Summary of Key Aspects of the Final Rule:
- For HSR filings made based on an executed letter of intent or term sheet, instead of a definitive agreement, parties must submit:
- a document including some combination of the following terms: parties’ identity; transaction structure; scope of what is being acquired; purchase price calculation; estimated closing timeline; employee retention policies, including with respect to key personnel; post-closing governance; and transaction expenses or other material terms; and
- an affidavit “attest[ing] that a dated document that provides sufficient detail about the scope of the entire transaction that the parties intend to consummate has also been submitted.”
- New disclosures regarding certain minority investors in limited partnerships and limited liability companies.
- Provision of ordinary course plans and reports that analyze market shares, competition, or markets pertaining to any overlapping product produced, sold, or known to be under development that were “prepared or modified within one year of the date of filing” and were shared with the CEO or board of directors (or their equivalent).
- For certain transactions, parties must describe their principal categories of existing or planned products and services and are instructed not to “exchange information for the purpose of answering this item.” But for any overlapping product or service—so-called overlap filings—the parties must provide:
- top ten customers overall and by product or service category;
- sales revenue, “projected revenue, estimates of the volume of products to be sold, time spent using the service, or any other metric” used to measure performance;
- description of all categories of customers of the product or service; and
- for products still in development, “the date that development of the product or service began; a description of the current stage in development, including any testing and regulatory approvals and any planned improvements or modifications; the date that development (including testing and regulatory approvals) was or will be completed” and the anticipated launch date.
- Parties must describe all transaction rationales and cross-reference them with the transaction-related documents submitted.
- In addition to transaction-related documents prepared by or for officers and directors, the parties must submit all reports evaluating the proposed transaction regarding market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets and prepared by or for the “supervisory deal team lead.”
- The Final Rule defines supervisory deal team lead as the “individual who has primary responsibility for supervising the strategic assessment of the deal, and who would not otherwise qualify as a director or officer.”
- Parties will be required to submit accurate and complete verbatim translation of foreign-language documents.
- Submission of all documents governing the transaction, “including, but not limited to, exhibits, schedules, side letters, agreements not to compete or solicit, and other agreements negotiated in conjunction with the transaction that the parties intend to consummate, and excluding clean team agreements.”
- Parties must describe any purchaser and target supply arrangements, including the amount of revenue and top ten customers, and note if the parties have nonsolicitation, noncompete, lease, licensing, operating, or master service agreements.
- Reporting pending proposals submitted to and awarded contracts with the Department of Defense or any member of the U.S. intelligence community valued equal to or greater than $100 million.
- Parties must report if they have “received any subsidy (or commitment to provide a subsidy in the future) from any foreign entity or government of concern,” meaning China, Russia, Iran, North Korea, any foreign terrorist organization designated by the Secretary of State, or any Office of Foreign Assets Control specially designated national.
The impact of the Final Rule will become clearer as HSR filings are made under the new regime and the FTC’s Premerger Notification Office starts to engage with the new format and the substantial volume of additional documents and information provided.
For more information, please see Business Law Today’s full-length article on this topic.
FTC Appeals Texas Court’s Decision to Set Aside the Noncompete Ban
By Barbara Sicalides and Julian Weiss, Troutman Pepper Hamilton Sanders LLP
The Federal Trade Commission (FTC) has filed a notice of appeal of the Northern District of Texas’s decision granting plaintiffs’ summary judgment motion and “setting aside” the agency’s rule banning nearly all employee noncompete agreements. This is the second case appealed by the FTC, following its earlier appeal of a Florida federal court’s decision enjoining the FTC rule with respect to the individual Florida plaintiff. A third case challenging the FTC’s rule in Pennsylvania federal court was voluntarily dismissed by the plaintiff in early October. For now, the rule will remain on hold as the appeals make their way through the Fifth and Eleventh Circuits.
The Texas and Florida courts’ analyses differed. The Texas court held that the FTC did not have the authority to promulgate “substantive rules regarding unfair methods of competition.” Instead, the court determined that the pertinent section of the FTC Act—Section 6(g)—is “a housekeeping statute,” authorizing rules regarding the agency’s practices and procedures. The Florida court, on the other hand, held that Congress granted the FTC the authority to make rules to prevent unfair methods of competition, but that given the economic significance of noncompetes, the noncompete rule likely violates the major question doctrine.
