Category: Litigation

AI Got It Wrong, Doesn’t Mean We Are Right: Practical Considerations for the Use of Generative AI for Commercial Litigators

Picture this: You’ve just been retained by a new client who has been named as a defendant in a complex commercial litigation. While the client has solid grounds to be dismissed from the case at an early stage via a dispositive motion, the client is also facing cost constraints. This forces you to get creative when crafting a budget for your client’s defense. You remember the shiny new toy that is generative Artificial Intelligence (“AI”). You plan to use AI to help save costs on the initial research, and even potentially assist with brief writing. It seems you’ve found a practical solution to resolve all your client’s problems. Not so fast.

Seemingly overnight, the use of AI platforms has become the hottest thing going, including (potentially) for commercial litigators. However, like most rapidly rising technological trends, the associated pitfalls don’t fully bubble to the surface until after the public has an opportunity (or several) to put the technology to the test. Indeed, the use of AI platforms to streamline legal research and writing has already begun to show its warts. Of course, just last year, prime examples of the danger of relying too heavily on AI were exposed in highly publicized cases venued in the Southern District of New York. See e.g. Benajmin Weiser, Michael D. Cohen’s Lawyer Cited Cases That May Not Exist, Judge Says, NY Times (December 12, 2023); Sara Merken, New York Lawyers Sanctioned For Using Fake Chat GPT Case In Legal Brief, Reuters (June 26, 2023).

In order to ensure litigators are striking the appropriate balance between using technological assistance in producing legal work product, while continuing to adhere to the ethical duties and professional responsibility mandated by the legal profession, below are some immediate considerations any complex commercial litigator should abide by when venturing into the world of AI.

Confidentiality

As any experienced litigator will know, involving a third-party in the process of crafting of a client’s strategy and case theory—whether it be an expert, accountant, or investigator—inevitably raises the issue of protecting the client’s privileged, proprietary and confidential information. The same principle applies to the use of an AI platform. Indeed, when stripped of its bells and whistles, an AI platform could potentially be viewed as another consultant employed to provide work product that will assist in the overall representation of your client. Given this reality, it is imperative that any litigator who plans to use AI, also have a complete grasp of the security of that AI system to ensure the safety of their client’s privileged, proprietary and confidential information. A failure to do so may not only result in your client’s sensitive information being exposed to an unsecure, and potentially harmful, online network, but it can also result in a violation of the duty to make reasonable efforts to prevent the disclosure of or unauthorized access to your client’s sensitive information. Such a duty is routinely set forth in the applicable rules of professional conduct across the country.

Oversight

It goes without saying that a lawyer has a responsibility to ensure that he or she adheres to the duty of candor when making representations to the Court. As mentioned, violations of that duty have arisen based on statements that were included in legal briefs produced using AI platforms. While many lawyers would immediately rebuff the notion that they would fail to double-check the accuracy of a brief’s contents—even if generated using AI—before submitting it to the Court, this concept gets trickier when working on larger litigation teams. As a result, it is not only incumbent on those preparing the briefs to ensure that any information included in a submission that was created with the assistance of an AI platform is accurate, but also that the lawyers responsible for oversight of a litigation team are diligent in understanding when and to what extent AI is being used to aid the work of that lawyer’s subordinates. Similar to confidentiality considerations, many courts’ rules of professional conduct include rules related to senior lawyer responsibilities and oversight of subordinate lawyers. To appropriately abide by those rules, litigation team leaders should make it a point to discuss with their teams the appropriate use of AI at the outset of any matter, as well as to put in place any law firm, court, or client-specific safeguards or guidelines to avoid potential missteps.

Judicial Preferences

Finally, as the old saying goes: a good lawyer knows the law; a great lawyer knows the judge. Any savvy litigator knows that the first thing one should understand prior to litigating a case is whether the Court and the presiding Judge have put in place any standing orders or judicial preferences that may impact litigation strategy. As a result of the rise of use of AI in litigation, many Courts across the country have responded in turn by developing either standing orders, local rules, or related guidelines concerning the appropriate use of AI. See e.g., Standing Order Re: Artificial Intelligence (“AI”) in Cases Assigned to Judge Baylson (June 6, 2023 E.D.P.A.), Preliminary Guidelines on the Use of Artificial Intelligence by New Jersey Lawyers (January 25, 2024, N.J. Supreme Court). Litigators should follow suit and ensure they understand the full scope of how their Court, and more importantly, their assigned Judge, treat the issue of using AI to assist litigation strategy and development of work product.

© 2024 Proskauer Rose LLP

by: William T. Walsh Jr of Proskauer Rose LLP

For more news on Artificial Intelligence, visit the NLR Communications, Media & Internet section.

The Increasing Role of Cybersecurity Experts in Complex Legal Disputes

The testimonies and guidance of expert witnesses have been known to play a significant role in high-stakes legal matters, whether it be the opinion of a clinical psychiatrist in a homicide case or that of a career IP analyst in a patent infringement trial. However, in today’s highly digital world—where cybercrimes like data breaches and theft of intellectual property are increasingly commonplace—cybersecurity professionals have become some of the most sought-after experts for a broadening range of legal disputes.

Below, we will explore the growing importance of cybersecurity experts to the litigation industry in more depth, including how their insights contribute to case strategies, the challenges of presenting technical and cybersecurity-related arguments in court, the specific qualifications that make an effective expert witness in the field of cybersecurity, and the best method for securing that expertise for your case.

How Cybersecurity Experts Help Shape Legal Strategies

Disputes involving highly complex cybercrimes typically require more technical expertise than most trial teams have on hand, and the contributions of a qualified cybersecurity expert can often be transformative to your ability to better understand the case, uncover critical evidence, and ultimately shape your overall strategy.

