Tag: government

AI-Generated Content and Trademarks

The rapid evolution of artificial intelligence has undeniably transformed the digital landscape, with AI-generated content becoming increasingly common. This shift has profound implications for brand owners introducing both challenges and opportunities.

One of the most pressing concerns is trademark infringement. In a recent example, the Walt Disney Company, a company fiercely protective of its intellectual property, raised concerns about AI-generated content potentially infringing on its trademarks.  Social media users were having fun using Microsoft’s Bing AI imaging tool, powered by DALL-E 3 technology, to create images of pets in a “Pixar” style.  However, Disney’s concern wasn’t the artwork itself, but the possibility of the AI inadvertently generating the iconic Disney-Pixar logo within the images, constituting a trademark infringement. This incident highlights the potential for AI-generated content to unintentionally infringe upon established trademarks, requiring brand owners to stay vigilant in protecting their intellectual property in the digital age.

Dilution of trademarks is another critical issue. A recent lawsuit filed by Getty Images against Stability AI sheds light on this concern. Getty Images, a leading provider of stock photos, accused Stability AI of using millions of its copyrighted images to train its AI image generation software. This alleged use, according to Getty Images, involved Stability AI’s incorporation of Getty Images’ marks into low-quality, unappealing, or offensive images which dilutes those marks in further violation of federal and state trademark laws. The lawsuit highlights the potential for AI, through the sheer volume of content it generates, to blur the lines between inspiration and infringement, weakening the association between a trademark and its source.

In addition, the ownership of copyrights in AI-generated marketing can cause problems. While AI tools can create impressive content, questions about who owns the intellectual property rights persist.  Recent disputes over AI-generated artwork and music have highlighted the challenges of determining ownership and copyright in this new digital frontier.

However, AI also presents opportunities for trademark owners. For example, AI can be employed to monitor online platforms for trademark infringements, providing an early warning system. Luxury brands have used AI to authenticate products and combat counterfeiting. For instance, Entrupy has developed a mobile device-based authentication system that uses AI and microscopy to analyze materials and detect subtle irregularities indicative of counterfeit products. Brands can integrate Entrupy’s technology into their retail stores or customer-facing apps.

Additionally, AI can be a powerful tool for brand building. By analyzing consumer data and preferences, AI can help create highly targeted marketing campaigns. For example, cosmetic brands have successfully leveraged AI to personalize product recommendations, enhancing customer engagement and loyalty.

The intersection of AI and trademarks is a dynamic and evolving landscape. As technology continues to advance, so too will the challenges and opportunities for trademark owners. Proactive measures, such as robust trademark portfolios, AI-powered monitoring tools, and clear internal guidelines, are essential for safeguarding brand integrity in this new era.

Copyright ©2024 Nelson Mullins Riley & Scarborough LLP
For more news on AI and Trademarks, visit the NLR Intellectual Property section.

The Administration Creates New Pathways for DACA Recipients to Obtain Legal Status

Among the multiple executive actions the White House announced on June 18, 2024, was one stating it was taking steps to facilitate the process for certain Deferred Action for Childhood Arrivals (DACA) recipients to obtain work visas/status. DACA was created in 2012 by President Barack Obama as a means for immigrant youth who met certain eligibility requirements to qualify for work authorizations and obtain “deferred action.”

While DACA protection has enabled hundreds of thousands of individuals to legally work and live in the U.S., the program has faced considerable uncertainty since 2017, when the Trump administration initially sought to terminate the program, but was prevented from doing so in the federal courts.

The program continues to face legal challenges, and additional litigation before the U.S. Supreme Court is likely. Fundamentally, DACA is not a legal status – the reliance on “deferred action” simply reflects the U.S. Department of Homeland Security’s (DHS) decision not to bring immigration removal proceedings against a specific individual. While many DACA recipients and their employers have since sought to transition to a work visa or other legal status that Congress specifically established in the Immigration and Nationality Act (INA), the process for doing so is uncertain, expensive and cumbersome.

Since DACA recipients either entered without authorization or were out of status when they received DACA protection, they are typically ineligible for a transition to a lawful status within the U.S.

Instead, they are required under immigration law to “consular process” outside the U.S. and obtain a work visa at a U.S. consulate. The individual’s departure from the U.S. could trigger removal bars (similar to those described above), requiring the individual to obtain a temporary waiver of inadmissibility from the government. These waivers, known as “d3 waivers” based on the section of the INA to which they relate, can take months to obtain and the outcome of such a waiver is not certain. These cumulative issues have chilled the interest of many employers and DACA recipients in pursuing these waivers.

On July 15, 2024, the U.S. Department of State made changes to the Foreign Affairs Manual (FAM), which is controlling guidance for consular officers at U.S. Consulates on factors to consider when adjudicating waiver requests. The three primary changes that the DOS made to 9 FAM 305.4-3 are:

  1. Expanding the factors that would have a positive effect on U.S. public interests in granting a waiver to include circumstances “where the applicant has graduated with a degree from an institution of higher education in the United States, or has earned credentials to engage in skilled labor in the United States, and is seeking to travel to the United States to commence or continue employment with a U.S. employer in a field related to the education that the applicant attained in the United States….” These changes noted in bold are clearly designed to benefit many DACA recipients.
  2. The second change creates a mechanism for a waiver applicant whose request is denied by a consular officer to request State Department review in circumstances involving “significant public interest,” which in turn cross-references the factors above that are of particular benefit to DACA recipients.
  3. The FAM was also updated to reflect the ability of DACA recipients who have graduated from an educational program in the United States or are seeking to reenter the U.S. with a visa as beneficiaries of an offer of employment to request an expedite of the waiver request. This change is particularly critical as one of the greatest challenges that DACA recipients face when seeking a waiver is the uncertain adjudication period, which often stretches for months.

Collectively, these updates are significant and will benefit several DACA recipients who are beneficiaries of employer sponsorship. These pathways also create a mechanism for U.S. employers to transition DACA recipients from DACA, with its increasing uncertainty, to a more stable work visa. DACA recipients should, of course, plan prudently if considering a departure from the U.S. to apply for such a waiver and should also apply for advance parole before departing the U.S. so as to provide a mechanism for reentering the U.S. if the waiver request is denied.

© 2024 BARNES & THORNBURG LLP
by: Tejas Shah, M. Mercedes Badia-Tavas of Barnes & Thornburg LLP
For more news on the DACA Executive Order, visit the NLR Immigration section.

Deep in the Heart of Texas: Court Blocks FTC Non-Compete Rule

On August 20, 2024, the United States District Court for the Northern District of Texas invalidated the FTC’s rule banning most non-compete agreements.  Ryan LLC et al v. Federal Trade Commission, WL 3297524 (08/20/2024). In its highly anticipated opinion, the Court determined the FTC exceeded its authority in promulgating the rule and that the rule is arbitrary and capricious.  This decision was not limited to the parties before the Court and blocks the rule from becoming effective nationwide on September 4, 2024.  As a result, existing non-compete agreements may still be valid and enforceable when permitted under applicable law.

