Thinking of Selling Your Med Spa? Here Are Six Things to Do to Prepare
Numerous legal, regulatory and operational issues will arise when selling a med spa. Proper preparation by ensuring the business is regulatory compliant, assembling the right group of professionals and documents will save time and costs and ensure that the transaction is as smooth as possible.
Ensure your business is properly organized and licensed
You should ensure that the business complies with applicable law from a structural and regulatory standpoint. Illinois follows the legal doctrine known as the “corporate practice of medicine,” which requires that a facility that provides medical services be owned solely by a physician or a physician-owned entity. It is important to analyze the scope of services being provided by your med spa to determine if you are compliant with Illinois law.
If a med spa is not organized in a compliant manner, it could cause issues for the med spa from a legal and regulatory standpoint and raise flags for the purchaser. In such a case, it would be prudent to restructure the entity to comply with applicable law. Such restructuring may include creating a management service organization (MSO) structure, in which a new non-medical MSO is created to perform all non-clinical services with respect to the med spa entity. These non-clinical services may include human resource matters, marketing, payroll, billing, accounting, real estate issues, etc. It is important that any MSO arrangements, including compensation structures, be carefully structured to comply with applicable law. The MSO structure is critical for any med spa with a non-physician owner that intends to render services that may constitute the practice of medicine.
Review the business’s governing documents
It is crucial that the med spa’s governing documents are complete and accurate. A sophisticated purchaser will review the business’s articles of organization or incorporation, operating agreement or bylaws and timely filed annual reports. A purchaser will raise issues and have concerns if a med spa cannot provide complete and accurate corporate records.
The owner of a med spa with multiple shareholders or members selling the business via an asset sale should review the bylaws or operating agreement to confirm the percentage of owners that must agree to the sale in order for it to occur. The sale of all or almost all of the business assets is a standard situation that requires majority consent.
A business owner intending to sell via a stock or membership interest sale should review all governing documents to confirm whether there are drag-along or tag-along rights. A drag-along right allows the majority shareholder of a business to force the remaining minority shareholders to accept an offer from a third party to purchase the entire business. There have been situations where a minority shareholder objects to the sale and prevents it altogether. A tag-along right is also known as “co-sale rights.” When a majority shareholder sells their shares, a tag-along right will allow the minority shareholder to participate in the sale at the same time for the same price for the shares. The minority shareholder then “tags along” with the majority shareholder’s sale. Any drag-along or tag-along rights provided in the business’s governing documents should be addressed as soon as possible to ensure such rights are provided and to deal with any disputes.
Retain an attorney at the onset of the transaction
After a med spa is offered for sale, a purchaser may prepare and submit a letter of intent (LOI) for the med spa’s review and approval. A LOI is a legal document that sets forth the form of the transaction (whether it’s an asset or stock sale), purchase price, manner of payment, deposit terms, transaction conditions, due diligence terms and timeline, choice of law and other relevant terms of the sale. Business owners often make the mistake of not engaging an attorney until after the LOI has been signed. By failing to retain an attorney to negotiate the LOI, a business owner may be stuck with unfavorable terms or may have missed the opportunity to ask for something valuable at the onset, including taking into account tax implications of the proposed deal structure.
Engaging an attorney can save significant costs and time because imperative business issues can be discussed and agreed upon in the early stages and if the parties cannot come to an agreement, they can go their separate ways as opposed to wasting time, costs and the efforts involved with both negotiating a purchase agreement (PA) and conducting due diligence. Using an attorney will also ensure that the LOI contains a timeline or expiration so that if the sale is not completed by a certain time, the med spa can move onto another interested party without issue. The LOI will continue to be a material part of the entire transaction even as the PA is negotiated. If something is agreed upon in the LOI and one party tries to differ from the LOI terms during the PA negotiation, the other party will point to the LOI for support — often successfully.
Gather information on financials and assets
One of the most important and lengthy parts of any business sale is due diligence. Due diligence is the process in which the purchaser requests to review various documents, data and other information in order to familiarize itself with the business’s operations, background and to identify potential liabilities or issues related to the business or transaction’s closing. The results of the due diligence process can cause the purchaser to react in a variety of ways, from requesting more documents, a reduction of the purchase price or terminating the transaction altogether. Some of the critical documents a purchaser will request access to include the med spa’s tax returns, income statements, balance statements, a list of accounts receivable, accounts payable, a list of inventory and a list of personal property and equipment. A med spa owner can do itself a huge favor by gathering such documents and saving them electronically in an organized fashion. This way they can be easily sent to the purchaser or uploaded to a data site. The med spa and/or med spa owners will also have to make representations and warranties based upon the accuracy and completeness of such documents so it is in the med spa’s best interest to have organized and complete files.
Gather existing contracts
Another standard due diligence request from a purchaser is to review all of the med spa’s existing contracts, purchase orders, vendor and supplier agreements. The purchaser will want to determine, among other things, what work is ongoing and what liabilities and expenses it can expect. A med spa owner considering a sale should gather and save all of such agreements electronically and in an organized manner so they can be easily uploaded for the purchaser’s review.
Consider third party consents
The business’s existing agreements will need to be reviewed to see if they are assignable or able to be terminated as the purchaser will likely want to assume some and terminate others. Therefore, it is imperative that a med spa identify and understand the assignment, change of control and termination provisions of all existing contracts so that they can plan ahead and be prepared to take action at the appropriate time. A med spa owner should review existing agreements, including leases for such provisions, to identify whether an agreement can be assigned or terminated and, if so, what is required for each assignment or termination.
