EnforceMintz — Novel Criminal Charges and Emerging Civil Trends from Opioid Enforcement in 2024
In past years we have discussed how opioid-related enforcement efforts have remained a top federal and state priority (here, here, and here). In 2024, opioid-related enforcement efforts continued across the entire opioid supply chain, and two themes dominated the most significant opioid cases and resolutions of 2024. First, two major settlements from the past year highlight examples of allegations that crossed a line, prompting the government to pursue criminal charges. Second, a number of recent cases against pharmacies involve a common theory of liability based on the Controlled Substances Act (CSA), which served as the basis for civil liability under the False Claims Act (FCA).
Opioid-Related Criminal Resolutions
In February 2024, Endo, a pharmaceutical manufacturer that previously filed for bankruptcy, reached a global resolution of various criminal and civil investigations into the company’s sales and marketing of opioid drugs. The company agreed to pay the government $464.9 million over 10 years (though the actual total payment amount will likely be much lower due to bankruptcy).
To resolve the criminal investigation, Endo agreed to plead guilty to a one-count misdemeanor charge for violations of the federal Food, Drug, and Cosmetic Act (FDCA). That charge related to the company’s marketing of the drug’s purported abuse deterrence, tamper-resistant, or crush-resistant properties to prescribers, despite a lack of supporting clinical data. In the plea agreement, the company admitted responsibility for misbranding its opioid drug by marketing the drug with a label that failed to include adequate directions for its claimed abuse deterrence use, in violation of the FDCA.
More recently, in December 2024, McKinsey & Company, a worldwide management consulting firm, agreed to pay $650 million to resolve criminal and civil investigations related to the firm’s consulting work for Purdue Pharma, the maker of OxyContin. As noted in the government’s press release, the McKinsey resolution was the first time a management consulting firm has been held criminally responsible for its advice resulting in a client’s criminal conduct.
The two-count criminal charging document accused McKinsey of conspiring to misbrand a controlled substance and obstruction of justice. The conspiracy charge related to McKinsey’s work to “turbocharge” OxyContin sales by targeting high-volume opioid prescribers. The obstruction charge arose from the alleged deletion by a senior partner of certain documents related to the company’s work for Purdue. To resolve those charges, McKinsey entered into a five-year deferred prosecution agreement (DPA). Under the DPA, McKinsey agreed not to do any consulting work related to the marketing, sale, or distribution of controlled substances and agreed to implement significant changes to its compliance program. Separately, the former McKinsey senior partner who allegedly destroyed records relating to the company’s work for Purdue was charged with obstruction of justice and agreed to plead guilty to that charge.
These two resolutions are relevant to all entities in the opioid supply chain, from manufacturers to consultants and all stakeholders in between. Sales and marketing practices, or abuse deterrence claims or practices targeting prescribers based on volume, can lead to both civil liability and potential criminal exposure.
Pharmacies Face Potential FCA Liability Based on CSA Violations
On the civil side, three opioid enforcement actions were particularly noteworthy. Three years ago, we highlighted some of the first pharmacy-related resolutions, which showed that pharmacies were “next in line” for opioid related enforcement. In 2024, two substantial settlements involved alleged CSA violations giving rise to FCA liability. A third FCA lawsuit filed in December 2024 against the nation’s largest pharmacy shows that this trend will likely continue in 2025 and beyond.
In July 2024, Rite Aid and its affiliates agreed to settle allegations brought by the government related to its opioid dispensing practices. Rite Aid had previously filed for bankruptcy, so the settlement agreement involved a payment of $7.5 million, plus a general unsecured claim of $401.8 million in the bankruptcy case.
The government alleged that Rite Aid pharmacists dispensed unlawful prescriptions and failed to investigate “red flags” before dispensing opioid prescriptions, then improperly submitted claims to the government for reimbursement of those prescriptions. The government alleged that the company dispensed unlawful prescriptions by (1) filling so-called “trinity” prescriptions, which are a combination of opioid, benzodiazepine, and muscle relaxants; (2) filling excessive quantities of opioid prescriptions; and (3) filling prescriptions written by prescribers previously identified as suspicious by pharmacists.
Similarly, in December 2024, Food City, a regional grocery store and pharmacy based in Virginia agreed to pay $8.48 million to resolve allegations that it dispensed opioids and other controlled substances in violation of the CSA and the FCA. Like the Rite Aid case, the government alleged that these prescriptions were medically unnecessary, lacked a legitimate medical purpose, or were not dispensed pursuant to valid prescriptions. The government alleged that Food City ignored “red flags” including, among other things, (1) prescribers who wrote unusually large opioid prescriptions; (2) early refills of opioids; (3) prescriptions for unusual quantities or combinations of opioids; and (4) patients who were filling prescriptions for someone else, driving long distances to fill prescriptions, or paying cash for prescriptions.
Also in December 2024, the Department of Justice announced that it had intervened in a nationwide lawsuit alleging that CVS Pharmacy filled unlawful prescriptions in violation of the CSA and sought reimbursement for those prescriptions in violation of the FCA. The lawsuit is currently pending. The theory of liability asserted against CVS is similar to the Rite Aid and Food City cases: CVS allegedly filled unlawful prescriptions, ignored “red flags” of abuse and diversion, and sought reimbursement from federal health care programs for unlawful prescriptions in violation of the FCA.
Under the CSA and applicable regulations, pharmacists dispensing controlled substances, like opioids, have a “corresponding responsibility” to ensure that the prescription was issued for a legitimate medical purpose. 21 C.F.R. § 1306.04(a). Exercising that corresponding responsibility requires identifying and resolving “red flags” before filling a prescription. There is no defined list of what the government deems to constitute “red flags” and determining the existence of red flags is often context dependent. Because FCA lawsuits based on alleged CSA violations appear to be a growing trend, these three cases provide helpful guidance for companies seeking to mitigate risk by implementing corporate compliance programs designed to identify and resolve “red flags” related to opioid prescriptions.