Ryan, LLC (“Ryan”) filed its lawsuit on April 23, 2024, arguing the FTC did not have rulemaking authority under the Federal Trade Commission Act, that the rule is the product of an unconstitutional exercise of power, and that the FTC’s acts and findings were arbitrary and capricious.  Several plaintiffs, including the U.S. Chamber of Commerce, intervened in the lawsuit to challenge the rule.

In July, the Court enjoined the FTC from implementing or enforcing the rule.  That ruling, however, was limited in scope and only applied to Ryan and the intervening plaintiffs.  Shortly thereafter, all parties filed motions for summary judgment.  Plaintiffs asked the Court to invalidate the FTC’s rule, and the FTC sought dismissal under the theory it has express rulemaking authority under the FTC Act.

The Court first examined the FTC’s statutory rulemaking authority and determined the rulemaking provisions under the FTC Act do not expressly grant the FTC authority to promulgate substantive rules.  The Court reasoned that although the Act provides some rulemaking authority, that authority is limited to “housekeeping” types of rules.  The Court concluded “the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition…”  As a result, the Court held the FTC exceeded its statutory authority in promulgating the rule.

Next, the Court considered whether the rule and the promulgation procedure was arbitrary and capricious.  The Court was unconvinced by the studies and other evidence relied on by the FTC in promulgating the rule and found that the FTC failed to demonstrate a rational basis for imposing the rule.  The Court also noted that the FTC was required to consider less disruptive alternatives to its near complete ban on non-compete agreements.  Although the FTC argued it had “compelling justifications” to ignore potential exceptions and alternatives, the Court concluded the rule was unreasonable and the FTC failed to adequately explain alternatives to the proposed rule.  Ultimately, the Court opined the rule was based on flawed evidence, that it failed to consider the positive benefits of non-compete clauses and improperly disregarded substantial evidence supporting non-compete clauses.

As a result of this ruling, the FTC’s rule will not become effective on September 4, 2024, short of any additional orders or rulings from a higher court reversing or staying the decision.  For the time being, the existing laws governing non-compete agreements will remain in place.  In Michigan, employers may enforce non-compete agreements that are reasonable in duration, geographical area and type of employment or line of business. In Illinois, they are regulated by the Illinois Freedom to Work Act, which imposes a stricter regulatory scheme. This should come as a relief for employers who can generally avoid—at least for now—analyzing complex issues regarding the impact that the FTC’s rule would have had on executive compensation arrangements tied to compliance with non-compete agreements, especially in the tax-exempt organization context.

© 2024 Miller, Canfield, Paddock and Stone PLC

by: D. Kyle Bierlein, Brian T. Gallagher, Barry P. Kaltenbach, Brian Schwartz of Miller Canfield

For more news on the Federal Court Ruling Against the FTC’s Non-compete Rule, visit the NLR Labor & Employment section.

American Bar Association Issues Formal Opinion on Use of Generative AI Tools

On July 29, 2024, the American Bar Association issued ABA Formal Opinion 512 titled “Generative Artificial Intelligence Tools.”

The opinion addresses the ethical considerations lawyers are required to consider when using generative AI (GenAI) tools in the practice of law.

The opinion sets forth the ethical rules to consider, including the duties of competence, confidentiality, client communication, raising only meritorious claims, candor toward the tribunal, supervisory responsibilities of others, and setting of fees.

Competence

The opinion reiterates previous ABA opinions that lawyers are required to have a reasonable understanding of the capabilities and limitations of specific technologies used, including remaining “vigilant” about the benefits and risks of the use of technology, including GenAI tools. It specifically mentions that attorneys must be aware of the risk of inaccurate output or hallucinations of GenAI tools and that independent verification is necessary when using GenAI tools. According to the opinion, users must evaluate the tool being used, analyze the output, not solely rely on the tool’s conclusions, and cannot replace their judgment with that of the tool.

Confidentiality

The opinion reminds lawyers that they are ethically required to make reasonable efforts to prevent inadvertent or unauthorized access or disclosure of client information or their representation of a client. It suggests that, before inputting data into a GenAI tool, a lawyer must evaluate not only the risk of unauthorized disclosure outside the firm, but also possible internal unauthorized disclosure in violation of an ethical wall or access controls. The opinion stressed that if client information is uploaded to a GenAI tool within the firm, the client data may be disclosed to and used by other lawyers in the firm, without the client’s consent, to benefit other clients. The client data input into the GenAI tool may be used for self-learning or teaching an algorithm that then discloses the client data without the client’s consent.

The opinion suggests that before submitting client data to a GenAI tool, lawyers must review the tool’s privacy policy, terms of use, and all contractual terms to determine how the GenAI tool will collect and use the data in the context of the ethical duty of confidentiality with clients.

Further, the opinion suggests that if lawyers intend to use GenAI tools to provide legal services to clients, lawyers are required to obtain informed client consent before using the tool. The lawyer is required to inform the client of the use of the GenAI tool, the risk of use of the tool and then obtain the client’s informed consent prior to use. Importantly, the opinion states that “general, boiler-plate provisions [in an] engagement letter” are not sufficient” to meet this requirement.

Communication

With regard to lawyers’ duty to effectively communicate information that is in the best interest of their client, the opinion notes that—depending on the circumstances—it may be in the best interest of the client to disclose the use of GenAI tools, particularly if the use will affect the fee charged to the client, or the output of the GenAI tool will influence a significant decision in the representation of the client. This communication can be included in the engagement letter, though it may be appropriate to communicate directly with the client before including it in the engagement letter.

Meritorious Claims + Candor Toward Tribunal

Lawyers are officers of the court and have an ethical obligation to put forth meritorious claims and to be candid with the tribunal before which such claims are presented. In the context of the use of GenAI tools, as stated above, there is a risk that without appropriate evaluation and supervision (including the use of independent professional judgment), the output of a GenAI tool can sometimes be erroneous or considered a “hallucination.” Therefore, to reiterate the ethical duty of competence, lawyers are advised to independently evaluate any output provided by a GenAI tool.

In addition, some courts require that attorneys disclose whether GenAI tools have been used in court filings. It is important to research and follow local court rules and practices regarding disclosure of the use of GenAI tools before submitting filings.

Supervisory Responsibilities

Consistent with other ABA Opinions relevant to the use of technology, the opinion stresses that managerial responsibilities include providing clear policies to lawyers, non-lawyers, and staff about the use of GenAI in the practice of law. I think this is one of the most important messages of the opinion. Firms and law practices are required to develop and implement a GenAI governance program, evaluate the risk and benefit of the use of a GenAI tool, educate all individuals in the firm on the policies and guardrails put in place to use such tools, and supervise their use. This is a clear message that lawyers and law firms need to evaluate the use of GenAI tools and start working on developing and implementing their own AI governance program for all internal users.

