Out With a Bang: Treasury Restricts Corporate Transparency Act to Foreign Reporting Companies
On March 2, 2025, the Treasury Department announced suspension of the March 21, 2025 deadline for filing under the Corporate Transparency Act (CTA) for any domestic companies or U.S. citizens.
Treasury said that it is preparing a proposed rulemaking to narrow the scope of the rule to foreign reporting companies only. “Foreign reporting companies,” under the present formulation, are entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the U.S. by filing a document with a secretary of state or any similar office.
While the rule may be subject to legal challenge, as the narrowing proposed by the Treasury Department is inconsistent with the text of the CTA itself, it is not clear who, if anyone, would challenge the new proposed rules. Congress is also contemplating changes to the law.
The determination from Treasury follows the February 17, 2025 decision out of the Eastern District of Texas in Smith v. United States Department of the Treasury, which lifted the last remaining nationwide preliminary injunction on enforcement of the filing deadline, following the Supreme Court’s stay of the injunction in Texas Top Cop Shop, Inc., et al. v. Merrick Garland, et al., earlier this year.
Passed in the first Trump Administration but implemented during the Biden presidency, the CTA — an anti-money laundering law designed to combat terrorist financing, seize proceeds of drug trafficking, and root out illicit assets of sanctioned parties and foreign criminals in the U.S. — faced legal challenges around the country, many of which are still pending before appellate courts.
Treasury has not announced what will happen to the information provided by entities that have already filed under the CTA. However, domestic companies and U.S. citizens are no longer under any obligation to keep that information up to date given the suspension of enforcement.
LINCARE GOES DOWN!: Home Respiratory Care Company Crushed With TCPA Class Action Certification Ruling After Making Calls to Customers of Predecessor Company
Here’s another big one folks.
One company buys another company and then sends marketing messages to the form company’s customers.
Seems ok, right?
Nope and Lincare just found that out the hard way.
In Morris v. Lincare, Inc. 2025 WL 605616 (M.D. Fl. Feb. 25, 2025) a court certified a TCPA class action involving Lincare’s prerecorded messages to consumers who had consented to receive contact from a predecessor company.
In Morris the class members had all signed express written consent agreements with American HomePatient, Inc. However, Lincare apparently purchased the company and absorbed it various assets–including its contact list.
Lincare began sending prerecorded messages to the Plaintiff after the transition took place and Plaintiff sued arguing it had consented to calls from API, but not from Lincare.
While the Court in Morris did not answer the ultimate substantive question of whether or not the consent was valid it did certify the case as a class action finding that the issue of consent–amongst others–was common across the entire class. As such the court certified the case as a class action.
The result is that Lincare must now face suit over calls made to over 1,800 people and faces millions in potential damages– for doing nothing more than calling people that had consented to receive calls from a company it purchased.
This is an important case for folks considering as part of due diligence for an asset purchase or company acquisition. Troutman Amin, LLP commonly gets brought in a part of diligence reviews for mergers and acquisitions where TCPA issues are apparent. But many M&A teams completely miss TCPA risk– as Morris really highlights the need to pay attention to these issues and to understand the limits on using consent forms naming different entities.
Tired of #biglaw firms billing you like crazy and then trying to get you to settle TCPA class actions for millions?
FDIC Withdraws Support for Colorado’s Opt-Out Law Before Tenth Circuit
On February 26, the FDIC withdrew its amicus brief in the 10th Circuit Court of Appeals challenging Colorado’s 2023 opt-out law which aimed to restricting higher-cost online lending. The FDIC’s decision follows a shift in the agency’s leadership and marks a departure from the previous administration’s position supporting Colorado’s interpretation of the Depository Institutions Deregulation and Monetary Control Act (DIDMCA).
Colorado’s opt-out law invokes a provision of DIDMCA that allows states to exclude themselves from the federal interest rate exportation framework, which enables banks to lend nationally at rates permitted by their home states. The law seeks to apply Colorado’s interest rate caps—some as low as 15%—to all loans made to Colorado residents, including those issued by out-of-state banks in partnership with fintech firms.
A coalition of industry groups challenged the law, arguing that Colorado is overstepping its authority by attempting to regulate lending that occurs outside the state. In June 2024, a federal district court sided with the industry groups, ruling that a loan is made where the lender performs its loan-making functions rather than where the borrower is located. The court issued a preliminary injunction preventing Colorado from enforcing the law against out-of-state lenders.
The FDIC initially supported Colorado’s position, arguing in its amicus brief that, for purposes of DIDMCA’s opt-out provision, a loan can be considered “made” where the borrower is located. However, citing a recent change in administration, the agency withdrew its brief before the Tenth Circuit could hear oral arguments in Colorado’s appeal.
Putting It Into Practice: The withdrawal follows the FDIC’s transition to Republican-led leadership under Acting Chairman Travis Hill, who has signaled a more favorable stance toward bank-fintech partnerships (previously discussed here). With oral arguments set for March 18, a ruling upholding Colorado’s law could inspire similar state restrictions, while a decision favoring industry plaintiffs would reaffirm federal rate exportation rules under the DIDMCA.
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CFPB Drops Lawsuit Against Online Lender Following Litigation Freeze
On February 23, the CFPB filed a joint stipulation in the United District Court for the Central District of California to dismiss its lawsuit against an online lending platform. The lawsuit, originally filed in May 2024, alleged that the platform misled borrowers about the total cost of its loans in violation of the Fair Credit Reporting Act (FCRA) and the Consumer Financial Protection Act (CFPA).
The dismissal follows a broader litigation freeze ordered by CFPB Acting Director Russ Vought (previously discussed here). The CFPB had previously sought a stay in the case against the online lending platform, but the U.S. district court judge denied the request, stating that there was “no good cause shown”.
The original lawsuit raised allegations concerning the platform’s lending practices, including:
Deceptive advertising of loan terms. The platform advertised its loans of having no interest or 0% APR while almost all loans required borrowers to pay lender tip fees or platform donation fees, significantly increasing the cost of borrowing.
Misleading loan disclosures. Borrowers were provided promissory notes and Truth in Lending disclosures that incorrectly stated loan costs, failing to include lender tip fees and platform donation fees.
Obscuring fee opt-outs. The platform allegedly designed its loan request process to obscure the “no donation” option, requiring borrowers to select a pre-set donation amount, interfering with their ability to understand loan terms.
Unlawful collection practices. The CFPB alleged that the platform attempted to collect payments on loans that were void or uncollectible under certain state usury or lender-licensing laws, misrepresenting borrowers’ repayment obligations and threatening negative credit reporting despite not actually reporting to credit bureaus.
Putting It Into Practice: Although the CFPB has dismissed the lawsuit, the issues raised in the case remain relevant for fintechs relying on nontraditional fee models (previously discussed here). While the lawsuit did not result in a legal determination, the CFPB’s approach underscores the risk for other companies operating under similar business models, particularly earned-wage access providers that rely on voluntary tips as state regulators have been active in this space (see prior discussions here and here). Fintechs should closely monitor enforcements like this matter and how the new administration approaches these issues.
