The National Law Forum

Investing in SAFE and Convertible Note Rounds ꟷKnow Your Bedmates!

Early-stage companies often rely on Simple Agreements for Future Equity (SAFEs) and convertible promissory notes to raise capital either prior to a company’s first priced preferred equity round, or to raise bridge capital between priced equity raises. In addition to the economic terms, investors considering participation in these financings should seek visibility as to the other investors in the round, and the potential misalignment of incentives among those investors.

Raising funds via SAFEs and convertible notes has a number of advantages for the issuer, not least of which is the speed with which such financings can be achieved. SAFE and convertible note financings involve significantly less documentation, legal lift, and expense than a standard preferred stock financing. Further, depending on how a SAFE or convertible note is structured, it can allow an early-stage company experiencing rapid growth (and, accordingly, valuation) to raise capital without selling equity at a valuation materially lower than the valuation it can justify in the next 12-24 months.

Similarly, SAFEs and convertible note rounds can appeal to early-stage investors. Again, the documentation is relatively straightforward and, to a large extent, consistent from transaction to transaction. Further, more recent iterations of Y-Combinator’s form SAFE include investor-favorite provisions that protect investors from dilution associated with the issuance of other convertible instruments.

That said, most SAFEs and convertible promissory notes include amendment provisions providing that their terms can be amended or waived with the approval of holders representing a majority of the total invested amount. Such amendments can fundamentally change the terms on which investors originally based their decision to participate in the SAFE or note round. For example, common amendments include reductions in the conversion discount, valuation cap, and/or required equity financing threshold at which the SAFE or note is required to convert. Perhaps more drastic, we increasingly see companies raising significant funds in multiple SAFE or note rounds without ever needing to do an equity financing prior to a liquidity event. In those instances, it is not uncommon for the company to get a majority-in-interest of the SAFE or noteholders to convert into equity on terms that bear little or no relation to what was contemplated in the original investment instrument.

Of course, you may ask, why would a majority-in-interest of the SAFE or noteholders agree to an amendment or adjustment that is not in their best interests? The answer is that savvy founders will often ensure that a majority-in-interest of the investors are “company-friendly,” with incentives that may be very different than those of a passive investor. For example, founders and their friends and family may control a majority of the round. Similarly, SAFE and noteholders may already have equity interests in the company, such that they see a net benefit to agreeing to changes in their note or SAFE terms that, viewed in isolation, are subpar.

Accordingly, before making a material investment in a SAFE or convertible note financing, investors should have a clear understanding of the maximum amount that can be raised, and the likelihood that a significant number of those investors may sign off on amendments that undermine the original deal terms.

Two Blockbuster U.S. Supreme Court Decisions May Spell End of NLRB’s Expansion of Reach of NLRA as Well as How Agency Prosecutes Cases

The U.S. Supreme Court issued two blockbuster decisions this week, both of which likely will curtail the ability of federal agencies, including the NLRB, to prosecute cases and expand the law.

In a 6-3 decision announced Thursday in Securities and Exchange Commission v. Jarkesy et al., U.S., No. 22-859 (Jun. 27, 2024), the Supreme Court ruled that when the SEC seeks civil penalties against a defendant, the defendant is entitled to a trial by jury. As reported here, this decision could affect a future ruling in Space Exploration Technologies Corp., v. NLRB, No. 24-40315 (5th Cir. 2024), a case challenging the authority of National Labor Relations Board (“NLRB”) Administrative Law Judges (“ALJs”) on the same grounds.

Perhaps more significant, a 6-2 decision announced Friday in Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce, et al., No. 22-451 (Jun. 28, 2024), eliminates the deference given to federal agencies to interpret laws by reversing the Chevron decision.

Jarkesy: Viability of Agency Administrative Law Judges Put Into Question

Jarkesy Background
In 2013, the Securities and Exchange Commission (“SEC”) initiated an enforcement action and sought civil penalties for alleged fraud against Defendants. Relying on relatively new authority conferred by the 2010 Dodd-Frank Act, the SEC opted to adjudicate the matter itself before an agency ALJ. In 2014, the SEC ALJ issued a decision levying civil penalties as well as other relief against the Defendants.

Defendants petitioned for judicial review at the Fifth Circuit, which held in 2022 that the agency’s decision to have an ALJ adjudicate the case violated the Defendants’ Seventh Amendment right to a jury trial. The Fifth Circuit also identified two further constitutional problems: (1) Congress violated the nondelegation doctrine by authorizing the SEC to choose whether to litigate this action in court or adjudicate the matter itself; and (2) the insulation of SEC ALJs from executive supervision, with two layers of for-cause removal protections, violated the separation of powers doctrine.

On March 8, 2023, the SEC appealed the Fifth Circuit’s decision to the Supreme Court. Oral argument was heard on November 29, 2023.

Jarkesy Supreme Court Decision
The Supreme Court held that the Seventh Amendment of the United States Constitution entitled Defendants to a jury trial where the SEC sought civil penalties for securities fraud. Writing for the majority, Chief Justice John Roberts reasoned that the SEC’s antifraud provisions “replicate common law fraud” claims, which must be heard by a jury. As a result, where a claim brought by an agency (1) resembles common law causes of action; and (2) seeks a remedy traditionally obtained in a court of law, a Seventh Amendment jury right attaches to the claim.

The Court recognized an exception to this general rule under a “public rights” doctrine, which permits non-Article III courts to adjudicate matters that “historically could have been determined exclusively by [the executive and legislative] branches.” However, causes of action that are “quintessentially suits at common law” and not “closely intertwined” with a public right—like the anti-fraud provisions at issue here—are unable to utilize this exception and must be heard in Article III courts.

Because the jury trial issue resolved the case, the Court declined to reach the nondelegation or removal issues. As a result, the Fifth Circuit’s decision in Jarkesy on these issues remains good law.

Sotomayor Dissent in Jarkesy
In dissent, Justice Sonia Sotomayor argued that Congress has latitude—via the Constitution as well as prior Supreme Court decisions—to assign the enforcement of civil penalties “outside the regular courts of law.” This would be the case “even if the Seventh Amendment would have required a jury where the adjudication of those rights is assigned to a federal court of law instead of an administrative agency.”

Justice Sotomayor also raised issue with the majority’s interpretation of a public rights doctrine. Notably, the dissent challenges the majority’s claim that most causes of actions that should be protected under the doctrine involve areas of the law where political branches “traditionally held exclusive power…and had exercised it.” To this end, Justice Sotomayor argues that the majority cannot distinguish between Congress’ enacting of statutes such as the National Labor Relations Act (“NLRA”) and its enacting of the Dodd-Frank Act. The dissent implies that neither labor relations nor securities were traditionally governed by political branches, thus (purportedly) refuting the majority’s reliance upon this principle.

NLRB Implications
Similar to the SEC, the NLRB utilizes ALJs to adjudicate violations of the NLRA. Contrary to the SEC, however, the NLRB ALJ scheme has been in place for decades. These judges hear and decide unfair labor practice cases in quasi-judicial hearings that affect the rights of parties to the cases. Moreover, unlike potential violations of the NLRA, the SEC is not always the exclusive forum for vindication of securities issues. The Department of Justice often prosecutes securities laws issues and private plaintiffs can bring lawsuits to vindicate civil claims. Contrast this with the NLRB, which is the exclusive forum for the vast majority of issues arising under the NLRA.

In the wake of the Fifth Circuit’s 2022 decision in Jarkesy, on January 4, 2024, Space Exploration Technologies Corp. (“SpaceX”) filed a complaint in the Southern District of Texas challenging the constitutionality of NLRB ALJs. SpaceX specifically argued that: (1) the NLRB’s structure is unconstitutional in that it limits the removal of NLRB ALJs and Board Members and permits Board Members to exercise executive, legislative, and judicial power in the same administrative proceeding; and (2) the Board’s expanded remedies constitute consequential damages, and therefore violate employers’ Seventh Amendment right to a trial-by-jury.