Fees

The key takeaway of the fees section of Opinion 512 is that a lawyer can’t bill a client to learn how to use a GenAI tool. Consistent with other opinions relating to fees, only extraordinary costs associated with the use of GenAI tools are permitted to be billed to the client, with the client’s knowledge and consent. In addition, the opinion points out that any efficiencies gained by the use of GenAI tools, with the client’s consent, should benefit the client through reduced fees.

Conclusion

Although consistent with other ABA opinions related to the use of technology, an understanding of ABA Opinion 512 is important as GenAI tools become more ubiquitous. It is clear that there will be additional opinions related to the use of GenAI tools from the ABA as well as state bar associations and that it is a topic of interest in the context of adherence with ethical obligations. A clear message from Opinion 512 is that now is a good time to consider developing an AI governance program.

Copyright © 2024 Robinson & Cole LLP. All rights reserved.
For more news on ABA Opinions on AI, visit the NLR Communications Media Internet section.

EPA Announces Strengthening the Safer Choice and Design for the Environment Standard for Commercial and Household Cleaning Products

On August 8, 2024, the U.S. Environmental Protection Agency announced that it made updates to strengthen the Safer Choice and Design for the Environment (DfE) Standard, which identifies the requirements that products and their ingredients must meet to earn EPA’s Safer Choice label or DfE logo. EPA states these updates strengthen the criteria that products must meet to qualify for the voluntary Safer Choice label, supporting the use of safer chemicals in the marketplace.

According to EPA, the Safer Choice program was implemented so consumers and purchasers for facilities like schools and office buildings could find cleaners, detergents, and other products made with safer chemical ingredients. It encourages use of chemicals that meet EPA’s stringent criteria for human health and the environment and provides opportunities for companies to differentiate their products in the marketplace with the Safer Choice label.

Similarly, the DfE program assists consumers to find antimicrobial products that meet high standards for public health and the environment. It assists consumers to identify antimicrobial products like disinfectants that meet the health and safety standards of the normal pesticide registration process required by the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), as well as meeting the Safer Choice and DfE Standard.

In addition to updated clarifying language, the final updated Standard includes:

  • A new certification program for cleaning service providers that use Safer Choice- and DfE-certified products. The Cleaning Service Certification logo is available for organizations and businesses that use cleaners, detergents, disinfectants, and related products as part of their primary operations. The logo distinguishes cleaning service providers who use Safer Choice-certified products for cleaning and DfE-certified products for disinfection either exclusively or to the maximum extent practicable.
  • Strengthened criteria that pet care products must meet to ensure they use only the safest possible ingredients for humans, pets, and the environment.
  • Updated safer packaging criteria, ensuring primary packaging does not include any unintentionally added per- and polyfluoroalkyl substances (PFAS) or other chemicals of concern.
  • Strengthened sustainable packaging requirements for all Safer Choice-certified products to use post-consumer recycled content and be recyclable or reusable.
  • Updated criteria for wipe products to ensure certified wipes contain “Do Not Flush” language to help reduce damage to wastewater treatment systems.
  • New, optional energy efficiency or use reduction criteria to encourage companies to use less water, use renewable energy, and improve energy efficiency.

This update follows a November 2023 request for public comment on EPA’s proposed updates to the Standard. This is EPA’s fourth update of the Standard since its inception in 2009 and the first since 2015. EPA states it periodically updates the Standard to keep current with the state of scientific and technological innovation, increase transparency and reduce redundancy, and expand the scope of the program as appropriate.

The updated Standard is available here.

©2024 Bergeson & Campbell, P.C.
by: Heather F. Collins, Barbara A. Christianson of Bergeson & Campbell, P.C.

August 2024 Legal Industry News Updates: Law Firm Hiring and Expansion, Industry Awards and Recognition, DEI and Women in Law

Thank you for reading the National Law Review’s legal industry news roundup for August 2024. We hope you are enjoying your summer! Please read below for the latest in law firm hiring and expansion news, key industry awards and recognition and a feature on diversity, equity and inclusion (DEI) and women in law.

Law Firm Hiring and Expansion

Barnes & Thornburg expanded its downtown Chicago office, marking the city’s largest law firm lease transaction to date in 2024. The firm’s office, located in the Irvine Company’s trophy tower at One North Wacker, will grow by 30 percent under this expansion. Barnes & Thornburg’s Chicago office currently has more than 135 attorneys and is one of the 25 largest law offices in Chicago.

“Our One North Wacker office has long served as a crucial hub for collaboration and innovation among our attorneys, business professionals, clients, and community partners,” said Michael A. Carrillo, managing partner of Barnes & Thornburg’s Chicago office. “This new, expanded space will help us foster even more in-person connection, bringing our legal capabilities and service to the next level.”

“Chicago businesses are facing increasingly complex legal and regulatory hurdles,” added Andrew J. Detherage, firm managing partner. “Not only will this new lease extend our commitment to innovation and collaboration and help our attorneys provide the robust and sophisticated counsel needed to tackle such challenges, it will also deepen our footprint in a market critical to the firm’s long-term growth strategy.”

Jackson Lewis welcomed William “Billy” Jackson and Eric B. Moody as principals in its Norfolk and Tampa offices, respectively.

Mr. Jackson earned his J.D. from Stanford Law School and his B.A. from Brigham Young University. His practice is focused on white-collar criminal defense and conducting internal investigations for companies facing allegations of misconduct.

“We are thrilled to welcome Billy to the Norfolk team,” said Norfolk office managing principal and litigation manager Kristin H. Vaquera. “His deep understanding of government investigations and enforcement actions will be a tremendous asset to our clients, helping them navigate the complexities of regulatory compliance.”

Mr. Moody received his J.D. from Stetson University College of Law and his B.S. from the University of South Florida. He represents clients in labor and employment litigation issues and in actions brought under federal and state consumer protection statutes.

Benjamin D. Sharkey, the managing principal at Jackson Lewis’s Tampa office, welcomed Mr. Moody to the team: “His impressive track record in handling high-stakes litigation—from discrimination and retaliation claims to wage and hour disputes—will significantly strengthen our ability to deliver strategic, results-driven solutions. We are excited to have Eric join us and look forward to the exceptional contributions he will make to our team.”

Bradley appointed three new office managing partners, in addition to three new practice group leaders. The new office managing partners are:

The new practice group leaders are:

“These new leadership appointments are part of the firm’s continued commitment to identifying and nurturing talent that will ensure Bradley’s future success and help us meet the evolving needs of our clients,” said Bradley chairman of the board and managing partner Jonathan M. Skeeters.

Sandra K. Newman and Rebecca Eberhardt joined Venable LLP as the firm’s first private wealth planning practitioners in its Chicago office. Ms. Newman and Ms. Eberhardt focus their practices on wealth, estate and gift tax planning, philanthropic planning, trusts and estates.

