Nevada Supreme Court: Judge, Not Jury, Decides Unambiguous Contract
In 2011, a local water district in Nevada entered into a lease agreement with Paradise Canyon, LLC to provide shares of water for irrigating the Wolf Creek Golf Club. The lease agreement granted Paradise Canyon a right of first refusal with respectrenewing the agreement, but unambiguously provided the district with sole and absolute discretion in rate-setting during the renewal period. When it came time to renew, the district notified Paradise Canyon that it intended to raise its rates. Paradise Canyon responded by suing the district for declaratory relief and damages, alleging a bad faith breach of the lease agreement. The trial court allowed some of the claims to got to a jury.
Yesterday, the Nevada Supreme Court found that the trial court had erred:
Given that the relevant provision here was unambiguous, the trial court erred in failing to find that the District had sole and absolute discretion to set the rental rate after January 1, 2020. Sending that question to the jury was error, and thus the verdict resulting from the jury’s mistaken reading of the lease and the trial court’s judgment resting on that jury verdict are in error.
Virgin Valley Water Dist. v. Paradise Canyon, LLC, 141 Nev. Adv. Op. 19 (April 25, 2025). Nevada does imply a covenant of good faith and fair dealing into contracts but this covenant “may not be used to supply additional terms to the lease or to fault conduct exercised under an authority expressly provided by the lease absent conduct that intentionally interferes with the intent and spirit of the lease.”
More Arrested Developments: Wisconsin Supreme Court Holds ‘Arrest Record’ Encompasses Noncriminal Civil Violations
The Supreme Court of Wisconsin recently provided significant guidance resolving uncertainty about the scope of the Wisconsin Fair Employment Act’s (WFEA) prohibition against discrimination based on an employee’s or applicant’s arrest record. The court held that “arrest record” includes noncriminal offenses, such as municipal theft, reversing the Wisconsin Court of Appeals. As a result, adverse employment actions based on an individual’s arrest record for a civil offense may now form the basis of a claim of unlawful discrimination.
Quick Hits
The Wisconsin Supreme Court interpreted the phrase “any … other offense” in the WFEA to include noncriminal offenses.
The court’s interpretation is the final chapter in extended, seesaw litigation resulting from a school district’s decision to fire two employees who allegedly stole scrap metal from the district, pocketing the money they received from recycling the stolen material.
The district elected to dismiss the brothers after they were cited by the police for municipal theft (a noncriminal offense).
Relying on its expansive interpretation of the term “other offense,” the court determined that the district’s decision to fire the employees was based on “arrest record,” in violation of the WFEA.
Background
As discussed in our 2024 article addressing prior developments in this case, the Cota brothers worked on the grounds crew for the Oconomowoc Area School District. They were accused of taking the district’s scrap metal to a scrapyard and not remitting to the district the several thousand dollars they received for the scrap.
After an internal investigation was unable to determine which employees were responsible for the alleged theft, the district contacted the Town of Oconomowoc Police Department. The police ultimately cited the Cotas for theft. Approximately a year later, an assistant city attorney told the district he believed he could obtain convictions and that he also believed the case against the Cotas could be settled. He proposed dismissing the citations against the brothers in exchange for a $500 “restitution” payment. The district supported the proposal; however, the Cotas did not agree to the deal and were fired the next day. The municipal citations against the Cotas were later dismissed.
In response, the brothers filed a complaint under the WFEA alleging the district unlawfully fired them because of their arrest records. After an evidentiary hearing, an administrative law judge (ALJ) found that the Cotas failed to establish unlawful discrimination by the district. On appeal by the Cotas, the Labor and Industry Review Commission (LIRC) reversed the ALJ’s decision, concluding that the district did discharge the brothers because of their arrest records. The circuit court then affirmed LIRC’s conclusion. The court of appeals subsequently reversed LIRC, holding that “arrest record” under the WFEA includes only information related to criminal offenses (i.e., not including the municipal offenses the Cotas were cited for). LIRC then petitioned the Wisconsin Supreme Court for review.
Arrest and Conviction Record Discrimination Under the WFEA
Wisconsin is one of a minority of states that prohibit discrimination against employees and applicants because of arrest or conviction records. In sum, the WFEA deems it unlawful for an employer to make employment decisions (including hiring and firing decisions) on the basis of an employee’s arrest or conviction record. Employers risk liability when they, for example, decline to hire an employee due to the contents of a background check or fire an employee when they learn of the employee’s arrest.
Importantly, the WFEA includes an exception—employers may defend an adverse employment decision motivated by arrest or conviction record when a pending arrest or conviction “substantially relates” to the job. In general, an arrest or conviction is “substantially related” to a job when there is some overlap between the circumstances of the job and the circumstances of the offense.
Under the WFEA, an employer may refuse to hire an applicant or suspend an employee based on a pending arrest if the offense is substantially related to the position in question. An employer may also take adverse employment action based on an individual’s conviction record, provided there is a substantial relationship between the crime of conviction and the relevant position. Thus, an employer cannot, in most circumstances, fire an employee based on a pending arrest or an arrest that did not lead to a conviction.
The Court’s Reasoning and Its ‘Strange Results’
The Wisconsin Supreme Court concluded that the ordinary meaning of the phrase “any … other offense” includes violations of both criminal and noncriminal laws. The majority opined that this interpretation of “offense” is consistent with how the word “offense” is used throughout the Wisconsin Statutes. The court’s majority also found that such an interpretation was consistent with the WFEA’s statutory purpose of “protect[ing] by law the rights of all individuals to obtain gainful employment and to enjoy privileges free from employment discrimination because of … arrest record ….”
The majority thus found that LIRC correctly concluded that the Oconomowoc Area School District discharged Gregory and Jeffrey Cota because of their arrest records, in violation of the WFEA.
In a concurring decision, Justice Janet Protasiewicz lamented that the court’s decision, while correctly interpreted, makes for a “strange result.” Justice Protasiewicz wrote that, “[a]s a result of today’s decision, the [Oconomowoc Area School] District may not fire employees who it suspects stole from the District. That is no way to treat the victim of an offense.” Justice Protasiewicz added that if the district had fired the brothers when they suspected them of stealing, instead of going to the police (or had fired the brothers before they were cited by the police), they would not have violated the WFEA. Under these circumstances, the decision could not have been motivated by an arrest record that did not yet exist. “Our statutes should not hamstring employers who are victims that way,” Justice Protasiewicz stated. “An employer should be allowed to take employment action when it is the victim of an offense and suspects an employee did it, even when it relies on information from law enforcement.”
Key Takeaways
The 2024 court of appeals decision in this case narrowed the scope of employer obligations under the WFEA’s arrest record provisions. But this relief was short-lived. Employers doing business in Wisconsin are now confronted with the possibility of a wider array of offenses serving as the basis for arrest record discrimination claims.