Because the Supreme Court in Jarkesy declined to reach the nondelegation or removal issues, the Fifth Circuit’s decision on these issues remains good law. This makes the current forum battle even more significant, as the Jarkesy Fifth Circuit opinion could provide dispositive precedent for SpaceX’s removal and nondelegation arguments. In addition, the Supreme Court’s ruling on the Seventh Amendment issue might support SpaceX’s argument that the Board’s expanded consequential damages remedies should be adjudicated in a trial by jury, depending on how the court interprets the current state of NLRB remedies.

As reported here, in Thryv, Inc., 372 NLRB No. 22 (2022), the NLRB expanded remedies under the NLRA to include “all direct or foreseeable pecuniary harms suffered as a result of the respondent’s unfair labor practice.” The Board has been committed to expanding remedies since 2021, when General Counsel Jennifer Abruzzo issued a memorandum on this subject. NLRB Regional Offices have also been aggressive in seeking these expanded remedies, which arguably are punitive rather than remedial in nature. In its Complaint, SpaceX used the Board’s position on remedies, coupled with the Jarkesy Fifth Circuit ruling, to argue that the Board has sanctioned compensatory relief that can only be issued through a trial by jury.

However, this position could be impacted by the Fifth Circuit’s ruling in Thryv, Inc. v. NLRB, No. 23-60132 (5th Cir. May 24, 2024). In this decision, the Court vacated the Board’s ruling in Thryv, Inc., 372 NLRB No. 22 (2022) on the merits, and thus did not reach the consequential damages issue. The Court did however label this remedy as “draconian” and “a novel, consequential-damages-like labor law remedy.” The Board therefore will require a new case to codify the issuing of consequential damages. It remains to be seen how this ruling would impact SpaceX’s Seventh Amendment argument concerning consequential damages, which could be a key element of its potential reliance on the Supreme Court’s ruling in Jarkesy.

Court Deference to Agency Positions Dead: Chevron Reversal
In a massive blow to agency power, the U.S. Supreme Court on Friday reversed Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), in a case involving a fishing industry rule. Under Chevron, on review of agency action, where the relevant statute was silent or ambiguous regarding a specific issue, courts were directed to defer to agencies and were not to “impose [their] own construction on the statute.” Thus, where an agency offered “a permissible construction of the statute,” courts were to defer to the agency even if the court would have reached a different conclusion. In the years since Chevron was issued, reviewing courts often remarked that they were bound to uphold an agency determination even if they disagreed with the interpretation. Justice Roberts, writing for the majority, held that Chevron could not be reconciled with the Administrative Procedures Act (“APA”), which commands “the reviewing court” to decide “all relevant questions of law” arising on review of agency action, which of course includes interpretation of the federal statute at issue. As a result, the majority determined that there should be no deference to agencies in answering legal questions, although deference is mandated for judicial review of agency policy-making and fact-finding. The majority concluded that, in deciding Chevron, the Supreme Court had required judges to “disregard their statutory duties,” which required this Court to “leave Chevron behind.”

Takeaways
These two Supreme Court decisions could substantially curtail the NLRB’s ability to bring and prosecute actions against parties (not just employers, but unions as well). While the Jarkesy Supreme Court decision is narrow, it could end the ability of the NLRB to bring certain claims in front of agency ALJs (all of whom are employed directly at the Board and who are not subject to removal). The pending SpaceX decision likely will further the development of the law, as it is a direct challenge to the NLRB adjudicatory scheme, and will also give a Circuit Court—and eventually maybe the Supreme Court—a chance to rule on additional constitutional challenges to federal agencies.

In addition, the reversal of Chevron likely will have a substantial effect on the review of NLRB cases. At time of unprecedented expansion of the reach of the NLRA—including finding non-compete agreements and confidentiality clauses unlawful—the end of Chevron deference allows a reviewing court the ability to disregard NLRB actions as not rooted in the NLRA or beyond the scope of the agency’s mandate. There is no doubt many challenges of NLRB actions will be brought as the probability of prevailing in a reviewing court has increased substantially with the end of deference.

As always, we will monitor decisions and agency actions to see how these important developments play out.

What Does the End of Chevron Deference Mean for Federal Health Care Programs?

On June 28, 2024, the Supreme Court rejected the doctrine of Chevron deference in the closely watched case of Loper Bright Enterprises v. Raimondo.[1] In a 6-3 decision, the Court held that Chevron’s rule that courts must defer to federal agencies’ interpretation of ambiguous statutes gave the executive branch interpretive authority that properly belonged with the courts. Moreover, the Court concluded that Chevron deference was inconsistent with the Administrative Procedure Act (APA), holding that the APA requires courts to exercise independent judgment when deciding legal issues in the review of agency action.

Loper will have significant and immediate implications for the U.S. Department of Health and Human Services (HHS), the federal agency charged with the administration of the federal health care programs, including Medicare and Medicaid. As detailed below, the Court’s decision sets a more exacting standard for courts to apply when reviewing HHS’s regulations and legal positions.

What Was Chevron Deference?

The doctrine of Chevron deference was established in 1984 by the Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.[2] In that case, the Court held when a “statute is silent or ambiguous with respect to the specific issue” raised regarding a statute that the agency administers, “the question for the court is whether the agency’s answer is based on a permissible construction of the statute.”[3]

Although scholars have debated Chevron’s rationale at length, it generally was read to require deference based upon agencies’ presumed subject matter expertise and an assumption that Congress delegated authority to agencies—rather than courts—to fill in gaps in statutory schemes. Notably, the Supreme Court had not itself invoked Chevron deference since 2016, although lower courts have continued to rely on it regularly.[4]

What Did Loper Decide?

Loper involved two New England fishing companies appealing the D.C. Circuit’s ruling that applied Chevron deference to uphold the National Marine Fisheries Service’s interpretation of the Federal Magnuson-Stevens Act (the “Act”) as requiring fishermen to pay for the use of compliance monitors on certain fishing boats, even though the federal law is silent on who must pay. Petitioners used the case as a vehicle to present a broader challenge to Chevron,arguing that the doctrine has led to excessive deference to federal agencies, resulting in overregulation, the abdication of judicial responsibility to interpret statutes, and the unwarranted imposition of regulatory enforcement costs.

The Loper majority firmly rejected Chevron and held that the APA requires courts to exercise their independent judgment in deciding legal questions that arise in reviewing agency action. As the majority held, “courts need not and under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous.”[5]

Importantly, however, Loper noted that deference may still be afforded agencies in certain instances. First, the Court observed that the APA expressly mandates a deferential standard of review for agency policy-making and fact-finding.[6] Second, Loper explained that some statutes are best read to “delegate[] discretionary authority to an agency,” in which case a court’s role is to merely ensure the agency “engaged in ‘reasoned decisionmaking’” within that authority.[7] Lastly, Loper reaffirmed that an agency’s “expertise” remains “one of the factors” that may make an agency’s interpretation persuasive.[8]

How Will Loper Impact Federal Health Care Programs?

Loper’s directive that courts should construe statutes independently and not defer to agencies’ positions has enormous implications for providers and suppliers that participate in federal health care programs. Much of today’s health care landscape is governed by HHS’ regulations, impacting many Americans and much of the federal budget. For example, Medicare currently covers more than 67 million beneficiaries, and Medicare spending comprised 12% of the federal budget in 2022 and 21% of national health care spending in 2021.[9]

Federal health care programs like Medicare and Medicaid are established by statutes that set forth myriad requirements regarding the coverage of items and services, and how, when, and by whom those items and services may be furnished.[10] HHS’s various components—most notably the Centers for Medicare and Medicaid Services (CMS)—have issued numerous, detailed regulations to implement these statutes. HHS’s components also include FDA, CDC, HRSA, AHRQ, OCR, NIH, and many others that intersect with health care providers and suppliers regularly.