The Pennsylvania court took a third approach, denying plaintiff’s request for preliminary injunctive relief and finding that the FTC likely has the authority to issue substantive unfair competition rules, including a rule prohibiting noncompetes as a class, and that the rule likely does not violate the nondelegation doctrine. Following the court’s decision that the plaintiff’s challenge was unlikely to succeed on the merits, plaintiff sought a stay. In opposition to the stay, the FTC argued that it would be unfair to allow the Pennsylvania plaintiff “to avail itself of [the Texas court’s] judgment . . . while preserving [p]laintiff’s challenge to the Rule indefinitely, for the sole purpose of reviving it in the event the Commission were to prevail in an appeal in another circuit.” After the Pennsylvania court refused to stay the proceedings, the plaintiff voluntarily dismissed its challenge.
Regardless of which candidate wins the presidential election, a new administration will decide the leadership of the antitrust agencies and whether to continue the FTC’s appeals in the Fifth and Eleventh Circuits. Further, the timing of the appeals is unclear, and so is whether one or more appeals will eventually go to the Supreme Court. The FTC also has suggested that its appeals might not focus solely on the merits and has questioned whether the Texas court had the authority to set aside a rule or issue an injunction on a nationwide basis. Accordingly, an appeal could be decided on a number of different grounds.
For now, the FTC’s worker noncompete ban remains stalled and companies need not issue the required employee notice. Employers, however, should remain alert to legal developments, particularly given the state and federal, and bipartisan, concern regarding such restrictions, the active role of state attorneys general, and the varied approach state legislatures have taken on the issue.
Banking Law
National Bank Ordered to Pay over $3 Billion for AML Violations
By Tracy Wang, Hudson Cook LLP
On October 10, 2024, the U.S. Department of Justice (“DOJ”), the Federal Reserve Board (“FRB”), the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”), and the Office of the Controller of the Currency (“OCC”) announced their separate but parallel settlement orders with TD Bank, N.A. and related companies (the “Bank”), totaling a penalty over $3 billion for the Bank’s violations of the Bank Secrecy Act (“BSA”). In the FinCEN consent order, FinCEN determined that the Bank willfully failed to implement and maintain an anti-money laundering (“AML”) program that met the minimum requirements of the BSA. FinCEN also determined that the Bank willfully failed to provide accurate and timely reports of suspicious transactions and currency transactions to FinCEN.
The FinCEN consent order highlighted five particular issues with the Bank’s failure to implement and maintain its AML program: (1) the Bank’s BSA officer’s ineffective oversight and management; (2) the Bank’s inadequate policies, procedures, and internal controls; (3) deficient AML training; (4) deficient customer due diligence process; and (5) insufficient independent testing.
The FinCEN order also noted that the Bank’s 2013 consent orders with FinCEN and the OCC made the Bank aware of its failure to file suspicious activity reports as a result of its insufficient training of business and AML staff.
The 2024 OCC order prohibits the Bank from adding any new product or service until the Bank receives a written determination of no supervisory objection from the OCC to the Bank’s improved policies and procedures for evaluating BSA/AML risks. The Bank is also prohibited from opening any new branch or entering into any new market without receiving a written determination of no supervisory objection from the OCC.
Pursuant to its consent order, FinCEN imposed a civil money penalty of $1.3 billion. The Bank also agreed to pay approximately $1.89 billion to the DOJ, $123.5 million to the FRB, and $450 million to the OCC to resolve each of the investigations. In addition to the civil money penalty, the Bank agreed to retain an independent compliance monitor for four years at the Bank’s expense.
Cannabis Law
Major Changes Could Be in Store for Hemp in 2025
By Daniel Shortt, McGlinchey Stafford PLLC
Proposed language in the next Farm Bill could substantially impact the hemp industry in the United States. The Farm Bill is an omnibus bill that governs agriculture and food and is renewed approximately every five years. The 2018 Farm Bill expired in 2023, but Congress enacted a one-year extension. Iowa Agribusiness Radio Network reports that Senator Chuck Grassley (R-IA) believes that the 2018 Farm Bill will be extended for another year.