Serta, Mitel, and Incora’s Potential Impact on Uptiers
Go-To Guide:
Recent court decisions offer insights into how different courts interpret uptier transactions based on specific credit agreement terms.
Various credit agreement provisions, including buyback restrictions and sacred rights clauses, played key roles in these rulings.
Lender strategies, such as cooperation agreements, may emerge as potential responses to liability management transactions.
On Dec. 31, 2024, the U.S. Court of Appeals for the Fifth Circuit in Serta Simmons and the New York Appellate Division in Mitel each issued decisions concerning the validity of non-pro rata uptier transactions.1 The uptiers that the borrowers in Serta and Mitel undertook were prototypical; the borrowers negotiated with a subset of their existing lenders for new financing that would prime the existing debt, the participating lenders amended the existing credit documents to permit for such financing and/or lien stripping/subordination, and certain participating lenders exchanged their existing debt for some of the newly issued priming debt.
Despite the similarities, the two courts reached opposite conclusions on the uptiers’ validity, based on the terms of the underlying debt documents. In Serta, the Fifth Circuit held that the non-pro rata exchange did not constitute an “open market purchase” and, as a result, the exchange breached the existing credit agreement. Conversely, in Mitel, the New York court upheld the non-pro rata exchange, finding no similar restriction on affiliate buybacks existed in the underlying credit agreement.
These decisions round out a year that included another important decision, this one from the U.S. Bankruptcy Court for the Southern District of Texas in Incora, where in July 2024 the court ruled that the challenged uptier violated multiple indentures.2
Takeaways from these decisions, and considerations for lenders, include
1.
focusing on the credit agreement’s buyback and sacred rights provisions,
2.
negotiating liability management transaction (LMT) blockers, including more broad-sweeping restrictions on uptiers, and
3.
entering into cooperation agreements to thwart borrowers from pitting lenders against each other and the resulting race-to-the-bottom.
Serta, Mitel, and Incora Rulings
In Serta, the Fifth Circuit held that the debt exchange undertaken in a 2020 uptier did not qualify as an “open market purchase,” the exception to the pro rata sharing requirement that permitted borrowers to purchase loans from their lenders, and upon which Serta relied on for its exchange. In reaching its decision, the Fifth Circuit defined an open market purchase to mean one “that occurs on the specific market for the product that is being purchased”—e.g., a secondary market for syndicated loans—and not privately pursuant to a negotiated exchange.
Conversely, the New York Appellate Division in Mitel upheld the non pro rata exchange, finding that the underlying credit agreement expressly authorized the borrower to purchase loans from its lenders. The court rejected the non-participating lenders’ arguments that the exchange triggered the sacred rights provision concerning any change to loan terms that “directly adversely affected” lenders. The court found that the exchange did not waive, amend, or modify any loan term, and that the exchange’s effect on the non-participating lenders was indirect.
The Bankruptcy Court’s decision in Incora dealt with both sacred rights and buyback provisions. There, the court ruled that the uptier violated the existing indenture’s sacred rights provision because it released collateral without the required supermajority consent. In doing so, the court found the series of amendments that the debtors and the participating noteholders entered to obtain supermajority consent ineffective as they “had the effect of releasing all or substantially all of the collateral securing the debt.” As a result, the court held that the rights, liens, and interests that benefitted the noteholders under this indenture remained in full force and effect.
Additionally, the Incora court held that another indenture was breached when the issuer’s sponsor purchased notes from the participating noteholders in connection with the uptier. While that indenture permitted the issuer and its affiliates to purchase notes, it required any such purchase to be pro rata if the purchase was for less than all outstanding notes. The court therefore found that the sponsor’s purchase violated the pro rata treatment required under the indenture.
Considerations
In light of these rulings, lenders should consider:
Buyback/Loan Assignment Provisions. Uptiers – which often contain an exchange component – may be driven on the strength or weakness of the buyback/loan assignment provision. Incora and Serta show that buyback restrictions (in varying forms) may block non-pro rata exchanges; conversely, Mitel shows that an agreement with no restriction might be ripe for such an exchange.
Considering these rulings, borrowers and lenders may wish to expressly define “open market purchase” to align with the Fifth Circuit’s definition in Serta, and then negotiate whether to permit privately negotiated affiliated purchases (permitted in Mitel and Incora) specifying where pro rata treatment is required. Further, lenders may want to consider adding the definition of open market purchase and the buyback/loan assignment provisions to the enumerated list of sacred rights in credit agreements. It is worth noting that the Mitel transaction was not a broadly syndicated facility like Serta or Incora, meaning that there was less risk that the minority lenders would object to a debt exchange transaction.
Umbrella LMT Provisions. In addition to now commonplace blockers, debt agreements are starting to include umbrella LMT provisions that expressly prohibit “uptiers” undertaken to contractually or structurally subordinate existing debt and/or otherwise cap the amount to a de minimis amount.
Sacred Rights. Incora demonstrates the importance of drafting a broad sacred rights provision to capture creatively manufactured LMTs. For instance, the indenture in Incora (unlike some other indentures in the market) blocked amendments that “have the effect of releasing” collateral, not just those that released collateral. Thus, the first step in the Incora uptier—an indenture amendment to permit a new notes issuance to participating noteholders with supermajority consent—coupled with the amendments that then stripped the liens, triggered the sacred rights provision. Conversely, in Mitel, the non-participating lenders’ reliance on the sacred rights provision, which was limited to amendments that “directly” adversely affected loan terms, was unsuccessful.
Remedies. Due to the ineffectiveness of remedies against borrowers who frequently declare bankruptcy, the recent successful challenges to uptiers in Serta and Incora—and the potential use of these cases by non-participating lenders to threaten future lawsuits—may discourage lenders from engaging in the aggressive uptiers seen in the market the past few years.