“We are thrilled to get two of the best private wealth practice attorneys in Chicago to join our office,” said Kenneth Roberts, managing partner at Venable Chicago. “We continue to attract top-tier talent, and their addition is a big win for Venable and the needs of our clients.”

Legal Industry Awards and Recognition

Bracewell announced that partners K. Brock Bailey and Aaron P. Roffwarg were named to Lawdragon’s 2024 500 Leading Global Real Estate Lawyers list.

Lawdragon provides free online editorial features and news, as well as guides to top US lawyers in different practice areas based on their work from the past year. This year’s list includes various geographic markets.

Mr. Bailey is the managing partner of Bracewell’s Dallas office, as well as a member of the firm’s management committee. He represents developers, borrowers, owners and lenders in the development and acquisition of large commercial and industrial projects.

Mr. Roffwarg is the chair of Bracewell’s Real Estate practice in the firm’s Houston office, who counsels clients on property and construction project transactions, including complex midstream oil and gas projects, pipelines and terminals.

Anthony (Tony) Oncidi, co-chair of Proskauer’s Labor & Employment Department, was named a 2024 Top Labor & Employment Lawyer in California by the Daily Journal.

Mr. Oncidi is a partner in Proskauer’s Los Angeles office who heads the West Coast Labor & Employment group. His experience in high-end employment law with nation-wide employers has established him as a trusted advisor and litigator in non-compete covenants and whistleblower claims.

The Daily Journal is a nationwide corporation which provides attorneys with up-to-date information and news that they require for their practice, including webinars, legal notices, quizzes and resources.

Moore & Van Allen announced that their Patent practice group was ranked in top categories in 2024 Patent Bots Patent Quality Rankings, including as a Top 10 firm in networking, multiplexing, cable and security.

Patent Bots offers patent-specific machine-learning tools and interfaces, with the rankings being made from evaluations over the year of issued patents.

Moore & Van Allen’s team offers a wide range of patent services, such as prosecution and validity options. They also assist clients with due diligence review, litigation, research and development agreements and management and development of patent portfolios.

DEI and Women in Law

Corporate Counsel recognized Amber Rogers, hiring partner of Hunton Andrews Kurth’s Dallas office and a member of the firm’s executive committee, with a 2024 Women, Influence & Power in Law Award.

Corporate Counsel will celebrate Ms. Rogers’ Collaborative Leadership award, designated for women leaders and allies demonstrating commitment to advancing and empowering women in law, on September 24 at the Women, Influence & Power in Law Conference in Chicago.

Massachusetts Lawyers Weekly awarded CMBG3 Law the 2024 Empowering Women award, bestowed on law firms exhibiting strong commitment and support for women attorneys in Massachusetts.

As a majority women-owned law firm since its inception, CMBG3 Law continues its dedication to empowering women attorneys. Over half of the firm’s professionals are women and women comprise over 80% of the firm’s Senior Leadership Team.

Erin Toomey, partner at Foley & Lardner LLP, was acclaimed as one of Michigan Lawyers Weekly‘s Influential Women of Law. The Influential Women of Law awards honor women attorneys for excellence in work, commitment to community and service to the profession.

Ms. Toomey is a partner in the firm’s Government Procurement and Government Solutions Practices, where she helps businesses minimize their risk and maximize their recovery in government contracting.

Daniel Attaway, partner at Womble Bond Dickinson, took part in the Moments to Movements Hackathon. The Hackathon, hosted by Diversity Lab, is a “shark-tank style pitch competition” that meets to solve some of the most challenging DEI issues facing the legal industry.

Mr. Attaway practices life sciences and pharmaceutical law, representing clients in patent litigation and trade secrets. He also serves on the firm’s diversity committee and is co-chair of the firm’s IP content committee.

Copyright ©2024 National Law Forum, LLC

by: The National Law Review of The National Law Review / The National Law Forum LLC – NLR

For more news on Legal Industry News Updates, visit the NLR Law Office Management section.

Energy Tax Credits for a New World Part I: Overview of Energy Tax Credits under the IRA

Signed into law on August 16, 2022, the Inflation Reduction Act (IRA) is the most significant long-term commitment made by the U.S. government to encourage and support a clean energy future. The IRA works through the Internal Revenue Code (Code) in ways that fundamentally change the landscape on how clean energy tax credits and incentives are designed, awarded, and monetized.

The regulation, taxation, and financing of energy projects has been an integral aspect of my law practice for decades. These are exciting times now, as the structuring of energy tax credits under the IRA expands on a number of themes that I first covered in an energy and environmental project finance book I coauthored for Oxford University Press back in 2010. Then, as now, my perspective is shaped by my work for clients in the traditional and emerging clean energy sectors.

Why launch a series now about the energy tax credits that were extended, modified, or introduced by the IRA?

  • Many of the IRA energy credits run until 2032, so project developers still have ample opportunity to get their projects underway while credits remain available.
  • The Treasury and the IRS have yet to provide us with many important details on IRA implementation, with much of the guidance having been provided in Notices and proposed Treasury Regulations. But while the details are being ironed out, taxpayers still need to move forward with their projects, and tax returns need preparation. As project owners and funders continue to seek assistance, it remains critical to remain vigilant and stay on top of the large number of new developments.
  • Two important technology-specific credits expire at the end of 2024. They will be replaced in 2025 by two technology-neutral credits. The technology-neutral credits do not expire until 2032, or until certain greenhouse gas emissions (GHG) are reduced to specific levels set out in the Code (most likely, later).
  • Projects that seek to qualify for IRA energy tax credits and which begin construction in and after 2025 will need to meet statutory requirements not required for earlier projects.

Developers and investors would be well advised to consider the tax consequences to their energy projects during the second half of 2024, which I look at as a transition period.

In this Q&A with Andie, Energy Tax Credits For A New World, I aim to provide an overview of the IRA as it relates to many important energy credits. I will take deep dives into some of the requirements and mechanics of some of these credits, and I will look at the ways in which these credits can be monetized.

Through Summer and Fall 2024, Readers can look forward to reading this extended occasional series presented in the following parts:

Part I: Overview of Energy Tax Credits under the IRA

Part II: Production Tax Credits and Investment Tax Credits: The Old and The New

Part III: Overview of Bonus Credits

Part IV: Prevailing Wage and Apprenticeship Bonus Credits

Part V: Domestic Content Bonus Credits

Part VI: Energy Community Bonus Credits

Part VII: Low-Income Communities Bonus Credits

Part VIII: Monetizing Energy Tax Credits

Part XI: Changes to Traditional Tax Equity Financing

The IRA’s tax benefits are enormous. As a result, when a “qualifying energy project” is properly structured and timed, it can receive tax credits that reduce certain related costs by more than 50 percent.

As I launch this series, I would like to extend my gratitude to Nicholas C. Mowbray for his comments and exceptional assistance.

