Loper Bright Dealt a Blow to the FTC’s Noncompete Rule — Will the New FTC Chairman Deliver the Knockout?
The Supreme Court’s decision in Loper Bright Enterprises v. Raimondo has and will continue to alter the legality and enforceability of federal agency rules and regulations related to ambiguous federal statutes. As a reminder, Loper Bright abolished the Chevron doctrine, which instructed courts to give deference to federal agency interpretations of ambiguous statutes. In Loper Bright, the Supreme Court held that the Administrative Procedure Act (“APA”) requires courts to “exercise independent judgment” when evaluating the constitutionality of a federal agency’s rulemaking or interpretation of an ambiguous statute. For a more detailed discussion of the Loper Bright decision and its overruling effect on the Chevron doctrine, please refer to our earlier blog post, which discusses Loper Bright’s impact on the International Trade Commission. This blog post focuses on another agency that has already felt the impact of Loper Bright, the Federal Trade Commission (“FTC”).
Last year, the FTC issued a final rule banning employers from entering new noncompete clauses as well as enforcing some pre-existing noncompete clauses (“the Rule”). 16 CFR § 910. In its announcement of the Rule, the FTC stated that the ban will “promote competition . . ., protect[] the fundamental freedom of workers to change jobs, increas[e] innovation, and foster[] new business formation.” This employee-friendly ban, which in many ways mirrors the law of the state of California, was received with much concern by trade secret owners. Noncompete clauses are measures commonly used by rightsholders to protect their trade secrets. Rightsholders are thus concerned outgoing employees could freely move and disseminate valuable trade secrets to competitors.
Their concerns, however, may be assuaged due to two recent developments. First, an order from the Northern District of Texas, which set aside the Rule nationally, is pending appeal before the U.S. Court of Appeals for the Fifth Circuit. Second, the newly designated FTC Chairman, Andrew Ferguson, who was sworn in on January 20, 2025, has publicly criticized the Rule since its origin.
Below, we discuss the recent order from the Northern District of Texas and the pending appeal. Additionally, we evaluate the Rule’s likely fate following Chairman Ferguson’s appointment. And lastly, we provide rightsholders with a few helpful takeaways to protect their trade secrets amongst the uncertainty.
Ryan, LLC v. Federal Trade Commission
On the same day that the FTC promulgated the Rule, Ryan, LLC (“Ryan”) filed suit against the FTC challenging the constitutionality of the Rule. Shortly after filing suit, Ryan was joined by several plaintiff intervenors. Ryan, a global tax-consulting firm headquartered in Dallas, routinely requires its principals and other workers to agree to temporally limited noncompete clauses to protect Ryan’s trade secrets. Ryan argues the Rule threatens to harm its business secrets by allowing its employees to freely move to competitors. These harms, as Ryan alleges, cannot be mitigated through the use of non-disclosure agreements (“NDAs”) and trade secret law because of the violations of NDA and trade secret law are less visible and harder to prove than violations of noncompete agreements. Ryan further argues that this harm is not unique to its industry and that other businesses that own intellectual property and rely on skilled labor are exposed to the same risks under the Rule. After a litany of procedural and discovery challenges, Plaintiffs moved for summary judgment challenging the constitutionality of the Rule.
On August 20, 2024, District Court Judge Ada Brown issued an order granting Plaintiffs’ Motion for Summary Judgment holding the Rule unconstitutional and setting it aside with national effect. The Court, following the guidance of Loper Bright, explained that the APA was enacted “‘as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating their offices.’ Further following Loper Bright, the Court analyzed the constitutionality of the Rule under “the APA[, which] delineates the basic contours of judicial review of such action.” Under the APA’s Section 706(2)(A)-(C), “courts must ‘hold unlawful and set aside agency action, findings, and conclusions found to be … arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,’ ‘contrary to constitutional right, power, privilege, or immunity;’ or ‘in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.’”
The Court begins its analysis by evaluating whether the FTC had statutory authority to promulgate the Rule. In its analysis, the Court agreed with Plaintiffs, holding that the FTC exceeded its statutory authority in promulgating the Rule. The Court ruled that “the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, under Section 6(g).” This wide sweeping rule effectively limits the FTC’s ability to regulate unfair competition to rules proffered under Section 5 of the FTC Act. The Court held the plain reading of Section 6(g) only gave the FTC authority to make rule for the purpose of classifying and regulating corporations, not regulating unfair competition. The Court also looked to the historical use of Section 6(g) and found that it was seldomly used to promulgate rules, noting that the FTC hadn’t promulgated a rule under Section 6(g) since 1978. In view of the text, which may come as a surprise. After reviewing the text, structure and history of the Act, the Court concluded that the FTC lacked substantive rule making authority under Section 6(g) and was only intended as a “’housekeeping statute’ authorizing what the APA terms ‘rules of agency organization procedure or practice’ as opposed to ‘substantive rules,’” quoting Chrysler Corp. v. Brown, 441 U.S. 281, 310 (1979). This ruling certainly raises an eyebrow or two as it appears the Court gave too much weight to the lack of rulemaking activity. First, the Court discredits a period of sixteen years from 1962 to 1978 where the FTC did promulgate substantive rules under Section 6(g). Second, and most notably, the Court’s ruling is contrary to a holding from the D.C. Circuit that concluded the FTC had rulemaking authority under section 6(g). In that 1973 case, National Petroleum Refiners Ass’n v. FTC, the court stated, “Our conclusion [that the FTC has substantive rule making authority under] Section 6(g) is not disturbed by the fact that the agency itself did not assert the power to promulgate substantive rules until 1962 and indeed indicated intermittently before that time that it lacked such power.”