Employers may want to note that the definition of “arrest record” under the WFEA includes noncriminal offenses—any information indicating an individual has been questioned, apprehended, or charged with any offense, criminal or noncriminal, may fall under the protection of the WFEA. And employers may also want to note that they have limited options when contending with an employee’s “arrest” by law enforcement. Even if the arrest involves conduct substantially related to the employee’s position (such as was the case with the Cotas’ alleged theft), employers risk liability if they discharge rather than suspend the suspected employee prior to conviction.
Under appropriate circumstances, employers may be well-served to discharge suspected employees prior to police action that may create an arrest record. And as lamented by Justice Protasiewicz, this outcome makes little policy sense and is contrary to the purposes of the WFEA.
While beyond the scope of this article, it is important to note that Wisconsin employers may also lawfully discharge an arrested employee based on their own independent investigation, if they can show that their discharge decision was motivated by the underlying conduct itself and not the fact the employee was arrested (the “Onalaska defense”). Employers may therefore want to conduct thorough internal investigations and document their findings independently of any arrest records—even if it is not possible or advisable to discharge an employee suspected of criminal wrongdoing prior to police action.
10th CIRCUIT EXPANDS TCPA EMERGENCY PURPOSES EXCEPTION: Calls Made to Inform Residents of Virtual Town Halls During Covid-19 Are Covered
For many of us, Covid-19 feels like a distant memory. But with the TCPA’s four-year statute of limitations, what’s in the past is rarely forgotten. The 10th Circuit Court of Appeals, in particular, has not forgotten the challenges of maintaining normalcy amidst social distancing measures and the raging pandemic.
In a recent decision, the 10th Circuit affirmed the New Mexico District Court’s dismissal of a TCPA case, holding that calls made by the City of Albuquerque to inform residents about virtual town-halls during the Covid-19 pandemic are covered by the TCPA’s emergency purposes exception. This decision notably expands scope of the emergency purposes exception – previously limited to calls conveying urgent health and safety information – to cover broader mitigation measures tied to public health emergencies.
Plaintiff Gerald Silver brought a putative class action against the City of Albuquerque, alleging that the city violated the TCPA by making pre-recorded phone calls inviting its residents to attend virtual town hall meetings during the COVID-19 pandemic. The calls were made to residents designated by the (505) area code. Silver’s complaint alleges that he received “at least seven prerecorded voice calls from the city on his cell phone” about the town halls.
Both parties agreed there was no commercial purpose to the calls, and that, during the period in which the calls were made, the federal government, the State of New Mexico, and the City of Albuquerque had all declared a state of public health emergency relating to Covid-19.
The city moved to dismiss Silver’s claim on two grounds: First, the city argued it was not subject to the TCPA because it was not a qualifying “person” under the statute; and second, the city contended that, even if it was subject to the TCPA, the calls fell under the TCPA’s exception for calls made for emergency purposes.
While the Court skirted around the issue of whether the TCPA applies to local governments, it held that Silver’s complaint did not show a violation of the TCPA. Although the TCPA generally prohibits the use of robocalls, it excepts from coverage “calls made necessary in any situation affecting the health and safety of consumers.” 47 C.F.R. § 64.1200(f)(4). The Court of Appeals undertook a two-step inquiry to determine whether the City’s calls were covered by the emergency purposes exception, looking at their (1) context and (2) content. Because the caller was a local government official, the “context” prong of the inquiry was satisfied. The “content” prong was also satisfied, because each call was informational. And because the City made the calls to inform citizens that town hall meetings would be held virtually—a mitigation measure “made necessary” by the social-distancing requirements of the pandemic—the Court of Appeals held that calls fall squarely within the exception.
“Because a virtual town hall meeting is itself a mitigation measure, any communications regarding those town hall meetings satisfy the content prong of the emergency purposes exception.”
The Court of Appeals also rejected Silver’s argument that because he had not expressed a desire to attend the town hall meetings, the phone calls were not relevant to him. The Court held that emergency purposes exception does not require that calls be tailored to an individual’s preferences, but rather, to an emergency that is relevant to the called party. Here, the emergency was the pandemic which, along with any associated mitigation measures, was relevant to all City residents.
Silver next argued that there were less intrusive means for the city to inform residents about the town halls, or, in the alternative, that the City’s calls could not have related to the pandemic because they did not explicitly mention Covid-19. Both these arguments failed to persuade the Court, because (1) the TCPA does not require calls to use specific words to invoke the emergency purposes exception, and (2) a caller is not required to use the least intrusive means available.
You can read the Court of Appeals’ Order here: Gerald Silver v. City of Albuquerque
8th Circuit Clarifies Minnesota Human Rights Act Doesn’t Cover Remote Workers
Last week, the Eighth Circuit said that a remote worker cannot sue their employer under the Minnesota Human Rights Act (MHRA), noting the law’s language makes clear that it does not apply to nonresidents.
The plaintiff in the case—a Michigan-based remote employee—took time off from work to recover from surgery. Shortly after her FMLA protected leave ran out, her employment was terminated. She sued her employer, alleging her employer violated the MHRA by refusing to accommodate her and by terminating her employment.
Her employer moved for summary judgment, arguing that the plaintiff was not covered under the MHRA because the statute defines an employee as someone who works for an employer and “resides or works in this state [of Minnesota].” The plaintiff had never lived in Minnesota, nor had she traveled to Minnesota for work for nearly two years before she was fired. Accordingly, the district court entered summary judgment for the employer.
On appeal, a three-judge panel honed in on the statute’s “works in this state” language, questioning whether it required Kuklenski to have a physical presence in Minnesota.
While the plaintiff argued the language should be interpreted liberally, the panel disagreed. In its opinion, the panel explained that the “plain meaning” of the phrase requires “some degree of physical presence in Minnesota,” as any other reading would contradict the statute’s purpose to “secure for persons in this state [of Minnesota], freedom from discrimination” because “discrimination threatens the rights and privileges of the inhabitants of this state [of Minnesota].” The panel found these phrases made clear that the law aimed to protect only those who live or work within the boundaries of Minnesota state lines.
The panel also rejected the plaintiff’s arguments that the court should consider her other contacts with the state, such as her supervisors’ and her clients’ physical presence in Minnesota, and her past travel to Minnesota for work. The panel found the MHRA’s language did not consider other factors and that her almost two-year absence from the state between February 2020 and December 2021 belied her argument that her absence was “temporary.”
The decision suggests that a non-resident with “customary or habitual” work in Minnesota potentially could be covered under the MHRA, and further clarifies that a person need not be physically present in Minnesota at the time of the discriminatory conduct to qualify as an employee under the MHRA.
However, an important question remains open: whether there are minimum requirements for travel to, or time spent in, the state of Minnesota to qualify for coverage under the MHRA.