Typically, an agreement requires a certain number of days’ notice to the third party or the third party’s written consent to assign the contract from the med spa to the purchaser. For stock sales, the med spa should identify whether the existing agreements have change of control provisions. If consent of the third party is required then it may be prudent for the med spa to contact the third party as soon as possible to determine whether the other party is willing to consent, subject to coordination with the purchaser and appropriate confidentiality protections. For contracts that a purchaser may not want to assume, a med spa should review the termination provisions and identify if there are any fees or penalties for termination. Closings can be delayed over a med spa’s failure to receive an important third party consent. This issue arises often with landlords that do not wish to consent to the assignment of the lease from the med spa to the purchaser.
It’s a Wrap—The Latest from the Ninth Circuit on “Sign-In Wrap” Agreements
On February 27, 2025, in Chabolla v. ClassPass Inc., the U.S. Court of Appeals for the Ninth Circuit, in a split 2-1 decision, held that website users were not bound by the terms of a “sign-in wrap” agreement.
ClassPass sells subscription packages that grant subscribers access to an assortment of gyms, studios and fitness and wellness classes. The website requires visitors to navigate through several webpages to complete the purchase of a subscription. After the landing page, the first screen (“Screen 1”) states: “By clicking ‘Sign up with Facebook’ or ‘Continue,’ I agree to the Terms of Use and Privacy Policy.” The next screen (“Screen 2”) states: “By signing up you agree to our Terms of Use and Privacy Policy.” The final checkout page (“Screen 3”) states: “I agree to the Terms of Use and Privacy Policy.” On each screen, the words “Terms of Use” and “Privacy Policy” appeared as blue hyperlinks that took the user to those documents.
The court described four types of Internet contracts based on distinct “assent” mechanisms:
Browsewrap – users accept a website’s terms merely by browsing the site, although those terms are not always immediately apparent on the screen (courts consistently decline to enforce).
Clickwrap – the website presents its terms in a “pop-up screen” and users accept them by clicking or checking a box expressly affirming the same (courts routinely enforce).
Scrollwrap – users must scroll through the terms before the website allows them to click manifesting acceptance (courts usually enforce).
Sign-in wrap – the website provides a link to the terms and states that some action will bind users but does not require users to actually review those terms (courts often enforce depending on certain factors).
The court analyzed ClassPass’ consent mechanism as a sign-in wrap because its website provided a link to the company’s online terms but did not require users to read them before purchasing a subscription. Accordingly, the court held that user assent required a showing that: (1) the website provides reasonably conspicuous notice of the terms to which users will be bound; and (2) users take some action, such as clicking a button or checking a box, that unambiguously manifests their assent to those terms.
The majority found Screen 1 was not reasonably conspicuous because of the notice’s “distance from relevant action items” and its “placement outside of the user’s natural flow,” and because the font is “timid in both size and color,” “deemphasized by the overall design of the webpage,” and not “prominently displayed.”
The majority did not reach a firm conclusion on whether the notice on Screen 2 and Screen 3 is reasonably conspicuous. On one hand, Screen 2 and Screen 3 placed the notice more centrally, the notice interrupted the natural flow of the action items on Screen 2 (i.e., it was not buried on the bottom of the webpage or placed outside the action box but rather was located directly on top of or below each action button), and users had to move past the notice to continue on Screen 3. On the other hand, the notice appeared as the smallest and grayest text on the screens and the transition between screens was somewhat muddled by language regarding gift cards, which may not be relevant to a user’s transaction; thus, a reasonable user could assume the notice pertained to gift cards and hastily skim past it.
Even if the notice on Screen 2 and Screen 3 was reasonably conspicuous, the majority deemed the notice language on both screens ambiguous. Screen 2 explained that “[b]y signing up you agree to our Terms of Use and Privacy Policy,” but there was no “sign up” button—rather, the only button on Screen 2 read “Continue.” Screen 3 read, “I agree to the Terms of Use and Privacy Policy,” and the action button that follows is labeled “Redeem now”; it does not specify the user action that would constitute assent to the terms. In other words, the notice needs to clearly articulate an action by the user that will bind the user to the terms, and there should be no ambiguity that the user has taken such action. For example, clicking a “Place Order” button unambiguously manifests assent if the user is notified that “by making a purchase, you confirm that you agree to our Terms of Use.”
Accordingly, the court held that Screen 1 did not provide reasonably conspicuous notice and, even if Screen 2 and Screen 3 did, progress through those screens did not give rise to an unambiguous manifestation of assent.
The dissent noted that the majority opinion “sows great uncertainty” in the area of internet contracts because “minor differences between websites will yield opposite results.” Similarly, the dissent argued that the majority opinion will “destabilize law and business” because companies cannot predict how courts are going to react from one case to another. Likewise, the dissent expressed concern that the majority opinion will drive websites to the only safe harbors available to them—clickwrap or scrollwrap agreements.
While ClassPass involved user assent to an arbitration provision in the company’s online terms, the issue of user assent runs far deeper, extending to issues like consent to privacy and cookie policies—a formidable defense to claims involving alleged tracking technologies and wiretapping theories. Notwithstanding the majority’s opinion, many businesses’ sign-in wrap agreements will differ from the one at issue in the lawsuit and align more closely with the types of online agreements that courts have enforced. Nonetheless, as the dissent noted, use of a sign-in wrap agreement carries some degree of uncertainty. Scrollwrap and clickwrap agreements continue to afford businesses the most certainty.