Despite reaching the conclusion that the FTC lacked rule making authority under Section 6(g), the Court continues its analysis to determine if the Rule passes muster under the APA’s arbitrary-and-capricious standard. A rule “is arbitrary or capricious only when it is so implausible that it could not be ascribed to a difference in view or the product of agency expertise,” quoting the 5th Circuit’s 1993 decision in Wilson v. U.S. Dep’t. of Agric.. In concluding that the Rule did not pass muster, the Court explained, “the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation” and “imposes a one-size-fits-all approach with no end date.” The Court found that the FTC’s reasons for the Rule were neither reasonable nor rationally connected to a categorical ban of noncompete clauses. Although the FTC had studied state policies on noncompetes, none of the states had enacted a categorical ban as the Rule seeks to do. Moreover, each state that the FTC had studied enacted noncompetes based upon specific facts that made the corresponding noncompete reasonable for that state, without any explanation why any the state-specific noncompete policies were appropriate for nationwide application. This was “completely inapposite to the Rule’s imposition of a categorical ban.” On these grounds, the Court held that the Rule was unlawful and set it aside with nationwide effect.
Appellate Review
As expected, shortly after the Court granted summary judgment for Plaintiffs, the FTC filed a notice of appeal setting this case up for review by the U.S. Court of Appeals for the Fifth Circuit. It is still early days for the appeal with the FTC filing its opening brief on January 2, 2025. It is worth noting that the brief was filed by the FTC under the Biden Administration, so we expect the arguments presented therein will not be representative of the FTC under the Trump Administration. Accordingly, we expect the current administration to move to dismiss the appeal.
In an effort to save the appeal, on January 13, 2025, a triumvirate comprising individuals claiming some potential harm from the lower court setting aside the Rule moved to intervene as defendant-appellants (“the Proposed Intervenors”). In their motion, the Proposed Intervenors argue intervention is justified because the change in administration and changes to the FTC’s leadership create a substantial likelihood that the government will stop defending the Rule. The Motion for Intervention is opposed by both Plaintiff-Appellee Ryan and Defendant-Appellant FTC.
The Proposed Intervenors, however, face an uphill battle. The Fifth Circuit allows “intervention on appeal only in an exceptional case for imperative reasons.” As Ryan pointed out in its Opposition Brief, the Fifth Circuit “denied sixteen States’ motion to intervene in National Association for Gun Rights, Inc. v. Garland, which was premised on the same grounds as the motion at issue. Ryan and the FTC, in their respective briefs, further argue that new presidential administrations commonly decline to defend the prior administration’s regulatory actions, which supports a finding that this case is not exceptional.
Regardless of the Proposed Intervenors’ efforts to overcome the high bar before them, the issues on appeal may become moot should the FTC choose to rescind the Rule. This outcome appears likely because newly appointed FTC Chairman Andrew Ferguson has strongly opposed the Rule since its inception.
New FTC Chairman Opposes the Rule
As mentioned above, Chairman Ferguson officially took office on January 20, 2025. Prior to being appointed Chairman, he was a commissioner on the FTC and was one of two commissioners who voted against the Rule’s promulgation. He also authored a strongly-worded dissenting statement that criticized the Rule as “the most extraordinary assertion of authority in the Commission’s history.” He criticized the FTC for overstepping its rulemaking authority by issuing the Rule without clear congressional authorization. But while his dissent is scathing, Chairman Ferguson is not in favor of unregulated noncompete agreements. He sees sound justifications for regulations, but his position is that regulation should be left to the states or Congress.
Chairman Ferguson’s dissent does not mince words, calling the Rule “unlawful” and “violat[ing] the basic requirements of the [APA].” Given his strong opposition to the Rule, it would be a surprise if Chairman Ferguson does not rescind the Rule once he has the votes to do so.
What Now for Rightsholders
Although it seems extremely likely that the Rule will be rescinded, this is not likely to happen quickly. The Trump Administration has not identified rescinding the rule as a priority, and Chairman Ferguson has not made public statements about it following his appointment. Instead, the comments out of the FTC suggest that its focus is elsewhere. Another reason for delay is that a fifth commissioner must be appointed, necessitated by Lina Khan’s resignation. Therefore, it is likely that the Rule will be stuck in purgatory for the time being.
Therefore, rightsholders may want to exercise caution if they choose to enter or enforce contracts that contain noncompete clauses, since that action would technically violate the Rule. Industry experts think it is unlikely the FTC under Chairman Ferguson will take action against such technical violations. “Unlikely,” however, is not a guarantee, so rightsholders should beware that they are exposed to some risk if they choose to ignore the Rule under the assumption that it will be rescinded. In fact, the FTC has published a notice stating that it may still address unlawful “noncompetes through case-by-case enforcement actions.” Thus, to the extent a rightsholder is at all nervous about the legality of its noncompete clause but still feels the need to bring an action against a former employee based on trade secret misappropriation, it might consider whether the breach of the noncompete is truly additive to the process—that is, will the rightsholder have more leverage or be able to obtain better or greater relief by bringing the noncompete claim? For example, in many cases, a rightsholder could forego the breach of contract claim over the noncompete, and instead pursue claims under the Defend Trade Secrets Act. Proceeding in this manner would have the effect of minimizing the risk of FTC action while also preserving claims as to what the rightsholder really cares about: the misappropriation of its trade secrets.
In fact, there are numerous other trade secret protection mechanisms at their disposal that are just as, if not more, effective than noncompete clauses. For example, NDAs offer protection through contractual means, like noncompete clauses. Another excellent option is conducting exit interviews of outgoing employees. Exit interviews give the employer the opportunity to learn where the employee is leaving to and whether the new job is a competitor that should be subsequently monitored. Additionally, exit interviews let the employer remind the outgoing employee of any NDAs and inform them about the legal consequences of trade secret misappropriation. Further, an employer can control the number or level of employees with access to the hardware, software, and documents containing trade secrets. Further, where practicable, the rightsholder can employ software that tracks which employees access, edit, and/or copy what files. While this software sounds exotic, standard programs like Office 365 usually have these types of logs for basic data. Finally, rightsholders can limit access to facilities containing trade secrets to only those employees that are necessary for either utilizing or improving the trade secrets.