“The plain meaning of this phrase requires some degree of physical presence in Minnesota.”
ecf.ca8.uscourts.gov/…
Blockchain+ Bi-Weekly; Highlights of the Last Two Weeks in Web3 Law: April 24, 2025
The last two weeks have seen federal agencies continue refining their approach to the digital asset industry, while state regulators are beginning to play a more prominent role—even as the overall pace of development appears to be slowed. With the SEC stepping back from non-fraud enforcement, Oregon’s lawsuit against Coinbase highlights a potential shift toward increased state-level activity.
At the federal level, the SEC issued new guidance on registering crypto-related securities, the House held hearings on digital asset market structure, and the DOJ released a memo calling on prosecutors to “end regulation by prosecution”—underscoring a growing federal priority to focus enforcement on fraud and consumer protection rather than taking a broad adversarial stance toward the industry. Other notable developments include Illinois advancing a BitLicense 2.0 proposal, OpenSea seeking SEC guidance on NFT regulations, and Ripple moving to acquire global credit network Hidden Road.
These developments and a few other brief notes are discussed below.
Oregon Sues Coinbase Over Alleged State Securities Laws Violations: April 17, 2025
Background: Oregon’s state attorney general has brought a lawsuit against Coinbase, alleging the exchange has violated Oregon state securities laws through listings of certain assets alleged to be securities under Oregon law. Coinbase has released a statement claiming, “Oregon’s holdout campaign is obstruction for the sake of obstruction. It is a desperate scheme that does nothing to move the crypto conversation forward, and in fact takes us a giant leap backwards from hard-won progress.”
Analysis: As anticipated, states and private litigants are beginning to fill the securities litigation gap left by the SEC’s decision to drop its pending and threatened cases against digital asset participants in favor of pursuing a statutory and rulemaking-based framework. Oregon’s lawsuit, which names 31 assets as “unregistered securities,” is notable—especially as other states withdrew similar actions following the SEC’s retreat in the Coinbase matter. This latest development underscores that, despite federal de-escalation, litigation against exchanges remains an ongoing issue for the industry.
SEC Issues Guidance on How to Register Securities that Involve Crypto: April 10, 2025
Background: Much of the focus at the SEC post-Gensler has been on releasing guidance on what crypto offerings are not securities (memecoins, stablecoins, etc.). The SEC Division of Corporation Finance has now put out guidance for issuers whose securities involve crypto assets on how federal securities law disclosure requirements apply. It recognizes that issuers may offer equity or debt securities as part of operations related to networks, applications, and crypto assets, and highlights the need for tailored, clear, and consistent disclosure aligned with existing rules (e.g., Regulation S-K, Forms S-1, 10, 20-F, and 1-A). Key disclosure elements include a focused description of the issuer’s business and developmental milestones, potential risks (such as technological, regulatory, and liquidity risks), a complete description of the securities (including any unique features and technical specs), and information on directors, executive officers, and significant employees (or third parties) performing policy-making functions.
Analysis: Tokenized securities are coming to traditional finance. Major actors in the traditional financial world are already preparing for that eventuality. Most digital assets are not securities, but many securities could be better handled through addendum only ledger technology rather than a seemingly endless number of middlemen all getting their cut to make sure none of the other middlemen are cheating the consumer. So, while the SEC and Congress work through determining which digital assets are securities and which are something else, this is a good step to allow innovative companies to start registering tokenized products.
Market Structure Hearings Held in House of Representatives: April 9, 2025
Background: The House Financial Services Committee’s Digital Asset Subcommittee and the House Agriculture Committee’s Digital Asset Subcommittee both held hearings on how to approach an overarching market structure for digital assets now that stablecoins seem to be on the fast track to regulatory standards. There is a broad consensus that digital assets that are securities need to be provided a way to register with the SEC and abide by SEC rules that aren’t so onerous that the registration process kills any value of the product.
Analysis: You can probably read the statements from witnesses Bill Hughes, Chris Brummer, and Rodrigo Seira to get the gist of where the focus should be for digital asset regulation. Both hearings had a noticeable focus on use cases for digital assets. We are still waiting for what the market structure bill will look like. It will be close to FIT21, previously passed through the House Financial Services Committee, but we don’t know how close it will be yet, as there were noticeable weaknesses in the bill. Draft language is expected to be public soon, though, and all expectations are for the determining factor between securities offerings and non-securities offerings to focus on “control” as opposed to “decentralization,” which was the focus of last year’s bill.
DOJ Releases Memo “Ending Regulation by Prosecution”: April 7, 2025
Background: Deputy Attorney General Todd Blanche has issued a memorandum to Department of Justice employees with the subject reading “Ending Regulation by Prosecution,” where he states, “Consistent with President Trump’s directives and the Justice Department’s priorities, the Department’s investigations and prosecutions involving digital assets shall focus on prosecuting individuals who victimize digital asset investors or those who use digital assets in furtherance of criminal offenses…” The memo clarifies that the DOJ is not going to focus efforts on exchanges or wallets for the actions of third-parties, and is not the regulator of alleged unregistered money transmission laws. It also disbands the National Cryptocurrency Enforcement Team, which was responsible for most current investigations and prosecutions in the space over the last few years.
Analysis: Note that this memorandum does not include guidance not to prosecute alleged violations of 18 U.S.C. 1960(b)(1)(C), which involves allegations of transmitting funds that are “knowingly” the product of criminal offenses and is the heart of the Roman Storm and Samuri Wallet developer cases. Interestingly, the memo calls out the issue of how digital asset losses are calculated when trying to compensate victims (a not-so-subtle reference to FTX depositors getting ~$20,000 per Bitcoin lost when Bitcoin was worth quadruple that by the time repayments happened). Not sure if there is a solution to this other than making people choose early in the process if they want in-kind or value of asset at time of theft. Unfortunately for Do Kwon, even with this DOJ pivot, his suit will remain ongoing.
Briefly Noted:
Paul Atkins Sworn in as SEC Chair: Paul Atkins has finally been sworn in as SEC Chair, marking the formal start of a new era for the Commission. The agency remained active in redefining its priorities throughout his confirmation process, and Atkins was widely understood to be in alignment with the key decisions made during that period. With his swearing-in now complete, he is positioned to implement a full regulatory agenda and set the tone for the post-Gensler SEC—potentially accelerating shifts in enforcement priorities, rulemaking, and digital asset policy.
Illinois Looking to Pass BitLicense 2.0: An Illinois bill is gaining traction and is expected to pass, which would enact similar onerous reporting and registration requirements as the New York BitLicense. With the combination of the Oregon lawsuit discussed above, this further emphasizes the need for comprehensive regulations at a federal level to prevent fractionalized and contradictory rules.
OpenSea Open Letter: OpenSea has submitted a public letter to the SEC advocating for NFT marketplaces to be carved out of broker/dealer registration requirements with the SEC. It is clear that even with NFTs decline, they are still a crucial part of the ecosystems that need regulatory guidance.
Nova Labs Lawsuit Dismissed: Nova Labs (the developer behind Helium Network) was sued in the last days before Gensler resigned, and that lawsuit has now been dismissed with prejudice. So this ordeal actually ended up good for them since the lawsuit being brought and then dismissed in this way prevents any future lawsuit over the same allegations from the agency.