Cooperation Agreements. In response to the LMTs witnessed in the last few years, lenders are shifting from organizing into groups to entering into formal cooperation agreements among themselves. Generally, cooperation agreements require lenders to negotiate with borrowers as a united front. To that end, these agreements restrict lenders from (1) selling their debt to parties outside of the lender group, (2) independently communicating or negotiating with the borrowers, and (3) otherwise taking actions inconsistent with the cooperation agreements. Further, if a lender supermajority supports a certain transaction with the borrower, these agreements would require all the lenders to support that deal. At a minimum, cooperation agreements are meant to lock up lenders and avoid defections to thwart borrowers from pitting the various lender factions against each other.
Understand the Market. Because LMTs are becoming more popular, even if loan documents contain protections for the lender group against a potential uptier transaction, it may still be challenging to entirely prevent the borrower from undertaking an LMT.
1 In re Serta Simmons, No. 23-201481 (5th Cir. Dec. 31, 2024); Ocean Trails CLO VII v. MLN Topco Ltd., No. 24-00169 (N.Y. App. Div. 1st Dep’t Dec. 31, 2024).
2 Hearing Transcript, Wesco Aircraft Holdings, Inc. v. SSD Inv. Ltd., (In re Wesco Aircraft Holdings, Inc.), Case No. 23-90611, Adv. No. 23-03091 (Bankr. S.D. Tex. July 10, 2024).
RealPage Antitrust Consent Decree Proposed
In August 2024, the Department of Justice (DOJ) and eight states filed a civil antitrust lawsuit against RealPage Inc., alleging that its software was used to unlawfully decrease competition among landlords and maximize profits. Last week, the DOJ, now joined by ten states, filed an amended complaint alleging that landlords Greystar Real Estate Partners LLC, Blackstone’s LivCor LLC, Camden Property Trust, Cushman & Wakefield Inc., Pinnacle Property Management Services LLC, Willow Bridge Property Company LLC, and Cortland Management participated in the price-fixing scheme. These companies operate over 1.3 million residential units across 43 states and the District of Columbia.
According to the amended complaint, these landlords shared sensitive information through RealPage’s pricing algorithm to decrease competition and increase corporate profits. Jennifer Bowcock, RealPage’s Senior Vice President of Communications, rebutted the allegations, arguing that issues with housing affordability stem from the limited supply of residential units and that the government should “stop scapegoating RealPage – and now [its] customers – for the housing affordability problems.”
The DOJ also announced a proposed consent decree with Cortland Management, where the claims against Cortland would be resolved in exchange for agreeing to cooperate with the DOJ’s ongoing investigation against the remaining defendants. Under the terms of the proposed agreement, Cortland would be barred from using a competitor’s sensitive data to train a pricing model, pricing units with the assistance of an algorithm without court supervision, and soliciting or disclosing sensitive information with other companies to set rental prices. A spokesman for Cortland indicated that it is pleased with the outcome and is looking forward to “improv[ing the] resident experience” in 2025. Under the Tunney Act, P.L. 93-528, the proposed consent decree will be published in the Federal Register for a 60-day comment period, after which the court can enter final judgment. The case is United States v. RealPage Inc., dkt. no, 1:24-cv-00710 (LCB) (M.D.N.C. filed Aug. 23, 2024).
The Third Circuit Pumps the Brakes on the NLRB’s New Remedies
As previously discussed, the Third Circuit recently considered the National Labor Board’s (“NLRB” or “Board”) statutory authority to order consequential damages in a case involving Starbucks. As a quick refresher, the current Board has envisioned consequential damages it purportedly has the right to issue against a party it finds to have violated employee rights, such as unlawful termination, as covering a wide swath of potential financial repercussions. This could, include, for instance, mortgage payments and credit card late fees. With interest these damages could potentially quickly balloon to tens of thousands of dollars, changing the settlement calculus.
While the Third Circuit otherwise enforced the Board’s order in the underlying unfair labor practice proceeding, the Court vacated the portion of the Board’s order under Thryv, Inc. requiring Starbucks to compensate the discriminatees for all “direct or foreseeable pecuniary harms incurred as a result of [their discharges.]” Starbucks Corp., 372 NLRB No. 50 slip op. at 1 n.3 (2023).
Starbucks argued in relevant part that the consequential damages remedy ordered by the Board were inconsistent with the National Labor Relations Act (“NLRA”) and “that reading the statute otherwise would violate the Constitution’s Seventh Amendment right to a jury trial[.]” NLRB v. Starbucks, Corp., Nos. 23-1953 and 23-2241 slip op. at 26 (3d Cir. 2024). In explaining its ruling, the Third Circuit noted that Section 10(c) of the NLRA authorizes the Board to “take such affirmative action[,] including reinstatement of employees with or without back pay, as will effectuate the policies of [the Act].” 29 U.S.C. § 160(c). The Court then went on to note that the Supreme Court has interpreted the Board’s remedial authority to mean that “Congress did not establish a general scheme authorizing the Board to award full compensatory damages for injuries caused by wrongful conduct.” UAW-CIO v. Russell, 356 U.S. 634, 642–43 (1958). Despite this limitation, the Third Circuit wrote that the Board in its Starbucks decision “purport[ed] to grant broad compensatory relief.” NLRB v. Starbucks, Corp., Nos. 23-1953 and 23-2241 slip op. at 31.
Ultimately, the Third Circuit reasoned that making Starbucks “compensate the employees for losses incurred as a result of” the unfair labor practices “resemble[d] an order to pay damages.” NLRB v. Starbucks, Corp., Nos. 23-1953 and 23-2241 slip op. at 31 (citing Damages, Black’s Law Dictionary (12th ed. 2024)). Because of this, the Third Circuit concluded that the Board’s order providing for consequential damages exceeds its authority under the NLRA. Id.
The Board has been issuing virtually identical orders to this order the Third Circuit refused to enforce in all cases involving discharges and similar adverse employment actions since it first issued its decision in Thryv, Inc. The Third Circuit’s decision gives employers faced with unfair labor practice allegations relating to employee discipline and other issues impacting employee wages a strong argument against such remedies.