So, fret not, rightsholders, your trade secrets can still be adequately protected whether or not the Rule is rescinded.
The Story of the Ghost: How a “Loophole” Created a Behemoth of Intoxicating Cannabis Products and What (If Anything) Congress Intends to Do About It
I feel I never told youThe story of the ghost
To paraphrase the legendary Dave Chapelle, in the midst of impersonating Rick James, “cannabis is a hell of a drug.” Thankfully I don’t mean that in the same sense as Mr. Chapelle/James did. I mean that marijuana and its relatively newly defined sister plant “hemp” are unique in that they have experienced explosive growth and remarkable evolutions in legal status even though marijuana has, for the entirety of this growth and evolution, remained a Schedule I substance under the federal Controlled Substances Act.
There are several reasons for this almost unprecedented legal anomaly, including federal guidance documents and a federal appropriations rider discouraging state-authorized medical cannabis use. But the thousand-pound gorilla in the room – or the ghost, for this title to make sense – is the development of intoxicating cannabinoids that Congress arguably (if unwittingly) allowed when it passed the 2018 Farm Bill. In a few short years, intoxicating cannabinoids have exploded on the scene, as anyone who walks into a gas station, grocery store, or convenience store can attest. This multibillion-dollar industry grew from scratch to become a thorn in the state-licensed marijuana industry and poses challenging questions for Congress as it debates the next Farm Bill this year.
Let’s get into it.
A Law, a “Loophole,” or a Trojan Horse?
If you talk to marijuana operators, you will almost certainly hear about the “loophole” in the 2018 Farm Bill that allowed for the creation and subsequent explosion of non-marijuana products that compete with marijuana products.
So, what exactly is this “loophole”?
At the federal level, the Controlled Substances Act has defined “marijuana” for more than 50 years as:
The term [marijuana] means all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin. Such term does not include the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.
In the 2014 and 2018 Farm Bills, Congress created a legal definition of “hemp”:
the plant Cannabis sativa L. and any part of such plant, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.
Shortly after Congress created this separate definition of hemp, savvy (and, in some instances, unsavory) operators concluded that Congress had created a loophole of sorts that would allow for products that contained cannabinoids from the cannabis plant – even those with psychoactive or intoxicating effects – as long as the concentration of delta-9 THC on a dry weight basis is not more than 0.3%. It was this interpretation of the Farm Bill, replicated in the 2018 version, that led to the proliferation of consumable products containing delta-8 THC, delta-10 THC, and the like.
Ergo, the loophole. And it makes me think of these lyrics:
For this was my big secretHow I’d get ahead
His answer came in actionsHe never spoke a word
I somehow feel forsakenLike he had closed the door
I guess I just stopped needing himAs much as once before
In this author’s opinion, Congress did not intend in 2018 for the intoxicating hemp boom as we know it today. I also believe the Farm Bill on its face allows for many of the intoxicating hemp products we now see today, be it at a dispensary that resembles an Apple Store to a row of shelves at a gas station. I further believe that most legislators probably didn’t have the first idea of what they were voting on in 2018. Maybe that makes me a simpleton or maybe someone who can keep more than one idea in my head at the same time.
Those dual concepts pose an interesting challenge to those who consider whether one should look to the words of a statute or the intent of those who enacted the law. As a general principle, I tend to look to the former, but I certainly understand those who take the position that an unintended loophole should not be used to end-run legislative intent.
I guess there are some people out there who could argue that Congress knew it was creating an expansive legal hemp market, but (1) I haven’t seen many people whose opinion I value seriously press that argument, and (2) I would have expected Congress to create a regulatory framework to accompany this broad new category of intoxicating products.
So, What’s Next?
Regardless of how you view the implications of the 2018 Farm Bill, it is hard to disagree that it led to the development of a substantial industry in intoxicating hemp. Intoxicating hemp companies have generated hundreds of millions (if not billions) of dollars in tax revenue for state and federal coffers and have offered millions of Americans jobs and therapies that were not previously available. Whether that is a good thing or a bad thing is, I suppose, in the eye of the beholder.
And that brings us to the next Farm Bill and what it may portend for intoxicating hemp products. Though the cannabis portion of the bill will make up a tiny percentage of the Farm Bill’s text and there are enormous consequences to so many other provisions of the massive legislation, one would be wrong to assume there isn’t a street fight occurring in Washington between marijuana operators and hemp operators. Tens of millions of dollars – at least – are being spent on lobbying efforts to influence federal cannabis policy. Lawmakers are regularly fielding questions from constituents and their local media about the proliferation of hemp in its various forms. This is going to come down to the wire, and the specific language (likely with tweaks imperceptible to the average American and even many in Congress) will have enormous consequences for the cannabis industry in America. Truly, the devil – ahem, ghost – will be in the details.
At the end of the day, I suspect Congress will land on some sort of compromise that allows for at least some versions of intoxicating hemp products. If true, I would expect Congress to direct some agency or agencies to adopt regulations governing the manufacturing, testing, marketing, and sales of such products. Operators targeting children or making health claims aimed at vulnerable populations are in the most jeopardy, and purveyors of novel cannabinoids and high-THC products should be concerned as well. Low-THC products, including the increasingly popular hemp beverages, seem to have occupied a different place in the public eye and may be codified, albeit subject to more definite regulation.
If I’m right, marijuana operators won’t be completely satisfied, but neither will hemp operators. Maybe I’m just crazy enough to believe Congress can find a compromise.
Conclusion
For the past almost seven years, intoxicating cannabinoids have — in the eyes of many — become a sort of ghost haunting marijuana industry. I’m not sure that’s the right way to look at it. While I have no doubt, and certainly understand why, many marijuana operators would prefer to exist in a world without the perceived competition from these hemp products, I’ll ask again: Why can’t weed be friends?