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Federal Court Pauses Open Banking Rule Litigation
On February 25, a federal judge in the United District Court for the Eastern District of Kentucky approved a joint motion between the CFPB and banking trade groups to pause litigation over the agency’s 1033 open banking rule. The lawsuit challenges the CFPB’s rule requiring banks to allow consumers to share deposit and credit card account information with third-party fintech providers.
The banking trade groups argue that the CFPB’s regulation surpasses its authority under Section 1033 of the Dodd-Frank Act, contending that the rule places an excessive regulatory burden on banks while disproportionately benefiting fintech companies. The lawsuit was filed in October 2024, the same day the CFPB finalized the rule.
The rule (previously discussed here) establishes a framework requiring financial institutions to allow consumers to securely share account data with external fintech services. Under the rule, data providers must make the following covered data available: (i) transaction details; (ii) account balances; (iii) information for initiating payments to or from a Regulation E account; (iv) available terms and conditions; (v) upcoming bill details; and (vi) basic account verification information, such as name, address, email, phone number, and, if applicable, account identifier.
The rule requires data providers to authenticate consumers before sharing requested information and honor data requests from third parties as authorized by the consumer. They must also offer a way for consumers to revoke third-party data access and keep records of any denied data requests. Data providers need written policies to ensure compliance and must retain records for three years.
Putting It Into Practice: The agreed upon litigation pause delays the lawsuit challenging the rule (previously discussed here), but does not alter the compliance deadlines, the first of which remains set to begin on April 1, 2026. The pause allows time for the CFPB, under Acting Director Russel Vought, to assess the open banking rule and determine whether it aligns with the new administration’s policy objectives. The rule had bipartisan support so it will be interesting to see what happens. We will keep monitoring this space for developments.
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Class Action Certified Against Fintech Lender for Home Improvement Loans
In an order issued in January and made public on February 24, a judge in the United States District Court for the Northern District of California granted class certification to consumers alleging a fintech lender’s loan transaction fees were imposed unlawfully, while also granting summary judgment to the lender on claims regarding performance fees due to insufficient evidence.
The lender partnered with contractors and banks to provide point-of-sale loans to consumers for home-improvement and home-maintenance projects. The contractors used a technology platform developed by the fintech lender to offer financing offers to the consumer. The complaint alleges, among other claims, that the company violates California’s Credit Services Act, including by collecting transaction and performance fees, failing to provide specific disclosures, and failing to register with the California Department of Justice. It also alleges the company violates California’s Unfair Competition Law by violating the Credit Act and by violating the California Financing Law by not being licensed.
The court certified a class of California borrowers who took out consumer program loans of $500 or more from January 9, 2016 onward, where the loan was subject to a transaction fee of at least 1% of the principal amount. The court determined that the case met the necessary legal standards for class action status, including sufficient class size and commonality of claims.
The court also rejected the lender’s request for summary judgement on plaintiffs’ transaction fee claims, affirming that the fees may have been indirectly passed to consumers through higher project costs. The court determined that plaintiffs had provided sufficient evidence supporting these claims, allowing the case to proceed.
Conversely, the court granted summary judgment in favor of the lender on claims related to performance fees, determining that plaintiffs had failed to establish a direct financial impact on borrowers. While plaintiffs suggested that these fees contributed to increased interest rates, the court found no clear evidence supporting this assertion.
Putting It Into Practice: The case highlights the ongoing scrutiny of fintech lending models, particularly with respect to fee disclosures and cost pass-through mechanisms. Lenders should continue to monitor developments in this space; while federal enforcement agencies may step back, we expect the plaintiffs’ bar to continue to be active.
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The Privity Defense in Illinois Today
“There is no privity of contract between these parties, and if the plaintiff can sue, every passenger, or even any person passing along the road, who was injured by the upsetting coach, might bring a similar action. Unless we confine the operation of such contracts as this to the parties who entered into them, the most absurd and outrageous consequences, to which I can see no limit, would ensue. Lord Abinger, Winterbottom v. Wright, 152 ER 402, Meeson & Welsby 109; pages 109 – 116 (1842); see also, Tweddle v. Atkinson, EWCH J57 (QB) (1861).
“Privity is an elusive concept.” Manley v. Hain Celestial Grp., Inc., 417 F. Supp. 3d 1114, 1122 (N.D. Ill. 2019).
Those of us “of a certain age” might remember studying the above-mentioned old English case, probably in your contracts class. It may also be the first time that you were exposed to the term “privity,” not a word used in everyday parlance. Privity is, basically, a central aspect of the commercial relationship between buyer and seller. Simply stated, it is “that connection. . . which exists between two or more contracting parties.”1 Both under the Uniform Commercial Code, and at common law, privity has been, and remains, an essential element in many of an aggrieved buyer’s claims against a seller for non-performance of the goods bought and sold.2
Practitioners of tort law might also recall that in 1965 the Illinois Supreme Court abolished the defense of privity of contract in tort actions involving personal injury, as part of the still-developing body of product liability law in Illinois. Suvada v. White Motor Co.,3 making “explicit that which was implicit” in such earlier cases as Lindroth v. Walgreen Co.4 and Gray v. American Radiator and Standard Sanitary Corp.5
The next major milestone in the evolution of Illinois product liability law may be said to have come in the case of Moorman Mfg. Co. v. National Tank Co.6, in which the Illinois Supreme Court held that economic loss – defined as “damages for inadequate value, cost of repair and replacement of the defective product, or consequent loss of profits . . . without any claim of personal injury or damage to other property . . .”7 – was not recoverable under tort theories. The court thereby resolved the Santor/Seeley debate for Illinois8, and answered a question left unresolved by Suvada, i.e. “whether a consumer could recover under a strict liability in tort theory for solely economic loss.”9
Having been relegated to a contract theory for disappointed commercial expectations, the aggrieved consumer faces another hurdle on the road to recovery – privity – a concept whose very existence was challenged before the Illinois Supreme Court in the case of Szajna v. General Motors Corp.10
The Szajna and Rothe Cases.
Mr. Szajna purchased a 1976 Pontiac Ventura but subsequently discovered that the car contained a Chevette transmission, which was allegedly inferior to the Pontiac transmission Szajna thought he had purchased. He brought a class action lawsuit against General Motors on his own behalf and on behalf of all others who had purchased a 1976 Pontiac Ventura. The class action alleged breach of both express and implied warranties along with other counts. Damages were based solely on economic loss, with plaintiff claiming that the Chevette transmissions required more repairs, had shorter service lives and lessened the value of the cars in question. Also, additional damages were claimed for the cost of replacing the transmission.