Just Compensation Based on Hypothetical Negotiation
In a long-standing copyright dispute on its second visit to the US Court of Appeals for the Federal Circuit, the Court affirmed the modest damages award from the US Court of Federal Claims, ruling that a hypothetical negotiation between the parties would have resulted in a license in the amount awarded by the claims court. Bitmanagement Software GmBH v. United States, Case No. 23-1506 (Fed. Cir. Jan. 7, 2025) (Dyk, Stoll, Stark, JJ.)
In 2016 Bitmanagement sued the US Navy for copyright infringement of its software. The Court of Federal Claims awarded damages based on usage of the software, rather than the number of copies made. In the first appeal, the Federal Circuit agreed with the claims court that the Navy had an implied license to make copies of the software but was limited as to simultaneous users of the software, a condition that the Navy breached. The Federal Circuit remanded the case with the following instruction:
Because Bitmanagement’s action is against the government, it is entitled only to “reasonable and entire compensation as damages . . . , including the minimum statutory damages as set forth in section 504(c) of title 17, United States Code.” 28 U.S.C. § 1498(b).
The Federal Circuit further instructed the claims court that Bitmanagement was:
. . . not entitled to recover the cost of a seat license for each installation. If Bitmanagement chooses not to pursue statutory damages, the proper measure of damages shall be determined by the Navy’s actual usage of BS Contact Geo in excess of the limited usage contemplated by the parties’ implied license. That analysis should take the form of a hypothetical negotiation. . . . As the party who breached the . . . requirement in the implied license, the Navy bears the burden of proving its actual usage of the . . . software and the extent to which any of it fell within the bounds of any existing license.
Following this mandate, the claims court denied Bitmanagement’s damages demand of almost $86 million and awarded $154,000. Bitmanagement appealed, arguing that it was entitled to damages based on each copy of the software made, rather than damages based on use exceeding the implied license.
The Federal Circuit disagreed, explaining that the law does not require that every award of copyright damages be on a per-copy basis:
. . . whenever the copyright in any work protected under the copyright laws of the United States shall be infringed by the United States . . . the exclusive action which may be brought for such infringement shall be an action by the copyright owner against the United States in the Court of Federal Claims for the recovery of his reasonable and entire compensation as damages for such infringement . . .
As the Federal Circuit noted, the methods used to determine recovery of “actual damages” under § 504 are those “appropriate for measuring the copyright owner’s loss.” Therefore, in § 504(b) cases, the copyright owner must prove “the actual damages suffered by him or her as a result of the infringement.”
As the Federal Circuit further explained, the “reasonable and entire compensation” provided for by § 1498(b) “entitles copyright owners to compensatory damages . . . but not to non-compensatory damages.” The focus is on “the copyright owner’s loss,” as opposed to the value obtained by the government.
Since the statutory requirement is to establish actual damages that are the consequence of, and thus caused by, the infringement, the Federal Circuit concluded that Bitmanagement was not entitled to recover per-copy damages.
Citing to its 2012 decision in Gaylord v. United States, the Federal Circuit explained that where a plaintiff cannot show lost sales, lost opportunities to license, or diminution in the value of the copyright (as in this case), an award of actual damages should be “based on the fair market value of a license covering the defendant’s use. The value of this license should be calculated based on a hypothetical, arms-length negotiation between the parties.”
Pink Is Not the New Black: See Functionality Doctrine
The US Court of Appeals for the Federal Circuit affirmed a Trademark Trial & Appeal Board decision canceling trademarks for the color pink for ceramic hip components, stating that substantial evidence supported the Board’s findings that the color pink as used in the ceramic components was functional. CeramTec GmbH v. CoorsTek Bioceramics LLC, Case No. 23-1502 (Fed. Cir. Jan. 3, 2025) (Lourie, Taranto, Stark, JJ.)
Trademarks cannot be functional. The functionality doctrine prevents the registration of useful product features as trademarks. As explained by the Supreme Court (1995) in Qualitex v. Jacobson Prods.:
The functionality doctrine prevents trademark law, which seeks to promote competition by protecting a firm’s reputation, from instead inhibiting legitimate competition by allowing a producer to control a useful product feature. It is the province of patent law, not trademark law, to encourage invention by granting inventors a monopoly over new product designs or functions for a limited time, 35 U.S.C. §§ 154, 173, after which competitors are free to use the innovation. If a product’s functional features could be used as trademarks, however, a monopoly over such features could be obtained without regard to whether they qualify as patents and could be extended forever (because trademarks may be renewed in perpetuity).
CeramTec manufactures ceramic hip components made from zirconia-toughened alumina (ZTA) ceramic containing chromium oxide (chromia). The addition of chromia gives the ceramic a characteristic pink color. CeramTec obtained trademarks for the pink color as used in these components. CoorsTek Bioceramics, a competitor, challenged the trademarks, arguing that the pink color of the ceramic was functional. The Board agreed, finding that the pink color was functional because it resulted from the addition of chromia, which provided material benefits to the ceramic, such as increased hardness. CeramTec appealed.
The Federal Circuit applied the four-factor Morton-Norwich (CCPA 1982) test to determine functionality:
Existence of a utility patent
Advertising materials
Availability of functionally equivalent designs
Comparatively simple or cheap manufacture.
The Federal Circuit found the first and second Morton-Norwich prongs were strongly in CoorsTek’s favor, as CeramTec held multiple patents that disclosed the functional benefits of chromia, such as toughness, hardness, and stability of the ZTA ceramic. Similarly, the Court found that CeramTec had multiple advertising materials that promoted its product’s functional advantages.
The Federal Circuit found that there was no evidence of alternative designs that were functionally equivalent to the pink ZTA ceramic, rendering the third factor neutral. The Court also found the fourth factor neutral because there was conflicting evidence regarding whether chromia reduced manufacturing costs.
Finally, CeramTec argued that CoorsTek should be precluded from challenging the trademarks based on the doctrine of unclean hands. The Federal Circuit acknowledged that the Board spoke too strongly in suggesting that the unclean hands defense is categorically unavailable in functionality proceedings but found any error to be harmless. The Court confirmed that the Board had adequately considered the defense and found it inapplicable in this case.
Hannah Hurley also contributed to this article.
Lager Than Life: $56 Million Verdict in Beer Trademark Dispute Still on Tap
The US Court of Appeals for the Ninth Circuit upheld a $56 million trial verdict in a trademark dispute, finding that the evidence supported the jury’s conclusion that a beer company’s rebranding of one its beers infringed a competitor’s trademark. Stone Brewing Co., LLC v. Molson Coors Beverage Company USA LLC, Case No. 23-3142 (9th Cir. Dec. 30, 2024) (Graber, Friedland, Bumatay, JJ.) (nonprecedential).
Stone Brewing sued Molson Coors in 2018 alleging that Molson changed its packaging of Keystone Light to emphasize the word “stone” in its “Own the Stone” marketing campaign, and that this change infringed Stone Brewing’s trademarks and caused consumer confusion. Molson raised a variety of defenses, all of which were rejected. A jury found infringement and ultimately awarded Stone Brewing $56 million. Molson appealed.
Molson argued that the district court erred in finding that the four-year laches clock did not bar Stone Brewing’s Lanham Act claims. The Ninth Circuit found that the laches clock began running in 2017 when Molson launched the “Own the Stone” campaign, to which all of Stone Brewing’s claims related. The Court noted that prior to 2017, Molson never referred to Keystone as anything other than Keystone in its packaging, marketing, or advertising materials, and specifically never broke up the product name “Keystone” and used the term “Stones” to refer to the number of beers in a case (“30 stones”) or as a catch phrase (e.g., “Hold my Stones”). Thus, the Court found that Stone Brewing brought the suit within the four-year statute of limitations period.
Molson also argued that the district court erred in refusing to set aside the jury verdict on the ground that Molson had a superior interest in the STONE mark. Stone Brewing applied to register the STONE mark in 1996, and the Ninth Circuit found there was substantial evidence that Molson did not approve production of packaging that used “Stone” before that date.
Molson argued that the district court erred in refusing to set aside the jury verdict on likelihood of confusion. The Ninth Circuit disagreed, explaining that Stone Brewing provided evidence from which a jury could plausibly conclude there was “actual confusion” by distributors and customers who thought that Stone Brewing sold Keystone Light. The Court noted that Molson expressly de-emphasized “Keystone” and instead highlighted “Stone” in its 2017 product refresh. The Court also explained that both brands compete in the same beer space, use the same marketing and distribution channels, and are relatively inexpensive products, all of which allowed the jury to plausibly conclude that Molson’s 2017 product refresh of Keystone Light was likely to cause consumer confusion.
Molson also challenged the damages award. At trial, Stone Brewing sought damages in three categories:
$32.7 million for past lost profits
$141.4 million for future lost profits
$41.8 million for corrective advertising.
The jury returned a verdict of $56 million in general damages, which was about one quarter of the requested damages, but did not indicate what amount came from each category. Molson argued that Stone Brewing could not recover future lost profits because no court has awarded speculative future lost profits. The Ninth Circuit disagreed, citing its 2014 decision in Oracle v. SAP in which it upheld a damages calculation that considered a lost future “ongoing stream of revenue from [the infringed upon company’s] former customers.” The Court found that Stone Brewing provided expert testimony that estimated how long it would take Stone Brewing to recover its sales after corrective advertising, and that the jury could reasonably rely on the expert’s calculation to determine that Stone Brewing’s sales would not recover immediately.
Equity Is Neither a “Good” Nor a “Service” Under Lanham Act
The US Court of Appeals for the Ninth Circuit affirmed a district court’s decision that, in terms of trademark use in commerce, corporate equity is not a “good” or “service” under the Lanham Act. LegalForce RAPC Worldwide, PC v. LegalForce, Inc., Case No. 23-2855 (9th Cir. Dec. 27, 2024) (Thomas, Wardlaw, Collins, JJ.) (Collins, J., concurring).
LegalForce RAPC Worldwide is a California corporation that operates legal services websites and owns the US mark LEGALFORCE. LegalForce, Inc., is a Japanese corporation that provides legal software services and owns the Japanese mark LEGALFORCE.
Both parties had discussions with the same group of investors. After those meetings, LegalForce Japan secured $130 million in funding, while LegalForce USA received nothing. Thereafter, LegalForce USA brought several claims against LegalForce Japan, including a trademark infringement claim. To support its case, LegalForce USA cited LegalForce Japan’s expansion plan, a trademark application for the mark LF, website ownership, and the use of LEGALFORCE to sell and advertise equity shares to investors in California.
The district court dismissed claims related to the website for lack of personal jurisdiction and dismissed claims related to the US expansion plan, trademark application, and alleged software sales in the United States as unripe. The district court dismissed the trademark infringement claims related to the efforts to sell equity shares for failure to state a claim. The court found that advertising and selling equity cannot constitute trademark infringement because it is not connected to the sale of goods or services, and the case did not present justification for extraterritorial application of the Lanham Act. LegalForce USA appealed.
To state a claim for trademark infringement under the Lanham Act, plaintiffs must show that:
They have a protectible ownership interest in the mark, or for some claims, a registered mark
The defendant used the mark “in connection with” goods or services
That use is likely to cause confusion. 15 U.S.C. § 1114(1)(a), § 1125(a).
The Ninth Circuit agreed with the district court that LegalForce Japan had not used LegalForce USA’s mark “in connection with” goods or services, and thus LegalForce USA failed to state a claim for which relief could be granted.
The Ninth Circuit concluded that using LEGALFORCE to advertise and sell equity failed to satisfy the requirement that a defendant used the mark in connection with goods or services. Referring to the U.C.C., the Court explained that corporate equity is “not a good for purposes of the Lanham Act, because it is not a movable or tangible thing.” Equity is also not a service because it is not a performance of labor for the benefit of another. There is no “another” involved because those who buy LegalForce Japan equity are owners and so they are not legally separate “others.”
The Ninth Circuit also agreed with the district court that LegalForce Japan’s services in Japan did not satisfy the “in connection with” goods or services requirement under the Lanham Act. To determine when a statute applies extraterritorially, courts invoke the 2023 Supreme Court Abitron Austria two-step test:
“[W]hether Congress has affirmatively and unmistakably instructed that the provision at issue should apply to foreign conduct”
“[W]hether the suit seeks a (permissible) domestic or (impermissible) foreign application of the provision, based on the statute’s focus and whether the conduct relevant to that focus occurred in the [US] territory.”
For the first step, the Supreme Court has held that the Lanham Act does not provide a “clear, affirmative indication” that it applies extraterritorially. As for the second step, the conduct relevant to trademark infringement would be the defendant’s “use [of the mark] in commerce.” The Lanham Act’s “use in commerce” requirement is equivalent to the “in connection with goods and services” requirement. Explaining that the Lanham Act does not apply if the mark is only used in connection with goods and services outside the US, the Ninth Circuit determined that the Lanham Act was inapplicable here because all LegalForce Japan services are outside the US.
In a concurrence, Judge Collins agreed that a company’s own equity or stock shares do not count as goods or services offered to customers in the market under the Lanham Act. At oral argument, LegalForce USA confirmed that the only good or service underlying its Lanham Act claims was LegalForce Japan’s equity. Although the Lanham Act does not define “goods” or “services,” how a company is internally structured under corporate law is distinct from goods and services that the corporation offers in commerce to its customers. However, Judge Collins thought it unnecessary to reach any additional issues to resolve this case or to import specific definitions of goods. Because securities may qualify as movable or tangible, he explained in a footnote that he did not agree with the majority’s limitation as to goods that are “movable” or “tangible” or its explanation as to why securities fail this test.
Climate Reporting in 2025: Looking Ahead
In this alert, we reflect on recent climate reporting updates and analyze expectations for 2025 that are relevant for international businesses.
The global landscape is becoming increasingly uncertain in relation to climate reporting following litigation and a change of management at the SEC in the U.S., an expected rise of Blue State climate reporting requirements, combined with the UK and other jurisdictions’ adoption of the global standard setter ISSB’s climate reporting standards and the EU’s implementation of the Corporate Sustainability Reporting Directive (“CSRD”), amongst other initiatives. A worldwide rollout of climate change disclosure requirements has always been uneven, but these uncertainties create the potential for even greater fragmentation.
Businesses should carry out regular horizon scanning to keep abreast with the range of legislation and regulation that could impact them.
California Climate Disclosure Law 2024 Year End Developments
As we noted in detail in our prior Client Alerts, California Climate Disclosure Laws – New Developments, Old Timelines and California – First State to Enact Climate Reporting Legislation, the California climate disclosure laws (SB 253 and SB 261) were passed in October 2023 and amended by SB 219 in September 2024. SB 253 requires covered entities to disclose their Scope 1 and Scope 2 greenhouse gas (GHG) emissions by an unspecified date in 2026 for the prior fiscal year and by an unspecified date in 2027 for Scope 3 emissions, and SB 261 requires covered entities to report on their climate-related financial risks on or before January 1, 2026. California Air Resources Board (CARB) is required to promulgate regulations by July 1, 2025, to implement SB 253 (but is not required to promulgate implementing regulations for SB 261).
On December 5, 2024, CARB issued an enforcement notice to advise entities required to comply with SB 253 that CARB will exercise its enforcement discretion for the first reporting cycle in 2026 if the reporting entity demonstrates good faith efforts to comply with the requirements of SB 253. More specifically, a covered entity may disclose its Scope 1 and Scope 2 GHG emissions based on information the entity already possesses or is already collecting and CARB will not take enforcement action against any entity that makes incomplete Scope 1 and Scope 2 GHG emissions disclosures in 2026 if the entity makes a good faith effort to retain all data relevant to its GHG emissions reporting for its prior fiscal year.
To better inform CARB’s implementation of SB 253 and SB 261, on December 16, 2024, CARB issued a solicitation to gather responses from stakeholders to 13 questions. CARB’s questions cover applicability, including what should constitute “doing business in California,” how to minimize duplication of reporting efforts for entities required to report under other programs, whether to standardize certain aspects of Scope 1, 2 and 3 reporting under SB 253 and what is an appropriate timeframe within a reporting year for biennial reporting under SB 261, among others. CARB also expressly opened the solicitation to any additional feedback that should be considered by CARB in its implementation of SB 253 and SB 261. The comment period is open until February 14, 2025 and comments can be submitted to CARB here.
SEC Developments
It is no secret that the incoming Republican Administration has been skeptical of the federal government’s climate change measures, which brings further uncertainty to the SEC’s new climate change rules. To be sure, there was already uncertainty surrounding litigation in the U.S. Court of Appeals for the 8th Circuit over the rules’ validity.
The new SEC rules for many companies were scheduled to take effect for their 2025 fiscal years, resulting in disclosure in annual reports on Forms 10-K and 20-F filed in 2026. The SEC has voluntarily stayed the effectiveness of its new rules in light of the litigation. Since certain U.S. filers will be subject to the rules based on their operations this year if the stay is lifted, the SEC will undoubtedly announce a delay in the rules’ effective dates of at least one year even if the SEC is successful in the 8th Circuit.
The new Administration will have a few options. For example:
it can await the outcome of the litigation before deciding what, if anything, to do with the rules;
it could decide to leave the rules intact in light of domestic and international pressure. As the SEC clarified in adopting the rules that disclosure is triggered only by “material climate risks,” many U.S. public companies may not have to provide disclosure under the new rules;
it could modify the rules to eliminate more controversial elements but otherwise leave the rules intact; or
the new Administration could decide to vacate the rules.
The President-Elect had been critical of climate change measures in his campaign, but not all members of his team are necessarily against all climate change measures, there is international pressure to have some level of disclosure, and therefore it is challenging to make any general, sweeping prediction. We will potentially see some additional color on the President-Elect’s plans when the nominee for SEC Chairman testifies at Senate confirmation hearings.
We recommend that companies continue to prepare for the new requirements, perhaps at a slower pace. Even if the courts invalidate the SEC’s rules, or the SEC vacates them, certain states in addition to California are likely to ramp up their own requirements in order to fill the gap, and institutional investors may strengthen their proxy voting guidelines on the subject. Companies with operations in the EU may be subject to those disclosure requirements, which overlap significantly with the SEC’s requirements.
EU Unrest on Corporate Sustainability Reporting
The first reports under the CSRD will be published in 2025. There is a phased scoping of CSRD and the first reports, predominantly by EU companies that had been subject to the Non-Financial Reporting Directive, will be read with great interest to review how they have approached the CSRD’s complex double materiality assessment and the number of sustainability topics reported on, which businesses in scope of later phases of CSRD may be able to leverage before making their own reports. Challenges remain with CSRD reporting as further guidance and expectations are published on a piecemeal basis, and national transposing law of CSRD remains incomplete in a number of EU jurisdictions.
Businesses with international headquarters that may be subject to the 2028 year CSRD reporting (to be reported on in 2029) should be aware that there is a consultation expected imminently in 2025 on the global standards for such reporting. The signals sent so far suggest the potential availability of an opt-out mechanism for global businesses, enabling them to focus disclosures on the EU footprint of products and services, rather than on global operations. For further information, please see here: A Step Closer to CSRD’s Non-EU Group Reporting Standards.
There is also political turmoil in the EU that could impact climate reporting requirements in the EU; for example, the German Chancellor, Olaf Scholz, has called for a two-year delay to CSRD (despite the timeline having already been triggered). Furthermore, there have been calls for a simplification of corporate sustainability obligations for EU businesses, with the EU currently considering simplifying various existing sustainability-related regulations into a “single omnibus regulation” (“Omnibus Regulation”). This is being led by the European Commission President, Ursula von der Leyen, after criticism that the sustainability legislation is impacting the EU’s competitiveness. Proposals on the Omnibus Regulation, alongside other streamlining proposals for businesses, are expected to be proposed by the European Commission by mid-2025.
Businesses are recommended to keep careful track of CSRD developments and how it may shape their own approach to reporting or trigger the need to re-visit key areas.
UK – and Global – Momentum Towards ISSB
The UK government has been openly supportive of the International Sustainability Standards Board (“ISSB”) International Financial Reporting Standards (“IFRS”). On 18 December 2025, the UK’s Sustainability Disclosure Technical Advisory Committee published final recommendations to the UK government to endorse the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures for used in the UK, with some minor amendments.
A consultation is expected in Q1 2025, with any eventual roll out of the ISSB standards likely to mirror the phased implementation of TCFD, with UK-listed companies being subject to the requirements first.
There is broader global momentum towards ISSB adoption – including in Canada, Hong Kong and Japan. With the fragmented political landscape on ESG and competing sustainability regulatory requirements, it is likely that 2025 sees the continued rise of ISSB and it increasingly establishing itself as a common global standard following it subsuming responsibility for TCFD in 2023.
FTC WENT TOO FAR: Seventh Circuit Court of Appeals Upholds Findings Against Lead Generators– But Finds FTC Went Too Far in Pursuing Dead Guy’s Estate
So a while back I wrote a blog about the extremely dire consequences of violating the TCPA and TSR.
As I reported, not only were a bunch of companies hit for millions in penalties but the individual company owners were also hit with the judgment. And when one of the owners died the FTC went after his estate and sued his daughter– which is just cold blooded AF:
DEATH IS NO ESCAPE: FTC Pursues Lead Generation Company Beyond The Grave as TSR Enforcement Push Smashes All Boundaries
Yeah…
So defendants all appealed. And for the most part they all lost. But the dead guy’s estate walked away clean so there is a lesson here– violate the TCPA/TSR and the only way out… suicide.
Here was the ruling by the Seventh Circuit Court of Appeals in FTC v. Day Pacer, 2025 WL 25217 (7th Cir. 2025):
We agree the defendants are liable and affirm the court on that front. For the companies, there is no genuine dispute of material fact that their practices are prohibited by the regulations, nor that they should have known their actions were deceptive. As for the individuals, all either knew or should have known of the companies’ illegal acts, and all had authority to prevent them.
Ouch. But the court goes on…
But we reverse and remand the decision to substitute an individual defendant’s estate upon his death and the damages award. The Commission’s suit here was a penal action, which never survives a party’s death.
Interesting, no?
Here is how the Court described the conduct of the “bad guys”:
Day Pacer LLC, and its predecessor EduTrek L.L.C., were companies that generated sales leads. Both purchased consumers’ contact information from websites, usually job-search platforms, where the consumers had entered their information. The companies would then personally call those consumers or contract with other organizations—termed “IBT Partners”—to call them, gauging the consumers’ interest in educational opportunities. If consumers expressed interest, the companies would sell their contact information to for-profit educational institutions.
Sound familiar? This is VERY common behavior for lead generators.
So what’s the issue?
Per the lower court: The court responded that consent given to vendors from whom the companies purchased the information was not sufficient; consumers must consent to each separate caller. Additionally, consumer consent after the call was placed was too late, as callers must have written consent before placing the call.
Hmmm. And what?
Well stay with me.