Supreme Court Says Alabama’s Exhaustion of State Processes Rule Unlawfully Blocked Due Process Claims
On February 21, 2025, the Supreme Court of the United States ruled that an Alabama rule requiring claimants to first exhaust the state administrative appeals process before bringing due process claims over delays in their appeals of unemployment compensation claims unlawfully immunizes state officials from due process claims brought under 42 U.S.C. § 1983.
Quick Hits
The Supreme Court ruled that Alabama’s requirement to exhaust administrative processes before pursuing federal due process claims in state court unlawfully immunized state officials from claims for delays in unemployment insurance claims.
Justice Brett Kavanaugh emphasized that the exhaustion rule created a “catch-22” situation, preventing claimants from seeking relief in state court while waiting on state processes.
The decision may pave the way for increased access to state courts for plaintiffs challenging administrative delays.
While holding that the workers may proceed with their federal due process claims under Section 1983, the opinion noted that the Court took “no position” on the merits of their claims.
In a 5–4 opinion in Williams v. Reed, the Supreme Court sided with a group of unemployed Alabama workers, reviving their civil rights claims under 42 U.S.C. § 1983 against state officials that alleged “extreme delays” in their unemployment insurance claims. The Court held that Alabama’s exhaustion of administrative processes requirement “in effect immunizes state officials from those kinds of Section 1983 suits for injunctive relief.”
Under Alabama’s unemployment compensation scheme, any person seeking benefits must file an application with the Alabama Department of Labor. If denied, the person must seek a hearing before the department’s Hearings and Appeals Division, and then the department’s Board of Appeals. The law includes an exhaustion requirement that prohibits state courts from hearing any appeals from these decisions until they are final, and after all administrative remedies have been exhausted.
The workers filed suit in state court alleging that the delays in the administrative appeals process violated their procedural due process rights and the Social Security Act, but the Supreme Court of Alabama dismissed their claims. The Alabama high court ruled that it lacked subject matter jurisdiction to hear the appeal because the workers had failed to exhaust their state administrative remedies.
The state argued that such an exhaustion requirement is a “neutral rule of judicial administration” and that the Alabama Supreme Court had properly applied it to preclude the Section 1983 claims.
The Supreme Court of the United States majority agreed with the workers that “Alabama cannot maintain such an immunity rule,” whereby those challenging delays in administrative processes under Section 1983 must first exhaust those administrative processes. The Court found such a rule “in effect immunizes state officials from those kinds of §1983 suits for injunctive relief” and is therefore preempted.
“[T]hat ruling [by the Alabama Supreme Court] created a catch-22: Because the claimants cannot sue until they complete the administrative process, they can never sue under §1983 to obtain an order expediting the administrative process,” Justice Brett Kavanaugh wrote in the majority opinion. “This Court’s precedents do not permit States to immunize state officials from §1983 suits in that way.”
Justice Kavanaugh noted that the Court has previously explained that states have “‘no authority to override’ Congress’s ‘decision to subject state’ officials ‘to liability for violations of federal rights,’ and states may not immunize “state officials from a ‘particular species’ of federal claims, even if that immunity is “cloaked in jurisdictional garb.”
The Court further rejected the state’s argument that the workers could have sought a writ of mandamus to compel state officials to act more quickly, finding that the availability of such relief goes more to the merits of their due process claims.
Justice Clarence Thomas wrote a dissenting opinion, which was joined in part by three other justices, arguing that states “have unfettered discretion over whether to provide a forum for §1983 claims in their courts.” Justice Thomas argued that Supreme Court precedents find that such state exhaustion requirements are preempted only when they disfavor federal law, which was not the situation in the present case. Justice Thomas said the majority’s view that “petitioners will never be able to advance to state court” is a “theory of futility” that was “both forfeited and meritless.
Perhaps tellingly, the majority opinion stated in a footnote that it took no position on the actual merits of the workers’ claims and observed that a plaintiff who asserts an unexhausted due process claim will “usually lose” because such claims are “complete only when the State fails to provide Due Process.”
Next Steps
The Supreme Court ruling could increase plaintiffs’ ability to challenge state administrative agencies for due process concerns. Business groups had argued that the Alabama Supreme Court decision could frustrate the efficient handling of federal Section 1983 claims and “invite claim splitting and duplicative litigation.” While states have discretion to control subject matter jurisdiction in state courts, the Supreme Court’s ruling suggests that states cannot indefinitely delay processes to avoid due process claims over such delays.
Nevertheless, the merits of the workers claims will now be decided by the Alabama state courts, with a possible roadmap for dismissal on the merits contained in a key footnote of the majority’s opinion.
FCC One-To-One Consent Rule Set-Back
The Eleventh Circuit granted a reprieve to businesses worried the FCC’s “one-to-one” update to the TCPA Rule. As we wrote in December, the update was set to go into effect at the end of January, and according to the FCC would “close the lead generator loophole.” Specifically, it would have prohibited “generic consent.” Namely where people agree to be called by “affiliates,” “partners” or third parties. That prohibition would have been true even if those entities were specifically identified elsewhere. It would also have required consent from the individual to be called at a specific phone number, by a specific company, even though this is already required under TCPA.
Shortly before the effective date, an industry group challenged the change, saying that the FCC was essentially expanding the TCPA’s prior express consent requirement with its “one-to-one” rule. The group had two concerns. First, that the FCC was restricting consent to only one seller at a time. Second, that consent must be associated with the interaction that prompted consent. Both of these, the group argued, essentially added to the TCPA’s definition of prior express consent.
The Eleventh Circuit agreed. It relied on the Supreme Court’s Loper decision to contradict the FCC’s interpretation of the TCPA. The court concluded that the FCC had gone beyond the plain meaning of the phrase prior express consent. Although this decision is currently only binding with the Eleventh Circuit, the FCC postponed the change by a year (until January 26, 2026).
Putting it into Practice: We will be monitoring to see if the FCC withdraws or pares back its modification to the TCPA Rule prior to January of next year and whether other circuits follow the Eleventh Circuit’s ruling.