Among its other rulings, the trial court dismissed the plaintiff’s implied warranty of merchantability claim, and the Appellate Court affirmed,11 finding no privity between Szajna and General Motors which, the court held, was fatal to the plaintiff’s UCC-based implied warranty claim.
At the Illinois Supreme Court, Szajna urged the court “to abolish the privity requirement in suits for breach of implied warranty when a plaintiff seeks to recover for economic loss.”12
The court reviewed the various commentators and case law regarding recovery for purely economic loss, which the court recognized “most certainly is not uniform in all jurisdictions.”13
Citing its decision in Moorman four years earlier, the court said, “we held that recovery for economic loss must be had within the framework of contract law.”14
Noting that the distinction between the two standards of recovery (tort and contract) is not arbitrary but rests upon an understanding of the nature of the responsibility a manufacturer must undertake in distributing his product, the court said the consumer should not be charged with bearing the risk of physical injury when he buys a product on the market, but he can, however, fairly be charged with the risk of disappointed commercial expectations in the quality or performance of a product.15
The court expressed its belief that “it is preferable to relegate the consumer to the comprehensive scheme of remedies fashioned by the UCC, rather than requiring the consuming public to pay more for their products so that the manufacturer can insure against the possibility that some of his products will not meet the business need of some of his customers.”16
The same rationale, the court concluded, supports the prohibition of recovery for economic loss by non-privity plaintiffs. The court therefore declined to abolish the privity requirement in implied warranty economic loss cases, and affirmed the judgment in favor of the defendant on the plaintiff’s UCC warranty claim.17
As to plaintiff’s implied warranty claim based upon the Magnuson – Moss Act,18 however, the Supreme Court resurrected this claim, reversing the dismissal of this count and remanding it to the trial court.19
The privity rules in Szajna were endorsed two years later in Rothe v. Maloney Cadillac, Inc.,20 when the Illinois Supreme Court again ruled that “with respect to purely economic loss, the UCC article ll implied warranties give a buyer of goods a potential cause of action only against his immediate seller”, and not against a remote manufacturer.21
As in Szajna, however, the plaintiff’s implied warranty claim based upon the Magnuson – Moss Act was allowed to stand, despite the absence of privity between the plaintiff and the remote manufacturer, ruling that the effect of the Act imposes against the remote manufacturer the same warranty obligations as would be imposed against the immediate seller.22
Post-Szajna/Rothe Rulings.
The last time the Illinois Supreme Court weighed in on the issue of implied warranties arising under the UCC and the Magnuson-Moss Act was in the case of Mydlach v. DaimlerChrysler Corp.,23 a 2007 decision that dealt primarily with questions of which statute of limitations applied to plaintiffs’ claims, when was it triggered, and whether the remedy of revocation was available against the remote manufacturer of the motor home plaintiffs had purchased from an independent RV dealer.
Refusing to extend the remedy recognized by the court in the Szajna decision to the facts of the case, the court said that the limited implied warranty created by the Magnuson-Moss Act does not provide a basis for relief against a remote manufacturer by a purchaser of a used motor vehicle.
The most recent appellate-level case to discuss the issue of privity in the context of an implied warranty of merchantability under the UCC is Zaffiri v. Pontiac RV, Inc.,24 a 2012 decision from the Fourth District Appellate Court of Illinois.
In Zaffiri, the plaintiffs purchased a motor home from the defendant that experienced problems with the exterior and interior walls. After multiple attempts to obtain repairs the plaintiffs sued multiple defendants under a number of theories, one of which was a UCC-based claim for breach of the implied warranty of merchantability. As to one of the defendants with whom the plaintiffs had not directly dealt, the court recognized their privity defense, stating that under the UCC, “a plaintiff must be in vertical privity of contract with the seller in order to file a claim for economic damages for breach of implied warranty of merchantability . . . Thus, pursuant to the UCC, a buyer of good seeking purely economic damages for a breach of implied warranty has ‘a potential cause of action only against his immediate seller.’”25
Plaintiffs invited the court to abandon the concept of privity, arguing that “most states hold that the existence of privity in order to enforce an implied warranty is not necessary”,26 but the court declined, holding that “[a]lthough the vertical privity requirement has been challenged on a number of occasions, our supreme court has consistently declined to abolish the doctrine in cases where, as here, purely economic damages are sought.”27
As will be seen in the following section, the vast majority of federal courts, including the Seventh Circuit, have disagreed with the Illinois Supreme Court and have rejected its rulings in Szajna and Rothe concerning the viability of implied warranty claims brought under the Magnuson- Moss Act.
The Privity Rule in the Illinois Federal Courts.
As can be seen from the number of cases cited below, the federal courts sitting in Illinois, particularly the Northern District, have been very active on the topic of privity, perhaps because of the federal nature of Magnuson-Moss claims. Ironically, however, those claims have fared much better in the Illinois state courts than in their federal counterparts.
The United States District Court for the Northern District of Illinois has taken a very different approach from the Illinois Supreme Court regarding the viability of a claim for breach of an implied warranty arising under the Magnuson – Moss Act while agreeing with the state court as to the dismissal of UCC – based implied warranty claims.
In Larry J. Soldinger Assocs. V. Aston Martin Lagonda of N. Am., Inc. (“Soldinger”)28 the plaintiff purchased a very expensive automobile which was beset with a myriad of mechanical problems. Plaintiff sued the American distributor of the British manufacturer, with whom he was not in privity. Plaintiff’s suit included implied warranty claims under both the UCC and the Magnuson-Moss Act. The court readily disposed of the UCC-based implied warranty claim, citing Szajna and Rothe, supra.29
In support of his Magnuson-Moss implied warranty action, the plaintiff cited the same two above-referenced cases, which he claimed constituted controlling law, and which he argued eliminated the need for privity in a Magnuson-Moss implied warranty claim.
The defendant relied upon a Second Circuit case30 as well as an earlier Northern District of Illinois ruling,31 both of which held that implied warranty claims asserted under the Magnuson-Moss Act are subject to state-law privity rules and that only purchasers from states not requiring privity could maintain an implied warranty action, because the Act did not create a federal cause of action for breach of implied warranty without privity.32
Noting that “[t]he Seventh Circuit had not yet addressed the question of whether privity of contract is a prerequisite to a Magnuson-Moss breach of implied warranty claim brought in Illinois”,33 the court declined to follow Szajna and Rothe and instead found “the Abraham line of authority [from the Second Circuit, requiring privity in Magnuson-Moss implied warranty claims] more persuasive.”34
While recognizing that it was “not bound by a Second Circuit decision, Abraham holds greater sway than Szajna, since the Seventh Circuit asks that district court[s] give ‘substantial weight’ to the ‘direct authority of a sister circuit.’”35
The court examined the legislative history of the Magnuson-Moss Act and, like the observations in Walsh36 and Skelton,37 concluded that “Magnuson-Moss does not create a federal cause of action for breach of implied warranty sans privity.”38
The Voelker decision.