On appeal the Seventh Circuit found the lead generators were liable for penalties because they could not produce the actual underlying record of consent. They were able to provide urls to the FTC– but those URLs did not actually load webpages as many of them had bee taken down. The failure to provide actual records of consumer consent resulted in the judgment standing.
So it wasn’t that the lead forms were bad– its that the callers could not produce the forms when they needed them!!!
The appellate court also found that all three of the majority owners of the calling defendants had the ability to control their activities and were, therefore, PERSONALLY liable for the amount awarded.
Couple of pieces of good news for the defendants though:
Although the lower court had awarded over $28MM in penalties the appellate court found this amount was arrived at in error because the defendant’s ability to pay was not considered– that might mean a big reduction in the judgment on remand;
The Court found the FTC penalties were penal in nature and did NOT survive death. That means when one of the guys who owned the lead generation company died the FTC could not pursue his estate. So the court erred in letting the FTC pursue the dead guy’s daughter as administrator.
Obviously a massive ruling here.
Notice– these guys were not true scumbags. They thought they were calling with consent and there was no finding of any sort of fraud. Their “crime” was not being able to produce consent records– and now they are all out of business and being chased for millions of dollars.
If you are a lead generator or call center you MUST MUST MUST take possession of consent records. Do NOT just get a data push from somebody and think you’re safe! And the new one-to-one rule has massive implications here– don’t get killed!
We will keep an eye on this case on remand and report ASAP when something else breaks.
Bit Swap: Motivation to Modify Prior Art Needn’t Be Inventor’s Motivation
Addressing the issue of obviousness, the US Court of Appeals for the Federal Circuit reversed a Patent Trial & Appeal Board decision, finding that the challenged patent claims were obvious because a person of ordinary skill in the art (POSITA) would have been motivated to switch two specific information bits in a 20-bit codeword to improve performance. Honeywell Int’l Inc. v. 3G Licensing, S.A., Case Nos. 23-1354; -1384; -1407 (Fed. Cir. Jan. 2, 2025) (Dyk, Chen, JJ.) (Stoll, J., dissenting).
3G Licensing owns a patent concerning a coding method for transmitting a channel quality indicator (CQI) in mobile communication systems. The CQI, a five-bit binary integer (0 to 30) is sent from user equipment, such as a cell phone, to a base station to indicate cellular connection quality. Base stations adjust data rates using adaptive modulation and coding, assigning higher rates to strong signals and lower rates to weaker ones. CQI accuracy is critical for maximizing data transmission efficiency and ensuring recovery of the original message despite transmission errors.
The challenged claims of the 3G patent relate to a CQI code designed to maximize protection of the most significant bit (MSB) to reduce the impact of transmission errors. The prior art disclosed a method and a basis sequence table that provided additional protection to the MSB, minimizing root-mean-square error. However, the claimed invention differed in that it required swapping the last two bits of the basis sequence table. The Board found that a skilled artisan would not have been motivated to make this modification to enhance MSB protection, nor would a skilled artisan have deemed it desirable. Honeywell appealed.
The Federal Circuit reversed, finding the claims obvious for four primary reasons. First, the Court determined that the Board incorrectly concluded that a POSITA would not have been motivated to swap the last two bits to improve MSB protection. The Court emphasized that the motivation to modify prior art does not need to align with the inventor’s motivation. As a result, the Board’s reasoning that minimizing root-mean-square error was not the patent’s primary purpose should not have been a primary consideration.
Second, the Federal Circuit found that prior art explicitly taught the importance of protecting the MSB through redundancy. A skilled artisan would have understood that swapping the two bits, as claimed, would add redundancy and enhance protection. Honeywell’s expert testimony further supported the conclusion that the prior art would have provided the requisite motivation to arrive at the claimed invention, and 3G’s expert did not dispute that the swap increased MSB protection.
Third, the Federal Circuit concluded that the Board improperly conflated obviousness with anticipation by requiring that the prior art disclose swapping the two bits. Anticipation requires the prior art to specifically disclose the claimed modification, but obviousness does not. The Court found that the Board erroneously treated the two standards as interchangeable.
Finally, the Federal Circuit found that the Board wrongly required that the claimed basis sequence table represent the preferred or most optimal combination. As the Court explained, obviousness does not depend on whether a claimed invention is the best possible solution, but instead on whether the prior art as a whole suggests its desirability.
Judge Stoll dissented in part, agreeing that the Board conflated obviousness with anticipation but arguing that this error only warranted vacating and remanding the Board’s decision for further analysis. She criticized the majority for engaging in fact finding and deciding arguments not raised by the parties.
Practice Note: The Federal Circuit’s decision underscores the importance of correctly evaluating and applying the relevant obviousness considerations.
Supreme Court Unanimously Clarifies Burden of Proof for FLSA Exemptions
On January 15, 2025, the Supreme Court of the United States issued a unanimous decision in E.M.D. Sales, Inc. v. Carrera, finally clarifying the standard of proof for employers to demonstrate an employee is properly exempt from minimum-wage and overtime-compensation requirements under the Fair Labor Standards Act of 1938 (“FLSA”). Long story short, the Supreme Court has made it crystal clear that FLSA exemptions are subject to the default “preponderance of the evidence” standard, akin to other employment law claims under Title VII. The Court explained that this decision was made, in large part, because: (1) the FLSA does not specify an evidentiary standard (which generally indicates a default preponderance standard); and (2) it does not involve the limited types of claims (e.g., constitutional claims or citizenship removal proceedings) in which the heightened “clear and convincing evidence” standard is warranted.
Until the Carrera decision, the Fourth Circuit stood alone as the sole circuit embracing the “clear and convincing” standard of proof for FLSA exemptions. The Carrera decision rectified this discrepancy, making every circuit uniform in this respect. Ultimately, this decision is a win for employers in the Fourth Circuit, because it lowers their evidentiary burden to successfully argue their workers fall within an FLSA exemption. Employers elsewhere should continue doing business as usual.
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