For example, in the case of a criminal data breach, defense counsel might seek an expert witness to analyze and evaluate the plaintiff’s existing cybersecurity policies and protective mechanisms at the time of the attack to determine their effectiveness and/or compliance with industry regulations or best practices. Similarly, an expert with in-depth knowledge of evolving data laws, standards, and disclosure requirements will be well-suited to determining a party’s liability in virtually any matter involving the unauthorized access of protected information. Cybersecurity experts are also beneficial during the discovery phase when their experience working with certain systems can assist in potentially uncovering evidence related to a specific attack or breach that may have been initially overlooked.

We have already seen many instances in which the testimony and involvement of cybersecurity experts have impacted the overall direction of a legal dispute. Consider the Coalition for Good Governance, for example, that recently rested its case(Opens an external site in a new window) as the plaintiffs in a six-year battle with the state of Georgia over the security of touchscreen voting machines. Throughout the process, the organization relied heavily on the testimony of multiple cybersecurity experts who claimed they identified vulnerabilities in the state’s voting technology. If these testimonies prove effective, it will not only sway the ruling in the favor of the plaintiffs but also lead to entirely new policies and impact the very way in which Georgia voters cast their ballots as early as this year.

The Challenges of Explaining Cybersecurity in the Courtroom

While there is no denying the growing importance of cybersecurity experts in modern-day disputes, it is also important to note that many challenges still exist in presenting highly technical arguments and/or evidence in a court of law.

Perhaps most notably, there remains a significant gap in both legal and technological language, as well as in the knowledge and understanding of cybersecurity professionals and judges, lawyers, and the juries tasked with parsing particularly dense information. In other words, today’s trial teams need to work carefully with cybersecurity experts to develop communication strategies that adequately illustrate their arguments but do not result in unnecessary confusion or a misunderstanding of the evidence being presented. Visuals are a particularly useful tool in helping both litigators and experts explain complex topics while also engaging decision-makers.

Depending on the nature of the data breach or cybercrime in question, you may be tasked with replicating a digital event to support your specific argument. In many cases, this can be incredibly challenging due to the evolving and multifaceted nature of modern cyberattacks, and it may require extensive resources within the time constraints of a given matter. Thus, it is wise to use every tool at your disposal to boost the power of your team—including custom expert witness sourcing and visual advocacy consultants.

What You Should Look for in a Cybersecurity Expert

Determining the qualifications of a cybersecurity expert is highly dependent on the details of each individual case, making it critical to identify an expert whose experience reflects your precise needs. For example, a digital forensics specialist will offer an entirely different skill set than someone with a background in data privacy regulations and compliance.

Making sure an expert has the relevant professional experience to assess your specific cybersecurity case is only one factor to consider. In addition to verifying education and professional history, you must also assess the expert’s experience in the courtroom and familiarity with relevant legal processes. Similarly, expert witnesses should be evaluated based on their individual personality and communication skills, as they will be tasked with conveying highly technical arguments to an audience that will likely have a difficult time understanding all relevant concepts in the absence of clear, simplified explanations.

Where to Find the Most Qualified Cybersecurity Experts

Safeguarding the success of your client or firm in the digital age starts with the right expertise. You need to be sure your cybersecurity expert is uniquely suited to your case and primed to share critical insights when the stakes are high.

© Copyright 2002-2024 IMS Legal Strategies, All Rights Reserved.
For more news on Cybersecurity Experts, visit the NLR Civil Procedure section.

740,000 Reasons to Think Twice Before Putting a Company in Bankruptcy

A recent decision from a bankruptcy court in Delaware provides a cautionary tale about the risks of involuntary bankruptcy.

In the Delaware case, the debtor managed a group of investment funds. The business was all but defunct when several investors, dissatisfied with the debtor’s management, filed an involuntary Chapter 7 petition.  They obtained an order for relief from the bankruptcy court, then removed the debtor as manager of the funds and inserted their hand-picked manager.  So far, so good.

The debtor, who was not properly served with the involuntary petition and did not give the petition the attention it required, struck back and convinced the bankruptcy court to set aside the order for relief. The debtor then went after the involuntary petitioners for damages.  After 8 years of litigation, the Delaware court awarded the debtor $740,000 in damages – all of it attributable to attorneys’ fees and costs.

If you file an involuntary petition and the bankruptcy court dismisses it, then a debtor can recover costs and reasonable attorneys’ fees.  The legal fees include the amount necessary to defeat the involuntary filing.  In addition, if the court finds that the petition was filed in bad faith, then the court also can enter judgment for all damages proximately caused by the filing and punitive damages.  The Delaware court awarded the debtor $75,000 for defeating the involuntary petition.

The debtor also sought a judgment for attorneys’ fees in pursuit of damages for violating the automatic stay.  The involuntary petitioners had replaced the debtor as manager without first obtaining leave from the court to do so.  The investment fund was barely operating and had little income to support a claim for actual damages.  Nevertheless, the Delaware court awarded $665,000 in attorneys’ fees related to litigating the automatic stay violation.

Because the debtor had no “actual” damages from the stay violation, the involuntary petitioners contended that the debtor was not entitled to recovery of attorneys’ fees.  The Delaware court pointed out that “actual” damages (e.g., loss of business income) are not a prerequisite to the recovery of attorneys’ fees, much to the chagrin of the defendants.  The court held that attorneys’ fees and costs are always “actual damages” in the context of a willful violation of the automatic stay.

The Delaware court also rejected defendants’ argument that the fee amount was “unreasonable” since there was no monetary injury to the business.  In other words, the debtor should not have spent so much money on legal fees because it lost on its claim.  The court held that defendants’ argument was made “with the benefit of hindsight” – at the end of litigation when the court had ruled, after an evidentiary trial, that debtor suffered no actual injury.  The court pointed out that the debtor sought millions in damages for the loss of management’s fees, and even though the court rejected the claim after trial, it was not an unreasonable argument for the debtor to make.  The court concluded that “the reasonableness of one’s conduct must be assessed at the time of the conduct and based on the information that was known or knowable at the time.”