The 2018 Farm Bill removed hemp from the statutory definition of “marijuana” and defined hemp as all parts of the cannabis plant—and all of its derivatives, extracts, and cannabinoids—with a delta-9 tetrahydrocannabinol (THC) concentration of less than 0.3 percent. 7 U.S.C. §1639o. The presence of other cannabinoids, including other forms of THC, does not factor into the classification of hemp. Delta-9 THC gives users the euphoric high associated with marijuana and is one of dozens of cannabinoids found in the cannabis plant.
Intoxicating hemp-derived products have become popular, including delta-8 THC. Delta-8 THC naturally occurs in small quantities in hemp but can be converted from hemp-derived cannabidiol (CBD). It has similar effects to delta-9 THC but is not as potent. According to Cannabis Business Times, delta-8 products generated $1.2 billion in sales in 2023.
In a case involving trademark infringement for a hemp-derived product, the Ninth Circuit noted that “the only statutory metric for distinguishing controlled marijuana from legal hemp is the delta-9 THC concentration level. In addition, the definition extends beyond just the plant to ‘all derivatives, extracts, [and] cannabinoids.’” AK Futures LLC v. Boyd St. Distro, LLC, 35 F.4th 682, 690 (9th Cir. 2022) (citations omitted). The presence of delta-8, THCA, or other cannabinoids does not turn a hemp product into a marijuana product. According to the court, if “Congress inadvertently created a loophole legalizing [] products containing delta-8 THC, then it is for Congress to fix its mistake.”
Proposed language to the 2024 Farm Bill would close that alleged loophole. The House Agriculture Committee passed a 2024 Farm Bill draft on May 23, 2024 (H.R. 8467), that included an amendment that would exclude the following from the definition of hemp:
- hemp-derived products containing cannabinoids not naturally produced in the cannabis plant or that are naturally produced but were synthesized or manufactured outside of the plant
- quantifiable amounts of any THC or any cannabinoids that have or are marketed to have similar effects as THC
This language would remove delta-8 products, and any other intoxicating cannabinoids, from the definition of hemp and close the loophole that has allowed these products to proliferate.
Advocates for the hemp industry are rightfully concerned that the proposed language could destroy the hemp cannabinoid market. Many in the hemp world are pushing for regulatory oversite of hemp rather than an outright ban. The hemp industry will closely watch the Farm Bill over the next year. The language could make or break the industry.
Consumer Finance Law
CFPB Releases Final Rule Implementing Section 1033 of the CFPA, Immediately Challenged in Court
By Eric Mogilnicki and Brandon Howell, Covington & Burling LLP
On October 22, the Consumer Financial Protection Bureau (“CFPB”) released its long-awaited final rule on Personal Financial Data Rights, which implements Section 1033 of the Consumer Financial Protection Act, 12 U.S.C. § 5533. Consistent with the proposed rule released in October 2023, the final rule requires financial service providers to make a consumer’s data available upon request to the consumer and authorized third parties. In prepared remarks at the Federal Reserve Bank of Philadelphia, CFPB Director Rohit Chopra touted the ability for consumers to “more easily walk away from mediocre products or services and choose financial institutions that offer higher rates for your savings, lower rates on loans, free access to your paycheck before payday, or ways to more effectively manage your finances.”
The final rule provides:
- Data providers must make covered data available to consumers and authorized third parties upon request.
- Data providers are required to do so in a “standardized and machine-readable format and in a commercially reasonable manner” but the rule does not “require the use of any particular technology.”
- Authorized third parties, in seeking access to covered data, must obtain the consumer’s express informed consent through a written or electronic authorization disclosure.
- Authorized third parties’ collection, use, and retention of covered data is limited “to what is reasonably necessary to provide the consumer’s requested product or service.”
- Data providers and third parties must have written policies and procedures reasonably designed to achieve the final rule’s objectives, including record retention.
The final rule includes a phased implementation schedule based on an institution’s size. The largest covered institutions must comply by April 1, 2026, and the smallest covered institutions must comply by April 1, 2030.