Hinman Cleared by Office of Inspector General: Former Corporation Finance Director Bill Hinman has been cleared of allegations that his infamous speech was the result of insider dealings.
$1.2 Billion M&A Deal: Ripple is reportedly acquiring global credit network Hidden Road for $1.25 billion. This is reportedly an effort to give functionality to Ripple’s stablecoin, RLUSD, in traditional finance for cross-border settlements.
MEV Submission: Really great work from the team at Paradigm explaining how MEV works and what the SEC should consider in regulation in light of those technical realities. Good stuff.
DOJ Memo Confirmed Not Applicable for Fraud: As stated above, the DOJ memo regarding cutting down on criminal actions for crypto actors is not a get out of jail free card for past (alleged) frauds.
SEC Roundtable on Crypto Custody: The SEC has announced the time and speakers in its next crypto roundtable on custody. It remains great to see as many of these conversations as possible happen in public.
Phantom Wallet Lawsuit: It looks like an attorney is suing the wallet developer where he held certain memecoins he created, but which were stolen through his computer being compromised. This will be something worth following, especially if wallet developers are regulated under a market structure bill or similar legislation.
Conclusion:
The last two weeks have been relatively quiet in terms of crypto legal development. With the SEC pivoting away from prosecuting non-fraud crypto cases, state regulators have begun stepping into that role, most notably with Oregon suing Coinbase over alleged violations of state securities laws. At the federal level, the SEC provided guidance on registering securities that include crypto assets, the House of Representatives held market structure hearings, while the DOJ aimed to “end regulation by prosecution.”
Re: Watch What You Say Here
The Commercial Electronic Mail Act (CEMA) is a Washington State law that prohibits sending state residents a commercial email misrepresenting the sender’s identity. A commercial email promotes real property, goods, or services for sale or lease. A recent Washington Supreme Court opinion held that this prohibition includes the use of any false or misleading information in the subject line of a commercial email and is not limited to false or misleading information about the commercial nature of the message. Brown v. Old Navy, LLC, No. 102592-1 (Wash. 4/17/25).
The case arose when the plaintiffs sued Old Navy after allegedly receiving emails with false or misleading subject lines about the retailer’s promotions . The plaintiffs categorized four types of false and misleading emails from Old Navy:
Emails that announced offers available longer than stated in the subject line;
Emails that suggested an old offer was new;
Emails that suggested the end of an offer; and
Emails that stated a promotion extension.
For example, plaintiffs claimed that they received emails with subject lines including phrases like “today only” or “three days only” when sales or promotions lasted longer. The plaintiffs also pointed to emails from Old Navy about a 50% off promotion that would supposedly end that day, but continued in the following days. Plaintiffs argued that such emails violate CEMA because of false or misleading subject lines.
The applicable CEMA provision prohibits entities from sending commercial emails that “contain false or misleading information in the subject line.” RCW 19.190.020(1)(b). While plaintiffs argued that the provision refers to any information, Old Navy asserted that the prohibition is directed at statements in the subject line that mislead the recipient as to what the email is about. The Washington Supreme Court noted that the plain meaning of Subsection 1(b), and CEMA’s general truthfulness requirements, indicate that the statute applies to any information contained in an email subject line.
Old Navy also claimed that the plaintiffs’ interpretation of the subsection would punish Old Navy for “banal hyperbole.” According to the retailer, such puffery was not intended to be in CEMA’s scope. The court noted that though this issue was not within the scope of the narrow question in the case, typical puffery, including statements such as “Best Deal of the Year,” is not misrepresentation or false because “market conditions change such that a better sale is later available.” According to the court, mere puffery differs from representations of fact, such as “the duration or availability of a promotion, its terms and nature, the cost of goods, and other facts” that are important to Washington consumers when making decisions.
Though five justices signed the majority opinion, four others dissented. The dissent notes the antispam legislative intent and history behind CEMA, holding that the legislature was concerned about the “volume of commercial electronic mail being sent,” suggesting the narrower interpretation of Subsection 1(b) that Old Navy proposed. The dissent opinion points to the preceding provision of CEMA, which precludes transmitting an email that “[u]ses a third party’s internet domain name without permission of the third party, or otherwise misrepresents or obscures any information in identifying the point of origin or the transmission path of a commercial electronic mail message.” RCW 19.190.020(1)(a). According to the dissent, Subsection (1)(b) should “be read in harmony” with Subsection 1(a) and should be interpreted to address the prevention of sending emails that hide the email’s origin and promotional purpose. In support of its position, the dissent includes the example of the Washington Attorney General’s Office website, which directs consumers to “[c]arefully examine the body of the email message as it relates to the email’s subject line” and see if “it accurately describe[s] what is contained in the email” to determine whether the subject line would violate CEMA.
Companies can expect increased CEMA litigation due to this case. Those engaging in email marketing should be mindful of their subject line language. Statements about the nature of specific offers could be subject to increased scrutiny in Washington state. When choosing between general puffery and a more targeted subject about a specific offer, businesses may want to err on the more conservative side of the line (pun intended).
Whither Discretionary Denials? Read the Tea Leaves, or Follow the Bread Crumbs? (Part II)
In Part I of this set of blogs, we discussed the impact of the rescission of former USPTO Director Vidal’s Guidance Memorandum for handling discretionary denials in inter partes review proceedings before the Patent Trial and Appeal Board. We also discussed Chief Judge Boalick’s Guidance Memorandum on the rescission.
In Part II, we examine a new interim procedure, instituted March 26, 2025, for briefing of discretionary denials. This new procedure radically changes how a patent owner whose patent is the subject of an IPR or post-grant review petition can raise discretionary denial issues prior to the PTAB’s decision whether to institute a proceeding. The new procedure bifurcates discretionary denial issues, including Fintiv issues, from merits and non-discretionary denial issues, and delegates to the USPTO Director the determination of whether to discretionarily deny a petition.
The Old Procedure
Previously, petitioners and patent owners would include discussion of discretionary denial issues as a small (sometimes very small) part of their 14,000 word limit for petition and preliminary response, with the remaining words devoted to the substantive merits or demerits of the petition. The petitioner would try to anticipate the patent owner’s arguments for discretionary denial. From time to time, the PTAB would grant the parties limited additional briefing on discretionary denial issues where, for example, the patent owner raised discretionary denial issues that the petitioner had not anticipated.
The New Procedure
Under the new interim procedure, a patent owner has 14,000 words (the same as in any IPR petition or responsive brief) to argue that discretionary denial is proper. The petitioner has 14,000 words to respond. The patent owner’s discretionary denial brief is due two months after the PTAB issues a Notice of Filing Date Accorded to the petition, and one month before the patent owner’s preliminary response (another 14,000 word paper) is due. The petitioner’s response (also 14,000 words) is due one month after the patent owner’s discretionary denial brief.