Nationwide Injunction Shuts Down Enforcement of Trump’s DEI Executive Orders
On February 21, 2025, a federal district court judge issued a nationwide preliminary injunction that blocks enforcement of three major provisions of President Trump’s Executive Orders related to Diversity, Equity and Inclusion (DEI) programs:
Executive Order 14151, “Ending Radical and Wasteful Government DEI Programs and Preferencing.”
Executive Order 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity.”
(Each an EO and collectively referred to as the EOs.)
The National Association of Diversity Officers in Higher Education filed a lawsuit in the U.S. District of Maryland (Maryland District Court) challenging the constitutionality of these EOs, arguing they are vague under the Fifth Amendment and violate the First Amendment’s Free Speech Clause.
Below is a summary of the enjoined provisions.
Termination Provision: Requires Executive agencies to terminate “equity-related grants or contracts.”
Certification Provision: Requires federal contractors and grantees to certify they will not operate programs promoting DEI that violate Federal anti-discrimination laws.
Enforcement Provision: Directs The U.S. Attorney General to investigate and take actions (e.g., civil compliance investigations) against private sector entities continuing DEI practices.
While the injunction prevents the executive branch from enforcing these EOs, U.S. District Court Judge Adam Abelson allowed the U.S. Attorney General to continue its investigation for a report on ending illegal discrimination and preferences pursuant to EO 14173.
The Trump administration filed a motion with the Fourth Circuit Court to appeal the nationwide injunction. Depending on whether the Fourth Circuit upholds or reverses the injunction, the case may go to trial to determine if the Trump administration’s actions to ban DEI policies and practices are constitutional. Pending the appeal, the Trump administration requested a stay of the preliminary injunction which was denied by Judge Abelson. The Maryland District Court stressed the Trump administration was unable to demonstrate a strong likelihood of success on the merits. Additionally, the Court emphasized, “the chilling of the exercise of fundamental First Amendment rights weighs strongly in favor of the preliminary injunction and against a stay pending appeal.”1
On March 10, 2025, Judge Abelson issued further clarification regarding the scope of the preliminary injunction, stating that it applies to all federal agencies, departments and commissions, not just the named defendants. He explained that limiting the injunction to only the named parties would create an unfair situation where the termination status of a federal grant or the certification requirements for federal contractors would depend on which specific federal agency the grantee or contractor works with for current or future funding. This would result in inequitable treatment in an area that requires uniformity. Consequently, considering President Trump’s directives for all federal agencies, departments and commissions to adhere to the Termination and Certifications Provisions, the preliminary injunction will now encompass all federal agencies to prevent any inconsistent application.
Since the Maryland lawsuit, additional complaints against the anti-DEI EOs have been filed in Illinois, California and Washington D.C., with similar legal arguments to the Maryland case. We will continue to monitor these lawsuits as they progress through the court system.
You can read more about the Maryland lawsuit and the implications of these EOs in our previous alert linked here.
[1] Nat’l Ass’n of Diversity Officers in Higher Educ. v. Trump, Memorandum Opinion and Order Denying Motion to Stay Injunction Pending Appeal, Case No. 25-cv-00333-ABA (Mar. 3, 2025), 6.
New Jersey and New York Lawmakers Propose New Limits on Restrictive Covenants
For years, New York and New Jersey legislators have proposed various measures that would prohibit or restrict employers from using non-compete agreements that may restrict employees’ future employment opportunities. This GT Alert discusses two bills, New York Senate Bill S4641 and New Jersey Senate Bill S1688, which propose changes to the landscape of restrictive covenants in these states.
New York Senate Bill S4641
On Feb. 10, 2025, the New York Senate introduced S4641 in response to Gov. Hochul’s veto of a prior non-compete bill (S3100A) in December 2023. Bill S4641 would add Section 191-d to the New York Labor Law, prohibiting employers from requiring any “covered individual” to enter into a non-compete agreement. The bill defines a “covered individual” as any person other than a “highly compensated individual” who, with or without an employment agreement, performs work or services for another person, “in a position of economic dependence on, and under an obligation to perform duties for, that other person.” “Highly compensated individuals” are those who are paid an average of at least $500,000 per year.
The bill would also prohibit use of post-employment non-compete agreements with regard to “health care professionals, regardless of the individual’s compensation level. Most health care providers who are licensed under New York law may fall under S4641’s definition of “health related professionals.” The law would permit employers to enter into agreements, even with covered individuals or a health care professional, which (1) establish a fixed term of service and/or exclusivity during employment; (2) prohibit disclosure of trade secrets; (3) prohibit disclosure of confidential and proprietary client information; or (4) prohibit solicitation of the employer’s clients.
The bill would also permit non-compete provisions as part of agreements to sell the goodwill of a business or to dispose of a majority ownership interest in a business, by a partner of a partnership, member of a limited liability company, or an individual or entity owning 15% or more interest in the business. Such non-compete agreements would still need to meet the common law test as to reasonableness in time and geographic scope, a necessity for protection of legitimate business interests, and lack of harm to the public.