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Trade Secret Law Evolution Episode 74: First-to-File Rule, Res Judicata, and Statute of Limitations [Podcast]
This month, Jordan discusses how courts apply the first-to-file rule after a “race to the courthouse” and addresses cases involving the doctrine of res judicata and statute of limitations.
Federal Court in Florida Clarifies Chapter 93A, Section 11 Claim Pleading Requirements
The United States District Court for the Middle District of Florida recently addressed the pleading requirements for Chapter 93A, Section 11 claims in the case of Liberty Mut. Ins. Co. v. Compex Legal Servs. Liberty sued Compex for allegedly breaching their master services agreement (MSA) by overbilling for services and for unallowable charges, not refunding overbilled or unallowable amounts, failing to honor audit rights, and imposing extracontractual conditions on Liberty.
In addition to common-law claims, Liberty filed a Chapter 93A, Section 11 claim, which Compex moved to dismiss. Compex argued that Liberty failed to plead (1) extortionate conduct, (2) damages beyond the alleged breach of contract, and (3) a factual connection to Massachusetts. The district court was not persuaded by these arguments and denied the motion.
First, the court recognized that an act is unfair under Chapter 93A, Section 2 if it (i) falls “within at least the penumbra of some common-law, statutory, or other established concept of unfairness,” (ii) “is immoral, unethical, oppressive, or unscrupulous” and (iii) “causes substantial injury to consumers [or competitors or other businessmen].” The court noted that conduct generally must have an extortionate quality to transform a breach of contract into an unfair business practice. The court concluded that Liberty adequately alleged this by asserting that Compex had tried to impose its extracontractual conditions on Liberty as a prerequisite for conducting an audit, which was extortionate.
Second, the court disagreed with Compex’s assertion that Massachusetts case law precluded Liberty from proving causation and harm arising from Compex’s alleged extortionate conduct for Rule 12(b)(6) purposes. The case law cited was distinguishable based on Liberty’s complaint and, absent Massachusetts case law requiring Liberty to assert “unique” Chapter 93A damages, the court concluded that Compex did not meet its burden under Rule 12(b)(6) to support its argument.
Third, the court determined that Compex failed to prove that the alleged unfair acts did not occur “primarily and substantially” in Massachusetts, as required by Section 11. Liberty’s complaint did not specify the location of the acts, and Compex did not provide any other facts for consideration. The court ruled that the “primarily and substantially” argument was an affirmative defense not proper to consider under the circumstances, but noted it could be raised in a motion for summary judgment.
This decision underscores the fact-dependent nature of unfairness under Chapter 93A, Section 2, and the “primarily and substantially” requirement for Section 11 claims. The burden of proving unfairness rests with the plaintiff, while the burden of proving location rests with the defendant. While a simple breach of contract does not normally rise to the level of a 93A violation, when that breach is being used to try to extort additional benefits or opportunities, that can result in 93A liability.
NO LOGS FOR YOU: Court Declines to Require Privilege Log for Withheld Communications.
I have a fascinating tidbit from a TCPA discovery dispute.
In a recent decision on a motion to compel, a defendant was not required to produce purported communications between its attorneys and class members, or a “privilege log” thereof.
Taking a quick step back, Federal Rule of Civil Procedure 26(b)(5)(A)(ii) generally requires that parties withholding information based on attorney-client privilege or the work product doctrine “describe the nature of the documents, communications, or tangible things not produced or disclosed.” This description, generally known as a “privilege log,” was ultimately not required by a magistrate judge in Walston v. Nat’l Retail Solutions, Inc. d/b/a NRS Pay. No. 24 C 83, 2025 WL 580518, *6 (N.D. Ill. Feb. 21, 2025).
In Walston, the plaintiff wanted all records of communication between the defendant or its counsel and potential class members. Id. at *4. This lead to a motion to compel by the plaintiff and two interesting disputes regarding plaintiff’s discovery requests: (1) whether plaintiff was entitled to records of communication between defendant and potential class members and (2) whether plaintiff was entitled to records of communication between defendant’s counsel and potential class members.
Regarding the first dispute, the defendant contended that it had not communicated with class members—and that any such communications were made by its counsel. Id. at *5. The court agreed that documents that the defendant never possessed—i.e., because their counsel (probably) had the communications and never explicitly gave them to the defendant—could not be compelled by a discovery request. Id. at *6.
However, it is worth noting that, if the defendant had communicated with potential class members, that information would have been discoverable. Id. at *5.
On the second dispute as to communications between defendant’s counsel and potential class members, the defendant again asserted that it never had those communications. Id. at *6. Further, to the extent that the defendant communicated with its counsel regarding those communications, the defendant asserted attorney-client privilege and the work product doctrine. Id. The plaintiff requested a privilege log of withheld communications, and the defendant argued that documents created after a lawsuit is filed are presumed privilege and thus not subject to a privilege log. Id. at 5.
The court noted an emerging trend in which courts are not enforcing strict adherence with Rule 26(b)(5)(A)(ii) and thus not requiring a privilege log for withheld communication between a client and their counsel that occurred after litigation has commenced. Id. at 5 (citing Rayome v. Abt Elecs., 2004 WL 1435098, at *4 (N.D. Ill. Apr. 3, 2024)).
That is the key takeaway from this case: the promising view that privilege logs are not required for communication between counsel and their client in litigation matters. Privilege logs can be burdensome and, in some cases, just as damaging as producing the privileged information.
More updates are to come, as we see how courts apply this emerging trend!
Updated Guidance on the Corporate Transparency Act and Beneficial Ownership Information Reporting Requirements
The Corporate Transparency Act (CTA) and the Financial Crimes Enforcement Network’s (FinCEN) enforcement of the CTA’s beneficial ownership information (BOI) reporting requirements have been the subject of numerous pending legal challenges that have affected compliance dates. Following a recent court decision to stay its injunction, FinCEN has updated guidance resuming its enforcement of BOI reporting requirements. Consequently, the vast majority of non-exempt reporting companies must file initial, amended, and/or corrected BOI reports by March 21, 2025, and as set forth below in the FinCEN Guidance:
For the vast majority of reporting companies, the new deadline to file an initial, updated, and/ or corrected BOI report is now March 21, 2025. FinCEN will provide an update before then of any further modification of this deadline, recognizing that reporting companies may need additional time to comply with their BOI reporting obligations once this update is provided.