The Seventh Circuit itself weighed in on the matter of privity in the context of implied warranty claims under the Magnuson-Moss Act four years later in the case of Voelker v. Porsche Cars N. Am., Inc.39 In Voelker, the plaintiff leased a car from a Porsche dealer. As part of plaintiff’s lease, he was provided with a “New Car Limited Warranty” which obligated Porsche to “repair or replace any factory-installed part that was defective in material or workmanship under normal use.”40
The plaintiff was involved in an accident with an SUV shortly thereafter which did extensive damage to the car, necessitating major repairs and replacement of parts. The car was in the shop for several months while awaiting parts from Porsche which were in short supply. The plaintiff stopped making lease payments on the car, and the Porsche-affiliated finance company demanded the surrender of the car for overdue payments, in response to which the plaintiff filed suit against Porsche under a number of theories, including breach of implied warranty under the Magnuson-Moss Act.
The court noted that the Act allows for breach of “‘an implied warranty arising under State law (as modified by sections 2308 and 2304(a) of this title)’”41
“Because secs. 2308 and 2304(a) do not modify or discuss in any way [the court continued], a state’s ability to establish a privity requirement, whether privity is a prerequisite to a claim for breach of implied warranty under the Magnuson-Moss Act therefore hinges entirely on the applicable state law. “42
Since, under the law of Illinois, privity of contract is a prerequisite to recover economic damages for breach of implied warranty,43 the plaintiff’s claim against Porsche was properly dismissed.44
The Federal/State Court Split, Examined.
Perhaps the most comprehensive description of the complexities of the conflict between the Illinois state courts and their federal counterparts, both in Illinois and nationally, can be found in a 2004 decision from the First District Appellate Court of Illinois in the case of Mekertichian v. Mercedes-Benz U.S.A., L.L.C.45
In Mekertichian, the plaintiff purchased a new Mercedes-Benz automobile from a dealership in Illinois. The car came with a 48-month or 50,000-mile limited written warranty issued by the defendant-manufacturer. Shortly after the purchase, the plaintiff began experiencing problems with the car and returned it to the dealership on several occasions for repairs. Ultimately the dealership said it was unable to repair the vehicle, and the plaintiff thereafter filed suit against the defendant-manufacturer claiming breach of written and implied warranties under the Magnuson-Moss Act.
As to the plaintiff’s claim for breach of the implied warranty of merchantability, the defendant argued that since the plaintiff did not purchase the vehicle directly from the manufacturer, no vertical privity existed and therefore the breach of implied warranty claim could not be sustained. The defendant-manufacturer moved for partial summary judgment on this basis on the implied warranty claim but because of the rulings in the Szajna and Rothe cases (holding that Magnuson-Moss expanded Illinois state law to excuse the absence of vertical privity to allow a direct action by a consumer against a remote manufacturer), the trial court denied the motion, but certified for immediate appeal the question of whether privity was required to maintain such a suit. The appellate court denied the defendant’s application for leave to appeal, but the Illinois Supreme Court issued a supervisory order directing the interlocutory appeal to proceed.46
The appellate court began its analysis of the certified question by reviewing the language and effect of the Magnuson-Moss Act which provides that actions predicated upon a breach of an implied warranty brought under the Act are governed by state law. Under common law, as well as under the Uniform Commercial Code, actions for breach of the implied warranty of merchantability seeking economic damages require privity between buyer and seller.47 The Illinois Supreme Court had ruled, however, in 1986, and again in 1988, that the Magnuson-Moss Act served to modify state law with regard to the privity requirement, eliminating it in order to “furnish broad protection to a consumer”48. . . “where a manufacturer has expressly warranted a product to a consumer.”49
In such instances “vertical privity will be deemed to exist with respect to the consumer,”50 allowing direct actions by the consumer against a remote manufacturer in Illinois state courts.
This finding, eliminating the requirement of vertical privity in implied warranty cases brought under the Magnuson-Moss Act, has been rejected by every federal appellate circuit to have ruled on the issue, as well as by the overwhelming majority of federal district courts,51 which have taken the position that the Magnuson-Moss Act, by itself, has not relaxed the privity requirement, and that the need for privity must be determined by state law. Since “Illinois requires contractual privity as a prerequisite for breach of implied warranty claims under internal law”, the federal courts hold, “there must also be vertical privity in breach of implied warranty claims brought pursuant to Magnuson-Moss in Illinois.”52
In taking the position, it staked out in the Szajna and Rothe decisions, the Illinois Supreme Court, according to Mekertician, was “not purporting to construe state law, which still requires privity, but purports to construe federal law,”53 and while the Illinois supreme court has said in the past that “federal decisions are considered controlling on Illinois state courts interpreting a federal statute,”54 six months later the Illinois supreme court held that it need not follow Seventh Circuit precedent interpreting a federal statute where there is a split in the federal circuits on the issue, where the Supreme Court of the United States has not yet ruled, and where it believed that the Seventh Circuit had wrongfully decided on the issue.55
Hence, federal court decisions, including those of the Seventh Circuit, are considered persuasive, but not binding, on Illinois state courts in the absence of a decision by the Supreme Court of the United States.56
Until then, Illinois courts remain bound by the Szajna and Rothe cases in deeming privity to be present between a consumer and a remote manufacturer in implied warranty cases brought under the Magnuson-Moss Act.57
District Court Cases After Voelker.
Post-Voelker decisions from the Northern District of Illinois remain consistent with the ruling of that Seventh Circuit holding, rejecting the Magnuson-Moss exception to the privity rule that the Supreme Court of Illinois announced in the Szajna and Rothe cases.
A very instructive case that discussed in detail the history and rationale of the Illinois/federal distinction is Watson v. Coachman Rec. Vehicle Co.58 Plaintiff purchased a motor home from an RV dealership, which was not a party to the case. The defendant-manufacturer provided a written warranty covering all “parts, components and features” of the motor home while limiting its liability under the warranty to repair or replacement of defects in materials or workmanship.59
Shortly after taking possession of the motor home, the plaintiff began to experience various problems with the motor home and after giving the dealer sufficient opportunity to repair the defects, sued the manufacturer for, inter alia, breach of the implied warranties of merchantability and fitness for a particular purpose. The manufacturer asserted the defense of lack of privity, in response to which plaintiff attempted to use the manufacturer’s written warranty as an exception to the no-privity defense, citing Szajna and Rothe, to which the district court responded: “[a]s The Court has already determined not to follow the Illinois Supreme Court’s holding[s] in Szajna and Rothe, it finds the Plaintiff’s instant argument unavailing. . .”60
Before announcing its decision, as mentioned, the district court provided a comprehensive contrast between “The Illinois View” and “The Federal View” regarding the privity defense, and whether the existence of a written warranty from a manufacturer provides an exception to the privity rule,61 finding it did not, and ruling in favor of the defendant-manufacturer.