Shortly after the CFPB released its final rule on Personal Financial Data Rights, Forcht Bank, N.A., the Kentucky Bankers Association, and the Bank Policy Institute sued the CFPB in federal district court seeking declaratory and injunctive relief. In their complaint, the plaintiffs asserted that the final rule is unlawful on a number of grounds, principally that the CFPB overreached its statutory authority and acted in an arbitrary and capricious manner by requiring banks to “furnish consumers’ data to innumerable, as-yet-unidentified third parties—with unknown credentials or security protocols—that are far less regulated than banks.”
CFPB Surveils Worker Surveillance
By Eric Mogilnicki and Brandon Howell, Covington & Burling LLP
On October 24, the CFPB issued a circular regarding the use of background dossiers and algorithmic scores for hiring, promotion, and other employment decisions. The circular states that the Fair Credit Reporting Act (“FCRA”) governs certain employment-related decisions made by employers using background dossiers obtained from third parties. The circular concludes that these dossiers are consumer reports under the FCRA, and because of this, employers “must comply with FCRA obligations, including the requirement to obtain a worker’s permission to procure a consumer report, the obligation to provide notices before and upon taking adverse actions, and a prohibition on using consumer reports for purposes other than the permissible purposes described in the FCRA.” Further, the circular opines that third-party providers of these dossiers are consumer reporting agencies and must adhere to FCRA requirements.
Director Chopra discussed the circular in prepared remarks at a Joint Field Hearing with the Department of Labor on Worker Tracking in Michigan. Director Chopra commented that the CFPB is “making clear that employers that traffic in data about workers and make decisions—including hiring and firing—using third-party scores based on tracking must adhere to federal protections.” He outlined four “crucial rights” employers must give their workers when using these dossiers: (1) obtaining employee consent; (2) providing transparency about data used in adverse decisions; (3) allowing employees to dispute inaccurate information; and (4) using the dossier only for lawful purposes.
Fintech Group Sues to Block CFPB’s BNPL Interpretive Rule
By Eric Mogilnicki and Tyler Smith, Covington & Burling LLP
On October 18, the Financial Technology Association filed a lawsuit in D.C. federal court seeking to block an interpretive rule the CFPB proposed in May of this year, which provided that Buy Now, Pay Later (“BNPL”) lenders must comply with legal requirements, including disclosure obligations, that apply to credit card issuers. The lawsuit alleges that the Bureau’s interpretive rule violates the Administrative Procedure Act’s notice-and-comment rulemaking requirements, and is arbitrary and capricious because “the CFPB overlooked that certain obligations [it] purports to impose are a poor fit for BNPL products.”
Texas Magistrate Judge Rejects New Constitutional Challenge to the CFPB
By Eric Mogilnicki and Tyler Smith, Covington & Burling LLP
On October 11, a federal magistrate judge in Houston recommended that the district court judge deny the motion of Colony Ridge, a Texas land developer, to dismiss a State of Texas lawsuit alleging violations of the Consumer Financial Protection Act (“CFPA”). Colony Ridge’s motion relied upon the novel theory that, even though the Supreme Court recently upheld the CFPB’s funding mechanism under the Appropriations Clause, the requirement that such funding come from the “combined earnings” of the Federal Reserve means that the agency was not lawfully funded because the Federal Reserve has not generated net income since 2022. Colony Ridge used this theory to argue that the CFPB could not lawfully receive the required pre-filing notice of intent to sue under the CFPA from Texas, and so a prerequisite to suit had not been met.
In recommending that the district court judge deny the motion, the magistrate judge rejected this theory, noting that Colony Ridge failed to “explain how funding for, or the budget of, an agency is tied to its lawful ability to act.” The magistrate judge also noted that “the Supreme Court found that the CFPB is constitutionally funded—and it did so during a time when Colony Ridge argues the CFPB was not funded.”
CFPB’s Fall 2024 Supervisory Highlights Report Focuses on Auto Finance
By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP
On October 7, the CFPB released its Fall 2024 Supervisory Highlights report. The report, which is the thirty-fifth edition of the Supervisory Highlights publication, focuses on findings from examinations related to auto finance that were completed between November 1, 2023, and August 30, 2024. The report covers Bureau findings across all aspects of the consumer auto finance market, including findings of deceptive advertising of loan terms, incomplete disclosures, abusive and unfair practices related to add-on products, inaccurate reporting to credit bureaus, and unlawful repossessions.
