False Claims Act Liability Based on a DEI Program? Let’s Think It Through.
One of the more attention-grabbing aspects of Executive Order (“EO”) 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” is the specter of False Claims Act (“FCA”) liability for federal contractors based on their Diversity, Equity, and Inclusion (“DEI”) programs. Many workplace DEI programs have been viewed as a complement to federal anti-discrimination law—a tool for reducing the risk of discrimination lawsuits. The new administration, however, views DEI programs as a potential source of discrimination. EO 14173 proclaims that “critical and influential institutions of American society . . . have adopted and actively use dangerous, demeaning, and immoral race- and sex-based preferences under the guise of so-called ‘diversity, equity, and inclusion’ (DEI) or ‘diversity, equity, inclusion, and accessibility’ (DEIA) that can violate the civil-rights laws of this Nation.” To counteract this potential “illegal” use of DEI programs, the Trump administration is leveraging the FCA, a powerful anti-fraud statute, to enforce its policy within the federal government contractor community.
We discuss below the framework of the FCA, how it might apply to federal contractor DEI programs under the administration’s orders, and potential hurdles the government may face in pursuing FCA claims based on a contractor’s allegedly illegal DEI program. We recommend steps contractors can take to mitigate potential FCA risks when evaluating their own DEI programs.
How Does the False Claims Act Work?
The FCA creates civil monetary liability for those who submit to the government (1) a false or misleading claim or statement, (2) while knowing that the claim was false, and where (3) the false claim or statement is material to the government’s payment decision.
The courts have recognized a number of circumstances that can give rise to FCA liability. As relevant to EO 14173, the government might assert that a contractor submits a “legally false” claim when it knowingly fails to comply with a contractual or legal requirement, even if the contractor otherwise performs the services or provides the goods that are the subject of the contract. This theory posits that the contractor “impliedly certifies” its compliance with a material term or requirement at the time it submits its claim for payment.[1]
The consequences of FCA liability can be significant. The statute allows the government to recover treble damages (i.e., three times the amount that the government was harmed), plus civil penalties that attach to each false or fraudulent claim.[2] Government contractors also may find themselves facing severe collateral consequences, as a finding of FCA liability often leads to suspension and debarment proceedings, which threaten the contractor’s eligibility for future federal awards.
One of the unique features of the FCA is its whistleblower provisions, which allow a private person (or company) to file an FCA lawsuit on behalf of the government. Such qui tam lawsuits are filed in court, but under seal—i.e., not available to the public—to allow the government to investigate the claims and decide whether to participate in the whistleblower’s claims. The FCA provides strong financial incentives to would-be qui tam plaintiffs, by allowing them to share in any recovery to the government, and to recover their attorney’s fees and costs incurred in bringing the action.
Whistleblower-initiated FCA activity is on the increase. Recent data shows that nearly 1,000 qui tam actions were filed in fiscal year 2024. Further, of the $2.9 billion that the government recovered through the FCA in 2024, more than $2.4 billion resulted from qui tam cases. Whistleblowers received more than $400 million through these recoveries.
How Might Federal Contractor DEI Programs Give Rise to FCA Liability?
EO 14173 requires every government agency to include in every contract or grant award a provision confirming that the contractor understands and agrees that “its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions,” for purposes of the FCA. Those agreements must also require contractors and grantees to certify that “it does not operate any programs promoting DEI that violate any applicable federal anti-discrimination laws.” By citing the FCA and specifically invoking the element of materiality requiring certification, EO 14173 signals that the administration intends to enforce its policies through the FCA.
Once a contractor provides the certification envisioned by EO 14173,[3] the potential exists for the government or a whistleblower to initiate an FCA action on the theory that the contractor’s DEI program violates federal anti-discrimination law. Some government contractors may think they should immediately abolish their DEI programs in order to neutralize the potential risk of costly FCA investigations and litigation. But as we explain below, actually winning an FCA case on the basis that the contractor’s DEI program violates applicable federal law will not be slam dunk.
What Are Some Potential Hurdles to Proving an FCA Violation Based on a DEI Program?
The plaintiff, whether the government or a whistleblower, bears the burden of proving each element of the alleged FCA violation. The elements of falsity, scienter, and materiality could each face obstacles of proof in establishing liability based on allegedly improper DEI program.
Falsity. To establish falsity, the government must show that the defendant contractor submitted a claim for payment to the government without disclosing that its DEI program violated federal anti-discrimination laws. The government may try to argue that some portion of the contractor’s DEI program is manifestly unlawful, but federal courts are divided as to whether contemporaneous, good faith differences in interpretation related to a disputed legal question (e.g., what constitutes “illegal DEI”) are “false” under the FCA. A number of courts require that an alleged statement or “implied certification” is objectively false.
Adding to the uncertainty here, neither the EO nor the versions of the contractor certification proposed so far define key terms such as “promoting,” “DEI,” and “illegal DEI.” The administration’s apparent view that certain DEI programs violate anti-discrimination statutes, such as Title VII of the Civil Rights Act, may not receive the deference that the courts once extended to the Executive Branch.[4]
Scienter. A false statement or certification is not actionable under the FCA unless the contractor “knew”—or at a minimum, recklessly disregarded—the falsity at the time its claim was submitted. A contractor’s honestly held, good faith belief in the truthfulness of its certification is a strong defense to liability.[5] Where contractors are required already to comply with federal anti-discrimination laws, it seems likely that they hold a good faith belief that their DEI programs are consistent with, and not contrary, to those laws. We expect that the government will face significant hurdles in proving that contractors “knowingly” engaged in “illegal” DEI programs.
Materiality. While EO 14173 expressly invokes materiality language in its anticipated contract and grant provisions, that alone is insufficient to establish the materiality element under the FCA. Indeed, the Supreme Court has held specifically that a contract provision or regulation requiring compliance as an express condition of payment is not dispositive on materiality.[6] Instead, establishing the materiality element under the FCA requires consideration of a variety of factors, including whether the government continued to pay the contractor’s claims in full, knowing that there were questions as to the legality of the contractor’s DEI program. Given the demanding standard required to establish materiality, contractors should not feel pressured to readily concede this element merely because the of a DEI certification in their contracts.
What Steps Should Federal Contractors Take to Reduce Their Risk?
Despite these likely obstacles to establishing FCA liability, EO 14173 will no doubt engender FCA investigations and whistleblower complaints in the upcoming months. To prepare for the new legal landscape, contractors should take the following precautions.
Conduct a Thorough, Privileged Analysis of All Aspects of the DEI Program
Contractors may think that abolishing their DEI program will erase the FCA risk. However, the government has cautioned that those who try to hide DEI activities by “misleadingly relabeling” them,[7] will still face scrutiny. Accordingly, FCA whistleblowers may be undeterred by the absence of a specific program called DEI, particularly if such an initiative existed previously.
To be clear, even under EO 14173, it is not illegal to have a DEI program. If a contractor has such a program, now is the time to undertake a comprehensive review to ensure that it comports with current anti-discrimination laws. There are several benefits to engaging counsel to conduct this review, even if the contractor believes its DEI program is lawful. First, evaluating the program through the more critical lens of the current administration can identify any aspects that should be amended to mitigate misunderstanding and risk. Second, engaging in such a review can help establish the contractor’s good faith belief in the truthfulness of its DEI certification. Third, the review can allow a contractor to explain to the government, if necessary, the legality and business value of each element of its DEI program.
Conduct a Privileged Assessment of Public-Facing DEI Messaging
Federal contractors also should undertake a privileged review of all public-facing DEI messaging and disclosures. These can appear in various places including on a company’s website, in its SEC filings, in recruiting materials, and on intranet platforms. Again, this evaluation can identify and mitigate the risk that any portion of the DEI program appears unlawful, even if it is not in practice or substance. Changes to descriptions of a company’s DEI program or its commitments to non-discrimination should be made in consultation with counsel and appropriate internal and external stakeholders, to avoid inadvertent legal admissions or the perception that a company has abandoned its previously stated commitment to compliance with the law.