Another significant post-Voelker case is Rodriguez v. Ford Motor Co.62 This case involved an alleged defect in the trunk lid wiring harness of the plaintiff’s car which caused intermittent failure of the backup camera, which was said to be a common problem among Ford Mustang vehicles manufactured between 2015 and 2017. Plaintiff sued the defendant-manufacturer with whom he had no direct dealings, having purchased the car from an authorized Ford dealership. In response to the manufacturer’s defense of lack of privity, plaintiff attempted to invoke one of the court-created exceptions to the privity requirement known as the “direct dealing exception”, which is the subject of the following section. As more fully discussed, infra, this exception only applies when there are direct dealings between the customer and the remote manufacturer and has been applied quite restrictively by the courts.
The Direct Dealing Exception to the Privity Requirement.
In discussing the history and evolution of the direct dealing exception to the privity requirement, one court said: “Much as all roads led to Rome, the cases that mention a ‘direct-dealing’ exception to the privity requirement under Illinois law seem to trace back to one case, Rhodes Pharmacal Co. v. Continental Can Co.” (citation omitted).63
In Rhodes, the plaintiff was a marketer of various cosmetic and hair beauty products. It purchased from a distributor a certain type of “rustproof” aerosol cans manufactured by the defendant. When the plaintiff began receiving complaints from its customers that the aerosol cans were leaking, causing not only loss of the product but damage to the inventory of its customers, the plaintiff complained to the manufacturer of the cans who responded that the contents of the cans was incompatible with the “rustproof” linings of the cans, resulting in corrosion.64
When plaintiff sued the manufacturer for breach of implied warranty, the defendant asserted a lack-of-privity defense. Plaintiff argued that the absence of privity should not foreclose its implied warranty action since it alleged that its employees had direct dealings with the manufacturer of the cans, in that they had met with the manufacturer to discuss various design issues.65 The Appellate Court agreed, concluding that the plaintiff could sue the manufacturer on a third-party beneficiary theory, given that the plaintiff had worked directly with the defendant-manufacturer on product specifications for the cans.66
The holding in Rhodes eventually evolved into two distinct exceptions to the privity rule in implied warranty cases; the “direct dealing exception” which “applies when there are direct dealings between the manufacturer and the remote customer,”67 and the “third-party beneficiary exception” which allows warranty claims “to bypass the privity requirement if ‘the manufacturer knew the identity, purpose and requirements of the dealer’s customer and manufactured or delivered the goods specifically to meet those requirements.’”68
Having observed the number of cases “which evidence the increasing disregard for the privity requirement through the continued expansion of the class of permissible plaintiffs under [the] third-party beneficiary doctrine”, the Illinois Supreme Court, beginning with Rozny v. Marnul,69declined any further erosion of the privity requirement. Written advertisements cannot serve as the basis for a direct dealing relationship.70
Also, “Illinois courts have made clear that their direct-dealing exception does not extend to goods mass-produced and sold at retail to a third party who is not a beneficiary of the manufacturer-seller contract.”71
Given the fact that “the Illinois Supreme Court has hammered home the necessity of privity in claims for breach of implied warranty”72 at least one court has been led to believe that if the Illinois Supreme Court is squarely faced with the issue of the continued viability of the exceptions to vertical privity in implied warranty cases, “[t]his Court is not alone in doubting the Illinois Supreme Court would recognize any exceptions to the requirement of privity for implied warranty cases.”73
Conclusion.
“Since the mid-nineteenth century, courts have used privity of contract as a way of limiting relief based on warranties.”74
“Thus, remote sellers were relieved of liability for injuries to persons other than those for whom the goods were constructed or to whom they were sold.”75
The adoption of sec. 402A of the Restatement of Torts rendered the privity rule irrelevant in cases involving personal injury,76 but instances of purely economic loss remained the province of warranty law.77
At present, the federal/state court split appears to remain, with state court cases excusing the absence of privity in implied warranty cases brought pursuant to the Magnuson-Moss Act, with cases holding that (while absent), vertical privity will be “deemed” to be present, thus allowing direct actions by consumers against remote manufacturers. Federal courts, on the other hand, have strictly interpreted Illinois common law to require actual privity in all such cases.
Vertical privity has withstood its challenges in the Illinois state and federal courts and, in certain cases, remains a viable defense to remote sellers from whom purely economic losses are sought to be recovered. Therefore, at least for now, there remains a legitimate place for the notion of vertical privity in Illinois contract jurisprudence.
BLACK’S LAW DICTIONERY 1079 (5th ed. 1979).
Szajna v. General Motors Corp., 115 Ill. 2d 294, 311, 503 N.E. 2d 760, 767 (1986), see also, J. White & R. Summers, Uniform Commercial Code (2d ed. 1980).
32 Ill. 2d 612, 210 N.E. 2d 182 (1965).
407 Ill.121, 94 N.E. 2d 847 (1950).
22 Ill. 2d 432, 176 N.E. 2d 761 (1961).
91 Ill.2d 69, 435 N.E. 2d 443 (1982).
Note, Economic Loss in Product Liability Jurisprudence, 66 Colum. L. Rev. 917, 918 (1966).
Compare, Santor v. A & M Karagheusian, Inc., 44 N.J. 52, 207 A.2d 305 (1965) (allowing a direct action in warranty by a purchaser against a manufacturer despite an absence of privity between the parties, and inferring, in dicta, that recovery in tort for a product’s diminished value was also possible) and Seely v. White Motor Co., 63 Cal. 2d 9, 45 Cal. Rptr. 17, 403 P.2d 145 (1965) (denying recovery in tort for economic losses).
Moorman, 91 Ill. 2d at 74.
115 Ill. 2d 294, 503 N.E. 2d 760 (1986).
Szajna v. General Motors, Corp., 130 Ill. App. 3d 173, 474 N.E.2d 397 (1st Dist. 1985).
Szajna, 115 Ill. 2d at 301, 503 N.E. 2d at 762.
Id., 115 Ill. 2d at 302, 503 N.E. 2d at 763.
Id., 115 Ill. 2d at 304, 503 N.E. 2d at 764.
Id., referencing Seeley v. White Motor Co., 63 Cal. 2d 9 at 18, 45 Cal. Rptr. 17 at 23, 403 P.2d 145 at 151 (1965), and Moorman, supra, 91 Ill. 2d at 81, 435 N.E. 2d at 448.
Szajna, 115 Ill. 2d at 310, 503 N.E.2d at 767, quoting Moorman, 91 Ill. 2d at 79-80, 435 N.E. 2d at 448.
Id., 115 Ill. 2d at 311, 503 N.E. 2d at 767.
Specifically, 15 U.S.C. Sec. 2310(d)(1).
Id., 115 Ill.2d at 317, 503 N.E. 2d at 769.
119 Ill. 2d 288, 518 N.E. 2d 1028 (1988).
119 Ill. 2d at 292, 518 N.E.2d at 1029.
119 Ill. 2d at 294, 518 N.E.2d at 1030.
226 Ill. 2d 307, 865 N.E. 2d 1047 (2007).
2021 IL App (4th) 120042-U, 2021 Ill. App. Unpub. LEXIS 2211, 2021 WL 7050429 (4th Dist. 2012).
Zaffiri, 2012 IL App (4th) 120042-U at P88, quoting Mekertichian, supra, 347 Ill. App. 3d at 1168.
Id., at P89.
Id., at P90.
1999 U.S. Dist. LEXIS 14765, 1999 WL 756174 (N.D. Ill. Sept. 13, 1999).
Soldinger, 1999 U.S. Dist. LEXIS 14765 at *18.
Abraham v. Volkswagen of Am., 795 F.2d 238 (2d Cir. 1986).
Skelton v. General Motors Corp, No. 79 C 1243,1985 U.S. Dist. LEXIS 18649, 1985 WL 1860 (N.D. Ill. June 21, 1985).
Abraham, 795 F.2d at 249; Skelton, 1985 U.S. Dist. LEXIS 18649 at *7,8.
Soldinger,1999 U.S. Dist. LEXIS at *21.
Id., at 22.
Id., at *29, quoting Richards v. Local134, Int’l Bhd. Of Electrical Workers, 790 F.2d 633, 636 (7th Cir. 1986).
Walsh v. Ford Motor Co., 807 F.2d 1000 at 1012 (D.C. Cir. 1986).
Skelton, supra, 1985 U.S. Dist. LEXIS 18649 at*7, 1985 WL 1860 at *3.
Id.
353 F.3d 516 (7th Cir. 2003).
353 F.3d at 520.
353 F.3d at 525, quoting 15 U.S.C. sec. 2301(7).
Walsh, supra, 807 F.2d at 1014; Abraham, supra, 795 F.2d at 249.
Rothe, supra, 119 Ill. 2d at 292, 518 N.E.2d at 1029-30.
See also, Soldinger, supra, 1999 U.S. Dist. LEXIS 14765 at **27-31, 1999 WL 756174 at **6-10.
347 Ill. App. 3d 828, 807 N.E. 2d 1165 (1st Dist. 2004).
Mekertician, 347 Ill. App. 3d at 830, 807 N.E. 2d at 1167.
See, Szajna, 115 Ill. App. 2d at 311, 503 N.E. 2d at 767; Rothe, 119 Ill. 2d at 292, 518 N.E. 2d at 1029-30.
Szajna, 115 Ill. 2d at 315-16, 503 N.E. 2d at 769: Rothe, 119 Ill. 2d at 294, 518 N.E. 2d at 1030
Mekertichian, 347 Ill. App. 3d at 832, 807 Ill. App. 2d at 1168.
Id.
Id., 347 Ill. App. 3d at 833, 807 N.E. 2d at 1168 (citing cases).
Id.
Id.
Wilson v. Norfolk & Western Ry. Co., 187 Ill. 2d 369 at 383, 718 N.E. 2d 172 at 179 (1999) (following a Seventh Circuit interpretation of the Federal Employers’ Liability Act, 45 U.S.C. sec. 51 et seq. (1994)).
Wieland v. Telectronics Pacing Systems, Inc., 188 Ill. 2d 415 at 423, 721 N.E. 2d 1149 at 1154 (1999).
See, Sprietsma v. Mercury Marine, 197 Ill. 2d !!2, 757 N.E. 2d 75 (2001), rev’d on other grounds, 537 U.S. 51, 123 S. Ct. 518, 154 L. Ed. 2d 466 (2002); see also, Bishop v. Burgard, 198 Ill. 2d 495 at 507, 764 N.E. 2d 24 at 33 (2002).
See, People v. Spahr, 56 Ill .App. 3d 434 at 438, 371 N.E.2d 1261 at 1264 (1st Dist. 1978) ( holding that Illinois supreme court decisions are biding on all Illinois courts, but decisions of federal courts, other than the Supreme Court of the United States, are not binding on Illinois courts).
No. 05-CV-524, 2006 U.S. Dist. LEXIS 15087, 2006 WL 8455882 (N.D. Ill. March 31, 2006).
Watson, 2006 U.S. Dist. LEXIS 15087 at *4.
Id., at *27.
Id., at *15 -26; see also, Mekertichian v. Mercedes-Benz U.S.A., L.L.C., supra.
596 F. Supp. 3d 1059 (N.D.) Ill. 2022.
Manley v. Hain Celestial Grp., Inc., 417 F. Supp. 3d 1114, 1123 (N.D. Ill. 2019).
Rhodes Pharmacal Co. v. Continental Can Co., 72 Ill. App. 2d 362, 366, 219 N.E.2d 726, 729 (1st Dist. 1966).
Rhodes, 72 Ill. App. 2d at 372, 219 N.E. 2d at 732.
Id.
See, e,g., Edward v. Electrolux Home Prods., Inc., 214 F. Supp. 3d 701, 705 (N.D. Ill. 2016).
F.E. Moran, Inc. v. Johnson Controls, Inc., 697 F. Supp. 3d 786, 797 (N.D. Ill. 2023), quoting Frank’s Maintenance & Eng’g , Inc., v. C.A. Roberts Co., 86 Ill. App. 3d 980, 408 N.E. 2d 403 (1st Dist. 1980); see also, Redmon v. Whirlpool Corp., No. 20 C 6626, 2021 U.S. Dist. LEXIS 81628, 2020 WL 9396529 (N.D. Ill. April 28, 2021) (collecting cases).
43 Ill. 2d 54, 250 N.E. 2d 656 (1969).
In re VTech Data Breach Litig., No.15 C 10889, 2018 U.S. Dist. LEXIS 65060 at *18, 2018 WL 1863953 at *5 (N.D. Ill. Apr. 18, 2018) ( “I am not persuaded that the Illinois Supreme Court would conclude that advertising alone creates a direct relationship between a manufacturer and a customer. . .” )
Harris v. Kashi Sales, LLC, 609 F. Supp.3d 633, 643 (N.D. Ill. 2022); see also, Harmon v. Lenovo (U.S.) Inc., No. 3:23-CV-1643, 2024 U.S. Dist. Lexis 74091, 2024 WL 1741264 (S.D. Ill. Apr. 23, 2024).
Manley, supra, 417 F. Supp. 3d at 1124.
Id., (citing Caterpillar, Inc. v. Usinor Industeel, 393 F. Supp. 2d 659, 678 (N.D. Ill. 2005) (emphasis added).