The involuntary petitioners likely had sound reasons to want the debtor removed as fund manager.  But by pursuing involuntary bankruptcy and losing, they ended up having to stroke a check to the debtor for over $700,000.  Talk about adding insult to injury.  The upshot is that involuntary bankruptcy is an extreme and risky action that should be a last-resort option undertaken with extreme caution.

© 2024 Ward and Smith, P.A.. All Rights Reserved.

by: Lance P. Martin of Ward and Smith, P.A.

For more news on Bankruptcy Litigation, visit the National Law Review’s Bankruptcy & Restructuring section.

Federal Court Strikes Down NLRB Joint Employer Rule

On March 8, 2024, just days before it was set to take effect, U.S. District Judge J. Campbell Barker of the Eastern District of Texas vacated the National Labor Relations Board’s (“NLRB’s”) recent rule on determining the standard for joint-employer status.

The NLRB issued the rule on October 26, 2023. It established a seven-factor analysis, under a two-step test, for determining joint employer status. Under the new standard, an entity may be considered a joint employer if each entity has an employment relationship with the same group of employees and the entities share or codetermine one or more of the employees’ essential terms and conditions of employment which are defined exclusively as:

  • Wages, benefits and other compensation;
  • Hours of working and scheduling;
  • The assignment of duties to be performed;
  • The supervision of the performance of duties;
  • Work rules and directions governing the manner, means and methods of the performance of duties and grounds for discipline;
  • The tenure of employment, including hiring and discharge; and
  • Working conditions related to the safety and health of employees.

Set to take effect on March 11, 2024, the NLRB’s decision would have rescinded the 2020 final rule which considered just the direct and immediate control one company exerts over the essential terms and conditions of employment of workers directly employed by another firm. The new rule would have expanded the types of control over job terms and conditions that can trigger a joint employer finding.

In the lawsuit, filed by the United States Chamber of Commerce and a coalition of business groups, the Chamber and coalition claimed that the NLRB’s rule is unlawful and should be struck down because it is arbitrary and capricious. Judge Barker agreed as he held that the NLRB’s new test is unlawfully broad because an entity could be deemed a joint employer simply by having the right to exercise indirect control over one essential term. Judge Barker faulted the design of the two-step test which says an entity must qualify as a common-law employer and must have control over at least one job term of the workers at issue to be considered a joint employer, finding that the test’s second part is always met whenever the first step is satisfied. The Court vacated the new standard and indicated it will issue a final judgment declaring the rule is unlawful.

The NLRB quickly responded to the Court’s ruling. In a statement on March 9, 2024 NLRB Chairman Lauren McFerran said the “District Court’s decision to vacate the Board’s rule is a disappointing setback but is not the last word on our efforts to return our joint-employer standard to the common law principles that have been endorsed by other courts.” According to the NLRB, the “Agency is reviewing the decision and actively considering next steps in this case.”

What Employers Need to Know

The legality of the NLRB’s joint-employer standard has been a contested issue since the October 2023 announcement. The rule will not go into effect as scheduled, but Judge Barker’s decision is unlikely to be the final word on the matter.

© 2024 Dinsmore & Shohl LLP. All rights reserved.
by: Brian J. Moore of Dinsmore & Shohl LLP
For more on the NLRB, visit the NLR Labor & Employment section.

Nevada Reaffirms Inquiry Notice Standards for Medical Malpractice Statutes of Limitations

Igtiben v. Eighth Jud. Dist. Ct., 140 Nev. Adv. Op. 9 (App. Feb. 22, 2024), concerned a prisoner who was transported to a hospital for medical treatment and died in the hospital after treatment began. At the time, the applicable statute of limitations contained in NRS 41A.097(2) was “1 year after the plaintiff discovers or through the use of reasonable diligence should have discovered the injury….” This also is known as inquiry notice.

Applied here, the prisoner’s mother obtained his complete hospital medical chart six weeks after the death. Approximately fourteen months after the death, a forensic pathologist the family hired concluded professional negligence contributed to the death. The family filed their lawsuit eight months after receiving the forensic pathologist’s report. The hospital and physician moved to dismiss, arguing the family’s one-year statute of limitations had expired. The district court denied the motion, concluding a genuine issue of material fact was present because the family filed suit within eight months of the pathologist’s report.

Nevada’s Court of Appeals reversed and directed the district court to dismiss the complaint. In Nevada, inquiry notice for potential medical malpractice begins when the plaintiff or the plaintiff’s representative receives “all relevant medical records.” Applied here, the only relevant medical records were the hospital records. Thus, the family had the information necessary to investigate the care and treatment and trigger inquiry notice just six weeks after the death. The date that the forensic pathologist provided his report was irrelevant.

Igtiben might provide greater certainty to providers and patients as they evaluate potential professional negligence claims. However, it underscores the importance of careful responses to requests for medical records because if other “relevant” records existed but were not provided, inquiry notice might not be triggered.

© 2024 Wilson Elser
For more news on Medical Malpractice Statutes of Limitations in Nevada, visit the NLR Professional / Malpractice section.

U.S. Corporate Transparency Act: CTA is Declared Unconstitutional in U.S. District Court Case

The Corporate Transparency Act has been declared unconstitutional. On March 1, 2024, U.S. District Court Judge Liles C. Burke issued a 53-page opinion[1] granting summary judgment for the National Small Business Association and held that the Corporate Transparency Act “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.”

As a result, Judge Burke found the CTA to be unconstitutional because it exceeds the Constitution’s limits on Congress’ power, without even reaching a decision on whether it violates the First, Fourth, and Fifth Amendments. The Court then permanently enjoined the government from enforcing the CTA against the named plaintiffs and ordered a further hearing on the award of costs of litigation.

While it is likely that this litigation will continue to play out in the federal court system, the initial victory has gone to small business and importantly that means that compliance with this now unconstitutional regulatory regime can be set aside for the current time being.

[1] Nat’l Small Bus. United v. Yellen, No. 5:22-cv-01448-LCB (N.D. Ala. 2022)

Copyright ©2024 Nelson Mullins Riley & Scarborough LLP
For more on the Corporate Transparency Act, visit the NLR Corporate & Business Organizations section.