S4641 would create a private right of action, allowing covered individuals who are subject to a prohibited non-compete agreement to file claims in court. If the employer is found to have violated the new Section 191-d, a court may void the non-compete agreement, prohibit the employer from similar conduct going forward, and order payment of liquidated damages, lost compensation, compensatory damages and/or reasonable attorneys’ fees and costs to the employee. The bill caps liquidated damages at $10,000 per impacted individual but permits a court to award liquidated damages to every claimant.
New Jersey Senate Bill S1688
In New Jersey, the Senate Labor Committee is considering S1688, which was initially introduced in January 2024. This bill, if passed, would amend the New Jersey Law Against Discrimination (NJLAD), N.J.S.A. 10:5-12:7, and 10:5-12:8 to clarify that the prohibition of certain waivers in employment agreements includes non-disclosure and non-disparagement provisions that would limit an employee’s right to raise claims of discrimination, retaliation, or harassment. The bill would also amend N.J.S.A. 10:5-12:7(c) to remove the original carve out for collective bargaining agreements, meaning the prohibition of waivers relating to discrimination, retaliation, or harassment claims would apply in the collective bargaining context as well as individual employment agreements.
Conclusion
These proposed bills demonstrate states’ continued efforts to limit employers’ use of restrictive covenants. Prior efforts to formalize such restrictions have been mostly unsuccessful, but the New Jersey and New York legislatures still seek to narrow the scope of the restrictions.
KEEPING UP: Kardashian Brand Sued in TCPA Call Timing Class Action
When Kim Kardashian said, “Get up and work”, the TCPA plaintiff’s bar took that seriously. And another Kardashian sibling may be facing the consequences.
We at TCPAWorld were the first to report on the growing trend of lawsuits filed under the TCPA’s Call Timing provisions, which prohibit the initiation of telephone solicitations to residential telephone subscribers before 8 am and after 9 pm in the subscriber’s time zone. Call it a self-fulfilling prophecy or just intuition honed by decades of combined experience, but these lawsuits show no signs of slowing down.
In Melissa Gillum v. Good American, LLC. (Mar. 11, 2025, C.D. Ca), Plaintiff alleges that Khloe Kardashian’s clothing brand Good American sent the following text messages to her residential telephone number at 07:15 AM and 06:30 AM military time:
Of course, Plaintiff alleges she never authorized Good American to send her telephone solicitations before 8 am or after 9 pm.
Plaintiff also seeks to represent the following class:
All persons in the United States who from four years prior to the filing of this action through the date of class certification (1) Defendant, or anyone on Defendant’s behalf, (2) placed more than one marketing text message within any 12-month period; (3) where such marketing text messages were initiated before the hour of 8 a.m. or after 9 p.m. (local time at the called party’s location).
The consensus here on TCPAWorld is that calls or text messages made with prior express consent are not “telephone solicitations” and likely not subject to Call Time restrictions. We’ll have to see how these play out but stay tuned for the latest updates!
NO SMOKING UNTIL 8 AM: R.J. Reynolds Burned By TCPA Time-Of-Day Class Action Lawsuit
Hi TCPAWorld! R. J. Reynolds Tobacco Company—the powerhouse behind Camel, Newport, Doral, Eclipse, Kent, and Pall Mall—is back in court. This time, though, it isn’t about the usual allegations against Big Tobacco. Instead, the plaintiff accuses the company of violating the TCPA’s time-of-day restrictions and causing “intrusion into the peace and quiet in a realm that is private and personal to Plaintiff and the Class members.” Vallejo v. R. J. Reynolds Tobacco Company, 8:25CV00466: Vallejo v RJ Reynolds Tobacco Complaint Link
Under the TCPA, telemarketing calls or texts can’t be made before 8 a.m. or after 9 p.m. (local time for the recipient). We’ve been seeing a lot of these time-of-day cases pop up lately:
IN HOT WATER: Louisiana Crawfish Company Sued Over Early-Morning Text Messages – TCPAWorld
IT WAS A MATTER OF TIME: Another Company Allegedly Violated TCPA Time Restrictions. – TCPAWorld
TIME OUT!: NFL Team Tampa Bay Buccaneers Hit With Latest in A Series of Time Restriction TCPA Class Action – TCPAWorld
SOUR MORNING?: For Love and Lemons Faces TCPA Lawsuit Over Timing Violations – TCPAWorld
TOO LATE: 7-Eleven Sued in TCPA Class Action for Allegedly Failing to Comply With Call Time Limitations–And This Is Crazy If its True – TCPAWorld
Here, in Vallejo v. R. J. Reynolds Tobacco Company, however, the plaintiff claims he received early-morning marketing texts around 7:15 a.m. and 7:36 a.m., local time. The complaint further alleges that he “never signed any type of authorization permitting or allowing Defendant to send them telephone solicitations before 8 am or after 9 pm,” though it doesn’t actually say he withheld consent entirely for these messages.
The plaintiff seeks to represent the following class:
All persons in the United States who from four years prior to the filing of this action through the date of class certification (1) Defendant, or anyone on Defendant’s behalf, (2) placed more than one marketing text message within any 12-month period; (3) where such marketing text messages were initiated before the hour of 8 a.m. or after 9 p.m. (local time at the called party’s location).
As I’ve said before, from my reading of the TCPA, these time-of-day restrictions apply specifically to “telephone solicitations,” meaning calls or texts made with the recipient’s prior consent or within an existing business relationship might be exempt. Since the plaintiff doesn’t deny consenting to these texts in the first place, we’ll have to keep an eye on this lawsuit to see if the Central District of California agrees with that interpretation.