Arlie R. Nogay, Comment: Enforcing the Rights of Remote Sellers Under the UCC: Warranty Disclaimers, the Implied Warranty of Fitness for a Particular Purpose and the Notice Requirement in the Nonprivity Context, 47 U. Pitt. L. Rev. 873 (Spring, 1986), at p. 882, citing Winterbottom v. Wright, 152 Eng. Rep. 402 (Exch. 1842) (sustaining a demurrer to suit by injured coachman for breach of warranty against a third party who had contracted to maintain the coach), (see also, the reference to same at the beginning of this article).
Id.
See, Suvada, supra, n. 1.
See, Moorman, supra, n. 4.
FinCEN Not Issuing Fines or Penalties in Connection with Beneficial Ownership Information Reporting Deadlines for Now
FinCEN announced that it will not issue any fines or penalties or take any other enforcement actions against any companies based on any failure to file or update beneficial ownership information (BOI) reports pursuant to the Corporate Transparency Act by the current deadlines.
For the vast majority of reporting companies, the current deadline to file an initial, updated, and/or corrected BOI report is March 21, 2025.
No fines or penalties will be issued, and no enforcement actions will be taken, until a forthcoming interim final rule becomes effective and the new relevant due dates in the interim final rule have passed.
FinCEN intends to issue the new interim final rule by no later than March 21, 2025. The new interim final rule will extend BOI reporting deadlines, according to FinCEN.
FinCEN also intends to consider making further substantive revisions to existing BOI reporting requirements, with the goal of minimizing burdens on small businesses while ensuring that reporting companies continue to submit BOI reports that are highly useful to important national security, intelligence, and law enforcement activities.
Reporting companies remain free to submit their BOI reports now or at any time before the current reporting deadlines. However, given FinCEN’s stated intention of extending the filing deadlines further, reporting companies may want to refrain from submitting their BOI reports until a date that is closer to the applicable reporting deadline.
Supreme Court Expresses Skepticism Over Higher Burden in Majority Discrimination Cases
The Supreme Court of the United States recently heard oral arguments in a case to determine whether employees who are part of a majority group must meet a higher standard to prove discrimination.
Quick Hits
The Supreme Court heard oral arguments in a discrimination case brought by a straight woman alleging sexual orientation discrimination.
The oral arguments occurred shortly after President Donald Trump issued several executive orders to stop “illegal” workplace diversity, equity, and inclusion (DEI) programs and reshape how federal policy defines sex discrimination and gender.
The court is likely to decide this case before its term ends in late June 2025.
On February 26, 2025, the Supreme Court of the United States heard oral arguments in a lawsuit claiming a state agency in Ohio discriminated against a straight employee because she is straight.
The Supreme Court is expected to decide whether an employee who is part of a majority group must also meet the “background circumstances” rule in proving discrimination. The background circumstances rule is a heightened evidentiary standard applied in some circuit courts of appeal and stands in contrast to claims brought by employees who are part of minority groups, who are able to rely on evidence surrounding their own employment circumstances to prove discrimination. Four circuits have adopted the background circumstances rule. Two other circuits have rejected the background circumstances rule. Five other circuits do not apply the background circumstances rule, treating discrimination claims from majority group plaintiffs like claims from minority group plaintiffs. The Supreme Court is expected to resolve the circuit split.
Background on Case
A heterosexual woman served as the Ohio Department of Youth Services’ administrator of the federal Prison Rape Elimination Act (PREA). She applied and interviewed to be the department’s bureau chief of quality. The department terminated her employment as PREA administrator and offered her another job that amounted to a demotion with less pay, which she took. The department later hired a gay man to serve as PREA administrator and a gay woman to be bureau chief of quality. The heterosexual woman filed a discrimination lawsuit, alleging discrimination in violation of Title VII of the Civil Rights Act of 1964.
The district court granted summary judgment to the Ohio Department of Youth Services, finding the plaintiff failed to present evidence demonstrating discrimination in the department’s hiring practices or policies. The employee appealed, and on December 4, 2023, the U.S. Court of Appeals for the Sixth Circuit found she did not produce sufficient evidence to prove discrimination against a majority group. The appellate court noted her performance evaluation shortly before the demotion was “lukewarm” and sometimes “critical.” Thus, the agency could have demoted her based on lackluster performance, rather than discrimination.
Oral Arguments
Xiao Wang, the attorney for the plaintiff, said the background circumstances rule is inconsistent with Title VII. “It’s a difficult and more demanding burden on majority-group plaintiffs,” he said.
Ashley Robertson, an attorney representing the U.S. Department of Justice, supported overturning the Sixth Circuit’s ruling. “That heightened standard [in the background circumstances rule] risks screening out cases with merit,” she said. “Even if an employer generally treats a group well, if a plaintiff has evidence that the employer discriminated against her, she should be able to proceed.” A court “should not, based on its own independent sense of which group experiences more discrimination or not, draw its own conclusions absent evidence,” Robertson argued.
T. Elliot Gaiser, an attorney representing the Ohio Department of Youth Services, said the plaintiff didn’t meet the requirements to make a prima facie case and “could not establish that anybody was motivated by sexual orientation or even knew her sexual orientation … Every circuit has said that, if the employer isn’t even aware of the protected trait, it’s not possible to infer that they were motivated by that protected trait.”
Justice Elena Kagan pushed back on this argument, however, stating that the justices were determining whether a majority group plaintiff has an extra burden that a minority group plaintiff does not, as opposed to other elements of discrimination claims.
During oral arguments, most of the justices appeared to agree that federal law does not require plaintiffs to meet a higher bar just because they are members of a majority group. “We’re in radical agreement today on that, it seems to me,” Justice Neil Gorsuch said. Justice Amy Coney Barrett said the plaintiff “would have the exact same burden and be treated the exact same way under Title VII” if she was gay or straight. The oral arguments did not mention the new Trump administration or the recent executive orders.
Next Steps
If the court rules in favor of the plaintiff, as signaled by the oral argument, it may become easier for employees in majority groups to bring discrimination claims.
In anticipation of a ruling, employers may wish to review their policies and employee training to ensure they reflect that the law protects all employees against discrimination based on sex, race, color, national origin, and religion, regardless of whether the employee falls within the majority or minority group.
In addition, the Trump administration has targeted programs that promote diversity, equity, and inclusion (DEI), as the Trump administration considers many of these programs to be discriminatory toward employees in majority groups. Therefore, employers also may wish to conduct an attorney-client privileged assessment of all DEI initiatives.
Mass. Appeals Court Clarifies Chapter 93A, Section 2 Standards: Takeaways from Bucci v. Campbell
In Bucci v. Campbell, the Massachusetts Appeals Court, in a summary decision, clarified standards that govern a trial court’s conclusions about whether acts or practices are unfair or deceptive under Chapter 93A, Section 2.
The underlying case concerned whether the defendants had breached a contract with the plaintiffs by failing to install a natural gas line to the plaintiffs’ lot. The jury found that the defendants (i) had breached the contract, (ii) had breached the implied covenant of good faith and fair dealing, and (iii) were liable for negligent, but not intentional, misrepresentation. The plaintiffs also asserted a Chapter 93A claim against the defendants, which the trial judge reserved for the court after the jury verdict, and later found that the defendants did not violate Chapter 93A. The plaintiffs appealed the Chapter 93A judgment.