Part I: Overview of Energy Tax Credits under the IRA

“Dozens of countries are widening the gap between their economic growth and their greenhouse gas emissions. . . . If these trends continue, global emissions may actually start to decline,” observed Umair Irfan writing for Vox.[1]

What is the importance of the Inflation Reduction Act (IRA) to energy tax credits?

The IRA has strengthened the United States’ long-term commitment toward a clean energy economy. It is the most ambitious U.S. effort to date to incentivize the development of renewable energy technologies[2] that can help to reduce greenhouse gas (GHG) emissions. The IRA targets the enormous capital expenditures needed to create, commercialize, and broadly make available renewable energy technologies. The IRA’s goal is to lay out a path toward a net-zero GHG economy by 2050.[3]

How does the IRA affect energy project funding?

The IRA has brought about major changes in the ways in which energy projects are structured and funded. It provides for loans, grants, financial and technical assistance, rebates, and energy tax credits. About $400 billion has been allocated for clean energy innovation, technology, and manufacturing. Of this funding, about $260 billion applies to the extension and modification of existing tax credits and the introduction of new ones. In fact, more than 70 percent of the IRA’s benefits are delivered through tax incentives. Now, more than 20 tax credits allow for monetization that supports clean energy generation, develops related manufacturing capacity, incentivizes the increased use of clean vehicles and energy sources, and increases carbon capture programs.[4]

How does the IRA target GHG emission?

The IRA uses funding and financial incentives to support research, development, and commercialization of low- and zero-GHG emission technologies. It also seeks to steer project developers to locate their projects in “energy communities” or “low-income communities”; to pay prevailing wages and encourage the training of registered apprentices; and to increase the use of domestic content components in project-related manufacturing and construction processes.

Have the IRA initiatives been effective?

Initial IRA success stories are very positive, but we have a long way to go. In 2023, “more solar panels were installed in China […] than the US has installed in its entire history. More electric vehicles were sold worldwide than ever.”[5] As the United States seeks to become a global leader in decarbonization and to compete with other major economies like China, the IRA is creating “new opportunities for workers […] and lower costs for America’s families.”[6]

Congress also seeks to ensure that monies provided by the IRA strengthen domestic supply chains and ensure the nation’s energy security in its transportation modes. The IRA is boosting domestic manufacturing for critical renewable energy components, while partially funding the construction of renewable energy projects through its rigorous domestic sourcing requirements.

In 2023 the American Council on Renewable Energy found that, “One of the most notable impacts of the IRA is how quickly it helped to onshore new advanced green manufacturing. More than 83 new or expanded wind, solar, and battery manufacturing facilities have been announced since August 2022, including 52 plants for solar production, 17 for utility-scale wind production, and 14 for production of utility-scale battery storage.”[7]

Notwithstanding some initial successes, two years after passage of the IRA, there are some serious concerns that some of the credits are unworkable, and that the IRA’s domestic sourcing requirements have fallen short of expectations.[8]

Is it possible that the IRA could be dismantled by future Administrations?

Yes. It is possible. Perhaps, a better question might be should the IRA be dismantled? Is it in our best interests to shut down the onward innovation of a thriving high-growth, high-benefit fledgling U.S. industry segment, substantially underwritten by the government, and made available to the residents of a leading market economy?

What makes the IRA different from prior environmental and climate efforts?

The IRA is fundamentally different from the carrot-and-stick approaches of many prior U.S. environmental and climate laws. It has an incentives-based focus: it does not rely on traditional regulation and enforcement to achieve its desired outcomes. It proactively seeks to encourage long-term commercial investments to decarbonize transportation, manufacturing, and construction. The IRA is popular among early adopters. Kimberly Clausing, the Eric M. Zolt Chair in Tax Law and Policy at the UCLA School of Law, noted in a 2023 interview, “There’s a lot of things to like about these tax credits […] they’re broad, they’re longer lived than prior tax credits, and they don’t phase out as quickly. They’re more flexible than prior tax credits. They’re more transferable and refundable, and that enables them to be ultimately more effective.”[9]

The IRA’s long-term focus on tax credits, financial incentives, and monetization may offer prospective project developers a degree of certainty in their planning; persuade investors to commit to clean energy undertakings; and broaden the pool of capital available to do so. So far, the facts speak for themselves: in the first year after the IRA’s enactment, 280 clean energy projects were announced across 44 states, representing $282 billion of investment.[10]

What deference will be given to Treasury Regulations addressing the IRA provisions?

Since passage of the IRA, the Treasury and the IRS have been carefully moving through the details of its rollout.[11] At the date of this writing, many critical questions remain unanswered. In addition, for many decades, the Treasury and the IRS have enjoyed broad latitude on the administration of the laws. But the legal landscape might be changing. On June 28, 2024, in Loper Bright Enterprises v. Raimondo, the U.S. Supreme Court effectively overturned the so-called Chevron doctrine. Chevron is a 40-year-old Supreme Court case that afforded federal agencies a degree of deference in the reasonable interpretation of a statute that fell within their areas of expertise.[12] As a result, many questions will be raised about many laws, along with the frameworks for their roll out and enforcement. Although the Treasury and the IRS will be able to claim broad expertise in some areas of the tax law, it is likely that there will be disputes and litigation over the deference to be given to climate-related tax regulations.[13]

What is the starting point for the IRA’s focus on tax credits?

Let’s take a walk down memory lane. Federal income tax credits for wind and solar energy were first enacted in The Energy Tax Act of 1978.[14] They were structured as refundable 10 percent tax credits for energy property and equipment that produced electricity using wind and solar sources. Later, The Windfall Profit Tax Act of 1980 extended the expiration through 1985, increased the credit to 15 percent, and removed a taxpayer’s ability to get a tax refund based on the value of the credit.[15] The Tax Reform Act of 1986 reduced solar energy credits from 15 percent to 10 percent and extended them through December 31, 1988. Further energy credit extensions for solar property were enacted between 1988 and 1991.

With The Energy Policy Act of 1992,[16] Congress made solar energy credits “permanent” and named them “investment tax credits” (ITCs). The same legislation also enacted the “renewable electricity production tax credit,” or the PTC. When the PTC expired in 1999, it was subsequently extended and expanded to include additional energy technologies.

The Energy Policy Act of 2005 increased the ITC for solar energy from 10 percent to 30 percent, and it extended the credit to additional types of energy property.[17] It did not, however, extend the PTC for solar and refined coal facilities. This meant that from 2005 until enactment of the IRA, the PTC was not available for electricity that was produced from solar energy.

Does the IRA move away from technology-specific tax credits?

Yes. Before the IRA, the PTC at Section 45 and the ITC at Section 48 were the two principal energy tax credits. They were enacted to encourage the development of U.S. wind farms and solar arrays. Both the PTC and the ITC included technology-specific statutory provisions that had been amended over the years to include additional technologies identified by Congress.