The report breaks down the CFPB’s findings into five categories: origination disclosures, repossession activities, servicing practices, add-on practices, and furnishing deficiencies. Of the five, add-on practices are given the most detailed treatment. The report says that some servicers:
- made the process of canceling add-on products unreasonably onerous;
- failed to ensure that consumers received accurate and timely refunds of unearned premiums; and/or
- continued to collect payments for add-on products after the loans terminated.
In an accompanying press release, CFPB Director Chopra explained that “[b]orrowing to buy a vehicle is one of the largest sources of household debt for American families, and many deal with unnecessary costs and challenges paying for their car,” and that the Bureau “will take action against auto-finance companies that charge fees for nonexistent services, or repossess cars after borrowers make payments.”
CFPB Announces Additional Efforts to Regulate Medical Debt Collection Practices
By Eric Mogilnicki and Brandon Howell, Covington & Burling LLP
On October 1, the CFPB announced a host of actions as part of its larger initiative to address unfair and coercive medical debt collection practices.
In prepared remarks at the White House, Director Chopra argued that medical debt can have a destructive, compounding effect on consumers that strains finances, eliminates savings, hurts credit scores, and prevents further medical care. Director Chopra commented that “medical bills are often confusing and opaque, filled with hard-to-interpret codes or outright errors that can cost people thousands of dollars.” Director Chopra noted that “[o]ver 100 million Americans have debt from medical bills” and that among these Americans, “more than four in ten say they received an inaccurate bill, and nearly seven in ten say they were asked to pay a bill that should have been covered by insurance.” Director Chopra then highlighted the advisory opinion, consumer advisory, and blog post described below.
The CFPB issued an advisory opinion explaining that debt collectors are strictly liable under the Fair Debt Collections Practices Act and Regulation F for engaging in unlawful medical bill collection practices, including:
- collecting an amount not owed because it was already paid
- collecting amounts not owed due to federal or state law
- collecting amounts above what can be charged under federal or state law
- collecting amounts for services not received
- misrepresenting the nature of legal obligations
- collecting unsubstantiated medical bills
The CFPB also published a consumer advisory detailing the following actions available to consumers before paying questionable medical debt bills:
- asking your healthcare provider or the debt collector for an itemized bill;
- negotiating the amount you owe with the medical provider and debt collector;
- submitting a complaint regarding debt collection to the CFPB;
- consulting with an attorney if you believe a medical charge is illegal or a debt collector is breaking the law; and
- monitoring the CFPB’s efforts to address medical debt, including its proposed rule on banning medical bills from consumers’ credit reports.
Finally, the CFPB published a blog post discussing nonprofit hospital billing issues. To keep its status as a nonprofit, a nonprofit hospital is required to follow Internal Revenue Service requirements and develop financial assistance policies to aid patients. The blog post notes that the CFPB continues to receive complaints from consumers that bring into question the efficacy of nonprofit hospitals’ financial assistance policies, and, in particular, their policies regarding eligibility criteria and application processes.
Separate Actions against a Residential Tenant in Different Courts Could Constitute Abusive Collection Practices under the FDCPA
By Aleksandr Altshuler and Jim Sandy, McGlinchey Stafford PLLC
On September 30, 2024, the District Court for the Eastern District of New York denied dismissal of a plaintiff-tenant’s claim against her landlord’s counsel for abusive collection practices in violations of the Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. § 1692f, finding that the commencement of more than one suit against the same consumer in different courts could potentially violate the FDCPA prohibition on abusive acts or practices. Onfroy v. Law Offices of Geoffrey T. Mott, P.C., 2024 WL 4350489 (E.D.N.Y. Sept. 30, 2024).