Federal Court Strikes Down the Corporate Transparency Act as Unconstitutional

On March 1, 2024, the federal judge presiding over the lone case testing the validity of the Corporate Transparency Act (CTA) struck down the CTA as unconstitutional. As we have explained, through the CTA, Congress imposed mandatory reporting obligations on certain companies operating in the United States, in an effort to enhance corporate transparency and combat financial crime. Specifically, the CTA, which took effect on January 1, 2024, requires a wide range of companies to provide personal information about their beneficial owners and company applicants to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). More than 32.5 million existing entities are expected to be subject to the CTA, and approximately 5 million new entities are expected to join that number each year. By mid-February, approximately a half million reports had been filed under the CTA according to FinCEN.

The CTA’s enforceability is now in doubt. In National Small Business United d/b/a National Small Business Association v. Yellen, the Honorable Liles C. Burke of the United States District Court for the Northern District of Alabama held that the CTA exceeded Congress’s authority to regulate interstate commerce, and that the CTA was not necessary to the proper exercise of Congress’ power to regulate foreign affairs or its taxing power. The Court issued a declaratory judgment—stating that the CTA is unconstitutional—and enjoined the federal government from enforcing the CTA’s reporting requirements against the plaintiffs in that litigation. A nationwide injunction, which would have raised its own enforceability concerns, was not included in the Court’s ruling.

The Court focused on three aspects of the CTA. First, the Court highlighted that the CTA imposes requirements on corporate formation, which is traditionally left to state governments as matters of internal state law. Second, the Court observed that the CTA applies to corporate entities even if the entity conducts purely intrastate commercial activities or no commercial activities at all. Third, the Court concluded that the CTA’s disclosure requirements could not be justified as a data-collection tool for tax officials as that would raise the specter of “unfettered legislative power.”

What the Decision Means for Entities Subject to the CTA

The Court’s decision creates uncertainty on entities’ ongoing obligations under the CTA. Although the Court purported to limit its injunction to the parties in the litigation before it, the lead plaintiff in the suit is the National Small Business Association (NSBA). In its opinion, the Court held that the NSBA had associational standing to sue on behalf of its members. Based on precedent, this means the Court’s injunction likely benefits all of the NSBA’s over 65,000 members. If so, the government is prevented from enforcing the CTA’s reporting requirements against any entity that is a member of the NSBA.

Regardless of membership in the NSBA, however, the Court’s declaratory judgment that the CTA is unconstitutional also raises serious doubts about the government’s ability to enforce the CTA’s reporting requirements. This could amount to a de facto moratorium on CTA enforcement, depending on the government’s view of the decision.

What Happens Next

The government will likely appeal this decision, but the Court’s injunction and declaration will remain in effect unless a stay is granted. To receive a stay, the government will first likely need to file a motion in the district court, which will consider (1) how likely it is that the government will succeed on appeal; (2) whether the government will be irreparably harmed without a stay; (3) whether a stay will injure other parties interested in the litigation; and (4) whether a stay would benefit the public interest. If the district court denies a stay, the government will be able to seek a stay from the Atlanta-based United States Court of Appeals for the Eleventh Circuit.

The government has 60 days to appeal, though it will likely file its appeal sooner given the grant of an injunction and decision’s far-reaching consequences. The grant or denial of stay should be resolved in the coming weeks, but the timing of any final decision from the Court of Appeals is uncertain. In 2023, the median time for the Eleventh Circuit to resolve a case was over 9 months. However, the key deadline by which tens of millions of companies otherwise must file their initial report under the CTA is January 1, 2025.

© 2024 Varnum LLP
For more news on the Constitutionality of the Corporate Transparency Act, visit the NLR Corporate & Business Organizations section.

2024 Litigation Look Ahead Series: Challenges to Administrative Law Judges, Judicial Review Process Could Limit Executive Power

B&D is pleased to present the third installment of our 2024 Litigation Look Ahead series. (Read part two on the increased application of the major questions doctrine here.) In this section of the compilation, our litigation team highlights two pending Supreme Court cases examining the constitutionality of appointed administrative law judges and the judicial review process under the Administrative Procedure Act. The outcome of these cases could have significant ramifications on the enforcement power of the executive branch and the deadline for challenging final agency actions.

Securities and Exchange Commission v. Jarkesy, No. 22-859

CASE SUMMARY

The Securities and Exchange Commission (SEC) brought a civil enforcement action against George Jarkesy and an investment advisor, alleging securities fraud. SEC utilized the agency’s in-house administrative adjudication procedures to pursue the matter. SEC’s administrative law judge (ALJ) found Jarkesy and his co-defendants liable and ordered various remedies. The defendants pursued administrative appeals, unsuccessfully, and then sought review in the U.S. Court of Appeals for the Fifth Circuit. In May 2022, the Fifth Circuit held that the SEC’s use of ALJs to enforce civil securities laws violates the accused’s Seventh Amendment right to a jury trial. The Fifth Circuit further found the SEC’s administrative courts unconstitutional because the appointed judges are protected from removal, in violation of Article II of the Constitution, and Congress improperly granted the SEC legislative power by allowing the agency to decide whether to sue in administrative or federal court. The SEC petitioned the U.S. Supreme Court for certiorari, which it granted, and oral arguments took place on November 29, 2023.

IMPLICATIONS

The case challenges the constitutionality of appointed ALJs to resolve disputes. While Jarkesy only pertains to the SEC’s use of ALJs to enforce securities laws, EPA and many other federal agencies rely on in-house civil administrative proceedings to enforce laws, in lieu of civil actions in court. If the Supreme Court affirms the Fifth Circuit’s decision, the ruling could have broader impacts by eliminating or restricting the ability of other agencies to use ALJs. Such a result would channel more enforcement cases to the courts, a more time-consuming, resource-intensive, and costly process. Limiting the enforcement power of the executive branch would greatly impact how agencies enforce statutes and their regulations. A ruling in favor of the petitioners could also call into question the past decisions of ALJs. To minimize the enormous consequences of such a decision, the Supreme Court may find a middle ground, focusing on limitations on the Seventh Amendment right to a jury trial in the context of agency enforcement actions.

