and criteria transparently to all associates and potential lateral hires.
Incorporate regular training and professional development workshops to enhance the skills and knowledge of associates.
Implement incentives for senior partners to mentor associates and income partners, fostering a culture of growth and collaboration.
Develop a succession planning framework that identifies and nurtures potential future leaders within the firm.
EXAMPLE:
A founder-owned law firm with a highly concentrated business book successfully spread the business over three successor partners. The firm is well on its way to a second generation.
Origination Sharing Policies
Most firms compensate partners based on business originations. An essential component of any transition plan is a policy for sharing originations during the transition period.
Action Steps:
Develop a clear origination sharing agreement that outlines the percentage of credit transferred over the transition period.
Determine whether the firm or the successor partner will underwrite the transitioning partner’s compensation costs.
Regularly review and adjust the origination sharing policy to ensure it meets the firm’s evolving needs.
EXAMPLE:
A law firm established a three-year transition plan where the retiring partner’s origination credit declined by one-third yearly. This policy ensured a smooth transfer of client relationships and maintained firm stability.
Orderly Transfer of Equity
Equity transfers are typically more complicated in smaller law firms. A systematic process for transferring equity is essential for an orderly transition.
Action Steps:
Establish a basis for transferring equity between partners.
Develop policies for new partner equity, lateral partner equity, and capital requirements tied to ownership.
Implement a valuation approach to firm assets to ensure fair equity reallocation.
EXAMPLE:
A small/mid-sized founder-owned law firm implemented a process that facilitated admitting junior partners over a 3-year vesting period. This approach facilitated transparent and equitable equity transfers among partners.
Removing Retiring Partners from Leases and Debt Guarantees
Debt guarantees and office leases can pose challenges during the transition period.
Action Steps:
Review and update bank guarantees and office leases to reflect changes in firm ownership.
Ensure that senior partners support junior partner guarantees when necessary.
Develop agreements among partners regarding lease obligations and debt responsibilities.
EXAMPLE:
A firm negotiated with their bank to adjust the debt guarantees based on the current equity structure and the financial ability of junior partners, ensuring that retiring partners were relieved of their obligations.
Post-Retirement Compensation
Providing retiring partners with a post-retirement option can facilitate a gradual transition.
Action Steps:
Develop policies for post-retirement compensation and separate law practice options.
Ensure agreements are in place to govern competitive behavior and client relationships post-retirement.
EXAMPLE:
A law firm allowed retiring partners to maintain a small client base while providing mentorship to junior associates. This arrangement ensured continuity and leveraged the retired partners’ expertise.
Return of Capital and Interests in Billing Assets
Retiring founders with significant fixed capital and undistributed earnings invested in the firm need clear policies for the payout of these monies.
Action Steps:
Develop a process for valuing and returning fixed capital and undistributed earnings.
Implement payment schedules for returning fixed capital and billing assets (WIP and AR) net of liabilities.
Establish agreements for splitting net proceeds from contingent cases and addressing contingent liabilities.
EXAMPLE:
A firm created a detailed payout schedule for returning fixed capital over three years and interest in the net WIP and AR over 5 years, ensuring financial stability while honoring retiring partners’ investments.
Addressing Potential Challenges
Transitions can pose various challenges, including resistance from senior partners and communication breakdowns.
Action Steps:
Foster open communication among partners to address concerns and expectations.
Develop contingency plans to manage unexpected challenges during the transition process.
Engage external consultants to provide objective insights and facilitate smooth transitions.
EXAMPLE:
A firm experiencing resistance from founding partners hired PerformLaw to mediate discussions and develop a transition plan that addressed all parties’ concerns.
Importance of Communication
Effective communication is crucial during the transition process to ensure transparency and collaboration.
Action Steps:
Regularly update all stakeholders on the progress and changes related to the transition.
Encourage open dialogue and feedback to address any issues promptly.
Utilize multiple communication channels to reach all partners and associates effectively.
EXAMPLE:
A law firm conducted quarterly meetings to discuss transition updates and gather feedback, fostering a collaborative and supportive environment.
Conclusion
These supporting policies facilitate a smooth and orderly transition for founder-owned law firms. Clear advancement criteria, equitable origination sharing, systematic equity transfers, and well-defined post-retirement compensation are essential components. Addressing potential challenges and maintaining open communication ensures a successful transition that benefits both the firm and its partners.
Summary of Benefits:
Enhanced retention and recruitment of talented associates.
Stable financial performance during the transition period.
Transparent and equitable processes for all partners.
Continued client satisfaction and firm reputation.
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Eleventh Circuit Revives Trade Secret Misappropriation Claim in Long-Running Litigation
On April 4, 2025, the Eleventh Circuit reversed the U.S. District Court for the Northern District of Alabama’s ruling dismissing Alabama Aircraft Industries’ (“AAI”) trade secret misappropriation claim against Boeing, thereby allowing AAI to pursue unjust enrichment damages in addition to amounts previously recovered on its breach of contract claim. See Alabama Aircraft Industries Inc. v. The Boeing Co., No. 20-11141.
Background
In 2005, the parties entered a “teaming arrangement” to jointly pursue a maintenance contract with the U.S. Airforce. The agreement consisted of three contracts: a master agreement, a work share agreement, and a non-disclosure agreement. In 2011, AAI filed suit against Boeing alleging misappropriation of trade secrets and breach of contract with respect to the master agreement and non-disclosure agreement. In 2013, the Northern District of Alabama dismissed AAI’s trade secrets claim as barred by the Alabama statute of limitations. But in 2020, AAI’s two remaining claims for breach of contract proceeded to trial where a jury returned a verdict in favor of AAI and awarded AAI $2.1 million in damages.
In February 2022, the Eleventh Circuit reversed and remanded the dismissal of AAI’s trade secrets claims, holding that the claim was not time-barred. On October 26, 2022, the district court dismissed AAI’s trade secrets claim on the grounds that AAI had already recovered all the damages that were available on its breach of non-disclosure agreement claim, and therefore it could not pursue a Missouri Trade Secrets Act “for the same injury arising from the same course of conduct.” AAI appealed.
Eleventh Circuit’s Holding
On April 4, 2025, the Eleventh Circuit reversed and remanded the dismissal of AAI’s trade secrets misappropriation claim, holding that the Missouri Trade Secrets Act expressly permits the remedy of unjust enrichment recovery, so long as the amount is not duplicative of the actual loss damages stemming from the misappropriation. According to the Eleventh Circuit, the unjust enrichment recovery AAI sought is distinct from the consequential damages awarded in the jury verdict (which compensated AAI for out-of-pocket expenses resulting from the breach of contract). In contrast, an unjust enrichment remedy would deprive Boeing of the gain it purportedly obtained from allegedly misappropriating AAI’s trade secrets.
Further, pointing to the parties’ master agreement, the Eleventh Circuit noted that the remedy of unjust enrichment was “conspicuously absent from the list of categorically barred damages” under the limitation of liability provision. Acknowledging that AAI and Boeing were both “sophisticated parties,” the Eleventh Circuit reasoned that if the parties “had wanted the liability limitation provision to categorically bar an unjust enrichment award, they could have added it to the list of remedies they specified were barred by the contractual provision. They didn’t.”
Implications
While trade secret misappropriation statutes typically offer a broad range of remedies, the Eleventh Circuit’s ruling suggests that sophisticated parties may potentially limit such remedies through carefully drafted agreements.
DEFAULT DEFEAT: TCPA Defendant Faces Class Discovery After Failing to Defend Itself in TCPA Class Action
Quick one for you this am.
In Ashworth v. Off Leads K9 Training Central Florida 2025 WL 1083621 (M.D. Fl. March 24, 2025) a court ordered class discovery to be taken against a defendant that had failed to show up in a TCPA class action.
Plaintiff asked the court to take discovery in this matter to identify members of the putative class and to determine the amount of damages to which the class members are entitled, prior to seeking class certification and moving for default judgment.
The Court found the request to be well taken and granted the request, giving the Plaintiff 90 days to conduct discovery and then seek a class judgment.
Eesh.