In Onfroy, the plaintiff was initially sued for unpaid rent and eviction in the housing court. However, before default judgment was obtained in that case, defendants commenced another action against plaintiff in Nassau County Supreme Court for unpaid rent, covering a different period of time than the unpaid rent sought in the housing court case. Defendants then obtained default judgment for unpaid rent and attorney’s fees in the Supreme Court action. Nonetheless, before default judgment was obtained from the Supreme Court, defendants filed yet another action in the housing court, seeking the same unpaid rent as in the Supreme Court action and a warrant of eviction.
Plaintiff appeared at a few administrative conferences in the housing court case, incurring parking fees, reduced wages, and copying costs. Consequently, plaintiff sued her landlord and their attorneys, who moved to dismiss for lack of jurisdiction and failure to state a claim.
Defendants argued that separate actions were required because only the housing court had jurisdiction over the eviction. However, the court determined that defendants did not demonstrate that one action could not suffice given the dispositions of the first housing case and the Supreme Court action. Accordingly, the court in Onfroy concluded that plaintiff sufficiently stated a claim for relief under Section 1692f.
While the court recognized that further development of facts and arguments may result in a different ruling, Onfroy demonstrates that unless a debt collector convincingly sets forth that an action in one forum would not have been enough to obtain all available relief, separate actions to collect unpaid rent and to evict a residential tenant could give rise to a claim for abusive collection practices in violation of the FDCPA.
Supreme Court to Hear TCPA Class Action on Unsolicited Faxes and Online Fax Services
By Marisa Roman and Jim Sandy, McGlinchey Stafford PLLC
For the second time in five years, the U.S. Supreme Court will decide a case that arises out of the Telephone Consumer Protection Act (“TCPA”) ban on the sending of unsolicited faxes. On Friday, October 3, 2024, the Court said it would hear arguments about whether to reopen a class action lawsuit filed by a group of chiropractors, McLaughlin Chiropractic Associates (the “McLaughlin Class”), against medical tech company McKesson Corp. (“McKesson”).
The McLaughlin Class filed their class action lawsuit against McKesson on the grounds that McKesson violated the TCPA by sending unsolicited fax advertisements to members of the Class. Some of these advertisements were sent to Class members via online fax services. The McLaughlin Class alleged that these unsolicited fax advertisements violated the Federal Communications Commission (“FCC”) interpretation of the TCPA under the Hobbs Act.
The Ninth Circuit Court of Appeals upheld the decision of the Northern District of California, which had decertified the McLaughlin Class on the grounds that the Class could not identify which faxes had been sent by McKesson via an online fax service or which faxes had been sent by a traditional fax machine.
The McLaughlin Class subsequently filed its petition for a writ of certiorari in May 2024. In their petition, the McLaughlin Class specifically asks the Court to expand its 2019 ruling in PDR Network, LLC v. Carlton & Harris Chiropractic, Inc., which stopped short of deciding whether the Hobbs Act requires a district court to accept the FCC’s interpretation of the TCPA. The McLaughlin Class contends that the Court’s lack of interpretation on the FCC’s guidance and the Hobbs Act has prevented the justices from making a full determination about the scope of the TCPA and online fax communications.
This matter presents a unique challenge for this Supreme Court, which eviscerated Chevron deference in Loper Bright Enterprises v. Raimondo last term. While some may expect the Court to take a similar approach to this case, as it involves a federal agency’s interpretation of a statute, the Hobbs Act operates on a different wavelength, as the FCC’s interpretation of the statute takes away power from the courts to review the FCC’s decision-making under the TCPA. The Court skirted these arguments in PDR Network, but given its decision in Loper Bright, it is possible that the Court may further weaken agency interpretation of statutes, like the Hobbs Act at issue here. Depending on which way the Court rules, this could lead to greater litigation under the TCPA, as the FCC would no longer be able to rely on its regulatory authority to interpret what exactly the TCPA means.
Intellectual Property Law
Turning the Volume to 10: Record Labels Sue Generative AI Music Platforms
By Emily Poler, Poler Legal LLC
In mid-June, the major U.S. record labels (“Plaintiffs”) sued the companies behind two generative AI platforms that create digital music—Suno, Inc., which owns Suno AI, and Uncharted Labs, Inc., which owns Udio (“Defendants”). Both platforms allow users to enter prompts and, according to Plaintiffs, “generate outputs that imitate the qualities of genuine human sound recordings.”