Going forward under Loper, future challenges to agency regulations will take place upon a much different playing field. This has several important implications:

More Legal Challenges: We expect to see more legal challenges brought against HHS’s regulations as they are issued. Loper expressly stated that it “does not call into question prior cases that relied on the Chevron framework,” so prior decisions affirming regulations should be stable.[11] But going forward, Loper means that courts have no “thumb on the scale” in favor of HHS’s legal positions, and so litigants may view Loper as increasing their odds of success. At the same time, this may create more uncertainty for providers and suppliers who must determine how to comply with new regulations under challenge.
Less Ability for HHS to Create New Programs or Impose New Requirements: Especially where HHS imposes new substantive requirements that are not clearly authorized by statute, HHS’s regulations may be vulnerable. For example, the challengers to CMS’s minimum-staffing requirements for nursing homes are sure to cite Loper.[12] Likewise, when HHS creates new programs or initiatives by regulation based on broad statutory language (e.g., HHS’s recent creation of rural emergency hospital regulations[13]), the regulations may be more vulnerable to challenges. As another example, legal challenges to FDA’s new rule on Laboratory Developed Tests are pending and will likely invoke Loper.[14]
More Incentive to Challenge Reimbursement Rules: Legal challenges are frequently brought to CMS’s rules governing reimbursement, which often have complicated statutory formulas subject to differing interpretations. Whereas in the past, courts often deferred to CMS’s interpretations,[15] Loper now creates more potential for providers and suppliers to seek more favorable legal interpretations to enhance reimbursement.
Slower and More Cautious Rulemaking: As HHS promulgates new regulations, it will now have to consider the enhanced litigation risk that Loper creates. This may lead to agencies slowing and proceeding more cautiously in rulemaking as agencies seek to craft defensible regulations.
Inconsistent Decisions by Courts: Because Loper directs courts to exercise independent judgment rather than defer to HHS’s interpretations, we expect that courts in different areas of the country may reach differing conclusions regarding HHS regulations. This may make certain geographic locations more advantageous for provider and supplier operations or expansions.

Conclusion

Going forward, courts will be more amenable than ever to siding with challenges to HHS regulations. This creates both challenges and opportunities for providers and suppliers who should carefully assess the legal basis for all new regulations.

The authors acknowledge the contributions of Callie Ericksen, a student at the University of California Davis Law School and 2024 summer associate at Foley & Lardner LLP.

[1] Loper Bright Enterprises v. Raimondo, No. 22-451 (June 28, 2024), together with Relentless, Inc. v. Department of Commerce, No. 22-1219, available here.

[2] 467 U.S. 837 (1984).

[3] Id. at 843 (emphasis added).

[4] See Am. Hosp. Ass’n (“AHA”) v. Becerra, 142 S. Ct. 1896, 1904 (2022) (determining that HHS’s preclusion of judicial review “lacks any textual basis,” remaining silent with respect to Chevron); Becerra v. Empire Health Found., 142 S. Ct. 2354, 2362 (2022) (illustrating that HHS’s reading aligns with the statute’s “text, context, and structure” in calculating the Medicare fraction for purposes of Medicare Part A benefits, without any mention of Chevron); Vanda Pharms., Inc. v. Ctrs. for Medicare & Medicaid Servs.,98 F.4th 483 (2024) (holding that CMS’s definitions of “line-extension” and “new formulation” did not conflict with the Medicaid statute).

[5] Loper Bright Enterprises v. Raimondo, No. 22-451, slip op. 35 (June 28, 2024).

[6] Id. at slip. op. 14 (citing 5 U.S.C. §§ 706(2)(A), (E)).

[7] Id. at slip op. 18.

[8] Id. at slip op. 25 (citing Skidmore v. Swift & Co., 323 U.S. 134 (1944).

[9] See KFF, Medicare 101 (published May 28, 2024), available here.

[10] See 42 U.S.C. §§ 1395–1395lll.

[11] Loper Bright Enterprises v. Raimondo, No. 22-451, slip op. 34 (June 28, 2024).

[12] See Am. Health Care Ass’n v. Becerra, No. 24-cv-114 (N.D. Tex) (challenging the rule issued at 89 Fed. Reg. 40876 (May 10, 2024).

[13] Conditions of Participation, 42 C.F.R. §§ 485.500-485.546 (Subpart E), and Payments, §§ 419.90-419.95 (Subpart J), 87 Fed. Reg. 71748, 72292-93 (Nov. 23, 2022),

[14] 21 C.F.R. § 809, 89 Fed. Reg. 37286 (May 6, 2024).

[15] See, e.g., Baptist Mem’l Hosp. – Golden Triangle, Inc. v. Azar, 956 F.3d 689 (5th Cir. 2020) (deferring to CMS’s rule addressing “costs incurred” for calculating Medicaid Disproportionate Share Hospital payments).

June 2024 Legal Industry News Updates: Law Firm Hiring and Expansion, Industry Awards and Recognition

Welcome back to another edition of our legal industry news roundup, and happy summer from the whole team at the National Law Review! Please read below for the latest in law firm hiring and expansion news and key industry awards and recognition.

Law Firm Hiring and Expansion

Bradley Arant Boult Cummings’ Atlanta office continues to grow with the addition of partners Jeff S. Luechtefeld, John Nail and Sean R. Gannon, senior attorney Gabriella Cole and associate Jessica R. Stephan as members of the firm’s Tax Practice Group. The firm’s Atlanta office has more than doubled in size since it was established in May 2023.

Mr. Luechtefeld earned his LL.M. in Taxation from the University of Florida Levin College of Law, his J.D. from the University of Missouri Columbia School of Law and his B.S. in Finance from Missouri State University. Mr. Nail earned his J.D. (cum laude) at Wake Forest University School of Law and his B.S. from the College of Charleston. Mr. Gannon earned his LL.M. in Taxation at the University of Florida Levin College of Law, his J.D. from Western Michigan University Thomas M. Cooley Law School and his B.A. from Michigan State University. The new partners represent Fortune 500 companies, closely held businesses and high-net-worth individuals in IRS examinations, appeals and litigation, as well as other tax issues.

Ms. Cole received her J.D. from the University of Houston Law Center, her M.B.A. from the University of Houston C.T. Bauer College of Business and her B.S. (magna cum laude) from Kennesaw State University. Her practice focuses on tax controversy law and representing corporations and individuals against the IRS and state departments throughout the audit, administrative appeals and litigation processes.

Ms. Stephan received her J.D. from the University of Southern California Gould School of Law, an LL.M. in Taxation from the University of Florida Levin College of Law and a B.B.A. (summa cum laude) in Finance from Mississippi State University. She advises partnerships, corporations and individuals in federal and state tax disputes.

Bradley Atlanta office managing partner Sidney S. Welch welcomed the new members of the Tax Practice Group: “We are delighted that this group of highly accomplished tax controversy attorneys is joining the firm. Their significant litigation experience and deep understanding of the IRS allows them to offer strategic solutions for our clients. The addition of these attorneys also strengthens and enhances Bradley’s federal tax controversy capabilities, as well as being synergistic with the firm’s government enforcement and investigations work. The Atlanta office is continuing our growth strategy with tremendous legal talent, and we look forward to their collaboration.”

ArentFox Schiff announced the addition of 17 members to the firm’s Technology, Life Sciences, Intellectual Property and Complex Litigation services in the Boston office. With these new additions, the firm’s Boston office has grown by more than 40% in 2024.

New additions to the IP team include partners Joseph M. Maraia, Dr. Daniel W. Clarke, Christopher Carroll, Laura L. Carroll, Brooke A. Penrose, Paul A. Pysher and Howard J. Susser; counsel Shawn P. Foley, Bruce D. Jobse and Joseph P. Quinn; and six associates and patent agents. Litigation partner Shepard Davidson has also joined ArentFox Schiff and will continue to focus his practice on complex business torts and contract claims. Among these new firm members are a former patent examiner, a master electrician and a molecular microbiology Ph.D., all of whom offer unique insights to clients in specialized and technical industries.

“ArentFox Schiff has long had a preeminent IP practice, and one of our strategic goals was to further expand this in Boston with a focus on life sciences, patent, litigation, trademark, and general IP services,” said chairman Anthony V. Lupo. “Adding this talented team helps us accomplish that goal. This group’s clients also fit strategically into our industry approach to the business of law, and based on our prior success with laterals and groups, we anticipate a number of opportunities to significantly grow revenue.”

“Thanks to its many leading universities, research institutions, and cutting-edge companies, the Boston area continues to be a hub for innovation that demands top-tier IP services,” added Boston managing partner David M. Barbash. “Adding this highly respected group of attorneys will offer immense benefits to our clients in New England and across the country as they grow their businesses.”