Failing to show up in response to a TCPA class action is a very dangerous strategy. Will be interesting to see how many class members exist here and what the default judgment will ultimately look like.
More soon.
Diversity, Equity and Inclusion: Under Scrutiny, But Still Viable
Diversity, Equity, and Inclusion (DEI) initiatives have been a cornerstone of workplace culture for many organizations, developed in response to historic and ongoing patterns of exclusion, and have been linked to better profits and improved work environments. But under the current administration, these programs are facing increased legal and political scrutiny. Recent executive orders, federal guidance, and high-profile lawsuits have significantly altered the landscape for DEI, especially for companies that rely on federal funding or government contracts.
While most DEI programs remain legal, employers must now be more cautious than ever about how they structure and communicate their inclusion efforts. A misstep in this evolving environment can trigger not just reputational damage, but also serious legal consequences.
The Legal Framework: What Still Stands
The foundational legal standards for workplace discrimination remain protected by Title VII of the Civil Rights Act of 1964, which prohibits employers from discriminating based on race, color, religion, sex, or national origin. Courts interpreting Title VII have made clear that DEI programs must avoid certain practices—specifically, using race or other protected traits as a basis for hiring, promotion, or termination, or instituting race-based quotas or preferences.
Categorizing employees by race or creating benefits that are only available to particular demographic groups may violate Title VII’s equal treatment principles. However, participating in a race-conscious training program does not by itself constitute an “adverse employment action,” which is a necessary element of a discrimination claim.
Two additional statutes are relevant for organizations receiving government funds or operating in regulated sectors. Title VI of the Civil Rights Act of 1964 (42 U.S.C. § 2000d) prohibits discrimination on the basis of race, color, or national origin in programs receiving federal financial assistance. Title IX of the Education Amendments of 1972 (20 U.S.C. § 1681) prohibits sex-based discrimination in educational programs and activities.
The Ripple Effect of the Harvard Case
In Students for Fair Admissions, Inc. v. President & Fellows of Harvard College, the U.S. Supreme Court held that race-conscious admissions policies at Harvard and the University of North Carolina violated the Equal Protection Clause and Title VI, which now impacts all college and university admissions. While the decision directly applies to educational institutions, its reasoning has clear implications for employment under Title VII. The Court rejected the use of race as a categorical factor in decision-making but allowed for its consideration within the context of a personal narrative. Employers should heed this logic: considering race explicitly in hiring decisions is likely unlawful, even if well-intentioned.
Executive Orders under the Trump Administration
Two executive orders signed under the Trump Administration have intensified compliance obligations for government entities and contractors. Executive Order 14151 directs all federal agencies to terminate existing DEI programs. Executive Order 14173 requires federal contractors to certify they do not maintain “illegal DEI programs,” with the threat of False Claims Act liability (31 U.S.C. §§ 3729–3733) for misrepresentation.
Under EO 14173, each federal agency may nominate up to nine contractors for compliance review. The Department of Justice is scheduled to begin prosecuting non-compliant contractors beginning May 21, 2025. The Equal Employment Opportunity Commission (EEOC) issued clarifying guidance on March 19, 2025, addressing permissible DEI practices and identifying potential areas of legal exposure. Companies engaged in federal contracting should review this guidance closely.
What’s Still Permissible?
Despite these constraints, employers still have room to foster inclusive workplaces—if they do so carefully and in compliance with federal law. For example, outreach and recruitment efforts aimed at underrepresented communities remain permissible, so long as employers do not use race or sex as decision-making criteria.
Employee Resource Groups (ERGs) and affinity networks can continue to exist and serve important cultural roles, provided they are open to all employees and do not grant or restrict access based on protected characteristics. The content and focus of these groups may center on shared identities or experiences, but eligibility must remain non-discriminatory.
With respect to DEI training programs, employers should avoid separating employees by race or tailoring content based on demographic traits. These practices could be viewed as discriminatory under Title VII. Training should emphasize respectful communication, bias awareness, and inclusion principles—without suggesting that any racial or identity group is inherently privileged or deficient.
Messaging Matters
Optics and tone are increasingly important in managing DEI risk. Companies do not need to eliminate all references to DEI in their public-facing materials, but careful messaging can help mitigate scrutiny. Legal counsel should review websites, social impact statements, and recruitment materials to ensure they reflect the company’s commitment to equal opportunity and inclusion—without suggesting preferential treatment.
Many organizations are shifting from terminology like “diversity,” “equity,” and “DEI” toward softer framing such as “belonging,” “community values,” and “inclusive culture.” These alternatives often better capture the intent of such programs while lowering the risk of being perceived as discriminatory or exclusionary.
Lessons from the Courts
Several recent cases illustrate how DEI-related policies can give rise to litigation—and how courts are approaching these claims.
In Herrera v. New York City Department of Education (S.D.N.Y. 2021), several white executives alleged they were demoted and replaced as part of a discriminatory push against “toxic whiteness.” The case settled for $2.1 million, underscoring the risk of implementing perceived race-based personnel decisions.
In Duvall v. Novant Health, Inc. (4th Cir. 2024), a jury awarded $3.4 million to a white male executive who alleged his termination was driven by the company’s diversity goals. The jury found that race and sex were impermissible factors in the decision, reinforcing that DEI initiatives must not violate anti-discrimination laws.
In contrast, the court in Young v. Colorado Department of Corrections (D. Colo. 2022), dismissed a claim that DEI training created a hostile work environment, emphasizing that discomfort with DEI content does not meet the legal threshold for harassment.
Finally, in Diemert v. City of Seattle (W.D. Wash. 2022), a white male employee challenged the city’s Race and Social Justice Initiative. While some of his claims were dismissed, others survived early motions, indicating how DEI efforts, if seen as exclusionary or coercive, can be vulnerable to legal challenges.
Proceed with Purpose
Despite the legal and political headwinds, DEI is not dead—but it is evolving. Employers should avoid the temptation to abandon inclusion initiatives entirely. Instead, they should take this moment as an opportunity to reassess, refine, and reframe.
In the rush to reduce legal exposure, some employers are choosing to rapidly scale back or entirely eliminate their DEI initiatives. A growing number of companies have quietly scrubbed DEI language from their websites, renamed employee groups, or disbanded inclusion committees altogether. While these changes may be intended to align with new federal directives or to preempt political scrutiny, they carry their own set of legal risks.
As recent coverage has tracked (HR Brew DEI Tracker), this trend is becoming increasingly visible—and potentially problematic. From a litigation standpoint, an abrupt reversal of DEI commitments could be cited as evidence of a company’s shifting culture or intent. In the context of a hostile work environment or disparate treatment claim, particularly one involving race or gender, the removal of DEI programs could be used to support an inference of discriminatory motive or tolerance of bias.
Put simply, if a plaintiff alleges that their employer fostered or ignored a toxic or exclusionary workplace, the dismantling of programs designed to promote inclusion may undermine the employer’s defense. Employers should therefore proceed thoughtfully, ensuring that any changes are rooted in legal compliance and sound business judgment—not in fear or political reaction.
A careful review of training programs, ERGs, recruitment policies, and public messaging can go a long way in ensuring that DEI efforts are both legally compliant and culturally meaningful. In this environment, thoughtful recalibration—not retreat—is the key to continuing to build inclusive workplaces without exposing the company to unnecessary legal risk.
The Path & The Practice Podcast Episode 124: David Goroff, Partner [Podcast]
This episode of The Path & The Practice features a conversation with David Goroff. David is a litigation partner in Foley’s Chicago office where he is also chair of Foley’s appellate practice group. In this discussion, he reflects on growing-up in Skokie, IL, attending the University of Illinois for undergrad, earning his J.D. from Columbia Law School, and clerking for the U.S. Court of Appeals for the Seventh Circuit. David discusses starting his career at Hopkins & Sutter, a firm that subsequently merged with Foley in 2001. He also reflects on the early days of his career and what has kept him at the firm. Finally, David gives wonderful advice on the importance of being open to unexpected opportunities.