Court Applies Internal Affairs Doctrine Even Though Statute Refers Only To Directors
Courts are wont to say that Section 2116 of the California Corporations Code codifies the internal affairs doctrine. See Villari v. Mozilo, 208 Cal. App. 4th 1470, 1478 n.8 (Cal. Ct. App. 2012)(“Corporations Code section 2116 codifies [the internal affairs doctrine] in California.”). I have long held the position that this is only partially true. Section 2116 provides:
The directors of a foreign corporation transacting intrastate business are liable to the corporation, its shareholders, creditors, receiver, liquidator or trustee in bankruptcy for the making of unauthorized dividends, purchase of shares or distribution of assets or false certificates, reports or public notices or other violation of official duty according to any applicable laws of the state or place of incorporation or organization, whether committed or done in this state or elsewhere. Such liability may be enforced in the courts of this state. (emphasis added)
The statute makes no reference to officers. Thus, it would seem reasonable to conclude that it does not apply to officers. Courts, however, seem to miss the obvious omission of officers from the statute, as illustrated in a recent ruling by U.S. District Court Judge Janis L. Sammartino in Lapchak v. Paradigm Biopharmaceuticals (USA), Inc., 2025 WL 437904 (S.D. Cal. Feb. 7, 2025). In that case, Judge Sammartino ruled that Delaware law applied to the individual defendant even though the plaintiff failed to allege that the defendant was a director of the corporation. In fact, neither party even alleged that the corporation was incorporated in Delaware, but the court did some online checking. Finally, it is unclear from the ruling whether the individual defendant was even an officer of the corporation.
As I have previously contended, officers are agents of the corporation whilst directors qua directors are not. In many cases, their duties and responsibilities may be governed by contractual choice of law provisions and local agency and employment laws. In any event, a plain reading of Section 2116 reveals that officers have no place in it.
COMPLAINTS ABOUT COMPLAINTS: Defendant Granted Leniency from Burdensome Discovery Production
Discovery disputes are a big part of TCPA cases and, practically speaking, it can be exceptionally difficult for defendants to produce all documents requested by TCPA plaintiffs… for several reasons. Requests for production and interrogatories tend to be worded as broadly as possible (generally to seek class information). Then, even with discovery requests that are agreed upon by the parties, the practical difficulty of obtaining and producing the requested material can range from difficult to nearly impossible.
In Nock v. PalmCo Administration, LLC, No. 1:24-CV-00662-JMC, 2025 WL 750467 (D. Md. Mar. 10, 2025), the District Court of Maryland showed leniency to the defendant, although it still ordered the defendant to at least attempt to produce nearly every material that the plaintiff had requested.
For some context, the plaintiff alleged that the defendant had violated 47 U.S.C. § 227(c), the Do Not Call (“DNC”) provision of the TCPA, and Md. Com. Law § 14-320, Maryland’s analogous DNC law. Id at *1. An informal discovery dispute was brought before the court based on the defendant’s purportedly incomplete responses to the plaintiff’s discovery requests. Id.
Firstly, the court found that an interrogatory seeking “all complaints ‘regarding [the defendant’s] marketing practices’” unreasonably burdened the defendant—since complaints relating to all marketing practices would clearly turn up material unrelated to the case’s subject matter. Id. at *2. However, the court still ordered production of all complaints related to the case’s subject matter. Id. at *3.
Secondly, the plaintiff sought production of documents that had previously been ordered by the court. Id. However, one of the categories of documents was outside the defendant’s possession—data from one of its vendors. Id. As the defendant demonstrated “reasonable efforts to obtain the requested information,” the court allowed the defendant to send one more email request to furnish missing data from the third-party vendor to fulfill the defendant’s obligations under the previous court order. Id.
Although this specific request did not fall under retention requirements, it is worth a reminder that the statutory Telemarketing Sales Rule recently expanded in what records must be kept for all telemarketing calls.
Thirdly, the plaintiff sought records of all communications between the defendant and a third-party vendor. Id. Similarly, the court was lenient with the defendant, even though the defendant had already missed a court ordered production deadline on those communications. Id. The defendant was still ordered to produce the communications within thirty days, but the court was understanding of the practical difficulties in producing all said communications. Id. at *3-4.
That is all for this order. However, the TCPA keeps seeing new rules and requirements. Most urgently, we are now less than a month away from new revocation rules coming into effect. Be ready for those changes as they are set to be implemented on April 11, 2025!
Federal Judge Clarifies Scope of Preliminary Injunction Enjoining President Trump’s DEI-Related Executive Orders
On March 10, 2025, a federal judge in Maryland clarified the scope of the nationwide preliminary injunction that enjoins key portions of two of President Donald Trump’s diversity, equity, and inclusion (DEI)–related executive orders (EOs), stating that the injunction applies to all federal agencies.
Quick Hits
On February 21, 2025, a federal judge granted a nationwide preliminary injunction that enjoined key provisions of President Trump’s executive orders aimed at “illegal” DEI initiatives.
On March 3, 2025, the judge refused to halt the preliminary injunction, pending the government’s appeal to the Fourth Circuit Court of Appeals.
On March 10, 2025, the judge clarified that the preliminary injunction applies to all federal executive branch agencies, departments, and commissions, not just those that were specifically named in the complaint.