In addition, reporting companies that previously received a different reporting deadline or are involved with certain ongoing litigation should be aware of the additional FinCEN Guidance below:
Reporting companies that were previously given a reporting deadline later than the March 21, 2025 deadline must file their initial BOI report by that later deadline. For example, if a company’s reporting deadline is in April 2025 because it qualifies for certain disaster relief extensions, it should follow the April deadline, not the March deadline.
As indicated in the Alert titled, “Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.),” Plaintiffs in National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) — namely, Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024) — are not currently required to report their beneficial ownership information to FinCEN at this time.
Additionally, moving forward, any new reporting company formed (or foreign reporting company registered) will have 30 days from the date of its formation (or its registration in the case of foreign entities) to file its initial BOI report.
As with past developments, the CTA’s future remains uncertain, and possible Congressional and/or further court actions could delay, change, or eliminate beneficial ownership reporting requirements.
Preliminary Injunction Granted Related to DEI-Related Executive Orders—Takeaways for Government Contractors
In the four weeks since President Trump issued Executive Order (“EO”) 14151 (“Ending Radical and Wasteful Government DEI Programs and Preferencing”) and EO 14173 (“Ending Illegal Discrimination and Restoring Merit-Based Opportunity”), virtually all sectors of American society have been scrambling to understand their compliance obligations and seeking to reduce legal risk. Businesses have taken a range of approaches, from preparing to defend their diversity, equity, and inclusion (“DEI”) commitments to removing public-facing references to DEI. Some government contractors have received DEI-related certifications required by EO 14173, which implicate enforcement under the False Claims Act (“FCA”).
In a significant new development, on February 21, 2025, the United States District Court for the District of Maryland issued a nationwide preliminary injunction against both EO 14151 and EO 14173. Here’s what federal contractors need to know.
Case Background
The plaintiffs allege that EO 14151 violates the Constitution’s spending clause by directing the termination of “equity-related” contracts (Count I); that Sec. 2 of EO 14151 and Sec. 4 of EO 14173 are unconstitutionally vague (Counts II and III); that Sections 3 and 4 of EO 14173 violate the First Amendment’s Free Speech Clause (Counts IV and V, ); and that EO 14173 violates the constitutional separation of powers principle (Count VI).
The Challenged Provisions
The Court generally describes the EOs’ “Challenged Provisions” as follows:
The “Termination Provision” of EO 14151 directs executive agencies to terminate “equity-related” grants and contracts;
The “Certification Provision” of EO 14173 directs executive agencies to require a new contract certification, enforceable through the FCA, stating that the contractor does not promotea DEIprogram that violates applicable federal anti-discrimination laws; and
The “Enforcement Threat Provision” of EO 14173 directs the Attorney General (“AG”) to encourage the private sector to end illegal discrimination and preferences, including DEI, and to have agencies identify up to nine targets for potential civil compliance investigations.
The following analysis focuses on the Certification and the Enforcement Threat challenges, which are the most salient for government contractors.
1. Likelihood of Success on the Merits
The Court found that Plaintiffs showed injury from the Certification and Enforcement Threat Provisions because Plaintiffs “reasonably expect that they will be forced to either restrict their legal activities and expression that are arguably related to DEI, or forgo federal funding altogether.” (Memorandum of Opinion (“Mem. of Op.”) at 25.)
(a) First Amendment Rights of Contractors
The Court specifically addressed the First Amendment rights of federal contractors, reiterating that in Board of Cnty. Com’rs, Wabaunsee Cnty., Kan. v. Umbehr the Supreme Court held that the government does not have “carte blanche to terminate independent contractors for exercising First Amendment rights.” 518 U.S. 668, 679 (1996). Although the government has some ability to restrict a government contractor’s free speech rights, Fulton v. City of Philadelphia, Pennsylvania, 593 U.S. 522, 535 (2021), the First Amendment prohibits the government from “seek[ing] to leverage funding to regulate speech outside the contours of the program itself.” Agency for Int’l Dev. v. All. for Open Soc’y Int’l, Inc., 570 U.S. 205, 214-15 (2013) (“AID”). Additionally, the government may not terminate government contracts “because of the[] [contractors’ or grantees’] speech on matters of public concern.” Wabaunsee County, 518 U.S. at 675.
The Court also found Plaintiffs are likely to succeed because the Certification “constitutes a content-based restriction on the speech rights of federal contractors…” and applies to all of a contractor’s work, whether or not funded by the government. (Mem. of Op. at 25.)
The Court noted that during the hearing, the government failed to satisfactorily address hypotheticals about DEI implementation by federal contractors and thus, “[b]ecause even the government does not know what constitutes DEI-related speech that violates federal anti-discrimination laws, Plaintiffs have easily shown a likelihood that they will prevail in proving that the Certification Provision operates as a content-based prior restraint on their speech, and likely will also prevail in showing that the Certification operates as a facially viewpoint-discriminatory order as well. The speech-chilling effect of the Certification Provision is particularly obvious given the vagueness of the [EOs]…”, and that “federal contractors… have shown they are unable to know which of their DEI programs (if any) violate federal anti-discrimination laws, and are highly likely to chill their own speech—to self-censor, and reasonably so—because of the Certification Provision. Indeed, the Certification Provision was likely designed to induce, and certainly has been shown to have the effect of inducing, federal contractors… to apply an overinclusive definition of illegal DEI to avoid risking liability. This is exactly what AID prohibits…” (Mem. of Op. at 47.)