David’s Profile:
Law School: Columbia Law School
Title: Partner
Foley Office: Chicago
Practice Area: Litigation
Hometown: Skokie, IL
College: University of Illinois
Mass. Chapter 93A Clarifications: Understanding Demand Letters and Contract Breaches in Dworman v. PHH Mortgage
In Dworman v. PHH Mortg. Servs., the District of Massachusetts recently issued a decision that deals with various aspects of Chapter 93A jurisprudence. Some of the court’s statements about Chapter 93A, however, may benefit from clarification.
As to the dispute at issue, the plaintiff (a mortgagor) alleged that the defendants (mortgage servicers) breached a contract to forgive mortgage debt, and that defendants’ alleged failures were unfair or deceptive under Chapter 93A, Section 9. The defendants countered with allegations that the plaintiff breached their contract, and the court granted their motion for summary judgment against the plaintiff.
When addressing Chapter 93A, the court discussed the Chapter 93A “Legal Landscape” in its decision. In particular, the court concluded that, although sending a demand letter is prerequisite to a Section 9 suit, the “failure to respond or an inadequate response to a demand letter is not itself a violation of Chapter 93A.” First, a 30-day demand letter is required in most instances; however, a claimant does not need to send a demand letter to trigger Chapter 93A jurisdiction if the claim “is asserted by way of counterclaim or cross-claim, or if the prospective respondent does not maintain a place of business or does not keep assets within the commonwealth” as set forth in Section 9(3). Second, as to not responding to demand letters or providing an inadequate response, it is important to understand and appreciate that a bad faith refusal to grant relief in response to a demand letter “with knowledge or reason to know that the act or practice complained of violated said section two” may expose a defendant to double or treble damages, also as set forth in Section 9(3). Responses to demand letters may not only limit multiple damages, but may also cut off a plaintiff’s attorneys’ fees and costs.
Also, when explaining that a mere breach of contract without more does not violate Chapter 93A, the court stated that a defendant’s action must “attain a level of rascality that would raise an eyebrow of someone inured to the rough and tumble of the world of commerce.” However, the Massachusetts Supreme Judicial Court (SJC) abandoned the rascality language as uninstructive in Massachusetts Employers Ins. Exch. v. Propac-Mass, Inc., 420 Mass. 39 (1995). Instead, according to the SJC, courts should focus on the nature of the challenged conduct and on the purpose and effect of that conduct as the crucial factors in making a Chapter 93A fairness determination. That SJC standard has been used by the First Circuit Court of Appeals, along with an additional evaluation of “the equities between the parties,” the “plaintiff’s conduct,” and “[w]hat a defendant knew or [reasonably] should have known.” (Schuster v. Wynn MA, LLC, 118 F.4th 30 (2024)). As to when a breach of contract would violate Chapter 93A, there must be a “plus factor” with the breach. For example, conduct in disregard of known contractual arrangements and intended to secure benefits for the breaching party may violate Chapter 93A. In other words, conduct used as leverage to destroy another party’s rights is viewed as commercial extortion and may violate Section 2. A good faith contractual dispute regarding whether money is owed, or performance of some kind is due, may not.
District Court Strikes Down FDA’s LDT Rule, Opens the Door for Challenges to FDA’s Regulation of Other “Services” as Medical Devices
On Monday, March 31, a court in the Eastern District of Texas found unlawful and vacated the Food and Drug Administration’s 2024 Rule regulating as “devices” under the Food, Drug, and Cosmetic Act (“FDCA”), certain laboratory-developed test (“LDTs”) used to diagnose, monitor, or determine treatment for diseases and conditions. The decision, American Clinical Laboratory Assoc. v. FDA, No. 4:24-CV-479-SDJ, 2025 WL 964238 (E.D. Tex. Mar. 31, 2025), marks another application of the Supreme Court’s recent Loper Bright decision rejecting the longstanding Chevron principle of deference to agency statutory interpretation. Loper Bright continues to fundamentally rework the legal framework for challenging agency actions.
LDTs are familiar products which underlie an enormous amount of modern medical care and range from the prosaic to the profound. Anyone who has ever had bloodwork done during an annual checkup has been a part of this well-known process: a doctor orders a specimen to be taken—here, blood—which is drawn from the patient and sent off to a laboratory for analysis to report quantitative measurements such as blood type which are in turn reported to the ordering physician to inform patient care. Other LDTs are much more specialized; Human Leukocyte Antigen (“HLA”) tests are necessary components of emergency, life-saving care which involves a rapid histocompatibility test as part of organ, stem cell, and tissue transplantation.
LDTs have long been regulated by the Center for Medicare and Medicaid Services under the 1967 Clinical Laboratories Improvement Act. CMS has issued extensive regulations to regulate LDTs under this authority, for example, regulating HLA testing by requiring use of the World Health Organization (WHO) Nomenclature Committee for Factors of the HLA System for laboratories performing such tests. 42 C.F.R. § 493.1278(b)(1). For years, FDA has claimed the authority to regulate LDTs but purported to exercise its discretion to decline to do so. E.g., 62 Fed. Reg. 62,243, 62,249 (Nov. 21, 1997) (stating position but not invoking the authority). But in 2024, given the dramatic increase in quantity and importance of LDTs to modern medicine, FDA issued the Rule to phase out what it terms its prior “enforcement discretion” of non-regulation. This was, effectively, a dramatic expansion of FDA’s regulatory authority given how ubiquitous LDTs are; FDA estimated tens of billions of dollars of anticipated costs (and benefits).
Regulated parties swiftly challenged the new rule, arguing FDA lacked the legal authority to regulate LDTs. The Eastern District of Texas agreed. Grounding its analysis in Loper Bright, the Court began by noting that “abdication in favor of the agency is least appropriate” for matters concerning the scope of the agency’s authority. In that way, the Court departed from the pre-Loper Bright principle—from a 2013 case, City of Arlington v. FCC—that such scope questions are Chevron-eligible as any other. Right from the outset, the Court made clear that the analysis was different in the Loper Bright era.
Proceeding from first principles, the Court held that LDTs are not “devices” under the FDCA and FDA’s regulatory authority. Rather, the Court emphasized that LDTs are “medical service[s]” and that this was the “common sense” interpretation of the plain terms of the FDCA. An LDT, the Court said, is “far afield from such tangible products” covered by the term “device.” After all, LDTs and FDCA “devices” had long been addressed by Congress and regulated by agencies are parallel but distinct objects. Decades of practice presupposing the distinct nature of the two could not be so easily overcome.
Loper Bright is doubtless a fundamental transformation of administrative law, but despite the Court’s emphasis on the case, it is not clear what difference it made to the outcome here. Before Loper Bright, a court would only have deferred to the agency’s interpretation if the statute was ambiguous and the interpretation reasonable; but the Court was at pains here to emphasize the clarity of the statute and the untenable nature of FDA’s interpretation. Courts have never deferred to unreasonable readings of clear statutes, and indeed the Court here relied extensively on pre-Loper Bright caselaw in its analysis.
Further, analyzing whether Loper Bright was dispositive in the fine details may disguise the forest in the trees. The past few years have revealed a dramatic shift in the judiciary’s approach to agency regulation and a reassertion of the judicial function to interpret the law. Respect is still due to the interpretation of coordinate branches of government—as the Supreme Court emphasized in its Bondi v. VanDerStok decision the week before—but Loper Bright has clearly ushered in a new era of rigor in reviewing agency decisions. FDA’s failed attempt—subject to appeal—to regulate LDTs is merely the latest casualty.
Another important takeaway from District Court’s decision in American Clinical Laboratory Assoc. is that it may inform FDA’s interpretation of whether other products, that include service components, meet the definition of a medical device under the FDCA. Since at least 2005, FDA has issued several guidance documents governing how it intends to regulate software as a medical device, mobile medical apps, clinical decision support software and— most recently—artificial intelligence. FDA has made clear the first inquiry in determining whether these products and/or services are regulated by FDA is whether they meet the definition of a medical device under FDCA (section 201(h)). Query whether FDA now may (or must) reach a different conclusion than it has previously especially for products that are comprised exclusively of software versus hardware functions.