Corner Post, Inc. v. Board of Governors of the Federal Reserve System, No. 22-1008

CASE SUMMARY

The U.S. Supreme Court is considering a circuit split regarding the six-year statute of limitations for Administrative Procedure Act (APA) challenges, a cornerstone of environmental litigation. Under the APA, any person who claims to have been injured by an agency’s action has the right to go to court to challenge the action, but they must file their action within six years after the “right of action first accrues.”

In this case, Corner Post, Inc., the operator of a convenience store and truck stop, challenged the Federal Reserve’s debit card interchange rules, known as Regulation II, which set the range of fees larger card-issuing banks can charge merchants for processing debit card payments, asserting the rules were promulgated in violation of the APA. The rules were adopted in 2011. Corner Post, which opened for business seven years later in 2018, argued that the statute of limitations does not begin to run until a plaintiff suffers a “legal wrong” or becomes “adversely affected or aggrieved,” as required by 5 U.S.C. § 702. Consequently, the statute of limitations did not apply to bar its claim because the “adverse affect” of the challenged rule did not occur until 2018.

A North Dakota federal district court dismissed the case as untimely because the six-year statute of limitations expired in 2017. The U.S. Court of Appeals for the Eighth Circuit affirmed, holding that the six-year statute of limitations for facial challenges to regulations brought under the APA accrues upon publication of the final rule. In this ruling, the Eighth Circuit followed the majority position that the APA claims first accrued upon publication of the final agency action. Corner Post, Inc. filed a petition for certiorari, which was granted, and the case is now before the Supreme Court.

IMPLICATIONS

The Supreme Court heard oral arguments in the case on February 20, 2024. The precise question before the Court is whether a facial challenge to a regulation, brought under the APA, accrues when the regulation is first published or when the plaintiff first suffers a related “legal wrong” or an “adverse affect.” At oral arguments, the Justices questioned Corner Post’s position. In particular, Justice Ketanji Brown Jackson seemed concerned that a ruling favoring Corner Post would put every agency rule in effect in question, subject to facial challenges whenever a regulated entity claims to have first suffered a related harm.

The outcome of this case could have major impacts on the ability of regulated entities to assert facial challenges to regulations under the APA. If the Supreme Court reverses and holds that the statute of limitations accrues when a party is first injured, plaintiffs will be permitted to challenge a regulation—no matter the promulgation date—so long as they commence the cause of action within six years of the initial harm. Such a holding could open floodgates within the judicial system, creating a pathway for parties to challenge long-settled regulations, leading to perennial regulatory instability.

In Conclusion

The decisions in both Jarkesy and Corner Post could significantly affect the executive branch’s ability to enforce statutes and regulations as well as litigants’ options for bringing judicial challenges. In either case, Supreme Court decisions in favor of the petitioners would magnify the effect of other decisions that may alter how courts approach administrative law questions, such as the pending decisions regarding Chevron deference.

A ruling in favor of the petitioner in Jarkesy could unravel a complex system of administrative adjudication and expedite a litigant’s access to the crowded federal courts. A ruling in favor of the petitioner in Corner Post could change how courts apply the statute of limitations for APA challenges to agency actions and open the door to such claims years, or even decades, after regulations are published. Such rulings would eliminate long-standing obstacles in the path to federal court.

Furthermore, if the Supreme Court strikes down or limits Chevron deference, vastly different criteria would apply when federal courts review agency actions. This combined impact of the three cases could potentially mark a revolution in administrative law litigation, with the landscape fundamentally altered to provide regulated entities more opportunities to challenge agency action in federal court, freed, to some extent, from the agency-favorable doctrine of Chevron deference, allowing the judiciary more opportunity to shape agency action.

Coming Soon in our Litigation Look Ahead Series…

In our 2024 Litigation Look Ahead series, we highlight cases – environmental and otherwise – that could have notable impacts on the regulated community or lead to changed regulatory approaches. Upcoming installments of the series will examine Fifth Amendment takings, the Commerce Clause, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), and natural resource law. In case you missed it, read part two of the series covering the increased application of the major questions doctrine.

© 2024 Beveridge & Diamond PC
For more news on 2024 Litigation Expectations, visit the NLR Litigation / Trial Practice section.

Road to Victory Just Got a Little Easier for Whistleblowers

In 2017, a federal jury found whistleblower Trevor Murray was wrongfully terminated after he refused “to change his research on commercial mortgage-backed securities.” He won over $900,000. On appeal in 2022, the U.S. Court of Appeals for the Second Circuit overturned Murray’s award, finding whistleblowers who bring a retaliation claim against their employer under the Sarbanes-Oxley Act (SOX) must prove their employer acted with “retaliatory intent.”

Earlier this month, the U.S. Supreme Court weighed in, issuing a unanimous decision in Trevor Murray v. UBS Securities LLC, et al. The justices found that the Second Circuit was wrong. That is, “when it comes to a plaintiff’s burden of proof on intent under SOX, they only need to show that their protected activity contributed to an unfavorable personnel action, such as a firing.” Once the plaintiff does this, the Supreme Court found the burden of proof shifts to the employer to prove that “it would have taken the same adverse action regardless of the employee’s protected activity.” The justices found the law is intended ”to be plaintiff-friendly.”

In light of this development, employers should continue to be diligent in documenting the reasons that lead to an employee’s termination. This is especially true if that employee may be found to have engaged in a protected activity, cloaking them with certain whistleblower protections.

In siding with whistleblower Trevor Murray, the justices rejected UBS’ position that a separate finding of retaliatory intent is required for whistleblower protection under the Sarbanes-Oxley Act, or SOX, which governs corporate financial reporting and recordkeeping.
© 2024 BARNES & THORNBURG LLP
For more on Whistleblowers, visit the NLR Labor & Employment section.