Maintain Real-Time Awareness and Develop a Strategy Regarding the Certification
Agencies already have begun sending their own versions of a DEI certification to contractors as proposed bilateral modifications to existing contracts, often with a demand for a response within just a few days. For new contracts, the government may include the new certification in a portal with other representations and certifications that a contractor must complete in connection with maintaining eligibility or submitting proposals. It is critical to anticipate, identify, and be ready for the moment when a DEI certification becomes applicable to the contractor organization. Contractors should identify the person(s) within their organization likely to receive the certification requests and provide them with instructions and training on how to respond.
We also recommend consulting legal counsel in connection with making any proposed certification. Contractors may be able to present alternative responses to agency requests, rather than immediately agreeing to an ill-defined certification. For instance, the contractor might bring the ambiguities in the certification language to the attention of the Contracting Officer, while contemporaneously memorializing the basis for the contractor’s reasonable interpretation of the ambiguous certification to assist in the defense of a future FCA claim.
Do Not Retaliate Against Employees (or Anyone) Asking Questions About the Legality of the DEI Program
In the coming months, potential whistleblowers may be sizing up whether there is a possibility for an FCA action. In so doing, they may raise questions or concerns about a contractor’s DEI program. The FCA includes anti-retaliation provisions that can expose a company to an employment lawsuit, even if a substantive FCA violation cannot be established. Anticipating how to address questions about the DEI program (and documenting such exchanges) may help avoid potential legal challenges. Contractors should also confirm that employees have multiple, safe avenues to report, and provide managers and human resources professionals with guidance for responding appropriately.
Review and Consider Updates to Internal Company Policies on DEI
Contractors should consider whether to update internal policies to reflect that they contemporaneously reviewed the requirements of EO 14173 and made efforts to comply with its directives. For instance, internal policies could be amended to more clearly state that employment decisions are based on merit and not on protected characteristics. Policies could be developed that expressly disallow race or gender-based quotas, workforce balancing, required composition of hiring panels, diverse slate policies, or DEI training relying on stereotypes. Having recently updated policies that align with the new EO may provide greater protection in the event of a government investigation, particularly if contractors can demonstrate that these new policies are subject to an internal control schedule to test for compliance.
Conclusion
We anticipate the administration will seek to vigorously enforce the requirements of EO 14173. Indeed, the EO contemplates civil compliance investigations of numerous entities ranging from publicly traded corporations to institutions of higher education. Although contractors should remain vigilant about compliance, they should also keep in mind that FCA liability for an allegedly “illegal DEI” program is not a foregone conclusion, even in the face of a certification regarding materiality. The government (or whistleblower) must still establish an FCA violation on the specific facts at issue and likely will face challenges given the many ambiguities in the EO and in the certifications and provisions proposed to date. Even a meritless FCA suit quickly dismissed, though, is something contractors will want to avoid. Thus, it is critical to undertake steps to mitigate the risk of a qui tam action.
[1] The Supreme Court acknowledged the implied false certification theory of FCA liability in Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016).
[2] 31 U.S.C. § 3729(a)(1).
[3] How the government will include this certification into all federal contracts is not yet clear. Some contractors have begun receiving proposed bilateral contract modifications with certification language (each slightly differently worded). For new contracts, the certification likely will appear on a portal along with other routine government contracts representations and certifications. It is also worth noting that, the ordered DEI certification should be subject to notice and comment rulemaking under the OFPP Act, 41 U.S.C. § 1707; yet the administration has paused rulemaking under a memorandum dated January 20, 2025 titled Regulatory Freeze Pending Review – The White House. Failure to engage in rulemaking could render the proposed DEI certifications unenforceable. See Navajo Ref. Co., L.P. v. United States, 58 Fed. Cl. 200, 209 (2003) (contract clause invalid because no notice and comment process occurred pursuant to the OFPP Act); La Gloria Oil & Gas Co. v. United States, 56 Fed. Cl. 211, 221–22 (2003) (same), abrogated on other grounds by Tesoro Hawaii Corp. v. United States, 405 F.3d 1339 (Fed. Cir. 2005).
[4] See Loper Bright Enterprises v. Raimondo, 603 U.S. 369, 412-13 (2024) (holding that courts should not defer to administrative agencies’ interpretations of statutes that are clear and unambiguous).
[5] See United States ex rel. Schutte v. SuperValu, Inc., 598 U.S.C. 739, 749 (2023) (“The FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonably person may have known or believed.”).
[6] See Universal Health Servs., Inc. v. Escobar, 579 U.S. 176, 190 (2016) (“. . . not every undisclosed violation of an express condition of payment automatically triggers liability. Whether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry.”).
[7] See, e.g., Ending Radical And Wasteful Government DEI Programs And Preferencing – The White House (Feb. 5, 2025; Dep’t of Justice, Office of Attorney General Memorandum (February 5, 2025).
Federal Circuit Clarifies § 101 Patent Eligibility for Composition-of-Matter Claims
In a significant decision, the Federal Circuit reversed the U.S. International Trade Commission’s (ITC) finding that claims of U.S. Patent No. 10,508,502 (502 Patent) were invalid under 35 U.S.C. § 101. The opinion addresses critical issues in patent eligibility jurisprudence, particularly regarding composition-of-matter claims and provides additional clarity for patent owners facing § 101 challenges.
Background of the Case
The case, US Synthetic Corp. v. ITC, involves petitioner’s allegations that various companies violated Section 337 of the Tariff Act by importing products that infringed its 502 Patent. The 502 Patent pertains to polycrystalline diamond compacts (PDCs) used in drilling applications.
At issue was Claim 1 of the 502 patent, which describes the structural and magnetic properties of the PDC as follows:
A polycrystalline diamond compact, comprising:
a polycrystalline diamond table, at least an un-leached portion of the polycrystalline diamond table including:
a plurality of diamond grains bonded together via diamond-to-diamond bonding to define interstitial regions, the plurality of diamond grains exhibiting an average grain size of about 50 μm or less; and
a catalyst including cobalt, the catalyst occupying at least a portion of the interstitial regions;
wherein the un-leached portion of the polycrystalline diamond table exhibits a coercivity of about 115 Oe to about 250 Oe;
wherein the un-leached portion of the polycrystalline diamond table exhibits a specific permeability less than about 0.10 G∙cm3/g∙Oe; and
a substrate bonded to the polycrystalline diamond table along an interfacial surface, the interfacial surface exhibiting a substantially planar topography;
wherein a lateral dimension of the polycrystalline diamond table is about 0.8 cm to about 1.9 cm.
The ITC’s Ruling
The ITC’s Administrative Law Judge (ALJ) ruled the claims were patent-ineligible under § 101, reasoning that while the claimed PDC was a physical product, its claimed magnetic properties—coercivity, specific permeability, and specific magnetic saturation—were merely side effects of the manufacturing process and did not define structural elements. The ALJ concluded that the claims were directed to an abstract idea, namely: unintended “results or effects” of the manufacturing process. A divided Commission affirmed, rejecting petitioner’s argument that magnetic properties are structural or indicative of structure, and instead agreeing with the ALJ that the claimed properties were not a sufficiently concrete structure but rather a reflection of natural phenomena.
The Federal Circuit’s Analysis
The Federal Circuit’s decision, delivered by Judge Chen, reversed the ITC’s ruling on patent eligibility, holding that the claimed invention was not directed to an abstract idea but instead to a specific, non-abstract composition of matter, namely, a PDC defined by its constituent elements.
The court rejected the ITC’s reasoning that the magnetic properties were merely side effects of a manufacturing process, and instead found that the relationship between the measured properties and the structure of the PDC was sufficiently disclosed in the patent specification and magnetic properties such that the claimed magnetic properties further define the structural characteristics of the claimed product. In this regard, the Federal Circuit clarified that patent claims do not need a “perfect proxy” for structural properties to survive § 101 scrutiny. The court noted, “The disclosed relationship here is sufficient for § 101, where we are trying to ascertain as a matter of law whether a patent claim is directed to a specific implementation of an idea or merely just the idea itself.”