In the discretionary denial briefing, the parties are allowed to address all discretionary denial considerations as reflected in PTAB precedential decisions, including Fintiv(involving a parallel district court case), General Plastic(involving multiple petitions), and Advanced Bionics(involving previous prior art and/or arguments in the USPTO regarding the patent). The discretionary denial briefing also may include consideration of denial issues under 35 U.S.C. § 325(d).
In addition, discretionary denial considerations may include (Interim Procedure, p. 2):
Whether the PTAB or another forum has already adjudicated the validity or patentability of the challenged patent claims;
Whether there have been changes in the law or new judicial precedent issued since issuance of the claims that may affect patentability;
The strength of the unpatentability challenge;
The extent of the petition’s reliance on expert testimony (the PTAB has said that this factor is under consideration, and that guidance will be forthcoming);
Settled expectations of the parties, such as the length of time the claims have been in force;
Compelling economic, public health, or national security interests; and
Any other considerations bearing on the Director’s discretion.
The first bullet point is similar to Fintiv Factor 3 (how much work have the district court and the parties done on the validity of the claims in the IPR). The third bullet point is similar to Fintiv Factor 6 (which includes consideration of the merits of a petition). While the PTAB has not (yet) specifically commented on the fourth bullet point factor, this factor appears somewhat similar to Fintiv Factor 4 (overlap between issues raised in the petition and in the parallel proceeding).
In a recent discretionary denial of institution of an IPR petition in Motorola v. Stellar, the Acting Director found the Board erred in weighing the Fintiv factors, noting among other things that the petitioner’s invalidity expert report in the accompanying district court litigation basically repeated all of the arguments in the petition. This overlap in arguments was of concern because of the possibility that much of the work that would be done in the IPR to adjudicate validity would not alleviate the validity workload. For example, some of the invalidity positions in district court relied on prior art combinations in the IPR petition, plus some additional system art. The district court and the parties had done a lot of work on the case, having taken expert depositions and proceeded through claim construction and what appeared to be overlapping expert reports. Consequently, even though petitioner submitted a Sotera stipulation, the Acting Director denied institution.
The USPTO Director will work with three senior PTAB judges to decide whether to discretionarily deny a petition. If denied, no proceeding is instituted. If not denied, then a different PTAB panel will consider the petition on its merits, based on the petition and the patent owner’s preliminary response.
The Acting USPTO Director intends that this bifurcation of discretionary denial and merits considerations will reduce the PTAB’s workload.
No Briefing, No Discretionary Denial
At a Boardside Chat on April 17, 2025, the PTAB said that in order to have the Director decide whether to issue a discretionary denial, the patent owner must file a discretionary denial brief. Otherwise, the PTAB will proceed to determine whether to institute a proceeding on the merits. If the patent owner does not file a discretionary denial brief, the petitioner does not have to file one. Also, the Director will not address any discretionary denial factor (for example, any of the Fintiv factors) that the patent owner does not raise in its brief.
What About Merits?
At the Boardside Chat, the PTAB said that the discretionary denial briefing opportunity is not to be used for doubling up on merits briefing, even though merits consideration is one of the Fintiv factors. In the discretionary denial brief, it would be appropriate for the patent owner to comment briefly on merits — for example, to identify weaknesses in the petitioner’s case — and then refer to the forthcoming Patent Owner Preliminary Response (POPR) for more detailed discussion of the merits. Given the timing of petitioner reply to a discretionary denial brief and the POPR, it is expected that the Director will have recourse to merits briefing from both parties before deciding whether to discretionarily deny a petition. Patent owners should not necessarily count on the PTAB seeing any discussion of merits in the discretionary denial brief, so the patent owner’s preliminary response should contain all of the merits arguments that patent owners plan to make.
What About Timing?
There are two timing points of interest. One is that, if the patent owner files its discretionary denial brief before the two-month deadline, petitioner’s response deadline moves up accordingly. A second is that, if a petitioner wants to use the presence of a Sotera or a Sand stipulation as an argument against discretionary denial, the petitioner should file the stipulation within one month of the Notice of Filing Date Accorded. This early filing allows the patent owner to have a meaningful opportunity to address the stipulation in its discretionary denial brief.
What About Fee Refunds to Petitioner in the Event of Discretionary Denial?
Also at the Boardside Chat, the PTAB said that it still is discussing how to handle fee refunds in the event of discretionary denial.
What Recourse Do the Parties Have in Challenging Decisions on Discretionary Denial and/or Merits?
During the Boardside Chat, the PTAB identified three possible paths of recourse for parties to challenge institution (or non-institution) decisions:
Merits: Panel Rehearing Request
Discretionary Denial: Director Review Request
Merits + Discretionary Denial: Director Review Request
Takeaways
In addition to the items discussed here and in Part I of this blog, there have been significant resignations of APJs from the PTAB. In addition, the PTAB has been ordered to accelerate its work on appeals to the USPTO by over 40 percent. Since some PTAB judges handle both IPRs/PGRs and appeals, there will be an adverse impact on capacity to generate IPR decisions. As a result of all this, it seems likely that there will be more discretionary denials of IPR and PGR petitions going forward, and thus fewer merits decisions. In the short term at least, this approach may help with the Board’s workload. Longer term, it remains to be seen whether the increase in discretionary denials will continue as a part of Patent Office policy. A continued increase in discretionary denials could have a chilling effect on a patent infringement defendant’s willingness to file an IPR petition.
A New Era in Federal Sentencing: Updates to the Guidelines and the Elimination of Departures
The federal sentencing landscape in the United States could undergo a significant transformation with recent amendments to update the United States Sentencing Guidelines that will go into effect on November 1, 2025, unless Congress takes action to disapprove the amendments. These changes, which include the removal of departures, mark a pivotal shift in how justice is administered in federal courts. This article explores the implications of these updates, their impact on the judicial system, and what they mean for defendants, attorneys, and the broader legal community.
Background on the Federal Sentencing Guidelines
The Federal Sentencing Guidelines were established in 1987 by the United States Sentencing Commission (“USSC”) to promote consistency and fairness in sentencing. These guidelines provide a framework for judges to determine appropriate sentences for federal offenses, taking into account factors such as the severity of the crime and the defendant’s criminal history.
Historically, the guidelines allowed for “departures,” which enabled judges to deviate from the prescribed sentencing range under certain circumstances. Departures were intended to provide flexibility in cases where the guidelines did not adequately account for unique factors. However, the use of departures has been a subject of debate, with critics arguing that they undermine the consistency and predictability of sentencing.
Key Updates to the Federal Sentencing Guidelines
The recent amendments to the Federal Sentencing Guidelines represent a comprehensive overhaul aimed at addressing longstanding concerns and modernizing the sentencing process. The most notable change is the removal of departures, which has been replaced with a more structured approach to variances.