The complaints (Plaintiffs sued Uncharted in the Southern District of New York and Suno in the District of Massachusetts) allege that these platforms trained their models on, among other things, copies of “massive numbers of sound recordings” owned by Plaintiffs. According to Plaintiffs, this amounts to copyright infringement on a grand scale.
To preempt claims that Defendants’ copying of Plaintiffs’ sound recordings is fair use, the complaints contend that the AI platforms could be used to create music “for the ultimate purpose of poaching the listeners, fans, and potential licensees of the sound recordings . . . copied,” and that Defendants copied the entirety of copyrighted works. (Courts are less likely to find fair use where the defendant has copied the entire work as opposed to a small portion of it.)
Suno and Udio answered the complaints in early August. In the answers, they contend their platforms further creativity and originality. They also argue they copied Plaintiffs’ materials solely as part of the training process, and their copies have never been heard by anyone. According to Defendants, this is key because, under applicable case law, intermediate copies that are made as a part of generating noninfringing outputs are not actionable. Here, Defendants point to cases such as Authors Guild v. Google, Inc. In that case, the court found Google’s wholesale copying of copyrighted books to create a research tool that allowed researchers to locate words in a text and see the context for such words was not actionable. In Google’s case (and other similar cases), the copyrighted materials were used to create a product (a search tool) different from the underlying materials (books).
One of the big questions here is whether courts end up thinking that Suno and Udio are offering AI tools to create something that is largely unique and different from the underlying copyrighted works, or that these platforms will be used to create materials (i.e., music) that can substitute for copyrighted work. The complaints appear to anticipate this question by noting that the platforms trained on the “expressive features” of Plaintiffs’ works, which would undermine arguments from Suno and Udio that they were merely extracting the music’s underlying information to develop a new technology or product that does not display its expressive content.
In an interesting aside, Defendants also assert that Plaintiffs have engaged in anticompetitive behavior amounting to “copyright misuse.” This doctrine can preclude enforcement of the copyright or copyrights at issue. Here, while there’s certainly a discussion to be had around the degree to which most popular music is now owned by a few mammoth companies, it seems like a stretch to claim that the Plaintiffs’ efforts to enforce their copyrights are “beyond what copyright law itself allows.”
Tax Law
New Tax Treatment for Wholly Owned Tribal Entities?
By Megan Carrasco, Snell & Wilmer LLP
As a function of dual sovereignty, Indian Tribal Nations are generally exempt from federal and state taxation. The Internal Revenue Service (“IRS”) has proposed to extend this logic one step further. On October 9, 2024, the IRS issued a notice of proposed rulemaking (“NOPR”) and notice of public hearing. The new rule proposes that entities that are “wholly owned” by one or more Indian Tribes and “organized or incorporated solely under the laws” of the Indian Tribe would be no longer be recognized as separate entities under the tax code. Said another way, these entities would not be taxed just as the Indian Tribe that incorporated and owns these entities is not taxed.
The IRS consulted with the Department of the Interior, which oversees Indian Tribes from a federal perspective, and both agree that this proposed regulation is in line with President Biden’s Executive Order 14112, “Reforming Federal Funding and Support for Tribal Nations to Better Embrace Our Trust Responsibilities and Promote the Next Era of Tribal Self-Determination.” In EO 14112, President Biden explained that “Federal funding and support programs that are the backbone of Federal support for Tribal self-determination are too often administered in ways that leave Tribal Nations unduly burdened and frustrated with bureaucratic processes.” The current tax regulations require a lengthy and multistep process to charter corporations to include subjecting these Tribal corporations to both federal approval and federal oversight.
The NOPR explains that in consulting with Tribes, it understood they view Tribally chartered corporations as an “exercise of their inherent sovereign authority” that allows them to pursue the economic plans of the Tribal Nation. If passed, this regulation has the potential to prompt a considerable growth in Tribal-owned businesses, potentially sparking new business collaborations and economic opportunities for Tribes.
Though only open for a few days, comments thus far are generally positive and support the expansion of Tribal self-governance. The comment period is open until January 7, 2025. On January 17, 2025, at 10:00 a.m. EST, the IRS will hold a public hearing.