The ruling also noted that the ITC’s reliance on cases involving software and algorithmic patents, was inappropriate. Unlike those cases, which involved performing functions using generic computer components, the 502 Patent’s composition-of-matter claim defined a tangible, physical product. The Federal Circuit drew a clear distinction, stating, “The claimed PDC is not an abstract result of generic computer functionality, but instead is a physical composition of matter defined by its constituent elements, dimensional information, and inherent material properties.”
Why this Case is Important
This decision has significant implications for composition-of-matter claims. It provides another foothold for protecting physical inventions, particularly in materials science, chemistry, and engineering. Had the ITC’s ruling stood, it could have set a dangerous precedent, casting doubt on patents that define materials by their measurable properties rather than their physical structure. The ruling also provides additional clarity on how § 101 considerations apply to composition-of-matter patents, pushing back against overbroad interpretations of the “abstract idea” exception.
This decision also draws a line against extending the applicability of software and business method jurisprudence into cases where patents define physical structures or claimed parameters that are concrete, objective measurements for defining the invention.
Ultimately, this case serves as an important precedent for patent owners, particularly those in industries where innovations are defined by measurable material properties. By reaffirming the eligibility of composition-of-matter patents, the Federal Circuit provided a clearer path for protecting physical innovations under § 101.
Key Takeaway
The Federal Circuit makes clear that the broader context of the entire patent is important in the analysis. When including claims using non-structural properties, be sure that the specification describes a sufficient correlation between the claimed effects/results and any unclaimed physical characteristics. These correlations should be concrete and meaningful, rather than merely speculative. The specification should sufficiently disclose the relationship between the claimed properties and the structure.
For further details, patent professionals are encouraged to review the full court opinion and consider how this decision may influence their current and future portfolio and/or litigation strategies.
ANOTHER MASSIVE TCPA SETTLEMENT: Blue Cross Pays Over $1,000.00 Per Class Member as Court Approves $1.6MM TCPA Class Action Settlement
From Red Cross to Blue Cross, TCPA risk is massive these days.
And wrong number calling, in particular, can be incredibly costly.
Just ask Citibank.
Or John Deere.
Or, now, Blue Cross.
In Stark v. BLUE CROSS AND BLUE SHIELD OF NORTH CAROLINA and CHANGE HEALTHCARE RESOURCES, LLC, 1:23-CV-22, 2025 WL 524781 (M.D.N.C. Feb 18, 2025) the Court approved a $1.6MM settlement related to Blue Cross making illegal robocalls to a wrong number.
Per the order:
the case arose because Change Healthcare allegedly made calls on behalf of BCBSNC to identify BCBSNC customers and increase enrollment in certain programs, but Change Healthcare made calls to wrong numbers or to consumers who had opted out of receiving these calls. Ms. Stark alleged that despite being told that her number no longer belonged to a BCBSNC customer, Change Healthcare continued to make sales calls to her number.
The class had 1,573 people in it– which means Blue Cross paid over $1,000.00 per class member!!! (Whoa)
Oh and per the order Class Counsel Avi Kaufman has “recovered via settlement more than $100 million on behalf of TCPA class members.”
This case will net him another $500k in fees.
So there you have it Blue Cross paid a ton of money to settle this– one of the highest-per-class-member settlements I have seen yet. Not sure why they paid so much but it is a good reminder to all of you out there– use the reassigned numbers database to avoid this sort of thing folks!
Is the Chief of IRS Appeals Constitutionally Appointed?
Introduction
The United States Tax Court skillfully dodged answering the headline question with a holding on standing. The court decided, however, that IRS appeals officers and IRS appeals team managers are not officers of the United States and therefore do not need to be constitutionally appointed.
Officers of the United States, who exercise “significant authority,” must be appointed under Article II of the Constitution. Non-officer employees, on the other hand, need not be selected in compliance with the Constitution.
In Tooke v. Commissioner,[1] the petitioner (“Tooke”) moved for judgment on the pleadings on the theory that the IRS Independent Office of Appeals (“Appeals Office”) unlawfully determined the petitioner’s tax liability because the Appeals Office personnel who issued the determination were Officers who were not constitutionally appointed. The Tax Court disagreed and denied the taxpayer’s motions.
Constitutional and Statutory Background
The Constitution’s Appointment Clause and Removal Power: The Constitution requires the Senate to consent to the President’s nomination of a Department Head. The Appointment Clause also bestows Congress with the power to appoint other Officers of the United States by stating, “the Congress may by Law vest the appointment of such inferior Officers … in the President alone … or in the Heads of Departments.”[2]
Moreover, although the Constitution does not expressly grant the President the power to remove an Officer of the United States from their position, the Supreme Court has held that the Constitution gives the President power to remove those who assist him in carrying out his duties (the “Removal Power”). The executive power is vested in the President,[3] and without such Removal Power, the President could not be held fully accountable for discharging his own executive responsibilities.[4]
Statutory Creation of the Appeals Office: In 2019, Congress enacted the Taxpayer First Act, which restructured the IRS Office of Appeals and renamed it as the Internal Revenue Service Independent Office of Appeals.
Under the Act, the Appeals Office is now supervised and directed by the Chief of Appeals (“Chief”), who is appointed by the Commissioner of Internal Revenue. The Chief holds a statutory position, which is made without regard to the competitive civil service or the senior executive service.[5]
Two additional roles (appeals officer and appeals team chief) report to the Chief and do not hold statutory positions in the Appeals Office. They are employees hired pursuant to the hiring authority of the commissioner, as opposed to Officers who must be constitutionally appointed if they exercise “significant authority.”[6]
Factual Background
Appeals Office Hearing: Tooke failed to pay assessed income taxes, for which the IRS filed a federal tax lien on his property and issued a notice that it intended to levy on (seize) his property. Tooke requested a collection due process hearing in the Appeals Office, asking it to provide collection alternatives, for example, an agreement to pay the unpaid taxes in installments, in lieu of imposition of a lien and execution of a levy.
The hearing was conducted by an appeals officer. The taxpayer and appeals officer could not agree on a collection alternative, resulting in the issuance by the Appeals Office of a notice of determination of Tooke’s tax liability. The appeals officer prepared the determination, and the appeals team manager approved it.
Tax Court Proceeding: Tooke filed a petition in the Tax Court, arguing that the notice of determination issued by the Appeals Office was unconstitutional because the Chief, at the time of the determination, and the appeals officer and team manager, who issued and approved the determination, were unconstitutionally appointed in violation of the Appointments Clause and the Removal Power. He asked the Tax Court to remand his case to a panel that was constitutionally constituted.
Creation and Structure of the Appeals Office: The Appeals Office hears and determines taxpayer challenges to determinations by the IRS operating divisions, the collection division, and other operations. Taxpayers had expressed concern to Congress that determinations of the Appeals Office were subject to undue influence by the IRS operations that proposed them.
In response, Congress passed the Taxpayer First Act.[7] The Act clarifies that the duties of the Appeals Office are to fairly and impartially reach resolution with the taxpayer of federal tax controversies without litigation, promote consistent application and interpretation of the tax laws, and enhance public confidence in the integrity and efficiency of the IRS.
Standing
The first issue that the Tax Court discussed was whether Tooke had standing to challenge the constitutional authority of the Chief, appeals officer, and appeals team manager. The court held that Tooke had standing to challenge the appeals officer and the appeals team manager who participated in the collection due process hearing but did not have standing to challenge the Chief who did not participate.
Standing has three components: A plaintiff must show that they have a legally protected interest that is injured, that the defendant’s action is traceable to the injury, and that a court can fashion a remedy that redresses the plaintiff’s injury.[8]
Injury to Tooke:
The Tax Court readily found that the mere conduct of a collection due process hearing by the appeals officer and appeals team manager injured Tooke assuming that the appeals officer and team manager were not constitutionally appointed.
The Tax Court rejected what it characterized as dictum in Landry v. FDIC [9] that would have treated the Chief as also injuring Tooke. The theory in Landry is that an individual who is affected by a proceeding in a department the head of which is not constitutionally appointed is injured even if the department head is “radically attenuated.” Injury occurs because separation of powers in the Constitution is “structural,” that is, the power of each branch is expressed in a separate article and does not require specific evidence of injury. The Tax Court discussed a dozen cases to explain away the dictum, which might suggest that the Tax Court decision on this issue is disputable.
Tracing of the Injury:
The Tax Court had no difficulty in tracing Tooke’s injury to the appeals officer and team manager who participated in the collection due process hearing.
With respect to the Chief, Tooke argued the root-to-branch theory:
[B]ecause the Chief’s appointment was purportedly unconstitutional, the integrity of Mr. Tooke’s CDP hearing and the determination made thereon by the Appeals Officer and the Team Manager were necessarily marred.
The Tax Court rejected the theory, unwilling to treat the Chief as having injured the taxpayer when the Chief did not participate in the hearing.
The Supreme Court has not expressly addressed whether a plaintiff has standing to bring a Separation of Powers challenge against an official who did not participate in a plaintiff’s case.
Authority to Redress the Injury:
Solely for the purpose of its standing analysis, the Tax Court also found that, if it had to, it could redress Tooke’s injury by remanding the case to the Appeals Office with instruction to conduct the hearing with constitutionally appointed officers.
But because the Chief did not participate in Tooke’s hearing, the court found no redressable injury by the Chief.
Therefore, the Tax Court held that Tooke lacked standing to challenge either the appointment of the Chief or the restriction on the power to remove the Chief from his position.
To the contrary, the Tax Court found that Tooke had standing to challenge the authority of the appeals officer and appeals team manager who participated in the Appeals Office determination adverse to Tooke.
The issue of standing to challenge the constitutional authority of the Chief was a question of first impression.
Separation of Powers (Appointments Clause and Removal Power)
With the finding that Tooke had standing to challenge the authority of the appeals officer and appeals team manager who issued the adverse tax determination, the remaining question was whether they were officers of the United States.
The court held the appeals officer and appeals team manager were not “Officers of the United States.” Thus, neither the Appointments Clause nor the Removal Power apply to them.
The classification of the appeals officer and appeals team manager as non-United States officers follows a fourteen-year-old Tax Court precedent, Tucker v. Commissioner.[10] The Tax Court opined that the intervening enactment of the Taxpayer First Act[11] and subsequent court decisions relating to separation of powers of the three branches of the federal government[12] did not implicitly overrule Tucker.
Classification of Officers of the United States: In the context of conducting a hearing, an individual is an Officer of the United States if they have the tools and adjudicatory power of a federal district court judge.[13] The Tax Court special trial judges and the SEC administrative law judges are prime examples of administrators who have those tools and power. The Tax Court held that an appeals officer and appeals team manager simply do not because a collection due process hearing lacks the typical processes of a judicial proceeding. Their power was not “significant.”[14]
Conclusion and Comments
The Tax Court denied Tooke’s motions for judgment based on his Appointments Clause argument and his Removal Power argument.[15] It found that, although Tooke had standing against the appeals officer and appeals team manager, they were not officers of the United States and therefore did not require a constitutional appointment.
The Tax Court did not discuss whether the Chief was an Officer of the United States. It was able to avoid that question by denying standing for Tooke against the Chief. It would not be surprising if an appeal is filed, arguing that (i) the Chief is an Officer of the United States, (ii) Tooke’s standing to challenge the Chief should have been based on the Chief’s statutory position rather than his participation in the collection due process hearing, and (iii) the Chief was not appointed by the President, the head of a department, or a court of law, all of which voids a collection due process hearing on his watch. The merit of the argument remains to be seen.
[1] 164 T.C. No. 2 (Jan. 29, 2025).
[2] U.S. Const., Art. II, Sec. 2., cl. 2.
[3] U.S. Const., Art. II, Sec. 1, cl.1.
[4] Seila Law LLC v. Consumer Financial Protection Bureau, 591 U.S. 197, 204 (U.S., 2020). The constitutionality of a statute that restricts the President’s power to remove an officer of the United States is problematic. Tooke relied on 5 USC 7813(a), which provides that “an agency may take an action [including removal] covered by this subchapter against an employee only for such cause as will promote the efficiency of the service.” It is questionable whether 5 USC 7813(a) applies to the Chief’s position. The Tax Court did not discuss the question.
[5] IRC §7803(e).
[6] §7804(a); Buckley v. Valeo, 424 U.S. 1 (1976).
[7] Supra note 3.
[8] Tooke, No. 2, 164 T.C. at – .
[9] 204 F.3d 1125, 1128 (D.C. Cir. 2000).
[10] 679 F.3d 1129 (D.C. Cir. 2012, aff’g 139 T.C. 2010).
[11] Pub. Law 116-25 §1001(a), codified at IRC §7803(e) (effective July 1, 2019).
[12] Lucia v. Securities and Exchange Comm’n, 585 U.S. 237 (2018) (administrative law judge is Officer of the United States), United States v. Arthrex, Inc., 494 U.S. 131 (2021) (administrative patent judge is Officer of the United States).
[13] Lucia, 585 U.S. at 241; Arthrex, Inc., 594 U.S. at 13.
[14] Cf. Buckley v. Valeo, 424 U.S. 141-142 (1976) (“Yet each of these functions also represents the performance of a significant governmental duty exercised pursuant to a public law. …These administrative functions may therefore be exercised only by persons who are “Officers of the United States.”)
[15] Tooke, No.398-21L, order served Jan 30, 2025).
Eyes Wide Open: Lost Profits Are Available in the Absence of Acceptable Non-Infringing Substitutes
Lost profit damages are notoriously difficult to recover in patent infringement cases. Lost profits damages are recovered in only a small percentage of cases that go to trial. Among the challenges in recovering lost profits under the Panduit test are that the patent owner must prove the absence of acceptable non-infringing alternatives (Panduit factor 2) and proving a negative in life is never easy. But the law is sometimes more flexible than meets the naked eye.
In Bausch & Lomb vs. SBH Holdings LLC, over which U.S. District Judge Burke of Delaware presides, the accused infringer, SBH, learned this principle the hard way. SBH was accused of infringing B&L patents covering nutritional supplements for treating age-related macular degeneration, or AMD. B&L sought lost profits damages caused by SBH’s sale of the accused product that competed with B&L’s supplement. In pre-trial disclosures, B&L supported its claim for lost profits damages by relying on expert opinions of a damages expert and a technical expert. In his report, the damages expert relied in part on the technical expert in opining that there was an absence of acceptable non-infringing substitutes in the marketplace. In addition, the damages expert relied on an alternative theory of lost profits, namely that B&L should recover its share of the “eye vitamin” market.
In a Daubert motion, SBH challenged the bases for B&L’s lost profits damages opinions. SBH argued that the technical expert’s opinion that there was an absence of acceptable non-infringing alternatives lacked a sufficient basis because it was conclusory on this point and confined to a single paragraph in the technical expert’s report. Based on this alleged deficiency, SBH argued that its Daubert motion should be granted, and that B&L should be precluded from presenting any lost profits damages theory to the jury. But the court did not see it the same way and denied SBH’s motion.
First, the court found a sufficient basis in B&L’s technical expert’s report to support the damages expert’s lost damages theory based on the absence of non-infringing alternatives. The technical expert relied on clinical studies demonstrating that the patented formulation was the only safe and effective treatment of AMD to conclude that there were no acceptable non-infringing alternatives on the market, and the court found this to be ample if brief. In addition, the court found support for the absence of acceptable non-infringing alternatives in B&L’s damages expert report, including his analysis of corporate testimony of B&L and its marketing materials discussing the importance of the clinical studies to doctors in prescribing treatment for AMD patients.
Second, the court found a sufficient basis for B&L’s damages expert opinion that lost profits damages should be awarded based on market share theory even if there were acceptable non-infringing alternatives on the market to treat AMD. Relying on a string of cases going back to State Indus. v. Mor-Flo, a 1989 Federal Circuit case, the court held that a market share theory of lost damages is available when acceptable non-infringing alternatives are available in the market. In other words, a patent owner “may rely on proof of its established market share instead of proof of no acceptable non-infringing alternatives in order to satisfy Panduit factor two.” Because SBH did not challenge any aspect of the market share theory presented by B&L’s damages expert, the court green-lighted this theory of lost profits damages, too. The first takeaway from the court’s order is that Panduit factor two—the absence of acceptable non-infringing alternatives—can be overcome with a well-supported market share theory of lost profits. The second takeaway is that the admissibility of expert opinions regarding non-infringing alternatives does not depend on a word count in their expert reports but rather the substance undergirding the opinions. Where sufficient support exists for the absence of non-infringing substitutes for a jury to decide the fact question, then disagreements should be explored through a combination of cross examination and rebuttal testimony of the accused infringer’s experts.
The first takeaway from the court’s order is that Panduit factor two—the absence of acceptable non-infringing alternatives—can be overcome with a well-supported market share theory of lost profits. The second takeaway is that the admissibility of expert opinions regarding non-infringing alternatives does not depend on a word count in their expert reports but rather the substance undergirding the opinions. Where sufficient support exists for the absence of non-infringing substitutes for a jury to decide the fact question, then disagreements should be explored through a combination of cross examination and rebuttal testimony of the accused infringer’s experts.
Latest Updates on Maine’s Net Energy Billing Program
Recent decisions by the Maine Legislature and the Maine Public Utilities Commission (PUC) may affect participants in Maine’s Net Energy Billing (NEB) Program. Here are a few updates to keep you up to speed:
Maine Legislature Considering Bills to Repeal Net Energy Billing
The Maine Legislature is considering four bills that aim to eliminate or drastically limit Maine’s NEB program. The fate of the bills is uncertain as they are likely to face significant opposition. The bills are:
LD 32: An Act to Repeal the Laws Regarding Net Energy Billing
LD 257: An Act to Eliminate the Practice of Net Energy Billing
LD 359: An Act to Prohibit Net Energy Billing by Certain Customers
LD 450: An Act to Lower Electricity Costs by Repealing the Laws Governing Net Energy Billing
Bills LD 32, LD 257, and LD 450 are identical in substance, and would repeal the laws that established the NEB program and prohibit the Maine PUC from requiring transmission and distribution utilities to allow customers to participate in NEB. In addition, they would eliminate references to NEB in other laws, including repealing the provisions of law providing for property tax exemptions for solar equipment used for NEB.
Bill LD 359 would prohibit customers from having a shared financial interest in distributed generation facilities. It would limit the NEB program to distributed generation (DG) resources that are located on the same side of the customer’s meter and that are used primarily to serve the load of that customer. It would also require all NEB credits associated with the output of the DG facility to be allocated to that customer. The bill would further revise the applicability of the tariff rates and amend other statutes to reflect the changes in the NEB program.
All four bills have been scheduled for a public hearing before the Energy, Utilities, and Technology (EUT) Committee on February 25, 2025.
NEB Projects in kWh Program Certified as a Maine Class I Resources Must Retain or Obtain RECs to Meet RPS
Last week, the PUC rejected a Request for Rehearing in Docket No. 2024-00251 and upheld its prior decision that a DG resource owner certified as a Maine Class I or Class IA resource, and participating in Maine’s Net Energy Billing Kilowatt Hour (kWh) Credit program, must retain generation information systems (GIS) certificates or otherwise obtain GIS certificates necessary to satisfy Maine’s Renewable Portfolio Standard (RPS) for that portion of the load that is served by the facility or the load associated with NEB kWh credits (REC Holdback Requirement).[1]
The PUC rejected arguments that the REC Holdback Requirement is an unnoticed and therefore impermissible change to the NEB program rules and beyond the authority granted to it by the Legislature.
Rather, the PUC found that imposing the REC Holdback Requirement falls within its authority to certify Maine Class I Renewable Resources under Maine’s RPS and its authority to determine how much of the output of the facility is eligible to receive such certification.
The PUC also also found that the REC Holdback Requirement is consistent with a similar long-standing requirement that behind-the-meter generation facilities comply with Maine’s RPS for that portion of the load that is supplied by the behind-the-meter generator.
DG resources participating in Maine’s NEB Tariff Program are not subject to this REC Holdback Requirement.
[1] Nexamp, Inc. and Holden Solar LLC Request for Approval of Certification for RPS Eligibility Pertaining to Versant Power, Docket No. 2024-00251, Order Denying Request for Rehearing (February 14, 2025) (REC Holdback Order).
Privilege Under Pressure: The Shifting Data Breach Investigation Landscape
Go-To Guide:
Recent case law shows skepticism by some courts when evaluating whether forensic reports prepared after a data breach are protected under privilege, with some courts questioning privilege over communications with the client and counsel where the forensic firm is copied.
Companies may consider reviewing their practices for managing breach investigation communications and information sharing.
To preserve confidentiality, companies should consider managing who receives breach investigation updates and how they are delivered.
Over the past few years, the rate of notable data breaches has risen considerably, and along with that rise has come an increase in class action litigation. In a world where any company can be the next victim of a breach, business leaders and their legal counsel should consider in advance how to protect privilege and minimize risk in post-breach investigations. But certain recent federal district court decisions have made it more difficult to assert protection over breach-related documents and communications. Traditional Approach to Data Breaches: Forensic Reports
Traditionally, after data breaches of all sizes, outside counsel’s standard approach has been to hire highly technical vendors, such as forensic investigators, to perform the analysis of how a breach unfolded to inform their legal advice. This approach creates a three-way relationship focused on providing companies with the best legal advice possible after a breach. The forensic firm’s role in such situations is as a consulting expert, often providing a comprehensive report to support legal counsel’s efforts. Previously, lawsuits after a breach were rare, and challenges to defendants’ breach investigation methods were even more uncommon. Thus, collaboration between companies’ legal counsel and forensic firms proceeded unquestioned.
The CCPA’s Potential Effect on the Landscape
Since 2020, the number of lawsuits filed after data breaches have increased dramatically, especially where a significant number of individuals’ personal information is exposed. The reason for the increase may be California’s data privacy law, the CCPA1, which allows plaintiffs to claim statutory damages of $100 to $750 per affected person. While damages are limited to California residents, plaintiffs’ lawyers have persisted in filing nationwide class actions involving non-Californians, resulting in a proliferation of lawsuits. These lawsuits have led to increasing challenges against keeping forensic reports protected under privilege.
Forensic Reports and Discovery
During the discovery phase of a lawsuit, lawyers are entitled to request relevant documents and communications from the opposing party. For forensic reports, counsel typically claims at least one type of protection, whether via the work product doctrine, attorney-client privilege, or both. Work product protection is permitted when a document was created “in anticipation of litigation,” either by counsel or by a non-lawyer at counsel’s direction.2 As seen in case law, the facts of how and why a document was created determine whether its purpose was primarily for litigation or merely business purposes.
Attorney-client privilege generally applies to (1) a communication; (2) made between privileged persons; (3) in confidence; (4) for the purpose of seeking, obtaining, or providing legal assistance to the client.3 While powerful, it can be waived, such as by sharing communications with certain third parties. And it does not protect underlying facts, though the communications themselves often contain a mix of facts and opinions.
But recent cases—discussed below—show that findings of protection over forensic reports are by no means assured. On top of courts’ new tendency to find that there is no guarantee of protection when counsel directly retains a forensic investigator in certain circumstances, a recent federal district court case has also excluded from protection communications between the victim company, counsel, and the forensic investigator.
Federal Courts Narrow the Scope of Protection
In the last few years, certain federal district courts across the nation have begun issuing decisions slimming the scope of protection for forensic reports produced in response to a data breach. An early notable case was Capital One4 in 2020, which found no work product protection attached to the forensic report. The dispute over work product protection arose in large part because the forensic investigator was on retainer with the victim company before the breach occurred, even though the investigator conducted its investigation pursuant to a separate statement of work that outside counsel requested. The court held that even though litigation may have been likely when the report was made, the report was ultimately prepared for business purposes because the facts proved a similar report would have been created anyway. Capital One did not appeal this ruling.
In 2021, Wengui held that there was no work product protection when a separate forensic firm drafted a forensic report at counsel’s request, despite the report being created in parallel to a report the defendant corporation’s IT security advisor prepared, because the forensic report was still used for business purposes. The court also held that attorney-client privilege did not apply to this report because the facts showed the defendant corporation was seeking the investigator’s technical advice directly, rather than relying solely on their attorney’s legal advice as aided by the investigator’s findings.
Several months later, Rutter’s5 found work product protection only applies where “‘identifiable’ or ‘impending’ litigation is the ‘primary motivating purpose’” of creating the document. Because the defendant suspected, but did not know for sure, whether a breach had occurred at the time it engaged the forensic investigator, the court decided the defendant could not have “unilaterally believed that litigation would result.”
As to the attorney-client privilege, the Rutter’s court found it does not exist where the forensic report only discusses facts and does not involve “opinions and tactics,” noting that the privilege does not protect any communications of fact, nor does it apply merely because a legal issue is present.
An opinion from the Western District of Washington, Leonard v. McMenamins,6 continues this recent trend, but with a twist – the plaintiff requested both the forensic report and counsel’s email communications to the client where the forensic firm was copied. In Leonard, the defendant corporation suffered a ransomware attack. External counsel hired a forensic investigator, which investigated at counsel’s direction and prepared a forensic report. The defendant claimed both work product and attorney client privilege over the report. The court disagreed on both fronts.
For the report, the court found work product protection was not present, relying on prior persuasive cases to develop a list of factors: (1) whether the report provides factual information to the breached company; (2) whether the report is the only analysis of the breach; (3) the kinds of services the retained investigator provided; (4) the relationship between the retained investigator and the breached company; and (5) “whether the report would have been prepared in a substantially similar form absent the anticipation of litigation.”
Ultimately, the court based its opinion on its finding that the report was drafted for a purely business purpose. Because the report was, in the court’s view, the only source of meaningful analysis about the breach, it held the plaintiffs would have met the Rule 26(b)7 exception to work product privilege. That exception permits a party to overcome a work product privilege claim by demonstrating that documents are (1) otherwise discoverable under Rule 26(b), and (2) the party can show it has “substantial need” for the documents to support its arguments and would take on “undue hardship” if required to obtain similar documents by other means.
Regarding attorney-client privilege for the report, the court placed great weight on whether legal advice is sought when requesting the forensic report, but even greater weight on whether such advice is in fact provided. In the end, because the report in Leonard “does not provide legal advice,” the court found it was not privileged.
Leonard is unique because the court addressed more than just materials the forensic investigator prepared; it evaluated counsel’s emails to the client where the forensic firm was copied. After the defendant asserted attorney-client privilege, the court elucidated its view that “communications involving [the forensic investigator] concerning the facts of the attack and [the defendant’s] response, investigation(s) and remediation are not privileged.” The court did leave the door open for at least some email communications with counsel to remain privileged, noting that “[t]here can be circumstances when a cybersecurity consultant works with counsel to provide legal advice after a data breach.” However, in a footnote, the court expressed its expectation that, in that case, “most, if not all, communications that include [the forensic investigator] will be removed from the privilege log and produced.” The court may have been alluding to the Kovel doctrine, which provides that attorney-client privilege can attach to communications with third party consultants if their primary purpose is to give or receive legal advice, as opposed to business or tax advice.8 The Leonard court did not acknowledge Kovel explicitly, relying primarily on tests that emphasize the nature of the privilege.9
Conclusion
While many courts have protected forensic reports and communications from disclosure in litigation, the emergence of this more restrictive view may require companies to exercise caution and restraint when communicating with forensic investigators. Recent cases have focused on whether a forensic firm is truly assisting legal counsel with providing advice, or instead performing the business function of analyzing how a breach occurred. When examining protection in light of the increasing likelihood a class action is filed after a significant breach, courts appear to be struggling to align on whether that risk is the true reason reports are prepared and whether the forensic investigator is truly providing expertise to aid legal counsel. At a time when litigation following a data breach is surging, lending credibility to the argument that forensic reports are prepared in anticipation of such litigation, courts are grappling with this essential question: what is the true role of a forensic investigator following a data breach?
Takeaways
When breaches occur, attorneys can react proactively to this district court trend. Companies may want to consider the following:
Assume privilege will not apply to communications with a forensic firm.
When possible, save substantive updates about the breach for phone calls where participants can be controlled and not emails, which can be easily forwarded, jeopardizing privilege.
Ensure the engagement letter between counsel and the forensic investigator clearly sets forth the risk of litigation because of the breach and need for counsel to advise the victim company on its legal obligations and risks.
In breaches that may give rise to litigation risk (e.g., for companies processing significant amounts of sensitive personal data), consider whether issuing a litigation hold at the outset of the investigation is prudent.
Review forensic reports live with the investigator and client to provide feedback in real time to ensure accuracy.
Email intentionally. Assess whether vendors are on a thread who may not need to see what you have to say.
Likewise, minimize who within an organization is included on communications, including emails and calls. Courts have cited the presence of many different people from within a company as a reason to find against both attorney-client privilege and work product protection.
1 California Consumer Privacy Act (CCPA), Cal. Civ. Code § 1798.150 (a)(1) (2018). The threshold for such lawsuits is low, requiring a showing that the breached entity failed to have reasonable security.
2 Fed. R. Civ. P. 26(b)(3).
3 Wengui v. Clark Hill PLC, No. 19-3195 (D.D.C. Jan. 12, 2021).
4 In re. Capital One Consumer Data Security Breach Litig., No. 1:19md2915 (AJT/JFA) (May 26, 2020).
5 In re. Rutter’s Inc. Data Security Breach Litig., No. 1:2020cv00382 (M.D. Penn. August 21, 2021).
6 Leonard v. McMenamins Inc., No. C22-0094-KKE (W. D. Wash. Dec. 6, 2023).
7 Fed. R. Civ. P. 26(b)(3)(A) requires plaintiffs to demonstrate a “substantial need” and “undue hardship” if the document were barred from discovery.
8 United States v. Kovel, 296 F. 2d 918 (2d Cir. 1961).
9 See Leonard, at *8.
Requirements For Professional Engineers Practicing in Connecticut
Many out-of-state professional engineering companies practice engineering in Connecticut and may not be aware of all the requirements to do so. Connecticut has certain requirements for corporations and limited liability companies (LLCs) engaging in the practice of engineering. The applicable law, General Statutes §§ 20-306a and 20-306b, requires that (1) the personnel who act as engineers on behalf of the company must be either licensed in Connecticut or exempt from Connecticut’s license requirements, and (2) the company must have been issued a certificate of registration by the State Board of Examiners for Professional Engineers and Land Surveyors (State Board). Professional engineering firms must be registered with the Secretary of State as a domestic or foreign firm prior to applying for registration from the State Board. In addition, no less than two-thirds of the individual members of an LLC or owners of a professional corporation must be individually licensed as professional engineers in Connecticut. The Connecticut Department of Consumer Protection maintains a list of all professional engineers licensed in Connecticut and all State Board registrations.