Varnum formed a Health Care Artificial Intelligence (AI) Task Force focused on the use of AI technologies and machine learning in the health care industry. The Health Care AI Task Force consists of attorneys with particular expertise in health care law, data privacy and AI technologies, and is led by four partners who regularly advise health care clients on regulatory compliance and counsel large corporations on innovative technologies and privacy regulations.

The goal of the task force is to help health care organizations protect sensitive patient data and maintain high clinical standards through advising on AI integration, promoting privacy and data security, assisting in policy development and fostering risk management.

Sarah Wixson, who co-chairs Varnum’s Health Care Practice Team, noted the increasing importance of AI for health practitioners.

“As AI continues to evolve, it is crucial for health care providers to stay ahead of the curve by understanding and adhering to the legal frameworks that govern these technologies,” Ms. Wixson said. “Our task force is committed to helping our clients navigate this complex landscape.”

“Our goal is to provide our clients with the guidance they need to adopt AI technologies,” said data privacy attorney Jeff Stefan. “We are helping clients leverage the power of these revolutionary advancements and avoid their equally significant risks.

Manatt, Phelps & Phillips, LLP expanded their New York office with the addition of financial services partner Mike Katz. With significant experience in crypto, payments, emerging company and venture capital, Mr. Katz will expand Manatt’s blockchain capabilities.

Mr. Katz is a strategic adviser to emerging growth companies and investors and a counsel to tech companies and venture funds. He provides advice to startups and venture capital funds to navigate overlapping corporate and regulatory issues. He earned his J.D. from Columbia Law School and his B.A. from the University of Pennsylvania.

“As I have seen firsthand, Manatt’s interdisciplinary and entrepreneurial approach to client service is extremely effective, and I am excited to join this team to help with leading the expansion of the Firm’s blockchain capabilities and support our clients across all aspects of financial services and venture capital,” said Mr. Katz. “Innovation-focused companies and investors are at the forefront of my practice every day, and Manatt is the perfect platform for me to bring experience to bear for clients across the Firm. I look forward to leveraging my varied in-house, corporate and regulatory skills to further enhance the Firm’s reputation as the go-to adviser for companies at the frontlines of innovation.”

Legal Industry Awards and Recognition

The 2024 Chambers USA Guide recognized Greenberg Traurig’s Data Privacy & Cybersecurity Practice in Band 1 for Nationwide Privacy & Data Security: Highly Regarded for the fourth year in a row. The guide’s “Privacy & Data Security: Privacy” category also recognized shareholders Liz Harding and David A. Zetoony, co-chair of the U.S. Data Privacy & Cybersecurity Practice.

Chambers and Partners selects attorneys and practices for the guide based on thousands of interviews with practicing lawyers and clients on a global scale. Chambers USA provides legal data and analytics to inform buyers of legal services of the top lawyers and law firms in the United States. Overall, the 2024 Chambers USA Guide recognized 273 Greenberg Traurig attorneys.

Claire Weglarz, partner at Womble Bond Dickinson, was elected to the Board of Directors of Trial Attorneys of America, a group of private practice attorneys and corporate counsel focused on the defense of products liability litigation. Membership in Trial Attorneys of America is by invitation only and is based on the recommendation of a member.

Ms. Weglarz is a member of Womble Bond Dickinson’s Product Liability Litigation team in the firm’s Los Angeles office. She represents energy, chemicals, manufacturing, automotive and consumer goods industry clients, and is involved in high-risk litigation on cases involving product liability, premises liability, environmental claims and toxic exposures to chemicals.

Chambers USA and The Legal 500 US recognized Andrea (Andie) S. Kramer in their 2024 nationwide rankings of leading tax lawyers. Specifically, Chambers USA included Ms. Kramer as a top tax and derivatives lawyer, and she was one of only four lawyers named to The Legal 500 Hall of Fame for Tax, Financial Products in the United States for 2024.

Ms. Kramer is a solo practitioner providing integrated legal counsel on regulatory, governance, commercial and tax matters to her clients.

“Each year, Chambers and Partners and The Legal 500 conduct unbiased research on lawyers around the world—and their independence encourages us all to be better,” said Ms. Kramer. “It has been a strong, productive, and interesting 18 months for ASKramer Law—and our clients and colleagues have gone the extra mile with these ranking agencies to underscore our commitment to legal excellence and great service.”

BTI Consulting Group’s 2024 report recognized Jackson Lewis P.C. attorneys Stephanie Adler-Paindiris, Ross M. Gardner and Alessandro “Alex” G. Villanella as Client Service All-Stars. Attorneys are named as Client Service All-Stars for their client service excellence and commitment to fulfilling their clients’ needs. The BTI Client Service All-Stars list is based on feedback gathered from over 350 in-depth, confidential and unsolicited interviews.

Ms. Adler-Paindiris is a principal in the firm’s Orlando office, a member of the firm’s Board of Directors and co-leader of the firm’s Litigation group. She defends class and collective actions on behalf of employers and counsels clients on workplace challenges. Mr. Gardner is a principal in the firm’s Omaha office who represents management throughout traditional labor law and related litigation. Mr. Villanella is a principal in the firm’s Long Island office, whose practice focuses on collective bargaining, labor arbitration, contract administration and representation and unfair labor practice proceedings before the National Labor Relations Board.

“Stephanie, Ross and Alex are true champions of problem-solving for our clients,” said firm chair Kevin Lauri. “They understand exactly what clients need and effortlessly craft solutions that tackle immediate issues and safeguard against future challenges. They uphold the firm’s client service standards to the highest degree, and the entire firm congratulates them on this accomplishment.”

Chaikin, Sherman, Cammarata & Siegel, P.C. partner Allan M. Siegel was awarded the 2024 Trial Lawyer of the Year Award by the Trial Lawyers Association of Metropolitan Washington, D.C. He received this honor at the association’s Annual Awards Dinner at Nationals Park in Washington, D.C.

Mr. Siegel graduated magna cum laude in from The George Washington University and earned his J.D. from The George Washington University’s National Law Center. His practice is centered on personal injury cases related to automobile and commercial vehicle negligence, premises liability and medical malpractice. He is board-certified in civil trial law by the National Board of Trial Advocacy, an honor held by only 3% of attorneys in the United States.

Supreme Court Issues Landmark Decision Upending Deference to Federal Agencies

On June 28, 2024, the Supreme Court of the United States upended the 40-year-old doctrine whereby federal courts gave deference to administrative agencies’ reasonable interpretations of federal statutes. The ruling stands to have significant implications for federal agencies’ rulemaking and enforcement of federal labor and employment laws.

Quick Hits

The Supreme Court held that courts must exercise their independent judgment in deciding whether an agency acted within its statutory authority and may not defer to an agency’s interpretation when a law is ambiguous.
The decision overruled the four-decades-old doctrine known as Chevron deference, in which courts had deferred to agencies’ reasonable interpretations of ambiguous statutes.
The ruling will have a major impact on federal agencies’ rulemaking authority.

The Supreme Court decision in Loper Bright Enterprises v. Raimondo held that courts must exercise independent judgment in deciding whether an agency acted within its statutory authority and may not simply defer to the agency’s interpretation of ambiguities in the law.

The decision overrules the longstanding doctrine known as Chevron deference, under which courts would defer to a federal agency’s reasonable interpretation of an ambiguous law that the agency administers. The deference had provided the rules of such administrative agencies with the force of law, but that authority will, at a minimum, be weakened, along with the corresponding power of the agencies.

In the opinion of the Court, Chief Justice John Roberts wrote that Chevron deference “defies the command of the” Administrative Procedure Act (APA) that courts “not the agency whose action it reviews … ‘decide all relevant questions of law’ and interpret … statutory provisions.” Chevron deference “requires a court to ignore, not follow, ‘the reading the court would have reached’ had it exercised its independent judgment as required by the APA,” (Emphasis in original).

The Court, in its majority, rejected the presumption that ambiguities in federal statutes are implicit delegations of authority to agencies, stating the “presumption is misguided because agencies have no special competence in resolving statutory ambiguities.”