U.S. District Judge Adam B. Abelson clarified that the nationwide preliminary injunction enjoining the termination, certification, and enforcement provisions of EO 14151 and EO 14173 “applies to and binds Defendants other than the President, as well as all other federal executive branch agencies, departments, and commissions, and their heads, officers, agents, and subdivisions directed pursuant to” those executive orders.
The court’s February 21, 2025, preliminary injunction order defined the “Enjoined Parties” as “Defendants other than the President, and other persons who are in active concert or participation with Defendants.” The plaintiffs filed a motion to clarify the scope of the order. The government argued that the court lacked jurisdiction to rule on the motion, and that only the specific departments, agencies, and commissions named as additional defendants in the complaint were bound by the preliminary injunction. The complaint named the following defendants: the Office of Management and Budget, the U.S. Departments of Justice, Health and Human Services, Education, Labor, Interior, Commerce, Agriculture, Energy, and Transportation, along with the heads of those agencies (in their official capacities), the National Science Foundation, and President Trump in his official capacity. The government argued that including other departments, agencies, and commissions as enjoined parties would be inconsistent with Federal Rule of Civil Procedure 65(d), Article III of the U.S. Constitution’s standing requirement, and traditional principles of equity and preliminary injunctive relief.
The court disagreed. First, according to the court, the plaintiffs have shown a likelihood of success on the merits that the termination, certification, and enforcement provisions are unconstitutional, so any agencies acting pursuant to those provisions “would be acting pursuant to an order that Plaintiffs have shown a strong likelihood of success in establishing is unconstitutional on its face.”
Second, the termination and certification provisions were directed to all agencies, the enforcement provision was directed to the U.S. Department of Justice, and the president was named as a defendant in the complaint; thus, the preliminary injunction (in both its original and clarified forms) “is tailored to the executive branch agencies, departments and commissions that were directed, and have acted or may act, pursuant to the President’s directives in the Challenged Provisions of” EO 14151 and EO 14173.
Third, only enjoining those agencies that were specifically named in the complaint, despite the fact that the president was named as a defendant, would provide incomplete relief to the plaintiffs because their speech is at risk of being chilled by non-named agencies as well. In addition, the court held that “[a]rtificially limiting the preliminary injunction in the way Defendants propose also would make the termination status of a federal grant, or the requirement to certify compliance by a federal contractor, turn on which federal executive agency the grantee or contractor relies on for current or future federal funding—even though the agencies would be acting pursuant to the exact same Challenged Provisions,” resulting in “‘inequitable treatment.’” Thus, the court granted the plaintiffs’ motion to clarify that the preliminary injunction applies to every agency in the executive branch.
Second Circuit: Rule 37 Sanctions Require ‘Intent to Deprive’ for Lost ESI, Not Mere Negligence
Plaintiff–Appellant Richard Hoffer sued the city of Yonkers, the Yonkers Police Department, and various individual police officers under 42 U.S.C. § 1983, alleging the officers used excessive force when arresting him. After trial, the jury returned a verdict in the officers’ favor. Hoffer appealed the judgment, arguing the district court erred in denying his request for an adverse inference instruction pursuant to Federal Rule of Civil Procedure 37(e)(2), based on a missing video of him being tased. On appeal, the parties disputed the standard applicable to requests for adverse inference instructions under Rule 37(e)(2).
The Second Circuit held that to impose sanctions pursuant to Rule 37(e)(2), a district court or a jury must find, by a preponderance of the evidence, that a party acted with an “intent to deprive” another party of the lost information. Consistent with this holding, the court further held the lesser “culpable state of mind” standard, which includes negligence,[1] was no longer applicable for imposing Rule 37(e)(2) sanctions for lost electronically stored information (ESI).
Hoffer v. City of Yonkers, et al. Background
Plaintiff–appellant commenced a § 1983 suit against the city of Yonkers, the Yonkers Police Department, and various individual police officers alleging, among other things, that the officers used excessive force during his 2016 arrest. A trial was held in 2021 on the claims against the individual police officers (collectively, the officer defendants), where differing accounts of the arrest were offered into evidence. There was no dispute that plaintiff was tased two times. However, each taser generates a log, which reflects each use of the taser. And while the log for the date in issue reflected two deployments, they were hours apart: the first at 4:16 p.m., when the officer tested the taser at the beginning of his shift, and the second at 8:02 p.m., lasting eight seconds, which the officer testified corresponded to the secondtime he tased plaintiff. The log also reflected an event at 10:24 p.m. titled “USB Connected,” that apparently corresponded to the taser syncing to an external device.
There was also testimony that each taser deployment generates a video. However, the testimony established that only video of the second deployment was available because the video of the first deployment “had somehow been overwritten.” No further explanation was provided as to the first video’s absence. Plaintiff’s girlfriend testified that, when she was at the police station after plaintiff’s arrest, she saw one officer holding a USB and saying to another officer: “It shows everything that we did and nothing that he did.”
Plaintiff’s counsel orally requested the district court instruct the jury that it could draw an adverse inference against the officer defendants based on the purported spoliation of the first video. At the charge conference, the district court, after assessing the request under Rule 37(e)(2), declined finding the evidence before it insufficient to establish any defendant “acted with an intent to deprive [Plaintiff] of the use of the video.”
There was no “clear evidence” that the first taser video existed in the first place, speculating that perhaps the first deployment did not trigger a video recording or that the first and second taser deployments happened within the same eight second period the log captured. The court further reasoned that it was not clear what the officer meant when he testified about “something being overwritten,” and nothing in his testimony suggested he had any direct knowledge or experience with the document management system for taser videos or this video specifically. The district court further observed that officer testimony establishing there were two taser deployments and no effort by defendants to “cover up that fact” undercut the theory the video was purposely destroyed. After three days of deliberations, the jury returned a unanimous verdict, finding in the officer defendants’ favor.
Appeal
On appeal, plaintiff-appellant argued that the district court erred by failing to instruct the jury that it could draw an adverse inference based on the purported spoliation of the first taser video. To decide that issue, the court was required to first resolve the parties’ dispute regarding the showing required for an adverse inference instruction under Rule 37(e)(2).[2]
In resolving this issue, the court discussed the history of Rule 37. Specifically, it noted that before 2015, a party seeking an adverse inference instruction based on lost evidence—electronic or otherwise—had to establish that the party obligated to preserve such evidence who failed to do so acted with “a culpable state of mind”[3] (internal quotation marks omitted). At that time, the circuit court held the requirement could be satisfied when a party acted knowingly or negligently. An intentional act was not required to establish a “culpable state of mind.” Then, in 2015, Rule 37(e) was amended to address the measures a court could employ if ESI was wrongfully lost, and the findings required to order such measures. At that time, Rule 37 was split into two subsections. The first allowed a court, upon a finding of prejudice to another party arising from the loss of ESI to order “measures no greater than necessary to cure the prejudice.” The second enumerated certain sanctions the court may impose “only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation.”
The court observed that the Advisory Committee notes to the 2015 Amendment explicitly stated that subdivision (e)(2) rejects cases such as Residential Funding that authorize adverse inference instructions upon a finding of negligence.[4] According to the court, the notes reason that only the intentional loss or destruction of evidence gives rise to an inference that the evidence was unfavorable to the party responsible for that loss or destruction. Negligent—or even grossly negligent—behavior does not logically support that inference.
While plaintiff-appellant correctly noted various circuit decisions after the 2015 Amendment that referenced or used the lesser “culpable state of mind” standard in the context of lost ESI (citing cases), the circuit noted that none of those decisions expressly held that the state of mind required for a sanction under Rule 37(e)(2) could be less than “intent to deprive.” Rather, no decision directly addressed the question before the court: whether the 2015 Amendment abrogated the lesser “culpable state of mind” standard in the context of lost ESI. According to the circuit, “[t]o the extent these decisions implied that a Rule 37(e)(2) sanction could issue upon a finding of a state of mind other than ‘intent to deprive,’ any such implication was mistaken after the 2015 Amendment.”
Conclusion
The Second Circuit has clearly articulated that imposing a sanction under Rule 37(e)(2) requires a finding of “intent to deprive another party of the information’s use in the litigation.” Thus, the 2015 Amendment to Rule 37(e)(2) abrogated the lesser “culpable state of mind” standard used in Residential Funding in the context of lost ESI. “A party’s acting negligently or knowingly will not suffice to justify the sanctions enumerated in Rule 37(e)(2).” Notably, in holding that the requisite state of mind to impose a sanction under Rule 37(e)(2) is “intent to deprive,” the Second Circuit joins the majority of its sister circuits.[5]
[1] see Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 108 (2d Cir. 2002).
[2] The parties also disagreed about whether the requirements of Rule 37(e)(2) must be proven by clear and convincing evidence or by a preponderance of the evidence, and whether the district court erred in resolving factual questions itself, rather than submitting them to the jury. Although the appellate court determined these issues (i.e., by a preponderance of the evidence and there was no error), these issues are not discussed in this blog.
[3] See Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 107 (2d Cir. 2002).
[4] Before the 2015 Amendment, Rule 37(e) provided in full: “Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system.” Rule 37(e)(2) advisory committee’s note to 2015 amendment.
[5] See Jones v. Riot Hosp. Grp. LLC, 95 F.4th 730, 735 (9th Cir. 2024); Ford v. Anderson Cnty., Texas, 102 F.4th 292, 323–24 (5th Cir. 2024); Skanska USA Civ. Se. Inc. v. Bagelheads, Inc., 75 F.4th 1290, 1312 (11th Cir. 2023) (specifying that “intent to deprive” means “more than mere negligence”); Wall v. Rasnick, 42 F.4th 214, 222–23 (4th Cir. 2022); Auer v. City of Minot, 896 F.3d 854, 858 (8th Cir. 2018); Applebaum v. Target Corp., 831 F.3d 740, 745 (6th Cir. 2016) (“A showing of negligence or even gross negligence will not do the trick.”).
GRAB THE POPCORN: Regal’s Marketing Texts Just Premiered in a TCPA Blockbuster!
Grab your popcorn, here’s a quick case alert for you. Regal Cinemas just found itself in the middle of a legal thriller, and this one is playing out in the Central District of California instead of the big screen. See Hensley v. Regal Cinemas, Inc., No. 8:25-cv-00468 (C.D. Cal. Mar. 11, 2025). Here, we have a moviegoer suing the theater giant, claiming they were bombarded with promotional text messages before 8 a.m., breaking the rules set by the TCPA.
We are not just talking about a single rogue text. According to the Complaint, Regal allegedly sent off four early morning marketing messages, including two that landed at 7:21 and 7:22 in the morning. Instead of waking up to a quiet morning, Plaintiff was greeted with ads for free popcorn, extra Crown Club credits, and something called Funnel Fangs. Curious enough, I had to look into what these Funnel Fangs are and apparently they are funnel cake fries with red icing… which sound pretty good. Nothing like getting a promo for deep-fried snacks before you have even had your first sip of coffee.
But here is where things get sticky, like the bottom of a theater floor after a late-night screening. As we know, strict guidelines under the TCPA prohibit businesses from sending telemarketing messages before 8 a.m. or after 9 p.m. However, allegedly Regal rolled the credits on that rule and kept the marketing show going anyway.
This is no small popcorn flick. This is a class action lawsuit, meaning thousands could have been hit with these early morning texts. And the timing could not be worse, no pun intended. TCPA lawsuits are exploding faster than a bag of extra-butter popcorn in a hot microwave. More TCPA class actions were filed in the first ten days of March than in all of March last year!
Lawsuits over time-restricted messages keep rolling in, proving that plaintiffs’ lawyers are watching compliance missteps like hawks. Companies are learning the hard way that when they ignore TCPA rules, the lawsuits come in faster than a summer blockbuster lineup.
Dewberry Group, Inc. v. Dewberry Engineers Inc. (No. 23-900)
The federal Lanham Act provides that a plaintiff who prevails in a trademark infringement suit is sometimes entitled to recover the “defendant’s profits” derived from the infringement. But does the “defendant’s profits” look only to the named defendant, or can it consider the profits of separately incorporated affiliates that were not parties to the lawsuit? In Dewberry Group, Inc. v. Dewberry Engineers Inc. (No 23-900), a unanimous Supreme Court held that district courts may “award only profits properly ascribable to the defendant itself” absent some legal basis (like veil piercing) for looking beyond the named defendant to related entities.
The case began with a trademark infringement suit between two real-estate companies: Dewberry Engineers and Dewberry Group. (As the Court’s opinion acknowledged, any summary of the facts was itself likely to create confusion because there were “too darn many Dewberrys.”) After Dewberry Engineers emerged victorious, it sought to recover the “defendant’s profits,” as authorized by the Lanham Act. But the only named defendant was Dewberry Group. Unfortunately for Dewberry Engineers, Dewberry Group has no profits: It provides various business services at below-market rates to separately incorporated companies also owned by Dewberry Group’s owner, thus operating at a significant loss. And while those affiliates earn millions of dollars in profits, those profits go to the books of the affiliates alone, not back to Dewberry Group. No matter, said the District Court: It would look to the “economic reality” of the situation and treat the affiliates and Dewberry Group “as a single corporate entity” for purposes of calculating the “defendant’s profits.” It therefore awarded $43 million to Dewberry Engineers, an award (and methodology for calculating it) that the Fourth Circuit affirmed.
In a unanimous opinion by Justice Kagan, the Supreme Court held that the District Court and Fourth Circuit had erred by including the affiliates’ profits in the calculation of the “defendant’s profits.” Kagan began by noting that the ordinary legal meaning of the term “defendant” refers only to the entity actually sued—here, Dewberry Group alone. And while Dewberry Engineers could have added the affiliates as defendants, for whatever reason, it hadn’t. Kagan then turned to “background principles of corporate law,” which generally prohibit courts from treating separately incorporated affiliates as a single legal entity absent some recognized exception. Piercing the corporate veil is one such exception, but Dewberry Engineers had never tried to establish the facts required to pierce Dewberry Group’s corporate veil and reach its affiliates. For these reasons, the lower courts “were wrong to treat Dewberry Group and its affiliates as a single entity in calculating the ‘defendant’s profits.’”
Justice Kagan then turned to an alternative argument raised by Dewberry Engineers to defend the lower courts’ award: Another sentence of the Lanham Act provides that, “[i]f the court shall find that the amount of the recovery based on profits is either inadequate or excessive[,] the court may in its discretion enter judgment for such sum as the court shall find to be just, according to the circumstances.” Kagan rejected Dewberry Engineers’ reliance on that provision, observing that neither the District Court nor Fourth Circuit had based the award on this “just-sum provision.” Instead, the decisions below reasoned only that the courts could disregard the affiliates’ legally separate status. The Court therefore vacated and remanded the case back to the district court for a new award proceeding. Those new proceedings could include consideration of this “just-sum” provision. They could also involve an analysis of whether corporate-veil piercing was an available option. And the lower courts could take up the suggestion of the United States Government as amicus curiae that in calculating a the named defendant’s profits, courts can “look behind” the defendant’s books to identify “the defendant’s true financial gain,” i.e., that Dewberry Group may effectively be earning a profit on its infringing activities even if its books don’t say so.
Justice Sotomayor briefly concurred. She agreed that “principles of corporate separateness,” as well as the Lanham Act’s statutory text, “forbade the lower courts from attributing to Dewberry Group all the profits of its affiliates, absent veil piercing.” But she also noted that such legal principles “do not blind courts to economic realities” or “force courts to accept clever accounting, including efforts to obscure a defendant’s true financial gain through arrangements with affiliates.” She reasoned that there were still “myriad ways” by which courts could consider arrangements with affiliates when calculating the “defendant’s profits.” In particular, she opined that courts could take into account “a non-arm’s-length relationship with an affiliate that effectively assigns some portion of its revenues to the latter,” as well as “evidence that a company indirectly received compensation for infringing services through related corporate entities.”