Elimination of Departures: The removal of departures reflects a shift towards greater uniformity in sentencing. Under the updated guidelines, judges will no longer consider departures from the prescribed sentencing range based on guideline specific criteria. Instead, the judges will consider variances that do not require a guidelines-sanctioned basis; they stem from judicial authority under Booker and its progeny and considerations of 18 U.S.C. § 3553(b)(1) factors (e.g., Irizarry v. United States, 553 U.S. 708 (2008)).
Simplification of the Sentencing Process: The updated guidelines introduce a streamlined “three-step” approach to sentencing, designed to simplify the process for judges and practitioners. The new three-step approach simplifies the sentencing process while maintaining fairness and transparency. Here’s how it works:
Step 1: Determine the Base Offense Level: Judges begin by identifying the base offense level for the crime, as outlined in the guidelines. This step ensures that the severity of the offense is accurately reflected in the sentencing range.
Step 2: Apply Adjustments: Next, judges apply any relevant adjustments, such as enhancements for aggravating factors (e.g., use of a firearm) or reductions for mitigating factors (e.g., acceptance of responsibility). These adjustments are designed to account for the specific circumstances of the case.
Step 3: Consider Variances: Finally, judges may consider variances based on statutory factors, such as the nature and circumstances of the offense and the history and characteristics of the defendant. Variances must be justified with detailed reasoning and are subject to appellate review to ensure consistency.
Enhanced Focus on Individualized Sentencing: The updated guidelines encourage courts to take an individualized approach to sentencing. Judges are urged to consider the unique circumstances of each case and defendant, within the framework of the guidelines.
Addressing Emerging Issues: The updates also address contemporary challenges, such as the rise of synthetic drugs and the use of firearms in criminal activities. New provisions have been added to ensure that sentences reflect the severity of these offenses and their impact on public safety.
Implications of the Updates
The removal of departures and the introduction of a more structured approach to variances have important implications for the federal judicial system:
Increased Consistency and Predictability: By eliminating departures, the updated guidelines aim to reduce disparities in sentencing and promote greater consistency across federal courts. This is expected to enhance public confidence in the fairness of the judicial system.
Challenges and Opportunities for Defense Attorneys: Defense attorneys will now focus more on individualized arguments when advocating for leniency on behalf of their clients. Although variances have been a driving force in federal sentencing since Booker, the focus on variances in sentencing will streamline arguments for reduced sentences. The criteria for variances require attorneys to present compelling evidence and arguments to justify deviations from the prescribed sentencing range, which provides opportunities and challenges.
Impact on Defendants: The emphasis on individualized sentencing provides an opportunity for defendants to present mitigating factors and make compelling arguments based on the individual circumstances of their case.
Judicial Training and Adaptation: The updates necessitate additional training for judges and legal practitioners to ensure a thorough understanding of the new guidelines. This includes familiarization with the criteria for variances and the streamlined sentencing process.
The Broader Context
The updates to the Federal Sentencing Guidelines reflect broader trends in criminal justice reform. In recent years, there has been a growing emphasis on evidence-based practices, transparency, and accountability in sentencing. These principles are at the heart of the updated guidelines, which seek to balance the goals of punishment, deterrence, and rehabilitation.
The removal of departures also aligns with efforts to address systemic disparities in sentencing. Studies have shown that discretionary departures can contribute to racial and socioeconomic disparities, as they may be influenced by implicit biases. By replacing departures with a more structured approach to variances, the updated guidelines aim to mitigate these disparities and promote equity in sentencing.
Looking Ahead
As the updated Federal Sentencing Guidelines take effect, their impact on the judicial system will become clearer. Legal scholars, practitioners, and policymakers will closely monitor the implementation of the guidelines and their outcomes. Key areas of focus will include:
Evaluating the Effectiveness of Variances: The success of the updated guidelines will depend on how effectively variances are applied in practice. This includes assessing whether the criteria for variances strike the right balance between flexibility and consistency.
Addressing Unintended Consequences: As with any major policy change, the updates may have unintended consequences that require further refinement. Ongoing feedback from judges, attorneys, and other stakeholders will be critical in identifying and addressing these issues.
Advancing Criminal Justice Reform: The updates to the Federal Sentencing Guidelines are part of a broader movement towards criminal justice reform. Continued efforts to promote fairness, transparency, and accountability in sentencing will be essential in building a more just and equitable system.
Conclusion
The revised Federal Sentencing Guidelines represent a significant step forward in the ongoing evolution of the criminal justice system. By emphasizing structured variances, evidence-based practices, and a commitment to equity, these updates pave the way for a more transparent and accountable approach to sentencing. As the legal community adapts to these changes, it is imperative to remain vigilant in evaluating their effectiveness and addressing any unforeseen challenges. Through continuous efforts and collaboration, the ultimate goal of fostering a fairer and more just judicial system can be realized.
Harvard’s Tax-Exempt Status Dispute with the Trump Administration: Implications for Nonprofits
On April 16, 2025, President Donald Trump signaled a desire for Harvard University (Harvard or the University) to lose its tax-exempt status after the University refused several demands in the Trump Administration’s letter to Harvard, dated April 11, 2025, including reforms to governance and leadership, hiring and admission processes, student programs with records of antisemitism or bias and student discipline, as well as a discontinuation of DEI programs. Harvard’s refusal resulted in the Department of Education freezing $2.2 billion in grants and $60 million in contracts to Harvard. The Trump administration plans to freeze another $1 billion in federal funding for Harvard’s health research.
Harvard University sued the Trump administration on Monday, April 21, 2025, for infringing on the University’s free speech rights under the First Amendment. Additionally, Harvard argues that the administration’s actions against the University were arbitrary and capricious and outside the scope of its authority. Harvard contends that the federal government cannot impose unrelated conditions for higher-education institutions to access federal funding. The fate of Harvard’s federal funding and tax-exempt status may now set a precedent that could impact other nonprofit organizations.
While most nonprofit organizations focus on their missions, even a mission-driven organization can lose its 501(c)(3) status if it violates the Illegality Doctrine.1 In Bob Jones University v. United States (1983), the Supreme Court affirmed that a tax-exempt organization must operate in a manner consistent with public policy and federal law.2 The Court upheld the IRS’s decision to revoke tax-exempt status based on racially discriminatory practices — even though the institution claimed a religious purpose.3 If a tax-exempt organization engages in illegal activity or operates against public policy, it risks revocation — even if the charitable purpose itself is lawful.
Can the President Direct the IRS To Revoke Harvard’s Tax-Exempt Status?
On April 15, 2025, President Trump posted on Truth Social: “Perhaps Harvard should lose its Tax Exempt Status and be Taxed as a Political Entity if it keeps pushing political, ideological, and terrorist inspired/supporting ‘Sickness? Remember, Tax Exempt Status is totally contingent on acting in the PUBLIC INTEREST!”
Generally, Section 7217 of the Internal Revenue Code of 1986 (the Code) prohibits the President, and other executive branch employees, from either directly or indirectly requesting that the IRS investigate or audit specific targets. The IRS has declined to comment to date on whether they are considering review or revocation of Harvard’s tax-exempt status. Additionally, a White House spokesman stated, “Any forthcoming actions by the I.R.S. are conducted independently of the President, and investigations into any institution’s violations of their tax status were initiated prior to the President’s TRUTH.” However, if the IRS revokes Harvard’s status, Harvard will almost certainly appeal.
What Rev. Rule 80-278 Says – and Why It Still Matters
With calls to revoke Harvard’s tax-exempt status making headlines again, nonprofit organizations must revisit Rev. Rul. 80-278, one of the IRS’s clearest positions on when 501(c)(3) status can be revoked. In Rev. Rul. 80-278, the IRS held that an organization systematically violating civil rights laws was not entitled to tax-exempt status even if its stated mission was charitable.4 Charitable purpose is not enough if the conduct is illegal or contrary to “clearly defined and established” public policy.5
Harvard’s legal position was made clear by a spokesperson for the University, who stated that “there is no legal basis for revoking the University’s exemption.” However, the burden of proof would be on Harvard to prove that its activities are not illegal or against public policy, and that it is otherwise entitled to tax exemption. Ultimately, if Harvard exhausts all administrative remedies with the IRS, then it could potentially file for a declaratory judgement remedy under Section 7428 of the Code. Historically, there is no IRS precedent that directly applies to protected speech by students or faculty.
What Should Your Nonprofit Do?
In light of the ongoing dispute with Harvard, and the potential for time and cost associated with defending tax-exempt status, nonprofit organizations should diligently review their internal governing documents, ongoing federal and state grants and contracts, and other materials to ensure compliance with federal and state laws related to tax-exempt status.
Suggested Actions
Audit Advocacy and Activities. Make sure your lobbying, programming and public-facing content align with your exempt purpose and IRS standards.
Review Governance & Oversight. Ensure your board understands its fiduciary role in legal compliance — not just mission direction.
Compile Basic Organizational Information for Potential Audits. Begin compiling materials that commonly would come up in an audit or investigation, such as tax returns, relevant agreements and grant or scholarship program materials.
Develop a Rapid-Response Framework. Have a plan for if (or when) your tax status, operations or speech get questioned by regulators, donors or the media.
[1] Rev. Rul. 80-278, 1980-2 C.B. 175 (1980).
[2] Bob Jones Univ. v. United States, 461 U.S. 574, 103 S. Ct. 2017, 76 L. Ed. 2d 157 (1983).
[3] Id. at 602-604.
[4] Rev. Rul. 80-278, 1980-2 C.B. 175 (1980).
[5] Id.
Royal Play Penalty: No Standing in the End (Zone)
The US Court of Appeals for the Federal Circuit dismissed an appeal from the Trademark Trial & Appeal Board, finding that the appellant lacked standing because it failed to allege any actual and particularized injury. Michael J. Messier v. New Orleans Louisiana Saints, LLC, Case No. 24-2271 (Fed. Cir. Apr. 14, 2025) (per curiam) (Moore, C.J.; Prost, Stark, JJ.) (nonprecedential)
Michael J. Messier claimed that he is a direct descendent of the kings of France, and that he and his family own intellectual property rights to the Fleur-de-Lis mark used by the NFL’s New Orleans Saints. Messier filed a petition with the Board for cancellation of the Saints’ Fleur-de-Lis mark. Messier’s petition contained no claim that he or his family currently use any fleur-de-lis marks in commerce or any other avenues for revenue, such as licensing. The Board dismissed the petition.
The Board held that pursuant to Sections 13 and 14 of the Lanham Act, 15 U.S.C. §§ 1063 and 1064, to maintain a cancellation action, Messier had to “allege a commercial interest in the registered mark or a reasonable belief in damage from the mark’s continued registration.” Messier’s original and amended petitions failed to do so. The Board noted that Messier did not own or conduct “any business under the mark, and thus he cannot allege entitlement.” Messier appealed.
The Federal Circuit determined that Messier lacked standing to bring the appeal. The Court explained that to demonstrate Article III standing for his appeal, Messier had to demonstrate actual or imminent injury that was concrete and particularized, a causal connection between the alleged conduct and the injury, and potential redressability by a favorable decision. Messier failed to meet his burden, primarily because he failed to demonstrate injury by the Saints’ use of the Fleur-de-Lis mark that went beyond “a general grievance or abstract harm.” Messier did not allege that he used a fleur-de-lis design in commerce whatsoever and thus failed to demonstrate any injury.
Broadcast Alert! Applying Conventional Machine Learning to New Data Isn’t Patent Eligible
The US Court of Appeals for the Federal Circuit affirmed a district court’s ruling that patents applying established machine learning methods to new data are not patent eligible under 35 U.S.C. §101. Recentive Analytics, Inc. v. Fox Corp. et al., Case No. 23-2437 (Fed. Cir. Apr. 18, 2025) (Dyk, Prost, Goldberg, JJ.)
Recentive sued Fox, alleging infringement of four patents designed to tackle long-standing challenges in the entertainment industry – namely, optimizing the scheduling of live events and refining “network maps,” which determine the content aired on specific channels across various geographic markets at set times. These patents aim to streamline broadcast operations and enhance programming efficiency.
The patents at issue can be divided into two categories: network maps and machine learning training. The machine learning training patents focus on generating optimized event schedules by training machine learning models with parameters such as venue availability, ticket prices, performer fees, and other relevant factors. The network map patents describe methods for dynamically generating network maps that assign live events to television stations across different geographic regions. These methods utilize machine learning to optimize television ratings by mapping events to stations and updating the network map in real time based on changes to the schedule or underlying criteria. The patents’ specifications explain that the methods employ “any suitable machine learning technique” using generic computing machines.
Fox moved to dismiss on the grounds that the patents were subject matter ineligible under § 101. Recentive acknowledged that the concept of preparing network maps had existed for a long time. Recentive also recognized that the patents did not claim the machine learning technique. Nonetheless, Recentive argued that its patents claimed eligible subject matter because they involve using machine learning to generate custom algorithms based on training the machine learning model. Recentive characterized its patents as introducing “the application of machine learning models to the unsophisticated, and equally niche, prior art field of generating network maps for broadcasting live events and live event schedules.”
The district court disagreed and granted Fox’s motion. Applying the Alice framework, at step one, the court determined that the asserted claims were “directed to the abstract ideas of producing network maps and event schedules, respectively, using known generic mathematical techniques.” At step two, the court determined that the machine learning limitations were no more than “broad, functionally described, well-known techniques” that claimed “only generic and conventional computing devices.” The court denied Recentive’s request for leave to amend because it determined that any amendment would be futile. Recentive appealed.
For the Federal Circuit, this case presented a question of first impression: whether claims that do no more than apply established methods of machine learning to a new data environment are patent eligible.