The IRA modified and extended both the Section 45 PTC and the Section 48 ITC through the end of 2024 at which point they will be replaced by the next generation of technology-neutral credits: the Section 45Y Clean Electricity Production Tax Credits (CEPTC) and the Section 48E Clean Electricity ITC (CEITC).[18] The rest of the energy tax credits that the IRA modified or introduced took effect for projects beginning on or after January 1, 2023, with most of those credits expiring on December 31, 2032.

In the next part of this series, we will take a look at the production tax credit (PTC), the investment tax credit (ITC), and their progeny. Many of the IRA tax credits are modifications or expansions of the PTC and the ITC. It is an important next step to consider the underlying framework of the old credits and the new.

The firm extends gratitude to Nicholas C. Mowbray for his comments and exceptional assistance in the preparation of this article.

[1] “We Might Be Closer to Changing Course on Climate Change Than We Realized,” Umair Irfan, Vox, April 25, 2024.

[2] Ibid.

[3] The Inflation Reduction Act of 2022, Pub. L. No. 117-169, 136 Stat. 1818 (2022) (IRA), August 16, 2022.

[4] Treasury, Inflation Reduction Act, https://home.treasury.gov/policy-issues/inflation-reduction-act#:~:text=The Inflation Reduction Act, enhanced, for clean energy and manufacturing. See also, “Elective Pay Overview,”
IRS Pub. 5817 (Rev. 4-2024) Number 941211. https://www.irs.gov/pub/irs-pdf/p5817.pdf

[5] “We Might Be Closer to Changing Course on Climate Change Than We Realized,” Umair Irfan, Vox, April 25, 2024.

[6] “Inflation Reduction Act Tax Credit,” U.S. Department of Labor, Inflation Reduction Act Tax Credit | U.S. Department of Labor (dol.gov), accessed August 15, 2024.

[7] “Celebrating One Year of Progress: The Inflation Reduction Act’s Impact on Renewable Energy and the American Economy,” Greg Wetstone, American Council on Renewable Energy, August 14, 2023.

[8] Press release, www.manchin.senate.gov, June 4, 2024.

[9]  “Why the Inflation Reduction Act Can’t Be Repealed,” Evan George, Legal Planet, April 17, 2023.

[10] “The US Inflation Reduction Act is Driving Clean-Energy Investment One Year In,” Marco Willner,

Sebastiaan Reinders and Aviral Utkarsh, Goldman Sachs, October 31, 2023.

[11] “Here’s What the Court’s Chevron Ruling Could Mean in Everyday Terms,” By Coral Davenport et al., The New York Times, June 28, 2024.

[12] “The Supreme Court’s Elimination Of The Chevron Doctrine Will Undermine Corporate Accountability,” Michael Posner, Forbes, July 8, 2024.

[13] “Tax Pros Discuss Impact of Loper Bright on IRS Regs,” Tim Shaw, Thomas Reuters, July 29, 2024,
“The Supreme Court’s decision […] may have ripple effects on Treasury and IRS rulemaking, though to what extent remains unclear, tax professionals say.”

[14] Pub. L. No. 95-618, 92 Stat. 3174 (1978).

[15] Pub. L. No. 96-223, 94 Stat. 229 (1980).

[16] Pub. L. No. 102-486, 106 Stat. 2776 (1992); H.R. 776, 102nd Congress (1991̵–1992).

[17] Pub. L. No. 109-58, 119 Stat. 594 (2005). I will discuss the term “energy property” in a future article.

[18] The PTC, ITC, CEPTC, and CEITC are discussed in Part V: Domestic Content Bonus Credits of this series.

by: Andie Kramer of ASKramer Law

For more news on Energy Tax Credits under the IRA, visit the NLR Tax section.

Selection of Gov. Walz as VP Candidate Implicates SEC Pay-To-Play Rule

Kamala Harris’ selection of Tim Walz as running mate for her presidential campaign has implications under the Securities and Exchange Commission’s (SEC) Rule 206(4)-5 under the Investment Advisers Act (SEC Pay-to-Play Rule). In particular, certain political contributions to vice presidential candidate Tim Walz, who serves as Chair of the Minnesota State Board of Investment (SBI), and other actions by investment advisers and certain of their personnel could trigger a two-year “time-out” that would prevent an investment adviser from collecting fees from any of the statewide retirement systems or other investment programs or state cash accounts managed by the SBI. As a result, all investment advisers should consider reviewing their existing policies and procedures relating to pay-to-play and political contributions, and they should remind employees of these policies in connection with the 2024 election cycle.

A few key takeaways in this regard

  • The SEC Pay-to-Play Rule prohibits investment advisers, including exempt advisers and exempt reporting advisers,1 from receiving compensation for providing advisory services to a government entity client for two years after the investment adviser or certain personnel, including executive officers and employees soliciting government entities,2 has made a contribution to an “official”3 of the government entity.
    • Governor Walz is an “official” of the SBI under the SEC Pay-to-Play Rule because he serves on the board of the SBI.
    • An investment adviser was recently fined by the SEC for violations of the SEC Pay-to-Play Rule following a contribution by a covered associate to a candidate who served as a member of the SBI.4
  • As a result of Governor Walz’s role with regard to the SBI, any contributions by a covered adviser (or any PAC controlled by the adviser) or any contributions by its covered associates above the de minimis amount of US$3505 to the Harris/Walz campaign will trigger a two-year “time-out.” This may have implications for investment advisers that are not currently seeking to do business with the SBI but may in the future, as the “time out” period applies for the entirety of the two-year period, even if Governor Walz ceases to be an “official” of the SBI after the election.
  • Contributions by family members of covered associates and contributions to super PACs or multicandidate PACs (so long as contributions are not earmarked for the benefit of the Harris/Walz campaign) generally are not restricted under the SEC Pay-to-Play Rule, if not done in a manner designed to circumvent the rule.
  • In addition to the SEC Pay-to-Play Rule, financial services firms should be mindful of other restrictions under Municipal Securities Rule Making Board Rule G-37, Commodity Futures Trading Commission Regulation 23.451, Financial Industry Regulatory Authority Rule 2030, and SEC Rule 15Fh-6.
  • Similar concerns were implicated when then-Governor Mike Pence of Indiana was the Republican vice presidential nominee in 20166; however, former President Donald Trump and current U.S. Senator J.D. Vance (R-OH) are not “officials” for purposes of the SEC Pay-to-Play Rule or other applicable pay-to-play rules, and contributions to the Trump/Vance campaign will not be restricted under these rules.

In addition to the SEC Pay-to-Play Rule and other federal pay-to-play rules noted above, many states and localities have also adopted pay-to-play rules that are applicable to persons who contract with their governmental agencies. Campaign contributions to other candidates may trigger disclosure obligations or certain restrictions under such rules. As political contributions can lead to unintended violations of the SEC Pay-to-Play Rule or other applicable pay-to-play rules, advisers should assess whether any of these rules present a business risk in the 2024 election cycle and take appropriate steps to protect themselves.