The ruling will have significant implications for the multiple federal agencies that regulate employers, including the U.S. Department of Labor (DOL), the U.S. Equal Employment Opportunity Community Commission (EEOC), the Federal Trade Commission (FTC), the National Labor Relations Board (NLRB), Occupational Safety and Health Administration (OSHA), and the Office of Federal Contract Compliance Programs (OFCCP), among others.

Chevron Deference

Under the two-step Chevron deference framework, the court would first determine whether a statute in question was clear and unambiguous regarding an issue. If the statute was clear, then the court would give effect to it. If, however, the court found the statute was ambiguous or silent on the issue, then the court would proceed to step two. At that step, the court would determine whether the agency’s interpretation was a permissible or reasonable construction of the statute. If so, the court would uphold the agency’s interpretation.

The deference had allowed federal agencies leeway to act, allowing them interpret ambiguities and fill gaps in the laws they enforce. However, the doctrine has been criticized in recent years as unconstitutionally allowing the Executive Branch’s policy positions to be advanced by federal agencies outside the democratic process and for taking power away from federal courts to interpret laws.

Background

The issue over Chevron deference came before the Supreme Court in two cases challenging a National Marine Fisheries Service (NMFS) rule that required fishing vessels to pay the salaries of federal observers that vessels are required to “carry” under the Magnus-Stevenson Act (MSA). The MSA is silent as to whether the fishing industry is responsible for paying the costs for the observers. Given concerns about funding, the NMFS rule required the vessels carrying the observers to pay the costs despite objections from the fishing industry over its negative economic impact on the livelihoods of commercial fishermen.

In Loper Bright Enterprises, four family-owned and –operated fishing companies, argued that the NMFS cannot force vessels to pay for the observers because the MSA did not clearly give the agency power to do so. However, the D.C. Circuit Court of Appeals ruled in favor of the agency, finding that the law’s silence on the issue created an ambiguity that required deference to the agency.

Supreme Court Justice Ketanji Brown Jackson recused herself from the Loper Bright case as she had sat on the D.C. Circuit panel that had ruled in the case. The Court then added Relentless, Inc. v. Department of Commerce, in which the owner of fishing vessels raised a similar challenge to the NMFS rule. The challengers argued that since the MSA provides for observers to be paid in at least three other contexts, the NMFS did not have the authority to require fishing vessels to pay for them. But the First Circuit Court of Appeals affirmed a district court finding that “the rule is a permissible exercise of the agency’s authority and is otherwise lawful.”

At the Supreme Court, the challengers in Loper Bright Enterprises argued that the Court should “either abandon Chevron for good or at least substantially cabin its scope” because it has “proved unworkable” and has “seriously distorted how the political branches operate.” They argued that stare decisis does not bar the court from abandoning the framework since the Court would not have to change the outcome of the case in which the deference was established but merely alter the interpretative methodologies used. Similarly, the challengers in Relentless argued that the deference is unconstitutional because it “compromise[es] judges’ independence when interpreting the law,” which is a power vested in the federal courts under Article III of the U.S. Constitution.

Decision

In deciding Loper Bright, the Supreme Court stated that courts simply “do not throw up their hands because ‘Congress’s instructions have’ supposedly ‘run out.’” “Courts instead understand that such statutes, no matter how impenetrable, do—in fact, must—have a single, best meaning. … So instead of declaring a particular party’s reading ‘permissible’ in such a case, courts use every tool at their disposal to determine the best reading of the statute and resolve the ambiguity,” the Court stated.

The Supreme Court further stated that agencies do not have any special ability to interpret ambiguities, “even when an ambiguity happens to implicate a technical matter” as “Congress expects courts to handle technical statutory questions.” However, the Court stated that courts do not decide cases “blindly” and instead, rely on arguments from the parties and amici, noting that an agency’s interpretation “may be especially informative.”

“The better presumption is therefore that Congress expects courts to do their ordinary job of interpreting statutes, with due respect for the views of the Executive Branch,” the court stated. “And to the extent that Congress and the Executive Branch may disagree with how the courts have performed that job in a particular case, they are of course always free to act by revising the statute.”

However, the Court noted that the decision does “not call into question prior cases that relied on the Chevron framework,” as cases upholding specific agency actions “are still subject to statutory stare decisis despite our change in interpretative methodologies.

Justice Elena Kagan and Justice Sonia Sotomayor dissented and were joined by Justice Jackson to the extent it applied to the Relentless case. In the dissenting opinion authored by Justice Kagan, the justices argued that Chevron deference “has formed the backdrop against which Congress, courts, and agencies—as well as regulated parties and the public—all have operated for decades” and “has been applied in thousands of judicial decisions.”

They argued that Chevron deference is “right” and the “obvious choice” to resolve ambiguities because “[a]gencies have expertise” that “courts do not.” Further, agencies report to the president, “who in turn answers to the public for his policy calls; courts have no such accountability and no proper basis for making policy.” Moreover, “Congress has conferred on that expert, experienced, and politically accountable agency the authority to administer—to make rules about and otherwise implement—the statute giving rise to the ambiguity or gap,” Justice Kagan wrote.

Next Steps

The Supreme Court’s latest decision is likely to shift power dynamics by weakening agency authority to interpret ambiguous statutes and increasing judicial scrutiny. At a minimum, agencies may need to provide stronger justifications on the merits for their interpretations, and overall, they may be less likely to issue rulemaking in areas where statutory authority is not clear.

The decision is also likely to increase litigation and legal uncertainty, as it potentially opens the floodgates to a wave of legal challenges to overturn all sorts of existing agency rules that have been upheld citing Chevron deference and legal challenges to new agency rules moving forward. For example, this decision likely will have significant impact on the litigation challenging the Federal Trade Commission’s (FTC) rule purporting to ban noncompetes nationally.

Congress Passes ADVANCE Act to Accelerate Deployment of Advanced Nuclear Reactors

On June 18, the Senate passed the Accelerating Deployment of Versatile, Advanced Nuclear for Clean Energy (ADVANCE) Act as a section of the Fire Grants and Safety Act (S.B. 870). The Senate approved House amendments to the bill with a vote of 88-2, opposed only by Senators Edward Markey (D-MA) and Bernie Sanders (I-VT). The ADVANCE Act has diverse backing from industry, government, and nonprofit stakeholders, and its passage reflects strong bipartisan support for promoting advanced nuclear reactors, which offer carbon-free dispatchable energy generation for both electricity and industrial applications. The ADVANCE Act now heads to President Biden, who is expected to sign the act into law.
The ADVANCE Act is the latest in a series of recent legislative and regulatory developments aimed at bolstering the development of a technology that may be necessary to meet the nation’s growing energy demand. Advanced reactors promise improvements over conventional, much larger light water reactors. These improvements include additional safety features, lower waste yields, and operational flexibility that can complement integration with intermittent renewable energy or energy storage. One category of advanced reactors, small modular reactors (SMR), is of particular interest; SMRs hold the potential of fitting within the footprint of industrial applications.
In 2019, President Trump signed into law the Nuclear Energy Innovation and Modernization Act (NEIMA), which directed the Nuclear Regulatory Commission (NRC) to streamline its licensing process for advanced reactors and modified the fee structure for traditional and advanced reactors. The passage of the ADVANCE Act builds on NEIMA and provides even more support to deploy advanced nuclear reactors efficiently and successfully.