Step One
While Recentive claimed that its machine learning approach was uniquely dynamic and capable of uncovering hidden patterns in real time, the Federal Circuit found these features to be merely standard aspects of how machine learning operates. The Court explained that iterative training and model updates are not breakthroughs but rather are fundamental to the technology itself. Recentive conceded that its patents did not disclose any novel method for enhancing machine learning algorithms – just their routine application. Recentive also conceded that before the advent of machine learning, event planners relied on “event parameters” such as ticket sales, weather forecasts, and other data to guide scheduling decisions, a process the patents themselves acknowledge was traditionally manual and inflexible. The same is true for network maps, which were historically crafted by humans to determine content placement across channels. The Court found that Recentive’s assertion that applying machine learning to this context was more than an abstract concept and therefore rendered the claims patent eligible lacked merit. Courts have consistently held that claims that simply place an abstract idea into a new field of use do not transform it into a patent-eligible invention.
The Federal Circuit made clear that applying existing technology to a new dataset or context does not, on its own, confer eligibility. Federal Circuit precedent teaches that true innovation demands more than repackaging conventional methods within a different domain, regardless of how novel the application may seem. The Court noted that Recentive’s claim that its patents qualified merely because they incorporate machine learning into event planning and network mapping stood in direct contradiction to settled § 101 jurisprudence.
Step Two
Recentive claimed that its patents involved an inventive concept by using machine learning to dynamically create optimized maps and schedules based on real-time data, updating them as conditions changed. The Federal Circuit disagreed, affirming the district court’s decision that this merely described the abstract idea itself. The Court found nothing in the patent or the claims that added anything more to transform the abstract concept of generating event schedules and network maps using machine learning into a patent-eligible invention.
No Point in Amending
The Federal Circuit rejected Recentive’s argument that the district court should have granted leave to amend its complaint, noting that Recentive neither proposed specific amendments nor identified factual issues that would impact the § 101 analysis.
Practice Note: Recognizing that machine learning is a burgeoning and increasingly important field that may lead to patent-eligible improvements in technology, the Federal Circuit was careful to circumscribe its ruling: “Today, we hold only that patents that do no more than claim the application of generic machine learning to new data environments, without disclosing improvements to the machine learning models to be applied, are patent ineligible under § 101.”
The Employee Retention Credit: IRS’s “Risking” Model Faces Legal Challenge
Case: ERC Today LLC et al. v. John McInelly et al., No. 2:24-cv-03178 (D. Ariz.)
In an April 2025 order, the US District Court for the District of Arizona denied a motion for a preliminary injunction filed by two tax preparation firms. The firms sought to halt the Internal Revenue Service’s (IRS) use of an automated “risk assessment model” that the IRS used to evaluate and disallow claims for the Employee Retention Credit (ERC), seeking to restore individualized review of ERC claims.
BACKGROUND ON THE ERC
The ERC was enacted in 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial relief to businesses affected by COVID-19 by incentivizing employers to retain employees and rehire displaced workers. The ERC allowed employers that experienced significant disruptions due to government orders or a substantial decline in gross receipts to claim a tax credit equal to a percentage of qualified wages paid to employees. Millions of employers have filed amended employment tax returns (Form 941-X) claiming the credit for periods in 2020 and 2021. Since the enactment of the CARES Act, the IRS has issued roughly $250 billion in ERC.
THE IRS’S MORATORIUM AND AUTOMATED RISK ASSESSMENT MODEL
In September 2023, the IRS instituted a moratorium on processing ERC claims to review its procedures, reduce the backlog of claims, and identify potential fraud. Before the moratorium, all ERC claims received individualized review. During the moratorium, the IRS developed an automated “risk assessment model” to facilitate the processing of claims. This model, which is alternatively known as “risking,” utilizes taxpayer-submitted data and publicly available information to predict the likelihood that a taxpayer’s claim is valid or invalid. Claims deemed to be “high risk” by the system are excluded from review by an IRS employee and instead are designated for immediate disallowance. In August 2024, the IRS lifted its ERC processing moratorium and began issuing thousands of disallowance notices to taxpayers. Notwithstanding these actions, the number of pending ERC claims remained above one million as of November 2024.
THE COURT CHALLENGE TO THE IRS’S “RISKING” MODEL
In their motion for a preliminary injunction, filed January 7, 2025, the plaintiffs (the tax preparation firms) sought a court order compelling the IRS to, among other things, stop the use of “risking” and restore individualized employee review of ERC claims. The plaintiffs claimed to be injured by the “risking” model because they were unable to collect contingency fees from clients when claims were disallowed.
In support of their motion, the plaintiffs pointed to having received on behalf of their clients many boilerplate rejections immediately following the end of the moratorium. The plaintiffs alleged that these summary disallowances were arbitrary and capricious, thus violating the Administrative Procedure Act (APA), because the “risking” model precluded the IRS from acquiring information necessary to properly evaluate the claims.[1] The plaintiffs also contended that the disallowances reflected a shift in IRS policy to disfavor ERC, with the result being that several legitimate claims were being unfairly disallowed. The plaintiffs argued that this apparent shift violated Congress’s intent in enacting legislation providing for ERC.
On April 7, 2025, the court denied the motion, finding that the plaintiffs failed to meet the high bar for injunctive relief at this stage of the litigation.[2] The court said that the record of the case at this juncture did not support the plaintiffs’ contention that the increase in claim disallowances after August 2024 was because of the IRS denying valid claims. However, the court pointed to a concession by the IRS that its use of the “risking” model may be resulting in the disallowance of legitimate claims. The court suggested at several points in its order that the plaintiffs (or the employers they support) could bring forth evidence demonstrating that the “risking” model was unduly denying benefits to deserving taxpayers.
Practice Point: This case highlights that the IRS has been adopting novel mechanisms to address its backlog of pending ERC claims, which given current resource constraints, it may seek to employ them in other contexts, including those involving income tax refunds. The “risking” model in particular, while purporting to expedite the review of certain supposedly “high-risk” claims, may be having the collateral consequence of denying benefits to eligible employers. Taxpayers with potentially meritorious claims can (and should) be prepared to administratively appeal or even litigate disallowed claims, which they can do by filing a complaint in the US district court with jurisdiction or in the US Court of Federal Claims.
[1] The plaintiffs also alleged that the IRS exceeded its statutory authority by disallowing their clients’ ERC claims without providing them a right to be heard or a direct right to appeal in an independent forum. The plaintiffs argued that the IRS violated the Due Process Clause of the US Constitution’s Fifth Amendment by depriving their clients of ERC without adequate review of these clients’ claims.
[2] More specifically, the court found that the plaintiffs did not establish that they had standing to seek the requested relief, or that the United States (through the actions of the IRS) had waived sovereign immunity as to the plaintiffs’ APA claims. The court also concluded that the plaintiffs did not show that their due process claim was likely to succeed on the merits such that a preliminary injunction was an appropriate remedy.