(b) The FCA
The Court also addressed the precarious situation of contractors facing the Certification Requirement, noting that the vagueness of EO 14173 puts them “in a position to have to guess whether they are in compliance” and that they are “threatened with False Claims Act liability if they miss the mark. Such escalation of consequences dramatically raises the stakes, and by extension dramatically expands the degree of injury to interests protected by the Fifth Amendment.” (Mem. of Op. at 54-55.)
2. Irreparable Harm
The Court found that Plaintiffs are suffering irreparable harm due to a chilling effect on their speech and a potential loss of federal funding. The Court noted: “…the Challenged Provisions strip Plaintiffs of the ability to know what the government might now consider lawful or unlawful. There have been 60 years of statutes, regulations, and case law developed since the Civil Rights Act of 1964. The Challenged Provisions strip away much of the prior executive branch guidance, and then threaten the loss or condition the receipt of federal funds, and also threaten civil enforcement actions—some backed by the possibility of treble damages—for violations. And in so doing, they threaten to punish prior expressions of protected speech, and chill future expressions of protected speech.” (Mem. of Op. at 56-57.)
3. Balance of the Equities
Here, the Court approvingly cited the Plaintiffs’ statement that “[e]fforts to foster inclusion have been widespread and uncontroversially legal for decades” (Mem. of Op. at 59), and stated that the “the status quo must be maintained while Plaintiffs and the government litigate the claims asserted in this case. The balance of equities tips strongly in Plaintiffs’ favor.” (Mem. of Op. at 60.)
Implications for Federal Government Contractors
The injunction has several immediate implications for federal government contractors:
1. Contractors no longer face the immediate threat of termination due to undefined “equity-related” activities.
2. Agencies cannot require contractors to make certifications pursuant to the Certification Provision.
3. The government may not bring an FCA suit or other enforcement action based on the Enforcement Threat Provision, temporarily reducing the risk of government-initiated FCA action.
4. The injunction does not apply to the requirement under EO 14173 that the AG submit a report in coordination with the heads of relevant agencies that identifies key sectors of concern within each agency’s jurisdiction, and each sector’s “most egregious DEI practitioners,” as well as up to nine targets for potential civil compliance investigations. We therefore expect the AG to continue preparing this report—which is what was prompting some contractors to reconsider the extent of their public commitments to DEI in the first place. The AG’s report is due May 21, 2025.
Moving Forward
Contractors should consider the following steps in light of the injunction:
Document DEI-Related Interactions with the Government: Contractors should document any communications or actions taken by federal agencies that might contravene the injunction.
Stay Informed: Monitor further legal developments, both in this case and in a similar one filed February 19, 2025, in the United States District Court for the District of Columbia.
Consult Legal Counsel: Contractors should consult counsel regarding existing DEI programs, including whether and how to amend such programs given the changing legal landscape.
Conclusion
The preliminary injunction is an initial victory for federal contractors that provides immediate relief from the threat of losing federal funding for not signing a DEI certification, the threat of government-initiated FCA enforcement, and the infringement on DEI-related speech.
Federal Court Concludes States Have Standing to Challenge EEOC’s Pregnant Workers Fairness Act Rule (US)
The U.S. Court of Appeals for the Eighth Circuit ruled on February 20, 2025, in Tennessee v. Equal Employment Opportunity Commission, that seventeen (17) State attorneys general have standing to challenge the EEOC’s Final Rule interpreting the Pregnant Workers Fairness Act (the “PWFA” or “the Act”). In the first federal appellate court decision to consider the issue, the Eighth Circuit panel held that the plaintiff-States have a sound jurisprudential basis to challenge the Final Rule because the States “are the object of the EEOC’s regulatory action.”
Congress enacted the PWFA in 2023. The Act requires covered employers to provide employees or applicants with reasonable accommodation to known limitations related to, affected by or arising out of “pregnancy, childbirth, or related medical conditions,” unless the accommodation will cause the employer undue hardship. 42 U.S.C. § 2000gg(4). Critical to understanding this employer obligation is the embedded term “related medical conditions,” which Congress left undefined, choosing instead to delegate to the Equal Employment Opportunity Commission (EEOC) the responsibility to “provide examples of reasonable accommodations addressing known limitations related to pregnancy, childbirth, or related medical conditions.” 42 U.S.C. § 2000gg-3(a).
In April 2024, after notice-and-comment rulemaking, the EEOC issued regulations broadly defining what constitutes “limitations related to, affected by, or arising out of pregnancy, childbirth or related medical conditions,” including within its examples, among others, lactation, miscarriage, stillbirth and “having or choosing not to have an abortion.” 29 C.F.R. Part 1636 & app. A. Numerous religious organizations voiced dissent to the EEOC’s broad definition of limitations related to pregnancy and childbirth. Even within the EEOC, there was vocal disagreement about the proposed regulations. Andrea Lucas—who at the time was an EEOC Commissioner but who, on January 20, 2025, was designated by President Trump as the Acting Chair of the EEOC shortly before he terminated two of the three Democratic Commissioners on the five-seat EEOC—vociferously objected to the agency’s broad interpretation of the phrase “pregnancy, childbirth, or related medical conditions,” claiming the phrase conflated accommodations to pregnancy and childbirth with accommodations to the female sex, including female biology and reproduction. Over Ms. Lucas’s objection, the EEOC’s Final Rule issued, with the broad definition of pregnancy-related limitations intact.
Less than one week after the Final Rule took effect, seventeen State Attorneys General, all hailing from Republican states, challenged the Final Rule on behalf of State employers, contending the EEOC exceeded its authority under the PWFA when it included abortions within the scope of pregnancy “related medical conditions.” At oral argument, the States conceded there may be some situations when a State employer should reasonably accommodate an employee obtaining an abortion, such as in the case of an incomplete miscarriage, ectopic pregnancy or when pregnancy-related medical conditions (such as diabetes) imminently threaten the health of the pregnant employee. However, the States objected, the Final Rule also purports to require accommodation for elective abortions “prompted exclusively by the woman’s choice, where no ‘physical or mental condition related to, affected by, or arising out of pregnancy, childbirth, or related medical conditions…’ exists, but where getting the abortion creates some limitations on the employee’s ability to do her job.” The States argued that, in many jurisdictions they represented, elective abortions—indeed, almost all abortions—are illegal; therefore, a regulation requiring accommodation for an illegal medical procedure created a non-speculative injury to the State-employers. The EEOC retorted that the States’ request to enjoin the regulation was unwarranted and the States lacked standing to bring the case because the States’ asserted injuries were purely speculative, both with respect to any individual accommodation and the overall cost of compliance with the regulation.