From a compliance standpoint, some investment advisers have implemented pre-clearance procedures for all employees, which can permit an investment adviser’s compliance team to confirm that political contributions by employees will not lead to unintended consequences. Compliance teams may also consider periodic checks of publicly available campaign contribution data to confirm contributions by employees are being disclosed pursuant to applicable internal policies.

Should you have any questions regarding the content of this alert, please do not hesitate to contact one of the authors or our other lawyers.

Footnotes

1 The rule applies to “covered advisers,” a term that includes investment advisers registered or required to be registered with the SEC, “foreign private advisers” not registered in reliance on Section 203(b)(3) of the Investment Advisers Act, and “exempt reporting advisers.”

2 The rule applies to “covered associates,” which are defined for this purpose as: (i) any general partner, managing member, executive officer, or other individual with a similar status or function; (ii) any employee who solicits a government entity for the investment adviser and any person who supervises, directly or indirectly, such employee; and (iii) any political action committee (PAC) controlled by the investment adviser or by any person described in parts (i) or (ii).

3 An “official” means any individual (including any election committee of the individual) who was, at the time of a contribution, a candidate (whether or not successful) for elective office or holds the office of a government entity, if the office (i) is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity; or (ii) has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity.

4 Wayzata Investment Partners LLC, Investment Advisers Act Release No. 6590 (Apr. 15, 2024).

5 Under the SEC Pay-to-Play Rule, covered associates (but not covered advisers) are permitted to make a de minimis contribution up to a US$350 amount in an election in which they are able to vote without triggering the two-year “time-out.”

6 Clifford J. Alexander, Ruth E. Delaney & Sonia R. Gioseffi, Impact of Pay-to-Play Rules in the 2016 Election Cycle, K&L GATES (Aug. 18, 2016), https://www.klgates.com/Impact-of-Pay-to-Play-Rules-in-the-2016-Election-Cycle-08-18-2016.

Copyright 2024 K & L Gates
by: Ruth E. Delaney, Richard F. Kerr of K&L Gates
For more news on the SEC Pay-to-Play Rule, visit the NLR Securities SEC section.

Filing Requirements Under the Corporate Transparency Act: Stealth Beneficial Owners

The Corporate Transparency Act (“CTA”) requires most entities to file with the Financial Crimes Enforcement Network (“FinCEN,” a Bureau of the U.S. Department of the Treasury) Beneficial Ownership Information (“BOI”) about the individual persons who own and/or control the entities, unless an entity is exempt under the CTA from the filing requirement. There are civil and criminal penalties for failing to comply with this requirement.

A key issue: WHO are the Beneficial Owners?

FinCEN has issued a series of Frequently Asked Questions along with responses providing guidance on the issue of who the beneficial owners are.

Question A-1, issued on March 24, 2023, states that “[BOI] refers to identifying information about the individuals who directly or indirectly own or control a company.”

Question A-2, issued on Sept. 18, 2023: Why do companies have to report beneficial ownership information to the U.S Department of the Treasury? defines the CTA as “…part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.”

Question D-1, updated April 18, 2024: Who is a beneficial owner of a reporting company? states that “A beneficial owner is an individual who either directly or indirectly (i) exercises substantial control over a reporting company” and, in referring to Question D-2 (What is substantial control?), “owns or controls at least 25 percent of a reporting company’s ownership interests.”

Question D-1 goes on to note that beneficial owners must be individuals, i.e., natural persons. This guidance is extended by Question D-2 on Substantial Control, where control includes the power of an individual who is an “important decision-maker.” Question D-3 (What are important decisions?) identifies “important decisions” with a pictorial chart of subject matters that FinCEN considers important, such as the type of business, the design of necessary financings, and the structure of the entity. Question D-4 explores ownership interests (again with a pictorial) including equity interests, profit interests, convertible securities, options, or “any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.”

Who, in FinCEN’s view, has “substantial control”?

Question D-2 lists four categories of those who have substantial control:

  1. A senior officer, including both executive officers and anyone “who performs a similar function;”
  2. An individual with “authority to appoint or remove certain officers or directors;”
  3. An individual who is an important decision-maker; or
  4. An individual with “any other form of substantial control.”

“Silent partners” and/or other undisclosed principals, including some who may be using the reporting company for nefarious purposes, might be discussed here, but that is not the intended subject of this writing. Rather, this piece is intended to warn businesspersons and their advisers of potential “stealth beneficial owners” – those whose status as beneficial owners is not immediately obvious.

First, consider the typical limited liability company Operating Agreement for an LLC with enough members and distribution of ownership interests so that no member owns over 25% of the LLC’s equity. If the LLC is manager-managed, then the manager(s) is/are Beneficial Owners, but the other members are not. But what if the Operating Agreement requires a majority or super-majority vote to approve certain transactions? Assuming that those transactions are “important” (as discussed in Question D-3), then possessing a potential veto power makes EACH member a beneficial owner. Such contractual limitations on executive power necessarily raise the issue of “beneficial ownership” in corporations, in limited liability companies, and even in limited partnerships where the Limited Partners have power to constrain the general partner (who clearly is a beneficial owner).

Second, consider the very recent amendments to the Delaware General Corporation Law (“DGCL”) in response to the Delaware Chancery Court’s holding in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co (“Moelis”) Feb. 23, 2024. In Moelis, the CEO had a contract with the Company that materially limited the power of the Board of Directors to act in a significant number of matters. Vice Chancellor Travis Laster issued a 133-page opinion finding the agreement was invalid, as it violated the Delaware Law that placed management and governance responsibilities in the Board. Because such arrangements are frequently used in venture capital arrangements as part of raising capital for new enterprises, the Delaware Legislature and the State’s Governor enacted amendments to the DGCL that expressly authorize such contracts. In the Moelis situation itself, Ken Moelis was a major owner and CEO so he would have had to be disclosed as a Beneficial Owner if Moelis & Co. had not been exempt from the filing requirements of the CTA because it is a registered investment bank.

But what of a start-up venture entity where a wealthy venture investor owns a 10% interest in the entity, but has a stockholder agreement that gives him substantial governance rights including the ability to veto or even overrule board decisions? Is that venture investor not a “beneficial owner”? Somewhat even more Baroque, what about the private equity fund controlled by a dominant investor, say William Ackman or Nelson Peltz? If that fund invests in the same start-up entity and holds a 10% interest, but also has a stockholder agreement giving the fund substantial governance rights, isn’t the controlling owner of the fund a “beneficial owner” of the start-up?