Key Provisions of the ADVANCE Act

PROMOTING NEW NUCLEAR TECHNOLOGIES

Reduced Fees for Advanced Nuclear Reactor Application Reviews. The Act amends NEIMA and sets a specific fee reimbursement rate for NRC’s review of advanced nuclear reactor licensing applications. While applicants are responsible for direct program salaries and benefits for the nuclear reactor safety program, the costs associated with indirect program and agency support expenses will not be passed onto applicants.
Prizes for Advanced Nuclear Reactors. To incentivize the successful development and deployment of advanced nuclear reactors, the Act establishes multiple prizes. The first entities to successfully deploy the specified types of advanced nuclear reactors can receive federal funding to cover the licensing and permitting costs associated with deployment.
Development, Qualification, and Licensing of Advanced Nuclear Fuel Concepts. The Act directs the NRC to improve its ability to qualify and license advanced nuclear fuel. The NRC must collaborate with the Department of Energy (DOE) to test and demonstrate accident-tolerant fuels and advanced nuclear reactor fuel concepts; operate a knowledge-sharing database for agencies and the private sector; and ensure both NRC and DOE have the technical expertise to support advanced nuclear fuel from the research stage through commercial application. A report detailing these efforts must be submitted to Congress within two years.
Licensing and Oversight for Nuclear Facilities on Brownfields and Retired Fossil-Fuel Plant Sites. The Act directs the NRC to identify and report on regulatory, guidance, or policy changes to streamline licensing reviews and oversight for nuclear facilities at brownfields and retired fossil-fuel electric generation sites. Within two years, the NRC must adopt strategies and initiate rulemaking to achieve these efficiency improvements. This provision recognizes the advantage of using existing power grid infrastructure to bring nuclear facilities online and the potential of advanced reactor construction to create more high-paying jobs for former fossil-fuel industry workers.
Licensing and Regulation of Microreactors and Nonelectric Applications of Nuclear Technology. The Act directs the NRC to develop strategies and guidance for licensing and regulating microreactors, covering items such as oversight and inspections, emergency preparedness, risk analysis methods, and the transportation of fueled microreactors. Additionally, the Act directs the NRC to submit a report to Congress detailing unique licensing issues or requirements for nonelectric applications of nuclear energy, along with a proposed budget and timeline for implementing regulatory guidance.

STRENGTHENING THE NUCLEAR WORKFORCE, FUEL CYCLE, SUPPLY CHAIN, AND INFRASTRUCTURE

Nuclear Energy Traineeship Program. The Act directs the NRC to coordinate with trade schools and institutions of higher education to establish a competitive nuclear energy traineeship program. The program must provide training that meets the critical mission needs of the NRC and nuclear workforce needs.
NRC Hiring and Compensation Improvements. The Act includes provisions to ensure the NRC is prepared to review licenses safely and successfully should the demand for NRC licensing and oversight services increase. Specifically, the Act empowers the NRC Chair to appoint up to 120 exceptionally well-qualified individuals into the excepted service and up to 20 exceptionally well-qualified individuals into term-limited positions during each fiscal year. In addition, the Act allows the NRC to determine the compensation for these positions without regard to the General Schedule classification and pay rates, subject to some limitations. The NRC may also award hiring bonuses and performance bonuses.
Biennial Reporting on Spent Nuclear Fuel and High-Level Radioactive Waste. The Act requires the Secretary of Energy to submit a report to Congress no later than January 1, 2026, and biennially thereafter, that describes spending related to (1) breaches of contract under the Nuclear Waste Policy Act of 1982 and (2) storage, management, and disposal of spent nuclear fuel and high-level radioactive waste (including the projected lifecycle costs for such activities). The report must also describe mechanisms and recommendations to improve accounting of liabilities and lifecycle costs for spent fuel and radioactive waste. Additionally, the report must describe any activities taken in the previous fiscal year by DOE with respect to interim storage and the development and deployment of technologies that enhance the safe transportation and storage of spent nuclear fuel or high-level radioactive waste.
Report on Advanced Manufacturing and Construction Methods. The Act directs the NRC to submit a report to Congress within 180 days on advanced manufacturing and construction techniques for nuclear energy projects. The report must, among other things, assess licensing issues, identify safety standard gaps, and provide recommendations to use the existing regulatory framework or engage in new rulemaking to support advanced manufacturing and construction methods.

IMPROVING NRC EFFICIENCY AND EFFECTIVENESS

Updated NRC Mission Statement. The Act provides that the NRC must update its mission within a year to include that licensing and regulation will be conducted “in a manner that is efficient and does not unnecessarily limit” the civilian use of radioactive materials, the benefits of civilian use of radioactive materials, or the benefits of nuclear energy technology to society.
Periodic Review of Performance Metrics and Milestones. The Act amends NEIMA and directs the NRC to review its performance metrics and milestones at least once every three years and to revise them as necessary to reflect the most efficient metrics and milestones reasonably achievable.
Nuclear Licensing Efficiency. The Act mandates that the NRC establish techniques and guidance for evaluating nuclear reactor license applications that support efficient, timely, and predictable regulatory reviews and the safe use of nuclear reactors.
Modernization of Environmental Reviews. To streamline the approval of new nuclear reactor license applications, the Act directs the NRC to improve the efficiency, timeliness, and predictability of NEPA environmental reviews through the expanded use of categorical exclusions, environmental assessments, and generic environmental impact statements. The NRC must submit a report on these efforts to Congress within 180 days.
Report on Oversight and Inspection Program Improvements. The Act requires the NRC to provide a report to Congress within a year that identifies potential improvements to NRC’s oversight and inspection programs for nuclear reactors and materials. The report must assess options to maximize program efficiency through the use of risk-informed, performance-based procedures; information technologies; staff training; improved planning; and licensee innovations that may advance nuclear reactor operational efficiency and safety.

ADVANCING INTERNATIONAL NUCLEAR LEADERSHIP

Export and Innovation Activities. The Act directs the NRC to support interagency and international coordination related to nuclear reactor import and export licensing. Specifically, the Act directs the NRC to engage in international coordination to promote (1) international technical standards for licensing and regulating nuclear reactor design, construction, and operation; (2) competent nuclear regulatory organizations and frameworks in countries seeking to develop civil nuclear industries; and (3) exchange programs and training for foreign countries to improve their regulation and oversight of nuclear reactors and radioactive materials. The Act empowers the NRC to establish an “International Nuclear Export and Innovation Branch” to support these efforts.
DOE Global Nuclear Energy Assessment. The Act directs the Secretary of Energy to conduct a study in consultation with the Secretary of State, Secretary of Commerce, the Administrator of the Environmental Protection Agency, and the NRC that evaluates the global status of the civilian nuclear energy industry and its supply chains. The study must provide recommendations to strengthen the United States’ engagement with nuclear energy in foreign policy and modernize regulatory requirements to improve domestic supply chains of civilian nuclear energy.
Prohibitions on Russian and Chinese Enriched Uranium. The Act prohibits possession and ownership of enriched uranium fuel fabricated by an entity in Russia or China. A person may obtain a license to possess or own such fuel, but the Act provides that the NRC may only issue such a license in consultation with the Secretaries of Energy and State.
Foreign Ownership of Nuclear Facilities. Under the Atomic Energy Act, nuclear reactor licenses could not be issued to foreign corporations and other entities. The Act modifies this restriction and allows the NRC to issue licenses to governments, corporations, citizens, and foreign nationals of Organization of Economic Cooperation and Development member countries and India if issuance is not contrary to national security or public health and safety.

Other Recent Developments

DOE Funding for Small Modular Reactors. On June 17, DOE issued a Notice of Intent to distribute $900 million to support the deployment of small modular reactors (SMRs). Part of the funding comes from President Biden’s Bipartisan infrastructure Law.
Reappointment of NRC Chair. On June 18, the current Chairman of the NRC, Christopher Hanson, was sworn in for a second term – running through 2029. In his confirmation hearings, Senators pressed him to work harder on NRC reform.
NRC Rulemaking for Advanced Reactors. In response to NEIMA, the NRC has drafted proposed revisions to create a risk-informed, performance-based, and technology-inclusive framework for advanced reactors. An analysis by Van Ness Feldman lawyers found that the NRC has substantial headroom within its Congressional safety mandate to reduce the risk aversion and restrictiveness in its licensing and permitting process.

China’s Supreme People’s Court Releases Two Recent Patent-Related Typical Anti-Monopoly Cases

On June 24, 2024, China’s Supreme People’s Court (SPC) released five recent typical anti-monopoly cases, two of which relate to patents. The SPC stated that the cases were released so that Courts can “correctly apply the revised Anti-Monopoly Law and accurately understand the new judicial interpretation of anti-monopoly civil litigation issued today, fairly and efficiently hear monopoly cases, ensure the correct implementation of the Anti-Monopoly Law, and maintain fair competition in the market.”