Caselaw interpreting these requirements is sparse. Strict compliance with the State Board registration requirement is not always required. In Rowley Engineering & Associates, P.C. v. Cuomo, 1991 WL 27286 (Conn. Super. Jan. 2, 1991), the defendant alleged that the plaintiff professional corporation was not entitled to its design fees because it had not been issued a certificate of registration and thus did not comply with Conn. Gen. Stat. § 20-306a. The Rowley Court rejected this argument, reasoning that the statute was established for administrative purposes to allow professional engineers to practice in a corporate form and not safeguarding life, health, or property. The Court found substantial compliance with the statute, reasoning that all of the design professionals in Rowley were, in fact, licensed to practice in Connecticut. Thus, the purpose of licensure—to protect the public—was essentially satisfied. However, strict compliance with Connecticut’s professional engineer license requirement is required. In Anmahian Winton Architects v. J. Elliot Smith Holdings, LLC, 2010 WL 1544418 (Conn. Super. Mar. 16, 2010), the Court confirmed that a professional engineer or architect license in Connecticut is required to practice in Connecticut and it does not matter that such professional is licensed in any other state. The failure to be licensed in Connecticut precludes professional engineers from enforcing their right to payment for work performed.
Professional engineering companies practicing in Connecticut should be familiar with all state requirements. The failure to do so could result in being terminated from a project and not getting paid for work otherwise properly performed. Even if the company substantially complies with the State Board registration requirement, it could be difficult to explain this to an inquiring owner.
Dubai Court of Cassation Holds Clause Providing for Court Provisional Measures Not a Waiver of Arbitration Agreement
Introduction
The Dubai Court of Cassation (Court of Cassation) in Case No. 296 of 2024 vacated the decision of the Dubai Court of Appeal (Court of Appeal) in Commercial Appeal No. 2284/2023, in which the Court of Appeal issued a decision on the merits of a claim despite the existence of an arbitration agreement. Relying upon an inaccurate translation of the arbitration agreement, the Court of Appeal found that the parties had agreed that either party could refer disputes arising out of the parties’ contract to any competent court and had therefore waived the right to arbitration. In vacating the Court of Appeal’s decision, the Court of Cassation confirmed that the Dubai courts have the authority to look to the original text of an arbitration agreement, and disregard any inaccurate translation, to ascertain the intent of the parties.
Background
The claimant filed proceedings in the Dubai Court of First Instance seeking a monetary judgment against the defendant arising out of alleged breaches of contract. The defendant did not appear before the Court of First Instance, and the Court of First instance dismissed the claim due to lack of evidence.
The claimant (appellant) filed an appeal to the Court of Appeal. The respondent to the appeal (the defendant in the lower court proceedings) argued that the claim should be dismissed on the grounds of lack of jurisdiction due to the existence of an arbitration agreement between the parties. The Court of Appeal dismissed this argument and found, based on the Arabic translation of the arbitration agreement, that the parties had agreed that either party could refer disputes arising out of the parties’ contract to any competent court and therefore, the Dubai courts had jurisdiction over the dispute.
The defendant appealed this judgment to the Court of Cassation relying upon the existence of an arbitration agreement to argue that the Dubai courts lacked jurisdiction.
Judgment of the Court of Cassation
The Court of Cassation noted that the arbitration agreement was concluded in English and therefore, the intent of the parties had to be considered in light of the original text of the arbitration agreement and not any Arabic translation thereof. The Court of Cassation held that the original text is clear that either party may apply to any competent court for “injunctive relief” or other “provisional remedies” (but not in respect of the determination of the substantive claim). The Court of Cassation noted that these are common law terms and the closest concepts under UAE law are “provisional orders” and “provisional or precautionary measures”. The Court of Cassation confirmed that the parties’ agreement is consistent with the right of the parties, set forth in Article 18(2) of Federal Law No. 6 of 2018 (UAE Arbitration Law), to seek provisional or precautionary measures from a court of competent jurisdiction in support of current or future arbitration proceedings. Accordingly, the Court of Cassation held that the parties’ agreement did not constitute a waiver of the agreement to resolve the substantive dispute in arbitration and therefore the Court of Appeal decision must be vacated.
Analysis
This judgment confirms that, under the UAE Arbitration Law, parties may seek provisional or precautionary measures from a court of competent jurisdiction in support of current or future arbitration proceedings and that any express agreement to this effect does not constitute a waiver of the arbitration agreement. It also serves as a reminder to ensure that translations into Arabic for the use in onshore court proceedings are accurate.
Nevada Bill Would Bestow Personal Jurisdiction On Business Entities Who Simply Register
Earlier this month, Nevada Assemblymember Erica Roth introduced a bill, A.B. 158, to authorize Nevada courts to exercise general personal jurisdiction over entities on the sole basis that the entity:
is organized, registered or qualified to do business pursuant to the laws of this State;
expressly consents to the jurisdiction; or
has sufficient contact with Nevada such that the exercise of general personal jurisdiction does not offend traditional notions of fair play and substantial justice.
The following entities would be covered by the statute: corporations, miscellaneous organizations described in chapter 81 of NRS, limited-liability companies, limited-liability partnerships, limited partnerships, limited-liability limited partnerships, business trusts or municipal corporations created and existing under the laws of this State, any other state, territory or foreign government or the Government of the United States
The last basis is generally consistent with traditional constitutional jurisprudence. See Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) quoting Milliken v. Meyer, 311 U. S. 457, 463 (1940). California has codified this principle in Section 410.10 of the Code of Civil Procedure (“A court of this state may exercise jurisdiction on any basis not inconsistent with the Constitution of this state or of the United States.”).
The penultimate basis is consistent with and might even be categorized as a subset of the last. How is fair play and substantial justice offended if an entity has consented?
The first basis hearkens to the U.S. Supreme Court’s decision in Mallory v. Norfolk Southern Ry. Co., 600 US 122 (2023). In the case, the Supreme Court in a 5-4 decision held that a Pennsylvania statute did not offend the Due Process clause of the United States Constitution. The Pennsylvania statute provided that a company’s registration as a foreign corporation” is deemed “a sufficient basis of jurisdiction to enable the tribunals of this Commonwealth to exercise general personal jurisdiction over” the corporation. 42 Pa. Cons. Stat. § 5301(a)(2)(i).
If A.B. 158 becomes law, the doors of Nevada’s courts will be thrown open to lawsuits against foreign entities that have registered to do business suits. These lawsuits may be brought even when the plaintiff, the defendant and the dispute occurred outside of Nevada. The case may be a boon to Nevada’s lawyers (Assemblymember Roth is a lawyer), but may have the unintended consequence of discouraging business in Nevada or encouraging creative business structures.
What to Do if Your Federal Contract was Wrongfully Terminated by the Government
Government contracts often include a termination for convenience clause, generally allowing federal agencies to cancel agreements when it serves the government’s interest. While this power is fairly broad, it is not absolute — and when misused, contractors may have legal recourse. Several court cases highlight situations where termination for convenience was found to be an abuse of discretion or bad faith.
For government contractors, understanding these legal precedents can help identify improper terminations and explore possible remedies.
When Termination for Convenience Becomes Abuse of Discretion
Government Cannot Use Termination to Correct Procurement Mistakes
Case: Krygoski Constr. Co. v. United States, 94 F.3d 1537 (Fed. Cir. 1996)
Issue: The government mistakenly awarded a contract under a small business set-aside and later terminated it for convenience to fix the error.
Ruling: The court held that termination for convenience cannot be used to correct government procurement mistakes if it results in bad faith or an abuse of discretion.
Takeaway: The government cannot cancel contracts simply to undo its own errors in the bidding process.
Termination Cannot Be Used to Escape a Bad Bargain
Case: Torncello v. United States, 681 F.2d 756 (Ct. Cl. 1982)
Issue: The government terminated a contract for convenience after finding a cheaper option elsewhere.
Ruling: The court found that the government cannot use termination for convenience to walk away from an unfavorable deal.
Takeaway: Agencies cannot cancel contracts just to get a better price.
Using Termination to Favor Another Contractor May Be Unlawful
Case: TigerSwan, Inc. v. United States, 110 Fed. Cl. 336 (2013)
Issue: The plaintiff argued that the contract was terminated as a pretext to award it to another contractor.