Finally, consider financing with a “bankruptcy remote entity” where the Board of that entity includes a contingent director chosen by the finance source. The contingent director does not participate in any part of the governance of the entity unless the entity finds itself in financial distress. The organizational documents of the entity provide that at that point, the contingent director can veto any decision to file for bankruptcy protection. At that point, the contingent director apparently becomes a “beneficial owner” of the entity, with the CTA filing requirements applicable. A more interesting question is whether the contingency arrangement in the organizational documents makes the contingent director a “beneficial owner” from the inception of the financing. Further, with respect to bankruptcy, key questions remain unanswered, such as whether the trustee in a Chapter 7 bankruptcy proceeding or a liquidating trustee in a Chapter 11 bankruptcy proceeding has a reporting obligation under the CTA.

This piece is not intended to identify all the situations that may give rise to “Stealth Beneficial Owners.” Rather, its intent is to raise awareness of the complexities involved in answering the initial question – WHO is a “beneficial owner”?

©2024 Norris McLaughlin P.A., All Rights Reserved

FTC Announces Final Rule Imposing Civil Penalties for Fake Consumer Reviews and Testimonials

On August 14, 2024, the Federal Trade Commission announced a Final Rule combatting bogus consumer reviews and testimonials by prohibiting their sale or purchase. The Rule allows the FTC to strengthen enforcement, seek civil penalties against violators and deter AI-generated fake reviews.

“Fake reviews not only waste people’s time and money, but also pollute the marketplace and divert business away from honest competitors,” said FTC attorney Chair Lina M. Khan. “By strengthening the FTC’s toolkit to fight deceptive advertising, the final rule will protect Americans from getting cheated, put businesses that unlawfully game the system on notice, and promote markets that are fair, honest, and competitive.”

The Rule announced on August 14, 2024 follows an advance notice of proposed rulemaking and a notice of proposed rulemaking announced in November 2022 and June 2023, respectively. The FTC also held an informal hearing on the proposed rule in February 2024. In response to public comments, the Commission made numerous clarifications and adjustments to its previous proposal.

What Does the FTC Final on the Use of Consumer Reviews and Testimonials Prohibit?

The FTC Final Rule on the Use of Consumer Reviews and Testimonials prohibits:

Writing, selling, or buying fake or false consumer reviews. 

The Rule prohibits businesses from writing or selling consumer reviews that misrepresent they are by someone who does not exist or who did not have actual experience with the business or its products or services, or that misrepresent the reviewers’ experience. It also prohibits businesses from buying consumer reviews that they knew or should have known made such a misrepresentation. Businesses are also prohibited from procuring from certain company insiders such reviews about the business or its products or services for posting on third-party sites, when the businesses knew or should have known about the misrepresentation. The prohibitions on buying or procuring reviews do not cover generalized review solicitations to past customers or simply hosting reviews on the business’s website. Neither will a retailer or other entity be liable for sharing consumer reviews unless it would have been liable for displaying those same reviews on its own website.

Writing, selling, or disseminating fake or false testimonials. 

Businesses are similarly prohibited from writing or selling consumer or celebrity testimonials that make the same kinds of misrepresentations. The are also prohibited from disseminating or causing the dissemination of such testimonials when they knew or should have known about the misrepresentation. The prohibition on disseminating testimonials does not cover the type of generalized solicitations to past customers discussed above with respect to reviews.

Buying positive or negative reviews.

Businesses are prohibited from providing compensation or other incentives contingent on the writing of consumer reviews expressing a particular sentiment, either positive or negative. Violations here include situations in which such a contingency is express or implied. So, for example, while it prohibits offering $25 for a 5-star review, it also prohibits offering $25 for a review “telling everyone how much you love our product.”

Failing to make disclosures about insider reviews and testimonials.

The Rule prohibits a company’s officers and managers from writing reviews or testimonials about the business or its products or services without clearly disclosing their relationship. Businesses are also prohibited from disseminating testimonials by company insiders without clear disclosures, if the businesses knew or should have known of the relationship. A similar prohibition exists for officer or manager solicitations of reviews from their immediate relatives or from employees or agents of the business, and when officers or managers ask employees or agents to seek such reviews from relatives. For these various solicitations, the Rule is violated only if: (i) the officers or managers did not give instructions about making clear disclosures; (ii) the resulting reviews – either by the employees, agents, or the immediate relatives of the officers, managers, employees, or agents – appear without clear disclosures; and (iii) the officers or managers knew or should have known that such reviews appeared and failed to take steps to have those reviews either removed or amended to include clear disclosures. All of these prohibitions hinge on the undisclosed relationship being material to consumers. These disclosure provisions also clarify that they do not cover mere review hosting or generalized solicitations to past customers.

Deceptively claiming that company-controlled review websites are independent.

Businesses are prohibited from misrepresenting that websites or entities they control or operate are providing independent reviews or opinions, other than consumer reviews, about a category of businesses, products, or services that includes their own business, product, or service.

Illegally suppressing negative reviews.

The Rule prohibits using unfounded or groundless legal threats, physical threats, intimidation or public false accusations (when the accusation is made with knowledge that it is false or with reckless disregard as to its truth or falsity) to prevent the posting or cause the removal of all or part of a consumer review. Legal threats are “unfounded or groundless” if they are unwarranted by existing law or based on allegations that have no evidentiary support, according to the FTC. Also, if reviews on a marketer’s website have been suppressed based on their rating or negative sentiment, the Rule prohibits that business from misrepresenting that the reviews on a portion of its website dedicated to receiving and displaying such reviews represent most or all submitted reviews.

Selling and buying fake social media indicators.

The Rule prohibits the sale or distribution of fake indicators of social media influence, like fake followers or views. A “fake” indicator means one generated by a bot, a hijacked account, or that otherwise does not reflect a real individual’s or entity’s activities or opinions, according to the FTC. The Rule also bars anyone from buying or procuring such fake indicators. These prohibitions are limited to situations in which the violator knew or should have known that the indicators were fake and which involved misrepresentations of a person’s or company’s influence or importance for a commercial purpose.

The Rule does not specifically refer to AI. However, according to the FTC, these prohibitions cover situations when someone uses an AI tool to generate the deceptive content at issue.

According to the FTC, case-by-case enforcement without civil penalty authority might not be enough to deter clearly deceptive review and testimonial practices. The Supreme Court’s decision in AMG Capital Management LLC v. FTC has hindered the FTC’s ability to seek monetary relief for consumers under the FTC Act. The Rule is intended to enhance deterrence and strengthen FTC enforcement actions.

The Rule will become effective 60 days after the date it’s published in the Federal Register.

Takeaway: The FTC will aggressively enforce the new Rule. The agency has challenged illegal practices regarding bogus reviews and testimonials for quite some time. In addition to investigations and enforcement actions, the FTC has also issued guidance to help businesses to comply. According to the agency, online marketplaces and social media companies could and should do more when it comes to policing their platforms.

© 2024 Hinch Newman LLP
For more news on FTC’s Final Rule on Fake Reviews, visit the NLR Consumer Protection section.