Year in Review: Criminal Enforcement by the DOJ Antitrust Division in 2023

Introduction

When it comes to antitrust criminal enforcement, 2023 will be remembered as the year when the US Department of Justice’s (DOJ) Antitrust Division redefined and tested the outer boundaries of its authority. Here is a look back at the key events that defined the DOJ’s year in criminal antitrust enforcement.

Losses in Labor Markets

The DOJ continued its focus on labor markets in 2023 by pursuing per se no-poach and wage-fixing prosecutions despite resounding resistance by fact finders. In these cases, the DOJ alleged that companies and executives restrained trade in labor markets in violation of Section 1 of the Sherman Act through agreements that restricted movement and suppressed the wages of workers.

Courts have allowed these per se no-poach and wage-fixing cases to survive the motion to dismiss stage of litigation, but the DOJ’s success has routinely ended there. In 2022, the DOJ tried its first criminal no-poach case in US v. DaVita, which was successfully defended by McDermott and resulted in a complete acquittal of both corporate and individual defendants. In 2023, the DOJ fared no better:

  • In US v. Manahe (D. Maine), the DOJ charged four business managers in an alleged conspiracy to fix the wages and restrict the hiring of personal support specialist workers for two months during the pandemic. The government presented evidence such as text messages discussing hourly wages and recordings of meetings between the defendants, while the defendants countered by showing that the discussed prices were not implemented, and a draft agreement went unsigned. The jury acquitted all four defendants following a two-week trial in March 2023.
  • As we previously reported, the DOJ suffered a blow in US v. Patel (D. Connecticut) in April 2023. During a four-week trial, the government alleged that defendants conspired to restrict the hiring and recruiting of skilled workers and engineers in the aerospace industry. The defense moved for a judgment of acquittal under Rule 29 of the Federal Rules of Criminal Procedure, an extreme lever that judges rarely pull to end a trial before it reaches the jury. Judge Victor A. Bolden granted the motion and acquitted all the defendants. He found that the engineers’ freedom to switch companies and the number of exceptions to the agreements could not support finding market allocation as a matter of law.
  • In November 2023, the DOJ stunningly moved to dismiss its own case alleging a conspiracy by outpatient medical care competitors not to solicit senior-level employees. The case was three years into litigation; in its motion, the DOJ simply stated that dismissal would conserve court time and resources. This was the DOJ’s last pending no-poach case against a corporation.

If the DOJ’s labor markets cases have a theme, it is this: If at first you don’t succeed, try, try again. Despite four straight losses and a voluntary dismissal, the DOJ remains undeterred in bringing additional criminal wage-fixing and no-poach suits. The Biden administration’s “whole of government” approach to enforcement means that shared resources and collaboration among agencies, including the DOJ and the National Labor Relations Board, will continue into 2024. Assistant Attorney General Jonathan Kanter left no doubt that the DOJ is doubling down on its executive authority despite a losing track record in court: “Let me confirm: We are just as committed as ever to, when appropriate, using our congressionally given authority to prosecute criminal violations of the Sherman Act in labor markets.” Addressing the Women’s White Collar Defense Association in December 2023, Deputy Assistant Attorney General Doha Mekki echoed, “We look forward to charging more no-poach and wage-fixing cases.”

Per Se Problems

The DOJ stumbled in a different per se setting in December 2023, when a three-judge panel on the US Court of Appeals for the Fourth Circuit affirmed fraud charges but reversed the per se bid-rigging conviction of a steel and aluminum manufacturing sales manager turned executive. In US v. Brewbaker, the appellate panel found that “caselaw and economics show that the indictment failed to state a per se antitrust offense as it purported to do.”

In its 2020 indictment, the DOJ alleged that Brent Brewbaker of Contech Engineered Solutions conspired with a North Carolina distributor and exclusive dealer, Pomona Pipe Products, to share total bid pricing information on North Carolina Department of Transportation (NCDOT) aluminum projects and use that information to purposefully submit losing bids. This allegedly appeased Pomona and maintained Contech’s status on NCDOT’s “emergency bid list.” Contech pled guilty, but Brewbaker continued to trial. A jury found him guilty of bid rigging and other fraud charges; he appealed.

The Fourth Circuit held that the DOJ’s indictment implicated Contech and Pomona as horizontal competitors in NCDOT aluminum projects and as vertical competitors through their manufacturer-dealer relationship, resulting in a “hybrid” restraint. The DOJ sought to isolate Contech’s role as a manufacturer and competing bidder for NCDOT aluminum projects, focusing solely on the horizontal nature of the restraint and subsequently arguing for per se treatment.

The panel did not accept the DOJ’s argument that the conspiracy itself involved only horizontal conduct and instead considered the parties’ competitive relationship, which involved both horizontal and vertical aspects. The panel found that “agreements that look otherwise identical in form produce different economic effects based on how the parties relate to one another,” and stated that the DOJ’s theory would “force . . . arbitrary and likely impossible line-drawing” to determine which “part” of the entity to consider. The court continued, “The Sherman Act doesn’t ignore reality; it treats the entire business entity as the single party it is. . . . Antitrust law does not turn on such artificial mental gymnastics.”

Under this premise, the court moved through an analysis of case law and economic rationale to determine appropriate scrutiny. Although there is no direct guidance on hybrid restraints in the bid rigging context, the panel contrasted the present case with Leegin Creative Leather Products, 551 U.S. 877 (2007), where the Supreme Court of the United States applied per se scrutiny to a price fixing case despite both horizontal and vertical elements. In Brewbaker, the court found instead that the restraint in the indictment should not have been subject to the per se standard based on precedent, nor would it invariably lead to anticompetitive effects upon economic analysis—all making per se scrutiny inappropriate. As a result, and in a blow to the DOJ, the court reversed Brewbaker’s Sherman Act conviction.