Ruling: The court held that if termination is used to intentionally circumvent contractor rights or favor a competitor, it may constitute an abuse of discretion.
Takeaway: The government cannot manipulate contract terminations to steer awards toward preferred vendors.
Termination in Bad Faith Can Be Challenged
Case: Salsbury Indus. v. United States, 905 F.2d 1518 (Fed. Cir. 1990)
Issue: The contractor alleged bad faith in the termination decision.
Ruling: While the government generally has broad discretion, a termination in bad faith can be deemed wrongful.
Takeaway: Contractors must prove bad faith, but if successful, the termination can be overturned.
Arbitrary or Capricious Terminations Can Be Contested
Case: Caldwell & Santmyer, Inc. v. Glickman, 55 F.3d 1578 (Fed. Cir. 1995)
Issue: The contractor argued that the termination was arbitrary and not in the government’s best interest.
Ruling: The court stated that terminations for convenience must have a rational basis and cannot be arbitrary.
Takeaway: If a contractor can prove a lack of reasonable justification, they may challenge the termination.
Key Legal Principles from These Cases
Bad Faith or Pretextual Termination
The government cannot terminate a contract for convenience to avoid obligations or favor another contractor.
Arbitrary or Capricious Terminations
If a termination lacks a rational basis or is done without reasonable justification, it may be an abuse of discretion.
No Escape from a Bad Deal
The government cannot terminate a contract just because it finds a better option later.
What Can Government Contractors Do?
If a contractor believes a termination for convenience was wrongful, they may have legal remedies, including:
Claim Breach of Contract Damages
Typically, a contractor is only entitled to termination settlement costs (e.g., costs incurred before termination, reasonable profit on completed work, etc.). However, if the termination was arbitrary, capricious, or in bad faith, it may be treated as a breach of contract, allowing the contractor to seek lost profits.
Seek Contract Reinstatement
In rare cases, a court may reinstate a contract if performance is still possible.
Request an Equitable Adjustment
If part of the contract is reinstated or re-awarded, the contractor may be able to recover increased costs due to the termination and subsequent reinstatement.
Recover Attorneys’ Fees and Costs
If the contractor proves wrongful termination, they might, in limited circumstances, be entitled to legal cost reimbursement under the Equal Access to Justice Act.
Does the Sovereign Acts Doctrine Apply?
The Sovereign Acts Doctrine can shield the federal government from liability when its actions are taken in a public and general capacity (e.g., certain new legislation or wartime measures). However, if contract terminations are targeted at specific contracts rather than simply as a result of broad governmental actions, the doctrine may not apply.
So far, the Trump administration’s termination of federal contracts, although fairly widespread, has been targeted at specific types of contracts with specific agencies. As such, the government may have a difficult time establishing that its actions were not targeted at particular contracts.
Final Thoughts: Protecting Your Rights as a Government Contractor
While the government has fairly broad discretion to terminate contracts for convenience, that power is not unlimited. If termination appears pretextual, arbitrary, or in bad faith, contractors should:
Review past legal precedents
Assess with counsel whether the termination lacks a rational basis
Gather evidence to support a potential challenge
Pursue legal remedies to recover losses
By understanding their rights and legal options, government contractors may be able to protect themselves from wrongful terminations and seek just compensation.
Fair Use Falls Short: Judge Bibas Rejects AI Training Data Defense in Thomson Reuters v. ROSS
Fair use — a critical defense in copyright law that allows limited use of copyrighted material without permission — has emerged as a key battleground in the wave of artificial intelligence (AI) copyright litigation. In a significant revision of his earlier position, Judge Stephanos Bibas in the United States District Court for the District of Delaware has dealt a blow to artificial intelligence companies by blocking their ability to rely on this defense in Thomson Reuters Enterprise Centre GmbH v. ROSS Intelligence Inc.
Fair use serves as a safety valve in copyright law, permitting uses of copyrighted works for purposes such as criticism, commentary, news reporting, teaching, scholarship, or research. Courts evaluate fair use through four factors, with particular emphasis on whether the use transforms the original work and how it affects the market for the copyrighted work.
The case originated when Thomson Reuters sued ROSS Intelligence for using content from Westlaw — the legal research platform’s headnotes and proprietary Key Number System — to train an AI-powered legal research competitor. ROSS had initially sought to license Westlaw content, but when Thomson Reuters refused, ROSS turned to a third-party company, LegalEase Solutions. LegalEase created approximately 25,000 legal question-and-answer pairs, allegedly derived from Westlaw’s copyrighted content, which ROSS then used to train its AI system.
In September 2023, Bibas denied Thomson Reuters’ motion for summary judgment on fair use, finding that the question was heavily fact-dependent and required jury determination. He particularly emphasized factual disputes about whether ROSS’s use was transformative and how it affected potential markets.
However, in August 2024, Bibas took the unusual step of continuing the scheduled trial and inviting renewed summary judgment briefing. His opinion represents a dramatic shift, explicitly acknowledging that his “prior opinion wrongly concluded that I had to send this factor to a jury.” While noting that fair use involves mixed questions of law and fact, Bibas recognized that the ultimate determination in this case “primarily involves legal work.”
Bibas’ unusual move to invite renewed briefing stemmed from his realization, upon deeper study of fair use doctrine, that his earlier ruling afforded too much weight to factual disputes and did not fully account for how courts should assess transformative use in AI-related cases. Rather than viewing transformation through the lens of whether ROSS created a novel product, Bibas recognized that the key question was whether ROSS’s use of Thomson Reuters’ content served substantially the same purpose as the original works.
He concluded that while fair use involves factual elements, the dispositive questions in the case were ultimately legal ones appropriate for resolution by the court. His key analytical shifts included rejecting the notion that ROSS’s use might be transformative merely because it created a “brand-new research platform.”
Critically, Bibas distinguished ROSS’s use from cases like Google v. Oracle where copying was necessary to access underlying functional elements. While Google needed to copy Java API code to enable interoperability between software programs, ROSS had no similar technical necessity to copy Westlaw’s headnotes and organizational system. ROSS could have developed its own legal summaries and classification scheme to train its AI — it simply found it more expedient to build upon Thomson Reuters’ existing work.
The concept of “transformative” use lies at the heart of the fair use analysis. This principle was recently examined by the Supreme Court in Andy Warhol Foundation for the Visual Arts, Inc. v. Goldsmith, where the Court significantly narrowed the scope of transformative use under the first fair use factor. The Court held that when two works serve “substantially the same purpose,” the fact that the second work may add “new expression, meaning, or message” is not enough to tip the first factor in favor of fair use.
This framework for analyzing transformative use provides important context for understanding how courts may evaluate AI companies’ fair use defenses. AI companies have consistently argued that their use of copyrighted materials for training data is transformative because the AI systems learn patterns and relationships from the works rather than reproducing their expressive content. They contend that this process fundamentally transforms the original works’ purpose and character. However, Bibas’ ruling suggests courts may be increasingly skeptical of such arguments, particularly when the resulting AI products compete in similar markets to the original works.
While this ruling represents a setback for one of the key defenses believed to be available to AI companies in copyright litigation, fair use is only one of several defenses these companies are raising in more than 30 pending lawsuits. Other defenses include arguments about copyrightability, substantial similarity, and whether training data uses constitute copying at all. A weakening of the fair use defense, while significant, does not necessarily predict the ultimate outcome of these cases.
Additionally, this case involved a particularly direct form of market competition — an AI system trained on legal content to compete with the original legal research platform. Other cases involving different types of training data or AI applications that don’t directly compete with the source materials might be distinguished. For instance, an AI trained on literary works to generate news articles might present a more compelling case for transformative use since the end product serves a fundamentally different purpose than the training data.
Nevertheless, Bibas’ ruling may alter how AI companies approach training data acquisition. If other courts follow his lead in viewing fair use primarily as a legal rather than factual determination, these companies may explore licensing agreements with copyright holders — a process that some have already undertaken.
Listen to this article