Explanations from the SPC regarding the two cases follows:

Case No.:【案号】（2020）最高法知民终1140号

[Basic facts of the case] Yang XX Pharmaceutical Group Co., Ltd. and its subsidiaries (collectively referred to as Yang) are the manufacturers of the anti-allergic drug desloratadine citrate tablets with the trade name “Beixue.” Hefei Yi XX Pharmaceutical Co., Ltd. owns the relevant patents for desloratadine citrate. The company and its subsidiaries and affiliated companies (collectively referred to as Yi) are the only suppliers of the desloratadine citrate API required for the production of “Beixue”. In addition to producing desloratadine citrate API, Yi also produces desloratadine citrate hard capsules. Yi and Yang are both the supply and demand parties of the desloratadine citrate API involved in the case, and are also competitors in desloratadine citrate preparations. Yang believed that Yi used its dominant position in the market of desloratadine citrate API to restrict Yang to only purchase the API involved in the case from it, significantly raised the price of the API involved in the case, and threatened to stop supplying the API involved in the case to force Yang to accept other commercial arrangements unrelated to the API transaction involved, causing huge losses to Yang and therefore constituting an abuse of market dominance. Yang requested that Yi stop abusing its market dominance and compensate Yang for losses and reasonable expenses of 100 million RMB. The court of first instance found that Yi had abused its market dominance by restricting transactions, setting unfair high prices, and attaching unreasonable transaction conditions, and ordered it to immediately stop the above-mentioned behaviors and compensate Yang more than 68 million RMB. Both parties were dissatisfied and appealed to the Supreme People’s Court.

The Supreme People’s Court held in the second instance that Yi has a dominant market position in the desloratadine citrate API market in China, but its dominant market position has been weakened to a certain extent due to the strong indirect competition constraints from the downstream second-generation antihistamine preparation market. Based on the existing evidence, it is difficult to determine that it has abused its dominant market position. First, desloratadine citrate falls within the scope of protection of Yi’s patent rights. The time and scope of Yi’s restriction that Yang can only purchase the patented API involved in the case from it do not exceed the scope of the legitimate exercise of patent rights, and the resulting market blocking effect does not exceed the statutory exclusive scope of patent rights, so it does not constitute a restricted transaction behavior that abuses the dominant market position. Second, considering the internal rate of return after the price increase and the matching degree of price and economic value, it is more likely that the initial price of the patented API involved in the case is a promotional price, and the subsequent large price increase is likely to be a reasonable adjustment from the promotional price to the normal price. The fact that the price increase is significantly higher than the cost increase is not enough to determine that there is an unfair high-price behavior that abuses the dominant market position. Third, the existing evidence is insufficient to prove that Yi has explicitly or implicitly bundled the sales of the patented API involved in the case with unrelated products, so it is difficult to determine that there is an act of attaching unreasonable transaction conditions. Therefore, the judgment was revoked and the first-instance judgment was changed to dismiss Yang’s lawsuit request.

[Typical Significance] This case is the first monopoly civil lawsuit in China involving raw material pharmaceuticals. The judgment clarified the consideration of indirect competition constraints from the downstream market when judging the market dominance of intermediate input operators, the relationship between the market blocking effect of limited trading behavior and the statutory exclusive scope of patent rights, and the basic ideas and specific methods for judging unfair high prices. It has positive significance for promoting the accurate application of the Anti-Monopoly Law and effectively maintaining fair competition in the pharmaceutical market.

【案号】（2021）最高法知民终1482号

[Basic facts of the case] Ningbo XX Magnetics Co., Ltd. is an enterprise engaged in the production of sintered NdFeB materials in Ningbo, Zhejiang Province. A Japanese metal company has more than 600 sintered NdFeB patents in the field of rare earth materials worldwide. After licensing eight companies in China to implement its patented technology, it decided not to add new licensees. From March 2014 to March 2015, Ningbo XX Magnetics Co., Ltd. repeatedly requested a license from the Japanese metal company but was rejected. Therefore, it filed a lawsuit in December 2014, requesting that the Japanese metal company stop the abuse of market dominance such as refusal to trade and compensate Ningbo XX Magnetics Co., Ltd. for economic losses of 7 million RMB. The court of first instance determined that the Japanese metal company had a dominant position in the patent licensing market for essential patents for sintered NdFeB and that its refusal to trade had no legitimate reason. Therefore, it ordered the Japanese metal company to stop abusing its market dominance by refusing to trade and compensate Ningbo XX Magnetics Co., Ltd. for economic losses of 4.9 million RMB. The Japanese metal company was dissatisfied with the decision and filed an appeal.

The Supreme People’s Court held in the second instance that the evidence in this case was insufficient to prove that the sintered NdFeB patent of a Japanese metal company was irreplaceable, nor was it sufficient to prove that there was an independent licensing market for patents necessary for the production of sintered NdFeB. Therefore, it was difficult to determine that the relevant market in this case was the patent licensing market for patents necessary for the production of sintered NdFeB owned by the Japanese metal company. In this case, based on the demand substitution of sintered NdFeB material production technology, the relevant market in this case should be defined as the global sintered NdFeB material production technology market, including patented technologies and non-patented technologies with close substitution. Given that sintered NdFeB material production technology is used to produce sintered NdFeB materials, and the market share of sintered NdFeB materials (products) and other conditions can more accurately and conveniently reflect the market conditions of sintered NdFeB production technology, the market power of the technology owner in the relevant market involved in the case can be evaluated through the market share of the sintered NdFeB material market. Taking into account the evidence in the case, the Japanese metal company does not have a dominant position in the global sintered NdFeB material production technology market. Therefore, the court ruled to revoke the first-instance judgment and dismiss the lawsuit filed by the Ningbo magnetic company.

[Typical Significance] This case is a typical case in which intellectual property rights and antitrust are intertwined, and has received widespread attention. The second-instance judgment properly handled the relationship between the exercise of patent rights and antitrust, and through scientific and reasonable definition of the relevant market, revised the judgment in accordance with the law to determine that the foreign right holder’s refusal to license the patent involved did not constitute monopoly behavior. The judgment in this case demonstrates the judicial concept of Chinese courts to equally protect the legitimate rights and interests of Chinese and foreign parties and the trial ideas of antitrust cases involving intellectual property abuse in accordance with the law, and actively responded to the concerns of the industry at home and abroad.

The original text including three additional cases is available here (Chinese only).

SCOTUS Freezes States’ Efforts to Resolve Water Conflict

What Happened?

On June 21, 2024, the Supreme Court narrowly held that three states could not enter a consent decree to settle their interstate water dispute without the support of the intervening federal government. The ruling halts the agreement between Texas, New Mexico, and Colorado to settle Texas’s claims and reconfigure water allocation under the Rio Grande Compact going forward. The decision frustrates multi-year efforts by the states to fairly apportion shrinking water supplies and continues uncertainty for water users dependent on flows from the Rio Grande. More generally, the decision highlights the federal government’s power in cases arising under interstate compacts where federal interests are “inextricably intertwined” with the outcome.

Background

In 2013, Texas sued New Mexico and Colorado, claiming that New Mexico’s increased groundwater pumping was diminishing flows from the Rio Grande, unfairly shorting water allocated to the Lonestar state. This claim arose under the Rio Grande Compact, a 1938 allocation agreement between the three states that depend on the Rio Grande’s waters. The Supreme Court allowed the federal government, although not a party to the Compact, to intervene in the dispute in 2014, based on the federal interests in delivering water to Mexico under a 1906 treaty, in operating a Bureau of Reclamation reservoir and irrigation project closely connected to Compact compliance, and in fulfilling potential federal obligations to Indian tribes. The Supreme Court held that the federal government’s interests were “inextricably intertwined” with the case.

Since that decision, the states sought a compromise, recognizing that the 1938 Compact failed to predict severe droughts and dwindling water supplies, new circumstances that require adaptation. Despite this negotiated solution, the federal government refused to sign the agreement. The federal government claimed that the settlement undermines the Compact’s plain language, which cannot be modified without congressional approval, and that the negotiated agreement would impose new obligations on the federal reservoir and irrigation project. Based on its intervenor status, the federal government asked the Supreme Court to reject the deal in the absence of its consent.