In Full (Strike) Force

The DOJ’s Procurement Collusion Strike Force (PCSF) succeeded in securing several guilty pleas and stiff penalties in 2023. The PCSF is tasked with training government personnel and enforcing antitrust and fraud laws related to government contract bidding, grants and program funding.

PCSF Director Daniel Glad spoke to the National Association of State Procurement Officials in November 2023, highlighting the state and agency partnerships that comprise the PCSF. He pushed for even greater collaboration with state officials in 2024 and coming years, noting the recent influx of funds from the Infrastructure Investment and Jobs Act, which authorized billions of dollars in transportation and infrastructure programs. Later that month, the PCSF held its first summit to discuss strategies, priorities and resources. As reported by the DOJ, attendees included 11 “law enforcement partners” from across the country and 22 US Attorneys’ Offices.

These partnerships have surely strengthened the PCSF, and it has an extensive track record of successful convictions and guilty pleas. Among them are the following:

  • In January 2023, military contractor Aaron Stephens pleaded guilty to rigging bids related to the maintenance and repair of military tactical vehicles, following his alleged co-conspirator Mark Leveritt’s guilty plea July 2022. In August 2023, Stephens received an 18-month prison sentence and a $50,000 criminal fine. Leveritt received a six-month sentence and a $300,000 fine.
  • Also in January 2023, a construction company owner received a 27-month sentence and was ordered to pay a $1.75 million fine for fraudulently securing government contracts meant for service-disabled veteran-owned small businesses.
  • A Metropolitan Transportation Authority (MTA) employee out of New York pleaded guilty to engaging in wire fraud related to MTA excess vehicle auctions. Assistant Attorney General Jonathan Kanter described the conduct as “stealing from the public” and promised that the DOJ would continue to “detect and punish” those who abuse the public trust. Two additional guilty pleas by fellow MTA employees followed.
  • An insulation contractor out of Connecticut was the seventh person sentenced in a bid rigging and contract fraud investigation, resulting in a 15-month prison sentence and a restitution fine of more than $1 million. The alleged scheme related to insulation contracting at both public and private institutions, including universities and hospitals.
  • In March 2023, a Georgia jury found three military contractors guilty of conspiring to defraud the United States and two counts of major fraud related to two years of conduct.
  • A construction company owner faced a 78-month prison sentence and an almost $1 million restitution fine for bid rigging and bribery involving the California Department of Transportation (Caltrans). Defendant Bill Miller previously pled guilty to recruiting others to submit sham bids and to paying almost $1 million in cash bribes to a Caltrans contract manager. The manager himself received a 49-month prison sentence and a similar restitution fine, and a co-conspirator who submitted false bids received 45 months in jail and a $797,940 restitution fine.
  • A Texas judge ordered corporate defendant J&J Korea to pay almost $9 million for wire fraud and conspiracy to restrain trade related to subcontract work for US military hospitals in South Korea. A grand jury indicted two corporate officers for the same conduct in 2022.
  • Three military contractors received their sentences in December 2023 following a jury trial related to their alleged procurement fraud scheme. The defendants’ sentences included prison, supervised release and fines ranging from $50,000 to $250,000.

In December 2023, the PCSF also secured a seven-count indictment using wiretap evidence to charge two forest firefighting services executives with bid rigging, allocating markets and fraud. Wiretap evidence is rarely used in cartel investigations and marks a meaningful step in PCSF’s investigative approach. PCSF likely has already begun obtaining wiretap evidence in other cases and, based on its success in 2023, will continue pursuing aggressive investigative and litigation strategies moving forward.

Partnerships and Collaboration

Taking the PCSF to the global stage, the DOJ announced a joint initiative with Mexico’s Federal Economic Competition Commission and the Canadian Competition Bureau to collaborate on “outreach to the public and business community about anti-competitive conduct, as well as on investigations, using intelligence sharing and existing international cooperation tools” in the run-up to the 2026 FIFA World Cup to be hosted across the three countries.

In addition to its international partnerships for the World Cup, the DOJ is tackling technology with global efforts. In November 2023, DOJ leaders met with G7 competition authorities in Tokyo to discuss competition in digital markets and enforcement priorities. This was one in a series of meetings among authorities that have taken place since 2019 with a goal of setting and issuing guidance on shared priorities for regulating competition in tech. Following the summit, the group published a “communique” grounded in concern around emerging technologies, including risks in the criminal realm. The leaders noted, “As firms increasingly rely on AI to set prices to consumers, there is risk that such tools could facilitate collusion or unfairly raise prices.”

This sentiment is consistent with statements made earlier in the year by DOJ leadership. For example, Principal Deputy Assistant Attorney General Doha Mekki highlighted the role of technology in information exchanges. She described the current “inflection point” of algorithms, data and cloud computing as creating new market realties. Assistant Attorney General Jonathan Kanter stated that artificial intelligence’s “boundless potential” comes with “risks [that] transcend borders.” The consistency of rhetoric and global dedication to tackling the risks of emerging technology signals a potentially busy 2024 in this space.

The DOJ also continued its practice of partnering with fellow domestic law enforcement agencies. For example, the DOJ secured three guilty pleas in August 2023 for bid rigging asphalt paving services contracts in Michigan from 2013 to 2021. The DOJ worked with the Offices of Inspector General for the US Department of Transportation and the US Postal Service, and highlighted the partnership in public statements on the pleas. Deputy Assistant Attorney General Manish Kumar said, “Along with our law enforcement partners, the division will continue to seek justice when corporations and their leaders deprive customers of fair and open competition.” Cross-agency collaboration is a hallmark of the DOJ’s criminal enforcement and there is no reason to believe this practice will change in 2024.

Anything but Generic Remedies

In August 2023, the DOJ announced that it had entered into two unprecedented deferred prosecution agreements (DPAs) to resolve price fixing charges in the generic drug industry against Teva Pharmaceuticals USA, Inc., and Glenmark Pharmaceuticals, Inc. Teva and Glenmark agreed to pay $250 million and $30 million, respectively, in criminal penalties and compliance monitoring, with Teva also obligated to donate $50 million worth of drugs to aid organizations. These agreements included divestitures of the companies’ product lines for the cholesterol drug pravastatin, alleged as central to the alleged price fixing conspiracy underlying the agreements. These arrangements are unusual for two reasons.

DPAs

First, DPAs are typically unfavored by the government and used as incentives for cooperation early in investigations. It is striking that the DOJ entered into these agreements in such an advanced stage of litigation, where five other corporations and three individuals had already admitted to the implicated conspiracy. DPAs are agreements between the government and defendants in which the defendants accept certain penalties in exchange for prosecutors stopping their pursuit of the underlying charges. Prosecutions are “deferred” indefinitely while defendants fulfill their end of the bargain. Although both DPAs and plea agreements involve admitting wrongdoing, DPAs allow defendants resolution without admission of legal guilt. In the event defendants fail to meet the terms of the agreement, the government resumes its prosecution and seeks convictions.

“Extraordinary” Remedial Measures

Second, both DPAs involved unheard of divestitures of product interests in the cholesterol drug pravastatin, with Teva’s DPA requiring an additional measure of $50 million in donated clotrimazole and tobramycin to humanitarian organizations. All three generic drugs were impacted by the charged conspiracy. This remedy is first of its kind—criminal antitrust enforcers historically have sought monetary and prison sentences only. However, DOJ criminal enforcers driving outside of their historic lane is not necessarily inconsistent or surprising. The current administration has repeatedly committed to “using the whole legislative toolbox” in litigation.

Deputy Assistant Attorney General Manish Kumar stated in October 2023 that these divestitures were appropriate in the “heavily regulated” context of generic pharmaceuticals, where a corporate conviction could have precluded Teva and Glenmark’s participation in federal drug programs to such an extent that the companies would have gone out of business. Of course, these are not the first defendants to face corporate convictions in heavily regulated industries, and they are not even the first to do so in this specific alleged conspiracy.

Whether this specific tool will build or break down competition, whether criminal enforcers are equipped to evaluate the impact of divestiture, and whether it is appropriate to test this novel approach in an industry with an alleged prolific conspiracy among major players and thus among potential buyers remains to be seen. For better or worse there will be more data points to answer these and other uncertainties: Kumar noted that the DOJ hopes to implement divestitures as criminal remedies “in other contexts” moving forward.

Investigation Nearing Its End

On November 16, 2023, in a surprising turn of events shortly after the DOJ announced the resolutions with Teva and Glenmark, the DOJ moved to dismiss a February 2020 indictment against Ara Aprahamian, a former senior executive of Taro Pharmaceutical Industries charged with fixing prices, rigging bids and allocating markets for generic drugs. The district court granted the motion to dismiss the indictment with prejudice. Prior to filing the motion, the DOJ had been preparing for a February 2024 criminal trial against Aprahamian. As a result of these recent actions, the DOJ has no remaining public proceedings in connection with its investigation of pricing in the generic drug industry. And, in December 2023, a district court overseeing the multidistrict civil litigation against generic drug manufacturers for the same alleged conduct terminated the DOJ’s intervenor status in the case. Thus, the DOJ’s nearly decade-long investigation of the generic drug industry appears to be ending.

Monaco on Mergers and Corporate Compliance 

In a speech at the Society of Corporate Compliance and Ethics’ Annual Compliance & Ethics Institute, Deputy Attorney General Lisa Monaco emphasized the importance of compliance programs and announced a safe harbor policy for voluntary self-disclosures of antitrust wrongdoing by companies engaged in mergers and acquisitions.

Compliance

Deputy Attorney General Monaco focused her remarks on the increased importance of, and scrutiny on, corporate compliance programs. She noted that under a new initiative, every resolution by the Criminal Division requires companies to add compliance-promoting criteria to compensation systems. She also shared that the Division is enacting “clawback credits” to incentivize tying executive compensation to compliance. Remaining focused on bottom lines, she warned: “Invest in compliance now or your company may pay the price—a significant price—later.” These sharp words are consistent with the DOJ’s increased rhetoric on and policy prioritization of compliance programs throughout 2023.

Mergers & Acquisitions Safe Harbor Policy

Deputy Attorney General Monaco also commented on the recently unveiled DOJ-wide safe harbor allowing companies to report misconduct by the companies they seek to acquire or merge with. The covered conduct must be discovered through the M&A process. Conduct that should have otherwise been disclosed or which could have been publicly known does not count. Conduct already known to the DOJ is not entitled to safe harbor protection either.

Monaco stated, “Going forward, acquiring companies that promptly and voluntarily disclose criminal misconduct within the Safe Harbor period [six months from date of closing], and that cooperate with the ensuing investigation, and engage in requisite, timely and appropriate remediation, restitution, and disgorgement [within one year of closing]—they will receive the presumption of a declination.” In line with remarks by enforcers earlier in the year, Monaco specifically highlighted cybersecurity, tech and national security as areas of heightened risk and thus heightened scrutiny. Corporations in these markets should take heed of the DOJ’s emphasis on corporate compliance in 2024.

Looking Ahead

In 2023, criminal antitrust authorities used novel approaches at every stage of enforcement—from charging decisions to partnerships, to litigation, to remedies— and they show no sign of slowing down in 2024. The emergence of new technologies and a policy promise to forego old guideposts takes the DOJ further from the familiar, and perhaps further from its expertise.

In a high-stakes election year and with an influx of federal funds in infrastructure and defense spaces, the DOJ will likely hit the accelerator sooner than it hits the breaks. Markets that impact maximum voters, including employment, tax-funded government contracts, national security and healthcare, are likely focuses. All considered, it is more important than ever for businesses and individuals to stay up to date on policy priorities, revamp and champion internal compliance programs, and seek agile counsel in the ever-changing landscape of criminal enforcement to avoid costly investigations.

© 2024 McDermott Will & Emery
For more on Antitrust Criminal Enforcement, visit the NLR Antitrust & Trade Regulation section.