In its decision, the Appeals Court first explained that whether acts are unfair or deceptive in their factual setting is a question of fact, but whether unfair or deceptive conduct rises to a level to violate Chapter 93A is a question of law and subject to a de novo review standard. Here, the trial judge found the defendants’ conduct to be “a bit sleazy” and based on “an extremely weak claim,” but it did not “rise to the level of rascality or misconduct” required to violate Section 2. Before getting to the merits of the judge’s conclusions, the Appeals Court noted that Chapter 93A no longer includes a “rascality” standard, which the Supreme Judicial Court rejected in 1995[1]. This, according to the Appeals Court, may have caused the trial judge to err.
Based on the trial judge’s acceptance of the jury’s findings, combined with the judge’s additional findings, the Appeals Court concluded that, as a matter of law, the defendants’ conduct was both unfair and deceptive under Section 2. Specifically, the court found the defendants’ negligent misrepresentation of fact, the truth of which could be reasonably ascertained, to be unfair and deceptive. With the addition of the “sleaziness” and “weak claim” the judge found, the defendants’ conduct was sufficiently “extreme or egregious” enough to violate Section 2. A breach of the implied covenant of good faith and fair dealing may also violate Section 2. Since the jury found such a breach here, and the judge found that they breached the covenant for their own economic advantage, the court had to conclude that their conduct violated Section 2 as a matter of law. The defendants’ conduct also was unfair under 940 Code Mass. Regs. § 3.16(2), which further supported the Appeals Court’s conclusions that the trial judge had erred in finding the defendants had not violated Chapter 93A.
This case demonstrates that unfairness and deception under Section 2 are fact based in a sense that a fact finder must determine whether conduct is unfair or deceptive in the factual setting at issue. Beyond that, it is for the court to decide whether the conduct—coupled with other relevant facts—is unfair or deceptive enough to violate Section 2.
[1] See Mass. Employers Ins. Exc. v. Propac-Mass, Inc.
E.M.D. Sales: A Reminder That California Stands Out from the Crowd
While welcome news to most employers, those in California are unlikely to be impacted by the U.S. Supreme Court’s recent ruling in E.M.D. Sales, Inc. v. Carrera, 220 L. Ed. 2d 309 (2025). In E.M.D. Sales, the Court rejected the argument that employers must prove an overtime exemption under the Fair Labor Standards Act (FLSA) by clear and convincing evidence. The standard, the Court said, should be no greater than by a preponderance of the evidence. But this ruling does not change the burden for California employers under state law.
E.M.D. Sales
The plaintiffs in E.M.D. Sales claimed they were improperly classified under the FLSA asoutside salespersons exempt from overtime. Exemptions are considered a defense to overtime claims, and the burden to prove the defense is on an employer. The District Court sided with the plaintiffs, holding that the employer had not proved by “clear and convincing” evidence[1] that they were properly classified. This aligned with precedent in the Fourth Circuit, which affirmed the lower court’s ruling. When the case made its way to the U.S. Supreme Court, however, the Court instead sided with precedent from the Fifth, Sixth, Seventh, Ninth, Tenth, and Eleventh Circuits, holding an employer must only satisfy the lower (and easier to meet) “preponderance of the evidence” burden of proof.
The plaintiffs argued that the higher, “clear and convincing” standard was appropriate because the FLSA focuses on the public’s interest in a well-functioning economy, the FLSA rights at issue were not waivable, and the employer generally has control over the evidence while impacted employees may have fewer resources. The Court was unpersuaded. In its 9-0 decision, the Court explained that, as can be evidenced by Title VII cases, a law’s focus on important public interests, the fact that the employer controls much of the evidence, and the non-waivability of rights do not require a heightened standard of proof.
Takeaways for California Employers
The E.M.D Sales holding, coupled with the Court’s ruling in Encino Motorcars, LLC v. Navarro, 579 U.S. 211, 230 (2016), which rejected the notion that FLSA overtime exemptions should be narrowly construed, may provide good news for employers who face claims they misclassified workers under the FLSA. Unfortunately for California employers however, most misclassification claims are brought under California state law and not the FLSA such that these decisions are likely to have little practical application.
The California Supreme Court has maintained that state law overtime exemptions should be “narrowly construed” and applied only to employees who “‘plainly and unmistakably’” fall within the exemption’s language.[2] This, together with the quantitative prong of California’s duties test, which requires employers to prove that their exempt employees are actually engaged in exempt duties more than 50% of their working time, effectively means that the burden of proof for employers under California law is greater than it would be if the case were filed under the FLSA. Stated differently, while the E.M.D Sales decision should be good news to most employers outside of California, it has little to no practical application to California employers.
The E.M.D Sales decision is another reminder that California stands out from the crowd—and often to the employers’ detriment. California employers are advised to have competent California legal counsel at the ready to help guide them through the prickly and unique brambles of California employment law.
[1] The “clear and convincing” standard means that the evidence is highly and substantially more likely to be true than untrue. By contrast, the “preponderance of the evidence” standard means more than 50%, or enough evidence to tip a scale slightly for a fact to be more probable.
[2] See, e.g., Ramirez v. Yosemite Water Co., 20 Cal. 4th 785, 794 (1999); Peabody v. Time Warner Cable, Inc., 59 Cal. 4th 662, 667 (2014).
Quarterly Sanctions Update | Q4 2024 / Q1 2025
What’s New? The European Union and the United Kingdom remain committed “to keep up the pressure on the Kremlin” by way of imposing further sanctions as Russia’s illegal invasion of Ukraine enters the fourth year. Within a course of the last three months, the EU adopted two new sanctions packages, with new restrictions ranging from asset freezes imposed on over a hundred of individuals, companies and vessels to banning imports of aluminum originating in Russia. The United Kingdom followed the European Union’s suit, imposing new sanctions as recently as February 24, 2025.
US Policy Changes. Stay ahead of US law and policy changes, including shifting restrictive trade measures under the current administration, with our dedicated resource center available here.
Clarifying the Rules. The European Commission issued a series of long-awaited clarifications on the ‘best efforts’ and ‘no re-export to Russia’ clause requirements. The UK Office of Trade Sanctions Implementation (OTSI) also provided new guidance on ‘no Russia’ clauses, highlighting their role in due diligence best practices.
Expanding Sanctions Reporting. In the United Kingdom, a new group of companies, including insolvency practitioners, letting agents and art market participants, now fall under the reporting requirements relating to Russia sanctions.
Easing Pressure on Syria. The EU agreed to suspend certain sanctions against Syria following the collapse of President Assad’s regime in December 2024. The United Kingdom has announced its willingness to implement similar measures on February 13, 2025.
Click here to read the full Update.