The federal court for the Eastern District of Arkansas agreed with the EEOC and held, on June 14, 2024, that the States lacked standing to challenge the Final Rule. The district court held the Plaintiff-States had not asserted a redressable injury-in-fact, pointing specifically to the EEOC’s inability to bring enforcement actions against State employers and the vagary around the compliance costs the States argued they would bear implementing the regulation. On appeal, however, the Eighth Circuit Court of Appeals reversed, concluding that “[t]he imposition of a regulatory burden itself causes injury.” The appellate court reasoned:
Covered entities must comply with the Rule, and we presume that the States will follow the law as long as the Rule is in effect. An employer cannot meet its obligations under the Rule without taking steps to ensure that its employees know their rights and obligations under the Rule. As a practical matter, the Rule requires immediate action by the States to conform to the Rule, and this action produces an injury in fact.
The case now returns to the district court to hear the States’ arguments on the merits. Should the States prevail on the merits, the Final Rule is likely to be substantially revised. Although EEOC Acting Chair Lucas lacks the authority unilaterally to rescind or modify the Final Rule, she has indicated that the EEOC will reconsider portions of the Final Rule that are “unsupported by the law” once a quorum is re-established. We will continue to monitor and update with developments.
Indian Music Industry Enters the Global Copyright Debate Over AI
The legal battles surrounding generative AI and copyright continue to escalate with prominent players in the Indian music industry now seeking to join an existing lawsuit against OpenAI, the creator of ChatGPT. On February 13, 2025, industry giants such as Saregama, T-Series, and the Indian Music Industry (IMI) presented their concerns in a New Delhi court, arguing that OpenAI’s methods for training its AI models involve extracting protected song lyrics, music compositions, and recordings without proper licensing or compensation. This development follows a broader trend of copyright holders challenging generative AI companies, as evidenced by similar claims in the U.S. and Europe.
This case was originally filed by Asian News International (ANI), a leading Indian news agency, which alleged that OpenAI had used its copyrighted content without permission to train its AI models. Since then, the lawsuit has drawn interest from music companies, book publishers, and news organizations, all highlighting the alleged economic harm and intellectual property concerns stemming from these practices in India. The proceedings emerge amid a global backlash against the use of copyrighted materials in AI training. In November 2024, GEMA, Germany’s music licensing body, filed a lawsuit against OpenAI, alleging that the company reproduced protected lyrics without authorization. In parallel, lawsuits from authors and publishers in the U.S. have accused OpenAI and other AI platforms of improperly using copyrighted materials as training data.
The unfolding litigation raises critical questions about the boundaries and applicability of ‘fair use’ within the context of AI in the digital age. While OpenAI maintains that its reliance on publicly available data falls within fair use principles, commentators warn that a ruling against the tech giant could set a precedent that reshapes AI training practices not only in India but worldwide—given the global nature of AI development and jurisdiction-specific nuances of copyright law. As courts grapple with these complex issues, both creative industries and the broader tech community are watching closely to understand how emerging precedent and legal frameworks around the world might influence future AI development and deployment.
As legal challenges mount globally, this litigation is another reminder for businesses developing AI models or integrating AI technologies to proactively assess data privacy and sourcing practices, secure appropriate licenses for copyrighted content, and thoroughly review existing agreements and rights to identify any issues or ambiguities regarding the scope of permitted AI use cases. Beyond obtaining necessary licenses, companies should implement targeted risk mitigation strategies, such as maintaining comprehensive records of data sources and corresponding licenses, establishing internal and (where appropriate) external policies that define acceptable AI use and development, and conducting regular audits to ensure compliance. For any company seeking to unlock AI solutions and monetization opportunities while safeguarding its business interests, engaging qualified local legal counsel early in the process is essential for effectively navigating the evolving global patchwork of fair use, intellectual property laws, and other relevant regulations.
District Court Blocks Enforcement of SCOPE Act Requirements
On February 7, 2025, the U.S. District Court for the Western District of Texas granted a preliminary injunction further blocking enforcement of Texas’ Securing Children Online through Parental Empowerment Act (“SCOPE Act”). The SCOPE Act, which was enacted in 2023, imposes obligations on digital service providers to protect minors.
In a separate lawsuit regarding the SCOPE Act (Computer & Communications Industry Association v. Paxton), the District Court enjoined certain provisions of the law before it went into effect. In August 2024, plaintiffs, including a student-run civic engagement organization, a “social-good” advertising company, a mental health content creator and an unidentified high school student, sued Texas Attorney General Ken Paxton to block enforcement of the SCOPE Act on the basis that the law is an unconstitutional restriction of free speech.
In Students Engaged in Advancing Texas v. Paxton, the District Court ruled that the law is a content-based statute subject to strict scrutiny. The District Court further held that with respect to certain of the SCOPE Act’s monitoring-and-filtering requirements (§ 509.053 and § 509.056(1)), targeted advertising requirements (§ 509.052(2)(D) and § 509.055), and content monitoring and age-verification requirements (§ 509.057), the plaintiffs had carried their burden in showing that the law’s restrictions on speech fail strict scrutiny and should be facially invalidated. The District Court also ruled that § 509.053 and § 509.055 were unconstitutionally vague. Accordingly, the District Court issued a preliminary injunction enjoining Paxton from enforcing those provisions pending final judgment in the case. The remaining provisions of the law remain in effect.