Writing for the 5-4 majority, Justice Jackson explained that the Court’s 2018 decision to allow federal claims in the case to proceed “leads inexorably” to the federal government’s approval being necessary before a valid resolution. Justice Gorsuch, writing for the dissent, cautioned that this deference to the intervenor risks federalizing interstate water disputes and limiting the necessary discretion for states to independently manage their waters. Despite previously authoring a unanimous 2018 decision that green-lighted the federal claims, his dissent pointed back to “a century’s worth” of precedent, holding that the Reclamation Act requires the federal government to comply with state control of water resources and not to assert incompatible federal interests. The majority reasoned, by contrast, that the federal government’s interest was particular to the Compact, where compliance depends on federal action.

Analysis

The Court’s acknowledgment of the federal interest in the three states aligning Rio Grande Compact compliance with contemporary water realities is expressly tailored to the unique federal role in this situation. The problem the Court focused on was the proposed resolution’s failure to include the federal government, given its intervenor status and its integral role in managing a reservoir and irrigation project essential to the Compact. This does not authorize federal interference in all interstate water compacts, as the dissent fears, but others may be “inextricably intertwined” with federal interests. Still, the pointed dissent may signal that a significant court minority stands ready to guard state control of water resources when the federal government overreaches. The decision’s immediate impact will perpetuate uncertainty for water users in all three states as the parties are forced back to trial or the negotiating table.

The Commodity Futures Trading Commission Cracks Down on Employer Non-Disclosure Provisions

The Commodity Futures Trading Commission (“CFTC”) has now joined the Securities and Exchange Commission (“SEC”) in taking a stand against broad non-disclosure provisions in employment agreements.

Last week, the CFTC announced a settlement with Trafigura Trading LLC, in which the company agreed to pay a $55 million penalty, in part because it required employees to sign agreements that impeded voluntary communications with the CFTC.

In its decision, the CFTC specifically found:

Between July 31, 2017 and 2020, Trafigura required its employees to sign employment agreements, and requested that former employees sign separation agreements, with broad non-disclosure provisions that prohibited the sharing of Trafigura’s confidential information with third parties. These nondisclosure provisions did not contain carve-out language expressly permitting communications with law enforcement or regulators like the Commission.

The CFTC concluded that such non-disclosure provisions violate Regulation 165.19(b), 17 C.F.R. § 165.19(b) (2023), implementing Section 23(h)-(j) of the Act, 7 U.S.C. § 26(h)–(j), even without any additional actions impeding communications.

As a result of this finding, among others involving misappropriation of material nonpublic information and manipulative conduct, the CFTC not only levied a significant fine on Trafigura, but imposed a host of conditions and undertakings with which Trafigura was required to comply. Relevant here, the CFTC required that Trafigura modify its non-disclosure provisions to include language making clear that “no term in any such Agreement should be understood to limit or prevent the filing of a complaint with; or voluntary, lawful communication with; or disclosure of information to any federal, state, or local governmental regulatory or law enforcement agency.”

Director of the Whistleblower Office Brian Young commented, “This is the first CFTC action charging a company under regulations designed to prevent interference with whistleblower communications. This groundbreaking action demonstrates the CFTC’s commitment to protecting potential whistleblowers and puts the market on notice that the CFTC will not tolerate contractual arrangements that could impede communication by potential witnesses.”

We have long reported on the SEC’s targeting of employment agreements. With the CFTC following suit, employers should expect additional agencies to scrutinize language in employment agreements, separation agreements and other employment-related documents, such as employee handbooks and Codes of Conduct. To minimize such scrutiny and exposure employers should take action to modify non-disclosure and other provisions such as non-disparagement and confidentiality clauses that might have the purpose or effect of impeding agency communications. Such modifications must include carve-out language clarifying that nothing precludes current and former employees from communicating in any way with a government agency, such as the CFTC or the SEC. It is more important than ever for employers to work with counsel to conduct a comprehensive review of their policies, practices, and agreements for language that such agencies may find problematic.

A Lawyer’s Guide to Understanding AI Hallucinations in a Closed System

Understanding Artificial Intelligence (AI) and the possibility of hallucinations in a closed system is necessary for the use of any such technology by a lawyer. AI has made significant strides in recent years, demonstrating remarkable capabilities in various fields, from natural language processing to large language models to generative AI. Despite these advancements, AI systems can sometimes produce outputs that are unexpectedly inaccurate or even nonsensical – a phenomenon often referred to as “hallucinations.” Understanding why these hallucinations occur, especially in a closed systems, is crucial for improving AI reliability in the practice of law.

What are AI Hallucinations
AI hallucinations are instances where AI systems generate information that seems plausible but is incorrect or entirely fabricated. These hallucinations can manifest in various forms, such as incorrect responses to prompt, fabricated case details, false medical analysis or even imagined elements in an image.

The Nature of Closed Systems
A closed system in AI refers to a context where the AI operates with a fixed dataset and pre-defined parameters, without real-time interaction or external updates. In the area of legal practice this can include environments or legal AI tools which rely upon a selected universe of information from which to access such information as a case file database, saved case specific medical records, discovery responses, deposition transcripts and pleadings.

Causes of AI Hallucinations in Closed Systems
Closed systems, as opposed to open facing AI which can access the internet, rely entirely on the data they were trained on. If the data is incomplete, biased, or not representative of the real world the AI may fill gaps in its knowledge with incorrect information. This is particularly problematic when the AI encounters scenarios not-well presented in its training data. Similarly, if an AI tool is used incorrectly by way of misused data prompts, a closed system could result in incorrect or nonsensical outputs.

Overfitting
Overfitting occurs when the AI model learns the noise and peculiarities in the training data rather than the underlying patterns. In a closed system, where the training data can be limited and static, the model might generate outputs based on these peculiarities, leading to hallucinations when faced with new or slightly different inputs.

Extrapolation Error
AI models can generalize from their training data to handle new inputs. In a closed system, the lack of continuous learning and updated data may cause the model to make inaccurate extrapolations. For example, a language model might generate plausible sounding but factually incorrect information based upon incomplete context.

Implication of Hallucination for lawyers
For lawyers, AI hallucinations can have serious implications. Relying on AI- generated content without verification could possibly lead to the dissemination or reliance upon false information, which can grievously effect both a client and the lawyer. Lawyers have a duty to provide accurate and reliable advise, information and court filings. Using AI tools that can possibly produce hallucinations without proper checks could very well breach a lawyer’s ethical duty to her client and such errors could damage a lawyer’s reputation or standing. A lawyer must stay vigilant in her practice to safe guard against hallucinations. A lawyer should always verify any AI generated information against reliable sources and treat AI as an assistant, not a replacement. Attorney oversight of outputs especially in critical areas such as legal research, document drafting and case analysis is an ethical requirement.

Notably, the lawyer’s chose of AI tool is critical. A well vetted closed system allows for the tracing of the origin of output and a lawyer to maintain control over the source materials. In the instance of prompt-based data searches, with multiple task prompts, a comprehensive understanding of how the prompts were designed to be used and the proper use of same is also essential to avoid hallucinations in a closed system. Improper use of the AI tool, even in a closed system designed for legal use, can lead to illogical outputs or hallucinations. A lawyer who wishes to utilize AI tools should stay informed about AI developments and understand the limitations and capabilities of the tools used. Regular training and updates can provide a more effective use of AI tools and help to safeguard against hallucinations.

Take Away
AI hallucinations present a unique challenge for the legal profession, but with careful tool vetting, management and training a lawyer can safeguard against false outputs. By understanding the nature of hallucinations and their origins, implementing robust verification processes and maintaining human oversight, lawyers can harness the power of AI while upholding their commitment to accuracy and ethical practice.

The National Law Forum

Investing in SAFE and Convertible Note Rounds ꟷKnow Your Bedmates!

Like this:

Two Blockbuster U.S. Supreme Court Decisions May Spell End of NLRB’s Expansion of Reach of NLRA as Well as How Agency Prosecutes Cases

Like this: